Why I Hate Annuities . . . and Ken Fisher Too!

To forestall the libel lawsuits I remind you that the titles of these posts are Myths.  In general, I don't practice "hate".  And, as you probably already know, I don't "hate" most annuities (and Ken Fisher really doesn't either, by the way).  There are excellent ones, and bad ones as well.
I certainly don't hate multi-billionaire Ken Fisher.  I've never met him.  I admire his research on, and support of, California redwood forests.  But really?  Are you going to sign over all your retirement funds to a high pressure firm that performs worse than unmanaged money?  Here are my issues with his firm's borderline practices. 

First and foremost are the ubiquitous (not to mention, factually remiss and ethically questionable) full-page "I Hate Annuities  . . . And So Should You" advertisements.  I have a copy of the "free" report offered in the ad and it is, overall, a fairly evenhanded summary of annuities . . . with a few serious errors.  But serious, glaring errors they are, and I wonder if they are accidental, for example conflating fixed annuities with their risky cousins, variable annuities.  I'm not going to get into those details in this post.  Later.

Second, is his gargantuan push to lure investors into a very bubbly market with claims of consistent 11+% annual returns.  Didn't work out so well back in 2008 either.  I think this is unconscionable, this appeal to the irrational fear and greed of investors who cannot afford to lose any money, especially in this overvalued market.

Third, is the neglect of his fiduciary obligations to his clients.  Fisher Investments has its own propriety products which it almost exclusively recommends.  They have a history of inadequate evaluation of client needs.  And for this they charge fees of 1% or more.  They have been sued and fined.

Fourth, as a result, Fisher Investments appears to be glossing over a major retirement risk for small investors:  sequence of returns risk.  The table below shows how average returns work.  It doesn't matter in what order the years are calculated, the end result is the same, as long as no contributions or withdrawals are made.

But suppose you're retired and making withdrawals to meet your fixed budget.  All of a sudden, losing years make a huge difference.  Nobody seems to be able to consistently predict sequence of returns.  So avoiding losses is essential in retirement.  Here are the facts in the table:

• Initial principal balance is $500,000.
• $25k annual withdrawals are taken, increased with inflation.
• The average return for both portfolios is identical:  6%

Finally, Fisher is already a billionaire.  I encourage you to do business- instead -with local independent, fiduciary advisers who sell no proprietary investments & employ a holistic approach in evaluating and planning for your retirement.  And who don't resort to inflammatory mass marketing to add to an already gigantic empire.  If you're going to spend 1.25+% of your assets every year for planning and management you might as well at least get some guarantees in return.  Or at least outperform unmanaged index funds.

10 Things Life Insurance Agents Won't Tell You: Thing #3

Thing #3. Your child doesn’t really need life insurance- Daniel Goldstein

Those of you who know me won't be surprised that I agree with this "Thing".  Other than as required by legal arrangements, nobody "needs" life insurance any more than they "need" a sports car.  Life insurance is a luxury, a luxury many of us prefer to have.  So for a child, especially, there is no "need" for life insurance.
So why do my peers and I often recommend coverage for kids?  To name just a few reasons:

• It is, in fact, a great investment.  The best equity indexed universal life (EIUL) policies now have uncapped indexing options.  Of course you give up some gains in the form of a spread or participation rate but over the long term that is well worth the advantage of missing out on all losing years.  Combined with no caps on contributions & tax-free access, I know of no other way to replicate these benefits.  What a great head start for a kid.
• Long Term Planning-  Someday your kid will be an adult with a family.  If you have lousy genes or poor family health history, let your kid arrive at adulthood with a fully funded, increasing life insurance policy.  Life insurance seems invaluable when you are no longer able to qualify for it.
• Estate planning-  If you think you'll have a taxable estate, why not gift premiums to an EIUL?  They will reduce your taxable estate, and, pass tax-free to your beneficiary/owners.

As far as "profiting" from your child's death, I also find that idea repugnant.  But a small policy we had on my daughter allowed us to contribute to a medical foundation in her name after she died.  That really helped us through.

10 Things Life Insurance Agents Won't Tell you- Thing #2

Thing #2- "We'd rather sell you investments than insurance."
Hooboy.  This one makes me tired.  To reiterate, this "10 Things" series resulted from a breathtaking article by Daniel Goldstein.  Thing #1 appeared in a previous post.
Thing #2 makes no sense at all, especially the "wave of complaints" about missing out on market returns.  I see.  Those complaints must have flooded in after the 2008 crash, no?, where people like me continued to earn 4%, tax-free, while my peers were suffering double digit losses three years in a row.  Slow and steady wins the race.
I sort of agree with Mr. Goldstein's take on "suitability".  A good solution is to take financial advice, and buy financial products, from only  legal fiduciaries.  Here's the difference.  "Suitability" essentially means the product is OK for you, not inappropriate, not bad.  Under a fiduciary standard, however, it must be the best option the adviser can find for you.
In the final analysis, I sincerely believe most of us advisers want to "sell" you success in reaching your goals using the lowest cost, least risky options we can possibly find.  I'm not really sure what people like Mr Goldstein want.

HAARPing on AARP

A chemist, a physicist & a statistician went hunting.  They came across a deer.  The chemist aimed and fired way to the left, missing the deer.  The physicist aimed and fired way to the right, also missing.  The statistician shouted, "We got him!"  (Thanks to my old friend David Salminen for reminding me of this classic joke.)  It perfectly illustrates the hazards of relying on tips from financial entertainers, a lot of whom appear in AARP Bulletin.

