Coffee to Car Payments

I'm Not Here to Make You Rich.

Over the last couple weeks, the talking heads on CNBC have been debating whether or not "buy and hold" investing is dead.  If you've been listening to all the noise, you are probably just as confused as I am.  "It's too late to sell." says one guy.  "We've got to be close to a bottom and if you sell now you're just locking in all of those losses and you'll likely miss the beginning of the recovery".  "It's time to buy." says another.  He then quickly qualifies it buy saying you need to ease into it slowly, buying a little here and there until we're sure we've reached the bottom.  Then you have the pompous hedge fund manager who puffs out his chest and says "We've been sitting mostly in cash since February."  February?  Why February?...and why in the heck wasn't this genius being interviewed in February?  The truth is that even very competent experts are confused by the way the market is behaving right now.  Nothing makes sense and the only thing that makes is worse is lack of investor confidence.  So, they have to be a little reassuring to keep you from putting everything in a coffee can.

My last two posts were intentionally focused on the short term to set the stage for this one.  It's easy to become very despondent watching your retirement funds tank in the short term but if you take a little broader view, the picture still isn't pretty, but it certainly illustrates that it may be OK to consider other options.

Let's look at the last five years.  From October 2003 through October 2008, the Dow has returned a -.97% per year.  It still sucks but you've only lost a little less than 1% per year over the last 5 years.

How about the last ten years?  Well, from October 1998 through October 2008, the Dow averaged a .83% gain annually.  So, a little less than 1% per year average gain.

So, yes if you only look at the last month or the last year, things look pretty bleak and it seems you may have no choice but to ride it out.  But if you look at the last 5 or 10 years, all you've lost is time and a little bit to inflation.  For anyone who is 15 years or less from retirement, this is a good time to start considering options that you can count on to ensure that your money lasts as long as you do. 

I always tell new clients that my job isn't to make you rich.  It's to keep you from becoming poor. 

Plant an Acorn in Your Youth. Sit Under an Oak Tree in Your Old Age.

But, what if the government came along and made you cut a limb off every year after you reached a certain age?  I was reading the paper this morning and this headline caught my eye Retirement Account Rules Catch Many By Surprise .  Sen. Charles Grassley, R-Iowa, wants to see a review of a somewhat antiquated law that requires retirees to start taking distributions from their IRA and 401k accounts when they turn age 70 1/2.  This is know as your "Required Minimum Distribution" or RMD.  This distribution is mandatory whether you need it or not and carries a hefty penalty of 50% of the amount that should have been withdrawn if you don't take it.  The purpose of the law is to prevent people from abusing the tax advantages of these accounts.  Uncle Sam let you defer taxes all those years and now he wants his money.  The article further stated that 6 out of 10 households that owned traditional IRAs that made withdrawals in 2006 did so just to satisfy the RMD requirement.

On the surface, it looks like a Republican Senator looking for more tax advantages for his wealthy constituents.  I beg to differ.  I would estimate that closer to 80% of my clients who are over age 70 1/2 and are subject to RMDs say something like "Well, the government makes me take out so much every year.  What's that called again?".  It's your RMD.  A recent study by Cogent Research called "The Retirement Income Dilemma" showed that outliving assets was #4 on the list of Top 10 Investor Concerns.  My personal thoughts are that the retiree who had the foresight to save for retirement and not rely on entitlement programs alone should be allowed to have greater control over their money in retirement.  Uncle Sam wants his money but why not wait and enforce the RMDs on their beneficiaries?  This is currently a concept know as a stretch IRA.  This would lead to more tax revenue over time, make the inheritance last longer than six months, and provide greater financial security for the retiree who diligently saved all those years.

Watch for more upcoming posts on this topic:

• What will happen to the market in 2016 when the first baby boomers are forced to take RMDs regardless of whether they need it or not and regardless of other market conditions.
• Review of Ed Slott's book, "Parlay Your IRA Into a Family Fortune"

 

Shawn Johnson: Spoiler Alert

If you don't know how she did yet, don't worry.  I'm not gonna spoil it.

