What You Will Find Here
- OJOS11
- Articles and news of general interest about investing, saving, personal finance, retirement, insurance, saving on taxes, college funding, financial literacy, estate planning, consumer education, long term care, financial services, help for seniors and business owners.
Blog List
-
-
Scott Bessent compares AI CEOs who warn of catastrophe to Hannibal Lecter: 'Stop me before I kill again' - Treasury Secretary Scott Bessent said Silicon Valley doesn't need the government to intervene.
-
In Big Warning to the Fed, Bond Yields Rise Despite Weak Jobs - The bond market is telling the Fed it wants another interest rate hike.
-
Bracing for More Inflation Volatility - Consumers, business owners and investors are growing increasingly concerned about rising inflation, and its potential repercussions.
-
Everybody Else Is Reading This - Snowflakes That Stay On My Nose And Eyelashes Above The Law Trump’s New Birth Control […]
-
Maximizing Employer Stock Options - Oct 29 – On this edition of Lifetime Income, Paul Horn and Chris Preitauer discuss the benefits of employee stock options and how to best benefit from th...
-
Wayfair Needs to Prove This Isn't as Good as It Gets - Earnings were encouraging, but questions remain about the online retailer's long-term viability.
-
Hannity Promises To Expose CNN & NBC News In "EpicFail" - *"Tick tock."* In a mysterious tweet yesterday evening to his *3.19 million followers,* Fox News' Sean Hannity offered a preview of what is to come from ...
-
Don’t Forget These Important Retirement Deadlines - *Now that fall is in full swing, be sure to mark your calendar for steps that can help boost your tax-advantage retirement savings.*
Showing posts with label financial planning. Show all posts
Showing posts with label financial planning. Show all posts
GET GOING! INVESTING FOR THE NEW YEAR (Bankrate.com)
10 top tips to beat investing inertia
This is my 16th year of writing a "Top 10" column to get you thinking about improving your finances in the upcoming year. May you benefit in 2015 from these investing tips.
1. Figure out what you're trying to reach
I encourage people to figure out what their goals are in life, and then work on a financial plan that will help them achieve those goals. However, goals that aren't well-defined -- like "I want a comfortable retirement" or "I want to save for my children's education" -- don't have numbers behind them, and that makes them harder to achieve.
I often see people financing goals they should have invested for, especially when it comes to their children's college education. With some exceptions, such as financing a mortgage, I'd rather see you earn a yield on your investments than pay a rate on a loan.
2. Insure, save, invest
Investing isn't the first step in providing for you and your family's future. Insurance is that first step. Between life insurance, health insurance, disability insurance, home, auto, liability insurance and long-term care insurance, evaluating and meeting your needs for insurance is an important first step before starting to save and invest for your future.
Financial professionals tend to differentiate between saving and investing. With saving, protecting principal is more important than increasing purchasing power. With investing, the emphasis is on building wealth and increasing purchasing power. An emergency fund, with its role of providing liquidity in times of financial need, is the place for savings. Retirement accounts, at least while you're still working, are the place to invest. Consumers with low risk tolerances tend to save money they would be better off investing.
3. Have an emergency fund
Too many people live paycheck to paycheck. They can't handle any financial setbacks in their lives. Some expect their credit cards to see them through the tough times, only to find themselves trying to dig out from under a mountain of credit card debt that may be growing at 23.99 percent interest.
As you start to build wealth in your investment portfolio, the portfolio can act as a financial backstop for at least part of the funds available in an emergency. Until then, it makes sense to have three to six months' worth of living expenses in a high-yield savings account or other liquid investment available to meet an unexpected financial need.
4. Know your income and outflow
Whether you want to do a forensic accounting of how you spent money in 2014 or decide to track spending with a financial app on your smartphone in 2015, the idea is to keep track of how you spend your income and figure out where the money goes.
While you're doing that, put together a spending plan and stick to it. I call it a spending plan instead of a budget, because like a diet, no one likes to be on a budget. Call it "planned spending" and it puts a positive spin on allocating your income to your need for current consumption, savings and investment. That's right; your spending plan should include line items for saving and investing.
I'm not a member of the "lose the latte" branch of financial planning. As long as you're not financing that latte by carrying credit card balances and you are meeting your savings and investment goals, enjoy your coffee. There's a lifestyle balance between current spending and saving for your future. All delayed gratification takes the fun out of today. Of course, if a cup of fancy coffee is the highlight of your day, you've got other things to work on besides your finances.
5. Invest in your health
What's health got to do with investing? Well, as my junior high school health teacher, Mr. Andrew Codispoti , always told his students, "health is wealth. All the money in the world can't buy health." OK, the poet Virgil said it first and better: "The greatest wealth is health." Invest in your health and the return on investment might amaze you.
6. Retirement income needs
Don't get confused into thinking that the 401(k) and IRA contribution limits, even with catch-up contributions for those 50 and older, were set by the government to ensure that you can retire comfortably. You're probably not saving enough.
Retirees wind up putting together a retirement income stream from retirement savings, Social Security and pension benefits. Pension benefits are getting rare in the private sector. Try to estimate your retirement income needs, and then work out a plan as to how you will meet those needs. Don't go ostrich on the topic; work with a financial professional if you need help coming up with a target for your retirement nest egg.
7. Maximize expected Social Security benefits
Too many seniors are in a rush to file for Social Security benefits. File before your full retirement age and there's a big reduction in benefits. For senior couples that can make it work, the higher wage earner can "file and suspend" at his or her full retirement age, earning delayed retirement credits up until age 70, while the lower wage earner files for a spousal benefit at his or her full retirement age.
When in doubt on the benefit claiming strategy that will maximize your Social Security benefits, hire a professional to review the different claiming strategies.
8. Maximize your employer's contributions to your retirement
If your employer matches any part of your contribution to their 401(k) or 403(b) plan, make sure you contribute up to the limits of the employer match. That's free money and you don't want to leave any free money on the table.
The typical plan will match 50 cents to every dollar you contribute up to 6 percent of salary. That has your employer contributing 3 percent of salary. You've made 50 percent on your money before even deciding how you're going to invest it.
9. Review and rebalance your portfolio
Over time, you'll see your asset allocations change as the investments you own go up and down in value. Reviewing your portfolio holdings lets you see if you've gotten overweight or underweight in your target asset allocation.
Portfolio rebalancing has you buying and selling investments to get your asset allocations back to your target levels or ranges. Buying and selling in tax-advantaged retirement accounts typically won't have a tax impact, while buying and selling in taxable accounts does have an impact on your taxes.
If you're working with an investment professional, you should know his or her approach to rebalancing. If you're doing it yourself, weigh your investment horizon against your risk tolerance and whether you're adding new money to the portfolio to decide on the frequency or timing of your portfolio rebalancing.
10. Track investment fees and expenses
Knowing what you're paying for in fees and expenses when investing is an important move. Managing those fees and expenses is just as important. Whether your investments are in a tax-advantaged retirement account or a taxable brokerage account, by knowing what you're paying, you can make better decisions about how you're invested, reducing the drag on your investment returns net of fees. The Department of Labor's "A look at 401(k) Plan Fees" Web page is a good place to learn about fees in that type of retirement account.
If you're working with a financial services professional, you should know how they're paid. There are several different compensation models including hourly fees, assets under management, commission-based models or a flat fee for a specific financial plan or service.
© Copyright 2014 Bankrate, Inc. All rights reserved
To Investors Under 40 (Washington Post)
Wanna eat when you retire? If you are under 40, listen up
To retire comfortably, under-40 workers need to seriously bulk up savings
By Jonathan Kern
Special to The Washington Post
Sunday, July 18, 2010; G01
If your junior-high soundtrack was more Bangles or Britney than Beatles, I am going to try to scare some sense into you with three words about life in retirement, based on personal experience: The paychecks stop.
I retired last year after 30 years as a broadcast journalist. Unlike most baby boomers who have retired, I do not receive a pension. This surprises and appalls my fellow early retirees, who are either enjoying income from a spouse who's still working or receiving checks from old employers.
If you're, say, under 40 -- and especially if you're under 30 -- you probably have worked only at firms or agencies that offered 401(k)s or their nonprofit cousin, the 403(b). That means that when you finally do retire 25 or 35 years from now, you will be responsible for providing for your own income. No pension for you!
Much has been written telling you how to prepare for that day -- namely, to save every cent you can.
A recent study shows that most people ignore that advice. In the wake of the recession, the Employment Benefit and Research Institute found that, among other things, fewer workers are saving for retirement, a quarter of those surveyed have nearly no savings (i.e., less than $1,000), most workers don't know how much they'll need to retire and more than half say their total savings is less than $25,000.
Clearly, all those thoughtful lectures about the need to prepare are falling on deaf ears.
So I'll say it again: The paychecks stop. Every day, every week and every month of your retirement, you'll use up some of the money you accumulated while you were working.
Specifically, imagine that every week you have to pay for food with cash from savings. And it's the same with your electricity, cable, phone, gas, credit card and other recurring bills. Because your health care is no longer subsidized by your employer, you write a big check each month to an insurance company as well. If you earn a few bucks on the side, even the taxes have to come out of your savings; no one else withholds federal and state tax from every paycheck.
Sure, if you work until you can collect Social Security, you'll get some money from the government, but it's a fair bet that your No. 1 source for retirement is going to be you. If you are not saving assiduously now, you are going to be much, much poorer in retirement. Restaurants, cable TV, BlackBerry service, travel abroad -- even things like beer, fast food and haircuts -- all will be fond memories of youth.
Retirement does not have to be this way.
I glimpsed my own future more than 20 years ago, when my wife and I worked for the federal government. In 1987, it introduced the Thrift Savings Plan -- basically a 401(k) for government employees. When we left government service, we withdrew our contributions and invested the money ourselves. My next employer offered no pension, only a 403(b).
In other words, although we are both baby boomers -- born in 1946 and 1953, respectively -- we are living the Gen X or Gen Y retirement.
Over the past year, I have learned a few things about how to retire successfully without a pension.
First, take a moment to think about how much money you will need each year after you stop working. Start by itemizing your usual expenses. Estimate your rent or your mortgage and property tax. Make reasonable assumptions about what you spend on food, utilities, essential travel, clothing, car repairs and so on. I assumed that my single biggest expense would be health insurance and budgeted more than $10,000 a year.
Whatever figure you come up with -- let's say, $50,000 -- consider it a minimum. Divide it by 26 to come up with your biweekly retirement income -- about $1,925. Your figure will probably be much less than the usual 80 percent of your current income that most financial advisers say you'll need. We're talking about getting by; any extra will only make life better.
So without a pension, how much do you need to get $50,000 (before inflation) each year? Simply put: a bundle. If you plan to retire at 65 and hope to have at least 30 years in retirement, you'll probably need something like $1.5 million in today's dollars. Even a little inflation could push that to $3 million if you're two or three decades from retirement. For the moment, let's leave inflation out of the calculation.
In other words, if you have saved just $25,000 -- and remember, that describes about half of all workers -- you are less than 2 percent of the way toward your goal. Your future definitely doesn't include cable.
Here's more bad news: Just saving a lot isn't going to be enough. Let's say you're 30 years from retiring, you earn $100,000 now and you guess that your income will go up by about 3 percent a year. Even if you earmark 10 percent of every paycheck for your retirement and your employer adds another 5 percent, you'll have set aside only about $713,000 by the time you stop working. That's half of what you'll need for that $50,000 annual income.
To live comfortably in retirement, whatever you save has to grow -- and its growth has to beat inflation by at least a percent or two. Here's where time is your ally. Take the example above, where you're earning $100,000 a year: That first $10,000 you set aside in 2010 will have become more than $30,000 in 2040 if it grows by 4 percent each year. If it grows by 6 percent, you'll have more than $50,000. And whatever your employer put in will have tripled or quintupled as well.
The bottom line is that the only way to ensure that decades from now you will have enough money to live on is to invest wisely.
So it's imperative to educate yourself. You should understand what a bond is, how to select a mutual fund, how inflation affects your investments and so on. Even if you turn to a financial planner, you'll need to evaluate the advice and make your own decisions about where to put your money. Bernie Madoff's clients wouldn't have been so easy to scam if they'd understood that it's simply impossible to get 12 percent returns, year after year, in vastly different economic climates.
