Are I Bonds for You?

If credit risk and inflation protection are concerns of yours for the fixed income portion of your assets, you may want to consider I Bonds issued by the U.S. Treasury.  They avoid state taxes, as do all Treasury issues, and taxes can be deferred until bonds mature or are redeemed.

Credit risk is eliminated because I Bonds are issued by the U.S. Treasury.  As the saying goes, if the Treasury doesn't honor its debts, we have bigger problems to worry about.  And inflation is covered because every 6 months there is an inflation adjustment based on the CPI-U.

One drawback is that individuals can only buy $10,000/year outright, although an additional amount up to $10,000 can be bought with a tax refund.

I Bonds are 30-year issues that have to be held at least 1 year.  After that, up to 5 years, if redeemed, the holder pays a penalty of 3-months' interest.  After 5 years, there is no penalty.

How Yield is Calculated

The yield is comprised of 2 components:  a fixed part that stays fixed for 30 years, and an inflation component that changes every 6 months from the purchase date.  The fixed part now is 0%.  The inflation component is obtained from the CPI-U.  The next inflation component adjustment will be in November.  The CPI-U index in March was 229.392.  If the September index is unchanged from the August 230.379 level, the rate set in October will be .86% ((230.379/229.392)-1*100 *2= 0.86).

Importantly, the yield cannot go negative if the U.S. enters a period of deflation.

Where to Buy

Source: Treasury Direct

To buy I Bonds, you need to go to Treasury Direct.  At this site, you can buy Treasury bills, notes, and bonds at auction as well.  Doing so avoids brokerage commissions and bid-ask markups.

At the site, click on the link indicated on the left graphic to get at I Bond info.  The information will explain that the bond you buy will be electronic.  You'll find that you can buy paper bonds with a tax refund by using IRS form 8888.  You can also set up a payroll deduction.

You'll find, as well, that these bonds cannot be bought through brokers or banks.

U.S. Central Planning Committee (aka FOMC) Meets Today

Source: audreymarie.edublogs.org

It is circus day in the financial markets.  It is Day 2 of a 2-day Federal Open Market Committee (FOMC) meeting.  The Committee will tell markets if it will do QE 3 and if it will extend low rates out to late 2015.  Bernanke has set it up so that financial markets see him and his committee as the chief price setter of  money in the economy.  This is what central planning committees do.  This is what the ex-Soviet Union did before its control policies imploded the economy.

The Committee will also issue forecasts on the economy.  These forecasts are valuable in the same way you want to know the alcohol imbibed by the driver before you decide to get into a vehicle.  In terms of accuracy, the forecasts are of no value.  You can get better forecasts on where the economy is headed in any bar in Manhattan.  If you want to get a sense of their ineptness, check out their forecasts as the housing crisis unfolded.

In the afternoon, chief price setter Bernanke will play the role of professor and field soft ball questions from the financial press.  They'll ask whether the FOMC takes the developments in Europe into account.  They'll ask whether the FOMC is running out of arrows in its quiver and whether monetary policy can do anything further in light of the precarious fiscal policy position of the Federal government.

His responses will provide fodder to talking heads on CNBC and Bloomberg news as they parse each response.  Most pundits will say that QE3, if it occurs, won't have an impact.  They are talking about the economy.  They are talking about GDP and employment.  The impact is more subtle, and it has been ongoing.  It is pushing harder on retirees and others to take risks in the financial markets they don't understand.  It is creating underlying pressures as price controls always do for a spike in yields.  Along these lines, the financial press would do well to ask Bernanke to trace the likely consequences on investment markets, the housing market, and the Federal deficit if the yield on the 10-year Treasury spikes.

The bottom line is that all of this is pushing the U.S. towards a cliff other than the much bally-hooed "fiscal cliff."  It is like getting sucker-punched when looking the other way.  And when rates rise, Bernanke will follow his predecessor Greenspan, writing a memoir explaining why the debacle wasn't his fault.

The cure for all of this is simple.  Accept the lesson of history - price controls do not work.  Do what Volcker did to bring down the rate of inflation.  Get a good definition of money and have it grow in a range of say 2% to 4% and let the market determine interest rates, i.e. the price of money. 

Stock Rover

Source: Capital Pixel

Looking for a state-of-the-art investment management, analysis system?  Stock Rover may be exactly what you are looking for.

In just the couple of days I have played around with it, I have used it to screen for stocks, analyze portfolios, set up watch lists, etc. The software has an easily accessible abundance of info that can only be truly appreciated by giving it a test drive.  Download and create  portfolios, and then find market news or firm-specific news by rolling over portfolio holdings' stock symbols.  Compare performance to various benchmarks over 11 different time frames and arrange information how you want to see it.

There are a number of reviews on line and really good supporting videos showing capabilities of the system, so I'll just point out one feature that impressed me.

