Monday, October 27, 2014

Big Ben gets cut down to size

I have often pointed out that the investment world is like a living entity. By that, I mean that it inhales and exhales, although on a much more irregular basis than humans.

The recent market downturn indicates that many investors seem to have forgotten about the inhaling part of the equation. Between the downturn, radical terrorism in Iraq, and the Ebola virus crisis, there are a lot of nervous households around the country.

And right in the midst of these worrisome issues, the politicians are trying to push everyone over the edge with their never-ending onslaught of political ads. Yet, every once in awhile, something happens in the investment world that adds a little levity and causes one to chuckle. Such an incident recently occurred in the world of finance that I just had to share with my readers.

Ben Bernanke served two terms as chairman of the Federal Reserve, the central bank of the United States. He served under both President Bush and President Obama, from 2006-14. In other words, he was gatekeeper of our nation’s money supply and instrumental in guiding the country through the financial crisis.

As Federal Reserve Chairman, his compensation was just under $200,000 per year. Since he left office, he has been on the speaking circuit where he commands more than $100,000 per appearance. He is intelligent, well educated, and widely known, not only in this country but also throughout the world.

He is obviously well off financially and apparently knows how to handle money. What brought a smile to my face was his recent attempt to refinance his mortgage to a lower rate. In spite of his credentials, and much to my amusement, he was initially turned down. Once the most powerful man in the financial world couldn’t get a mortgage a year later.

Of course, it was a happy ending for Ben. Details weren’t made available to the public, but many mortgage experts speculate that the initial denial was because he went from a making a steady income to one that was collected from time to time. Pretty strange since he was actually making much more.

I don’t necessarily want to be critical of the mortgage industry, but prior to the recession, just about anyone who could fog a mirror could get a mortgage.

Changes in the mortgage industry were most certainly in order, but, as with so many changes in laws and regulations, the needle moved from just being a problem all the way up to potential disaster. And somewhere along the way, common sense got lost in the shuffle.

As is the case in many industries, it appears mortgage companies were more focused on getting forms filled out correctly than on looking at circumstances and letting common sense prevail.

The banks blame the regulators and are fearful of additional litigation and fines. The regulators blame the banks for being too tight with their purse springs.

As a result, households with great credit ratings and strong personal balance sheets continue to have difficulty obtaining a mortgage. Just ask Ben Bernanke.

I’m fairly confident he was able to get his paperwork through underwriting with a simple phone call. But not everyone has his connections. Hopefully this incident will serve as a wake up call for bankers and regulators alike.

Monday, October 20, 2014

The buck starts here: The U.S. is still viewed as a safe haven

For many, this is an exciting time of the year. Hunters, for example, are busy preparing for their pursuit of the big buck. Many retailers are excited too, anticipating the onslaught of hunters coming in to gear up and put the finishing touches on their hunting camps. And, no doubt, anticipating some nice profits.

They’re already bagging bucks, as the bow season has been underway since Oct. 1. And when the traditional Nov. 15 opening date for the firearms season kicks in, more sales will be rung up.

It’s a simple fact. This time of year is important to Michigan. The hunt for the buck puts a lot of dollars into the state’s economy.The buck is also getting a lot of attention on the national scene. The buck I’m referring to here, of course, is the U.S. dollar, quite commonly referred to as a buck.

The slang term buck in connection to the dollar goes back to the days when the early settlers were trading with the Native Americans. The rate of exchange was a deer hide for a dollar, thus the term buck.

On a national as well as international level, the currency version of the buck has been making big news. Most Americans probably don’t pay much attention to how the U.S. dollar is doing relative to other currencies.

They don’t wake up in the morning, turn on the television and eagerly await the latest developments from the international currency scene. In other words, the dollar’s relationship to other currencies is something about which most Americans little know or care.

In reality, though, it has an impact on us each and every day. One example is the falling price of gasoline. The strength of the U.S. dollar versus foreign currencies is a major reason why gasoline prices have fallen. So far this year the dollar index, which is a measurement of the dollar’s strength against a basket of major foreign currencies, has climbed 7 percent. For 12 consecutive weeks the U.S. dollar is up against the euro and Japanese yen.

There’s no question that the rising dollar has taken a lot of economists by surprise, especially considering the staggering amount of our national debt. However, with all the turmoil around the globe, we are still viewed as the world’s safe haven.