I gotta say that I've never really been into the Olympics much until this year.  Two Des Moines natives, Shawn Johnson and Lolo Jones trying to bring home the gold.  Wow!  Since all the action happens while I'm sleeping and then airs that evening, I try really hard to avoid any hint of the results.  My girlfriend, on the other hand, goes online to find out the results first thing in the morning.  When she calls, she asks me if I want to know or if I want to wait and watch it that evening to find out. I always opt to watch it.  It's just more interesting that way.  After all, who would throw a Super Bowl party the following Tuesday and watch the game on their DVR.  The big plays mean nothing if you know the end result.  So, I'm the guy running around covering his ears saying "No.  No.  Don't tell me."  Anyway, on my way to work today I was listening to my favorite country station and Kim Chase (you gotta read her bio) at "the Hawk" was politely making every attempt to let me know I needed to turn the volume down for a minute if I wanted to wait till tonight to find out how Shawn Johnson did on the balance beam.  She repeatedly said "Spoiler Alert!  Spoiler Alert!".  However, with my hands at 10 and 2 and my attention on morning traffic, she did not have my undivided attention like my girlfriend does when she asks.  So, it wasn't until she told me exactly how Shawn did that I realized I could watch whatever I wanted tonight instead of watching several hours of boring stuff like another Kerri Walsh and Misty May-Treanor victory celebration just to catch the few tense minutes of the balance beam competition.  I was really looking forward to hearing more commentary on biased judges and underage Chinese gymnasts.

So, some people can't wait to see the results and others want to experience the event and emotion by watching it live (or something like it).  Neither one is right or wrong.  It's just a matter of preference. 

When it comes to planning for retirement, what type of person are you?  Do you thoroughly enjoy taking the good with the bad and hoping for the best?  Do you like saying "So far, so good."?  Do you enjoy the big plays or would you just find out how the game ends?  How much could you afford to lose?  Again, neither approach is right or wrong and they're both better than a coffee can.  It's just a matter of preference.  People choose me when they want to know exactly what they can count on for their retirement.  This frees up their time to do other things. Sort of like tonight.  I'm going to go to a potluck that I had originally been iffy about because I wanted to watch Shawn Johnson.

Ask me about Guaranteed Lifetime Withdrawal Benefits.

Have you ever watched paint dry?

Last Saturday, on the way home from running our errands, I said to my girlfriend "Let's go check and see if they've moved the Murillo building yet."  This has been big news here in Des Moines for several weeks now.  A major health insurance carrier is wanting to build new headquarters downtown and there are a lot of small properties in the three block area where they want to build.  Among them were two historic buildings over 100 years old.  One was a rowhouse built in 1880.  It was the sole survivor of 8 original rowhouses.  The other was a three-story, six-unit brick apartment building built in 1903.  The insurance company agreed to donate the building if someone would move it.  It would be the biggest structure ever moved in Iowa.  Local news crews as well as the Discovery Channel and National Geographic were on hand to film it.

Well.  We arrived at around 2:00 in the afternoon and, when we left around 3:30, the building had moved a little more than half a block.  You had to watch closely to even see it move.  A lot of the preparation had already been done like lowering power lines, trimming trees, lowering street lights, and of course the hundreds of man hours just to get the building ready for it's 4-block trip.  However, from time to time, they'd bring someone in to trim a tree branch that was in the way or take down a traffic sign. But then the building would start to move again.

It's sort of like planning for your financial future.  First, you have to know where you are now, where you want to go, and have a plan in place to get there.  Then, you need to work with someone who has the tools and the knowledge to handle the little things that get in your way from time to time.  Financial planning is a journey, not a destination.

Fear and greed are the two most common reasons why people make decisions but, it may be smarter to trust your plan when it comes to your money.  Every year the Dalbar Quantitative Analysis of Investor Behavior shows how individual investors have fared in comparison to overall market returns.  The 2007 report covered the twenty-year period from the beginning of 1987 thru the end of 2006.  During that time, the average investor earned only 4.3% annually while the overall market return averaged 11.8%.  Why?  Well, greed motivates them to dump money into things that are already doing well but, then when those investments experience a temporary setback, fear makes them sell off their position when there may not be anything fundamentally wrong.

