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A Monthly Newsletter Source of Financial Sources • Stadion Retirement’s $102 Million in New Assets Makes July Top Sales Month in Firm’s History • Mutual Funds – Economies of Scale in Reverse • Searching for Yield in a Low-Interest Environment • The IRS is Having a SALE! • Why Adult Children Might Want to Pay the Long-Term Care. Insurance Premium for their Parents • Term Life Insurance Policies Need Regular Review • September is Not Too Soon to Look at Your Year-End Financial Checklist ---------------------------------------------------------------------------------------------------------------------------- Stadion Retirement’s $102 Million in New Assets Makes July Top Sales Month in Firm’s History. Stadion Retirement (formerly 401k Toolbox) announces that new sales in July equaled nearly $102 million, the firm's top sales month in its 14-year history through partners at Guardian, Lincoln National, and Mutual of Omaha”, says Tim McCabe, Senior Vice President for Sales. McCabe also attributes the sales record to the recognition of Stadion Retirement’s conservative, tactical managed account strategy that has clearly appealed to plan sponsors and participants. Stadion Retirement’s QDIA product has an 85% utilization rate with plan participants. “QDIA’s do what they were designed to do – give employers a fiduciary option for their employees when the employees do not make an investment choice,” says McCabe. Stadion Retirement’s managed account options are available in over 6500 retirement plans nationally. Stadion Money Management, Stadion Retirement’s parent company, has $1.7 billion in assets under management. Stadion Money Management also set an overall record for new sales in July with total inflows of over $260 million. For further information: Tim McCabe, Senior Vice President, Stadion Retirement, 800-222-7636. Fearful Investors Who Seek Growth Without Equities Require an Alternative Investment Approach, and Likely, a Different Advisor. Combining Muni Bonds, Equity Index Certificate of Deposits, Non-Traded Commodities, and Non-Traded REITS has generated growth and income in challenging markets. So why aren’t investors hearing about this strategy? You might ask, “What are they thinking?” when financial advisors try to get investors off the sidelines and back into the market by tempting them with the same investment products and allocation (stocks, mutual funds, and exchange-traded funds - ETFs) whose values declined so precipitously less than one year ago. While it is true that fearful investors sitting on money in savings accounts have lost out on the significant market rise that has occurred over the past five months, it is also true that the same investors are panicked about when and whether they will be able to retire. The net result is that they are still in savings accounts because they cannot stomach further losses and have lost their appetite for risk. A different portfolio is required for fearful investors – a portfolio that can potentially deliver growth and reduced volatility. Here are four investments that meet this much sought-after combination. A portfolio of municipal bonds, chosen from all over the U.S. Municipal bonds have been returning around 5.75% or slightly higher this summer, a far greater bet than a savings account at less than one percent. By choosing bonds with a geographical spread throughout the U.S., and not simply the state of the investor, the portfolio can be protected against any single state’s bond problems. And unlike bond mutual funds or long term bonds that are less liquid, some bond strategies allow for immediate liquidity without the day-to-day volatility of the marketplace. An equity-indexed CD. Keeping with the theme of seeking growth with an eye on risk, consider an investment that combines the peace of mind of a 100% FDIC guaranteed return of principal (up to the applicable limits) at the end of a set time frame, with the ability to participate in a portion of the potential upside that can be achieved through investing in global equity markets. This strategy seeks to achieve a return in excess of the principal investment through purchasing equity-linked certificates of deposit that have return rates tied to broad market indices. These equity-indexed CDs are generally five-year term and do not pay incremental income or interest. Unlike traditional CDs, the absence of annual income or interest becomes tax efficient because no income or gains are realized until the end of the term or withdrawal, whichever happens first. The equity-indexed CD has the potential to deliver equity-type results. Limited Partnership of Commodity Managed Futures. A fund that invests in managed futures can include investments in such varied things as interest rates, currency, precious metal, agriculture, global indices, and energy. The limited partnership wrapper means that it is not treated like a stock or mutual fund, which helps reduce the anxiety of daily volatility. But unlike many illiquid assets like a business or real estate, some funds offer liquidity on a monthly basis. Commodities are generally viewed as non-correlated to the equities market. In 2008, while equity accounts realized losses ranging from 25-50%, some commodities saw handsome