But I have to say the "5 Steps to Retire Happy" article was actually pretty good (until Step #5, which I"ll discuss below.)  To their credit, Bulletin editors drew from a stable of authors instead of relying on one writer's stream-of-consciousness.  Here are their 5 Steps:

1. Ask these key questions:  Am I ready to retire?  What will I do when I retire?  How will retirement change my life?  What role will my children play?  How do I cope with the downside of retirement?  Can I afford to retire? 
   I wholeheartedly agree with Stan Hinden, the author, that often these "soft" questions are the most important.  Life is more than a math problem.  If we do great math but you're still unhappy, what good have we done? 
   Let me just say this though:  There is no substitute for Q&A sessions with an experienced, holistic, fiduciary adviser who is registered in your state of residence.
2. Educate yourself.  Allan Roth lists some excellent books to read.  But it is also essential to take classes in your state of residence because tax regulations, product availability and estate planning statutes can be very different.  A generic, national market publication could send you down the wrong path.  (This is an unabashed plug for my highly rated Retirement Success classes!)
3. Save all you can.  This actually goes hand in hand with #4.  Excellent article by Carla Fried.
4. Avoid a nasty tax surprise.  If you can reasonably predict that your tax bracket will be lower in retirement, then by all means save in "Traditional" retirement accounts.  A lot of us however, due in part to our good savings habits and also doing work we love until we die, will continue to pay more in taxes.  In that case, better to plow after-tax dollars into Roth IRAs and even do conversions, especially before age 70.
5. Make your money last.  Here's where I take issue with Jane Bryant Quinn; she asks the wrong question:  "How much [i.e. what percent of your assets] can you safely withdraw from your nest egg each year?".  I especially adore the phrase (referring to the 4% withdrawal rule), "It's too early to know the 30-year outcome for people who retired in 2000 . . ."  I never would have guessed.
   The "expert" withdrawal rates quoted in the article range from 2.5% to 5.5%, over a 100% difference! 
   What is a reader supposed to do with that??  I side with Wade Pfau, professor of retirement income at The American College, (from which I received my ChFC designation) who suggests the 2.5% figure plus future inflation increases.  But who has $2,000,000 to work with to meet a $50,000/yr. budget?
   My main issue with this 5th article is that it fails to deal with, or even mention, the #1 risk of market-based (stocks & bonds) income sources:  Sequence of returns risk.  If you need 5.5% of your assets to live on at the same time the market is experiencing double digit losses- possibly several years in a row like in 2001 -it could be impossible to recover.  In the Wade Pfau article it is pointed out that the standard "4% rule" will result in retirement failure for 1 of 3 retirees, a completely unacceptable ratio.
   There are ways, however, to enable 5-6% withdrawal rates with no risk of running out of money and without surrendering your principal to a third party (like AARP suggests you do in the full page annuity advertisement right after their article)  But these solutions vary wildly from state to state.  There is no substitute for a customized analysis of, and plan for, your retirement by a legal fiduciary practicing in your resident state.

Ten Things Life Insurance Agents Won't Say: #1

Once again, just to be sure, I remind you that the titles of these posts are MYTHS.  And here, courtesy of MarketWatch's Daniel Goldstein, are ten myths all in one place at the same time.  Yum!
I work very hard.  Much of what I do is extremely challenging and complex.  So I love the intermittent easy ones, even if it means occasionally shooting fish in a barrel like this.  Since there are so many fish in this particular Ten Things barrel, I'll snare them one at a time in a series of blog posts.  (But FYI, here are the Ten Things all at once)

Thing #1 "that agents won't say" (because we're* all ignorant crooks, is the implication):  You actually have too much life insurance. 
Before we torpedo that already capsizing assertion, let's first dispose of the myth that you even "need" life insurance.  Life insurance isn't a need.  It is a luxury.  Food is a need.  Shelter is a need.  Love is a need.  Life insurance is a luxury.  People buy it because they want to. Unless they have to, to satisfy a business and/or loan contract or divorce decree.  Life insurance needs analyses attempt to calculate your human economic value to your beneficiaries.  Chances are that they wouldn't need to replace 100% of that economic value.  But don't think the average life insurance policy in force today comes anywhere close, as you'll see later.

As a holistic retirement planner, I stress test all my plans asking and illustrating, "What could go wrong?":

• What if the market crashes again.  And again?
• What if rates of return aren't as good as we expect?
• What if inflation rears its head?
• What if one or both of you needs long term care?
• What if one of you dies?
• What if you lose your job?
• What if you don't wait to age 70 to turn on Social Security?

The death of a high income spouse can be devastating.  And in these days of dual income households, the death of either spouse can derail the most carefully crafted plan.  Which is where life insurance comes in.  Leading to why life insurance agents won't say "You actually have too much life insurance".

It's handy when a financial entertainer like Mr. Goldstein disproves his own assertion in the same paragraph:  the average face value of life insurance policies was $163,000 in 2012.  According to StatisticBrain the mean mortgage balance as of 2013 was $188,000.  $163,000 death benefit is "too much"?  I beg to differ.  The reason no life insurance agent will say "You actually have too much life insurance" is this:  It ain't true. (to put it scientifically)

Mr. Goldstein attempts to prove his point by specious comparison, as most sycophants do:
"The average face value of a policy in 2012 was $163,000, up 37% from a decade earlier—a faster increase than the rise in average salaries over the same period, according to the Social Security Administration."

So what?  My Montmorency cherry tree is up 50% over the last decade.  Goldstein assumes the only function of life insurance is to replace income.  And even that false assumption serves only to prove that $163,000 is woefully inadequate to all but minimum wage workers.  (Alluding to the SSA lends the illusion of authority.)  A more relevant fact is, over the same period, the average mortgage balance doubled.  Anyone heard of "debt" as a reason for life insurance?  Such a narrow position is dangerously ignorant and contrary to not only all the evidence but also to how Americans feel about it:

"Forty-four percent of all U.S. households (48 million) either don’t own life insurance and believe they should, or own life insurance and believe they need more. Among those that already own some life insurance, 40 percent believe they don’t have enough."  -LIMRA 2005
 
Things have not improved in the nine years hence.  I fail to see how the author could possibly think his position is beneficial to his readers.  I call it financial porn.