So, if you have a plan, make sure that, before you make any big changes, you are reviewing the plan overall and not just reacting to temporary setbacks.  It requires patience and it is a little like watching paint dry.  Now, you've probably never watched paint dry.  You know that you can paint and be confident that it will dry.  You may check in on it from time to time but you don't grab a towel and wipe it off and switch to wallpaper just because it's a little humid outside. 

Wordless Wednesday: Dream Big

  My friend, Sandy Renshaw, has a regular Wordless Wednesday feature on her blog.  Thanks to my neighbor and loyal subscriber, Claudia Pfander, for sending me this picture.  It just proves that everyone's dream is different and the only limit is your imagination.

Use your IRA before retirement to fund those dreams too.

Some of us are blessed to be doing what we love to do and make a living from it.  For a lot of other people, their bucket list may include the dream of owning their own business.   Late last year, I reconnected with an old friend of mine.  We worked together waiting tables and bartending about 8 years ago.  I asked what he was up to.  He said about two years ago, he was able to buy an established baseball card store.  He said he was like a kid in a candy store and loved it.  I've stopped in several times to see him and he always seems to be enjoying himself.

I wrote in a previous post about rolling your money over to a self-directed IRA which allows you to use the money you've saved over the years to purchase or fund the business of your dreams before you retire and with no taxes or penalties.

I stumbled across a story today about a music teacher who makes roughly 30% on his money.  What is his sideline.  Well, his passion is music.  So, he still teaches.  As any parent knows, kids have a hard time making up their mind whether or not they want to play an instrument or maybe deciding what type they want to play.  Well, the parents at his school are relieved of having to shell out the money for an instrument and then end up putting it on Craigslist six months later for half what they paid for it.  This teacher used his IRA money to buy instruments and then rents them out to his students for up to $60 per month.  Not bad for an investment of less than $1000 per instrument.

My point is simple.  If you've got a dream chase it.  With a self-directed IRA, the only limit is your own imagination.

There's still time to make your Roth IRA contribution

Even if you've already filed your taxes you can still make a contribution for 2007 to your Roth IRA at any time before your deadline to file (not counting extensions).  The reason is that you make these contributions on an after-tax basis.  So, there would be no need to file again unless your Adjusted Gross Income is below $26,000 (single) or $52,000 (MFJ).  In that case you may qualify for a savers credit on your return and it would probably benefit you to file an amended return.

So, there's no need to think "Oh well. Maybe next year."  If you have the money sitting somewhere to make the contribution, talk to your tax professional about the guidelines for Roth IRA contributions.

I am a big fan of Roth IRAs and here's why:

Let's say you're 40 years old and plan to retire at age 65.  If you contribute the maximum of $4,000 for 2007 and pay taxes on it now, assuming a modest 6% rate of return, you will have $17,167 in tax-free money to use for retirement at age 65

Now, let's say you're 50 or older and have 15 years left till you retire.  Your maximum contribution is $5,000 for 2007.  In 15 years, assuming that same 6% rate of return, you will have $11,982 in tax-free money to do with as you please.

People often tell me "But I'll be in a lower tax bracket when I retire".  Really!  Here's a post from someone who describes "the whole 401(k) thing – apart from the “free money” from your employer "– as "a perfect way to lose money without even trying." 

There are only two reasons you'd be in a lower tax bracket when you retire.

1. You draw a significant portion of your retirement income from a tax-free account like a Roth IRA.
2. You didn't quite reach your goals for retirement. 

No-Sweat Equity

Would you store 53% of your life savings under a mattress?  How about in a coffee can?  Would you go to the bank a put in a safe deposit box?  Of course not!  You probably want as much of your money working for you as possible at any given time.