gains. Commodities are no longer reserved for the wealthy. Some funds are suitable to the everyday investor. Non-Traded REITS. A small part of the stable portfolio might include a portion of investments in non-traded Real Estate Investment Trusts (REITs). A non-traded REIT can acquire and own dozens or hundreds of properties in a single fund (typically commercial or multi-family properties), spread throughout the country and some foreign countries, and is professionally managed. This gives the frightened investor a real estate investment but not direct real estate ownership with all of its issues. And because non-traded REITS are not traded daily like its listed counterparts, they generally maintained their net asset value over the past year, while the traded REIT saw declines as much as fifty-percent. Like direct ownership in real estate, non-traded REITS also provide tax-advantaged income during the holding period, and investors will share in any potential profits when the portfolio is sold. These alternatives to traditional stocks, mutual fund, and ETF investing meet the fearful investor’s criteria for safety with some growth. Beware the financial advisor who has not come up with different investments than those that tanked most recently. There are options for the very fearful that can get them back into the market with some confidence – confidence that allows them to replace their savings bank portfolio with conservative choices that offer hope for some growth and a great deal of safety. Rich Arzaga is Founder and President, Cornerstone Wealth Management, San Ramon, California, a life planning company specializing in providing options and solutions for residential and commercial real estate investors. He is also an instructor in the nationally-recognized financial planning certification program at U.C. Berkeley, and teaches the highly-acclaimed Real Estate Investments course at U.C. Santa Cruz and U.C. Berkeley. Rich can be reached at rich@consultrich.com or toll free (888) 290-9900. Securities and Investment advice through Associated Securities Corp. (ASC), Member FINRA/SIPC and a registered investment advisor. Additional Advisory and Investment Services offered through Cornerstone Wealth Management Inc., a registered investment advisor not affiliated with ASC. CA Insurance License No. 0D92796 Mutual Funds – Economies of Scale in Reverse As any astute consumer knows, price and scale should have an inverse relationship. As demand increases and the business grows -- think cell phones and computers -- prices decline. The mutual tund industry does not subscribe to the rule that scale should benefit the customer. Instead, the mutual fund industry has managed to turn economies of scale into profit margins for themselves as opposed to price breaks for their customers. Not many industries can claim the kind of scale that has been achieved by the mutual fund industry: they have more 100 million clients and are approaching $10 trillion in assets under management, making mutual fund companies the most dominant player in the financial services industry. That may be the problem. By some estimates, it has grown 1000 fold since the 1950’s when mutual fund expense ratios averaged around .75%. Today, despite the unprecedented scale that has been achieved, the average expense ratio for equity funds is almost twice that. And now, to add insult to injury, for those clients whose mutual fund portfolios were decimated in last year’s meltdown, the expense ratios have just been raised again, from 1.34% to 1.39% for the average equity fund according to Morningstar. Of course, assets under management are down for the mutual funds, so revenues are down as well, and we shouldn’t expect them to eat all the losses they helped create for clients! For years, knowing that they can’t beat the indexes on the upside, mutual funds have marketed active management as a way “to participate in the upside and get protection on the downside” ------- but last year mutual funds actually lost $43 billion more than the losses attributed to the major indexes. Louis Cameron Day, the founder of NS Capital LLC a new investment advisory and asset management firm, says, “There are just too many players who are standing between the typical investor and their ability to invest in the capital markets.” “I liken this to a retail gauntlet of middlemen who slice a piece off each investment dollar that is trying to make its way to the capital markets. It’s a gauntlet that has become a long line of advisors, distributors, broker-dealers, custodians and mutual fund companies, all of whom are more concerned with gathering assets for themselves to maximize their fee revenue as opposed to optimizing returns for their investors,” he says. NS Capital LLC was created to side-step this retail model and has built its value proposition to replicate the true institutional model of asset management. The NS Capital model is based on using low-cost index funds in efficient markets and then using independent research conducted by unbiased professionals to identify and select active asset managers for inefficient asset classes. They select asset managers whose main focus is managing assets as opposed to just gathering assets. Next they use the scale of NS Capital to negotiate directly