Category: IHT Articles

by: Loren Fox and Michael Ferraro

This fourth edition of the FT 300 assesses registered investment advisers (RIAs) on desirable traits for investors.

To ensure a list of established companies with substantial expertise, we examine the database of RIAs registered with the US Securities and Exchange Commission and select those that reported to the SEC that they had $300m or more in assets under management (AUM). The Financial Times’ methodology is quantifiable and objective. The RIAs had no subjective input.

The FT invited qualifying RIA companies — more than 2,000 — to complete a lengthy application that gave us more information about them. We added this to our own research into their practices, including data from regulatory filings. Some 725 RIA companies applied and 300 made the final list.

The formula the FT uses to grade advisers is based on six broad factors and calculates a numeric score for each adviser. Areas of consideration include adviser AUM, asset growth, the company’s age, industry certifications of key employees, SEC compliance record and online accessibility. The reasons these were chosen are as follows:

• AUM signals experience managing money and client trust.

• AUM growth rate can be a proxy for performance, as well as for asset retention and the ability to generate new business. We assessed companies on one- and two-year growth rates.

• Companies’ years in existence indicates reliability and experience of managing assets through different market environments.

• Compliance record provides evidence of past client disputes; a string of complaints can signal potential problems.

• Industry certifications (CFA, CFP, etc) shows the company’s staff has technical and industry knowledge, and signals a professional commitment to investment skills.

• Online accessibility demonstrates a desire to provide easy access and transparent contact information.

AUM comprised roughly 65 to 70 per cent of each adviser’s score, while asset growth accounted for an additional 10 to 15 per cent.

Additionally, the FT caps the number of companies from any one state. The cap is roughly based on the distribution of millionaires across the US.

We present the FT 300 as an elite group, not a competitive ranking of one to 300. This is the fairest way to identify the industry’s elite advisers while accounting for the companies’ different approaches and different specialisations.

The research was conducted on behalf of the Financial Times by Ignites Research, a Financial Times sister publication.

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By Steven Dudash

The NBA Finals began last night, with Stephen Curry’s Golden State Warriors taking Game 1 from LeBron James and the Cleveland Cavaliers 113-91 in Oakland. It’s the third consecutive time the teams have met on basketball’s grandest stage. The highly anticipated matchup caps an otherwise forgettable playoff season, which thus far has been marred by key injuries (San Antonio’s Kahwi Leonard and Boston’s Isaiah Thomas) and noncompetitive contests (nearly every game involving the Cavs and Warriors).

While last year’s memorable Game 7 set post-Michael Jordan television ratings records, should this series also go the distance, we’ll likely see similar numbers again, but in this hyper-commercialized world, it’s not just Cleveland and Golden State facing off, it’s also a battle of the brands, with James and Nike on one side, and Curry and Under Armour on the other.

On paper, this is a mismatch. Nike, with the help of its subsidiary Jordan Brand, not only dominates the basketball shoe segment but controls over 51% of the broader US athletic footwear market, according to NPD Group, a data analytics firm that studies consumer trends. Under Armour, by contrast, makes up only 2.5%. Still, it wasn’t too long ago when Under Armour seemed poised to narrow that gap, perhaps not enough to close it but enough to become a meaningful threat to the strength of Nike’s position.

What happened? Let’s go back to the beginning of 2016: Under Armour had endorsement deals in hand with Curry, the reigning NBA MVP, whose team was in the midst of a 73-win season, as well as Jordan Speith, who the year before flirted with golf’s grand slam, winning the Masters and U.S. Open before narrow misses at the British Open and PGA Championship. If the duo weren’t the two biggest sports stars in the country at the time, they were surely two of the hottest, pivotal in a world in which ‘trending’ is so important.

Then three things happened that blunted Under Armour’s momentum. In April, Speith, pursuing his second consecutive Masters title, coughed up a five-stroke lead on the back nine, punctuated by a quadruple bogey on Augusta National’s famed 12th hole. While still competitive, Speith just hasn’t been the same player since, and golf, desperate for a way to juice television ratings and fill the void left by the absence of Tiger Woods, has felt the collateral damage.

Roughly two months later, Golden State famously blew a 3-1 series lead in the Finals to James’ Cavaliers, something that no other team had ever done. The Warriors became an internet meme, and Curry, the subject of overwhelmingly positive press attention and unrelenting fan adulation for nearly two years, came under enormous criticism for being badly outplayed by Cleveland’s Kyrie Irving in the series.

During that same doomed trip to the Finals, Curry’s signature shoe, the Curry 2, was released to negative reviews, with the footwear widely panned as ‘chef’ shoes or – even worse for a brand that desperately needs young consumers – something dads, boring dads at that, might wear. Interestingly, the shoes sold well, but in hindsight that was likely due in part to the novelty factor, with many opening their wallet almost ironically, in much the same way that ugly Christmas sweaters become popular during the holiday season. The Curry 3s, released at the beginning of the 2016-2017 NBA season, were a commercial disaster for Under Armour, and it’s hard to believe that the ridicule foisted upon the previous version of the shoe didn’t play some role in this outcome.

Fast forward to today, and Under Armour’s stock has been the worst performer in the S&P 500 this year, down more than 30%, and the company’s run of 20 consecutive quarters of year-over-year revenue increases has come to an end. In fairness, the fact that Under Armour’s two biggest endorsers suffered humiliating, public meltdowns combined with the drab design of the shoes themselves aren’t the only factors weighing down the company.

The once-hot athleisure trend has fizzled, impacting all athletic apparel companies, including Nike, and there has been a spate of sporting goods retail bankruptcies, many involving close Under Armour partners, such as Sports Authority. But it’s hard not to think about what may have happened had Speith and the Warriors held on, and Curry’s shoe been more aesthetically pleasing.

