Tuesday, November 25, 2014

Know when to take your lumps when retiring

Once I push myself away from the Thanksgiving dinner table, it seems to me that the remaining portion of the calendar year moves at lightning speed.

There’s an abundance of year-end items that need to be taken care of in just a few short weeks. If you’re in your late 50s or early 60s and employed by a large company, let me add one more item to your list.

If your company has a frozen pension, ask your HR department for a handful of retirement projections covering a variety of retirement dates over the next few years. You might be surprised at what you discover.

To set the stage, interest rates are extremely low. Bank deposits earn next to nothing and mortgage rates are about as low as I can ever recall. The surprise is how these low rates can impact your frozen pension account.

Pension fund managers need to be somewhat cautious in the manner they invest pension funds. Hence, much of the money is in relatively safe, low-interest bearing funds to meet their pension obligations. In this low interest rate environment, that translates into a larger lump sum compared to just a few years ago.

Consequently, if your company offers the choice of a lump sum buyout in lieu of a monthly pension check, you just might be sitting on a once-in-a-lifetime opportunity and not even realize it.

I recently encouraged a client in his late 50s to ask his employer’s HR department for year-end retirement projections for 2014, 2016 and 2018.

Since the pension is frozen, retiring now and taking the traditional pension wouldn’t be much different than if he continued working until 2018.

However, the lump sum offers provided by the HR department were quite interesting. If he took the lump sum now or in 2016 or 2018 the amount would be virtually the same. In other words, he could retire now and receive a lump sum of $500,000 or wait a few years and collect the same $500,000.

Mathematically and historically speaking, there is every reason to believe that a $500,000 lump sum today would be worth more than the same $500,000 lump sum a few years from now.

In my client’s situation, other than any new 401(k) deposits and company match, there’s no compelling reason for him to stay with his current employer. In fact, you could even argue that, since his benefits are frozen and not growing, by staying on the job he is effectively taking a reduction in pay.

In this low-interest environment, where my client’s speciality is in high demand, and because he is somewhat disenchanted at his current place of employment, he should consider taking the lump sum and retiring now. Then, if he wanted, he could seek new employment with comparable benefits somewhere else.

By investing wisely, his lump sum could actually grow over the next few years, and at actual retirement some years later, he could have a considerably larger nest egg than if he stayed on course.

I believe many of my readers may be sitting on a similar opportunity and not even be aware of it. Take the time to request your retirement projections. If the lump is a viable option, discuss it with your financial adviser, along with ideas for investment.

Monday, November 17, 2014

Are you prepared to ride the DJIA seesaw?

The often-mentioned Dow Jones Industrial Average (DJIA) is simply a basket of 30 domestic stocks that provide a barometer for the performance of the U.S. stock market. There are other measures, but the Dow is the one most frequently referenced.

In October, it appreciated a very respectable 2 percent. On the surface, you would likely say it was a decent month. On the other hand, it could have been a poster child for the phrase “investors need an iron stomach.” In other words, it was a really wild ride.

The stock market was open for trading on 23 days last month. As measured by the DJIA, the action was pretty evenly split. That is to say there were 12 days in which the market lost ground and 11 positive days that it gained.

Recently, the Dow has been hovering around the 17,000 mark, swinging above and below it with apparent ease. Historically, 17,000 is where no DJIA has ever gone before.

Generally, when the market is down 200 points in a day, you would consider it a really bad day. Conversely, when the market is up by more than 200 points in a day, you’d call it a really good day.

During the month of October, there were swings exceeding 200 points up or down on 19 of the 23 trading days. Clearly, it was not a time for the faint of heart.

Since we’re an automotive town, let me illustrate with an automotive analogy. If October were a stretch of road with the speed limit of 50 mph, we were either chugging along at 25 mph or flying at 70 mph.

Although we never actually traveled at 50 mph, we arrived at the end of the ride as if we had traveled all the way just a hair above the posted speed limit. On the surface it may have appeared to be an uneventful ride, but moment-by-moment it was wild and crazy.

Quite often, it’s best to simply tune out many of the world’s worrisome current events. Looking back at October, the Ebola virus was the dominant news story. But there was also ISIS and the bombings in Syria, tensions in Hong Kong, and tragedy with our neighbors in Canada.

Not to downplay any of these events, but history books are full of conflicts, crises and catastrophes that could be used to rationalize why you should avoid being an investor. And while history is no assurance of what lies ahead, time and time again the investment world seems to reward those investors who have an iron stomach and stay the course.

October was an absolutely perfect example. If you had let your emotions take hold, you would have missed out on a fairly respectable month. If you had watched the news on an hour-by-hour basis, you might have thought the world was ending.

There is a lesser-known index called the VIX, which measures volatility. It has often been referred to as the fear index. In non-technical terms, it was all over the charts in October, further confirming what a wild ride October was for investors.

I don’t recall ever experiencing a month quite like this past October. But it certainly reminded me why it’s so important to keep your emotions out of your investments.