with these asset managers for the best possible price. Day says, “This effort serves to disintermediate middlemen who we feel don’t add value. When you combine that with the fact that we paid for and own our unique technology, it means that we are in total control of the value proposition we deliver to our clients. For NS Capital that translates into a better investment portfolio at a lower cost, which is generally at least 50% less than what the typical retail investors pays, and that leads to enhanced long term performance for our clients.” Louis Cameron Day, president, NS Capital LLC with offices in Stamford, Ct., and Sarasota, FL. He can be reached lday@nscapllc.com or 866-676-6002. Searching for Yield in a Low-Interest Environment The savings rate for US households has now climbed to its highest level in 15 years as consumers try to build a safety net in the face of possible job loss or economic hardship. But where are they putting those savings? What kind of interest are they getting on their money? Since the Fed lowered the Fed funds target rate to 0%, interest rates on most savings vehicles have dropped to historic lows. According to Bankrate.com, the average yield for a one-year CD has dropped to 1.05% as of the week of Aug. 24. The one-year Treasury is paying less than half that at 0.43%. Money market accounts are worse; the average yield is 0.36%. What’s a saver to do? If you need to keep your savings liquid, your options are limited. Some of the best options for emergency savings or cash that might be needed on short notice are online savings banks. These accounts are FDIC insured, and are electronically linked to your regular checking account. If you can meet the $1,000 account balance minimum, DollarSavingsDirect.com is offering 1.70% for its online savings account. EmigrantDirect.com and INGDirect.com offer 1.40%. HSBCDirect.com offers 1.45%. If you can afford to lock your money up for awhile, you could get a longer term CD with a more attractive rate. During the CD’s term, though, you can’t access your money without paying a penalty, and you could regret locking yourself in if interest rates begin to rise. An attractive alternative is short term (5 yrs or less), Treasury, US agency, or high quality corporate bonds. These could be purchased as individual bonds, or as bond funds. The advantage of bond funds is that you get diversification and professional management. The disadvantage of a fund compared with individual bonds is that the price of a share could go down. Thus, unlike the FDIC guaranteed accounts, it’s possible to lose money. Relatively speaking, though, these funds are considered low risk. Vanguard’s Short-Term Treasury Fund VFISX is currently yielding 1.92%. A similar fund that holds both short-term Treasuries and Federal agency bonds, Vanguard Short-Term Federal VSGBX is currently yielding 3.13%. Vanguard Short-Term Bond Index VBISX adds some short-term corporate bonds, and offers 3.21% yield. Other firms offer similar funds, so it pays to do a little research to find a high-quality fund with solid management, low expenses, a good track record and an attractive yield. Of course, it’s possible to do the same thing with individual bonds, but you’ll need to feel comfortable with your knowledge level in selecting the bonds you buy. Depending on where you have your account, you may also have commissions to factor in as a cost. In order to get more yield, an investor has to move further into risky territory. Investment-grade intermediate and long term corporate bonds take on more risk, but offer higher yield. Vanguard’s Intermediate Term Bond Index VBIIX currently yields 4.55%. For even more risk (and return), consider a fund such as Vanguard High-Yield Corporate VWEHX, which currently pays 7.94%. Loomis Sayles Bond LSBRX is a multi-sector fund that yields 7.05%. Finally, dividend-paying stocks and preferred stocks offer yield, too – for more risk. Real estate investment trust (REIT) funds are also a higher-risk, higher-return option. The yield on these funds will vary. For example, Vanguard’s REIT index VGSIX yields 5.49%; T. Rowe Price Real Estate TRREX currently yields 6.66%. Bottom line: if you need access to the funds and/or can’t take any risk, stick with FDIC insured savings vehicles, even if it means a low interest rate. If you can take on a small amount of risk, consider a high-quality short-term bond fund. If you’re willing to take more risk in order to get greater reward, consider other types of investments, such as investment-grade bonds/funds, high yield bonds/funds, dividend-paying stocks, and REITS. Susan Moore, CFPÆ, Moore Financial Advisors, Ltd., Watertown, MA, (www.mooreadvisors.com) provides fee-only financial planning and investment management services for individuals and families. She can be reached at moore@mooreadvisors.com or 617-393-9999. The IRS is Having a SALE! IRA owners have had to face some hard facts over the past year. Portfolios, in many cases, are down and some of those losses are permanent. Looking ahead, IRA owners who once assumed lower tax rates in retirement may now, in fact, face higher state and federal income tax rates on mandatory distributions, as governments try to balance budgets. Less money, even less after tax: this is not good news for