Forget the Fiscal Cliff, the deeper canyon is demographic

25 Mar

Let’s do the math: 2+1.9-2=less than 2.

The U.S. has been trending toward smaller families for generations, but the problem is becoming more acute. Population growth is a significant driver of economic growth, so when families have less children, it creates a negative cycle. Developed countries generally have lower birth rates than developing countries, but other factors are pushing Americans toward smaller families.

Not unsurprisingly, the economy is a major driver for falling birthrates. With the Great Recession hitting recent immigrants particularly hard, some of the traditional forces supporting a replacement birthrate are under the same pressure as the rest of the population.

A declining birthrate and an aging population both point to a weak U.S. economy over the long haul. This may be a situation, unfortunately, where we can look to Europe and Japan as examples of where the U.S. may be in 10, 15 or 20 years. It’s not a pretty picture.

As the financial burden on workers increases, it becomes more and more difficult to meet the growing health care costs of the country’s seniors, further weighing down the economy and discouraging larger families.

What does this mean for the average investor? It’s time to throw away our assumptions about U.S. economy, social security and the stock market as the lynchpin of our retirement savings. We all must look at a wider variety of choices to ensure income and stability in our golden years.


Tales of the sandwich generation

18 Mar

Many baby boomers find themselves in a rather uncomfortable financial position. Just when they were planning to arrive at retirement—their finish line—many have stepped in to help a struggling parent, adult child, or both. While these situations are never ideal, smart boomers are coming up with some creative ways to make the most of the situation, for their families and their finances.

For example, one of my clients, at the time when many choose to downsize their home, decided to move into a larger house in need of renovations. How could this possibly make sense for them? The needs of this sandwich generation family made this not only a necessary move, but a smart one.

The couple, both in their 60s, was ready to have an aging parent with dementia move in with them. At the same time, the couple’s only son and his wife were ready to buy a house, but didn’t have the cash for a down payment. The solution? Three generations moved in together.

This necessitated buying a house that was both accessible and large enough for everyone’s needs. The baby boomers covered the down payment and renovation costs while their son and his wife pay the mortgage and utilities.

Over the longer term, once the grandparent passes away, the plan is for the parents to move into the in-law suite, which has a separate entrance and kitchen, and for the house to eventually pass to the kids.

It might not be your vision of the perfect retirement, and it certainly wouldn’t work for everyone, but it saves money for all involved, shares the burden of caring for the grandparent and allows the boomer couple to retire without having to worry about a mortgage. While the solution may seem unorthodox, it works for this family, and I hope you’ll use it to broaden your horizons when thinking about solutions for your retirement.

State of the Union: Reality Check

11 Mar

As politicians congratulate themselves for saving the country from another self-inflicted crisis (even as the next one looms ahead), we as investors need to take a step back and understand, for our own financial well-being, the true state of our economy.

There’s no way to sugar coat it: We’ve been through a rough time. January 2012 brought an end to the worst five years of economic growth since 1928-1932—the beginning of the Great Depression:

  • There are three million fewer Americans employed today than there were in January of 2008.
  • From 2007-2011, the average net worth of all American households fell by nearly 40%.
  • Real household income fell by more than $4,000 from $54,489 in Dec. 2007 to just $50,054 by January 2012.

While the stock market’s recent resurgence is encouraging, the numbers mentioned above keep me from being too optimistic about where we’re headed over the long term. In particular, it makes me question the wisdom of both our reliance on stocks as a long-term investment tool as well as the assumption that social security benefits will be there for us in 10, 20 or 30 years.

Many families—particularly those closer to retirement that can’t afford more losses—should look at alternatives such as annuities to ensure their economic security.

With prices rising, is it time for a bond boom or bust?

4 Mar

As of Feb. 22, the 10 year Treasury bond yield has risen nearly 30% from its all-time low last July: from 1.404% to 1.965%. As rates have risen, prices have fallen and will most likely continue to fall. What does it mean for the average investor? Proceed with caution.

This could be a sign that interest rates will be jumping soon. If and when that happens, bonds will shift from being a secure investment to a liability. As I’ve described on this blog before, those who are left holding them after rates rise will not enjoy the results.