Yes, the Warriors could win this series (they are significant favorites in Las Vegas) and another NBA title next year and another one the year after that, but even if this happens, it won’t change things substantively for Under Armour. The company’s window of opportunity was last year, when all the stars seemed aligned. Also, with Kevin Durant now with Golden State, Curry is no longer the single face of the franchise.

So what’s the key lesson for investors? Companies reliant on fashion trends and influencer endorsements can only control so much. In particular, how endorsers perform is not manageable by any company at the end of the day. When two high-profile, high-cost endorsers flame out spectacularly in the span of 70 days, it creates lastingly negative images, and it’s only natural that will adversely impact the bottom line.

 

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1031 Exchanges Increasingly Attractive as Real Estate Prices Climb

By: Miriam Rozen

Published: April 24 2017, 9:22am EDT

Section 1031 of the IRS Code may seem like an arcane — and perhaps even unnecessary — subject for an adviser to be expert in. But now that property prices have risen to pre-2008 levels in most parts of the nation, it is essential to know about 1031 exchanges, according to Steve Dudash, president of Chicago-based IHT Wealth Management.

“If you are not able to hold conversations about like 1031 strategies with your clients, you are obsolete,” Dudash says. “You won’t have a job in five or 10 years.”

Knowing about 1031 exchanges is especially valuable for an adviser with clients who own rental real estate. Under this section of the tax code, clients can defer the federal government’s recognition of capital gains on the sale of a property if they buy a comparable property — one rental home for another, for instance — within a prescribed time period.
Only recently, as real estate prices have risen nationwide, have 1031 exchanges re-emerged as an extremely useful tool, Dudash says. When clients had properties that were underwater, capital gains taxes were not even a hint on the horizon, he says.

The attractiveness of 1031 exchanges might be amplified if proposals for a flat tax become serious. If such a proposal were to be enacted, clients’ capital gains may no longer be taxed at preferential rates but rather would fall into ordinary income brackets, according to Chad Smith, a wealth management strategist at HD Vest investment Services in Irving, Texas. “It could be changing very much over the next year and capital gains could be taxed at ordinary income rates,” he says.

OFFSETTING HANDSOME GAINS
But even under current tax laws, 1031 exchanges are an attractive tool for advisers in an economic environment in which clients are realizing significant capital gains. “It’s always handy,” says Lisa Detanna, a senior vice president and managing director for Raymond James Global Wealth Solutions Group in Beverly Hills, California.

According to Detanna, a client will call and say, ‘Oh, by the way, I’ve sold a property.” In some cases, this can lead to a scramble to find a place to exchange. For just such situations, Detanna turns to a banker whose institution has the designation to act as “a qualified intermediary” in 1031 exchanges.
1031 exchanges are an attractive tool for advisers, says Lisa Detana of Global Wealth Solutions Group.
1031 exchanges are an attractive tool for advisers, says Lisa Detana of Global Wealth Solutions Group.

Under a typical 1031 exchange scenario, a client who owns rental real estate sells the property but the proceeds initially go to such a bank, which is prepared to serve as a qualified intermediary or, as it is sometimes called, an accommodator. Under the IRS rules, the seller of the rental property then has 45 days to identify a “like” property and 180 days to purchase it, using the proceeds that have been kept with the qualified intermediary.

Although an intermediary adds an expense, the tax savings may be much greater. The exchange can help postpone taxes on highly appreciated properties that clients want to sell but don’t want to add to their tax bill.

“Some will charge a flat fee, and some charge a percentage of the sale price,” Detanna says. But, either way, “it’s nominal when consider how much you are saving by delaying the taxes.” Indeed, the tax saving put her clients in “a whole different arena” in terms of their purchasing power for a new rental property. “The delay of taxes lets you build wealth,” she says.

DEFINING ‘LIKE’
The exchanges are possible in a variety of circumstances because of how broadly the tax law defines a “like” property. There is tremendous flexibility in the term. “It doesn’t have to be apartment to apartment,” Detanna says. “You can switch to a duplex or exchange to a strip mall. It doesn’t have to be residential.”
The attractiveness of 1031 exchanges might be amplified if proposals for a flat tax become serious, says Chad Smith of HD Vest.
The attractiveness of 1031 exchanges might be amplified if proposals for a flat tax become serious, says Chad Smith of HD Vest.

For Smith, 1031 exchange strategies have enabled him to help clients who are “tired of being landlords.” For such clients, Smith has frequently recommended that they consider limited partnerships that own rental real estate. These partnerships aim at providing turnkey solutions for investors who don’t want to look for another sole-ownership property or haven’t been able to find one yet. But when evaluating limited partnerships — sometimes structured as tenancies in common — advisers should approach the proposals with skepticism, Smith says.

“Our firm works with only two vendors” of such vehicle, he says, in order to do business only with firms in which it has confidence. Even then, his firm hires an outside counsel to review any new investment packages the vendors offer. “We are very, very cautious,” Smith says.

“That turnkey option is not right for everybody,” he adds. “It needs to fit into their overall plan and their income needs.”

For her part, Detanna generally steers clients away from the turnkey 1031 investment vehicles. “There are lots of negatives associated with these,” she says. “You have no control; general partner fees are usually high. You are in a partnership maybe with 35 other partners and you get very little information about them or the management of the assets.”

ESTATE PLANNING
On the other hand, one-to-one 1031 exchanges are valuable for clients’ financial planning and, in particular, estate planning, Detanna says. “If the patriarch and matriarch have multiple rental properties and the adult kids don’t have the bandwidth to be in the property management business, 1031 options are something we would generally discuss,” she says.

Sometimes, since the heirs will get the step-up in property values when they inherit rental real estate, the best option is to wait and allow them to sell it and avoid more expensive strategies, Detanna and other advisers says.

At IHT Wealth, Dudash says his first question to clients considering a 1031 exchange is “What is your purpose?” By knowing their end game, he can help them figure out if such an exchange makes sense in their circumstances.