*Yes I include myself in this group because I retain all the training, experience, and credentials.  And I still sell the stuff because it is so important.

TV, Radio and print media are the best souces of financial advice

Just a reminder:  These post titles are Financial Myths.  In a concisely excellent article at producersweb.com, David Lewis gives us just one of many examples of the hazards of using financial entertainers (listed in the title of this post) as your financial planners.  "What's the problem?" you may ask.

1. First, financial entertainers are not legal fiduciaries and therefore collect little if any pertinent information from you before handing down their gumball-machine recommendations.
2. Second, you never hear about the [many] cases where their advice went wrong.  Do you really think they would publish or repeat that?
3. Third, because their companies are virtually all owned by Wall Street they tend to be biased in favor of products, services & advice peddled by Wall Street.
4. Their bad math, limited knowledge and resulting bad advice go largely uncontested.

 Case in point is the difference between arithmetic (or "average") and real returns.  The first technique simply adds up a series of annual returns & divides by the number of years.  So if you invest $100 and get 0% & 9% returns over the next two years, your average return is supposedly 4.5%.  A 4.5% annual return would yield $109.20.  But in reality you would end up with only $109, a 4.4% real annual rate of return.  Is it coincidence that average returns are always equal to or higher than real returns?

Finally, for retirees one of the largest income planning risks is sequence of returns risk.  If you've projected that the historically back-tested portfolio you've assembled will give you an adequate average rate of return for the rest of your life, as you draw it down, have you considered the effect of three years in a row of negative results?  Using average returns fails to take into account the effect of withdrawals in declining years, declines from which it is often impossible to recover. 

Inherited IRAs Are Protected From Creditors

Just to be sure it's clear, the titles of these blogs are myths.  So in this case, the confusion about creditor protection of Inherited IRAs has been settled by the Supreme Court just this month:  Inherited IRAs do not have creditor protection.  They don't.

"In Clark, et ux v. Rameker, 573 U. S. ____ (Jun, 12, 2014), the U.S. Supreme Court unanimously held that funds held in inherited IRAs are NOT protected as “retirement funds” within the meaning of Bankruptcy Code Section 522(b)(3)(C) of the federal bankruptcy code." (Thank you WealthManagement.com http://bit.ly/1nos60k)

In a surprisingly sensible decision, the Supremes used these tests to determine that Inherited IRAs do not deserve the protections afforded retirement accounts under IRS code:

Unlike other retirement accounts,  Inherited IRAs have these unique features:

1. The holder of an inherited IRA may never invest additional money in the account.
2. Holders of inherited IRAs are required to withdraw money from the accounts, no matter how far they are from retirement.
3. The holder of an inherited IRA may withdraw the entire balance of the account at anytime—and use it for any purpose—without penalty.

This decision greatly amplifies the importance of careful estate planning for your retirement funds.

Trees can grow into outer space

Even though all the numbers look great, most folks on the ground will tell you things just don't feel right.  At least those of us paying attention.  In terms of money & finance, I refer you to the graph below:

You would have to be nuts to not see a pattern here.  Note especially that in 2009 the index was worth 1/3 its current value.  That's only five years ago.  Do you think a "correction" is impending?  I do.  Trees don't grow into outer space.  If I'm right, wouldn't you like to avoid it?  And if I'm wrong wouldn't you like to not miss out on continued growth?  Yes.  You can eat your cake and have it too (an oft misstated aphorism).

Always Talk To Seniors as if They're 8 Years Old

Again, I remind you that these post headings are Myths.  And, again, this is one propagated by AARP's financial entertainer, Allan Roth.  (UPDATE:  since the publication of this blog, AARP removed all reference to equity indexed annuities from Mr. Roth's online article.  But if you have the paper version, please refer to it.)
In the April/May issue of AARP's newsletter, Mr. Roth lumps equity indexed annuities (EIAs) in with "5 Bad Money Moves" such as oil drilling partnerships, time shares and private REITS.  Really?
I take issue with this ignorant and astoundingly inaccurate portrayal because I frequently recommend EIAs for a variety of  excellent reasons, reasons that dramatically separate them from the other risky investments mentioned:

1. In today's low interest environment, the minimum guaranteed interest rates in fixed annuities can equal or exceed other fixed interest alternatives, such as CDs or money market accounts.  For example, I just got a glossy postcard in the mail from a bank, bragging about its 1.75% 5 year CD.  Annuity company, Sentinel, has a 5 year fixed annuity paying 3.2%.
2. And unlike CDs, the interest is tax-deferred and remains inside the annuity compounding interest until withdrawn.
3. Principal protection.  No, annuities are not guaranteed by the FDIC.  But even better, in my opinion:  Because EIAs are issued only by insurance companies they are backed up by each state's guarantee association (be sure you understand your state's requirements and limitations).  No, Mr. Roth, the guarantees are not "mostly illusion".
4. Which is because they are regulated by each State rather than any Federal window-dressing regulator like the SEC, at the beck and call of the very industry it's supposed to "regulate".  Oregon is one of the toughest.  If an annuity product is available here, it's probably pretty good.
5. Flexible and customizable income guarantees.  None of the other "bad" products Mr. Roth mentions include these essential planning characteristics.
6. Liquidity.  No, most annuities do not have 100% liquidity from day one.  That's why fiduciary advisers use them for long term money, much like a personal Social Security account.  Virtually all are 100% liquid after 10 years.  And virtually all allow 10% penalty-free withdrawals before then.
7. The ability to participate in market gains while avoiding the losses.  If an investor only received 30% of the S&P500's gains, but avoided all the losses, he would beat the S&P500.  Not losing money matters.