As the economy recovers and other investments look more attractive, bonds will cease to be the safety investment of choice. For those who have moved into this market, it means they will be left holding an investment that no one wants—and one that will lose its value. This potential shift makes it a good time to check with your advisor to ensure that you’re protected.

Riding the political roller coaster

28 Feb

While Congress managed to avert fiscal disaster with a last-minute deal in December, many of the same budget cuts loom on the horizon for March 1. The difference is, this time around, Congress doesn’t seem too worried about the impact.

For years, our federal government has denied the fact that we have a spending problem. Now, the sequester—the technical term for the mutually destructive $85 billion of across-the-board budgets cuts the parties negotiated last year—will make significant cuts, but in a way that could shatter the fragile economic recovery. Politicians from both parties are talking about solutions, but seem to be far apart with no intention of moving to the middle.

For investors, this means that, while they might not see an impact on March 1, the economy will feel a long-term impact. This is on top of many other recent federal spending cuts and the January payroll tax hike—all will contribute to a slower economy and a weak stock market.

This continued uncertainty about the recovery should, at minimum, force investors to look at a broad range of options beyond the traditional stocks and mutual funds. I’ve already shared some of my reservations with the bond market, but would recommend annuities and other guaranteed income options as better choices for many families.

401(k) flexibility

25 Feb

The conventional wisdom regarding 401(k)s is that, while they are commonly understood to be a great retirement savings strategy, they are not particularly flexible. In fact, many clients I talk to are firmly convinced that they are locked into their 401(k)s and that they have little to no choice what happens to those funds. The reality is a little bit different, however—at least for many people—because of a concept known as in-service distribution.

In-service distribution, or an in-service withdrawal, is a feature found in many plans that grants additional investment flexibility by enabling account holders to withdraw funds early and roll them into an IRA. For many accounts, the magic age at which that becomes possible is 59½, but some accounts allow you to have access even earlier—there are some that allowed account-holders to access more than half of their money at age 55.

The benefits of utilizing an in-service distribution strategy can be significant. At a time when the markets have been volatile and the only certainty is uncertainty, investing some of those rolled-over funds in a more conservative manner and diversifying your portfolio makes a lot of sense. It is always important to review any actions carefully and discuss any withdrawals with a trusted advisor, as certain withdrawals can impact future contribution limits, and there are circumstances where a failure to distribute company stock in a 401(k) might expose you to additional taxes.

The bottom line, however, is that using an in-service distribution to roll funds into an IRA provides you with a wider range of investment options and greater control of your financial future—and for those investors that take the time to understand the financial landscape, and move forward with counsel of a trusted financial adviser, that is never a bad thing.

Don’t look a gift horse in the mouth

18 Feb

The regulations for giving gifts are one of the most misunderstood pieces of our tax code. With recent changes, now is the time to discuss and debunk some mistaken impressions surrounding how these kinds of financial gifts (and the penalties for exceeding the annual limits) actually work.

In my experience, one of the most common financial misconceptions has to do with how much you have give away each year without incurring a tax penalty. In 2012, the annual gift limit was $13,000. As part of the agreement that was reached to settle the fiscal cliff debate, the new annual gift limit is now $14,000. Specifically, I speak with clients all the time who are under the impression that the annual gift limit represents a hard-and-fast rule whereby any amount of a financial gift over that limit is subject to taxation. The reality is that you can give away virtually any amount you like, you simply have to report it to the government.

The only tax “penalty” that you incur for doing so has to do with your lifetime basic exclusion amount, a number that is the same as the estate tax exemption ($5.25 million in 2013). So you can see that the instances where this would be a significant problem are rare. Looking at the math shows how even a very large financial gift of, say, $100,000, would only take that lifetime exclusion down to $5,164,000 (the number you get from taking the $86,000 that is over the $14,000 annual limit and subtracting it from $5.25 million). People tend to spend a lot of time worrying about these numbers, but the reality is that unless you routinely give extremely large amounts of money, there is very little reason to think that this will be an issue for you.