Labour Department Releases Jobs Report

A new jobs report from the labour department shows signs of economic strength, according to Bloomberg News

The US economy continues to surprise with strength and resilience, even as worries over global growth persist.  In addition to strong new job creation, it is promising to see wages starting to increase as well.

Stocks are not reacting to the news today.  This is because in the crazy world of market psychology, good news is often cast in a negative light.  In this case, strong labor markets mean that the Fed has a free light to start raising interest rates.  This worry (misplaced, in my opinion) offsets some of the enthusiasm with which markets should greet good economic news.

For bonds, it is a different story – this is nothing but bad news.  It is growing increasingly likely that the Fed will be raising rates probably before the end of the year.  Increasing interest rates generally are bad news for bond investors.  Still, this is hardly a surprise to anyone.  In fact, a rate increase in our opinion is several years overdue.

Heretic or Visionary: Rethinking Asset Allocation for Your Retirement Portfolio

Research Suggests That Increasing Stock Exposure During Retirement Reduces the Risk of Going Broke.

At last week’s gathering of the New Jersey chapter of the Financial Planning Association, financial researcher Michael Kitces presented some interesting research regarding asset allocation for retirement portfolios that quite simply turns “accepted truth” on its head.
The “truth” he challenged, with very convincing research, is that exposure to stocks in a portfolio should continue to lessen as an investor gets older. A commonly quoted rule of thumb suggests that investors have no more than 110 minus their age for a percentage of stocks in their portfolio. This would imply that a 60 year old should have 110-60=50% in stocks, while an 80 year old should have 110-80 or 30 percent of his portfolio in stocks.

Kitces’ firm did extensive research (apparently never considered before due to the completely heretical nature of his idea) that considered what would happen if a retiree actually started with a LOWER allocation to stocks and then INCREASED that allocation as they grew older. Contrasting the above example, the 60 year old recent retiree starts with 30% allocated to stocks and then increases that allocation to 50% or more as they age.

Using historical returns, Kitces makes a convincing argument that such increasing allocations actually reduce the risk that a retiree will run out of money.

I will spare you the details of the research (though I provide a link below), but considering this non-traditional approach with an open mind, it starts to make some sense. We advisors are well aware that one of the biggest threats to retirees is poor market performance or a significant bear market early in retirement. It can be mathematically proven that bad outcomes in the first 10 years of retirement matter much more than bad outcomes later in retirement.

Kitces points out (quite logically I might add) that the true worst case scenario for a recent retiree is not a financial crisis like crash followed by a swift rebound, but a 1999 – 2009 like extended period of extremely poor returns. In such an event (which might also have faced someone retiring in the late 1920’s or the late 1960’s) the investor is forced to sell much of his equity holdings as the market falls, only to find that when the market finally recovers, he has reduced his equity exposure so far that he cannot recoup his losses.
In contrast, the investor who starts with less equity exposure will find that, in the same market debacle, he a) is less exposed to stocks in the first place due to higher fixed income allocations and b) he is able to slowly build equity exposure over time when stocks are cheap, reaping the benefits when the market finally recovers, ensuring financial security for the second half of retirement.

What about the 80 year old who now has 50% in stocks? Are they not overly exposed to a market correction? Well, with a much shorter time horizon, drawing down equities in a poor market is much less likely to pose a problem than when a 60 year old faces the same condition. His research thus suggests (again quite logically) that an 80 year old with a 10-15 year time horizon can weather a financial storm much better than a 60 year old with a 30 or 35 year time horizon.

And lastly, for those who still refuse to believe, Kitces shows that even though investment in stocks increases over time when following his recommendations, stock exposure when averaged over the investors lifetime is actually much lower than more traditional strategies, since fewer stocks are owned early in retirement when portfolios are presumably larger. It might just make sense that lower average exposure to stocks should result in fewer bad outcomes for retirees.

If anyone wants to look at more detail on this topic (it is a bit too detailed and geeky for me to share in this forum) visit The article is written for financial professionals, but if you are into nerdy financial analysis, you might want to have a read.

Washington Set to Axe Popular Social Security Claiming Strategy

File and Suspend Strategies Targeted in Budget Deal

It appears that the budget deal set for a vote in Congress is going to target and practically eliminate the very popular strategy of “file and suspend”. This is a strategy most often employed by higher income working couples. One spouse on reaching full retirement age would file for Social Security benefits, then immediately suspend their payments. This would allow them to wait until age 70 to actually collect benefits while the benefit increased by 8% each year until then. At the same time, filing for benefits triggers the availability of spousal benefits for the other spouse. As soon as the other spouse reached full retirement age, they could file for and collect a spousal benefit equal to ½ of the benefit that the first spouse filed for but suspended. The second spouse could then re-file for their own benefit based on their own work history at age 70. The strategy allowed many couples to not only maximize benefits by waiting until age 70 to collect – but also to collect a partial benefit while they waited. It has been a very lucrative strategy whose days may be numbered.