I have recently been analyzing and making presentations on how investors can use ETFs to improve the yield on the bond portion of their asset allocation and at the same time manage risk.  This can be tricky given the number of bond ETFs available in the market place; and structuring them into a portfolio for analysis and comparative analysis is challenging, to say the least.  Thus, I was pleasantly surprised to see that Stock Rover carries bond ETFs and makes it easy to create portfolios.  Here is a small partial listing of the bond ETFs they list:

Source: Stock Rover

CLICK IMAGE TO ENLARGE   Note that this is just some of the ETFs that begin with the letter "c"!  This is the middle panel of three on the page that you'll see.  It holds stocks for screening, portfolios and, as shown here, available ETFs.

The image shows performance view.  In fact, there are numerous other views.  Because CSJ  (an ETF of short maturity corporate bonds) is highlighted, a graph of its price is shown on the bottom portion of the graphic.

Clearly, it is easy to see the price history of numerous bond ETFs efficiently by selecting them.  As you play around with this, you'll find it easy to move columns in the table and get the information you want in the format you want.

To the right of this middle panel graphic is security level information on the highlighted security:

Source: Stock Rover

 CLICK IMAGE TO ENLARGE   Again, just by a click and scrolling down, you have an incredible amount of information at your finger tips.  Note the "news" tab.  Click on it, and you get general market news as well as security-specific news.

With ticker symbols, security characteristics, etc. at your finger tips, it is a piece of cake to begin putting together a portfolio to examine.  With Stock Rover, you do this on the same page using the panel on the left hand side of the page you are already on!

As you can see in this panel, you have a couple of portfolios already set up.  I set up a Benchmark portfolio comprised of 65% stocks and 35% bonds benchmarked to the BlackRock diversified portfolio they use in their asset return table.

Source: Stock Rover

CLICK IMAGE TO ENLARGE  Again, you get an idea of the available information.  Just click the green "New" button, and you're set to construct a new portfolio.  Note that I've been on the "Portfolio Performance" view and that there are numerous other views available. Also, note the arrow pointing to ETFs. Clicking there produced the ETF listing in the center panel looked at earlier.

To really get a feel for the information available, you should play with it a bit.  I'm not sure how this will eventually be priced, but Stock Rover does make life easier for those who do a lot of security and portfolio analysis.

Check it out.

Disclosure:  I am not affiliated in any way with this product.  This post is purely for educational purposes.

Good Luck to Restaurant Workers Seeking to Retire!

So it starts.  401(k) plans are now required to spell out fees.  No one said they were required to make understanding them clear.  It interests me that you can open a brokerage account, buy funds and easily understand, even if you are not an investment professional, all the costs involved, including commissions and fund costs; but with a 401(k), participants could have PhDs in math and still be bewildered when it comes to the costs.  Of course there is a reason for this.  Clearly, big 401(k) providers are out to take advantage of financially illiterate plan administrators and participants.  It is part of the Wall Street ethos.

I have in my hands the "Hospitality Industry 401(k) Plan ERISA 404 Retirement Plan and Investment Information" document.

Source: Advisorone

It says, "The attached notice is intended to assist you in making informed decisions with regard to the management of your individual account ...by providing you with information about the Plan, including fees and expenses regarding the Plan's designated investment alternatives."

The notice was prepared by the Principal Financial Group.

When I get a document like this, I take a deep breath and try to imagine an employee reading it.  I have made a number of investment presentations and conducted financial education classes.  I know firsthand how fast eyes glaze over and people become stupified when confronted with financial documents.

Some people say fine - maybe the administrators will boil down the information.  Not necessarily so - administrators in some instances don't understand the cost of the plans or want to advertise that they have chosen plans that are costly.

With that said, let us think of the line cook, bar person, or waitress reading this document and trying to do the right thing in creating a nest egg for retirement.  It would be like a mutual fund manager trying to decipher a recipe for a fancy French entree.

The document says "An annual Plan administrative expense of 0.83 percent applies to each participant's account balance."  In addition, there are some nickel and dime expenses - for example, $35 "withdrawal service fee."

The real eye opener, and what participants need to pay attention to, is the investment management expenses.

For the Fixed Income Fund choices, the annual expenses range from .73 -.78%.
For the Balanced/Asset Allocation Fund choices ,the annual expenses range from .90 - .95%.
For Large Equity Fund choices, the annual expenses range from .31 (index fund) to 1.09%.
For International Equity Fund choices, the annual expenses range from 1.14% to 1.46%.

And so it goes with the other choices.

A non-investment person wouldn't see these fees as egregious.  But they do a lot of damage.

How much damage?  Suppose you have $10,000 in the MidCap Growth III Separate Account, one of the choices offered restaurant workers, sub-managed by Turner/Jacobs Levy.  The document informs us the fee is 1.10%.   Its return over the 10 years ended 6/30/2012 was 7.49% annualized versus 8.47% on the Russell Midcap Growth Index it reports as the benchmark.  Over 30 years, the investment would grow to $87,305. I f you got the index return, the $10,000 investment would be $114,627--31% higher!

Here's the kicker - it is very easy today with low-cost index ETFs to get within .15% of an index's return.  The bottom line is that seemingly small differences in fees have a huge impact over the longer run.  And, though progress has been made with the new law requiring reporting of fees, there is still a need to spell out their impact explicitly.

