The wrong people own life insurance January 22, 2012
Posted by forwardfinancialplanning1 in Estate Planning, Life Insurance.add a comment
There are a lot of things in life that don’t make sense. Often, one would expect a certain pattern to prevail, when in reality, things are exactly the opposite. A recent study by the Aite Group entitled “The Elusive Life Insurance Purchaser” identifies one of those anomalies.
Aite conducted an on-line survey of 1,024 consumers. Thirty seven percent of the respondents reported having no life insurance while five percent were unsure (….now there’s a group that could benefit from financial planning!!). Only two age groups reported ownership rates at or above 50 percent —-65 to 69 year olds at 50% and aged 75+ at 62%.
When considering that the most common and logical reason to own life insurance is to protect those who depend on one’s income, this is surprising . Clearly, people who have young children should constitute what the marketing world refers to as “the heavy user segment” for life insurance. Yet, obviously this is not the case.
And, why such a high rate of ownership in the 75+ segment? While it’s true that some life insurance is appropriately held by this age group to provide liquidity for handling estate taxes, this is a tiny fraction of the total. How many families are depending on the regular income of a septegenarian??
Some things in life just don’t make sense!!!
2012–a year of disclosure January 17, 2012
Posted by forwardfinancialplanning1 in 401k plans, Bond Mutual Funds, Equity Mutual Funds, Retirement Savings.add a comment
New regulations coming into effect in 2012 will make this an interesting year in the financial markets. New IRS requirements regarding cost basis information for mutual funds become effective in 2012. In a nutshell, mutual funds must now provide cost basis information to the IRS on form 1099B when account holders sell “covered” shares. ”Covered” shares are any mutual fund shares that an account holder purchases after January 1, 2012. This requirement does not apply to the sale of mutual fund shares acquired prior to this effective date—these still fall under the “honor system” that has been the norm prior to these new regulations. Tax preparers (and the IRS) have known for years that many tax filers didn’t always keep very good records to substantiate their cost basis, especially for funds held for long periods of time. So, they’ve put the onus on the fund companies to track the information for their account holders, but to disclose it to both the account holder and the tax authorities. Since trillions of dollars of previously acquired mutual fund shares don’t yet fall under the requirement, the new rules most likely won’t immediately yield additional revenue to the US Treasury. More probably, there will be countless reporting snafus due to the variety of possible accounting methods that are eligible for use when tracking cost basis of mutual fund shares.
A second interesting 2012 disclosure requirement concerns 401k retirement plans. Without getting too specific, employers will now be tasked to provide additional cost and expense information to their employees participating in such retirement plans. The requirements dictate more direct and specific disclosure of the numerous expenses that 401k plan participants absorb simply by joining the plan. Industry insiders have long understood arcane expenses such as Sub-Transfer agency fees and other “revenue sharing” arrangements. However, the average plan particpant has had no idea concerning these costs. In fact, numerous academic studies have found that many plan participants believe that they pay no expenses whatsoever, since they never actually “receive an invoice” for investment management fees, recordkeeping expenses, auditing fees and the like. These new disclosures are to be made in actual dollars absorbed, which should be a real “eye-opener” for a lot of participants.
Stand back and watch the fireworks…………………….
Economic Happiness January 11, 2012
Posted by forwardfinancialplanning1 in Financial Planning.add a comment
What does it take to generate financial satisfaction? A University of Georgia study of 28,000 Americans suggests that having an emergency fund was key. Having such a “rainy day” fund was deemed even more satifying than owning a home or paying off a credit card. Apparently the peace of mind of not living paycheck to paycheck is invaluable!
More evidence that others are “fearful” January 10, 2012
Posted by forwardfinancialplanning1 in Economic Conditions, Investing-General.add a comment
Recent posts on this blog (January 2, December 14) have noted the extreme degree of “fear” currently pervading the investing world. And now, from Europe we have still further evidence that perhaps risk aversion has reached an extreme. On Monday, Germany auctioned $3.9 billion Euros of 6 month sovereign notes at a yield of -0.0122% (yes, that is a negative number!). This signifies that the investors in this German debt are willing to ”pay” a small amount for the perceived assurance that they’ll receive the face value of the debt back at maturity. They’re also willing to lock in a negative return in the process.
Germany is considered one of the “safe havens” among European governmental issuers of debt and as such, is viewed as a “risk-free” borrower. A little further research revealed that Switzerland (September) and the Netherlands (December) have also recently issued sovereign debt at negative yields. And, yields on US T-bills dipped into negative territory in the financial markets (i.e., during financial market trading activity but not at auction) during October. So, once again, we’re seeing further evidence that others are “fearful”. This would be a signal to become “greedy” according to investing genius, Warren Buffet.
