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Mom was right…………. September 24, 2015

Posted by forwardfinancialplanning1 in Financial Planning, High Yield Bond Funds, International Equity Funds, Investing-General, Large Cap Growth.
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There was no shortage of parental wisdom in the household of my youth.  And, while neither of my parents had an abundance of formal education, growing up in the Great Depression had taught them many important life lessons.  My mom would frequently remind us to set aside and save some money “for a rainy day.”  It’s a shame that so many Americans failed to learn these important financial axioms.

I’m basing this lament on some recent data released from a survey by bankrate.com.  They found that 30 million Americans had tapped retirement savings in the last 12 months to pay for an unexpected expense. Baby boomers were the most likely age grouping to have done so as some 26% of those aged 50-64 answered that their finances had deteriorated and 17% had used a 401k or similar retirement savings account to pay for an emergency expense.

Some years I spent in the in-bound call center of a major 401k plan administrator also reinforced this message.  Three fourths of the calls we took were to assist a plan participant who was originating a 401k plan loan to themselves.  Likewise, many calls were for “hardship withdrawals” which do even greater damage to a participant’s retirement preparation.  Many callers would comment that they “had to do it because of an unforeseen emergency” such as a car repair, a leaky roof or what have you.  I can remember several poor souls who paid a $100 loan origination fee (levied by their employer) to borrow $1,000 from their balance.

PEOPLE!!!!  —–Cars are going to have problems, roofs are going to leak and kids are going to break their  eye glasses.  These shouldn’t be surprises in life but rather they are certainties……………..the only surprise should be the form in which the emergency will take.   Emergency funds should be in place for emergencies!!!


It’s no better up north March 2, 2015

Posted by forwardfinancialplanning1 in Investing-General, Retirement Savings.
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Frequent readers have seen us cite statistics and surveys depicting how much our American populace struggles with finances and financial literacy. A recent study of Canadians completed by BMO Global Asset Management shows our friends to the north have similar challenges.

They noted that 56% of Canadian respondents needed assistance in deciding which investments best suited their needs. A full 53% wanted help in understanding how retirement portfolios will react in certain markets, while the same percentage wanted help in making portfolio adjustments because of market conditions. Further, 51% wanted assistance in ensuring that their portfolios were diversified while a similar number stated that they needed help in determining how much they’ll need to retire.

Different country—same problems.

General mistrust or a “do-it-myself” trend October 11, 2014

Posted by forwardfinancialplanning1 in Financial Planning, Investing-General, Retirement Savings.
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A recent Fidelity Investments study of Millennials may pose more questions than it answers. In particular, the Millennial Money Study found that 23% of millennials stated that they trust “no one” when it comes to financial advice. In addition, 41% disagreed with the statement that, “my parents provided a good example of how to have a successful financial future.” And, 49% don’t get financial advice from their folks.

This blog has often commented on the abysmal state of financial literacy in the United States and these findings raise the question: “Where will these young people go for advice?” In a best case scenario, they’ll take the initiative and acquire the knowledge to become self sufficient in this area. After all, this is is not rocket science. In a worst case scenario they’ll look to the government to take care of them, which will superimpose their problem on our society as a whole. The future collective financial health of the nation may depend on the answer.

Maybe the problem is foundational……….. April 16, 2014

Posted by forwardfinancialplanning1 in Financial Planning, Investing-General, Retirement Savings.
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I’ve read two articles today which commented on the failure of financial education efforts in this country. Dennis Ackley, a retirement education consultant in San Diego lamented, “Today, 401k education is the largest failure ever of adult education.” A second release entitled, “Financial Resources and Engagement Study” compiled by Genworth Financial Inc. observed, “While Americans recognize that becoming more financially savvy strengthens their chances of saving more for retirement, relatively few are taking steps to improve their understanding of financial matters.”

Ackley feels that the biggest mistake has been using financial industry experts to deliver 401k education rather than adult learning specialists. Barbara Nusbaum, a psychologist and money coach commented on the Genworth study and noted that many feel overwhelmed by the complexity of financial products or about the amount of time needed to improve one’s financial knowledge.

Both articles struck me as missing a more fundamental shortcoming which is surely at the root of the problem—–the failure of our nation’s school’s to impart basic numerical survival skills!! Ackley adds, “Naturally, people in the financial industry are ‘numbers oriented’. Yet many participants who attend 401k meetings are innumerate.” However, financial returns HAVE TO HAVE NUMBERS—how else are you going to measure anything!?!?? And, how can we expect adult learning experts to be any more successful when our nations “child education experts” have failed so miserably.