One well-known politician was quoted as saying “It means we have the best horse in the glue factory.” While that’s not exactly what you would call high praise, a strong dollar does have some benefits. In addition to the falling price of gasoline, it also means a European vacation will be a bit cheaper than it was last year.

That’s not to say there aren’t any negatives. There are. For example, it’s now a lot more challenging for American car companies to sell their vehicles overseas. For that matter, almost any American company selling goods overseas now has a higher hurdle to overcome.

As consumers and investors, we need to be aware that the dollar’s movement up and down in value relative to other currencies can have an impact on our daily expenses and the value of our nest eggs. I believe it is a positive that, despite all of our nation’s financial issues, we are still viewed as the safe haven of the world.

Monday, October 13, 2014

What if you’re never president of the United States?

Slightly less than two weeks ago, former President Jimmy Carter turned 90. It’s been 33 years since he left the Oval Office. I am not saying that he’s the oldest former president, but no other president has survived that many years beyond his term in office.

In a similar fashion, former President George H. Bush has also been living an active life since his term in office. I bring this up in a financial column because both former presidents illustrate the point that, for a variety of reasons, people today are living longer lives.

In fact, lifespans today are so much longer than in decades past, retirement can easily represent a third of a person’s life. Unlike you and me, neither of the former presidents has to worry about running out of money in retirement. Of course, their pension checks are funded by your tax dollars.

But longevity is one of the reasons that so many pension funds are either struggling or have been discontinued. Who could ever have imagined that so many people would live such long and fruitful lives?

By contrast, Civil War General and former President Ulysses S. Grant didn’t have it quite so well as former presidents have it today. He was elected to office at the young age of 46. When he left office, some poor financial decisions were made and he became dependent on his military pension.

Remember, there was no Social Security at the time. So, in order to supplement his retirement income and provide money for his heirs, he wrote his memoirs with the assistance of Mark Twain. Grant passed away from cancer at the young age of 63.

In today’s world there are definitely a lot more financial perks for former presidents and other politicians after they have left office. Such financial security did not exist a hundred years ago, but nowadays, I’m sure we would be shocked to hear that a former president was struggling with pocketbook issues.

My point is that the general public just doesn’t have the kind of income security that former presidents have. In fact, the majority of people today are nowhere near being on the financial trajectory that would lead them to a worry-free retirement income.

As someone who works with a lot of retirees, my observation has been that most people who worry least about their retirement income are those that began preparing early in their careers.

Yes, they contributed regularly into an IRA or whatever other retirement program that their employer provided. Just as important, they continued to participate in these programs whether the economic times were good or bad.

Like former Presidents Carter and Bush, I would prefer for everyone to have a relatively healthy and active retirement for many years to come. Unfortunately, you won’t have the financial benefits of being a former president. And, unlike President Grant, it’s highly unlikely you’ll find anyone willing to pay you a bundle for your memoirs.

That’s why it’s incumbent upon you to make certain you can reach age 90 with minimal financial concerns.

Having a reliable, steady income and a decent sized nest egg doesn’t just happen. It takes a lifetime of effort in order to make the retirement years the golden years we all dream about.

Monday, October 6, 2014

Many Michiganders can’t afford basic necessities

Because of unacceptable player behavior off the field, the National Football League has been all over the news. To the league’s credit, though, they’ve been partners with the United Way organization for more than forty years.

Our great state is in the center of Big Ten Country. For non-sports enthusiasts, the Big Ten Conference now has 14 schools, and one of the recent additions is Rutgers, the State University of New Jersey.

I recently discovered that Rutgers was in Michigan this summer for something other than a football game. They conducted a study for the Michigan Association of United Ways. Called ALICE (Asset Limited, Income Constrained, Employed), the study dealt with “the population of individuals and families who are working, but are unable to afford the basic necessities of housing, food, child care, and transportation.”

It found that 40 percent of our state’s population falls into that category. In other words, nearly half of Michigan’s population struggles to make ends meet. I think you’ll agree it’s a sad state of affairs when so many Michigan households can’t afford basic needs as defined by ALICE.

As someone that enjoys surveys, studies and numbers, I found ALICE to be as thorough and detailed as any I have ever reviewed. It was almost to the point of being overwhelming.

What hourly wage is needed to make life in Michigan affordable? It varies from county to county, but overall for a family of four (2 adults/2 children), the magic number seems to be just over $25, a number easier to attain if more than one family member works.