Sometimes, a 1031 exchange strategy can help with multigenerational planning. A rental property owner can make an exchange to buy a home for an adult child or an elderly parent who then pays rent. This can be an attractive option because no one has to pay capital gains taxes. But, Dudash cautions, often the family dynamics overwhelm whatever rental payment structure is devised and relationships turn sour. “It doesn’t always work out,” he says.

Another scenario in which a 1031 strategy might help, as long as clients have two years of lead time, is in financing a summer home or future residence. If the clients have a rental property, they can sell that and exchange it for a home in a vacation spot of their choice and then rent that vacation property for two years, so they satisfy the IRS’ requirements for the 1031 exchange. After that, the place is theirs to enjoy forever after — no capital gains tax payments required.

But the devil is in the details. According to Alan Soltman, a CPA with Merlis, Soltman, Green & Associates in Los Angeles, who works with Detanna, the IRS will not challenge that the dwelling qualifies as a like exchange under 1031 if it is leased at least 14 days at a fair rental in each of the first two years after the exchange.

But if the clients use the home during the two-year holding period, limitations apply. For a 1031 exchange, the property owners’ personal use cannot exceed the greater of 14 days or 10% of the total number of days the property was rented at a fair market price, Soltman says.

 

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. The strategy discussed may not be suitable for all investors

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By Steven Dudash, Contributor

Most have heard the saying, ‘Go big or go home.’ Well, events around the globe could soon have investors thinking, ‘Let’s go small instead.’

The first is trade. Without question, Donald Trump’s White House run was, in part, fueled by his fiery, campaign trail critiques of U.S. trade policy, which he claimed allowed other countries to profit at our expense and spurred the loss of millions of American jobs.

He pledged to change that, promising to renegotiate or scrap existing trade deals and to get tougher on China to swing the pendulum in the other direction. This posture has ramped up concerns that a trade war is in the offing – just as the domestic economy is showing signs of more strength – a prospect that could hamper an untold number of multinationals that depend heavily on unfettered access to foreign markets.

Ordinarily, it’d be easy to chalk up a presidential candidate’s rhetoric as politics as usual or, now that he is president, as a negotiating tactic to win better terms from trade partners. But if there’s one thing we have learned from Trump’s initial days in office, it’s that he’s going to make every effort to follow through on his campaign promises.

In the coming months, then, investors should, at the very least, expect rising tensions with major trade partners. Whether that means tariffs, no one knows for certain, but if that were to happen other countries would surely retaliate with punitive measures of their own, escalating hostilities even further and possibly sparking a full-blown trade war on multiple fronts.

That would put companies that import or produce goods abroad and then bring them back to the U.S. to sell especially at risk. Automakers, which have enjoyed blockbuster sales during the recent run of low-interest rates and cheap gas, are a prime example.

GM, Fiat Chrysler and Ford all import car parts from suppliers with factories in Mexico, while GM and Fiat Chrysler build a large percentage of their trucks – a significant driver of profit for both – there. If Trump were to slap a tariff on these goods, the added costs would get offloaded onto consumers and growth would decline.

The impact would be similar for many other large firms. Wal-Mart, for instance, already struggling to fend off Amazon, relies heavily on cheap manufactured goods produced in China. The same goes for Apple, which is dependent Chinese hardware manufacturers to achieve huge margins. Their prices would go up, and as a result Americans would buy fewer of their products, depressing growth.

Meanwhile, against this backdrop, investors also have to worry about the future viability of the European Union. Over the course of this year, there are a series of elections in Europe that are de facto referendums on whether the EU stays together – including in France, Germany and the Netherlands. Populist forces that favor withdrawal have gained momentum in all three countries.

While presently those forces are expected to fall a bit short, regional politics, as we have learned in the wake of Brexit and Trump’s victory, have become increasingly unpredictable. If another member of the eurozone goes the way of England – with trade wars involving the world’s largest economy simmering in the background – the ripple effects will reverberate around the globe.

And that’s why investors need to ‘go small.’ While large firms won’t go bust, many will have a much harder time achieving growth and producing returns if trade becomes more complicated and the EU begins to disintegrate.

On the other hand, small caps that are far less reliant on international trade or don’t have enough cache or name recognition to draw Trump’s ire will be somewhat more immune to these strains and would be poised to do much better. Think about real estate companies and firms that support infrastructure improvements that are all housed, taxed and provide jobs in America.

Given the fuller macro picture, investors should look to European small caps as well. Though the Dow has pushed through the 20,000-point barrier and markets continue to set new highs, the broader picture is more mixed, colored by full valuations, looming rate hikes and growth rates that lag historical averages.

Even without the added weight of trade-related pressures, it will be a tough slog, with domestic-focused portfolios, in our view, struggling to outpace 3-5% over the next few years. Gaining exposure to smaller European companies that can better fend off the challenges associated with an unraveling EU could help investors improve upon that.

Though it’s always been an unpredictable world, it seems like we have entered an unusually uncertain era, thanks to an uptick in the number of jolting geopolitical events around the globe. Investors should probably expect more of the same for the remainder of this year and adjust their portfolios accordingly.

Article originally published in Forbes:

IHT Wealth Management and US Wealth Management Announce Partnership and Strategic Transition Plan to Combine Firms

Phased Process to Position Combined Firm for Continued Growth through Enhanced Scale, Resources and Expertise

 

CHICAGO and BRAINTREE, Mass., Dec. 21, 2016 — IHT Wealth Management (or “IHT”), the Chicago-based super-OSJ focused on developing goals-based financial strategies for clients, and US Wealth Management, a network of experienced wealth managers providing holistic financial advice and wealth planning strategies, today announced that they have entered into a partnership and phased strategic plan to combine the two firms. The plan is expected to position the combined entity for continued growth and success by enabling it to offer advisors and their clients expanded resources, broader scale and an enhanced range of holistic financial planning capabilities, while providing a seamless succession roadmap for US Wealth Management Chairman and Chief Executive Officer John Napolitano. The two firms currently manage approximately $2 billion in combined brokerage and advisory assets.