I say we focus where the financial literacy problem begins—in our public schools.

We knew somebody was picking up the tab……… April 4, 2014

Posted by forwardfinancialplanning1 in Annuities, Economic Conditions, Fixed Annuities, Investing-General, Retirement Spending.
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I’ve had numerous conversations over the past few years with clients who are puzzled by US Federal Reserve policy. Several have commented that the Fed seems to be “creating money” out of thin air. They recognize that there are no “free lunches” in the real world and many wonder, “Will there be repercussions somewhere in the system?”

As is always the case, there are repercussions, and National Bureau of Economic Research President, James Poterba “nailed it” with a recent research release. Poterba estimated that a 65 year old who wanted to pay for retirement with annuities tied to bonds needed 24% more wealth in 2013 than he would have needed in 2005. Academics can argue all they want about central bank policy. but this observation definitely “hits home” for retirees.

Do we really need this? April 1, 2014

Posted by forwardfinancialplanning1 in Investing-General, Retirement Savings, Roth IRA, Traditional IRA.
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Public policy experts have been expressing concern for years regarding Americans’ abysmal state of retirement preparedness. Two recently published reports shed some important insights on this situation.

The 2014 Retirement Confidence Survey published by the Employee Benefit Research Institute showed that about 2/3 of workers are “very confident” or “somewhat confident” about their financial preparations for later life, i.e., retirement. This was a substantial increase in confidence over 2013’s findings which is attributed to last year’s strong stock market returns.
Additional data in the study suggests that this confidence is unfounded as only 23% of respondents aged 55 and older report retirement accumulations exceeding $250,000. While $250,000 is not an insignificant sum of money, long-standing financial planning tenets suggest that it will only generate about $10,000 of retirement income annually. And, as the EBRI survey reports, the majority of 55+ savers have accumulated far less.

Now, one of the keys to success in any endeavor is to take advantage of all of the “tools” at your disposal. The IRA is a retirement savings tool that is available to most every worker as “earned income” is one of the few requirements for IRA eligibility. Another study by TIAA-CREF reveals how underutilized IRA’s really are.

Just 17% of workers contributed or were contributing to IRA’s in 2014. This IRA participation rate was down from 19% last year and 22% in 2012. And for the Gen Y worker (aged 18-34), who has the most time to allow the power of compounding work in their favor, the participation rate is only 11%!!

The Obama administration has been crowing about its recently introduced MyRA initiative which was developed to promote retirement savings for people who do not have an employer sponsored retirement plan. Traditional IRA’s have been around since the early 1980’s and Roth IRA’s since 1998. Obviously, they are underutilized. So, once again, we have government trying to solve the wrong problem. Rather than creating a another new “tool” with all of its attendant red tape and regulation, it should be promoting the use of the tools that we’ve had all along.

Illinois–are you paying attention? March 23, 2014

Posted by forwardfinancialplanning1 in Investing-General, Retirement Savings.
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As a financial planning firm, we see first hand the tools that individuals have at their disposal when it comes to retirement planning. While many private sector employees have very viable 401k plans (if only they would take full advantage of them…..), public school employees are offered 403b plans that a colleague once described as “1960’s dinosaurs that outlived their time.” Indeed, some recent personal experience with an employee of a small local school district informed me of how poor (and expensive) the options were.

Unlike 401k plans where the plan sponsor (the employer) is legally bound by ERISA to prudently manage the plan for the exclusive benefit of the participants, 403b plans might best be described as “casual retirement benefits”. Basically, the school district allows nearly any purveyor of financial products access to their employees via an occasional employee benefits fair. The plan sponsor (the school district) makes little effort to vet these providers and until recently, wasn’t even required to have a written retirement plan document. The local school district handles the payroll deduction and forwards it to the financial services provider selected by the employee. That is about the extent of the effort for the school administration———–and, not surprisingly, the participation rate is low and the products offered are generally lackluster group annuity contracts with expense structures that could choke a horse.