According to the Bureau of Labor Statistics, 63 percent of our jobs pay less than $20 per hour, with most of them in the $10 to $15 per hour range. And that number is based on a full-time workweek, even as we are evolving into a nation of part-time workers.

In other words, Michigan is an expensive place to reside, while at the same time we are in need of higher paying full-time jobs. I suspect the high cost of living has driven a number of higher end households and businesses to relocate out of Michigan. And that’s on top of the many Michiganders who left looking for jobs during the economic downturn.

ALICE found our population to be very diverse, quite typical in this ever-changing world. Contrarily, it seems the phrase “a typical family of four” is becoming about as rare as a company that still provides a pension plan.

To Michigan’s credit, we were one of the first states to undertake this thorough analysis through United Way and Rutgers University. In many ways, the findings confirm reality.

Somehow, we need to continue to make Michigan an attractive place for businesses to call home. We need to re-establish our workforce as one that’s educated, dependable, reliable and enthusiastic.

I’ve personally observed that Michiganders who have been fortunate are also extremely generous. As we close in on the holidays, please remember to be generous to our neighbors who are in dire need and struggle to balance the budget every month.

While the study points out just how many are struggling, I’m confident that Michigan is poised to become one of the states where businesses want to set up shop and offer well-paying jobs.

Monday, September 22, 2014

Setting investment goals is a matter of life and death

In this column, I frequently emphasize the importance of setting investment goals in order to provide for your children’s college education and your own retirement.

To accomplish those goals, there are certain requirements. First and foremost, you must establish your goals and objectives. That’s pretty obvious.

But then you need to establish the parameters necessary to meet your defined goals. That could take some work. And, finally, you should periodically measure your progress toward achieving the goals.

At that point you may need to adjust your parameters or revise your goals. But make no mistake, goal setting and investing go hand in hand.

But what happens if something goes terribly wrong and you meet your maker long before you anticipated? September is Life Insurance Awareness Month and life insurance is the part of planning that few want to discuss.

Discussing death is never an easy topic, but it’s a vital part of financial planning. When my wife and I were raising our sons, they frequently lamented, “This isn’t fair.” My guess is that anyone who has raised children has heard this or a similar type comment. We often chuckled at such complaints, but we tried to do our best as parents.

In reality, though, life isn’t fair. It doesn’t always work out the way we want. A good example is being passed over for a well-deserved promotion. Then there’s illness and, even worse, an unexpected death.

I can’t emphasize enough how important it is for a family to own life insurance. Money is made two ways. You can work for it and you can put your money to work for you. Life insurance simply brings money to the table when you’re gone. Because, even if you’re no longer alive, you still want your family to have a roof over their head, food on the table and the means to achieve their goals.

Quite often, when a local tragedy makes the news, you hear about a fund-raiser to help the family. Although fund-raisers are admirable, they’re not something you can count on. I still think it’s best to plan and prepare for the unanticipated while you’re still alive and healthy.

Back when the Super Bowl was at the Pontiac Silverdome, one of the quarterbacks was Boomer Esiason. I mention this because his mother died at a young age without life insurance. Boomer watched as his father worked extra hard to provide for the family.

When he became a parent, one of his first purchases was life insurance. Today, he’s the spokesperson for Life Happens, an organization that highlights the importance of owning life insurance.

Statistics indicate that thirty percent of households in the U.S. have no life insurance at all. That happens to be an all-time low for life insurance ownership in this country. And it gives me a bad feeling.

It means that more and more families will be turning to the government for financial assistance at a time when Uncle Sam is hurting financially.

Life insurance is not only an unpleasant topic to discuss; it can also be quite confusing. There are all kinds of insurance companies and all kinds of policies, and the language can be confusing.

I hope you take the responsible route and make certain your life insurance program is in order.

Monday, September 15, 2014

Ready to take your lumps? A lump sum buyout, that is

If you’re currently in the workforce and you anticipate a company-sponsored pension when you retire, the odds are pretty good that you’ll be faced with a major decision before you actually retire.

The decision that you will likely face is whether you should continue to receive a traditional pension or opt for a lump sum buyout. It certainly appears to me the stars are aligned in such a manner that lump sum buyouts will soon prove to be the norm rather than the exception.

There are a number reasons why plan sponsors might want to dissolve their pension programs. One is the insurance premium imposed by the Pension Benefit Guaranty Corporation.

The insurance premium per participant has jumped in recent years, and currently stands at $49 per annum. By 2016, however, the cost of the premium will jump by more than 30 percent, all the way up to $64.

