Investment Help

If you are seeking investment help, look at the video here on my services. If you are seeking a different approach to managing your assets, you have landed at the right spot. I am a fee-only advisor registered in the State of Maryland, charge less than half the going rate for investment management, and seek to teach individuals how to manage their own assets using low-cost indexed exchange traded funds. Please call or email me if interested in further details. My website is at If you are new to investing, take a look at the "DIY Investor Newbie" posts here by typing "newbie" in the search box above to the left. These take you through the basics of what you need to know in getting started on doing your own investing.

Sunday, September 30, 2012

Ideas for Increasing Portfolio Income

Source: Capital Pixel
The biggest challenge facing many investors today is how to increase portfolio income.  Suppose you determine you want 40% of investment assets  in the fixed income sector. what's next?

If we go back to the good ol' day,s we could just put 40% in AGG, the exchange traded fund (ETF) that tracks the Barclay's Aggregate Index and be done with it.  Back then, AGG offered a decent yield for its duration.  Unless you are an ostrich, you know this is no longer true.  Today, the Aggregate Index is loaded with low-yielding Treasury issues (gee, I wonder how that happened!) and its yield is 1.56% with a duration of 4.36 years - not a real attractive yield/risk tradeoff.

So where can the DIY investor go to find some ideas that might improve this tradeoff?  This, of course, assumes that you are either willing to do some research or obtain a whittled down list of ideas to talk about with your advisor. 

The first place you might want to consider is Seeking Alpha.  Click "Dividends & Income" at the top, and on the right hand side of the page you come to you'll find:

Source: Seeking Alpha
As indicated, these are ETFs; so automatically you get some degree of diversification, and typically they are managed versus an index.  Still, as noted above, you need to do some research.  Go to Yahoo! Finance or Morningstar, put in the ticker symbols (shown in parentheses in the table on the left), and check out their durations, yields, expense ratios, etc.  DO NOT BE SWAYED BY THE 12-MONTH RETURNS SHOWN IN THE RIGHT HAND COLUMN!  Remember, looking in the rear view mirror causes crashes!

In fact, at this juncture, the returns are an indication of which funds will suffer the most when yields rise!

A second place to get ideas is from the list of ETFs people viewed when checking on a particular ETF. For example, if you put "JNK" in the quote box at Yahoo! Finance, you get:

Source: Yahoo
As you can see, this is an easy way to get a short list of candidates to analyze for possible yield-enhancing opportunities. At the risk of sounding like a broken record, I would emphasize that looking for higher yield is going down the pot-filled road of increasing risk where you want diversification and careful management of position size - i.e., I wouldn't invest in any yield fund or security (example - note that NLY is a security not a fund!) more than 5% of the fixed income allocation.

Disclosure:  This post is for educational purposes only.  I own some of the funds mentioned.  Individuals should do their own research or consult with a professional before making investment decisions.

Thursday, September 27, 2012

College Debt and House Choice

The Survey of Consumer Finance conducted by the Federal Reserve every 3 years found that in 2010 "For the richest 10%, making at least $146,792, college debt increased from $36,033 to $44,810," as reported by the Associated Press in "College debt hits record 19% of U.S. households."

This interests me in particular because I am in the process of downsizing and selling a home and wondered about the choice some families face between college debt and home choice.

Part of my competition is a stone's throw away - new, nicer houses for around $100,000 more than I am listing my house.  In fact, I will readily admit that if you are in the "impress the Joneses" game those houses are an obvious winner - the foyers are magnificent, the chandeliers are bigger, and the hardwood floors are nice.

But consider, all prejudice aside, the home I am selling is a great place to raise a family of 3 or 4 kids. I know--I did it.

In relation to the college debt issue, a question that comes up is what is the difference in payments between the home I am trying to sell and my competition costing $100,000 more? To answer this, I went to Mortgage Calculator and started by putting in the following entries:

As you can see, I put in the payment of $100,000.  Hit the calculate button and you find that over 30 years an extra $100,000 totals up to over $230,000!

Now let's turn to little 3-year old Ferdinand who will be thinking about college in 15 years.  Over 15 years, the $641 extra monthly payment to meet the $100,000 amounts to $641 * 180 = $115,380!  This is without any investment return factored in over the period.

If you go to Bankrate's saving calculator and assume a 3% return on the $641, you'll find that it grows to $145,976.  This, of course, would be done with a 529 plan or similar vehicle to avoid taxes.