retirees with large IRA accounts! There is, however, a silver lining in the clouds: the Roth IRA Conversion. Conversion of a traditional IRA to a Roth has been a beneficial planning strategy for a long time, with one catch. Until December 31st of 2009, there is an income limitation of $100,000. On January 1, 2010, everything changes: no income limitation exists. This presents a unique opportunity for affluent investors to incur a potentially large tax savings, if they are willing to part with some money now. What is a Roth IRA Conversion? When you “convert” your traditional IRA (or a portion of it), the funds from a traditional account get moved into a Roth account. Then, a form is filed with the IRS, reporting that amount as taxable income. This “sale” was designed to create cash flow for the IRS and to attract investors. Just in case there isn’t enough motivation for you, they have sweetened the pot even more: the income won’t hit your tax return until 2011 and 2012, and so payment of the tax can be over a two-year period. With investment values still down, it’s a double or triple sale on your own money! How much will it cost to convert? Who might benefit from converting a Roth IRA? Who should think twice about converting an IRA? What happens after I convert?
Pulling the trigger Other caveats Darlene Murphy, CFP, Sudbury Wealth Management, Sudbury, Mass.,is a registered investment advisor focusing on holistic financial planning and investing. 8220 or www.PartnerPlanning.com. She can be reached at Darlene@SudburyWealth.com or 978-440-8776 Why Adult Children Might Want to Pay the Long-Term Care Insurance Premium for their Parents By planning ahead for an aging parent’s long-term care needs, families may help to reduce the financial and care giving stresses that often fall on family members providing care. Long-term care (LTC) insurance policies, at different levels of coverage and design, may help the families of the insured implement a variety of long-term care planning strategies. With 70% of women likely to be the primary caregiver for their parents, in their home, husbands and brothers need to recognize that relying solely on a family member for care can be far more expensive and disruptive than ever imagined. The stress on families may become acute when several things occur in giving care to one’s own parents. Family caregivers may have to adapt their schedules and lifestyles, dining rooms may change into bedrooms, and someone, even pre-teen children, may be recruited to be with a grandparent after school until the working parent returns from work. In some cases, caregivers may decide to give up paid work to provide the at-home care diminishing the family’s income. Stress on the caregiver, even in the most loving families, is well documented, as is the depression that can occur among caregivers because of the hard work and dislocation of their lives. In addition, families need to consider the cost of bringing in home health aides, nurses and/or therapists and there can be un-reimbursed out-of-pocket costs for medical supplies and over the counter medicines, dressings, bedding, and such things as hospital beds. One solution is for adult siblings of healthy aging seniors (you can not purchase the insurance for an already sick senior) to come together to buy some form of long-term care insurance. These policies can help alleviate the financial drain on seniors and their caregivers and families. It does not have to be an “all or nothing” design when constructing a long- term care insurance policy. There’s a belief out there that long- term care insurance policies are expensive but there are ways to build a policy that is affordable and can still provide essential coverage. Siblings can look at a range of policy designs that long-term care insurance policies offer. To keep things as simple as possible, I often lay out their choices at three different levels of policy design. Through John Hancock Life Insurance Company (John Hancock), a minimally designed $50 daily benefit, with or without an inflation rider can offer access to care advisory assistance for coordinating long-term care services including home care and potentially valuable provider discounts — both features are offered through third party sources independent of John Hancock. Provider discounts may help "stretch" the benefits of the policy depending on charges incurred and benefits purchased. This may allow the benefits to last longer than they otherwise might and could be a savings compared to an uninsured person who pays "street" price for long-term care services. As a medium level, a policy with $150 as a daily benefit may be appropriate. If, at the time a Massachusetts resident applies to Medicaid for help with nursing home costs and they have an in-force policy that meets state requirements, they may be able to protect the family home from a Medicaid lien. I encourage clients to consider consulting with an attorney familiar with elder care law to assist them with this process. For those who may want to protect more assets, they can consider a policy design of $250-$300 daily benefit with an inflation rider. This benefit level will go a lot further in covering the cost of an assisted living facility, a nursing home, or more extensive home care benefits