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A Monthly Newsletter Source of Financial Sources • The Double Whammy: The market is down and you need to retire. • Real Estate Private Placements May Allay Fears About REIT Volatility • Alternatives to Mutual Funds and the Myth of Investment Control • 16 Strategies for Saving Estate Taxes #4 – • Key Decisions Important in Preparation for a Family or Private Foundation • Planning Social Security For a Surviving Spouse • Access to Legal Documents is Critical for Unmarried Couples • How to Figure Out Your “Half” of Costs for a College Bound Child of Divorce The Double Whammy: The market is down and you need to retire. The bull market is in its fifth year. You are ready to retire. Your greatest fear is that as soon as you retire, you will begin drawing down on a portfolio that will be impacted by market losses. This very real fear became a very real situation for many retirees who ended their careers in 2000, just before a significant market drop. Many financial advisors depend on diversification to solve the problem of protecting assets during a market downturn, but that approach has drawbacks. If the focus is primarily on returns, i.e. a portfolio with a heavy emphasis on equities, there can still be significant downside risk. If the emphasis is placed on safety, i.e. a larger allocation to fixed income, there is a loss of returns (and still some downside risk). Returns might be acceptable relative to a particular index benchmark like the S&P 500, but relative returns do not pay the light bill. The investment industry has focused on relative returns but most individual investors are focused on absolute returns. In fact, the media made much recently of the fact that portfolios that had lost value in 2000 had finally broken even seven years later. That means those investors spent seven years of their investing life making no improvement in their retirement savings, but rather only getting back to go. If you entrusted your retirement assets to a firm that sought to meet or exceed the S&P 500 index through diversification, and you retired on 1st of January 2000, a worst case scenario did occur for many. The market experienced a severe downturn. Investors who required withdrawals from their accounts for living expenses had to draw down on their capital significantly It is all about winning by not losing. The following illustration represents the results of a $1 million investment in PMFM Managed Growth account on 12/31/95 and withdrawals of 6% per year (adjusted for 3% annual inflation rate) beginning 1/1/96 through 9/30/07. PMFM Managed Growth follows a tactical asset allocation strategy. These results are net of 1.25% annual management fee.
PMFM proved the value of tactical asset allocation 2000-02 when PMFM clients enjoyed a positive absolute return while the average investor suffered losses of 20 to 30%. The winning-by-not-losing approach has been beneficial in 2007 also, as the PMFM model has been able to limit losses in the July and October corrections. As a result, the year-to-date performance is more than double the S&P 500 with only a fraction of the overall market volatility. Tim Chapman is the co-founder of PMFM/401kToolbox, Watkinsville, Georgia, The firm has more than $1 billion in assets under management.and provides tactical asset allocation money management and managed account services for client and 401(k) plan participants PMFM has a lengthy history of good risk-adjusted performance, preserving the value of client accounts in uncertain markets, consistently posting positive returns in each of their investment strategy composites since inception. Real Estate Private Placements May Allay Fears About REIT Volatility Increasing numbers of private sponsors have been developing private products for small funds and for individual investors. Investors and advisors seeking to improve returns and reduce risks have had a very good run in REITs since 1993 when, after the real estate problems of the late 1980s, the real estate securitization boom really started. According to the FTSE/NAREIT index, over the last 250 years Equity REITs have averaged a 13.17 IRR, with very few down years. In the last year, driven in part by a sympathetic reaction to the housing finance crisis, equity REITs have turned quite volatile, 1 Q 2007 was up 3.5%, 2Q was down 9.0%, 3Q up 2.6%, and 4Q down 12.7%.