To consider a lump sum buyout as an option, regulations mandate that the pension program be funded above 80 percent. So, as a plan sponsor, if your pension program is in relatively good shape and you can save significant money on insurance costs, why wouldn’t you consider terminating your pension?

In addition to no longer having to pay pension insurance premiums, even more money is saved by eliminating the required administrative costs.

Another major reason why I think so many plans will be offering lump sum options is the extremely low interest rate environment that we’re currently experiencing. Simply stated, if a projected pension is $1,000 per month or $12,000 per year, consider how much capital the plan would need to generate $12,000.

In other words, with interest rates so incredibly low, it would take a lot of investment dollars to generate $1,000 per month. If interest rates were to rise in the future, less money would be needed to generate the $1,000, maybe a lot less.

A common question that I’ve been asked by many employees is why the lump sum amount on their benefit projection statement is decreasing even though they are continuing to work. The answer is a function of the government rate for calculating how much the plan sponsor needs in reserve.

Currently, the rate is just over 1 percent. But in five years, it will be 4 percent. Obviously, the plan sponsor would need less money to generate your $1,000 per month at 4 percent rather than at 1 percent.

For the mathematically challenged, here’s a hypothetical example of what a person might face in today’s pension environment and why a current lump sum buyout might look fairly attractive from an employee’s point of view.

Retire now with a $12,000 annual pension or a lump sum payment of $150,000. Or, retire in five years with the same $12,000 pension or a $100,000 lump sum.

Of course, this is just hypothetical. Everybody’s situation is different and there are pros and cons both ways. But what would you do?

If you’re approaching retirement, I strongly suggest you get an opinion and analysis from a trusted financial adviser because there are a lot of moving parts. It will probably be the most important financial decision of a lifetime.

There is no one-size-fits-all answer because everyone’s circumstances are unique. But to dismiss either option without doing your homework is not a well-thought-out option.

Tuesday, September 9, 2014

It’s not too late to ‘Go West!’

Summer vacations can be both fun and educational. My recent western states vacation is a good example. When I head for the west coast, I generally make several stops. One of the most interesting was at Rapid City, S.D.

To my surprise, the city has life size bronze statues of all our presidents. I wandered into the main office and learned that the artists and statues were funded and maintained by a private organization. A gentleman explained to me that it was their way of honoring our nation.

My next stop was the Mount Rushmore National Memorial, where I was fascinated to learn the process of its dream, design, construction and ongoing maintenance. It’s also where I decided the direction of today’s column.

I overheard some startling comments from the large contingent of domestic and foreign visitors, including such as “Who is that along with Washington and Lincoln?” But my favorite was “Why did they put Roosevelt on the monument before he was president?” Obviously, some visitors were confusing Teddy and Franklin D.

Whenever I turned on the news during my western trip, the topic was Ferguson, MO, just outside of St. Louis. In our nation’s history, St. Louis was the starting point for many western settlers.

Most were seeking the American Dream of a better economic life. People have continually moved west seeking a better lifestyle. Those journeys were not without risk, and, on some occasions, ended in death.

The nation has changed dramatically since the Wild West was settled. While the American Dream is still alive and well, I fear that many don’t share the dream or simply lack the drive to improve their lot in life.

As a financial advisor, I help people handle their finances. Except for the few that inherited their wealth, most accumulate it through work and investment. But the foundation for building wealth is something that many seem to be lacking.

Our nation’s challenge is to develop new opportunities that lead to good jobs and careers. I believe we need a modern-day western journey to revive the American dream. In other words, we should be emphasize having dreams and taking calculated risks rather than debating the minimum wage.

It appears our focus is on just getting by rather than aiming for the sky. My youngest son and some of his friends are good examples. After graduating from college at the height of the recession he “went west.”

He discovered there are plenty of well-paying jobs for those that are willing to dedicate themselves and work hard. Many in his age group followed the same path.

In the investment world, you need to find the balance between minimizing risk and maximizing aggressiveness. I don’t mean if you’re without work or unhappy with your job, that you should drop everything and head west tomorrow. But you shouldn’t abandon your dreams.

There are indeed many opportunities that can be pursued. The American Dream that pushed many of our forefathers west still exists. You might have to look a bit harder to find them, but they are out there. Our history is full of stories of individuals who took risk and found success. America has changed, but with hard work, a bit of risk and maybe a little luck, no dream is unattainable.