That's a key point: Economic conditions change, and you will need to take advantage of those changes. If the next 30 years are even remotely like the past 30, inflation will swing from low to high and back. There will be stock market booms and crashes. As an investor, I've endured the crash of 1987, the bursting of the tech bubble in 2000 and the terrible bear market of 2008-09. I've also seen 13 percent annual inflation, which gave us 16 percent mortgages but also money markets with yields of 15 to 20 percent.
So do a little research about when it's smart to buy bonds -- and whether they should be Treasuries, corporate bonds or municipals -- and when it's better to invest in stocks, bank certificates of deposit or commodities. Learn how to recognize when investments overseas are strong. Over 20 or 30 years, you'll want to diversify and rebalance your investments so that the inevitable market tsunamis create relatively small waves in your portfolio. You're surrounded by this information. Read books about how the markets work, go to Web sites with primers on stocks and bonds or just watch business channels on TV.
Finally, even when times are tough -- especially when times are tough -- don't ignore that quarterly 401(k) statement. That's when you can see whether all your planning is working -- cushioning the blow of a bad stock, bond or real estate market -- or whether you need to explore different investments.
Think of all these do's and don'ts as a warning from your (not-so-distant) future. You can't just cross your fingers and hope that things turn out, or that someone else will take care of it. Start thinking about retirement now. Your life -- or at least your future standard of living -- depends on it.
To retire comfortably, under-40 workers need to seriously bulk up savings
By Jonathan Kern
Special to The Washington Post
Sunday, July 18, 2010; G01
If your junior-high soundtrack was more Bangles or Britney than Beatles, I am going to try to scare some sense into you with three words about life in retirement, based on personal experience: The paychecks stop.
I retired last year after 30 years as a broadcast journalist. Unlike most baby boomers who have retired, I do not receive a pension. This surprises and appalls my fellow early retirees, who are either enjoying income from a spouse who's still working or receiving checks from old employers.
If you're, say, under 40 -- and especially if you're under 30 -- you probably have worked only at firms or agencies that offered 401(k)s or their nonprofit cousin, the 403(b). That means that when you finally do retire 25 or 35 years from now, you will be responsible for providing for your own income. No pension for you!
Much has been written telling you how to prepare for that day -- namely, to save every cent you can.
A recent study shows that most people ignore that advice. In the wake of the recession, the Employment Benefit and Research Institute found that, among other things, fewer workers are saving for retirement, a quarter of those surveyed have nearly no savings (i.e., less than $1,000), most workers don't know how much they'll need to retire and more than half say their total savings is less than $25,000.
Clearly, all those thoughtful lectures about the need to prepare are falling on deaf ears.
So I'll say it again: The paychecks stop. Every day, every week and every month of your retirement, you'll use up some of the money you accumulated while you were working.
Specifically, imagine that every week you have to pay for food with cash from savings. And it's the same with your electricity, cable, phone, gas, credit card and other recurring bills. Because your health care is no longer subsidized by your employer, you write a big check each month to an insurance company as well. If you earn a few bucks on the side, even the taxes have to come out of your savings; no one else withholds federal and state tax from every paycheck.
Sure, if you work until you can collect Social Security, you'll get some money from the government, but it's a fair bet that your No. 1 source for retirement is going to be you. If you are not saving assiduously now, you are going to be much, much poorer in retirement. Restaurants, cable TV, BlackBerry service, travel abroad -- even things like beer, fast food and haircuts -- all will be fond memories of youth.
Retirement does not have to be this way.
I glimpsed my own future more than 20 years ago, when my wife and I worked for the federal government. In 1987, it introduced the Thrift Savings Plan -- basically a 401(k) for government employees. When we left government service, we withdrew our contributions and invested the money ourselves. My next employer offered no pension, only a 403(b).
In other words, although we are both baby boomers -- born in 1946 and 1953, respectively -- we are living the Gen X or Gen Y retirement.
Over the past year, I have learned a few things about how to retire successfully without a pension.
First, take a moment to think about how much money you will need each year after you stop working. Start by itemizing your usual expenses. Estimate your rent or your mortgage and property tax. Make reasonable assumptions about what you spend on food, utilities, essential travel, clothing, car repairs and so on. I assumed that my single biggest expense would be health insurance and budgeted more than $10,000 a year.
Whatever figure you come up with -- let's say, $50,000 -- consider it a minimum. Divide it by 26 to come up with your biweekly retirement income -- about $1,925. Your figure will probably be much less than the usual 80 percent of your current income that most financial advisers say you'll need. We're talking about getting by; any extra will only make life better.
So without a pension, how much do you need to get $50,000 (before inflation) each year? Simply put: a bundle. If you plan to retire at 65 and hope to have at least 30 years in retirement, you'll probably need something like $1.5 million in today's dollars. Even a little inflation could push that to $3 million if you're two or three decades from retirement. For the moment, let's leave inflation out of the calculation.
In other words, if you have saved just $25,000 -- and remember, that describes about half of all workers -- you are less than 2 percent of the way toward your goal. Your future definitely doesn't include cable.
Here's more bad news: Just saving a lot isn't going to be enough. Let's say you're 30 years from retiring, you earn $100,000 now and you guess that your income will go up by about 3 percent a year. Even if you earmark 10 percent of every paycheck for your retirement and your employer adds another 5 percent, you'll have set aside only about $713,000 by the time you stop working. That's half of what you'll need for that $50,000 annual income.
To live comfortably in retirement, whatever you save has to grow -- and its growth has to beat inflation by at least a percent or two. Here's where time is your ally. Take the example above, where you're earning $100,000 a year: That first $10,000 you set aside in 2010 will have become more than $30,000 in 2040 if it grows by 4 percent each year. If it grows by 6 percent, you'll have more than $50,000. And whatever your employer put in will have tripled or quintupled as well.
The bottom line is that the only way to ensure that decades from now you will have enough money to live on is to invest wisely.
So it's imperative to educate yourself. You should understand what a bond is, how to select a mutual fund, how inflation affects your investments and so on. Even if you turn to a financial planner, you'll need to evaluate the advice and make your own decisions about where to put your money. Bernie Madoff's clients wouldn't have been so easy to scam if they'd understood that it's simply impossible to get 12 percent returns, year after year, in vastly different economic climates.
That's a key point: Economic conditions change, and you will need to take advantage of those changes. If the next 30 years are even remotely like the past 30, inflation will swing from low to high and back. There will be stock market booms and crashes. As an investor, I've endured the crash of 1987, the bursting of the tech bubble in 2000 and the terrible bear market of 2008-09. I've also seen 13 percent annual inflation, which gave us 16 percent mortgages but also money markets with yields of 15 to 20 percent.
So do a little research about when it's smart to buy bonds -- and whether they should be Treasuries, corporate bonds or municipals -- and when it's better to invest in stocks, bank certificates of deposit or commodities. Learn how to recognize when investments overseas are strong. Over 20 or 30 years, you'll want to diversify and rebalance your investments so that the inevitable market tsunamis create relatively small waves in your portfolio. You're surrounded by this information. Read books about how the markets work, go to Web sites with primers on stocks and bonds or just watch business channels on TV.
Finally, even when times are tough -- especially when times are tough -- don't ignore that quarterly 401(k) statement. That's when you can see whether all your planning is working -- cushioning the blow of a bad stock, bond or real estate market -- or whether you need to explore different investments.
Think of all these do's and don'ts as a warning from your (not-so-distant) future. You can't just cross your fingers and hope that things turn out, or that someone else will take care of it. Start thinking about retirement now. Your life -- or at least your future standard of living -- depends on it.
How to Get More from Social Security (US News & World Report)
6 ways to get more Social Security
Marriages -- even former ones -- can have significant financial advantages. Here's a look at how having said 'I do' can win you more in retirement benefits.
By U.S. News & World Report
Couples who are currently married, or who have stayed together at least 10 years, tie together their working records -- and the resulting Social Security checks -- as long as they both shall live.
In the case of Social Security payments, the result is often better for the couple than it would have been for a single person. Spouses have Social Security claiming options that single people don't. Here are a few ways couples can boost their Social Security benefits:
1. Utilize spousal payments. Spouses are entitled to a Social Security payout of up to 50% of the higher earner's check (if that amount is higher than benefits based on his or her own working record). Retired couples in which one spouse didn't work or had low earnings have the most to gain from this provision.
However, low-earning spouses must wait until the full retirement age, as the Social Security Administration calls it, to collect the full 50%. Benefits are reduced for spouses who collect before their full retirement age. (For baby boomers born from 1943 to 1954, the full retirement age is 66.)
For example, a low-earning spouse whose full retirement age is 66 would be eligible for only 35% of the higher earner's benefit at age 62. The spousal benefit does not increase above 50% of the higher earner's benefit if claiming is delayed beyond the full retirement age.
2. Claim and suspend. The low-earning spouse cannot receive spouse's benefits until the higher earner files for retirement benefits. Workers who have reached their full retirement age may apply for retirement benefits and then request to have the payment suspended. Claiming and suspending payments allows the lower earner to claim a spousal benefit and the higher earner to continue working and earn delayed retirement credits until age 70.
"This would tend to maximize their lifetime benefits and, more importantly, maximizes the survivor's benefit," says Andrew Biggs, a resident scholar at the American Enterprise Institute and a former deputy commissioner of the Social Security Administration. "You will ensure you will have a higher benefit when you need one, which is when you are a widow later in life."
Social Security checks increase by 7% to 8% for each year of delayed claiming between your full retirement age and age 70. After age 70, there is no additional benefit for waiting to collect your due.
3. Claim twice. Spouses in dual-earner marriages who have reached their full retirement ages can claim Social Security twice: first as spouses, then using their own work records. A person may choose to sign up for only the spousal benefits at full retirement age and continue accruing delayed retirement credits on his or her own Social Security record. That person can then file for benefits based on his or her own work at a later date and receive a higher monthly benefit, thanks to the delayed retirement credits.
For example, a man planning to retire at age 70 could claim a spouse's benefit based on his wife's earnings at age 66 and then claim again based on his own working record when he exits the work force at age 70. High-income couples with relatively equal earnings gain the most using this strategy, according to calculations by the Center for Retirement Research at Boston College.
4. Include family. Social Security recipients who have children under age 16 or who are disabled can secure additional Social Security payments for the child and a spouse caring for the child, even if the spouse is under age 62. Each child is eligible for up to 50% of the retiree's full benefit. However, payments to family members are capped, typically at 150% to 180% of the retiree's benefit payment. If the total benefits due to the retiree's spouse and children are above this limit, their benefits will be reduced. The retiree's payout is not affected.
5. Take advantage of eligibility for ex-spouses. A former spouse may be eligible for benefits if the marriage lasted at least 10 years. The divorced spouse must be age 62 or older and unmarried. The amount of benefits an ex-spouse claims has no effect on the benefits the worker and his or her current spouse can receive.
6. Boost the survivor's benefit. Widows and widowers are entitled to the higher earner's full retirement benefit. A surviving spouse can begin receiving Social Security benefits at age 60, or at age 50 if he or she is disabled. Benefits are reduced by up to 28.5% if claimed before the recipient's full retirement age. The surviving member of a dual-earner couple also can claim a reduced benefit on one working record and then switch to the other.
For example, a woman could take a reduced widow's benefit at age 60, then, when she reaches full retirement age, claim 100% of the retirement benefits based on her own working record. Most survivor benefits are paid to women because wives are generally younger than their husbands and live longer. A spouse can increase the monthly survivor's benefit by 60% by waiting to sign up for Social Security until age 70.
This article was reported by Emily Brandon for U.S. News & World Report.
Published June 1, 2010
Marriages -- even former ones -- can have significant financial advantages. Here's a look at how having said 'I do' can win you more in retirement benefits.
By U.S. News & World Report
Couples who are currently married, or who have stayed together at least 10 years, tie together their working records -- and the resulting Social Security checks -- as long as they both shall live.
In the case of Social Security payments, the result is often better for the couple than it would have been for a single person. Spouses have Social Security claiming options that single people don't. Here are a few ways couples can boost their Social Security benefits:
1. Utilize spousal payments. Spouses are entitled to a Social Security payout of up to 50% of the higher earner's check (if that amount is higher than benefits based on his or her own working record). Retired couples in which one spouse didn't work or had low earnings have the most to gain from this provision.