As the initial step in the transitional plan, the partnership between the two firms will enable them to benefit right away from the respective strengths and insights that each brings to the table. Effective immediately, IHT Founder and President Steven Dudash has joined the US Wealth Management leadership team as Executive Vice President, Recruiting and Strategic Development. In this role, Mr. Dudash will share best practices on advisor recruiting and practice acquisitions, and will focus on solutions tailored to help advisory firms build strong succession strategies. IHT expects to benefit from access to US Wealth Management’s extensive business development and practice management platform, along with subject matter expertise in financial planning, estate planning and tax matters, among other areas.

Over the course of the process, IHT Wealth Management will purchase the equity of US Wealth Management in stages, allowing both firms’ advisors and their clients to smoothly and seamlessly transition to the combined company structure. IHT currently has 28 advisors in its network, while the US Wealth Management network consists of 30 advisors. No other changes were announced regarding the management teams of the respective firms, their headquarters locations or other operational issues.

IHT Wealth Management Founder and President Steven Dudash said, “The next several years will be a time of profound change for independent financial advisors. Evolving client expectations, industry consolidation and regulatory shifts such as the Department of Labor’s new fiduciary rule – among other factors – are expected to converge to create a difficult environment for firms that lack a critical mass of resources or the broad capabilities to serve the full range of clients’ needs. By combining our scale and expertise in helping advisors achieve their business and succession goals, our combined firm will offer the resources, flexibility and management insight to meet the challenges that lie ahead for independent advisors and their clients.”

US Wealth Management Chairman and CEO John Napolitano said, “While our firms currently manage over $2 billion in client assets, we are very much aware that the key factor that will differentiate firms in the years ahead will not be assets, but the ability to provide customized, thoughtful and comprehensive advice to meet the full spectrum of clients’ needs. The partnership and transitional plan we have announced today is evidence that we practice what we preach. This combination puts a stake in the ground stating that the USWM / IHT partnership is poised to help advisors elevate the service they provide to clients, and to offer business development and succession strategies that work.”

Mr. Napolitano continued, “Looking further down the road, I could not have found a better successor to take the reins at US Wealth Management when the time comes than Steven Dudash. Steve is 20 years younger than I am, and has built a team that demonstrates a unique gift for understanding the specific needs of each advisor and developing solutions to help them thrive. The IHT W-2 model – sometimes referred to as a ‘wirehouse lite’ model – is very appealing to advisors looking for more of an employment situation with benefits, and who don’t want the aggravation of opening their own office in order to be completely independent. We intend to implement that model immediately in selected US Wealth Management locations. I am very excited for the future of our two combined firms.”

Mr. Dudash concluded, “I am honored to have entered into this partnership with US Wealth Management, and to be entrusted with a key role in the future of both of these exceptional firms. We are confident that the decades of management experience that John’s team brings, in addition to USWM’s robust resources, will enable us to offer the scale and broad combined capabilities that any firm needs to grow and prosper in this new age of wealth management.”

Financial terms of the transaction were not disclosed.

About IHT Wealth Management
IHT Wealth Management is an independent wealth management firm and Office of Supervisory Jurisdiction (OSJ) specializing in financial planning, legacy and retirement planning, investment management and insurance and risk management. The firm seeks to provide both advisors and investors with the freedom to pursue their goals, while always adhering to uncompromising standards of integrity, honesty and trust. For more information please visit www.ihtwealthmanagement.com.

About US Wealth Management
US Wealth Management is an independent network of experienced wealth managers who provide holistic advice and custom-tailored strategies to manage their clients’ financial future. With ten offices located nationwide, the wealth managers of the firm have a common focus – a personal interest in meeting all their clients’ investment, estate planning, and retirement needs as they change throughout their lifetime.

To see article at PRNewswire

 

Securities Offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a registered investment advisor. IHT Wealth Management, US Financial Advisors and US Wealth Management are separate entities from LPL Financial.

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By JANE BENNETT CLARK, Senior Editor  
From Kiplinger’s Personal Finance, January 2017

Most people don’t know even the basic rules of Social Security. That can lead to filer’s remorse—and thousands of forgone dollars.

Not long ago, I attended an all-day seminar on Social Security, my goal being to soak up as much as I could about a devilishly complicated system. By noon, my brain had started to feel numb; by late afternoon, facts were bouncing off it like rubber darts. Considering that I already had a working knowledge of Social Security, I wondered how anyone coming at it cold could possibly master all the details. 

Not very well, it turns out. A recent report by the U.S. Government Accountability Office concludes that most people don’t know even the basic rules of Social Security and the strategies available to them. Among the fuzzy areas: the importance of health and family longevity in the claiming decision; the availability of spousal and survivor benefits; and the impact of filing at different ages. (If you file as soon as you’re eligible, at 62, your benefit will be 25% less than if you file at full retirement age, which is now 66. For each year you delay filing after full retirement age until age 70, you get an 8% boost.)

That lack of knowledge can lead to filer’s remorse—and thousands of forgone dollars. A 2016 survey by the Nationwide Retirement Institute shows that of the women surveyed who are taking Social Security, almost 20% wish they had waited to file to get a bigger paycheck.

You’d think that a Social Security claims specialist would steer you in the right direction. In fact, claims specialists are neither trained nor authorized to give personal advice, and they have been found to provide inconsistent, misleading or inadequate information, according to the GAO report. Worse yet, sometimes their answers are flat-out wrong 

How to protect yourself. Your best protection against bad or missing information? Do your homework. Start with the Social Security website, which presents a basic overview of the system’s rules and claiming strategies. Also check out our Boomer’s Guide to Social Security ($10). For a deep dive, pick up Get What’s Yours: The Revised Secrets to Maxing Out Your Social Security, by Laurence Kotlikoff, Philip Moeller and Paul Solman ($20). This readable book presents a soup-to-nuts guide to the available options, including recent changes to the claiming rules.