The proposed budget bill may include provisions to limit these potentially lucrative strategies on two fronts. Firstly, it appears the law will prevent anyone from claiming a benefit based on your own voluntarily suspended benefit. That means that your spouse or minor child will only be able to collect a spousal or child benefit if you yourself are actually collecting (not just filed for) your benefit.
Secondly, it appears they are going to phase out the ability to “pick and choose” which benefit you want to collect. Right now, as long as you are full retirement age, you can tell Social Security that you only wish to receive your spousal benefit (based on ½ of your spouse’s benefit at full retirement age). It appears that in the future, Social Security will not allow this choice, and will automatically pay the largest benefit you are entitled to. This – along with the “file and suspend” restriction above, will effectively eliminate the most effective Social Security maximization strategies.

Surprisingly, it appears that the passage of the bill would eliminate these strategies even for those couples who are already collecting – which would force some retirees to rethink their retirement income strategies.

Of course, this is Washington, and there will likely be some powerful forces (AARP maybe?) out to defend their interests in coming weeks, so stay tuned. These provisions may be watered down or even eliminated before the budget passes. Still, the Obama administration has long expressed its interest in removing these strategies, as they largely benefit wealthy retirees, and thus is not likely to waive the rule changes without a fight.


For extra information view this article:

FPA Conference: Long Term Care

What to do about long term care is a perplexing dilemma for planners.

I attended two sessions on the topic while at the conference, trying to gain insight into what the experts are thinking on the topic.

Of significant concern across the board is availability of care.  The baby boom generation threatens to overwhelm the system – both caregivers and government programs which pay for those services.  Everyone seems to agree – relying on the government to take care of you in your old age is not a viable plan.

That leaves two possibilities.  Insurance, self-pay, or family care.

One concern with relying on self pay is a tendency among the elderly to defer needed care when they have to pay for it – even if the resources are available.  “It’s too expensive!” or “I don’t want to spend my kids inheritance!”  One benefit of insurance is it makes it more likely the policy owner will obtain care when needed.

One way to potentially get around this (without insurance) is to fund a separate account which is agreed to be dedicated to long term care expenses.

A downside to self pay is that the large potential expense is always looming.  If paying yourself, you need to always be prepared for the “extreme need” – i.e. to pay for many years of care.  This can make seniors reluctant to spend on their own enjoyment in retirement, since there is always this “what if” scenario in the back of their minds.

How much do you need to be prepared for?  Average stay in a nursing home is under 3 years, but the problem is that higher income and healthier people tend to live longer and then need longer periods of care than lower income people.

Insurance is perhaps a more efficient approach.  The cost of care is averaged among all policy holders.  A big benefit is that planning is more certain.  There is no need to preserve assets for a big unknown.

Cost of insurance has risen dramatically.  This was fueled by a) poor underwriting assumptions in the past and b) very low interest rates limiting investment income to the insurer.  These problems have been corrected (and probably overcorrected) so todays premium rates, while high, are probably more stable than they were a few years ago.

There is a trend toward increasing home care, being fueled by improvements in medical and mobility technologies allowing seniors to be safe in their homes.  That is good because home care is less expensive.  This might make smaller insurance policies (i.e. $100/day vs. the typical $200) more useful than we might otherwise think.  This is good news for those who can’t afford a full long term care policy.

Reverse mortgages and home equity represent a significant tax favored resource for seniors to pay for extraordinary care expenses.  This is why we prefer never to include home equity as a source of retirement income unless there is no choice – we like to protect it as an asset of last resort.

Impact of caring for family members:

According to the presenter, 15% of seniors suffer depression.  40% of seniors who are also caregivers (i.e. to a sick spouse) suffer depression.  Care givers are twice as likely as non care givers to have chronic health conditions themselves and tend to die sooner than non-care givers.

Care of an aging parent is a frequent cause of family strife.  Careers are put on hold or sacrificed.  Elderly persons without Long Term Care Insurance are 50% more likely to move in with their children.

All of this argues toward having a sound financial plan for long term care and discussing it with the family.  Good long term care planning is about trying to reduce the likelihood of bad outcomes approaching end of life.

FPA Conference: College Planning

This session was hosted by Lynn O’Shaughnessy of  She is a prolific writer and blogger on the topic of college finance.