However, low-earning spouses must wait until the full retirement age, as the Social Security Administration calls it, to collect the full 50%. Benefits are reduced for spouses who collect before their full retirement age. (For baby boomers born from 1943 to 1954, the full retirement age is 66.)
For example, a low-earning spouse whose full retirement age is 66 would be eligible for only 35% of the higher earner's benefit at age 62. The spousal benefit does not increase above 50% of the higher earner's benefit if claiming is delayed beyond the full retirement age.
2. Claim and suspend. The low-earning spouse cannot receive spouse's benefits until the higher earner files for retirement benefits. Workers who have reached their full retirement age may apply for retirement benefits and then request to have the payment suspended. Claiming and suspending payments allows the lower earner to claim a spousal benefit and the higher earner to continue working and earn delayed retirement credits until age 70.
"This would tend to maximize their lifetime benefits and, more importantly, maximizes the survivor's benefit," says Andrew Biggs, a resident scholar at the American Enterprise Institute and a former deputy commissioner of the Social Security Administration. "You will ensure you will have a higher benefit when you need one, which is when you are a widow later in life."
Social Security checks increase by 7% to 8% for each year of delayed claiming between your full retirement age and age 70. After age 70, there is no additional benefit for waiting to collect your due.
3. Claim twice. Spouses in dual-earner marriages who have reached their full retirement ages can claim Social Security twice: first as spouses, then using their own work records. A person may choose to sign up for only the spousal benefits at full retirement age and continue accruing delayed retirement credits on his or her own Social Security record. That person can then file for benefits based on his or her own work at a later date and receive a higher monthly benefit, thanks to the delayed retirement credits.
For example, a man planning to retire at age 70 could claim a spouse's benefit based on his wife's earnings at age 66 and then claim again based on his own working record when he exits the work force at age 70. High-income couples with relatively equal earnings gain the most using this strategy, according to calculations by the Center for Retirement Research at Boston College.
4. Include family. Social Security recipients who have children under age 16 or who are disabled can secure additional Social Security payments for the child and a spouse caring for the child, even if the spouse is under age 62. Each child is eligible for up to 50% of the retiree's full benefit. However, payments to family members are capped, typically at 150% to 180% of the retiree's benefit payment. If the total benefits due to the retiree's spouse and children are above this limit, their benefits will be reduced. The retiree's payout is not affected.
5. Take advantage of eligibility for ex-spouses. A former spouse may be eligible for benefits if the marriage lasted at least 10 years. The divorced spouse must be age 62 or older and unmarried. The amount of benefits an ex-spouse claims has no effect on the benefits the worker and his or her current spouse can receive.
6. Boost the survivor's benefit. Widows and widowers are entitled to the higher earner's full retirement benefit. A surviving spouse can begin receiving Social Security benefits at age 60, or at age 50 if he or she is disabled. Benefits are reduced by up to 28.5% if claimed before the recipient's full retirement age. The surviving member of a dual-earner couple also can claim a reduced benefit on one working record and then switch to the other.
For example, a woman could take a reduced widow's benefit at age 60, then, when she reaches full retirement age, claim 100% of the retirement benefits based on her own working record. Most survivor benefits are paid to women because wives are generally younger than their husbands and live longer. A spouse can increase the monthly survivor's benefit by 60% by waiting to sign up for Social Security until age 70.
This article was reported by Emily Brandon for U.S. News & World Report.
Published June 1, 2010
Taking Care of Parents (Forbes Magazine)
Elder Care
How To Parent Your Aging Parents
Liz Davidson, 05.18.10, 11:19 AM ET
How do you take the car keys away from a father who taught you to drive? When did he go from wise council to frail, elderly man?
Unfortunately, the What to Expect When You're Expecting book series on parenting doesn't have a volume on parenting your parents. If anyone thinks dealing with aging parents is easy, they're deluding themselves. It is often one of the most difficult challenges people face during their adult lives--and one for which they're least prepared.
The consequences of inaction, meanwhile, can be severe. Many adult children don't understand the complexity of the problem. Why would their parents resist setting up a power of attorney? Will they have to be dragged kicking and screaming to a senior facility? The answer all too often is "yes," even well after it has become painfully apparent to others that they are no longer capable of handling their own affairs.
The fact is many elderly people don't see themselves as elderly and hate being around other old people. To them, moving to a senior facility involves making a move that they feel they can never undo; they are moving in their minds from independence to dependence. Hence the kicking and screaming.
Knowing this, many parents hide trouble signs from their children. Couple such behavior with the fact that many children are themselves pressed for time and unprepared to take responsibility for their parents, and the entire situation is fraught with peril. Early on, children often ignore danger signs or delude themselves into thinking that their parents can still make good decisions.
I know an attorney whose 92-year-old mother enjoyed sending out $15 and $20 checks to play sweepstakes. Soon the mother became obsessed with winning so she could leave a large legacy to her sons. It didn't take long before a woman who had run an investment club, golfed into her eighties and taken Spanish lessons in her nineties was doing nothing but playing sweepstakes. Since her phone number was on her checks, she started receiving phone calls from scam artists and eventually was "caught" by her kids taking a cab to the bank to send $2,000 to a "nice fellow named John in Seattle" who supposedly had an even larger check waiting for her.
The cab ride became the wakeup call for the woman's family. My friend talked to his mother at length about her sweepstakes obsession and finally confiscated her checkbook, took over her bank accounts and had her mail diverted to his own home. With no sweepstakes offers arriving at his mom's house, she slowly returned to her community activities. For my friend, who'd ignored signs along the way and let the situation reach the breaking point before intervening, the solution required months of effort.
At least he'd had the power of attorney that enabled him to act and had his mother in a good assisted living facility. Imagine the difficulties when none of this is in place. Being proactive early on, rather than reactive after problems arrive, provides adult children with the tools to intervene effectively. Here are some important proactive steps to make sure you and your family are prepared:
--Establish a financial power of attorney. If your parent has concerns about losing control, consider a "springing" power that goes into effect only after the parent is unwilling, or unable, to make financial decisions alone.
--Add a durable power of attorney for health care to the estate plan. Be sure to discuss with your parent and family what medical treatment is, and is not, desired.
--Consider working with a financial advisor who specializes in multigenerational planning. This can help you balance the needs of parents for elder care, your own children for college and you for retirement. Aging parents may also be more apt to cooperate after receiving advice from an outside expert.
--Keep on hand updated lists of parents' medications. This is especially helpful in tracking drug interactions when parents use multiple doctors.
--Add a family member to your parents' safe deposit box and keep track of the key.
--Review long-term care policies and consider in advance ways to fund additional care if it becomes necessary.
--Talk with parents and siblings about the types of care that are available and when it would be wise to move. This helps prepare everyone mentally for big life changes.
It's impossible to pinpoint when any one family will have to take action on behalf of an aging parent, but it's important for grown children to keep in mind that their parents may downplay or hide signs that they're struggling to remain independent. Here are some early warning signs:
--A parent stops participating in activities and becomes isolated.
--His or her routine changes, often with a shift from cooking to eating packaged foods.
--He or she shows signs of poor judgment in managing money and becomes susceptible to fraud.
--His or her support system changes, with people who used to help having moved elsewhere or passed away.
--The parent becomes forgetful.
For many adult children, becoming a member of the sandwich generation involves taking care of elderly parents precisely at the time in their lives when they're faced with the challenges of getting their own children safely through their teenage years. To minimize the tribulations of this difficult time in life, it is critical to prepare early and have plans in place to take action if and when it becomes necessary. The alternative is to face the risk of a major family crisis right around the time you're taking the car keys from your parents and giving them to your teenager.
Liz Davidson is CEO of Financial Finesse, a provider of financial education for employers nationwide.
How To Parent Your Aging Parents
Liz Davidson, 05.18.10, 11:19 AM ET
How do you take the car keys away from a father who taught you to drive? When did he go from wise council to frail, elderly man?
Unfortunately, the What to Expect When You're Expecting book series on parenting doesn't have a volume on parenting your parents. If anyone thinks dealing with aging parents is easy, they're deluding themselves. It is often one of the most difficult challenges people face during their adult lives--and one for which they're least prepared.
The consequences of inaction, meanwhile, can be severe. Many adult children don't understand the complexity of the problem. Why would their parents resist setting up a power of attorney? Will they have to be dragged kicking and screaming to a senior facility? The answer all too often is "yes," even well after it has become painfully apparent to others that they are no longer capable of handling their own affairs.
The fact is many elderly people don't see themselves as elderly and hate being around other old people. To them, moving to a senior facility involves making a move that they feel they can never undo; they are moving in their minds from independence to dependence. Hence the kicking and screaming.
Knowing this, many parents hide trouble signs from their children. Couple such behavior with the fact that many children are themselves pressed for time and unprepared to take responsibility for their parents, and the entire situation is fraught with peril. Early on, children often ignore danger signs or delude themselves into thinking that their parents can still make good decisions.
I know an attorney whose 92-year-old mother enjoyed sending out $15 and $20 checks to play sweepstakes. Soon the mother became obsessed with winning so she could leave a large legacy to her sons. It didn't take long before a woman who had run an investment club, golfed into her eighties and taken Spanish lessons in her nineties was doing nothing but playing sweepstakes. Since her phone number was on her checks, she started receiving phone calls from scam artists and eventually was "caught" by her kids taking a cab to the bank to send $2,000 to a "nice fellow named John in Seattle" who supposedly had an even larger check waiting for her.
The cab ride became the wakeup call for the woman's family. My friend talked to his mother at length about her sweepstakes obsession and finally confiscated her checkbook, took over her bank accounts and had her mail diverted to his own home. With no sweepstakes offers arriving at his mom's house, she slowly returned to her community activities. For my friend, who'd ignored signs along the way and let the situation reach the breaking point before intervening, the solution required months of effort.
At least he'd had the power of attorney that enabled him to act and had his mother in a good assisted living facility. Imagine the difficulties when none of this is in place. Being proactive early on, rather than reactive after problems arrive, provides adult children with the tools to intervene effectively. Here are some important proactive steps to make sure you and your family are prepared:
--Establish a financial power of attorney. If your parent has concerns about losing control, consider a "springing" power that goes into effect only after the parent is unwilling, or unable, to make financial decisions alone.
--Add a durable power of attorney for health care to the estate plan. Be sure to discuss with your parent and family what medical treatment is, and is not, desired.
--Consider working with a financial advisor who specializes in multigenerational planning. This can help you balance the needs of parents for elder care, your own children for college and you for retirement. Aging parents may also be more apt to cooperate after receiving advice from an outside expert.
--Keep on hand updated lists of parents' medications. This is especially helpful in tracking drug interactions when parents use multiple doctors.
--Add a family member to your parents' safe deposit box and keep track of the key.
--Review long-term care policies and consider in advance ways to fund additional care if it becomes necessary.
--Talk with parents and siblings about the types of care that are available and when it would be wise to move. This helps prepare everyone mentally for big life changes.
It's impossible to pinpoint when any one family will have to take action on behalf of an aging parent, but it's important for grown children to keep in mind that their parents may downplay or hide signs that they're struggling to remain independent. Here are some early warning signs:
--A parent stops participating in activities and becomes isolated.
--His or her routine changes, often with a shift from cooking to eating packaged foods.
--He or she shows signs of poor judgment in managing money and becomes susceptible to fraud.
--His or her support system changes, with people who used to help having moved elsewhere or passed away.
--The parent becomes forgetful.
For many adult children, becoming a member of the sandwich generation involves taking care of elderly parents precisely at the time in their lives when they're faced with the challenges of getting their own children safely through their teenage years. To minimize the tribulations of this difficult time in life, it is critical to prepare early and have plans in place to take action if and when it becomes necessary. The alternative is to face the risk of a major family crisis right around the time you're taking the car keys from your parents and giving them to your teenager.
Liz Davidson is CEO of Financial Finesse, a provider of financial education for employers nationwide.
Taking Advantage of Mortgage Rates Now (New York Times)
March 19, 2010
When Not to Pay Down a Mortgage
By RON LIEBER
This week, the Federal Reserve reaffirmed its intention to stop buying mortgage-backed securities, signaling the likelihood that the mortgage rates you can get today are as good as they’re going to be for a long while. Once the Fed stops buying, after all, rates are likely to go up.