That's for starters.  Of the $84.9 billion investors placed in fixed annuities in 2013 only $8.3 bil. were fixed immediate annuities (the worst ones, which Mr. Roth likes because they are "simple".  And maybe also because AARP sells them?)  $39.3 bil. were equity indexed annuities:

Courtesy of  Insured Retirement Institute

 Mr. Roth goes on to characterize those of us who use EIAs as greedy snake oil salesmen pursuing gigantic commissions through itinerant bait & switch seminars & classes.  If we eliminated all transactions that made a profit for someone, commerce would grind to a halt.  We don't mind paying a 10,000% markup on bottled water, a 90% markup on the coffee we drink nor a 3.5-7% real estate commission.  Every savings and investment option also has pros and cons, costs and benefits.
As a fiduciary adviser, I have to be able to demonstrate that my recommendations are the best for my clients.  And we're talking about long term, face-to-face relationships, Mr. Roth, not a mass audience that will forget your article in a week (in this case, fortunately).  Believe me, if insurance companies could sell their annuities online, by mail or through financial entertainers they certainly would.

Which brings me to the title of this blog, "Always Talk To Seniors as if They're 8 Years Old".  In his five "Warning Signs" Roth astoundingly states, "My rule is never to buy anything I couldn't explain to an 8-yr.-old" because everyone- even educated adults -should avoid that high-falutin' "fancy language".  Yes, I know.  That is the prevailing journalistic standard.  It really is.  (Which explains a lot about the dumbing-down of Americans.)  But I would never treat a client the same way I would treat an 8-yr.-old child.  How pompous and insulting.  Many of my clients are professionals; lawyers, doctors, engineers, professors, carpenters, CPAs, managers.  They are capable of understanding the best options.

I do tell my classes and my clients to never make a financial decision without the two elements of TRUST:  evidence and understanding.  Fame (such as appearing in the AARP newsletter), a nice suit and hair, toothy smiles, etc. are evidence of nothing.   Make your adviser explain everything you doubt or don't understand.  Insist on evidence for all claims.  There are no stupid questions.  You deserve better than Mr. Roth.  Sometimes complexity is superior.  Otherwise we would all use horses instead of cars.

Why Insurance and Investing Often Don't Mix

(A reminder:  The titles of these posts are financial myths.  Unless otherwise stated, they are MYTHS.)
This latest Myth is the title of an AARP blog by corporate-sellout hack, Allan Roth, whose main purpose seems to be to attract bankster advertising and products rather than protect his readers' finances.  Although I'm a member I have to say AARP is, after all, little more than a giant marketing organization promoting apparently very profitable but second rate products, services & information.
To their credit, AARP offers this caveat in Mr. Roth's bio:  His contributions aren't meant to convey specific investment advice.  But guess what.  Individual readers do take his baseless claims as individual and specific advice.  They take it to heart and it affects their actions.  That's human nature.
In this latest post Roth can't even seem to make up his own mind:  Yes, insurance is good for protecting "valuable assets, such as your car or your home".   But it is not good for protecting other more valuable assets like your income, bank accounts, IRA or retirement savings.  Huh?  Can you spell FDIC?
The truth is, for holistic fiduciary advisers who take the time to know their clients and examine their futures from now to the ends of their lives, Insurance and Investing always mix.  ALWAYS.
The reason is that risk management (aka "insurance") is always appropriate in some form, whether it involves actual insurance company products, or, tax/volatility/interest rate management in a portfolio.
As a holistic, fiduciary, Oregon-registered investment adviser I am concerned with reality.  I focus on what is best for each client, not on what makes good bumper stickers.  Check any adviser out at http://bit.ly/1gIOqzu  I'm there.  You'll notice Allan Roth is not.

The Best THings in Life are Free

Well, I actually believe the title of this post. 
But the next-best things in life are not free.  That's why I've revised and filed with the Oregon Department of Finance & Corporate Securities my new contract and fee schedule, effective the end of March.  (Which is also on my website at garyduell.com)
I strive to keep expenses as low as possible and to provide exceptional benefits.  (It is that ethic that has turned Vanguard into the largest fund family.)  That's why I work out of my home & use a virtual network of back office support staff & specialists.  That's why I don't have a glass, brass & mahogany office with Persian rugs & rare art on the walls.  But, after 36 years in financial services I've learned a thing or two.  My time & knowledge are valuable.  And I make every minute you spend with me as worthwhile as I can!

A Fool is Born Every Minute

I believe the heading of this post is a myth because it's more like every second that a fool is born.  Take the Utah case of American Pension Services Inc. and its CEO (Crook Ex-Officio) Curtis DeYoung.  This succinct article in The Trust Advisor magazine drives home the importance of receiving your account statements from a fully vetted third party, not from your adviser.  That third party should be a well-known and independent custodian or trustee.
According to the SEC, Mr. DeYoung lost over $22 million of retirement account assets, all the while sending his clients phony, inflated account statements.  And then, to top it off, he charged fees based upon the fake account values, even after they were totally worthless!
One might argue that this is a case of just desserts, since both Utah's senators voted against Dodd-Frank & its consumer protection provisions, including adequate funding for the SEC.  But nobody in Utah deserved this, despite voting for Mike Lee & Orrin Hatch.
We had a similar case here in Oregon with our own Wes Rhodes.  Talk about a whole bagful of warnings that investors ignored.  Entrusted with upwards of $40 million, Rhodes actually invested only about $4 mil. using the rest to pay off earlier investors and fund his lavish lifestyle.  His $1.6 mil. car collection was quite public and well-known yet set off no red flags.  To avoid Federal mail fraud charges, he hand delivered his phoney statements to his clients' homes, a service they found endearing.  Rhodes is currently serving 10 years in Texas.
My exasperated question is this:  Why are investors attracted to $1000 suits, expensive cars, offices, Persian rugs & secretaries who look like Vogue models?  Who do you think is paying for all that??  Do you really believe the guy is simply a market genius, benevolently sharing his golden touch with you?  This delusional thinking is how Bernie Madoff executed the grandest heist in history, fleecing otherwise wealthy, sophisticated investors.
That is why I dress casually, work from home, drive a Leaf, utilize virtual back office services and a national network of other experts and support systems.  This keeps my overhead low.  I am walking my talk, that costs matter.  What kind of message does it send to squander money on fluff and bling?
THE TAKEAWAY:  If your statements are coming straight from your adviser, run in the opposite direction.  Be sure to grab your money first. 

