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Tax Refunds April 20, 2015

Posted by forwardfinancialplanning1 in Retirement Savings.
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The 22nd quarterly Allstate/National Journal Heartland Monitor poll of 1000 adults recently uncovered some data that tells us a great deal about human behavior and one’s attitude about “financial windfalls”.   Respondents who said they have poor credit scores are more likely than those with excellent credit scores (46% to 33%) to agree that a tax refund should be used for a “fun purchase”. Likewise, this same group would rather buy something for themselves or a loved one than pay off debt (51% vs 20%).  Finally, 39% of the low credit score group consider a tax refund check as a bonus to be used to buy something for themselves as opposed to paying off debt.

One has to wonder if it is this same approach to personal finance that has led to four in ten baby boomers reportedly not having saved anything for retirement?

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Maybe we just elect the D students???? April 3, 2015

Posted by forwardfinancialplanning1 in Economic Conditions, Financial Planning.
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Read a recent study by WalletHub which caused me to chuckle at some of its implications. WalletHub claims to have a methodology that ranks each of the fifty states in terms of financial literacy. Lo and behold, the fiscal train wreck known as Illinois came in seventh in the ranking. Here are the measures (and Illinois’ score) that WalletHub used to arrive at its conclusions. “Knowledge and Education Rank”-14th; “Planning and Daily habits Rank”–8th; “Percentage of people who spend more than they make”–18%; “Percentage of people with a rainy day fund”–45% “Percentage of unbanked households”-7.4%; “Champlain University High School financial literacy grade”–B; “High School drop-out rate”-2.4%

Now my purpose here is not to throw stones at WalletHub’s intent. However, one could reasonably surmise that a state with such outstanding financial literacy skills should be a model for fiscally responsible government. After all, the government of the state is populated by these same, seemingly qualified residents. Well, then how do you explain Illinois being dead last in credit rating and degree of public sector pension funding? Likewise, would a financially literate government have a $6 billion backlog of unpaid bills?
Either WalletHub’s methodology is flawed, or perhaps we only elect the financially illiterate among us.

Averages versus medians March 16, 2015

Posted by forwardfinancialplanning1 in 401k plans, Retirement Savings.
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It’s been said that “the data will say anything if you torture it enough”. Unfortunately, there’s no way to torture this distressing information on America’s collective preparedness for retirement. We often see reports of average 401k balances approaching six figures. While these amounts will only sustain about $4,000 annually to supplement Social Security benefits, the picture is far worse when median balances are considered.

According to the National Institute of Retirement Security, the 2014 median retirement account balance was only $2,500. This figure is so low because roughly a third of households have saved nothing for retirement. When all of those $0’s are included in the calculation of a median, it quickly becomes obvious that we have a major national calamity brewing.

The big question is: “Who’s going to support these millions of people when they can no longer support themselves???”

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.

The good Lord must like defined contribution plans better…. March 1, 2015

Posted by forwardfinancialplanning1 in 401k plans, Pensions.
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A recent survey from USI Consulting Group found that a majority (57%) of Catholic dioceses are planning to freeze or terminated their defined benefit pension plans.

Eighty percent of the diocesan respondents currently offer lay employees a 403b plan while 15% offer a 401k plan.

Private corporations saw that this was the way to go twenty years ago and now we have religious organizations following suit. Living in the state (Illinois) with the nation’s most poorly funded governmental sector pension plans causes me to wonder—“When will our so-called political “leaders” figure this out?”

Does this seem stupid to everyone else too???? February 25, 2015

Posted by forwardfinancialplanning1 in Bond Index Funds, Bond Mutual Funds, Economic Conditions, Intermediate Term Bond Funds, Long Term Bond Funds, Short Term Bond Funds.
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Read where Germany has just sold 5 year government debt securities at a yield of -.08%. In January, they sold the same securities at -.05%. Also saw where Finland recently issued some government debt at a negative yield. My question for all readers is, “How can this make sense??”

A negative yield on a newly issued bond essentially means that the German/Finnish governments actually GOT PAID to borrow money!!! Some of the explanations for this perverse behavior cite the requirement for commercial banks to hold these high quality debt securities to meet regulatory capital requirements. That is, the banks in a fractional reserve system have to hold something of value to protect their depositors. This makes sense, but wouldn’t the banks accomplish the same thing (and avoid an expense) by simply holding on to their cash? Purchasing an investment that’s guaranteed to lose money is totally illogical. Just the same, I wish I could get paid to borrow money………..

Boy, that’s a deep hole…………. February 20, 2015

Posted by forwardfinancialplanning1 in Retirement Savings.
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The Employee Benefit Research Institute (EBRI) publishes a good deal of research material regarding the level of retirement preparedness in the United States. While much of their output might be characterized as “exciting only to academics”, a recent analysis produced a number of mind boggling significance.

The EBRI calculated that the aggregate national savings deficit is over $4.1 TRILLION for all US households between the ages of 25 and 64. It’s even more stunning when one considers that this figure is the present value of all of the future shortfalls. This means that the EBRI discounted future retirement savings needs due to the time value of money. In other words, the $4.1 trillion estimate is actually far less than the nominal dollars that will be required.

So who will make up this shortfall? The analysis assumes Social Security will continue to be funded, but an even more threatening prediction is that this deficit increases to $4.38 trillion if the forecasted pro rata reductions to Social Security benefits actually take place in 2033. If Social Security ceased to exist tomorrow, the EBRI savings shortfall leaps to $7.87 trillion.