And current rates are quite good. At about 5 percent, in fact, they’re so good that they’ve helped change the age-old debate over whether homeowners should make extra mortgage payments to pay off their debt well before their loan periods are up.
Back when rates ran at 7 or 8 percent, making extra payments offered what amounted to a guaranteed return on your money. When you’re ridding yourself of debt that costs you much less, however, it’s easier to imagine a future when you could more easily earn a higher return by investing those potential extra mortgage payments someplace else.
Meanwhile, at a time when just about everyone knows someone who is unemployed or who owes more on a home loan than the house is worth, keeping extra cash someplace more liquid than a mortgage seems like a safer approach.
So is the case against extra payments closed for good, given that so many people have locked in rock-bottom mortgage rates for the long haul?
The answer depends on two things: how likely you are to leave the extra money in savings and how good it would feel to wipe your debt out years earlier than your mortgage requires.
THE BASICS First, let’s dispense with the standard boilerplate. Don’t even think about making extra mortgage payments unless you’ve paid off higher-interest debt. Credit card debt is the easiest win here.
Also, if you’re not saving enough to get the full match from your employer in a 401(k) or similar account, increase your savings there first. And don’t make extra mortgage payments if you don’t already have a decent emergency fund set aside.
YOUR REAL INTEREST RATE Now, take a look at the interest rate on your mortgage. That 5 percent? It’s not your real rate if you get some of the interest back each year in the form of a tax deduction.
Let’s say you have a household income of $175,000 and are paying 35 percent of that in total to the state and federal tax collectors. If you pay $20,000 in mortgage interest each year on a loan that charges 5 percent, the deduction effectively brings your taxable income down to $155,000.
As a result, you’re paying $7,500 (35 percent of $20,000) less in taxes than you would have without the deduction. So ultimately, you’re not really paying $20,000 in interest at all; your net cost is $12,500 after you subtract the $7,500 tax savings.
And that makes your effective, after-tax interest rate on your loan just 3.25 percent, which is simply 35 percent (your tax rate) less than the original 5 percent.
BETTER RETURNS? So any money you set aside in lieu of making extra mortgage payments would need to earn more than 3.25 percent annually. That seems like a reasonable possibility in the future.
In fact, you could have done that well during the supposedly lost decade we just finished. Vanguard Wellington, for instance, a popular low-cost mutual fund that holds about 65 percent stocks and 35 percent bonds and other short-term securities, earned an average annual return of 6.15 percent in the 10 years ended Dec. 31, 2009.
The Vanguard Balanced Index Fund would not have outperformed our 3.25 percent benchmark, however, as it only returned 2.64 percent over the same 10-year period.
STORING THE SAVINGS Wouldn’t taxes eat into the returns from the money you’d save instead of making extra mortgage payments? Not if you place it into an account shielded from taxes. A Roth individual retirement account would fit the bill here, as would a 529 college savings account or health savings account.
Bruce Primeau, whose note to his financial planning clients at Wide Financial Group in Minneapolis on this topic inspired me to re-examine it, adds that this isn’t simply about keeping more assets under his watch so he can earn a better living. “I’m not telling them that the money has to come to me,” he said. “A 401(k) match beats the return on paying a mortgage off automatically. There’s real estate and buying employer stock through a purchase plan at a 15 percent discount and all kinds of things.”
Then you need to preserve those savings. When extra money goes toward a mortgage, it’s hard to get at it when the urge strikes to flee to an Asian beach for a few weeks of playtime. If the money is not locked up in retirement or college savings, however, you may be tempted to spend it.
THE LIQUIDITY PROBLEM Capital-gains taxes might eventually come due with some of these investments, and the rate could well rise above the current 15 percent long-term rate before too long. Still, having some of your savings in a taxable account makes sense for several reasons.
If you hit a stretch of long-term unemployment after having plowed most of your extra cash into paying down your mortgage, your bank probably won’t pat you on the back for being a good saver and give the money back to you. Nor is it likely to let you borrow it through a home equity loan if you have no income with which to repay it.
Elaine Scoggins, who had the mortgage department chief reporting to her at a bank before she became a financial planner, suggests imagining a situation where you need to move quickly but can’t sell your home or extract equity to use as a down payment in your new town. Given that possibility, why create more home equity through extra mortgage payments than you have to?
“The whole housing debacle has reminded us all, including me, that real estate is not liquid,” said Ms. Scoggins, who is the client experience director for Merriman, a planning firm in Seattle. “And it takes cash to support it.”
Those who have used their cash in an attempt to be conscientious have learned some tough lessons, meanwhile. Imagine people who scraped together a 5 percent down payment and bought a home in Florida or Arizona in 2005 and then made extra mortgage payments the first two years to try to increase their equity. Now, post-collapse, they owe, say, 30 percent more than their homes are worth and need to seriously consider walking away from the loan — and all of those extra payments.
REASON AND EMOTION So the reasoned case for making no extra payments is very strong. But there’s one counterpoint that almost always carries the day, even when there’s only a mild risk with the financial strategy of putting extra money elsewhere.
And it’s this: I need to be able to sleep at night.
Even Mr. Primeau concedes here. “Emotionally, you’re right, and financially I’m right, and emotionally, you win,” he said. “If emotionally, people want to pay down their debt, then that’s what I help them to do.”
If you’ve just started paying down your mortgage, any extra payments should go toward principal (make sure your mortgage company is applying it properly). That will have the effect of shortening the term of your loan from, say, 30 to 25 years, depending on how many extra payments you make. The extra payments won’t lower your monthly payment, but they will reduce your balance.
Many people who are years into their mortgages — and perhaps paying less in interest and getting less of a tax break as a result — tend to develop stronger feelings about making extra payments. Those feelings are often even more acute as retirement approaches and homeowners become determined to quit work with no debt to their names.
Those who do retire their debt rarely regret it or wring their hands over the big gains they might have scored by investing the money elsewhere. Tim Maurer, a financial planner and co-author of “The Financial Crossroads,” describes the feeling that washes over people who have paid their last mortgage bill as “beholden to no one.”
So he doesn’t feel as if it’s his business to separate people from their emotions if they feel strongly about working toward a debt-free existence. “The whole point of planning is to make life better,” he said. “It’s not to have more dollars at the end of the day.”
When Not to Pay Down a Mortgage
By RON LIEBER
This week, the Federal Reserve reaffirmed its intention to stop buying mortgage-backed securities, signaling the likelihood that the mortgage rates you can get today are as good as they’re going to be for a long while. Once the Fed stops buying, after all, rates are likely to go up.
And current rates are quite good. At about 5 percent, in fact, they’re so good that they’ve helped change the age-old debate over whether homeowners should make extra mortgage payments to pay off their debt well before their loan periods are up.
Back when rates ran at 7 or 8 percent, making extra payments offered what amounted to a guaranteed return on your money. When you’re ridding yourself of debt that costs you much less, however, it’s easier to imagine a future when you could more easily earn a higher return by investing those potential extra mortgage payments someplace else.
Meanwhile, at a time when just about everyone knows someone who is unemployed or who owes more on a home loan than the house is worth, keeping extra cash someplace more liquid than a mortgage seems like a safer approach.
So is the case against extra payments closed for good, given that so many people have locked in rock-bottom mortgage rates for the long haul?
The answer depends on two things: how likely you are to leave the extra money in savings and how good it would feel to wipe your debt out years earlier than your mortgage requires.
THE BASICS First, let’s dispense with the standard boilerplate. Don’t even think about making extra mortgage payments unless you’ve paid off higher-interest debt. Credit card debt is the easiest win here.
Also, if you’re not saving enough to get the full match from your employer in a 401(k) or similar account, increase your savings there first. And don’t make extra mortgage payments if you don’t already have a decent emergency fund set aside.
YOUR REAL INTEREST RATE Now, take a look at the interest rate on your mortgage. That 5 percent? It’s not your real rate if you get some of the interest back each year in the form of a tax deduction.
Let’s say you have a household income of $175,000 and are paying 35 percent of that in total to the state and federal tax collectors. If you pay $20,000 in mortgage interest each year on a loan that charges 5 percent, the deduction effectively brings your taxable income down to $155,000.
As a result, you’re paying $7,500 (35 percent of $20,000) less in taxes than you would have without the deduction. So ultimately, you’re not really paying $20,000 in interest at all; your net cost is $12,500 after you subtract the $7,500 tax savings.
And that makes your effective, after-tax interest rate on your loan just 3.25 percent, which is simply 35 percent (your tax rate) less than the original 5 percent.
BETTER RETURNS? So any money you set aside in lieu of making extra mortgage payments would need to earn more than 3.25 percent annually. That seems like a reasonable possibility in the future.
In fact, you could have done that well during the supposedly lost decade we just finished. Vanguard Wellington, for instance, a popular low-cost mutual fund that holds about 65 percent stocks and 35 percent bonds and other short-term securities, earned an average annual return of 6.15 percent in the 10 years ended Dec. 31, 2009.
The Vanguard Balanced Index Fund would not have outperformed our 3.25 percent benchmark, however, as it only returned 2.64 percent over the same 10-year period.
STORING THE SAVINGS Wouldn’t taxes eat into the returns from the money you’d save instead of making extra mortgage payments? Not if you place it into an account shielded from taxes. A Roth individual retirement account would fit the bill here, as would a 529 college savings account or health savings account.
Bruce Primeau, whose note to his financial planning clients at Wide Financial Group in Minneapolis on this topic inspired me to re-examine it, adds that this isn’t simply about keeping more assets under his watch so he can earn a better living. “I’m not telling them that the money has to come to me,” he said. “A 401(k) match beats the return on paying a mortgage off automatically. There’s real estate and buying employer stock through a purchase plan at a 15 percent discount and all kinds of things.”
Then you need to preserve those savings. When extra money goes toward a mortgage, it’s hard to get at it when the urge strikes to flee to an Asian beach for a few weeks of playtime. If the money is not locked up in retirement or college savings, however, you may be tempted to spend it.
THE LIQUIDITY PROBLEM Capital-gains taxes might eventually come due with some of these investments, and the rate could well rise above the current 15 percent long-term rate before too long. Still, having some of your savings in a taxable account makes sense for several reasons.
If you hit a stretch of long-term unemployment after having plowed most of your extra cash into paying down your mortgage, your bank probably won’t pat you on the back for being a good saver and give the money back to you. Nor is it likely to let you borrow it through a home equity loan if you have no income with which to repay it.
Elaine Scoggins, who had the mortgage department chief reporting to her at a bank before she became a financial planner, suggests imagining a situation where you need to move quickly but can’t sell your home or extract equity to use as a down payment in your new town. Given that possibility, why create more home equity through extra mortgage payments than you have to?
“The whole housing debacle has reminded us all, including me, that real estate is not liquid,” said Ms. Scoggins, who is the client experience director for Merriman, a planning firm in Seattle. “And it takes cash to support it.”
Those who have used their cash in an attempt to be conscientious have learned some tough lessons, meanwhile. Imagine people who scraped together a 5 percent down payment and bought a home in Florida or Arizona in 2005 and then made extra mortgage payments the first two years to try to increase their equity. Now, post-collapse, they owe, say, 30 percent more than their homes are worth and need to seriously consider walking away from the loan — and all of those extra payments.
REASON AND EMOTION So the reasoned case for making no extra payments is very strong. But there’s one counterpoint that almost always carries the day, even when there’s only a mild risk with the financial strategy of putting extra money elsewhere.
And it’s this: I need to be able to sleep at night.
Even Mr. Primeau concedes here. “Emotionally, you’re right, and financially I’m right, and emotionally, you win,” he said. “If emotionally, people want to pay down their debt, then that’s what I help them to do.”
If you’ve just started paying down your mortgage, any extra payments should go toward principal (make sure your mortgage company is applying it properly). That will have the effect of shortening the term of your loan from, say, 30 to 25 years, depending on how many extra payments you make. The extra payments won’t lower your monthly payment, but they will reduce your balance.
Many people who are years into their mortgages — and perhaps paying less in interest and getting less of a tax break as a result — tend to develop stronger feelings about making extra payments. Those feelings are often even more acute as retirement approaches and homeowners become determined to quit work with no debt to their names.
