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Don't miss this month's timely story ideas, direct dial phone numbers, and E-mail addresses of these accessible experts! INVESTMENTS AND WEALTH MANAGEMENT • It’s Time to Change at Least 50% of Your Long-Term Bond Allocation. • Portfolio Losses Are NOT Inevitable for All Investors. • Spend
Down Principal To Meet Income Needs • Where's Waldo? Finding Your True Portfolio Costs • Pay
Attention to Your Most Important Financial Tool – • Divorce Can Really Mess Up Retirement Planning. • Retirement Timing Will Be Significantly Impacted by Your Debt Load • Financial and Logistical Ways To Avoid a Nursing Home • ALERT
from FOREFIELD, INC. -- States React to Phase Out of Federal Estate
Tax Credit for State Death Taxes Paid. INVESTMENTS AND WEALTH MANAGEMENT It’s Time to Change at Least 50% of Your Long-Term Bond Allocation. Long-term bonds, particularly treasury securities, have very little upside potential lfeft after several years of strong returns. Cashing out makes tactical sense for several reasons.
As a result of the market changes, investors should consider this the appropriate time to take their gains off the table, making portfolios less susceptible to a rising interest rate environment going forward. To reach Tim Clift, Chief Investment Officer, FundQuest, Boston, call Joanna Flynn at 617-526-7307. FundQuest is the leading provider of customized Web-based managed account platforms for financial institutions interested in moving their representatives from commission-based to fee-based product sales. Portfolio Losses Are NOT Inevitable for All Investors. It is time to look carefully for alternatives to the “conventional wisdom” that keeps investors in the market subject to a “fixed” level of risk when the market’s very volatility is likely to guarantee significant losses. Modern Portfolio Theory (MPT) requires investors to comprehend the losses they can stand, because at some point, investors adhering strictly to MPT will realize those losses. Individual investment objectives are important, but not nearly as important as Modern Portfolio advocates would have investors believe. Since the advent of Modern Portfolio Theory, tens of millions of investors, including professional money managers and retail investors, have accepted that this is the only "correct" way to invest, and that the inevitable roller coaster ride from a relatively constant asset allocation mix is acceptable. It is not. In reality, most investors cannot tolerate the high volatility of the stock market and prefer an approach that adapts as market conditions evolve. The most important objective for all investors should be the balance between safety and return. Could anyone argue that today's stock market is entirely different from the market five or even ten yeras ago? Most investors probably do not understand that Modern Portfolio "Theory" is just that -- a theory -- developed over 50 years ago, and that it can be put into serious question by a strategy designed to adapt to the current conditions of the stock market. No one uses physicians who are diagnosing clients with theories 50-years old. Money management should be no different. There are times when investors should be fully invested in stocks, and times when they should be entirely out of the stock market. There are times a conservative investor should be fully invested in stocks, and times a growth investor should be completely out of the stock market. Everyone dislikes losses, not just investors near or in retirement. PMFM, Inc. Principals are Tim Chapman and Don Beasley, with offices just outside Athens, Georgia. Jud Doherty, CFA, manages the marketing and distribution of 401k Toolbox, a service that provides discretionary management as part of its advice product. PMFM provides money management services for its own clients, for the assets held by plan participants in their 401(k) plans, as well as for the clients of other asset managers. At PMFM, 100% of employees' 401(k) plan investments are managed in the firm's "growth" portfolio in exactly the same manner as clients. The firm has a lengthy history of good risk-adjusted performance, and has preserved the value of client accounts over the difficult last three years. Tim Chapman, timchapman@pmfm.com, www.401ktoolbox.com, 800-222-7636. Spend Down Principal To Meet Income Needs in a Low Interest Rate, Low Yield Environment. Never rely on interest rates for retirement income. Bonds can work, but they may not generate needed returns in this interest rate environment, nor protect against declining bond values. The far better strategy is to create a cash reserve that will cover expected expenses for the first three-to-five years of retirement. Deliberately draw this fund down to zero over this period and invest the rest of the retirement assets (the majority of the portfolio) in a long-term, high quality equity portfolio. This strategy serves retirees well in four ways:
More conservative
investors can set aside a larger amount of assets in the sinking
fund to be spent down over a longer period of time ( 5-7 years),
and the rest of their assets can be invested in asset classes other