Lynn indicates the most important item for parents to understand as their kids approach college age is the reality of how colleges set their prices.  She is pretty emphatic on the idea that the college value proposition is completely broken if you focus on tuition list prices:  “I can’t understand why ANYONE would pay list price to go to college”

According to Lynn, 58% of public school students and 89% of private college students get some kind of discount off list price.  She maintains that, headlines notwithstanding, this is a buyers market for college.  Schools are not filling their classes, 60% did not meet their recruitment goals last year.  More than ever, schools are willing and able to negotiate to get the students they find attractive. 

She notes that the willingness to negotiate is not universal.  Elite schools in particular have no trouble filling their positions and are much less likely to offer discounts.

The schools, by the way, do not call them discounts.  That is beneath their dignity.  The price reductions take the form of “merit aid” which allows the schools to discriminate, sorry “be selective” about who they offer discounts to.  Generally that would be the top third of their applicant pool.

Schools are now required to put a “Net Price Calculator” on their websites which is intended to help prospective students estimate what the true cost will be.  About half of those calculators are useless (only estimating need based aid), the good ones will take into account the applicants SAT scores, class rank, etc. to give them an honest and hopefully realistic assessment of what they may qualify in terms of both need-based and merit aid.

She strongly advises parents to have the financial discussion BEFORE the kids start shopping for schools.  It is very difficult to have the kids go off to visit a school, fall in love with it, and then find out that the price tag is too high and there is no aid available.

Also she encourages parents to cast a wider net when searching for schools.  More aid is often available when you leave the coasts and big cities.  In addition to school websites, the college board website can give students a good idea how much non-need based aid is issued by a particular college.

Lastly, don’t be afraid to question an aid award once you receive it.  Ask what Expected Family Contribution was used to determine an award.  Share offers from other schools if you are trying to get a better award – they pretend to be above car-dealer like negotiations, but on the other hand, they do have recruitment goals to meet!


FPA Conference: Discussion on Dividend Investing

This conference focused on dividend investing.  With bond yields low, many investors who used to rely on bonds for income have started looking toward dividend paying stocks.  The presenter suggested a few words of caution.

First, dividend stocks are still stocks.  In addition, there are times when the highest yielding stocks (typically REITs, telecom, and utility stocks – but we may include energy companies like Exxon and Chevron right now) can become highly overvalued.  It is therefore better for investors to look beyond the dividend yield and diversify beyond these traditional high yielding sectors.

More important for a long term investor may be to focus on companies which are growing their dividends.  In addition, overseas companies tend to pay much higher dividends than their US counterparts.  It is primarily a cultural issue – foreign investors expect higher payouts from companies.  Overseas companies may offer better value and higher yields.

Reaching for yield is often a problem.  Many investors focusing solely on income have been spoiled over the last few years as markets soared.  However, high yields often reflect the markets suspicion that current dividend payouts are at risk.  In the industry this is often referred to as a “value trap”.  This is when investors attracted to a stock based on apparently cheap valuation or high dividend soon find out that there was a good reason the stock price was so cheap when profits come up short, the dividend is cut, and the stock tumbles.

We believe focus on income is somewhat misplaced.  Our focus, even in our income portfolios, is less on yield and more on total return of a portfolio.  If a client needs to earn 4.5% in order to meet her retirement goals, then it matters little to the plan whether that return comes from dividends or principal growth.  We believe hyper focus on interest and dividend yields in today’s low interest rate environment are steering investors into dangerous waters such as junk bonds and riskier stocks.  It also tends to lead to unbalanced portfolios with a concentration on industries like telecom and utilities which are in decline.

Too often I hear investors, when we express concern over a concentrated position in a particular stock, reply with “but it pays such a nice dividend”.  Remember – dividends can only be sustained if the company earns enough profit to pay the dividend, and that can be a dicey situation!  Investors with large positions in energy stocks can tell you that dividends are not forever!



Report fro the FPA Conference: Cyber Security in Focus

Cyber Attacks are on the Rise – and Financial Firms are Targets

This is an extremely important issue, and one we take very seriously at Financial Pathways.  I attended this class to make sure there weren’t security best practices that I had not already considered and implemented.

Due to increasing concerns about hackers, we made a decision a little over a year ago to simply NOT store sensitive data on our local hard drives at all.  We implemented the leading cloud based financial CRM system which uses state of the art security and encryption methodologies that as small advisors we simply cannot match.  All client data is stored in the CRM.

We do not save passwords in our local operating system.  Too easy for hackers to potentially compromise.

We have already had hackers attempt to pose as a client, while hijacking that clients email, and request that we wire funds to a European bank.  Scary because the hacker had obviously targeted us by searching the clients email for a financial contact.  This was doomed to failure, however, because we would require any new bank transfer link to be approved in writing.