Those who do retire their debt rarely regret it or wring their hands over the big gains they might have scored by investing the money elsewhere. Tim Maurer, a financial planner and co-author of “The Financial Crossroads,” describes the feeling that washes over people who have paid their last mortgage bill as “beholden to no one.”
So he doesn’t feel as if it’s his business to separate people from their emotions if they feel strongly about working toward a debt-free existence. “The whole point of planning is to make life better,” he said. “It’s not to have more dollars at the end of the day.”
Investing Behavior - Men vs Women (N Y Times)
March 12, 2010
How Men’s Overconfidence Hurts Them as Investors
By JEFF SOMMER
MEN and women invest differently, a growing body of research has found. And in at least one important respect, women may be better at it.
The latest data comes from Vanguard, the mutual fund company. Among 2.7 million people with I.R.A.’s at the company, it found that during the financial crisis of 2008 and 2009, men were much more likely than women to sell their shares at stock market lows. Those sales presumably meant big losses — and missing the start of the market rally that began a year ago.
Male investors, as a group, appear to be overconfident, said John Ameriks, head of Vanguard Investment Counseling and Research and a co-author of the study. “There’s been a lot of academic research suggesting that men think they know what they’re doing, even when they really don’t know what they’re doing,” he said.
Women, on the other hand, appear more likely to acknowledge when they don’t know something — like the direction of the stock market or of the price of a stock or a bond.
Staying the course and minimizing costs — selling high and buying low, if you trade at all — are the classic characteristics of good long-term, buy-and-hold investors. But during the financial crisis, the Vanguard study showed, men were more likely than women to trade — and to do so at the wrong times.
That fits the patterns found in path-breaking research by Brad M. Barber of the University of California, Davis, and Terrance Odean, now at the University of California, Berkeley. In a 2001 study titled, “Boys Will Be Boys: Gender, Overconfidence and Common Stock Investment,” they analyzed the investing behavior of more than 35,000 households from a large discount brokerage firm. All else being equal, men traded stocks nearly 50 percent more often than women. This added trading drove up the men’s costs and lowered their returns.
The economists found that while both sexes reduced net returns through trading, men did so by 0.94 percentage points more per year.
In a telephone interview, Professor Barber said, “In general, overconfident investors are going to be interpreting what’s going on around them and feeling they are able make decisions that they’re really not equipped to make.”
Short-term financial news often amounts to little more than meaningless “noise,” he said. Far more than women, men try to make sense out of this noise, and to no avail.
Of course, gender generalizations must be taken with caution: they clearly don’t apply to all men or all women. “The differences among women and the differences among men are much greater than the differences between men and women,” he said.
Nevertheless, numerous studies show that men are more prone to make this particular mistake than women.
Women have also been shown to be more risk-averse than men. In portfolio selection, women tend to have a greater preference for fixed-income investments. That could cause their portfolio returns to lag over the long run, assuming that stocks outperform bonds — though in a shaky market like the one of the last decade, this greater caution might be beneficial.
Selling volatile stocks in a down market — as male I.R.A. investors did more often than women, according to the Vanguard data — might seem to protect a portfolio. But that isn’t necessarily so. Selling before the market falls and buying after it falls is the smart move. For long-term investors, though, the best strategy may be to ignore short-term market movements (perhaps rebalancing a diversified portfolio every so often).
Gender differences appear to extend to other financial behavior. For example, women who are C.E.O.’s and company directors tend to pay a lower premium in corporate takeovers, saving their shareholders a bundle, according to a 2008 study of mergers and acquisitions by Maurice D. Levi, Kai Li and Feng Zhang of the University of British Columbia.
What explains these differences? The answer isn’t clear.
“Is it biological, or cultural?” Professor Barber asked. “Nature or nurture? At this point, we don’t know.”
Plenty of research is under way, though. Over the last five years, brain-imaging technology has made it possible to determine “what is happening in the brain just before people make financial decisions,” said Brian Knutson, a Stanford psychologist and neuroscientist.
Researchers have found that activating the nucleus accumbens — a brain region that is stimulated when you eat delicious food or look at an attractive person — can affect financial risk-taking. When young Stanford men were shown pictures of partially clothed men and women kissing, he said, that region of their brains was activated. And when they were then given financial tests, the men became more likely to “make high-risk gambles.”
Women didn’t respond much to the same pictures, he said; it’s possible the researchers didn’t test enough women or that they haven’t found the right stimuli.
Others studying the effects of hormones on financial behavior have found correlations between testosterone and risk-taking.
Alexandra Bernasek, a professor of economics at Colorado State University, said that the weight of history — enormous gender disparities in earnings, wealth, power and social status — might explain many behavioral differences. It’s also possible, she said, that evolutionary psychology accounts for some of them. Before the dawn of history, aggressive risk-taking might have given men an advantage in finding mates, she said, while women might have become more risk-averse to protect their offspring.
Science may eventually provide some answers. In the meantime, she said, it would be a mistake to “force women into riskier financial behavior” that may be inappropriate, both for them and for society at large.
“Excessive risk-taking has gotten all of us into a lot of trouble,” she said. “That’s certainly one
of the lessons of the financial crisis.”
How Men’s Overconfidence Hurts Them as Investors
By JEFF SOMMER
MEN and women invest differently, a growing body of research has found. And in at least one important respect, women may be better at it.
The latest data comes from Vanguard, the mutual fund company. Among 2.7 million people with I.R.A.’s at the company, it found that during the financial crisis of 2008 and 2009, men were much more likely than women to sell their shares at stock market lows. Those sales presumably meant big losses — and missing the start of the market rally that began a year ago.
Male investors, as a group, appear to be overconfident, said John Ameriks, head of Vanguard Investment Counseling and Research and a co-author of the study. “There’s been a lot of academic research suggesting that men think they know what they’re doing, even when they really don’t know what they’re doing,” he said.
Women, on the other hand, appear more likely to acknowledge when they don’t know something — like the direction of the stock market or of the price of a stock or a bond.
Staying the course and minimizing costs — selling high and buying low, if you trade at all — are the classic characteristics of good long-term, buy-and-hold investors. But during the financial crisis, the Vanguard study showed, men were more likely than women to trade — and to do so at the wrong times.
That fits the patterns found in path-breaking research by Brad M. Barber of the University of California, Davis, and Terrance Odean, now at the University of California, Berkeley. In a 2001 study titled, “Boys Will Be Boys: Gender, Overconfidence and Common Stock Investment,” they analyzed the investing behavior of more than 35,000 households from a large discount brokerage firm. All else being equal, men traded stocks nearly 50 percent more often than women. This added trading drove up the men’s costs and lowered their returns.
The economists found that while both sexes reduced net returns through trading, men did so by 0.94 percentage points more per year.
In a telephone interview, Professor Barber said, “In general, overconfident investors are going to be interpreting what’s going on around them and feeling they are able make decisions that they’re really not equipped to make.”
Short-term financial news often amounts to little more than meaningless “noise,” he said. Far more than women, men try to make sense out of this noise, and to no avail.
Of course, gender generalizations must be taken with caution: they clearly don’t apply to all men or all women. “The differences among women and the differences among men are much greater than the differences between men and women,” he said.
Nevertheless, numerous studies show that men are more prone to make this particular mistake than women.
Women have also been shown to be more risk-averse than men. In portfolio selection, women tend to have a greater preference for fixed-income investments. That could cause their portfolio returns to lag over the long run, assuming that stocks outperform bonds — though in a shaky market like the one of the last decade, this greater caution might be beneficial.
Selling volatile stocks in a down market — as male I.R.A. investors did more often than women, according to the Vanguard data — might seem to protect a portfolio. But that isn’t necessarily so. Selling before the market falls and buying after it falls is the smart move. For long-term investors, though, the best strategy may be to ignore short-term market movements (perhaps rebalancing a diversified portfolio every so often).
Gender differences appear to extend to other financial behavior. For example, women who are C.E.O.’s and company directors tend to pay a lower premium in corporate takeovers, saving their shareholders a bundle, according to a 2008 study of mergers and acquisitions by Maurice D. Levi, Kai Li and Feng Zhang of the University of British Columbia.
What explains these differences? The answer isn’t clear.
“Is it biological, or cultural?” Professor Barber asked. “Nature or nurture? At this point, we don’t know.”
Plenty of research is under way, though. Over the last five years, brain-imaging technology has made it possible to determine “what is happening in the brain just before people make financial decisions,” said Brian Knutson, a Stanford psychologist and neuroscientist.
Researchers have found that activating the nucleus accumbens — a brain region that is stimulated when you eat delicious food or look at an attractive person — can affect financial risk-taking. When young Stanford men were shown pictures of partially clothed men and women kissing, he said, that region of their brains was activated. And when they were then given financial tests, the men became more likely to “make high-risk gambles.”
Women didn’t respond much to the same pictures, he said; it’s possible the researchers didn’t test enough women or that they haven’t found the right stimuli.
Others studying the effects of hormones on financial behavior have found correlations between testosterone and risk-taking.
Alexandra Bernasek, a professor of economics at Colorado State University, said that the weight of history — enormous gender disparities in earnings, wealth, power and social status — might explain many behavioral differences. It’s also possible, she said, that evolutionary psychology accounts for some of them. Before the dawn of history, aggressive risk-taking might have given men an advantage in finding mates, she said, while women might have become more risk-averse to protect their offspring.
Science may eventually provide some answers. In the meantime, she said, it would be a mistake to “force women into riskier financial behavior” that may be inappropriate, both for them and for society at large.
“Excessive risk-taking has gotten all of us into a lot of trouble,” she said. “That’s certainly one
of the lessons of the financial crisis.”
Financial Security for Women (AARP)
Women More Likely to Face a Life Crisis, Financial Hardship
August 13, 2009
Two-thirds of women between the ages of 40 and 79 have encountered a life crisis, be it a long-term unemployment, divorce, death of a spouse or a major illness or disability of someone in their household, AARP found. And with this, they encounter financial and emotional hardship.
AARP encourages women undergoing such stress to seek out counseling, and the organization itself offers free life crisis action plans and phone consultations.
“No one escapes the financial implications of a life crisis, but they are particularly acute for women,” noted Richard “Mac” Hisey, president of AARP Financial. "The demographic considerations are obvious: women outlive men, so they experience more life crises and deal with the consequences longer. But women also tend to be the caregivers. That means women are frequently dealing with the human and logistical consequences of a life crisis, leaving little time and energy for the financial considerations."
AARP found in a survey that 46% of women who had experienced the death of a spouse said it had a very significant impact on their finances, as opposed to only 17% of men. Among women who experienced long-term job loss, 66% said it had a very significant impact on their finances, as opposed to 49% of men.
“The findings relative to long-term job loss are particularly troublesome, given the state of the economy and the impact of job loss on women,” Hisey said.
In the case of divorce, 74% of women reduced their expenses, but only 59% of men did. Fifty-nine percent of women sold their home, as opposed to 44% of men, and 42% began working or took on a second job, compared to 21% of men.
Consequently, 61% of women said they are worried about the financial future, while only 52% of men have such worries. Fifty-two percent of women have less than $50,000 saved for retirement, while 28% of men have such low savings.
"The road to long-term financial security is already a difficult one for many women, and detours can emerge at any point along the way," Hisey said. "That's why planning for a life crisis and minimizing its financial impact are so important for achieving long-term financial security."
August 13, 2009
Two-thirds of women between the ages of 40 and 79 have encountered a life crisis, be it a long-term unemployment, divorce, death of a spouse or a major illness or disability of someone in their household, AARP found. And with this, they encounter financial and emotional hardship.
AARP encourages women undergoing such stress to seek out counseling, and the organization itself offers free life crisis action plans and phone consultations.
“No one escapes the financial implications of a life crisis, but they are particularly acute for women,” noted Richard “Mac” Hisey, president of AARP Financial. "The demographic considerations are obvious: women outlive men, so they experience more life crises and deal with the consequences longer. But women also tend to be the caregivers. That means women are frequently dealing with the human and logistical consequences of a life crisis, leaving little time and energy for the financial considerations."
AARP found in a survey that 46% of women who had experienced the death of a spouse said it had a very significant impact on their finances, as opposed to only 17% of men. Among women who experienced long-term job loss, 66% said it had a very significant impact on their finances, as opposed to 49% of men.