The reasons for the recent emotional and price roller-coaster ride can be debated but the important question is whether there is a cure? Most investors think US non single-family real estate is still positive. Private market sales of good quality, well-located, commercial property has held up well. It has been driven in part by a huge inflow of offshore capital and in part by the long-term real estate allocation goals of major US pension funds. There is a well-researched theory that investors should, if they can, consider diversifying their real estate allocation into “four quadrants”, public and private real estate debt and public and private real estate equities.* In 1995 the noted real estate research guru Susan Hudson-Wilson, together with Daniel Guenther published an article that indicated this four part allocation would substantially increase yield and decrease volatility for real estate investors. For investors without the huge resources of Calpers or Prudential, this strategy has been hard to execute. There have not been enough efficient and proven private equity real estate vehicles for the investor to utilize. Over the last ten years, however, increasing numbers of private sponsors have been developing private products for the smaller funds and for individual investors. These funds and direct investment vehicles typically generate much higher yields than the S&P or even REITs, and many have generated returns even above the REIT averages, while their price volatility is well below REITs, though their liquidity is also much less. Investors wishing to explore this should carefully consider the specific supply and demand of the type of property in which the vehicle is invested, and the track record, financial strength and expertise of management. * In 1990 the publicly traded US REIT universe was only $5.55 B, by 2002 it had grown to over $151 Bn. Millennium Credit Markets, LLC, an affiliate of United Group of Companies, Troy, New York, offers a product line of private equity opportunities in commercial real estate with a predictable / durable income stream and superior total returns to investors including brokerage houses, investment advisors, individual investors, and institutions. Alternatives to Mutual Funds and the Myth of Investment Control Investors are often confronted with their fear of losing control when they first hear about alternatives to mutual funds for their investment portfolio. These investors believe that the constant finessing of a mutual fund portfolio by its manager is an indication that their assets are under careful scrutiny by professionals every day. This view can be called the “myth of control”. Giants in investment thinking such as Warren Buffet think differently. He says “Inactivity strikes us as intelligent behavior. Neither we nor most business managers would dream of feverishly trading highly profitable subsidiaries because a small move in the Federal Reserve discount rate was predicted or because some Wall Street pundit had reversed his view on the market. Why then, should be behave differently with our minority positions in wonderful businesses.” Another investing luminary, John Bogle, founder of Vanguard and America’s largest index fund for individuals, after an exhaustive analysis of recent trading practices of fund managers, concluded that “market timing has thus far been a singular failure, and the rapid turnover of investment portfolios (in mutual funds) has been no more effective.” No one denies that the average mutual fund returns to the investor 2% less per year than the stock market returns in general. Yet the mutual fund industry spends billions of shareholders’ dollars to promote its money managers as experts who can manage investors’ dollars with skill. This promotion distracts shareholders from a perfectly simple, and clearly unacceptable little fact: the vast majority of mutual funds (between 75 to 85% from 1975 to 2005) have underperformed the stock market as a whole. With these embarrassing performance figures, two questions come up.
Where is the control here? In fact, truth is, you could have owned a basic, low-cost index fund, spent the past year sleeping well at night, participated fully in every “twist and turn” the markets could muster, and out performed the “experts.” Tim Decker, President, ISI Financial Group, Lancaster, PA, is a fee-only financial advisor providing comprehensive financial advice and retirement planning. He is the author of the soon to be released book “The Sleep At Night Investor”. He can be reached at 800-342-5474. His radio show “Financial Freedom” can be heard every Saturday at 2:00 pm on WHP 580 AM providing financial guidance and answering questions from callers. 16 Strategies for Saving Estate Taxes #4 – The grantor retained annuity trust (GRAT) is an estate planning strategy that allows wealthy families to move assets out of an estate for tax saving and gifting purposes. Gerry and Ginnie transfer $1 million to their son Hank. It is not a gift, but a GRAT. Gerry and Ginnie, as grantors, receive from Hank an annuity payment for a specified period of time. For this example we choose three years. Why would a family go to this extent to move assets out of an estate? The key is when the $1 million is given in stock in Gerry’s company, a stock that Gerry hopes and predicts will increase in value sharply because of the economic outlook for this stock if Gerry’s company stock increases by 50% it leaves Hank with assets in the GRAT worth $380,000 after returning the $1,180,000 to his parents. They have been able to transfer to him $380,000 without gift taxes. Gerry and Ginnie have saved $140,000 in gift taxes to make this transfer while they are still living. Some families use this strategy and a family limited partnership so the grantor can continue to control and vote the stock or reinvest the cash after the sale of the stock. Under these same circumstances, if the GRAT was funded with $10 million it would avoid gift taxes and death taxes on over $3,800,000! A recession may be a great time to fund a GRAT. Pearson Financial Services, Dennis, MA, is the author of "The Two Million Dollar Gift: Dynasty Trusts. Why Leave Your Assets Any Other Way", written for his clients, his