The session spent a lot of time focusing on training.  Hackers get access to systems often through unwitting (and sometimes complicit) employees or contractors.  The presenter spoke of a security firm who wanted to break into a large firms system left 5 CD’s laying around the firm entitled “2014 Bonus Information”.  Within 20 minutes every CD had been loaded into a computer, installing keystroke monitoring software which provided the firm with login information for the duped employees.  As a small firm, training and control is a little easier for us.

They also stressed the importance of cyber insurance, which is not covered under traditional E&O or business liability insurance, but is now a separate rider.

We are also implementing electronic signatures on forms and applications which is far more secure than paper/fax/and email approaches used in the past.

We take cyber security very seriously, recognize the threat, and are taking all prudent steps to protect sensitive client data.

FPA Conference: Medical Costs in Retirement

Session:  What You Don’t Know About Retiree Medical Expenses Can Hurt You

Dan McGrath of Jester Financial Technologies delivered a very depressing outlook on retiree medical costs at the FPA conference in Boston on Sunday. 

To some extent, this was not new for us.  Even though Medicare is supposed to take care of most medical expenses in retirement, costs still pile up.  Here are typical numbers:

Part B premiums: $105/person

Part D premiums: $53.26/person

Supplemental insurance: $200-250/person

All told, a married couple can expect $8000 or more per year in retirement.  That wasn’t too much of a surprise, that is about what we typically use for a medical cost assumption in our financial planning projections.  But wait, it gets worse.

Part B premiums have been increasing by 7% per year and are expected to continue increasing at 5% per year.  Higher income individuals will see much higher increases as premiums increase based on income.  This trend (means testing) is likely to increase.

And then there is the Long Term Care Time Bomb.

This was the most depressing part of the presentation.  We know that baby boomers will be flooding the market for nursing homes, assisted living, etc.  Dan points out that the real problem is that there are simply will not be enough facilities to provide all of the care that is needed.  Why aren’t more being built you may ask?  Because there are not enough doctors available to support additional facilities.  This is another trend likely to get much worse – and there is no easy fix, since it will take decades to increase medical school enrollments, train, and bring online a new generation of doctors.  And so far no one is doing anything.

The speaker was emphatic: ONLY those with ability to private pay will have ANY ACCESS AT ALL to care.  Forget about Medicaid strategies, hiding assets, etc.  LTC insurance may be the only way many people will be able to access quality care (or any care) 20 years from now.  With a dramatic shortage of beds and caregivers, no facility in their right mind would want to accept Medicaid patients!  It will become private pay or go away!

I have been thinking along these same lines for a while.  Medicaid is in bad shape today, and will be in worse shape 10 years from now.  Even today there is a worrying trend in many states (and it is spreading) in which children of people who receive Medicaid benefits are required to reimburse Medicaid.  In Massachussets, a new law apparently permits Medicaid to collect from lawyers (or presumably financial advisors) who help people hide assets for the purpose of claiming Medicaid benefits.

It is going to get ugly out there – for those who have not planned and adequately prepared.

FPA Conference: FPA and AARP Release Social Security Findings

The Financial Planning Association and AARP have been working on collaborative research on the topic of consumer awareness of the many features of Social Security.  The study was particularly interested in whether or not consumers understood the impacts of various claming strategies (i.e. claim sooner, claim later, impacts of the decision on survivor benefits, etc.).  Results of the study were released today at a special event at the FPA Conference in Boston.

The study was interesting because it also surveyed Certified Financial Planners for their perspectives on how well their clients understand Social Security, as well as the importance of Social Security to their clients’ overall retirement plans.  A key finding was that there is an enormous knowledge gap between financial pros and and ordinary consumers.

Since Social Security provides more than half of personal income for 6 in 10 retirees, it is critically important for individuals to increase their familiarity with the many aspects of Social Security, including various claiming strategies.  Most Certified Financial Planners are knowledgeable on the topic, and may be able to help consumers make better decisions.

Read more about the study on the AARP website here.

FPA Conference: Defining the term Fiduciary

At the urging of the Obama administration, the Department of Labor is preparing to release rules which will require individuals and firms who provide advice regarding employer retirement plans to be fiduciaries.  What is a fiduciary?  Well, you could read the DOL definition based on the rules they have created.  Unfortunately, that might take you a while…the rules are 700 pages long.

I am currently sitting in a session in which an attorney is explaining the ins and outs of what an advisor needs to do in order not to run afoul of the new fiduciary regulations, including a myriad of loopholes and exemptions.

Maybe the DOL should have just used the CFP Boards definition and rule.  It is 19 words long.  “A CFP Professional shall at all times place the needs of the client ahead of his or her own. Rule 1.4.

Financial Pathways makes this really simple.  Our definition is only 4 words in length. Do The Right Thing.  Always.  Period.