Maybe Ferdinand's family will go for the higher priced home and have no problem with college debt. The survey mentioned above, however, did find that many higher income families are in fact struggling with college debt.  They apparently are burning the midnight oil in their McMansions figuring out how to deal with it.

One suggestion is for today's young families to learn from this, think ahead, and decide whether you are buying a house for functionality or as a show piece.

Wednesday, September 26, 2012

$ heading up?

Rosebud - Vigilantes
QE3 made a commitment to keep rates low for a longer time and to buy Treasuries and mortgage-backed securities monthly until the unemployment rate drops a meaningful amount.

This is an interesting experiment for market observers.  Low rates typically push the dollar lower as speculative global money, like a roof leak seeking the path of least resistance, snakes away after higher rates elsewhere.  But so far, the dollar has risen since the 9/13 QE3 announcement.

This probably isn't good for stock investors (unless you're a boring dollar-cost averager, building a nest egg for retirement and seeking to buy at low prices!) because there has been an inverse relationship between the dollar and stock prices.  Check out this chart of UUP, a dollar bullish fund:
Source: ETF Trends

CLICK TO ENLARGE  Although this is early in the game, it bears watching.  Market participants of a certain vintage remember the days of the "bond market vigilantes."  Reminiscent of a hanging posse, those were days when the bond market looked at economic conditions and moved interest rates higher despite Fed policy.

This interests me for the simple reason that I've come to believe that there are underlying economic laws that can be violated for only so long.  One of those laws is that controlling prices, as Nixon did and as Bernanke is doing now, builds pressures that eventually cause prices to rise sharply.  In the present context, these pressures could be building on interest rates to result in a sharp spike down the road.  In conjunction with the accident waiting to happen (that regulators and legislators refuse to deal with) known as "high frequency trading," the end result could be ugly.

Monday, September 24, 2012

Reckless Endangerment - Book Review

 Some will rob you with a six-gun, And some with a fountain pen.  Woody Guthrie 

Talent comes in different forms.  Jesse James was good at robbing banks, Angelo Mozilo of Countrywide was expert at ripping off wanna-be homeowners, and James A. Johnson of Fannie Mae was at the top of his game in self-enrichment at the expense of the American taxpayer.  Like the prodigy who sits down at the piano at a young age and gets it, Johnson and Mozilo saw how national politics, policy manipulation, mortgage securitization, and ratings agencies being paid off all fit together.  He saw how Fannie Mae, a Government Sponsored Enterprise duopoly, along with Freddie Mac, could use the political advantage and the excessive profits generated thereby to win political favor to influence Congress, rip off the American taxpayer, and walk away a top 1 percenter.

Roles he and numerous others played in the 2008 housing crisis are the subject of Reckless Endangerment by Gretchen Morgenson, business reporter for The New York Times, and Joshua Rosner, research consultant for Graham Fisher & Company.  And many of those who played key roles are named in this book, which is unusual for this genre - I know because I have made a hobby out of reading books on the 2008 housing crisis.  The end of the book has a list of key players and where they are today--which by itself is a sobering eye opener.

I happened to have picked up the book on a whim.  I was  browsing the new book section in the library and saw it was by Morgenson and, because I enjoy her Times column, decided to give it a flip through. That got me to take it home with the objective of reading the first couple of chapters, and I found that I couldn't put it down.  Admittedly, some readers will find parts a bit tedious.  The book, however, is definitely worth reading if you are interested in the period and learning about the interaction between the financial community, lobbying, and Congress.

The ending, sadly, is depressing as most of these books are, in that it makes it crystal clear that nothing has really been done to prevent similar episodes in the future.  For example, the "too big to fail" issue is still with us, Congress can easily be bought off to garner favors, regulators are totally captured by the industries they regulate, and there is no need to worry about going to jail for blatant lying and manipulating financial documents.

Reading history can be scary because there comes a point where it dawns on you that, in effect, the people driving the bus are blind:  trusting that the people in charge know what they are doing (and, in this case, are doing what is in the best interest of the country) is a huge leap of faith.  Read Reckless Endangerment and you'll know exactly what I mean.

Friday, September 21, 2012

Why Analysts are Scratching Their Heads Over QE 3

QE 3.  Open ended.  Fed has arrows in its quiver.  Buy mortgage securities and Treasuries until employment picks up.  Sounds like a plan!

When the Fed buys securities like mortgage securities and Treasuries, it takes its checkbook and creates money out of thin air.  When banks get the deposit, they can create money out of thin air by lending because of our fractional reserve  monetary system.  As it continues, the money supply increases by a multiple amount.