Looks like there won’t be a future shortage of WalMart greeters…………..

Occasionally, they do something right in D.C. February 14, 2015

Posted by forwardfinancialplanning1 in Bond Mutual Funds, Economic Conditions, Intermediate Term Bond Funds, Long Term Bond Funds, Short Term Bond Funds.
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It’s usually pretty easy to find something to complain about when one considers what’s going on in Washington DC. If not, many in the media would be out of work. However, some recent reading led me to conclude that occasionally, they do something in Washington that could actually be described as “smart”.

It’s no secret that interest rates around the world are at rock bottom levels. U.S. banks and credit unions are paying depositors virtually pennies in interest on substantial balances. The interest yields in Europe and Japan are even lower, which makes US Treasury debt look very favorable to foreigners. Due to this substantial worldwide demand, the US government is able to finance its borrowings at very favorable rates.

How favorable? A year ago, 30 year US Treasury securities yielded about 4%. As of January 30, 2015, this figure was 2.2%. And, the term structure of the US government’s borrowings has lengthened. Treasuries maturing in three years or less comprise only 48% of US government debt compared to 58% six years ago. The portion of debt coming due within the next year is approaching levels last seen in the 1950’s. The government now pays less interest than it did in 2008, despite the fact that the amount of outstanding US debt has more than doubled to $12.5 trillion during this time period.

These circumstances might be akin to an astute household which refinances its mortgage debt when 30 year fixed rates have fallen greatly. Perhaps they lock in a home equity loan to pay off some higher cost debt while interest rates are way down (For the sake of argument, we’ll ignore the fact that they may be collateralizing a previously unsecured debt). And while it must be conceded that excessive debt is never a good thing, it’s highly unlikely that the US government is going to run a budget surplus any time soon. Similarly, it’s a rare household that can buy a house without a mortgage. So, if we accept the notion that the US government is going to borrow (and that the household will borrow for a home purchase) locking in historically low rates for longer periods of time is actually pretty smart behavior.

We’re going in the wrong direction… February 4, 2015

Posted by forwardfinancialplanning1 in 401k plans, Pensions, Retirement Savings, Retirement Spending, Roth IRA, Traditional IRA.
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The Center for American Progress has just released a study that can hardly be deemed as “progress”.

About 31% of Americans have nothing saved for retirement and also lack a defined benefit plan, such as a traditional pension. Among the age group closest to retirement (55-64 year olds), about one fifth (19%) reported no savings at all.

Of the 55-64 year olds who have saved something for retirement, the median retirement account balance was only $14,500. If you strip out the households who have saved nothing, the median retirement account balance of this age group rises only to $104,000.

While $104,000 is not an insignificant sum, it’s not going to support the life style that most of these households expect. Using the withdrawal rule of thumb which allows annual distributions of about 4%, we’re still only projecting about $5,000 per year. And income taxes will eat up a portion of this as well!!

Looks like a lot of people are going to be working well into their 70’s—or depending on the government. Neither of these outcomes look like progress to me.

How can this be considered “fair” January 21, 2015

Posted by forwardfinancialplanning1 in Education Planning.
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As U.S. citizens, we have numerous interactions with governmental and quasi-governmental entities. Some of these organizations are notorious for being arbitrary (think—the IRS), but one can usually find some political influence that can explain an apparent inequity. However, I believe I’ve come across an unfair situation that in my opinion, can’t readily be explained.

It can be found in the formulas that are used to determine financial aid eligibility for prospective college students. (Any readers who have recently slogged through the FAFSA form are allowed to groan at this point.) In the formulas used to calculate Expected Family Contribution (EFC), it has long been known that income and assets of the parents count much less than income and assets of the child. In the EFC computation, parental income and assets are assessed at 5.64% while student income and assets can be assessed at up to 50%. The logic behind this approach is that the student himself (or herself) should have the greatest stake in his (or her) own education. In keeping with this thinking, a child with a healthy income, (an actor, for example) could readily be expected to allocate a great deal of their funds to their own education. The same logic would apply if the child had inherited a large sum, which presumably would be held in an UGMA or UTMA. To this point, all of this makes some sense.

Common sense and logic take a detour when it comes to grandparents helping out. If the grandparents own a 529 Savings Plan with the child as a beneficiary, they would not be required to enter this data on the FAFSA form. This would appear to be a financial aid “loophole” at first, but the all-knowing federal government is “on to this trick.”. If money is disbursed from the grandparents’ 529 plan to pay for say the first year of the child’s education, the ENTIRE DISBURSED AMOUNT IS DEEMED TO HAVE COME FROM THE STUDENT!! Thus, there’s this chunk of funds applied at up to 50% in the next year’s FAFSA calculation. How can this draconian approach make sense???

Clearly it would be fair to now count the grandparents’ help in a similar fashion to a parent’s income/asset and assess it at 5.64% in the EFC calculation. And, you can make a case for changing the FAFSA rules to require that ALL 529 plan assets (regardless of the owner) with the child as beneficiary should be reported on the FAFSA form. But, whacking the grandparents’ 529 plan disbursement at a rate of 50% makes no sense whatsoever. At a time when young adults all over America are drowning in student loan debt, it clearly doesn’t make sense to have a policy that penalizes grandparents from helping out.