You could also seek advice from a financial planner. Look for one with a solid grounding in Social Security, such as a certified financial planner (CFP), and ask what tools he or she uses to find your best filing strategy. “Professionals who are serious will use a commercial software program,” says Theodore Sarenski, a certified public accountant and CFP in Syracuse, N.Y.

Or consider subscribing to software such as Maximize My Social Security, starting at $40, or Social Security Solutions, starting at $20. These programs run scenarios based on your circumstances and show how different filing strategies affect the total payout over the same time frame.

our last hurdle is filling out the application, which can be tricky. If you’re applying online, use the Remarks box to specify the date you want the benefits to kick in—otherwise, Social Security might start the payments earlier, potentially reducing the amount you get or precluding certain filing strategies. Also make a note in the Remarks box if you are restricting your application to spousal benefits, for which there is no separate line.

You can avoid some of this confusion by filing in person, as long as you tell the claims processor “exactly what you want to do,” says Kotlikoff. If you get information you know is wrong, ask for a supervisor. Be sure to review the application before you leave and get a dated copy of it.

By Steven Dudash

November 22, 2016

Full Article 

As a wealth manager, more than a few things keep me up at night, including what the election of Donald Trump means for the markets, the country’s economy and how Brexit will ultimately unfold. Perhaps my biggest worry continues to be that investors – both on the retail and institutional side – have not adjusted their expectations in today’s interest-rate and equity market environment.

To illustrate, consider a meeting I had recently with a $250 million university endowment fund. Each year, it uses 5.25% of its assets to award scholarships and at the same time expects to keep pace with a long-term inflation projection of 2.5%. To meet these assumptions and keep the principal intact, basic math says the fund needs to generate returns of just under 8%.

Given that the next 30 years will not be anything like the last 30 years, when investors could rely on a 50/50 portfolio of stocks and bonds to produce that kind of return, that’s pretty implausible. This is not a fun message to deliver to a roomful of stern-face endowment board members. It’s equally unpleasant to have to look a retiree or pre-retiree in the eye and tell them that may be facing a future income shortfall. Nevertheless, it’s the truth. A big reason why can be found in two significant events that occurred over the course of the last three decades – the scale of which are not likely to repeat themselves anytime soon.

The first was the rise of the PC and the Internet during the 1980s and 1990s, which caused productivity to spike, breeding higher corporate profits and boosting stocks. But as technology has permeated more and more areas of the labor market, productivity growth has slowed in recent years, crimping earnings. While equities have hardly suffered, that’s a bit of mirage, having been propped up by an aggressive Federal Reserve.

The second has been the steady decline in bond rates. The U.S. ten-year bond yield hit an all-time high of nearly 16% in September 1981. Earlier this summer, it was 1.36%, and despite a rise in recent since the presidential election, yields are not expected to ramp up meaningfully in the coming years, thanks to interest rates that are all but guaranteed to remain below historical norms for an extended stretch.

Therefore, we now have a stock market that is fully valued and unlikely to repeat past performance (even if corporate tax rates decline under Mr. Trump), combined with a bond market that is depressed, and unlikely repeat past performance. So what should investors do?

Assuming that, unlike an endowment, you can’t adjust your income needs, think about upsizing your level of risk. A 50/50 portfolio simply won’t be enough anymore, period. So my advice, at least in the near term, would be to lower U.S. government bond exposure and look to European equities.

Granted, it will likely be a bumpy ride, riddled with stomach-churning ups and downs. But as the United States seems likely to begin gradually raising interest rates in the coming months, much of Europe is essentially in the middle of QE infinity, still injecting massive amounts of capital into their economies in an attempt to jumpstart lagging growth. Take advantage of this phenomenon.

Cynically, whether those efforts are successful isn’t the concern over the long haul. The more important point is that mainland Europe, for all its issues, is in many ways valued much more favorably than the U.S. market, and there as some opportunities to go bargain hunting. PE ratios aside, Euro markets are likely to appreciate, if for no other reason than the governments are willing to mortgage their futures to make that happen.

Skeptics will point to looming concerns over Brexit. But England was never fully integrated with the rest of Europe in the first place, and as we have seen in the wake of that vote earlier this year, the divorce may not be the nightmare many predicted. What’s almost certain, though, is that the rest of the European Union will remain intact.

The bottom line is that investors need to be realistic about what the next 30 years may hold. This is a case where the past is unlikely to repeat itself, which means you may need to change your outlook and be willing to venture into areas that may not be so popular in the present but offer the opportunity to achieve larger upside potential.

 

 

 

 

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By Jane Bennett Clark,

You wouldn’t dream of running a marathon without undergoing months of training. Or heading into the wilderness without making sure you have adequate provisions. Or betting your life savings on a business venture you haven’t thoroughly researched.

But when it comes to entering retirement—when a failure to plan can have devastating consequences—a surprising number of people are unprepared. More than half of workers older than 55 haven’t developed a plan for paying themselves in retirement, according to a recent study by Ameriprise, and almost two-thirds haven’t identified which investments they’ll tap first. Many wait until they’ve set their retirement date to put together any kind of plan at all.

Planning late is better than never planning, but your chances of a secure retirement will improve if you start making decisions and checking items off your to-do list at least a year out. Take a look at seven big issues you’ll face as you transition into retirement.