The One Moment Retirement

In his wonderful article "Prioritizing Retirement Tradeoffs" Mark Miller raises the possibility that keeping one's nose to the grindstone, delaying gratification for 30 years and then completely retiring may not be the best strategy for everyone.  Based on all my study, this "retirement" scenario is also a fairly recent- and  often destructive -fabrication as we've marched lockstep toward ever higher productivity and ever greater commerce in our post-industrial age.  Have we lost sight of the purpose of all this productivity and commerce? Who or what is it really serving?  Or is it killing us, our society and our planet?

Before I elaborate on Miller's article, let me segue you to a brilliant YouTube video (which I highly recommend you view immediately) by Martin Boroson:  https://www.youtube.com/watch?v=F6eFFCi12v8
called The One Moment Meditation.  I'm serious.  Go to that link right now.
If I may be so bold, my takeaway is this supposition:  What if the number one thing you are working your ass off for, struggling for, hoping for, saving for, (and fearing you'll never achieve), were right here, right now?  If you make a serious attempt to watch and listen to Boroson's short video you may get a glimpse of what I'm talking about:  that sense of calm well-being, satisfaction, wholeness.  Why do we make it so difficult and conditional?  Can you capture in a Moment the same feeling you think a 10,000 square foot mansion will give you?  Please take a Moment to view the video, and then come back here.

I believe that The One Moment Meditation is a microcosmic experience of the scenario Miller describes in his article.  Just like finding moments of peace amongst the chaos, couples who save less in favor of more vacations, working less, and other fulfilling activities are often able to work longer, save longer, and live longer and more happily to boot.  Why wait to enjoy life until you're too unhealthy to enjoy it?  That Protestant work ethic and self denial need moderation, don't they?

The Payton Manning risk management plan

In his March 25 post in MarketWatch, Stan Haithcock describes the "Payton Manning" plan:

"I'm sure that one of Peyton's goals every game is to not take a hit from the defense that is trying to punish him on each offensive play. Typically, he will go an entire game without hitting the ground which is due to a pretty good offensive line along with getting the ball out of his hand as quickly as possible."

Don't get hit.  Be sure you have brilliant investment strategies, and team members like Manning's offensive line, to prevent or absorb the risk of losing money.  Or getting "hit".  Don't get hit.  Easier said than done?  What would you think if I said "easier done than said"?

Before so-called hedge funds became, essentially, bookees they did indeed purport to "hedge" or limit risk to their investors by contrarian strategies, options, etc.  It's ironic that hundreds of such funds went belly up last year.  Unlike any of my clients, I too lost a small fortune betting against the market in 2013.  I should have followed my own advice, which was to expect the best and prepare for the worst.  And your worst case scenario- if properly structured -should be zero return for the year.  Losses should be unacceptable.

Politicians would make good financial advisers

This is, of course, false.  You would be astounded at how everything we advisers and agents do is micromanaged.  Here is a recent cautionary trade press article about practices that get us into trouble.  If only all other industries were held to such standards!  Especially the power brokerage (political) industry.  Why is this?  I think it is because we advisers are on the ground dealing with real people on a daily basis; we don't have the time or resources to lobby, unlike insurance companies, bankers & investment brokerages.  In addition, once targeted by regulators, we don't have the resources to fight back; we're easy prey.  Hence we bear the brunt of regulatory scrutiny to an absurd level, while guys like Bernie Madoff waltz away with unrecoverable billions.
Anyway, here's the article.  My main critique of Utah regulations:  If something is true, you should be able to say it.  If a product pays 100% of something, then that shouldn't be illegal to put in writing.
Cautionary Tales

All Advertising Works

This heading is, of course, a myth.  And I'll base my position not by citing scientific research nor academic studies.  I'm basing it merely on my personal experience and the assumption that I am not the only one in the world whose mind works this way.  Although I've been told the contrary.
Are you paying a fortune for pop-up and scrolling banner ads or those obnoxious "bad-breath"* videos that hog your target audience's bandwidth and hinder their work efficiency?  I hope not.  Because my mind doesn't even see them anymore.  But even if your ad makes it far enough into my consciousness for me to recognize and remember your brand, that is not a good thing.  It is a demerit, prompting me to block you forever.


*i.e. as unexpected, unpleasant and unwanted as bad breath

Not a Myth- What's New for 2013 Tax Filers

Here's a list of significant and/or interesting changes handed down by IRS.  This is by no means a complete list.  Please consult with your tax expert or at least Publication 17.