than all stock portfolios. Patrick J. Horan, CFP™, ChFC, is the founder and managing partner of Horan & Associates Financial Advisors, Ltd., providing asset management and financial planning for executives and closely-held business owners through management of wealth accumulation and wealth preservation with minimal tax consequences. Worth Magazine recognized Horan & Associates in 2001 as one of the “Top 250 Financial Advisers in America” for the third consecutive year. He can be reached at 800-592-7534 or path@horan-associates.com, www.horan-associates.com. Where's Waldo? Finding Your True Portfolio Costs. It’s the dog days of August and the market has gone on standby as many participants embark on long-awaited summer vacations. Rather than watching the market, and your portfolio returns, “to and fro” in a narrow trading range, why not turn your attention to the other side of the return equation — portfolio costs? Here’s a fun exercise for the lazy, hazy days of August. Step 1: Dig out your year-end 2002 portfolio statement, the one in which your brokerage firm summarized all activity in the portfolio for the preceding 12 months. Cull from the statement the following expense items: 1) Portfolio advisory fee (i.e., the fee you paid your broker for selecting investments and otherwise overseeing your portfolio); 2) Mutual fund loads or sales charges (i.e., the further fee you paid your broker for selecting portfolio investments) 3) Mutual fund management fees (i.e., the fees you paid to the manager of the mutual funds selected by your broker for your portfolio) 4) Transaction fees (i.e., the fees you paid to your broker when he or she elected to buy or sell an asset in your portfolio). Step 2: Compare the total of items 1)-4) with your portfolio’s total return, the increase or decrease in portfolio value generated by the investments selected by your broker. Using the return on your portfolio, determine the number of months or, in some cases regrettably, years required to “earn” back the costs levied on your portfolio in 2002. (Note: we haven’t even raised the tax costs associated with high turnover mutual fund management strategies.) Step 3: Determine whether the costs of your current portfolio management strategy outstrip the returns generated by that strategy. Revise course accordingly! Paula
Chauncey, CFA, Managing Partner, être llc, 617-716-0257
works with individuals, and their closely held businesses,
to develop and execute wealth-building strategies. pchauncey@etrellc.com. Pay Attention to Your Most Important Financial Tool – Your Paycheck. The most ignored personal finance tool -- your paycheck -- is the focus of National Payroll Week, September 1-5, 2003. Nearly every working American receives a paycheck but few ever focus on how to maximize their take-home pay and manage their withholding deductions. Payroll professionals from the American Payroll Association suggest several strategies to boost the power of your paycheck. These include:
Adjusting withholding appropriate to your financial goals is important. Too much payroll tax withholding provides an interest-free loan to the government. Most financial advisors advocate using your salary for your financial and investing needs when you earn it, rather than making an unintentional interest-free loan to the government. If you withhold too little of your paycheck, you will find yourself paying Uncle Sam extra money when you file your tax return on April 15. A change in marital status or the number or tax status of your children may also warrant adjusting your withholding. The best way for you to maximize your net pay and figure out the ideal mix of withholdings and deductions is to use the free paycheck calculators at http://www.paycheckcity.com/netpaycalc/netpaycalculator.asp. Here you can model "what-if" scenarios with your paycheck numbers, adjust your withholding, see the impact of voluntary savings programs and retirement plans, note the tax advantage of cafeteria benefit plans, and see in advance what will happen if you make a charitable or other voluntary withholding option. The PaycheckCity.com calculators allow you to manage your paycheck and a healthy financial future by allowing you to access precise and accurate information If adjustments to your withholding are indicated, simply print a report and discuss the changes with your payroll department. PaycheckCity.com offers unequalled employee self-service tools for paycheck management. The FREE PERSONALk FINANCE CALCULATORS at this site are used by individuals and organizations of every size to quickly and accurately answer paycheck-related questions and to compute paychecks under a variety of circumstances. Over a million page views take place each month on the PaycheckCity.com site and visitors stay an average of 10 minutes each. It is the most visited site for payroll-related support on the Internet. Contact Jon Bohnert, jon@paycheckcity.com, 480-596-1500 x. 103. Divorce Can Really Mess Up Retirement Planning. Divorces among women over 50 are increasing. It is likely you were depending on your husband’s retirement plan for your own golden years security. If your husband will be eligible for a pension from his employer, and these funds accrued to him during the time of your marriage, you have a right to part of that pension. Chances are that your husband has more than one pension, 401(k) plan or IRA. You may have to do some homework by contacting all of your husband’s former employers. You will want to make certain that your attorney understands the particular retirement plans and account numbers your husband has or for which he is eligible. Your divorce settlement must refer to each individual retirement plan in order for you to get benefits from them all. You cannot get your share