New Research on Drawing Income in Retirement

Nothing is ever as simple as it first seems.  The latest entry in this category questions basic conventional wisdom (CW) of drawing down taxable accounts, then qualified accounts (IRAs, 401(k)s, etc.), and finally Roths.

The study by Coopersmith, Sumutka, Arvensen of Rider University entitled "Optimal Tax-efficient Planning of Withdrawals from Retirement Accounts" shows that CW is not always correct.  In the critical period leading up to the RMDs at age 70 and 1/2, it may pay to draw funds from IRAs, etc.  Avoiding RMDs that throw a retiree into a higher tax bracket can have an important impact.

An overview of the study is presented by Susan B. Garland of Kiplinger in "A New Rule of Thumb for Tapping Savings."

A Retirement Calculator for Retirees

If you've looked online for a retirement calculator, you know that most online retirement calculators don't work well for retirees.  If you input a current age greater than desired retirement age, for most you get an error message.  This isn't true for the T. Rowe Price calculator. Thus, this calculator is useful for retirees and, if you are younger, is a perfect tool to get the sometimes awkward conversation rolling to check on your retired parents - "hey dad, did you know there is this neat online, free, calculator that will...."

This calculator only takes a short time but gives you an idea on whether you are on the right track in retirement.  That is, it answers the most worrisome question on the minds of many retirees - whether they are likely to run out of money.

Before beginning, read the T. Rowe Price disclosure.  The calculator provides estimates of future actions under uncertain conditions.  As such, it should be viewed as a guide.  Their disclosure is at the bottom of the first page at the link below.

To begin, go to T. Rowe Calculator and click the orange "Start" button to get :

Source: T. Rowe Price

CLICK IMAGE TO ENLARGE   Fill in as indicated (Harvey, if you're reading this, you're supposed to fill in the date you were born not the date I filled in!).  Notice that it asks explicitly if you are "Living in Retirement." Other calculators tend not to have this feature!



Click orange "Next" button:

Source: T. Rowe Price

CLICK IMAGE TO ENLARGE   Here you only have to fill in two amounts.  Note that there is a worksheet that will refine the analysis.  On the worksheet, you break out the amounts you have in qualified accounts from the taxable accounts.  This is a big distinction!  When you withdraw from the qualified accounts, such as an IRA, you have to pay taxes (federal and, in most states, state tax).  You also have RMDs from your qualified accounts (except for Roths) in your 70s.

Click "Next" to go to the "Asset Allocation."

Source: T. Rowe Price

Asset allocation is just about the percentage you have invested in stocks, bonds, and fixed income.  Two important points:  investment performance depends greatly on asset allocation, and most individuals should increase their exposure to bonds as they get older to reduce the volatility of their performance.

As you can see, there are two choices.  The first lets you pick your allocation by using the sliders, and the second automatically changes your allocation as you age.

Click "Next Living in Retirement."

Source: T. Rowe Price

Note that you have worksheets here.  Check them out.  If you are receiving a pension, work part-time, or own real estate etc., you'll want to put that in a worksheet.





If you need to check how much you'll be getting from Social Security, read this Post:  "The First Thing You Need to Know About Retirement."

Click "Next Your Results."  You'll see that the model runs a number of simulations.  It will show how much you want to spend and how much it believes you can spend and have a 90% chance of not running out of money before the age of 95.  You'll also see that there are a number of inputs you can change to see the impact on your results.

If you have never done this type of exercise, it can definitely be eye-opening.  There are a few things, though, to know about this exercise in general.  For example, you should redo it regularly - at least every 2 years.  Also, there are a lot of unknowns including life expectancy, market performance, and general life events.  This observation tends to escape a lot of people, including financial planners.  They tend to think there is some magic number that, once reached, retirement is a done deal.  Instead, as mentioned above, revisit your situation on an ongoing basis (and especially when there are major events in your life).

Do this and you will get a lot of value out of this exercise.

The 3.8% surtax

Beginning in 2013, single-income earners above $200,000 in modified adjusted gross income and married above $250,000 filing a joint return will pay a 3.8% surtax on unearned income such as capital gains, dividends, interest, and rents.  Also, they will pay 0.9% more in Medicare tax if wages exceed $200,000 for single filers and $250,000 for those filing jointly.

The surtax will depend on investment income or the amount by which Adjusted Gross Income is greater than the threshold, whichever amount is smaller.

Kiplinger's provides these examples:

• Couple earns $400,000 from salary plus $50,000 in investment income.  The surtax would be 50,000*.038 = $1,900.
• Another couple earns $200,000 in salary plus $150,000 in investment income.  The surtax would be 350,000 - 250,000 = 100,000 threshold, 100,000*.038 = $3,800.

The surtax won't apply to sale of primary residence unless it exceeds the usual limits of $250,000 and $500,000 gains for single and joint owners.

Consideration of the surtax could be a tipping point for those considering a Roth conversion.

Source:  10/2012 Kiplinger's p. 11