“The findings relative to long-term job loss are particularly troublesome, given the state of the economy and the impact of job loss on women,” Hisey said.
In the case of divorce, 74% of women reduced their expenses, but only 59% of men did. Fifty-nine percent of women sold their home, as opposed to 44% of men, and 42% began working or took on a second job, compared to 21% of men.
Consequently, 61% of women said they are worried about the financial future, while only 52% of men have such worries. Fifty-two percent of women have less than $50,000 saved for retirement, while 28% of men have such low savings.
"The road to long-term financial security is already a difficult one for many women, and detours can emerge at any point along the way," Hisey said. "That's why planning for a life crisis and minimizing its financial impact are so important for achieving long-term financial security."
Re-Building Your Portfolio (WSJ)
RETIREMENT PLANNING JULY 25, 2009 How to Build a Portfolio Wisely and Safely
By JEFF D. OPDYKE
Inflation or deflation?
Even the experts can't agree whether rising or falling prices lie in our future.
That leaves investors in a quandary: how to construct a portfolio at a time of great uncertainty. A wrong bet could be devastating. If your portfolio is built for deflation, for example, your assets will slump if the country instead experiences a bout of inflation.
The answer is to prepare for the economic scenario you think is most likely, and then build in some insurance in case you are wrong.
"If you want to win the war," says Rich Rosso, a financial consultant at Charles Schwab, "you have to own both sides of the fight to some degree."
Such an approach necessarily means some investments will suffer no matter how the economy turns. That is OK: Buying insurance doesn't mean you actually want to use it.Here are three portfolios, each with built-in insurance. The first will do best in an inflationary period but won't be crushed if deflation instead rules the day. The second is for investors who fear deflation, but want some protection against potential inflation -- even if it is down the road. And the third is aimed at investors who believe the economy will muddle through without severe inflation or deflation.
Inflation
If you believe all the government spending in response to the financial crisis will ultimately beget inflation, you want a portfolio that thrives in a period of surging prices.
Commodities are the primary play, because everything from oil and corn to copper and pork bellies should gain. Plus, commodities -- particularly gold -- hedge against the dollar, offering a 2-for-1 benefit if a weak dollar accompanies inflation, as some expect.
Since commodities contracts can be a hassle for individual investors, consider a fund such as Pimco's CommodityRealReturn Strategy Fund, which offers exposure to a broad swath of industrial and agricultural commodities.
Though it seems counterintuitive, cash can do pretty well, too. The Federal Reserve would likely fight rising inflation by pushing up short-term interest rates, allowing investors with cash to capture the escalating rates through short-term certificates of deposit and money-market accounts.
Michele Gambera, chief economist at Ibbotson Associates, says his research shows that in the last five bouts of meaningful inflation, returns on cash essentially matched the inflation rate, meaning it isn't losing its purchasing power. Online banks and local credit unions tend to offer the highest rates.
Treasury inflation-protected securities, or TIPS, are an obvious investment since their principal adjusts upward along with inflation. TIPS exposure is available through mutual funds, such as the Vanguard Inflation-Protected Securities Fund, though Steven Fox, director of forecasting at Russell Investments, notes that holding individual bonds to maturity is more effective as an inflation hedge since "the majority of the inflation protection comes when the inflated principal is repaid." Individual TIPS are available through brokerage firms or TreasuryDirect.gov.
Sharp inflation is generally a negative for stocks, because rising interest rates potentially pinch corporate profits and undermine economic growth. But a few stocks will likely do fine. Start with energy and metals stocks because higher prices for their commodities will boost earnings, says Mark Kiesel, a managing director at Pacific Investment Management Co., or Pimco. Include as well U.S. firms with pricing power, such as regulated utilities, domestic pipeline companies and manufacturers of specialty materials. Examples of companies to consider: miners such as Freeport-McMoRan Copper & Gold and energy giant Exxon Mobil, or companies indirectly tied to commodity prices, such as driller Diamond Offshore Drilling, farm-equipment company Deere and seed supplier Monsanto.
Insurance Component: Long-term Treasury bonds and municipal bonds.
Both will likely soar in value amid deflation because their long period of fixed payments would be an attractive source of income as prices for goods and services broadly fall, and as paychecks shrink. And Treasurys, in particular, would likely become a haven for foreign investors, further pushing up their price.
Deflation
Portfolio preparation is easier for deflationists: Put a chunk of money into long-term Treasury bonds and much of the rest into cash and some municipal bonds.
If broad-based deflation materializes, long-term Treasurys are likely to surge. The bonds' fixed-income stream, meanwhile, would be worth increasingly more relative to falling consumer prices.
Some investment-grade municipal bonds could serve a similar role while also providing tax advantages for high-income earners. But beware: Deflation would likely mean some taxing authorities struggle to service bonds reliant on a specific income stream, like user fees. Instead, stick to "investment-grade bonds tied to necessary services like water and sewage, power or necessary government offices like, say, a courthouse building," says Marilyn Cohen, president of bond-investment firm Envision Capital.
Round out your deflation portfolio with a big slug of cash. Though it won't generate much of a return in a low-rate, deflationary environment, cash in the bank will gain value as prices fall.
Insurance Component: Commodities react most drastically to surprise inflation, so they should be part of your insurance. Add in TIPS, too, and stocks geared "toward consumer-staple companies," says Ibbotson's Mr. Gambera. If inflation arises, companies such Coca-Cola, tobacco giant Altria, and toothpaste maker Colgate-Palmolive will have some pricing power.
Goldilocks Economy
Maybe, just maybe, world bankers will get this right, and the economy will experience neither severe inflation nor severe deflation.
"We think most likely the central banks of the world will get this close enough to right that we will settle in close" to a relatively benign inflation rate of between 1.5% and 2.5%, says Aaron Gurwitz, head of global investment strategy at Barclays Wealth.
In such a "Goldilocks" scenario -- where the economy is neither too hot nor too cold -- "risky assets would do best, so equities and bonds with some equity characteristics should receive the emphasis," says Scott Wolle, portfolio manager of the AIM Balanced-Risk Allocation Fund.
That means broad exposure to large-cap and small-cap U.S. stocks through funds such as the Vanguard 500 Index Fund or the Bridgeway Small-Cap Value fund; and exposure to developed and emerging markets through funds like the Vanguard Total International Stock Index Fund (mainly developed markets), and the T. Rowe Price Emerging Markets Stock Fund.
For the bond component, pick a fund such as the Fidelity Total Bond fund that largely owns high-grade, intermediate-term corporate bonds and mortgages, along with government and agency debt.
Insurance Component: Just in case the Goldilocks scenario is wrong, you will need insurance against either inflation or deflation. Pick up inflation protection through a commodity ETF, and deflation protection with long-term Treasurys. Cash also is OK in either situation.
Write to Jeff D. Opdyke at jeff.opdyke@wsj.com
8 ways to leave a mess for your heirs ( Estate Planning ) from bankrate.com
8 ways to leave a mess behind
By Sheyna Steiner • Bankrate.com
1. Stay ignorant about the process
2. Be clueless about the role of wills
3. Put your kid's name on the deed
4. Dawdle indefinitely
5. Don't trust trusts
6. Leave messy financial records
7. Give your ex-spouse a parting gift
8. Let others figure out what you want
From Financial Literacy,Chapter 11
http://www.bankrate.com/nltrack/news/financial_literacy/Nov07_planning-heirs_main_a1.asp?s=11&caret=70
By Sheyna Steiner • Bankrate.com
1. Stay ignorant about the process
2. Be clueless about the role of wills
3. Put your kid's name on the deed
4. Dawdle indefinitely
5. Don't trust trusts
6. Leave messy financial records
7. Give your ex-spouse a parting gift
8. Let others figure out what you want
From Financial Literacy,Chapter 11
http://www.bankrate.com/nltrack/news/financial_literacy/Nov07_planning-heirs_main_a1.asp?s=11&caret=70
Where the Professionals are Investing (WSJ)
Where the Financial Gurus Are Putting Their Own Money
By Eleanor Laise, The Wall Street Journal
Last update: 3:27 p.m. EST Jan. 29, 2009
In times of market strife, financial gurus often tell investors to think long-term and stay the course. Some of them even put their own money where their mouth is.
A sampling of high-profile industry veterans, academics and brokerage-firm chiefs reveals that many are hanging on to holdings battered by last year's market slide and busily hunting down new opportunities, particularly among bonds and beaten-down value stocks. Some are snapping up municipal bonds, inflation-indexed securities and steady-Eddie dividend-paying stocks.
And they're generally upbeat about the prospects for long-term retirement savers.
"I think this is a marvelous time to be investing," says Rob Arnott, the 54-year-old chairman of Research Affiliates LLC, an investment-management firm in Newport Beach, Calif. "There are more interesting opportunities out there now than any of today's investors have ever seen." Financial stars are facing some of the same retirement-planning headaches as ordinary investors. Many suffered substantial losses last year in a market that crushed nearly everything. But unlike many small investors, they're patiently waiting and watching for bargains rather than making a mad dash for havens like cash or Treasury bonds or drastically revising their asset-allocation plans. And where possible, they're even stepping up their savings to put more cash to work in the market.
Certain parts of the bond market are priced for a scenario that's worse than the Great Depression.
Great investing minds don't always think alike, of course. John Bogle, the 79-year-old founder of mutual-fund giant Vanguard Group, says he has only about 25% of his portfolio in stocks, for example, while David Dreman, the 72-year-old chairman and chief investment officer of Dreman Value Management LLC, says he has a roughly 70% stock allocation. They do appear to have one thing in common, though: patience -- a trait many small investors lack. Last year, 401(k) participants shifted around 5.7% of their balances, compared with just over 3% in a typical year, according to consulting firm Hewitt Associates. Money flowed out of stock funds and into bond investments, money-market funds and stable-value products. And many fed-up and tapped-out investors have stopped contributing to retirement accounts altogether.
But this is hardly the time to hunker down and take bets off the table, financial pros say. Don Phillips, managing director at investment research firm Morningstar Inc., says he invests his entire individual retirement account in the Clipper Fund, a large-cap stock fund that lost about 50% last year. Early this year, he made the maximum IRA contribution to that fund, just as he has for the last 20 years. "It's long-term money, and you have to look at it that way," he says.
Here's how some top investing experts are now allocating their own retirement savings and handling the heavy blows being dealt by a volatile market.
Bonds
While many financial gurus say they're starting to spot some great opportunities in stocks, they believe the bargains in select corners of the bond market are even better. "Certain parts of the bond market are priced for a scenario that's worse than the Great Depression," Mr. Arnott says.
I earn my money and spend my money in dollars, and I don't need to take currency risk.
One favored area is Treasury Inflation-Protected Securities, or TIPS, a type of Treasury bond whose principal is adjusted based on changes in the inflation rate. Ten-year Treasurys currently yield only about 0.9 percentage point more than 10-year TIPS, indicating that investors believe inflation will remain quite low in the coming years. Mr. Arnott says he boosted his TIPS allocation "in a very big way" in his personal taxable account toward the end of last year because he expects a substantial increase in inflation in the next three to five years.
Municipal bonds also look attractive to many longtime investors. Munis are typically exempt from federal and, in many cases, state and local income taxes. Many are now yielding substantially more than comparable Treasury bonds. In his taxable account, Mr. Bogle holds two muni-bond funds: Vanguard Limited-Term Tax-Exempt and Vanguard Intermediate-Term Tax-Exempt.
Burton Malkiel, a 76-year-old economics professor at Princeton University and author of "A Random Walk Down Wall Street," says he boosted his allocation to highly rated tax-exempt bonds in his taxable account late last year, since yields available on some of these bonds were "unheard of." Some market watchers believe that it's time to take on more risk in their bond portfolios. Even investment-grade corporate bonds offer high yields, and below-investment-grade junk bonds yield far more than that. Mr. Arnott boosted his allocation to investment-grade corporate bonds in his personal taxable account late last year because the market had reached "irrationally high yields," he says. And Jeremy Siegel, a professor of finance at the University of Pennsylvania's Wharton School and senior adviser to exchange-traded-fund management firm WisdomTree Investments, has recently raised his allocation for junk bonds.
"Stocks and high-yield bonds will move together as the crisis passes," rebounding from their depressed levels, the 63-year-old Mr. Siegel says.