in the Greater Boston area. This higher level of coverage could be particularly appealing to risk averse clients as well as those with a family history of such illnesses as Alzheimer’s, Parkinson’s Disease, Osteoporosis, and other chronic diseases. An increasing number of states are offering even greater incentives to long-term care insurance policyholders through LTC Partnership programs, which offer Medicaid Asset Protection above and beyond the benefit currently available in long-term care insurance policies. These types of policies can be especially helpful to individuals in these states who have a desire to leave a financial legacy to their children and other loved ones including the healthy spouse. As these programs and insurance policies are very specific, you must meet with an appropriately licensed and trained agent in your state to review the choices available to you. There is a personal story behind this article. Some time ago, my siblings and I discussed these issues in our own family and came to an agreement to help pay for long-term care insurance policies for my mother and stepfather. Knowing that they had the protection of a long-term care insurance policy put us at ease. However, the benefit of our decision really came to light when my mother broke her hip from severe osteoporosis and filed a claim. Thank goodness she was covered. Stuart H. Armstrong, CFPÆ, CLTC, a John Hancock Life Insurance Company agent with Centinel Financial Group, a Boston Massachusetts area firm. He can be reached at 617-424-0005. sharmstrong@jhnetwork.com Long-term care insurance policy describes coverage’s under this policy, exclusions and limitations, what you must do to keep your policy in force, and what would cause your policy to be discontinued. Please contact your licensed agent or John Hancock for more information, costs, and complete details on coverage. Long-term care insurance is underwritten by John Hancock Life Insurance Company, Boston, MA 02117. Term Life Insurance Policies Need Regular Review People in the their early to late 50's and even some people in their 60's can face the issue of what to do with an expiring term life insurance policy. Typically, a person has the option of continuing the policy with highly increased premiums that go up more each year, converting the policy to some type of whole life policy, dropping the coverage totally or reapplying for a new policy. Each choice has the drawback of involving much higher premiums or a loss of coverage. If you apply for a new term policy, your health will surely have changed in the intervening years making a new policy much more expensive even if you choose a shorter term for the coverage. Instead of waking up to the problem at the end of the life of the term policy, people should be reviewing their life insurance coverage on a regular basis. Circumstances change, and what was an appropriate amount of life insurance 20 years ago may not be appropriate now. If you regularly discuss your insurance with a planner or an insurance agent, you can check your coverage against your needs and your current health. For example, a couple with two young children may get sufficient 20-year term life in their early 30's. When they reach their early 50's and the term expires, they may have had additional children meaning they still have young children at home and need to extend their life insurance coverage. Health issues could have cropped up in the intervening years making the new coverage prohibitively expensive. If the couple had reviewed their coverage after the later children were born or at least ten years into the term, they could have chosen to replace the existing policy at an earlier age. The new policy would most likely have higher premiums than their existing policy, but their coverage would now extend into their 60's when their children will be out of the home. Reviewing insurance should be done on a regular basis to ensure that the amount of coverage is appropriate for expected needs and that the named beneficiaries are correct. A regular review gives you the flexibility to decide to modify or replace insurance coverage. Donald L. McCoy, J.D., CMFC -- Planners Financial Services, Inc., 952-835-9000.Ü 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. 952-835-9000 - pfshim@usinternet.com. September is Not Too Soon to Look at Your Year-End Financial Checklist. Looking at your financial issues is difficult, particularly in the rush of early fall. September, though, is a good time to review important aspects of your financial situation, as the fall quarter leaves plenty of time to act on matters that will help you stay in control of your financial matters. Here are several areas that may need your attention: Employee Benefits – open enrollment for most employers is in the fall Contribution to employer 401(k) or 403(b) plan
Tax Planning Utilize Flexible Spending plans
Tax projections
Charitable contributions
Portfolio Planning
Self Employed Planning
Dana J. Levit, CFP, is principal of Paragon Financial Advisors is a fee-only comprehensive financial planning firm for people who want objective advice about their financial health & well-being. She can be reached at dana@paragonfeeonly.com or 617-938-3864.
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