clients' families, and his own family. He offers a fully integrated wealth management process, incorporating investment, retirement, financial and estate planning specialists under one roof, serving clients as their family's office, designing and implementing strategies to protect and distribute their wealth and highly appreciated property. Seth Pearson, CFP, 800-385-7925, seth.pearson@verizon.net. Key Decisions Important in Preparation for a Family or Private Foundation Creating a family or private foundation has many benefits that include eliminating or abating a tax bite on great wealth, as well as allowing a family’s philanthropic instincts to create change in a community, region or country with the foundation’s financial distributions. To the head of the family, it sounds great. Create a foundation and put all the members of the family on the board of directors, get the tax benefits, and require the kids to serve on the committee making the financial grants. “It will be good for them,” thinks the patriarch of the family. Corralling the kids into awareness of others in need is a laudable goal for a family foundation, but there are a number of key decisions to be made before you launch yourself and your family into the concept of a family or private foundation. Here is the homework – six questions to ask before you begin the process of establishing a foundation: 1. How will you form the foundation, through incorporation or through a trust? 2. Philosophically, is your intention to continue to make endowments from your foundation for a long period of time, or is your desire to spend down the assets more quickly, over a shorter term. Making this decision first helps with all of the later structuring of the foundation. 3. What is your mission statement? 4. Who will serve on your board of directors? 5. Will your family manage the grant making or do you need a director? 6. Will your grants have transparency to the world of philanthropy? Family and private foundations are remarkable structures for maintaining control of a family’s wealth, reducing or eliminating taxes, and drawing a family together in pursuit of a common goal of philanthropy. Setting up such a foundation may require outside professionals including a financial advisor to review and update your overall financial goals. Talking with your financial advisor first can help put the realities of a gift to a foundation in perspective with your other financial legacy desires. Additional professionals who can help include a foundation and tax attorney, a certified public accountant to make necessary audits and to do tax reporting, as well as philanthropy consultants for both global and domestic giving and, possibly, a foundation director. Family and private foundations, well structured and well managed, can bring direction to you and your family regarding giving back in a constructive way and in the management of wealth. Ask for help. Tom Gillespie is a Certified Financial Planner (CFP) ® with Matrix USA, LLC, a New York City-based brokerage firm. Tom provides comprehensive financial planning and money management, finding and monitoring the right investment managers for every client’s goals and objectives. He can be reached at 212-220-5117, or tgillespie@matrixusallc.com. Trends from Ink&Air --Editor: Lisbeth Wiley Chapman, beth_chapman@inkair.com , 508-479-1033 Planning Social Security For a Surviving Spouse Action steps need careful consideration if the surviving spouse is substantially younger and a lower earner than the deceased. The Social Security Administration estimates that there are five million Americans receiving monthly Social Security benefits based on their deceased spouse's earnings record. The issue of Social Security benefits for a surviving spouse is generally straightforward. A surviving spouse will normally choose to take the greater of the two Social Security benefits. The question becomes more muddled if the surviving spouse is substantially younger than the deceased. A surviving spouse is not eligible to take thedeceased spouse's Social Security benefits before age 60 unless there is a minor child in the household or the survivor suffers from a disability. Once the survivor reaches age 60, they can choose to take the deceased's benefits, but at a discount to the full benefits that would be available if the survivor waited until reaching their own full retirement age. At age 60, the discount rate is 28.5%. Put another way, the survivor at age 60 is entitled to 71.5% of the deceased's benefits. The penalty decreases for The survivor has the option of switching between the two benefits. The survivor could take their own benefits at age 62, then switch to the deceased's upon reaching their own full retirement age or take the deceased's benefits at age 60 and switch to their own at full retirement. Just as with working and taking benefits before reaching your full retirement age, the Social Security Administration will penalize survivor benefits $1 for every $2 earned over an annual limit. For 2008, that limit is $13,560. The SSA will only count the wages you earn from your job or your net profit if you're self-employed. They do include bonuses, commissions and vacation pay. They do not include pensions, annuities, investment income, interest, veterans or other government or military retirement benefits. The proper course to take will be dependent on the work histories of both spouses, the current cash flow needs of the survivor, the health history of the survivor, the earning potential of the survivor and whether taking the benefits will reduce or remove stress from the survivor's life. These choices remind us that the best way to deal with these issues is to discuss and plan for them before they ever arise. Couples, particularly couples with significant age differences and earning discrepancies, should review the options before one of them becomes a survivor. Donald L. McCoy, J.D., CMFC -- 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. 