Sign Up for Medicare

Thinkstock

You can’t ignore signing up for Medicare. You’re eligible at age 65, and you can sign up without penalty anytime from three months before until three months after the month of your 65th birthday. Medicare Part A covers hospitalization and is premium-free, so there’s generally no reason not to sign up as soon as you’re eligible. One exception: You can’t contribute to a health savings account if you enroll in Medicare. If you have an HSA and want to keep fueling it, don’t sign up for Medicare until you retire. (To enroll, go to www.ssa.gov.)

Part B covers outpatient care, including doctors’ visits. It costs $121.80 a month for singles with an adjusted gross income (plus tax-exempt interest) of $85,000 or less ($170,000 for couples) who sign up in 2016. Above those income levels, you’ll have to pay $170.50 to $389.80 per month. You’ll also have to pay a surcharge of $12.70 to $72.90 a month on top of the premium for Part D prescription drug coverage.

If you don’t sign up for Part B during the seven-month window around turning 65, and you do not have coverage through your current employer, you may have to pay at least a 10% penalty on premiums permanently when you do sign up. If you work for a company with fewer than 20 employees, your group coverage generally becomes secondary to Medicare at age 65, so you should sign up for both Part A and Part B—otherwise, you may not be covered at all.

Employees of larger companies can choose to keep group coverage while still working and hold off on signing up for Part B. But you must sign up for this coverage within eight months of leaving your job or, once you do enroll, you’ll pay at least a 10% penalty on premiums for the rest of your life.

Make a Retirement Budget

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Aside from signing up for Medicare, matching your future costs to income is the most important step in the run-up to retirement. Start by identifying fixed expenses—say, for food, housing, insurance and taxes—along with more-flexible expenses, such as for clothing and gifts. Don’t ignore big, occasional costs, says Lauren Klein, a certified financial planner (CFP) in Newport Beach, Calif. “Eventually, you’re going to need a new roof or you’ll have to replace your car,” she says. “Those costs shouldn’t come as a surprise.”

In a separate column, list discretionary expenses, for costs such as travel, entertaining and dining out. Note that some expenses will go down or disappear when you’re no longer working—you won’t be paying payroll taxes or saving for retirement, and your wardrobe will cost less when every day is casual Friday. But some expenses, such as for travel and health care, could also go up.

Once you’ve identified your fixed, essential expenses, match them to your resources. Ideally, guaranteed income—Social Security and maybe a pension or an annuity—will cover the basics. If not, you’ll have to use your retirement savings to close the gap, as well as to cover the nonessentials.

If your nest egg seems too skimpy to go the distance, better to know that before you leave your job, says Joe Tomlinson, a CFP in Greenville, Maine. “You don’t want to think later, I wish I’d worked another three years.” Working longer not only lets you continue to save for retirement but also means you have fewer years in retirement to finance, and it helps you delay taking Social Security.

Make a Retirement Budget

Maximize Social Security

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You can sign up for benefits as early as age 62 (full retirement age is 66 for people born between 1943 and 1954). But by claiming early, your benefits will be reduced by about 25% to 30% of the amount you’d get at full retirement age. For every year you postpone taking benefits after full retirement age until you hit age 70, you get an 8% boost.

If you think you have a less-than-average life expectancy (83 for 65-year-old men; 85 for 65-year-old women), or if you know you’ll need the income to make ends meet, you’ll probably take the money when you reach full retirement age, if not before. But if you have reason to think you’ll live into your nineties or beyond and that your savings could fall short, “draw down your IRAs, keep working—do whatever you have to do to get that 8% increase,” says Klein.

Although the government recently axed two lucrative claiming strategies that mainly benefited married couples, couples still have more options than singles. But their decision is also more complicated. You can take your own benefit as early as age 62, or you can claim a benefit equal to at least 50% of your spouse’s benefit if it’s higher and your spouse has already claimed. Either way, you’ll get a lower benefit if you claim before full retirement age. If you’re divorced or widowed, you may also have access to benefits based on your spouse’s earnings, which may be a better deal than your own.

 

Review Your Portfolio

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For years, you’ve concentrated on accumulating savings. Now the goal is to preserve your nest egg. You’ll still need to invest for growth to beat inflation and maintain spending, but you don’t want to risk losing a big chunk of your savings. A portfolio with 55% stocks, 40% bonds and 5% cash is a reasonable mix for near-retirees and retirees. More-aggressive investors might adjust the mix to 60% stocks and 40% bonds and cash; conservative investors could do the reverse.

If you’re like many investors, you have some or all of your retirement money in a target-date fund, which starts almost entirely invested in stocks when you’re several decades away from retirement and grows more conservative as you near the target date (theoretically, about the time you retire). Now’s the time to take a look at the fund, if you haven’t already, to see if you’re comfortable with its risk level. Each fund arrives at its definition of conservative a little differently. Fidelity’s 2015 Freedom Fund, for instance, currently puts you at 57% stocks and 42% bonds and cash; Vanguard’s 2015 target-date fund sets the mix at 50% stocks and 50% bonds. Both funds continue to grow more conservative over the next several years.

Review Your Portfolio

Set Your Withdrawal Plan

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Consider how you want to draw down your savings once you have retired. One long-standing strategy is to use the 4% rule: You withdraw 4% in the first year of retirement and the same dollar amount, adjusted for inflation, every year thereafter. The percentage-plus-inflation-adjustment strategy provides a reasonable assurance that your money will last 30 years or so, based on historical returns, but it lacks flexibility. You could do irreparable harm to your retirement stash by following the rule during a bear market, especially if the markets tank at the start of retirement.

A second approach is to take 4% of your portfolio and skip the inflation adjustment. This strategy technically ensures that you’ll never run out of money, but it’s “highly sensitive to the market,” says Colleen Jaconetti, senior analyst of the investment strategy group at the Vanguard Group. If the market goes south in a given year, so does your payout. Vanguard proposes a hybrid strategy in which you take a base percentage each year but set a ceiling on increases and a floor on decreases over the previous year to keep spending relatively smooth.