We've heard time and time again that your home is your biggest investment.  We've also been told that the best mortgage is no mortgage but let me ask you a question.  Does your home appreciate faster or slower based on how much equity you've accumulated?  That's right.  It makes no difference how much or how little you owe on your mortgage.  The value of your home is what it is. 

Many equity harvesting gurus will recommend that you continue to refinance every five years or so to continuously tap the equity in your home for other investments.  Your parents and grandparents keep saying to pay off your home as quickly as possible.  I said "They're both right!"  That is you can do both.

In the first quarter of 2007, we Americans owned $20.8 trillion dollars worth of residential real estate on which we owed only $9.8 trillion dollars.  That's an average of 53% equity in our homes.  Let me just add right here that the sub-prime mortgages that are causing such a commotion and turmoil in the market represent less than 20% of all outstanding mortgages.  You've heard the saying that the squeaky wheel gets the most grease.  Well, This quarter 1 2007 balance sheet shows that while consumer debt is growing, overall we still have a positive net worth.  $65.6 trillion in assets-$12.5 trillion in liabilities equals a positive $53.1 trillion in collective net worth!

I agree with Marian Snow when she suggests that we stop sitting on our assets, but beware that an interest only loan or a series of them will leave you with a big mortgage during retirement that will eventually need to be repaid.   The Home Ownership Accelerator offers an extremely efficient platform for equity repositioning along with the ability to retire mortgage free.   

By combining this powerful tool and safe money savings vehicles, you could call it "no-sweat equity"

"You are way too young for an annuity"

OK.  What's up with the S&P 500?  Not much, actually.  It closed today at $1325.19 down 7% from a year ago when it closed at $1426.37.  7% isn't a lot unless you think of it in dollars.  If you had $100,000 a year ago you now have $93,000.  You've lost $7,000.  What could you do with $7,000.  In the big picture, it's not financial ruin; however, it is a little disappointing. 

"But Derek, you have to take the good with the bad. You know, win some, lose some"

Really.  What have you heard about fixed index annuities?  The concept is this: If you have money in one of these annuities and it has an annual reset, if the market goes down, your account balance stays the same.  Then when the market goes back up, your interest earnings are based on an index such as the S&P 500.  Your actual interest will vary somewhat from the actual market returns because your money is not directly invested in the market.  The reason is that in order to offer you this protection, the insurance companies will apply a participation rate, a cap, or a spread that may decrease your actual return.  It's a small price to pay for peace of mind.  It is important to make sure that the amount you invest and the type of annuity you purchase is suitable for your particular situation.  Most carriers have suitability standards that serve as a guidline to help you and your agent determine what is suitable; however, it is your money and it's up to you how much or how little of your nest egg you can't afford to lose.  Ask your financial planner if it's something you may want to consider in these uncertain conditions.  The key here is that by the time your direct investment in the market gets back to where you started, your fixed index annuity would have actually earned interest since you never went backward but you got to participate in the recovery of the market.  Zero (loss) is our hero!

There is no one-size-fits-all approach to financial planning!

What if it wasn't about the money?

I'm really looking forward to watching the movie "Bucket List".  I hope it's as good as the previews.  Have you ever started to make a list of the things you want to do before you kick the bucket?  No. I don't mean random ideas that make you think "Wow!  Wouldn't that be cool?".  I mean sit down and start brainstorming about all the things you'd like to do and put it on paper.  When you consider:

• Your career goals
• Places you'd like to visit
• Hobbies that you've not yet found the time to enjoy
• People you'd like to meet
• Some adrenalin-pumping adventure
• A worthwhile cause you'd like to volunteer or contribute to

Chances are if you sit down for half an hour and just write things down as fast as you can to go back and edit later to add meaning and clarity, you'd probably end up with 75 or 100 things.  Go ahead try it. 

Next, you'd rank them in order of priority and be experiencing an overall sense of pleasure just thinking about it.

Now, back up a step.  What if you had to rank them in order of cost and decide which ones you'd have to forgo?

That is why I do what I do...so you can do what you want to do instead of thinking about the money.