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Bull or Bear?

Over $22 billion flowed into equity mutual funds and ETF’s this past week according to Bank of America Merrill Lynch. That was the second highest amount on record after the $22.8 billion that flowed into equity funds in September 2007. Is this a sign of the bull or bear?

Of this $22 billion inflow, $8.9 billion went to equity mutual funds, the biggest weekly influx in 12 years. It should be no surprise that equity mutual funds are “John Q Publics” investment of choice for their IRA’s and 401K’s.

With the S&P 500 jumping 13% in 2012, posting its biggest gain in 3 years, it looks like “John Q Public” may be ready to get back in the game.

At first glance this new development is certainly a positive sign. The “Fiscal Cliff” is over right? As far as “John Q Public” is concerned it is. The Debt Ceiling, Sequestration, and the expiration of the CRA are just headaches for the government right? After all, the housing market and bank stocks are showing signs of a recovery so this has got to be the end of the “Great Recession”!

2013 Risk Assessment

As we prepare to ring in the New Year, all eyes are focused on the edge of the “Fiscal Cliff” as if the outcome of this single event will set the course for 2013 and beyond.

Granted, if our fearless leaders choose to do a full gainer off the edge of the cliff and fail to pull the ripcord in time, we will all plunge to our fiscal death.

But the markets are acting as if this scenario is unlikely. Although we have certainly seen increased volatility in the past couple of days, the market hasn’t broken its upward trend from its low on November 16. So until the final chapter of the Fiscal Cliff is written, the market will remain spellbound to the drama and react accordingly.

But what happens after the cliff is conquered? What is the risk assessment? In the short term I would expect a celebration rally.  But barring a new Washingtonian or European inspired docudrama; the market will eventually begin to take a sobering look at the economic facts.

The “Economic Cycle Research Institute” declared in September that the U.S. had entered a new recession in July, yet the market was too busy betting on the election to notice. Will an official recession materialize? Only time will tell.

Social Security Inside Out

For many of us, Social Security will form the cornerstone of our income when we retire, yet most of us know nothing about the choices we face or even realize we will have choices.

Social Security is arguably the most complex and least understood program in the country, second only to the Federal Tax Code.

Fortunately, retired Social Security District Manager, Robert Bruce, offers an easy to understand Social Security Workbook on his web site at: www.SocialSecurityInsideOut.com

In 38 pages he takes the mystery out of the benefit choices we face and guides us through examples in order to make sound decisions.

Working couples in particular need to consider their social security benefit options before purchasing any type of retirement annuity.

For example, Mr. Bruce describes a hypothetical couple where each spouse is 66 years old and each eligible to receive “Full Retirement Benefits” of $1,200 per month based on their individual earnings record. Their combined benefit of $2,400 per month will drop to $1,200 per month when either spouse passes.

Am I Saving Enough for Retirement?

In July I posted an article titled “What’s Your Number?” to help answer the question “am I saving enough for retirement?” For those within 10 years of retirement the article and on-line calculator help’s to zero in on your savings goal giving you an opportunity to adjust your retirement plan as necessary.

Unfortunately for those several decades from retirement, the calculator can return a daunting figure that may seem impossible to attain and may even discourage some from saving. To solve this problem I’ve developed an age-based milestone calculator to help gauge how far along you should be in your retirement savings plan.

For example, if you are 25 years old with an expectation of retiring at age 70 and are currently earning $40,000 per year, you should have retirement savings valued at approximately $10,000 by now. At age 35 earning $50,000 per year, your current target is $50,000. At age 45 earning $60,000 per year, your current target is $180,000.

Go to Milestone Calculator and enter your current age, current annual income, and age at which you hope to retire. The result will be where you should be today.

An Irrational Market

Stock Markets around the world rallied last Thursday when Mario Draghi, President of the European Central Bank, announced the acceptance by the ECB’s governing body of his plan (OMT) to ease the European debt crises. But on Friday, U.S. markets reacted like dear in the headlights to yet another lower than expected employment report. The U.S. markets are transfixed to the idea that this will pave the way for another round of “Quantitative Easing” by the Feds.

Both of these market reactions are irrational or premature at best. First, the ECB plan will never get past the planning stage if the top German constitutional court rules on Sept. 12 against the country’s participation in the European Stability Mechanism.  Even if the courts rule in its favor, the Chief of Germany’s central bank opposes this plan and wants the politicians to weigh-in. Furthermore, Mr. Draghi’s plan requires each participating country to agree to additional reform measures.  It is questionable whether Spain, Italy, or Greece can or will agree to additional austerity measures. Bottom line, this is far from a done deal and it certainly won’t be an instant cure to the problems facing Europe. Another European recession is all but certain regardless of the ECB plan.

Thrift Savings Plan Post Retirement Options

While the Thrift Savings Plan rules are relatively simple during your working years they become a bit more complicated once you cross into retirement.