With all of the bad news coming out of Europe these days, it’s not surprising that investors are fearful. Perhaps that’s why Buffet has been so successful—-he’s comfortable being a true contrarian.
More evidence that “others are fearful” January 2, 2012
Posted by forwardfinancialplanning1 in Bond Mutual Funds, Equity Mutual Funds, International Equity Funds, Investing-General.add a comment
Our December 14 posting suggested that “others” may becoming “fearful” as evidenced by mutual fund flows. This trend was reinforced recently as the Investment Company Institute reported that long term mutual funds experienced outflows of $1.98 billion for the week ended December 21. Equity mutual funds had net outflows of $4.57 billion with $2.69 billion exiting domestic stock mutual funds and $1.88 billion leaving non-US equity mutual funds. Net inflows into bond, and balanced mutual funds reduced the overall outflows to the $1.98 billion total (money market funds are excluded from the “long term” fund totals).
These continued equity fund outflows come at a time when stocks are seemingly becoming “less expensive”. As of the final week of the year, the trailing P/E ratio of the S & P 500 had fallen to 14.48 compared to 18.05 a year ago. Likewise, the equivalent statistics for the P/E based on forecasted 2012 earnings is currently 12.58 versus 14.56 a year earlier. Clearly, this year’s volatility has made investors less enamored with the stock market.
A famous 1980 Time Magazine cover story entitled “The Death of Equities” ushered in an unprecedented 20 year bull market. As people become increasingly disenchanted with the gyrations of the stock market, we may want to keep our eyes on the newstand headlines………………………..
Paranoia versus “Set it and forget it” December 19, 2011
Posted by forwardfinancialplanning1 in Investing-General.1 comment so far
Geoff Davey of Finametrica (we’re fond of Finametrica’s risk assessment tools) has produced an interesting analysis that may help us tolerate the emotional roller coaster called investing. Davey looked at market movements over the last 40 years and monitored the gyrations of two different portfolios–a 70% stocks portfolio and a 30% stocks portfolio. There were some interesting similarities as well as a few differences. In either case, there are implications for controlling one’s emotions as they apply to investing.
Davey observed that if one looked at the monthly historical performance of the 70% stocks portfolio, it would show the portfolio value to be falling 33% of the time, recovering from a recent low 41% of the time and rising from a recent high 26% of the time. Surprisingly, the 30% stocks portfolio didn’t vary greatly from the 70% stocks portfolio, as it showed roughly a 1/3-1/3-1/3 behavior as well. The primary difference between the two allocations was found in the magnitude of the fluctuations, not in the direction.
However, extending the evaluation period from monthly to yearly paints a much different picture. When examining historical results on a yearly basis, Davey found that the 70% stocks portfolio was rising 63% of the time, recovering 19% of the time and falling only 18% of the time. The time period difference was even more dramatic for the 30% stocks portfolio as it was rising 84% of the time, recovering 8% of the time and falling only 8% of the time.
The moral of this story? As investors, we become our own worst enemies if we react to the day by day fluctuations of the market. That supposition most likely plays out in spades if one reacts to the second by second market movements espoused by day traders. For all but a few, “slow and steady” is definitely the better way to build wealth when participating in the financial markets.
Are others becoming fearful???? December 14, 2011
Posted by forwardfinancialplanning1 in Bond Mutual Funds, Equity Mutual Funds, Investing-General.add a comment
Super investor Warren Buffet has offered the investing world a great deal of wisdom over the years, with one of his most famous quotes being, “Be fearful when others are greedy and be greedy when others are fearful.” This, of course summarizes his ever contrarian views on buying and selling stocks. With the equity markets displaying minimal net gains during this millenium, some recent statistics suggest that many may becoming “fearful.”
Strategic Insights reports that inflows into stock and bond mutual funds are declining rapidly. The first eleven months of 2011 saw only $80 billion flowing into these investment vehicles. This is in sharp contrast to inflows of $246 billion in 2010 and $374 billion in 2009. Strategic Insights surmises that this is due to accelerated withdrawals from US equity funds, lower inflows into international equity funds, growing disenchantment with bond funds and general aversion to the market volatility we’ve seen of late. They also note that commercial banks have largely been the beneficiaries of this trend with bank deposits up $2 trillion over the past few years. While these deposits are yielding virtually zero, they generally enjoy FDIC insurance (within limits).
The real answers may be more nuanced as the Strategic Insights cash flow data does not include ETF’s, variable annuity sub-accounts and collective trusts etc. However, it does cause one to wonder, “Is the investing public becoming fearful?” Buffet himself has been very active, having invested $23.9 billion in a range of industries in the third quarter, his biggest quarterly buying spree in at least 15 years.