952-835-9000 - pfshim@usinternet.com. Access to Legal Documents is Critical for Unmarried Couples Both institutional regulations and state law make it critical for unmarried couples to know how one another will access key documents when necessary. While it is useful to put such documents in the glove compartment of a car, it is not a sure fire solution if the car is stolen or burns up in an accident, or is towed, while the partners are caring for one another. -Living Will -Health Care Power of Attorney -Organ Donation Form -Directives to Physician -Five Wishes -Burial Instructions -Marriage License or Domestic Partnership Forms -Guardianship Papers (LGBT & special needs clients) (Note: Be sure to execute the proper power of attorney for your specific investment management firm. Often, investment management firms require that their specific, proprietary power of attorney be executed to allow married or unmarried partners to access assets in their partner’s account. ) Travelers would do well to also put copies of their passport, credit card numbers, and itineraries, as well as airline ticket numbers into the Docubank account so that if a purse is stolen in Thailand they may cancel the credit cards immediately, arrange for an emergency loan, replace their passport at the American embassy, and make it onto their appropriate flight home. Clearly, the issue of access to important documents is important for travelers and for unexpected circumstances, but it becomes absolutely critical for unmarried partners who expect and want to provide love, support and decisions for an ill partner. Stonegate Wealth Management’s highly experienced professionals, including partners Thomas J. Geraghty, Jr., CPA, CFP, Steve Craffen, MBA, CFA, and Craig Marson, JD, CPA, solve complex financial challenges and provide counsel for the pressing financial issues confronting their high net worth clients. They have deep knowledge and experience in taxes, estate planning, investment management and divorce settlement counseling. The firm manages $175 million in assets under management. How to Figure Out Your “Half” of Costs for a College Bound Child of Divorce Kids leaving for college is a major transition for all parents. For divorced parents, the high dollar questions about who pays for college and whether or not the kids can study abroad for a semester can be a high stress time as both parents grapple with how to find the money needed. Each parent, and particularly the usually lower earning Mom, needs to think through what they feel they can do financially to support the college-bound child, and that requires a secure grasp on your financial situation. A regular financial assessment can be a productive ongoing process for a divorced parent, but particularly necessary in dealing with college planning. Take this hypothetical couple, John and Joan. They had a relatively harmonious divorce and arrived at a financial settlement satisfactory to both. John has a good corporate job and pays spousal maintenance and child support. John told Joan and their daughter Denise that he would pay for half of the cost of college – room, board, books, fees, tuition – and that his daughter and her Mom would have to figure out the rest. Joan had a good job, but did not have the household income of her ex, even with his ongoing spousal and child support. Joan wondered if she could earn more money with a career change, but determined that at this point in her life, it did not make sense. She made an appointment with her financial planner with expertise in education funding to see what her alternatives were for paying her “half” of the upcoming college bills. As she looked carefully at her assets and income, it became clear very quickly that if she pays half of the college costs for all of her kids that it would deplete both her cash flow and retirement assets. Joan believed that, long term, it was not in her children’s interest to have her deplete her retirement fund and potentially require their financial care as she aged. Instead, Joan looked at her situation and decided that she would adhere to the outlook that “Only I Control Me.” She did not go to her ex and demand that he pick up a larger piece of the kids’ college costs. Rather, she decided to tell each child what dollar amount they could depend upon from her to apply to college costs annually for four years. She made it clear that they would each only receive this money for four years, so if they required a fifth year to finish or planned graduate school, they would have to find ways to fund these costs themselves. Additionally, Joan and her financial planner found that if she claimed her daughter on her tax return, and both parents verified that she lived with her mother, that the daughter would qualify for financial aid, even if her Dad is paying part of the tuition. Based on the changes in her commitment to college costs that Joan made after realizing what she could afford, Joan has discussed with all three of her children what they could expect going forward. In addition, she is offering the kids research support about financial aid in their majors and at the colleges they want to attend. She also offered to help them investigate internships and to have them live at home with her full time during college if they want to go to a local school. She then told her ex of all of her decisions. While it’s important to anticipate as many financial issues as you can when faced with the financial stresses of divorce, it is also very important to make decisions that you can live with, rather than ones you feel pressured into with possible long term negative implications for your financial security. Linda Leitz, CFP and EA, is an author and financial planner working with divorced and divorcing couples in Colorado Springs, CO. She is the author of the soon to be published “We Need to Talk – Money & Kids After Divorce”. Her earlier book "The Ultimate Parenting Map to Money Smart Kids," published in 2006, was the first in a series of books planned by Leitz. She can be reached at Linda@brightleitz.com or 719-260-9800. Media review copies of "We Need to Talk – Money & Kids After Divorce" by Linda Leitz, CFP, will be available to the media shortly. Please send an e-mail to beth_chapman@inkair.com with the word Divorce in the subject line and provide a mailing address. Your copy will be mailed as soon as it is available from the publisher |
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