• Additional Medicare Tax- In a nutshell, an extra 0.9% on earned income exceeding $250k for couples, $200k for individuals.
• Net Investment Income Tax-  3.8% of net investment income or MAGI over $250k for a couple, $200k for individual filers.  Tea Partiers went nuts over this but hey, should we tax poor working stiffs or passive (i.e. nonworking) income?
• Top tax rate is now 39.6%- Put the guns away.  This applies only to taxable income over $450,000 for a couple.  And is still a far cry from the highest historical marginal rates >90%.  I only have two clients who are affected by this and I guarantee you it will not affect the kind of breakfast cereal they eat.
• Capital Gains & Dividends- for some folks the top rate will increase from 15 to 20%.  Why isn't this passive income taxed at the same rates as earned income???
• Medical Deductions- unless you or or spouse are 65 or older, the hurdle for deductibility is increased from 7.5 to 10%.  But corporations, which the Supreme court has affirmed are people, can deduct every penny.  I see.
• Yay, Person Exemptions!- increased to $3900, with exceptions.
• Itemized Deductions Restricted- if you make over $250k &  are single & other details.
• Same Sex Couples- Can file as married if legally married in a state, even if no longer living there.
• FSAs- Can't divert more than $2500/yr into these.
• Plug-in vehicle Credit expired in 2012, thankyou big oil.
• Home office deduction- simplified
• Standard Mileage Rate- 56 cents for business, 24 cents for medical care or moving.

IRS is never helpful

Just a reminder, these headings are Financial Myths unless otherwise noted.  IRS can actually be very helpful, if you know where to look.  And it should get better, thanks to TAP, the new Taxpayer Advocacy Panel made up of 73 volunteers around the country.  I applied for this panel but they ended up selecting no one from Oregon, probably because of me;  my three suggestions for improving IRS customer service were:

1. Leave
2. Me
3. Alone

No doubt they assumed everyone here is nuts and passed us over entirely.  Here's the link to the announcement, if you're interested in sending comments to TAP:  http://www.irs.gov/uac/Newsroom/Taxpayer-Advocacy-Panel-Members-Selected-2014

Another recent sort of friendly gesture is Publication 910, "IRS Guide to Free Tax Services".  To save you the effort of looking at all 27 pages, here are the sweet spots, in my opinion:

• pp. 1-3- IRS.gov.  Yes, their website is easy to navigate and full of robustness.
• p. 6 - tax advice for seniors.  Free.
• p. 9 -FreeFile, the online tax return preparation and filing system which, they claim, 40 million taxpayers have used thus far.
• This is cool.  At benefits.gov you can search for the hundreds of potential benefits programs that might apply to you.
• p.12 -Guide to free tax services
• p.18 -Nonprofit and Small Business resources.  I've used this extensively in my Treasurer roles at nonprofits.

So yes, Matilda, even the IRS can be warm and fuzzy.

One of the greatest financial tools available in Oregon is going away on 2/24

In a fascinating January 28 interview with James Montier (of Grantham Mayo van Otterloo [GMO] with $10 mil. account minmums!), Robert Huebscher teases out some thoughts & facts that warrant further study, if you would like to take the time to read it. (see What Worries Me Now)  But I'll save you some time with this bullet-point list:

• At the bottom of the market in 2009 "accounting authorities suspended FASB rule 157 . . . all of a sudden, financial institutions could lie with impuity" about their declining asset values.  Is this one factor in the market run up?  Possibly.  But FASB157 was replaced by ASC820 which, by my reading, uses very reasonable asset valuation formulas.  And won't financial institutions continue to lie with impunity anyway as long as they remain almost entirely self-regulating?  This is an important issue because the techniques used to assign a market value to assets and income streams directly affect stock prices and, therefore, your retirement account balances.
• He acknowledges the economic fact that government austerity is "likely to drag down profits and that remains a major source of concern".  The prevailing notion that taxes vanish into a black hole is so tired and, well, stupid that I'm glad to see a major fund manager dispel it.  Government belt tightening- just for the sake of belt tightening, I might add -slows the circulation of money & hurts the economy.
• Montier recognizes that "this is the purgatory of low returns".  He goes on to say that "the perfect dry-powder asset would . . . give you liquidity, protect you from inflation, and it might generate a little bit of return".  And then, "Right now, of course, there is nothing that generates all three of those characteristics".

It is this last assertion with which I heartily disagree.  What if there were an asset which:

1. Was principal guaranteed, every year.  Not ever losing money enhances long term returns.
2. Allowed you to use a "5% rule" or greater, depending on your age, (instead of the traditional "4% rule"* which is now considered excessive) for withdrawals
3. Every year that you delay taking withdrawals, for up to 20 years, your income amount would increase by 7.2%
4. You have 10-20% liquidity annually
5. 100% liquidity of principal plus interest in the event of death or 10 years.

Those features would tend to meet Montier's criteria, wouldn't they?  And the account minimum is $5000 as opposed to GMO's $10 mil.  Unfortunately, this particular product is going away on 2/24/2014.

*The lifetime retirement account withdrawal rate that assures you won't run out of money before your life expectancy.  It has recently been revised to 3%.

Ten Predictions From My Favorite Financial Columnist, Bob Veres

Advisor Perspectives

It's a great time to Hire a Veteran

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IRS to Employers: Hire Veterans by Dec. 31 and Save on Taxes

IRS Special Edition Tax Tip 2013-15, December 3, 2013

If you plan to hire soon, consider hiring veterans. If you do, you may be able to claim the federal Work Opportunity Tax Credit worth thousands of dollars.

You must act soon. The WOTC is available to employers that hire qualified veterans before the new year.

Here are six key facts about the WOTC:

1. Hiring Deadline.  Employers hiring qualified veterans before Jan. 1, 2014, may be able to claim the WOTC. The credit was set to expire at the end of 2012. The American Taxpayer Relief Act of 2012 extended it for one year. The WOTC expires on Dec. 31, 2013.
   
2. Maximum Credit.  The tax credit limit is $9,600 per worker for employers that operate a taxable business. The limit for tax-exempt employers is $6,240 per worker.
   
