Monday, April 27, 2009

The “Paper Loss” Garbage

Majority of those who have investments in the stock market are freaking out – and rightly so. They are looking for answers as well as ways to halt further evaporation of their savings. In 2008, all the major stock market measures (S&P 500, DOW and NASDAQ) plunged well over 30 percent.


To bring this point home, a hypothetical nest egg valued at $500,000 on January 1, 2008 would have had a balance of $350,000 as of December 31, 2008 – assuming no withdrawals and that no fees were accessed on it. That is a reduction of $150,000 in one year!


And, it gets worse: As noted by USA Today, the average stock fund fell approximately 9.1 percent in the past three months. Are we at the bottom yet? When is the freefall going to end? Is this what millions of investors signed up for?


Called Your Adviser Lately?
I’m pretty sure you have been told by your financial adviser (if he/she invested your money in the stock market- with your consent), heard the experts say, or read this golden solution: “Your losses are only on paper - you’ll be okay.”

Here’s the truth, those losses are REAL. I repeat, every bit of your losses are REAL! You see, once you lose in the stock market’s game, that investment is – GET THIS - lost FOREVER. These - in my opinion – shady advisors/experts are twisting the fact.

When the market recovers (and I’m praying for that to happen ASAP), it is “NEW” gains! In effect, if you had not lost, you’d have ended up with new gains on top of your previous earnings – Theoretically speaking if you are already in the stock market.


If these financial advisors are right (about the “paper loss” thing) then investing is like a big joke. Where, sometimes, your fund company shows you $350,000 instead of your previous $500,000 balance. Something tells me the only reason you see the lower value is because that’s your ACTUAL, LEGAL value.

Could You Have Avoided These “Paper Losses”?
Whether investors knew to ask or not, they needed to know the answer to THIS question: Is there a strategy that can get me decent returns when the stock market is positive and protect my account values so I don’t lose a DIME when the market declines? A qualified advisor should have been addressing this question all along.

As I indicated in my recent interview with the Frederick News Post, the answer is YES! That’s exactly what our firm has been teaching, recommending, and implementing for clients. I can tell you this much: They are NOT tormented by the safety of their investments. You may learn more by attending our next seminar or requesting a complimentary consultation or webinar.

Monday, April 20, 2009

Will You – REALLY- Need Lower Income in Retirement?

There is this completely bizarre idea that one year you are working - looking for ways to beef up your income - and the next you can comfortably survive on a much lower income. Simply, because you are in retirement.

What The Experts Say

Some so-called financial experts say you need 70 percent of pre-retirement income after retiring, while others claim its 80 percent, 85 percent or 90 percent.

Then, there are those (financial gurus) who advocate what is called the 4 percent rule. It simply holds that if you withdraw no more than 4 percent of your portfolio in the first year of retirement and then increase that amount for inflation each year, your money should last at least 30 years.

Yes, it gets that ludicrous sometimes. Whatever it is, I would ignore it - if I were you. One could only wonder if these experts are allergic to reality.

Real Life

May be our seminar attendees and retired clients have been living in a different United States of America. The last time I checked (last night), retirees pay the EXACT same prices – like everyone else - for things like groceries, gasoline, clothing, cable, newspapers and airplane tickets. When they patronize restaurants they do NOT receive a 30-percent discount.

The – I guess unusual- retirees I meet everyday face health care costs that threaten the roofs over their heads. But, to be fair, I must concede: they pay nine bucks for movie tickets that regularly cost $10 – courtesy of senior citizen discount.

Almost everyone desires to do things like, travel the world, have fun with family/friends and live comfortably (you know what that implies).

Exactly how are they going to afford these on the percentages of pre-retirement income suggested by the “experts”? Or, since they are the “experts” we should shut-up and believe (it’ll be wiser to hope) things will turn out exactly as prescribed?

Try This

I’m not asking you to agree with me. But, may I suggest a really simple, common-sense, real-life approach to gauging the kind of income you’ll need in retirement? I mean here in this United States.

  1. Decide (with some specificity) what you desire to do in retirement. (If you still don’t get my point after this, steps 2 and 3 below will nail it home).
  2. Locate a retiree who is doing the stuff you desire to do (or at least close).
  3. Find out how much they are spending?

I bet you’ll conclude that to survive on the percentage(s) of pre-retirement income the experts are trumpeting you MUST be the greatest magician of all time. Hey, if that’s you please let’s talk.

Monday, April 13, 2009

Investment Losses Can Lower Your Tax Bill (?)

Investors who are not disturbed by this title should – seriously - check their investment IQs. If you have investments in the stock market my guess is, they are in hell at the moment. It would be the biggest understatement to mention that 2008 was a horrific year – with the DOW, NASDAQ and S&P 500 Index each plunging well over 30 percent.

Investing directly in the stock market - in my opinion - is dangerous, speculative and unnecessary in building a steady, realistic nest egg. By that I mean, financial advisers (regardless of the college they attended or the length of time they’ve been wearing suit and tie) cannot predict the future movements of the stock market, but there’s absolutely NO need to gamble and risk crashing.