A third approach, the bucket strategy, represents a different tactic altogether. In the first bucket you put enough cash, CDs and other short-term investments to cover one to three years of living expenses, after factoring in guaranteed income. You fill the second bucket with slightly riskier investments, such as intermediate-term bond funds and a few diversified stock funds. The third bucket, for long-term growth, is devoted entirely to diversified stock and bond funds. As you spend down the first bucket, you eventually refill it with money from the second, and the second with money from the third. The purpose of this strategy is to avoid being forced to sell investments in a down market to fund living expenses.

Setting up a bucket system takes careful planning. If you decide to go this route, start positioning your assets now (or better yet, a few years ahead of retiring). Target-date funds don’t lend themselves to the bucket approach because each withdrawal represents a piece of the whole pie.

SEE ALSO: 8 Things No One Tells You About Retirement

Set Your Withdrawal Plan

Weigh Pension Choices

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If you’re lucky enough to be eligible for a pension, you’ll probably be offered the choice between a lump sum and guaranteed lifetime payments. With the guaranteed payments, you’ll have the security of knowing they will last as long as you do. With a lump sum, you can invest the money yourself and potentially end up with more than you’d draw from a pension over your lifetime. Plus, you have access to the entire amount from the get-go, and whatever remains in the account when you die goes to your heirs. On the downside, your investment won’t necessarily do better than the total amount of the payouts, especially if the market performs worse than you anticipate or you live longer than you expect.

To estimate which choice offers you the biggest potential payout, you’ll have to figure out the returns you’ll need from the lump sum to re-create the pension’s stream of income over your expected life span, says Michael Kitces, a CFP who’s a partner and director of wealth management at Pinnacle Advisory Group. If you think you can reap the same paycheck by investing the money at a doable 4% over 25 years, taking the lump sum would be a reasonable choice—unless you expect to live beyond those 25 years (maybe your parents and grandparents all lived to be 100), in which case “the pension looks like a pretty good deal,” says Kitces. The same goes if you’d need to earn 8% on your money to create the same income stream.

Married couples who choose lifetime payouts face another decision: whether to take the single-life option or the joint-life option, which has lower payouts to reflect the longer time over which the pension is likely to be paid out before the surviving spouse dies. Most couples choose joint life, which is the default option; you both must sign off if you choose single life. The minimum payout for joint life is 50%, although some plans let you choose a higher percentage—say, 75%—for a commensurately lower payout from the beginning. No matter who dies first, the reduced benefit usually kicks in for the survivor.

Weigh Pension Choices

Consider an Annuity

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You could use a chunk of your own savings to buy yourself a pension, in the form of an immediate or deferred-income annuity. These products also guarantee lifetime income, but the key word is lifetime: Unless you buy a costly rider, the payouts stop when you die, even if it’s the month after you start getting the paycheck. Plus, buying an annuity means giving up liquidity. Don’t put all your retirement assets in this basket. One approach, says Tomlinson, is to invest enough so that the payout combined with Social Security and any other guaranteed income will cover your fixed expenses.

Annuities come in myriad forms, some so complicated they can make your head hurt. Not so a single-premium immediate annuity: “It’s ridiculously simple,” says Tomlinson. “You pay x dollars up front, and the annuity pays you y dollars for the rest of your life.” With interest rates practically flatlining, however, you won’t get much for your money: A 66-year-old man who pays $100,000 for an immediate annuity would get $543 a month. (For quotes based on your situation, see www.immediateannuities.com.)

To beef up the payout, you could ladder your annuity purchases, with the expectation that interest rates will rise over time (even if they don’t, the older you are when you buy the annuity, the bigger the payout). Or spring for a deferred-income annuity now and collect the payout 10 to 20 years down the road. In exchange for your patience, the insurer will fork out much more—in the case of the 66-year-old man, about $1,300 a month if he collects 10 years out.

You can use up to $125,000 or 25% of your IRA or 401(k) account balance, whichever is less, to purchase a deferred-income annuity called a QLAC. And you won’t have to take required minimum distributions at age 70½ on what you paid for it.

Your Money

By RON LIEBER

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Here’s how to get better returns in your retirement account: Pay as little attention to it as possible.

That was the conclusion of a study by the investment giant Fidelity, according to a 2014 article on Business Insider. The article relayed the transcript of a Bloomberg program in which the well-known money manager Jim O’Shaughnessy said that people who had forgotten that they had accounts outperformed everyone else.

Fidelity, which has received inquiries about the study ever since, without knowing why, told me this week that it had never produced such a study.

How disappointing, given how tantalizingly counterintuitive the supposed conclusion was: Perhaps chasing headlines and darting in and out of stocks and bonds as hedge fund managers do wasn’t necessary after all.

But when the Standard & Poor’s 500-stock index hits a record high, as it did on Friday, we ought to be reminding ourselves of the near certainty of stock market declines that will test us just as the ones that began in 2000 and 2007 did. The apocryphal Fidelity study still suggests two questions that we should all be asking ourselves: How often should we look? And if we do check the performance of our investments, how often should we make any changes?

Michaela Pagel, an assistant professor in the division of economics and finance at Columbia Business School, answers the first question as the phantom Fidelity researcher might: Check your account statements as seldom as possible, especially when markets are falling.

We humans tend to experience pain from losses much more acutely than whatever joy we might experience from an equal-size gain. “If you’re watching as the markets go down, you are twice as unhappy as you would be happy if they went up by the same amount,” Professor Pagel said. “So looking at the market is, on average, painful.”

So stop looking so much. Consider turning off paper statements and email notifications for retirement accounts that you won’t need to draw on for several years. Most people’s accounts fall into that category — even those on the brink of what will hopefully be a multidecade retirement. The less we look, the less tempted we’ll be to act to try to alleviate that pain.