of a pension plan without a court order to present to the pension plan administrator at your husband’s place of employment. This is called a Qualified Domestic Relations Order (QDRO). Each retirement plan has its own set of rules about QDROs, so have your attorney check with the plan administrator before the QDRO is drafted to make certain it is valid. Because of the additional legal work required, QDROs can be expensive. If you are dividing multiple accounts with your husband, figure out the total and consider taking the total of what is rightfully yours from a single account, requiring only one QDRO and possibly saving money and time. Dee Lee, Harvard Financial Educators, Harvard, Mass. 978-456-3778. Educator and speaker, Dee has authored four books: “The Complete Idiot’s Guide to 401(k) Plans”, Let’s Talk Money”, Everywoman’s Money: Financial Freedom”, and “The Complete Idiot’s Guide to Retiring Early”. Retirement Timing Will Be Significantly Impacted by Your Debt Load. All of a sudden, in a trend that can’t be ignored, Baby Boomer pre-retirees are paying more attention to the role that debt can play in their retirement timing. Clearly, Boomers are saying they “get it” that significant debt can and will put off their ability to choose a retirement date. This means coming to grips with debt that includes mortgages, automobile payments, boat loans and other large ticket luxury items, plus credit cards. Advisors counsel that debts must be under control before you can project post-retirement cash flow and budget. Financial advisors have seen debt recognition begin in clients when they inquire about the “value” of the interest deduction on a mortgage. Bottom line, the mortgage interest rate deduction is a nice perk, but it has little value when the pre-retirees want their finances to feel settled. Freedom from debt and actually owning one’s home offers a sense of security and is a great attraction to clients close to retirement. Henry I. Montgomery, CFP -- Planners Financial Services, Inc., 952-835-9000. Minneapolis, Minnesota. Registered investment adviser and subsidiary company Montgomery Investment Management, specialize in the management of no-load mutual fund portfolios for individuals and retirement plans designed to protect capital by reducing risk. pfshim@usinternet.com Financial and Logistical Ways To Avoid a Nursing Home. Most seniors want to avoid ever living in a nursing home. But unless they have done the serious financial and logistical planning necessary, the nursing home is exactly where they will end up living. Here are five realities to help you avoid nursing home care: 1. Plan a savings cushion to pay for the early help you'll need to stay at home. Elders who can dress and bathe themselves may need help with activities such as cooking, using the telephone, paying bills, managing medications, cleaning, or shopping. Needing help with these activities does not qualify for government or long-term care insurance benefits. If cash is short, a reverse mortgage can provide needed money for help at home. 2. Moving to an assisted living facility is almost always a temporary destination. The average length of stay is approximately two years. The next move, due to a decline in health, is the nursing home. 3. Home-based care requires the right home. Make your home elder-friendly while you are still working by improving accessibility now, or moving into a home that will better suit elderly needs 4. Home-based care requires coordination and supervision. Protect yourself against physical, emotional, or financial abuse by designating an advocate. Home-based care does not work for frail elders with no support network. 5. Paying for your care gives you more options. If you need professional (paid) caregivers to assist you, you can pay with personal funds or qualify for a government program. Paying privately gives you the option to fire or replace an unsatisfactory home health aide when you are not happy. Consumers who rely on government programs to pay their bill usually find that nursing home care is covered, but home care is not. Long-term care insurance is a good, but not perfect, private-pay option. Two negative trends: Government-subsidized home health care is being cut back because of state and federal budget deficits, and the shortage of qualified home health care workers is acute. Pre-planning and understanding how the elder care system works can make your choice of home care possible. Marilee
Driscoll, President, Long Term Care Learning Institute, (508)
641-9393, Plymouth, Mass., www.ltc123.com,
author of “The Complete Idiot’s Guide to Long Term
Care Planning,” is the nation’s leading consumer
authority on strategies to pay for long term care. She is President
of the Long Term Care Learning Institute. ALERT from FOREFIELD, INC. -- States React to Phase Out of Federal Estate Tax Credit for State Death Taxes Paid. The Economic Growth and Tax Relief Reconciliation Act of 2001 phases out the federal estate tax credit for state death taxes paid (the "state death tax credit"). States that tie their own estate tax directly to the federal credit face a reduction in estate tax revenue unless they react. Not surprisingly, states have reacted. For a handy summary of their decisions, see Forefield's Status of State Death Taxes Summary at http://www.forefield.com/stateestate. Jim
Walsh, Forefield, Inc., Westboro, Mass. jwalsh@forefield.com,
508-630-1125.
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