Just for the record: our clients have NOT lost even a penny during this meltdown! Wondering how? It’s simple; we use common-sense instead of speculation. Hopefully, investors are finally waking-up to smell the coffee.

In an effort to calm frayed nerves, so-called financial advisers (who live on Mars) are arguing that those significant, troubling losses may actually be good for investors (haha). They suggest:

1. Capitalize on the opportunity to convert your 401(k), 403(b) or traditional IRA to a Roth IRA. To paraphrase: since you just lost over 30 percent of your nest egg, your tax bill will be lower – because -you get to convert the lower value.

2. You can use your realized capital losses (from the sale of your depressed securities) to offset up to $3,000 in ordinary income annually. Any unused losses may be rolled forward to cover any gains and income until they are all used up.

So you see after all it’s a “good” thing! Boy oh boy - no further comments.

Why Did You Invest?

People invest in order to build retirement nest eggs period! Their well-paid financial advisers promise to “manage”, “properly diversify” and “re-balance” their portfolios. As well as keep (very) close eyes on them. These investors were – and are still - being advised to relax and focus on the long-term. You see, in the long-term they’ll all of a sudden enjoy amazingly comfortable lifestyles! (or at least that’s what conventional advisers tell angry investors).

How much would you have invested if your adviser told you something like this: If you invest directly in the stock market, your nest egg may experience significant losses. But never mind, you can use the losses to reduce your taxable income by as much as $3,000 per year?

The sad fact is many retirees have watched helplessly as their life’s savings evaporate within a matter of months. They have losses to write-off for the rest of their lives and still have enough to last their children and grand children. Are there people who invest so they could write-off losses (LOSSES!) on their tax returns? Could someone tell those so-called experts to get real? PLEASE!

If Roth IRAs were that awesome (in the view of these advisers), how come their clients were (and are) invested in different plans? Let me guess: so they can lose significant amounts of their life’s savings – to make way for “the Roth conversion advice”. Sounds smart to you? Sounds – sort of – stupid to me.

How I See It

Every retiree facing this predicament has to endure living on a drastically reduced income (assuming a nest egg is presently generating income or about to). And that means lower taxable income. Therefore, they may not need the supposed – very expensive – additional break provided by realized capital losses. Yet, some so-called financial advisers see “good” news in that.

Monday, April 6, 2009

Numbers Don’t Lie, They Just Muddle

I see a bunch of confusing, twisted numbers in hundreds (if not thousands) of colorful, convincing 401(k), 403(b), IRA and TSA brochures – and on some websites. These sources usually portray – and wrongfully profess - that all things being equal using pre-tax contributions and deferring taxes will result in a bigger nest egg. Therefore, those who use such accounts will end up with higher net spendable incomes. That’s simply not true.
Our firm has proved over and over again that, if a nest egg is taxable (all qualified plans are under current law) you can still run out of money! Someone who uses after-tax contributions - under the same set of circumstances - will end up with the same outcome but with much less restrictions and more certainty (in terms of taxes).
Mathematical ILLUSION
Let’s assume a return of 7.2 percent (Rule of 72 makes for easy math) and a 25 percent federal marginal tax rate (presently every dollar over $33,950 -single and $67,900 – married filing jointly - is taxed at this rate).
$200,000 in pre-tax contributions will double to $400,846.27 in ten years. If you take the same $200,000 and pay tax on the front end ($200,000 minus 25 percent tax), it amounts to $150,000. When that doubles, it grows to $300,643.70. It looks - as if – using pre-tax dollars is better than using the already-taxed (75-cent) dollars. So the illusion is that there is $100,202.57 less in the after-tax-dollar account. Or is it?

What those brochures/websites (and the consultants who use them) don’t explain is that taxes are due and MUST be paid on the entire $400,846.27 tax-deferred nest egg – upon voluntary withdrawal or when compelled by the IRS.
Once that happens, you end up with the same amount of money! Based on our example, the $400,846.27 minus 25 percent tax will net you $300,634.70. There is no difference between funding a retirement account with after-tax dollars or pre-tax dollars, assuming the same tax bracket and provided that the account funded with after-tax money grows and stays tax-free upon withdrawal (as they are under current law). Interesting, huh?
Y’see, the misconception is that because the pre-tax dollars grow to a bigger number it’s better. Remember, the supposed bigger balance includes unpaid taxes and the last time I checked, the IRS doesn’t play.
Other worthwhile facts to note
  • As you approach retirement (if you’re like most retirees), you’ll have fewer deductions and exemptions compared to your earning years. That would probably bump up your tax bracket.
  • Tax due on a pre-tax contribution account is based on rates in effect at the time of withdrawal (whether voluntary or compelled by the IRS).
  • If you were the owner of the $300,634.70 tax-free account used in this example, you’ll not lose sleep over future tax rates. Why? Because your income is NOT taxable.

The next time you see one of those colorful brochures think about YOUR retirement.