But many of us will look anyway. We are rubberneckers, masochists, cravers of information. We convince ourselves that since the facts are different this time, then perhaps our behavior should be, too.

So should we touch our investments the next time markets take a prolonged dive? This is something Fidelity actually has studied. After the stock market collapse in 2008 and early 2009, the company noticed that 61,200 401(k) account holders had sold all of their stock. So the company started tracking them to see whether that move would pay off.

Since then, 16,900 had not bought stocks in their retirement accounts through the end of 2015. About 13,000 of them are under 60, so they probably didn’t just cash out and take early retirement either. Through the end of 2015, their account balances rose by 27.2 percent, including new contributions.

People who had at least some stock exposure, however, saw their accounts jump 157.7 percent. That left them with an average balance of $176,500, $82,000 more than the people who got rid of all their stock. Now imagine that $82,000 difference compounding over 20 or 30 more years, and think hard about whether you want to touch the stocks in your retirement fund the next time the markets fall far.

This is an extreme example but an important one, given that plenty of smart people capitulate when faced with the pain of looking too hard at fast-falling balances. Even when market moves aren’t quite as severe, people still tend to fiddle with their holdings. In the second quarter of this year, 13 percent of Fidelity 401(k) account holders did so.

One group is not counted in those numbers, though: the people who keep all their retirement money in target-date funds. These funds are designed not to be touched, since they maintain a prescribed mix of investments that shifts slowly over the years as you age and need to take fewer risks. In other words, they buy and sell only when they are supposed to, according to the investment mix that corresponds to your age. And sure enough, only 1 percent of the Fidelity account holders in those funds made any moves during the second quarter. If this sort of investing is attractive to you, automated investing firms like Betterment and Wealthfront work in similar ways.

Left to our own devices, picking and choosing among a variety of funds, we’re likely to change our minds often and flit in and out of things. According to Morningstar data examining 1,930 stock mutual funds over 15 years ending in June, the difference between what the funds would have delivered to steadfast investors and what the average investor (who did not hang around for that long) actually earned was 0.99 percentage points. That doesn’t seem like much, but a one percentage point difference in returns can mean missing out on many hundreds of thousands of dollars in returns over the decades.

So why do we keep touching? It may be because it’s so easy to fall under the influence of people who seem to know what they are talking about. In the “Seers and Seer Suckers” chapter of his new investing guidebook, “Heads I Win, Tails I Win,” Spencer Jakab explains in fine and uproarious detail how consistently most of them fail to predict the future.

He should know, as he used to be one. A former top-rated stock analyst in what he describes as the “fortunetelling business,” Mr. Jakab reveals in the book that he actually had no idea how his stock picks performed against any kind of market average, and still doesn’t. No one at his firm kept track, and neither did he. He’s now doing more honest work in the Wall Street Journal newsroom. He also keeps a shelf of books at home filled with what he believes is bad investment advice — just to remind himself how hard it is to achieve any kind of genius.

While Mr. Jakab did not repeat the legend of the Fidelity study in his book, it did show up on a Columbia University webpage promoting Professor Pagel’s research. She hadn’t known its origins either. (Turns out Mr. Shaughnessy first heard about it from a now former employee, who has not returned emails about where he heard of it, according to a spokeswoman.)

But when I told Professor Pagel that Mr. Shaughnessy’s interviewer, Barry Ritholtz, had wondered whether the punch line to the study might be that the most successful Fidelity account holders were the dead ones, she thought he might be onto something. “Even if it’s not true, it’s actually true,” she said. “Dead people can’t get upset from seeing the market go down.”

To view the original article click here:

Not all Americans prepare for retirement as early as they should, which unfortunately leaves them with few options when they want to call it quits. When that time comes, many people are left dipping into their Social Security benefits, even if that means cashing in earlier than they intended. Unfortunately, the sooner you apply for Social Security benefits (which you can do beginning at age 62), the less money you’ll receive monthly. The good news is that there are ways to retire early and still delay filing for Social Security benefits.

Prepare your finances in multiple ways.

One basic way to plan for your retirement is to start additional savings accounts with different purposes in mind. In general, you should have an emergency fund with a few months of expenses tucked away, but you should also be saving for the future. Some ways to do this are through investment vehicles, like IRAs, annuities, mutual funds, and many other options. Depending on your age, when you want to retire, what benefits your employer offers, and how much you already have saved, your retirement strategy should be tailored to your particular needs. Making these decisions is something that a retirement counselor can help you with.

Meet with a retirement counselor.

This may be the best option to figure out the most successful strategy for your unique situation. There are specific products and plans that can help you achieve your retirement goals, and a retirement counselor can help you feel confident that you’re making the smartest choice. Retirement counselors have specialized knowledge in the newest retirement and investment solutions and they are experienced in helping people make their futures more secure. Explain your plans to retire early and be prepared to share your goals and how much you’ve saved. Your retirement counselor can give you guidance and share some tips about effective saving and budgeting methods.

Make life changes.

If your retirement accounts won’t provide enough of an income stream to make ends meet without filing for Social Security, then try to reassess your expenses. Are there any areas where you can cut spending? Some retirees choose to downsize their home. Relocation may also be another option, even if it means going outside of your current state where you may be able to benefit from a lower cost of living without making drastic changes to your lifestyle.

Work part time.

If you’re retiring, you may not want to work anymore at all, but for some, an encore career can be very rewarding—both financially and personally. This can be something as simple as teaching a community class using a skill that you already have, or as adventurous as pursuing a long-forgotten passion in a completely different field. Not only will you be making money, but you’ll also be staying active and will be engaging in a a line of work that you enjoy. The key is to find something that won’t make you feel like you’re working at all!

You’ll end up working for 35-plus years to earn your Social Security benefits, but hold off on filing until the time is right for your particular claiming strategy. There are many ways to retire early and we can help!