3. Credit Factors.  The credit amount depends on a number of factors. They include the length of time a veteran was unemployed, the number of hours worked and the amount of the wages paid during the first year of employment.
   
4. Disabled Veterans.  Employers hiring veterans with service-related disabilities may be eligible for the maximum tax credit.
   
5. State Certification.  Employers must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their state workforce agency. They must file the form within 28 days after the qualified veteran starts work. For more information, visit the U.S. Department of Labor’s WOTC website.
   
6. E-file.  Some states accept Form 8850 electronically.

For more about this topic, visit IRS.gov and enter ‘WOTC’ in the search box.

Additional IRS Resources:

• Work Opportunity Tax Credit Extended
• Work Opportunity Tax Credit - Frequently Asked Questions and Answers
• Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit

Learn the primary myths and truths about Retirement!

Retirement classes begin again on January 14th at PCC SE Center in Portland:  

• Go to this link, http://tinyurl.com/knosyaa
• check the location, dates and times to see if they work for you
• If they do, click on "Registration" and set up an account
• then, register for my class!

Please feel free to call or email if you would like details about the class content, the substantial packet that you get, or if you just wonder whether the class will help you with your particular situation.  If it won't help, I'll be the first to tell you.  Make this a New Year's resolution!

Peace and Love,

Gary

WARNING: Not a Myth- Investment Scams of 2014

We Oregonians are blessed to have a relatively healthy investment watchdog on our team, the Oregon Division of Finance and Corporate Securities (DFCS).  Among other valuable resources, their website includes License Holder Searches for a whole range of financial services providers, from banks & prepaid funerals to pawnbrokers & payday lenders.
Every year about this time they highlight the worst of the financial scams for the year & project warnings for the next year.  Here's the link:  http://altarum.org/health-policy-blog/a-closer-look-at-the-slowdown-in-health-care-price-inflation
Because the Internet blurs state lines, the DFCS includes all states in their list.  The most notable risk is new, the result of the JOBS act which loosens the rules companies have to follow to raise capital.  A double edged sword, this ability to sidestep Wall Street is great but it also means less scrutiny of each offering.  Personally, how the SEC could exercise less scrutiny seems impossible without the liberal use of narcotics.
Before you invest in something that sounds too good to be true, do your research.  Or hire me to do it for you.  As DFCS administrator David Tatman says, don't invest more than you "can afford to lose" in these types of companies.  I would go further:  Don't invest more than you would be happy to lose.

The Annuity That All Annuity-Haters Buy

At one point in my planning process I show my clients the Red-Green spectrum of all possible places they can put their money, from bank savings accounts & CDs to credit default swaps & REITs.  I ask them if anything on the spectrum is off the table, any options they absolutely would not consider.  Most of my clients are my age or older and so are risk averse.  Most aren't interested in "Red" money like oil well leases & options.  And a few cross off annuities.  They hate and/or fear annuities because of what they've "heard" (not because of what they know).  I don't argue.  I take everything off the table they don't like.

Then we drill down into their specific desires, in most cases:

• Protection of their investment principal- they do not want any backsliding in their portfolio
• Inflation protection- a minimum rate of return at least adequate to keep up with inflation so their purchasing power isn't eroded over time.  They want to participate in the upside of the market but not in the downside
• Some tax advantages- it adds insult to injury to earn half a percent on a CD and then have to pay income taxes on it to boot.
• Keeping their Social Security benefits nontaxable.  
• Some income guarantees- if they've attended one of my retirement classes they've learned that outliving one's income is one of the three greatest retirement risks.  They would like an income they cannot outlive.
• Liquidity if a crisis occurs, like having to go into a nursing home or the death of a spouse.

Then I have to tell them that they've taken off the table the best tools I have for accomplishing all those goals:  annuities.  That is, the right annuities used in the right way with the right amount of their funds.

Take for example Social Security.  Social Security is a stream of payments, i.e., an annuity.  And a darn good one at that, if it is applied for optimally.  Everyone who is eligible for this stream of payments has "bought" it with their payroll taxes.  (In fact, some people are eligible for it who have never even paid so much as a cent for it:  nonworking spouses.)  I have yet to meet anyone who was "principled" enough to decline Social Security because it is an annuity.

Purple Unicorns can make you RICH!

Ken Fisher, Jonathan Pond, Suse Orman, Jim Cramer the list goes on of financial entertainers who propagate enough truth to be useful and alluring but also enough myth to be devastating.  All of them lost their readers/clients tons of money in the last crash and will do so again in the next one coming up.  Like a lot of questionable politicians who are inexplicably voted back into office over and over, they benefit mightily from a highly distracted populace with very short memories.  They are what I call Financial Pornographers.  None of them hold themselves to a fiduciary standard like I do.

I know that initially this sounds harshly cynical, a glaring violation of Dan Pink's well-documented ABC sales principles (Attunement, Buoyancy & Clarity).  But bear with me.  We're in the Attunement phase here.  I'm attempting to connect with and deconstruct the magical thinking Wall Street has injected into our culture.

One aspect of this magical thinking is how investors decide to whom to give their money.  When I meet with potential clients I ask them why they picked their current adviser and why they are leaving.  I do this to dispel any delusions about their attraction to me, and, to avoid the mistakes the former adviser made.  Almost invariably they were attracted by the adviser's "success", as evidenced by $1000 suits, expensive cars & high-rent office.  (Wes Rhodes is a classic local example.  Bernie Madoff is an infamous national example.)  I ask, "Well who do you think paid for all that?".  Even if they don't come right out and say it I can see the wheels turning, "We did.".  (The mythological belief is that the stock broker has been a great success with his own money and now wants to share that success with little ol' you.)  And almost invariably my new clients left their broker because of excessive fees and performance that's worse than unmanaged indexes.