Stocks
Financial gurus are picking through the wreckage of last year's stock-market meltdown to find the best bargains.
Emerging-markets stocks have 'gotten cheap enough to really give value now.'
Jeremy Siegel, the Wharton SchoolSome are looking for companies with strong market positions and juicy dividends. Muriel Siebert, founder and chairwoman of brokerage firm Muriel Siebert & Co., has recently been buying shares of companies like Pfizer (
PFE) Inc., Altria Group (MO) Inc., and General Electric (GE) Co. "I don't mind buying a stock on the bottom and waiting," says the 76-year-old Ms. Siebert. "But I do think when you get a market like this, you should be paid while you wait." Pfizer and Altria yield roughly 8%, while GE yields over 9%.
Some battered stocks in the energy sector also look like bargains, Mr. Dreman says. He likes oil and gas exploration and production companies like Anadarko Petroleum (APC) Corp., Apache (APA) Corp., and Devon Energy (DVN) Corp. If we don't have a long world-wide recession -- a scenario that Mr. Dreman thinks oil prices currently reflect -- "we'll see much higher prices for oil again," he says.
More From the Gurus
•
Though foreign stocks were generally hit harder than U.S. shares last year, some gurus aren't rushing to invest overseas. Mr. Bogle, who says he has a very small allocation for international stocks, notes that investors poured money into foreign funds in recent years, chasing their strong returns, while yanking money out of lagging U.S. stock funds. "To me that's a red warning flag on a very tall flagpole on a very windy day," he says. "I also earn my money and spend my money in dollars, and I don't need to take currency risk."
Other experts say that emerging-markets stocks, which were hit especially hard last year, are starting to look tempting. If these shares take another dip, they could become "extremely interesting," Mr. Arnott says. Mr. Siegel keeps one-quarter to one-third of his foreign-stock allocation in emerging markets, and "they've gotten cheap enough to really give value now," he says. He has bought some more of these shares as they've declined in recent months.
Jim Rogers, a 66-year-old veteran commodities investor based in Singapore, is putting new money into Chinese shares. He's focusing on sectors of the economy that the Chinese are pushing to develop, such as agriculture, water, infrastructure and tourism.
Market gurus are also finding some bargains among alternative investments. Mr. Rogers is putting some new money into commodities, particularly agricultural commodities. "We're burning a lot of our food in fuel tanks right now," he says. And Mr. Siegel recently added some U.S. real estate investment trusts to his portfolio, which got "very cheap" after declining sharply last year, he says.
Staying the Course
Sticking to principles they've developed over decades in the market allows people who live and breathe investments to be relatively relaxed about their retirement portfolios.
I don't mind buying a stock on the bottom and waiting. But I do think when you get a market like this, you should be paid while you wait.
Muriel Siebert, Muriel Siebert & Co.Morningstar's Mr. Phillips, 46, has made it easier to stay the course. He has relinquished responsibility for allocating his 401(k) account, leaving those decisions in the hands of a managed-account program run by a unit of Morningstar. The program, which he started using in 2007, has "actually been very good for me," Mr. Phillips says. "They started putting me into things like TIPS and high-quality bond funds that I'd never had in the portfolio before."
And when they do suffer substantial losses, they tend not to panic. Mr. Phillips remains committed to his battered Clipper Fund, though it lagged the Standard & Poor's 500-stock index by about 13 percentage points last year. Ms. Siebert says she took a "very substantial loss" in Wachovia Corp. stock, which plummeted last year before the company was sold to Wells Fargo (WFC) & Co., but she's hanging on to the Wells Fargo stock she received "until I see a reason not to."
She is, however, a bit sensitive when asked about her portfolio's overall performance last year. "Do you want to see a grown woman cry?" she asks.
Write to Eleanor Laise at eleanor.laise@wsj.com
By Eleanor Laise, The Wall Street Journal
Last update: 3:27 p.m. EST Jan. 29, 2009
In times of market strife, financial gurus often tell investors to think long-term and stay the course. Some of them even put their own money where their mouth is.
A sampling of high-profile industry veterans, academics and brokerage-firm chiefs reveals that many are hanging on to holdings battered by last year's market slide and busily hunting down new opportunities, particularly among bonds and beaten-down value stocks. Some are snapping up municipal bonds, inflation-indexed securities and steady-Eddie dividend-paying stocks.
And they're generally upbeat about the prospects for long-term retirement savers.
"I think this is a marvelous time to be investing," says Rob Arnott, the 54-year-old chairman of Research Affiliates LLC, an investment-management firm in Newport Beach, Calif. "There are more interesting opportunities out there now than any of today's investors have ever seen." Financial stars are facing some of the same retirement-planning headaches as ordinary investors. Many suffered substantial losses last year in a market that crushed nearly everything. But unlike many small investors, they're patiently waiting and watching for bargains rather than making a mad dash for havens like cash or Treasury bonds or drastically revising their asset-allocation plans. And where possible, they're even stepping up their savings to put more cash to work in the market.
Certain parts of the bond market are priced for a scenario that's worse than the Great Depression.
Great investing minds don't always think alike, of course. John Bogle, the 79-year-old founder of mutual-fund giant Vanguard Group, says he has only about 25% of his portfolio in stocks, for example, while David Dreman, the 72-year-old chairman and chief investment officer of Dreman Value Management LLC, says he has a roughly 70% stock allocation. They do appear to have one thing in common, though: patience -- a trait many small investors lack. Last year, 401(k) participants shifted around 5.7% of their balances, compared with just over 3% in a typical year, according to consulting firm Hewitt Associates. Money flowed out of stock funds and into bond investments, money-market funds and stable-value products. And many fed-up and tapped-out investors have stopped contributing to retirement accounts altogether.
But this is hardly the time to hunker down and take bets off the table, financial pros say. Don Phillips, managing director at investment research firm Morningstar Inc., says he invests his entire individual retirement account in the Clipper Fund, a large-cap stock fund that lost about 50% last year. Early this year, he made the maximum IRA contribution to that fund, just as he has for the last 20 years. "It's long-term money, and you have to look at it that way," he says.
Here's how some top investing experts are now allocating their own retirement savings and handling the heavy blows being dealt by a volatile market.
Bonds
While many financial gurus say they're starting to spot some great opportunities in stocks, they believe the bargains in select corners of the bond market are even better. "Certain parts of the bond market are priced for a scenario that's worse than the Great Depression," Mr. Arnott says.
I earn my money and spend my money in dollars, and I don't need to take currency risk.
One favored area is Treasury Inflation-Protected Securities, or TIPS, a type of Treasury bond whose principal is adjusted based on changes in the inflation rate. Ten-year Treasurys currently yield only about 0.9 percentage point more than 10-year TIPS, indicating that investors believe inflation will remain quite low in the coming years. Mr. Arnott says he boosted his TIPS allocation "in a very big way" in his personal taxable account toward the end of last year because he expects a substantial increase in inflation in the next three to five years.
Municipal bonds also look attractive to many longtime investors. Munis are typically exempt from federal and, in many cases, state and local income taxes. Many are now yielding substantially more than comparable Treasury bonds. In his taxable account, Mr. Bogle holds two muni-bond funds: Vanguard Limited-Term Tax-Exempt and Vanguard Intermediate-Term Tax-Exempt.
Burton Malkiel, a 76-year-old economics professor at Princeton University and author of "A Random Walk Down Wall Street," says he boosted his allocation to highly rated tax-exempt bonds in his taxable account late last year, since yields available on some of these bonds were "unheard of." Some market watchers believe that it's time to take on more risk in their bond portfolios. Even investment-grade corporate bonds offer high yields, and below-investment-grade junk bonds yield far more than that. Mr. Arnott boosted his allocation to investment-grade corporate bonds in his personal taxable account late last year because the market had reached "irrationally high yields," he says. And Jeremy Siegel, a professor of finance at the University of Pennsylvania's Wharton School and senior adviser to exchange-traded-fund management firm WisdomTree Investments, has recently raised his allocation for junk bonds.
"Stocks and high-yield bonds will move together as the crisis passes," rebounding from their depressed levels, the 63-year-old Mr. Siegel says.
Stocks
Financial gurus are picking through the wreckage of last year's stock-market meltdown to find the best bargains.
Emerging-markets stocks have 'gotten cheap enough to really give value now.'
Jeremy Siegel, the Wharton SchoolSome are looking for companies with strong market positions and juicy dividends. Muriel Siebert, founder and chairwoman of brokerage firm Muriel Siebert & Co., has recently been buying shares of companies like Pfizer (
PFE) Inc., Altria Group (MO) Inc., and General Electric (GE) Co. "I don't mind buying a stock on the bottom and waiting," says the 76-year-old Ms. Siebert. "But I do think when you get a market like this, you should be paid while you wait." Pfizer and Altria yield roughly 8%, while GE yields over 9%.
Some battered stocks in the energy sector also look like bargains, Mr. Dreman says. He likes oil and gas exploration and production companies like Anadarko Petroleum (APC) Corp., Apache (APA) Corp., and Devon Energy (DVN) Corp. If we don't have a long world-wide recession -- a scenario that Mr. Dreman thinks oil prices currently reflect -- "we'll see much higher prices for oil again," he says.
More From the Gurus
•
Though foreign stocks were generally hit harder than U.S. shares last year, some gurus aren't rushing to invest overseas. Mr. Bogle, who says he has a very small allocation for international stocks, notes that investors poured money into foreign funds in recent years, chasing their strong returns, while yanking money out of lagging U.S. stock funds. "To me that's a red warning flag on a very tall flagpole on a very windy day," he says. "I also earn my money and spend my money in dollars, and I don't need to take currency risk."
Other experts say that emerging-markets stocks, which were hit especially hard last year, are starting to look tempting. If these shares take another dip, they could become "extremely interesting," Mr. Arnott says. Mr. Siegel keeps one-quarter to one-third of his foreign-stock allocation in emerging markets, and "they've gotten cheap enough to really give value now," he says. He has bought some more of these shares as they've declined in recent months.
Jim Rogers, a 66-year-old veteran commodities investor based in Singapore, is putting new money into Chinese shares. He's focusing on sectors of the economy that the Chinese are pushing to develop, such as agriculture, water, infrastructure and tourism.
Market gurus are also finding some bargains among alternative investments. Mr. Rogers is putting some new money into commodities, particularly agricultural commodities. "We're burning a lot of our food in fuel tanks right now," he says. And Mr. Siegel recently added some U.S. real estate investment trusts to his portfolio, which got "very cheap" after declining sharply last year, he says.
Staying the Course
Sticking to principles they've developed over decades in the market allows people who live and breathe investments to be relatively relaxed about their retirement portfolios.
I don't mind buying a stock on the bottom and waiting. But I do think when you get a market like this, you should be paid while you wait.
Muriel Siebert, Muriel Siebert & Co.Morningstar's Mr. Phillips, 46, has made it easier to stay the course. He has relinquished responsibility for allocating his 401(k) account, leaving those decisions in the hands of a managed-account program run by a unit of Morningstar. The program, which he started using in 2007, has "actually been very good for me," Mr. Phillips says. "They started putting me into things like TIPS and high-quality bond funds that I'd never had in the portfolio before."
And when they do suffer substantial losses, they tend not to panic. Mr. Phillips remains committed to his battered Clipper Fund, though it lagged the Standard & Poor's 500-stock index by about 13 percentage points last year. Ms. Siebert says she took a "very substantial loss" in Wachovia Corp. stock, which plummeted last year before the company was sold to Wells Fargo (WFC) & Co., but she's hanging on to the Wells Fargo stock she received "until I see a reason not to."
She is, however, a bit sensitive when asked about her portfolio's overall performance last year. "Do you want to see a grown woman cry?" she asks.
Write to Eleanor Laise at eleanor.laise@wsj.com
Life Insurance - Secure Your Family's Future (from Florida's CFO)
LIFE INSURANCE: COVERAGE CAN SECURE YOUR FAMILY'S FUTURE
The National Association of Insurance Commissioners (NAIC) suggests that you review your life insurance policies to determine if your coverage is still appropriate for your situation.
The Basics
Life insurance helps secure your family’s financial future in the event of the death of you and/or your spouse. It also helps ensure that the estate that you’ve worked to build will be allocated to the beneficiaries you have chosen.