It's pretty clear that this should be the cure for what ails a very sick economy. Or maybe not.

This chart is the monetary base - currency + reserves- i.e. what is referred to as "high powered money." The monetary base is the raw material from which money is created.

 Uh... a lack of raw material does not seem to be the problem!

Maybe the banks are loaded with excess reserves, but interest rates are too high.  Yeah!  That's got to be it.  Let's look at the yield on the constant maturity 10-year U.S. Treasury note:

Hmm...the yield on the 10-year Treasury note started the century over 6% and now is below 2%!

Maybe the problem isn't rates.  Maybe the problem isn't a liquidity problem at all but, instead, is an on-going solvency problem.  Maybe banks have forgotten how to lend if they can't readily sell the loans to be securitized by Wall Street.

Maybe we have gone to the opposite extreme of moral hazard, where bank execs are overly cautious in their lending as they see that some high fliers (not Franklin Raines or James A. Johnson by the way, in case you're wondering) in the housing bubble actually had their lives ruined by greed.

One thing to be clear on is that the Fed, in our fiat money system, will never run out of arrows. Bernanke can literally walk down the street and write $50,000 checks to every homeowner if he wanted (I hope FOMC members aren't reading this; I'd hate to be the one to give them the idea).

Anyway, some analysts will continue to scratch their heads as they look at the charts and some will even wonder how the Fed (whomever is in charge at that point) will reverse Bernanke's actions.

Wednesday, September 19, 2012

Should They Break Up?

She's German...He's Greek


Monday, September 17, 2012

Inflation Expectations Revisited

In this How To Calculate Expected Inflation post from April 2011, I described the process of finding the rate of inflation expected by investors.  At that time, the rate for the 10-year period examined was 2.65%.  This was based on a yield on the 10-year Treasury note of 3.52% and a rate on the 10-year TIP of  0.87%.

Well, yields have changed since then.  Today, going to Bloomberg, etc. as described in the previous post shows that the yield on the 10-year Treasury note is 1.83% and the yield on the 10-year TIP is -.74%. S ubtracting, gives us an inflation expectation of 2.57%.

I have to say that I am surprised that the expectation has dropped slightly, in light of the ongoing printing of money and monetizing the Debt; but I understand there are factors influencing inflation other than money and that a lot of what we have seen is a build-up of excess reserves which still, this late in the recovery, have yet to be lent. 

This inflation expectations number is important to follow because it impacts views on what the Fed can and cannot do, the budget, and yield premiums on longer-term fixed income instruments.

It is, however, in my view, a very narrow reflection of inflation.  In fact, I will go out on a limb and argue that most economists don't really understand inflation.  To many, inflation is measured by the cost of a basket of goods and services over a period of time.  Others take a somewhat broader view and take a measure based on GDP--called the GDP deflator--or focus on Bernanke's favorite--the PCE deflator--reported with Personal Income.

All of these measures, I believe, miss the totality of inflation.  To me, inflation has to itself be put in real terms - specifically into labor units.  If the average labor force participant has to work more hours today than a year ago for a basket of goods, then we have inflation.

Think about this in light of what was reported above from the perspective of the tidal wave of retiring baby boomers.  In April 2011, a retiree who put $1,000 worth of stored up labor (40 hours, say) into a 10-year U.S. Treasury note got to buy $35.20 worth of goods and services.  Today the same $1,000, i.e. 40 hours, based on the 1.83% yield on the Treasury note, can buy $18.30 worth of the basket!  He or she would have to give up approximately twice the number of stored-up labor hours to get the same goods and services!  This is an inflation that is missed and is part of what is killing the economy IMHO. In fact, from a retiree's perspective, looking at money market and CD rates, it borders on hyperinflation!

So, Helicopter Ben continues to write checks out of thin air and baby boomers continue to take on riskier and riskier assets and Helicopter Ben puffs up and proclaims that one mandate - stable inflation - is being met.  What he doesn't get is that when you control prices, i.e. the price of money via the fed funds rate you are going to get inflation in some form.  Right now, it is a form that beats up on retirees and those trying to save for retirement.

I believe his price control policies are wrong and, like 2001 and 2008, in the end we may end up once again walking around like zombies wondering why the economy isn't working -  muttering about bubbles.How to Calculate Expected Inflation

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.

Thursday, September 13, 2012

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

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. 

Tuesday, September 11, 2012

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.

Monday, September 10, 2012

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 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.

Friday, September 7, 2012

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."

Wednesday, September 5, 2012

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.

Monday, September 3, 2012

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