After retirement you have 5 TSP options which can be exercised individually or in virtually any combination and they can be executed at the time of your choosing. You can:

1) Do nothing – If you don’t need immediate income from your TSP account and are happy with the investment choices, simply defer the decision. But at age 70 ½ this option expires. You will then be subject to IRS minimum distribution rules or face a hefty tax penalty. As a minimum you will need to select option 2)a. below upon reaching age 70 ½ .

2) You can Request TSP monthly payments – here you have 2 options:

a. You can have your payments automatically computed based on your life expectancy. I recommend using 5% as an assumed expected earnings rate in the Life Expectancy Monthly Payment Calculator. Note: you can make a one-time only change from TSP-computed life expectancy payments to a specified dollar amount later if you wish.

ETN’s Inherently More Risky than an ETF

An Exchange Traded Fund (ETF) is for all practical purposes a mutual fund which is traded like an individual stock. An ETF actually contains the underlying securities it represents.

An Exchange Traded Note (ETN) on the other hand, is an unsecured debt obligation issued by a financial institution that trades on exchanges and promises a return linked to a market index or benchmark. ETN’s do not own the underlying securities they represent.

The Financial Industry Regulatory Authority (FINRA) recently issued an “Investor Alert” for ETNs. FINRA warned investors that ETN’s can be illiquid, subject to early redemption at the issuer’s discretion, trade at a higher price than their underlying index, and contain conflicts of interests.

The conflict of interest warning is of particular concern. That’s because the bank responsible for issuing shares of the ETN could very well be betting that it moves in the opposite direction of your ETN.

Another factor that affects the ETN’s value is the credit rating of the issuer. The value of the ETN may drop due to a downgrade in the issuer’s credit rating despite no change in the underlying index.

When Lehman Brothers went bankrupt all of their “Opta” ETN’s stopped trading and became worthless.

What’s Your Number?

How much do I need to save for retirement?

The simple answer, 10 to 25 times your current annual salary! If you Google this question you will find countless mind boggling on-line calculators most of which require a PhD in economics to accurately complete. I think most of these on-line tools are designed to intimidate you into speaking to one of their “Financial Advisors” (Salespersons).

In my “Download Free” area you will find a link to a truly simple calculator I developed for finding “Your Number”. But I recommend you read the rest of this post so you better understand the logic behind the calculation.

To answer the question of “How much do I need to save for retirement?”, we must start with the question of how much income will I need in retirement?

Then by applying the 4% rule, we can answer the question of “How much do I need to save for retirement. Under the 4% rule, a properly diversified and managed retirement portfolio should provide steady, inflation protected income for 30+ years. The rule simply tells us to multiply the amount in our retirement account by 4%. This is the amount you can withdraw from your retirement account in your first year of retirement. In the second year of retirement you will give yourself a small raise based on the consumer price index (CPI). This will allow your annual retirement income to grow with inflation.

The Bucket Strategy for Saving and Investing

The bucket strategy is a simple way to conceptualize your saving and investing goals while keeping you focused and organized on your journey toward financial freedom.

Visualize 3 buckets representing your “Emergency Fund”, “Discretionary Fund”, and “Retirement Fund”.

The Emergency Fund Bucket is arguably the most important of the three. Without it you will have difficulty filling the other 2 buckets. Financial crises always seem to pop up at the most inconvenient times. If you have to raid your vacation fund or new car fund every time a crisis pops up, you may never attain your goals. And before long, you may lose the incentive to save.

If your employment is secure and your income is consistent, your emergency fund should hold 3 to 6 months of living expenses. Three months if you are single and renting, 6 months if you are married and own a home. If you or your spouse’s employment is not secure or your income varies significantly throughout the year, 6 months for singles and 12 months for couples may be more prudent.

Equity-Indexed Annuities – Buyer Beware

The Financial Industry Regulatory Authority (FINRA) posted the following Investor Alert:

Caution! Some Equity-Indexed Annuities (EIA) allow the insurance company to change participation rates, cap rates, or spread/asset/margin fees either annually or at the start of the next contract term. If an insurance company subsequently lowers the participation rate or cap rate or increases the spread/asset/margin fees, this could adversely affect your return. Read your contract carefully to see if it allows the insurance company to change these features.

If you didn’t understand a word in the preceding paragraph don’t buy an Equity Indexed Annuity before reading the full report on the FINRA web site.

Annuities are complex INSURANCE instruments SOLD by Insurance Agents who receive LARGE commissions for selling these products.

SOME annuities can be a good solution for SOME people but you would be hard pressed to find a salesperson that will tell you that their product isn’t appropriate for YOU in YOUR situation.

First there was Whole Life Insurance, then Universal Life, then Variable Universal Life. All products designed to hide the underlying cost of the insurance by combining it with an investment.