The complicated, circuitous narrative the entertainers propagate for risk-taking versus safety might as well be:  Well, in the back room we have a team of very skillful gnomes feeding magic mushrooms to our herd of purple unicorns, which then excrete the gains you'll experience.  Wow!  That's exciting just to make up!  I almost want to say, "Uh huh.  Ok.  Sign me up!"  Unfortunately, in most cases there are no purple unicorns, just ordinary bulls eating ordinary hay and excreting ordinary . . .ahem.

Nobody is using IRS Sec. 101(a) plans!

Well, this post title is a myth.  Lots of people own Sec. 101(a) plans.  Most just don't know it.  The sad thing is, though, except by the wealthy, the provisions of Sec. 101(a) are rarely fully used.  If you've already google searched Sec. 101(a) you know that this post is just in time for September, which is Life Insurance Awareness Month. 
Sec. 101(a), along with other tax code provisions, delineates some of the amazing tax and asset-leveraging advantages of life insurance.  Reminds me of a comedian who wondered about the persuasive shyster who invented life insurance:  "Hey, pay me $100 and then when you die I'll give you back $200!".  I think the reason people are turned off about life insurance is because of life agents, not the products they sell.  It doesn't help that financial "gurus" like Suze Orman have been telling people for years to buy term, not whole life (although she has changed her tune lately).  But that advice only takes narrow advantage of Sec. 101(a)(1).  It's like buying an umbrella but not being able to open it unless you're dead.
What can you do with the latest life insurance hybrid products these days?  Here's a partial laundry list, (all of which of course are totally contingent upon the insurer, the specific product design, policy provisions, your health and family history, etc.):

• Pass unneeded IRA money to  your kids or grandkids completely tax-free, multiplied 2-3 fold
• Pay life insurance premiums with tax-free dollars
• Earn 5-8 times current CD interest rates, also tax-free
• Guarantee that your children can pay for college, whether you live or die
• If you're already maxing out a Roth, build a supplemental retirement nest egg to provide future tax-free income
• Participate in a variety of market indexes with your worst-case annual loss being . . . zero
• Have coverage that will actually be in force when you die.  Very very very few term policies ever pay off because they usually lapse (due to gargantuan premium increases).
• Buy more coverage cheaper than term over your lifetime.  Go ahead.  Compare buy-term-and-invest-the-difference with an equity indexed universal life policy.
• Have a source for low or no interest loans if you need a house down payment, want to take a trip, or make a major purchase.  And don't pay it back until you die.

And that's just the beginning.


I'm not sure how I feel about all this because, originally, tax advantages were given to life insurance for the benefit of destitute widows and orphans.  Now it seems the wealthy are the main beneficiaries of these provisions.  Which is why on an annual basis Congress considers attacking them or at least means testing them to get more tax revenue.  But my job is do give you the best advice I can under current laws, regulations and economic conditions.  You should take it.

WHEN THE MARKETS ARE BOOMING, EVERYONE'S A GENIUS

I won't make any friends with that blog title.  But it's been my experience with every market run up; the phones stop ringing, annual reviews are postponed, & Jim Cramer is a hero again as his disciples forget how much of their money he lost, now that he has them "back to even".
Happily, there are exceptions.  Finally the public is realizing the illusory nature of the market run-up, cognizant that their own household micro-economy has not followed suit.  Could it be the approximate $100 billion in funny money per month that the Federal Reserve (Fed) is pumping into the markets?  Probably.  And the best evidence yet that this is the case is the recent market drop due to falling unemployment rates.  Yes, you read that right.
Usually falling unemployment means higher consumer disposable income and therefore higher spending which in turn buoys corporate earnings, causing stock values to rise.  So why are they falling instead??  Because Wall Street fears the Fed will back off on its Monopoly money stimulus as the jobs picture "improves" (It's not improving, not really.  They're just measuring it differently.).  Less money chasing the same securities will cause stock prices to fall.  Hence the defensive sell off now.
Wall Street's mantra is "You don't want to miss the best days of the market, so keep fully invested".  My mantra is, "It is far more important to avoid the worst days!"

Obamacare is Bad (to be clear, this is mostly a myth)

The best way to counter any mass mythology is with specific, factual information.  The degree of misinformation, hysteria and outright sabotage surrounding the Affordable Care Act (aka Obamacare) seems unprecedented in recent history.  Too many powerful people will harm as many others as necessary simply for political advantage.  Ironically, Obamacare is a very flawed piece of legislation largely because of these deranged people.  Compromise with them was necessary to get this landmark law passed.*  But the majority of us are good, decent and want the best for our fellow citizens.  And we managed to get dozens of good provisions into Obmacare.
The Patient-Centered Outcomes Research Institute (PCORI) is a wonderful example of specific reality to counter those who inexplicably attack the Affordable Care Act, thereby shooting themselves in the feet.  At a cost of about $2 per person per year, PCORI:
". . .helps people make informed health care decisions, and improves health care delivery and outcomes, by producing and promoting high integrity, evidence-based information that comes from research guided by patients, caregivers and the broader health care community."
And better yet, PICOR doesn't attempt to implement this vision with a top-down bureaucratic strategy.  Instead it funds carefully selected research projects all over the country.  Regrettably, some states saddled with obtuse leadership are actually refusing this funding.  Oregon is not one of them!
So do your own research, believe the opposite of what you  hear on FOX, and please visit your local state exchanges (i.e. if your State cares about you).  Oregon's is www.coveroregon.com 

*all that was really necessary was a single sentence amendment to the Medicare laws, rather than a 1400+ page bill:  Any citizen of any age may enroll in Federal Medicare.  That would have saved employers 30-50% on their employee benefits expenses.