Monday, November 10, 2014

Who wants you to be a millionaire? No one

Thank goodness the mid-term elections are over and done with. I anticipate we’ll begin hearing about the upcoming 2016 election within the next few weeks and I, for one, can hardly wait.

I intentionally try to avoid being political in this column, but there’s something that really bothered me throughout the recent pre-election campaign. The television ads. Specifically, it was how they seemed to vilify anyone who had money.

The ads would have you believe that everyone who is considered wealthy is selfish and doesn’t care about the schools or the environment. As a financial adviser I’m taken aback by this growing perception of people who are financially well off think it’s unfair to routinely criticize someone just because they have money. There seems to be some sort of automatic assumption that they came into their money dishonestly or illegally.

But it’s just as likely that they attained their financial status because they worked hard during their careers. And they probably put their families first and were active in their communities.

Generally speaking, most people accumulated their wealth because they were dedicated savers who stayed committed to their financial goals throughout their careers.

Simple mathematics shows that it’s possible. For example, let’s say you were to save $1,000 per month in a tax-deferred account at five percent interest. If you did so every year throughout a 35-year work career, you’d have in excess of $1,000,000.

This is obviously a hypothetical example, but it illustrates that, although it may be difficult for many, it can be done. That being said, if you’re just in the early stages of your career and don’t have $1,000 a month, you should still get into the habit of saving whatever you can.

This is especially important if your employer’s retirement plan provides a match to your contribution. Then, as you age and hopefully have more disposable income, Uncle Sam will provide more incentives to save even more.

The maximum annual contribution into a 401(k) this year is $17,500. If you happen to be over age 50, you can actually contribute an additional $5,500. That’s $23,000. Next year, both numbers increase. The maximum 401(k) deposit is $18,000 with an additional $6,000 for those over 50. That’s $24,000. If you’re in a financial position to take advantage of these provisions, I strongly encourage you to do so.

One out of twelve households in the U.S. has a net worth in excess of $1,000,000, excluding the value of the principal residence. That translates into more than 9.5 million households. Of that 9.5 million, fewer than twenty percent inherited their wealth. In other words, wealth for the vast majority was earned, saved and invested. Which is to say, they made it happen.

There’s no question that a million dollars is a lot of money. But even if you were to have that much, there’s still no assurance you won’t encounter financial issues during retirement.

Keep in mind that, in retirement, health related issues could easily carve out a huge slice of a million dollars. And interest rates can have an adverse impact on a retirement nest egg if they continue to stay at today’s extremely low rates.

When all is said and done, attaining a million dollars is a goal that should be encouraged, not vilified.

Monday, November 3, 2014

When the elections are over, will anything change?

Election day is finally on our doorstep. I sincerely hope, as you enter the voting booth, that you don’t make your election choices based on the 30-second commercials that have taken over the airwaves.

They are misleading at best. And while I hesitate to say that some of them are intentionally so, I can say with certainty that some of them are contradictory.

That being said, I know how difficult it is to get your arms around certain complex issues when things are going at full speed in your personal life. In many instances, even if you know your stance on specific issues that are near and dear to your heart, it’s difficult to determine exactly where political candidates stand. After all the annoying and half-truth commercials, at the end of election day, some of you will be thrilled with the results and others will be disappointed. I kiddingly state that I’ve been voting for so long, I can remember elections where the final results didn’t require the intervention of attorneys to determine a legitimate outcome.

In the financial world, I’ve always cautioned investors not to become overly euphoric when their investments were making rapid gains. Conversely, I’ve urged them not to become too distraught when their bottom line took a downward turn.

In other words, it’s a good idea to stay calm and collected regardless of the direction of your fortunes.

And that’s exactly how I feel about election results. I don’t believe any one loss or victory by a particular candidate will suddenly alter the long-term financial planning objective of any household.

When the election dust settles and reality sets in, everyone is still going to be paying taxes. Young families will still need to save and invest for college and retirement. Empty nesters will still need to plan for a rapidly approaching retirement. And those already retired will continue to fret over the increasing costs of living.

Regardless of who wins or what propositions are passed, post-election is the time to make year-end financial adjustments.

For example, if you have a high-deductible health insurance program, you should consider making a contribution into a Health Savings Account. If you participate in either a 401(k) or 403(b) account, you should at the very minimum make certain you’re contributing enough to receive any employer match.

If you received a pay increase during the year, you should consider increasing the amount of your contribution for the balance of the year. Keep in mind that there are special provisions to encourage contributions for those over the age of fifty. If you’re over fifty, you should definitely take advantage of those provisions.

If there’s no company program, you can still take the initiative to open an Individual Retirement Account. Because they can be somewhat confusing, in that there are both tax deductible and non-deductible programs, I suggest you consult your attorney or financial planner.

In the short term, investors need to move quickly to put any finishing touches on year-end strategies. Long term, no matter who is elected, it’s not the responsibility of Lansing or Washington, D.C. to make or break your financial goals.

In spite of all the political promises, your financial success or ultimate failure is not decided in the ballot box. It’s up to you.