However, the state of North Carolina has developed an interesting version of the 403b plan. The North Carolina Public School and Professional Educators Investment Plan offers the state’s K-12 educators a low cost alternative to the dinosaurs described earlier. The state has teamed with TIAA-CREF to offer an investment platform with 27 diversified low cost investment alternatives. All 115 school districts in the state will have the option to participate in the program. This will relieve them of the administrative burden of maintaining a local plan with the end result being greater economies of scale, fiduciary oversight by the state and reduced investment fees for the participants.

Hey Springfield—are you listening????

Is the truth finally coming to the forefront? March 10, 2014

Posted by forwardfinancialplanning1 in Investing-General.
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There’s been a forty year debate about the merits of active management of mutual fund assets versus simply mirroring the market’s return with a passively managed index fund. Often, the huge marketing budgets of the proponents of active management sway the investing public, despite ample academic and empirical evidence of the power of indexing.

However, politicians have long known that people “vote with their feet” and that axiom seems to be playing out in the mutual fund world. The Vanguard Group, which pioneered index investing for the general public, has become larger than the next two largest mutual fund families combined. Further, Vanguard’s index-based target date fund series took in more than $18 billion in new assets last year—more than double the new assets of any other target date fund series.

Five years ago Fidelity’s target date series held 39% of the industry’s assets—-today its share has dropped to 30%. During this same period, Vanguard’s share has increased to 27% from 22% at the end of 2009.

Why is this happening? Perhaps the investing public is discovering that Vanguard founder John Bogle is right. Indexing is a superior approach!!

The tide has turned on mutual fund cash flows December 9, 2013

Posted by forwardfinancialplanning1 in Bond Mutual Funds, Economic Conditions, Equity Mutual Funds, Investing-General.
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Regular readers probably got tired of postings in 2011 and 2012 which at the time, noted the inordinately large cash outflows from stock mutual funds and the enormous inflows into bond mutual funds. (One can check the archive for postings on 12/12/2011, 01/02/2012, 01/10/2012, 8/13/2012 et. al. for details). The main theme of these postings was to point out a possible application of the famed Warren Buffet quote, “Be fearful when others are greedy and greedy when others are fearful.” While not recommending that investors abandon bonds, the main message suggested that stocks might be poised to do well, due to the apprehension of mutual fund investors to commit money to equities. The strong returns experienced in 2013 seem to have validated Buffet’s axiom.

However, the tide appears to have reversed. The attached link from Vanguard notes that for the first time in years, equity funds are attracting strong cash inflows while bond funds are experiencing negative cash flows. The link is:

The article makes for good reading as it suggests that these inflows be noted as a good reason to rebalance one’s portfolio. Vanguard wisely suggests that one should always adhere to one’s long term plan and that maintaining the appropriate asset allocation is an important part of implementing that plan. For most long term investors, this would presently suggest that one’s equity exposure should be trimmed back to its target percentage with a corresponding increase in bond exposure. Of course, this means reducing one’s holdings of a “hot” asset class only to be replaced by the asset class that others are selling.

Easy to follow? No.
Contrarian? Yes
Solid long term financial strategy? Yes

Does anyone verify these survey reports? November 8, 2013

Posted by forwardfinancialplanning1 in Investing-General, Personal Budgets.
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Came across a newspaper article which cited some data that I found awfully hard to believe. The LA Times stated that a recent Black Rock survey of small investors found that US investors currently held only 18% of their investible assets in stocks and only 7% in bonds. Further, they claimed that small investors currently held more than 48% of their investible assets in cash. The article further claimed that these supposed “facts” reflect lingering investor fears caused by the painful bear market of 2008 and early 2009.

After thinking about this for a second, I started to wonder if this was just another example of poor survey design, biased sampling or just plain old stretching the truth. Also wondered where the remaining 27% of investible assets resided (gold? commodities? baseball cards?).

It wouldn’t be surprising to learn that nomenclature surely skews the so-called facts that this research uncovered. Since this survey claimed to be surveying individuals about stocks, bonds and cash, it was clearly ignoring institutional investors. And while many institutional investors are insurance companies, foundations and the like, the term “institutional investors” also includes mutual funds and exchange traded funds (ETF’s). And who owns a great portion of the mutual fund and ETF universe? Individuals, of course!! Somehow they weren’t part of the survey sample.

So, be careful before you conclude that since 48% of individual investor cash is sitting on the sidelines (which would suggest lots of pent-up demand for stocks), it’s a great time to load up on stocks. The survey data may have ignored two of the primary methods employed by individuals to participate in both the stock and bond markets.