You can’t believe everything you read in the paper… December 9, 2011
Posted by forwardfinancialplanning1 in Bond Mutual Funds, Equity Mutual Funds, Federal Income Taxes, Income Taxes, State Income Taxes.add a comment
Many of our readers reside in the Bloomington-Normal, Illinois area and subsequently subscribe to the local newspaper, The Pantagraph. An article in the December 8, 2011 “Money & Markets” column of the Money section is entitled “December is tax time”——not surprising given the time of year. However, the authors, AP writers Mark Jewel, and Jenni Sohn might want to double-check their sources as the article contains several inaccurate statements.
Their article is based on the annual mutual fund practice (required by law) of distributing to shareholders the pro-rata share of realized capital gains that have resulted within the mutual fund portfolio. The authors suggest that due to poor 2011 equity market returns, “many stock funds won’t have capital gains to pass on.” They continue with, “Some may even have losses that investors can use to offset gains on other investments.” While their first statement may eventually prove to be true, there’s no doubt about the second statement—it is incorrect. Mutual funds do not pass through the pro-rata share of net realized portfolio losses to shareholders. Rather, residual realized portfolio losses must be “carried forward” by the fund into future years.
The authors later state that capital gains are not a concern for a tax-free municipal bond fund. This supposition is also incorrect since only municipal bond interest payments (and not capital gains) escape the reach of the tax man.
The moral of the story??? It’s prudent to obtain guidance from a professional in the field. Jewel and Sohn do provide some good advice in that regard as they suggest that the complexity of the tax laws makes it wise to, “Consider consulting an accountant or other tax advisor about your strategy.” Perhaps they should heed some of their own advice……………!!!
For retirement funding, we’re increasingly on our own……….. November 28, 2011
Posted by forwardfinancialplanning1 in Pensions, Retirement Savings, Retirement Spending.2 comments
It’s been a well-known fact that the trend in U.S. corporate retirement plans has been away from defined benefit plans (such as traditional pensions) and towards defined contribution plans such as 401k/403b/457 type plans. And, this trend appears to be accelerating. In 2004, only 45 of the 633 Fortune 1000 companies with defined benefit plans had frozen at least one plan (“Freezing a plan usually means the the sponsor has discontinued future benefit accruals for some or all participants). According to a study by Towers Watson & Company, the equivalent statistics for 2010 are that 237 (or 40%) of the 584 Fortune 1000 employers with defined benefit plans have frozen at least one plan.
The implications of this trend???? Individuals are going to be increasingly reliant on their own resources to fund their retirements. This places a premium on “starting early” and continuing to maintain/maximize contributions throughout one’s tenure in the workforce. Making good investment choices and minimizing expenses will also help, but neither of these factors will be nearly as important as maximizing the number of years for investment compounding to do its thing.
Pain on the collegiate front November 21, 2011
Posted by forwardfinancialplanning1 in Credit Cards, Education Planning.add a comment
While some unemployed college graduates are voicing their frustrations by joining the Occupy Wall Street protests around the country, the financial challenge of funding a college education continues to be formidable. Recently released statistics quantify the difficulty.
According to a College Board report, tuition and fees at US public universities rose 8.3% in 2010, more than doubling the general rate of inflation. Non-profit private colleges held their increase to 4.5% which appears reassuring until you consider that private university tuiton and fees now average $28,500 annually. The College Board further reports that the average public university student who graduates with debt (of course, not all students utilize loans) owes an average of $22,000, up from $15,000 a decade ago. Debt holding private college graduates fare even worse with $28,000 of loans, an increase of $11,000 in the past ten years.
According to Mark Kantrowitz, publisher of FinAid.org, federal and private student loans outstanding now approach $1 trillion and now exceed our nations’ collective credit card debts. And much like credit card debt, holders are defaulting on student loans at a substantial rate. Defaults during the first two years of the payback period reached 8.8% as of September 30, 2010. This represents the highest default rate since 1997 and is particularly problematic as student lenders (in particular, the federal government) have much greater recourse than credit card lenders when pursuing student loan repayment.
Despite these ominous statistics, the percentage of people who feel they are saving enough to cover their children’s college costs is only 16%, down from 24% in 2007 (source: Fidelity Investments Annual College Savings Indicator Study).
However, there is some encouraging news among the gloom and doom. A full 67% of parents have begun saving for college compared to only 58% five years ago. Financial advisors are having a positive impact here as 50% of those families who are saving and also use an advisor are utilizing 529 plans. Only 28% of families who have commenced savings, but without an advisor are participating in 529 plans. Section 529 plans allow for tax free account growth when proceeds are used to cover qualified secondary education expenses. Many states also provide residents with tax breaks on contributions to their 529 plans.
Now, if only the equities markets would cause these 529 accounts to grow, rather than stagnate!! Perhaps then we could have a fighting chance of keeping up with ever increasing education expenses…….