When purchasing life insurance, consider the financial responsibilities that your family will immediately inherit such as a mortgage or car loan. In addition, you’ll want to consider long-term goals such as your spouse’s retirement or your children’s education. If you decide that you need more coverage, determine whether you need term life insurance or a cash value policy.
Term insurance generally has lower premiums in the early years, but does not build up a cash value you can access. Cash value policies come in the form of whole life, universal life or variable life insurance. It’s important to know which type of policy you own, and how the benefits are paid if something happens to you and/or your spouse.
If you have questions about your current coverage, or about the type of policy to best fit your situation, contact your life insurance agent or the Florida Department of Financial Services at http://www.MyFloridaCFO.com/.
Stop. Call. Confirm.
Before consulting an agent or purchasing a life insurance policy, make sure the agent and company are licensed to sell insurance in your state. To check, call your the Florida Department of Financial Services 1-877-MY-FL-CFO (877-693-5236) or visit http://www.MyFloridaCFO.com/.
What to Review
As your life situation changes through the years, so do your insurance needs. A regular review of your life insurance coverage is important. To begin your review, read your policy carefully. Look for answers to these questions:
· Do premiums or benefits vary from year to year?
· How much do the benefits build up in the policy?
· What part of the premiums or benefits is not guaranteed?
· What is the effect of interest on money paid and received at different times on the policy?
· In what situations and through what procedures can cash values be accessed?
· Can the policy be converted into another form of insurance or annuity?
When reviewing your policy, make sure the benefit covers your current needs. Changes — such as a birth, divorce, remarriage or even a new mortgage or job — are indicators that you might need to make changes to your life insurance policy.
In the case of the birth of a child or a new marriage, you might want to increase your death benefit. Check with your agent to see if your insurance company requires a physical exam before increasing your coverage levels.
Alternatively, your life changes might allow you to lower your life insurance coverage and premiums. The mortgage might be paid, you might have retired or your children might have completed college. At this stage of life, your life insurance company might be able to offer “conversion privileges” from your current term life insurance policy to a new whole life insurance policy. You might also be able to expand your death benefits so they can be used while you are still living. Ask your insurance agent or company about these options.
Beneficiaries
One of the most important decisions to make regarding life insurance is to whom to leave your benefits. That’s why it’s important to review your beneficiaries every few years.
There are two types of beneficiaries for your life insurance policy. Primary beneficiaries receive a portion or the whole policy benefit if they outlive you. Contingent beneficiaries (also referred to as secondary beneficiaries) receive proceeds if a primary beneficiary dies before you. If you name more than one beneficiary in either category, you should include the percentages of the death benefit proceeds that you would like each individual to receive, or stipulate “equal shares” to each.
You can name your spouse, domestic partner, children, grandchildren, relatives, friends, charities, businesses, trusts or your estate as your beneficiary. Naming individuals rather than an estate allows those individuals to receive the proceeds immediately and, generally, without taxation. As part of your estate, however, proceeds typically will go through probate with the rest of your assets and might be subject to estate taxes. Your will does not affect the distribution of your life insurance proceeds unless the sum goes to your estate to be divided according to the will. Check with your insurance agent, tax advisor or family lawyer if you have questions about how the life insurance benefit will be paid following your death.
Tips for naming beneficiaries:
· Spouse: You should use the individual’s legal name, as in “John Wayne Johnson,” rather than “husband.” In case of a second marriage, “husband” could be interpreted either as the husband when you bought the policy or the current husband. When reviewing your policy, think about who will be in the best position to make financial and other important family decisions upon your death.
· Children: You should qualify a specific class of individuals, such as “my children,” by the use of either “per stirpes” (according to the family tree or branch) or “per capita” (per head). A designation of “my children per stirpes” means that if your two sons have two children each, and your oldest son dies before you do, his children will each receive his share of your benefits. A designation of “my children per capita” means that the living son, in the case above, would receive the full amount and your oldest son’s family would receive none of the benefit.
· Minor Children: Most insurance companies will not pay life insurance proceeds to minors. If any of your children are minors, one of your options is to designate a trust as the beneficiary, with an individual or institution to use the funds for the welfare of your children. You will need to set up your trust(s) carefully, with your family attorney or tax advisor’s assistance. Another option is to designate two individuals whom you trust as beneficiaries, who will make joint decisions about the care and welfare of your children. As your children mature, you should update your beneficiaries accordingly.
If you are the owner of your life insurance policy, in most cases you can change beneficiaries at any time by completing a formal, written notification to your insurance company. During a regular review of your life insurance policy, take into consideration changes in your life, relationships and family — such as births, adoptions, marriages, remarriages, divorces and deaths — when updating your beneficiaries. Your family attorney, tax advisor or insurance agent can help you use specific wording to avoid unintended consequences.
Locating the Company that Services Your Life Insurance Policy
It’s possible the company that issued your life insurance policy has changed its name, merged with another company or sold your policy to another insurance company. You should have been notified of this change at the time it happened. For this reason, it’s important to make sure your mailing address is always current on your policy. However, if you did not receive an updated policy, you will need to locate the life insurer that services and pays claims on your policy.
You will need this information to search for the new company information:
· Make sure you have the entire legal name of the insurance company. This should be listed on the policy or binder.
· Check to see if there is a mailing address and phone number on the policy or binder.
· Determine in what state the policy was purchased and when the policy was purchased.
Once you have this information, contact the state insurance department in which the insurance company was located at the time the policy was issued. Many times, the state insurance department will be able to track name changes and/or mergers that impacted the insurance company.
To find contact information for your state insurance department, visit www.naic.org/state_web_map.htm.
You can also use the Life Insurance Company Location System, https://external-apps.naic.org/orphanedpolicy/. Using the information you have gathered, answer five questions and the system will provide a list of suggested state insurance department contacts that might be able to assist with your search.
More Information
To learn more about your insurance needs throughout your life, go to www.InsureUonline.org.
Get more information about life insurance by downloading the NAIC’s free “Life Insurance Buyer’s Guide” at www.naic.org/consumer_home.htm.
The National Association of Insurance Commissioners (NAIC) suggests that you review your life insurance policies to determine if your coverage is still appropriate for your situation.
The Basics
Life insurance helps secure your family’s financial future in the event of the death of you and/or your spouse. It also helps ensure that the estate that you’ve worked to build will be allocated to the beneficiaries you have chosen.
When purchasing life insurance, consider the financial responsibilities that your family will immediately inherit such as a mortgage or car loan. In addition, you’ll want to consider long-term goals such as your spouse’s retirement or your children’s education. If you decide that you need more coverage, determine whether you need term life insurance or a cash value policy.
Term insurance generally has lower premiums in the early years, but does not build up a cash value you can access. Cash value policies come in the form of whole life, universal life or variable life insurance. It’s important to know which type of policy you own, and how the benefits are paid if something happens to you and/or your spouse.
If you have questions about your current coverage, or about the type of policy to best fit your situation, contact your life insurance agent or the Florida Department of Financial Services at http://www.MyFloridaCFO.com/.
Stop. Call. Confirm.
Before consulting an agent or purchasing a life insurance policy, make sure the agent and company are licensed to sell insurance in your state. To check, call your the Florida Department of Financial Services 1-877-MY-FL-CFO (877-693-5236) or visit http://www.MyFloridaCFO.com/.
What to Review
As your life situation changes through the years, so do your insurance needs. A regular review of your life insurance coverage is important. To begin your review, read your policy carefully. Look for answers to these questions:
· Do premiums or benefits vary from year to year?
· How much do the benefits build up in the policy?
· What part of the premiums or benefits is not guaranteed?
· What is the effect of interest on money paid and received at different times on the policy?
· In what situations and through what procedures can cash values be accessed?
· Can the policy be converted into another form of insurance or annuity?
When reviewing your policy, make sure the benefit covers your current needs. Changes — such as a birth, divorce, remarriage or even a new mortgage or job — are indicators that you might need to make changes to your life insurance policy.
In the case of the birth of a child or a new marriage, you might want to increase your death benefit. Check with your agent to see if your insurance company requires a physical exam before increasing your coverage levels.
Alternatively, your life changes might allow you to lower your life insurance coverage and premiums. The mortgage might be paid, you might have retired or your children might have completed college. At this stage of life, your life insurance company might be able to offer “conversion privileges” from your current term life insurance policy to a new whole life insurance policy. You might also be able to expand your death benefits so they can be used while you are still living. Ask your insurance agent or company about these options.
Beneficiaries
One of the most important decisions to make regarding life insurance is to whom to leave your benefits. That’s why it’s important to review your beneficiaries every few years.
There are two types of beneficiaries for your life insurance policy. Primary beneficiaries receive a portion or the whole policy benefit if they outlive you. Contingent beneficiaries (also referred to as secondary beneficiaries) receive proceeds if a primary beneficiary dies before you. If you name more than one beneficiary in either category, you should include the percentages of the death benefit proceeds that you would like each individual to receive, or stipulate “equal shares” to each.
You can name your spouse, domestic partner, children, grandchildren, relatives, friends, charities, businesses, trusts or your estate as your beneficiary. Naming individuals rather than an estate allows those individuals to receive the proceeds immediately and, generally, without taxation. As part of your estate, however, proceeds typically will go through probate with the rest of your assets and might be subject to estate taxes. Your will does not affect the distribution of your life insurance proceeds unless the sum goes to your estate to be divided according to the will. Check with your insurance agent, tax advisor or family lawyer if you have questions about how the life insurance benefit will be paid following your death.
Tips for naming beneficiaries:
· Spouse: You should use the individual’s legal name, as in “John Wayne Johnson,” rather than “husband.” In case of a second marriage, “husband” could be interpreted either as the husband when you bought the policy or the current husband. When reviewing your policy, think about who will be in the best position to make financial and other important family decisions upon your death.
· Children: You should qualify a specific class of individuals, such as “my children,” by the use of either “per stirpes” (according to the family tree or branch) or “per capita” (per head). A designation of “my children per stirpes” means that if your two sons have two children each, and your oldest son dies before you do, his children will each receive his share of your benefits. A designation of “my children per capita” means that the living son, in the case above, would receive the full amount and your oldest son’s family would receive none of the benefit.
· Minor Children: Most insurance companies will not pay life insurance proceeds to minors. If any of your children are minors, one of your options is to designate a trust as the beneficiary, with an individual or institution to use the funds for the welfare of your children. You will need to set up your trust(s) carefully, with your family attorney or tax advisor’s assistance. Another option is to designate two individuals whom you trust as beneficiaries, who will make joint decisions about the care and welfare of your children. As your children mature, you should update your beneficiaries accordingly.
If you are the owner of your life insurance policy, in most cases you can change beneficiaries at any time by completing a formal, written notification to your insurance company. During a regular review of your life insurance policy, take into consideration changes in your life, relationships and family — such as births, adoptions, marriages, remarriages, divorces and deaths — when updating your beneficiaries. Your family attorney, tax advisor or insurance agent can help you use specific wording to avoid unintended consequences.
Locating the Company that Services Your Life Insurance Policy
It’s possible the company that issued your life insurance policy has changed its name, merged with another company or sold your policy to another insurance company. You should have been notified of this change at the time it happened. For this reason, it’s important to make sure your mailing address is always current on your policy. However, if you did not receive an updated policy, you will need to locate the life insurer that services and pays claims on your policy.
You will need this information to search for the new company information:
· Make sure you have the entire legal name of the insurance company. This should be listed on the policy or binder.
· Check to see if there is a mailing address and phone number on the policy or binder.
· Determine in what state the policy was purchased and when the policy was purchased.
Once you have this information, contact the state insurance department in which the insurance company was located at the time the policy was issued. Many times, the state insurance department will be able to track name changes and/or mergers that impacted the insurance company.
To find contact information for your state insurance department, visit www.naic.org/state_web_map.htm.
You can also use the Life Insurance Company Location System, https://external-apps.naic.org/orphanedpolicy/. Using the information you have gathered, answer five questions and the system will provide a list of suggested state insurance department contacts that might be able to assist with your search.
More Information
To learn more about your insurance needs throughout your life, go to www.InsureUonline.org.
Get more information about life insurance by downloading the NAIC’s free “Life Insurance Buyer’s Guide” at www.naic.org/consumer_home.htm.
Subscribe to:
Posts (Atom)
Posts
