Achieving Family Harmony in Estate Planning Part 2: Make Sure Your Plan Fits Your Unique Needs (2009-05-18)

by David John Marotta

Estate planning must begin with family harmony as the goal. Thus personal dynamics are more important than avoiding probate and estate taxes. Planning begins by selecting the right trustee. Here are some additional principles to help you assure family harmony in your estate planning.

First, have an up-to-date plan. Too many people either fail to prepare an estate plan or let their plan become outdated. Changes in the law occur frequently. As Will Rogers said, "The only difference between death and taxes is that death doesn't get worse every time Congress meets."

Plus, your circumstances can change. Toward the end of your life they seem to change faster. Between ages 40 and 65, have a new estate plan drawn up every decade. In your 70s and 80s, consider revisions every 12 months.

Second, you have unique circumstances that your estate plan must address. Everyone does. As a result there are very few "simple estate plans."

For example, an attorney related to me the story of a man who wanted so-called simple estate plan drawn up for him and his wife. In the first 15 minutes, the estate planner learned the client was a citizen of the UK, his 25-year-old son had bipolar disorder and the son was actually not his biological or adoptive child, although he and the young man's mother have been married for 23 years.

In another case, a very wealthy man was seeking "a simple estate plan" for him, his wife, and his family. But he was in a second marriage, had three children from his first marriage, his new wife had four children from her first marriage and one of his daughters was in a prison for kidnapping.

You are unique. Here are some of the questions you may answer in a unique way: Do you donate regularly to charity? Or make substantial gifts to family members? Do you want those gifts to continue if you lose capacity? Do you own a business? Do you own property that should not be sold? Do you have a beneficiary who is likely to cause trouble or owes you money? Do you want to provide for the continuing care of a pet? Do you have a working farm or farm animals? Do you want to be cared for at home regardless of the cost?

Your estate plan should be carefully crafted to address your specific needs and circumstances. The more tailored your plan, the less room there is for family disagreements.

Third, be careful not to change your plan inadvertently. Suppose, for example, you have a will that provides for your estate to be distributed equally among your three children, and you have named your daughter Susan as your executor.

To make it easy for Susan to access your bank accounts in the event of a medical emergency, you have added Susan's name to all of them. What you have done without realizing it is to change your plan. Under Virginia law, those bank accounts will belong to your daughter at your death and will not be shared by your other two children. As a result, your estate might be distributed differently than you intended. It can also result in family feuds or adverse tax consequences.

Before doing any self-help planning--even something as simple as adding a child's name to a bank account--check with your legal advisor to see how it impacts your plan.

Fourth, make sure your fiduciary/executor gets adequate help. The actions of your executor, trustee or agent under a power of attorney are subject to a rigid and sometimes unforgiving legal standard. It is easy unintentionally to run afoul of those rules. If you name a child to serve in these capacities, introduce him or her to your legal adviser. Make it clear in your legal documents that your fiduciary is authorized to pay for that help from your estate.

Fifth, check that the person you choose is willing to act as your fiduciary before naming him or her in your legal documents. You may find an unwillingness or a reluctance related to some concerns that need to be addressed. For example, a child may never feel comfortable giving consent to take you off a ventilator, even knowing that was your wish.

Finally, use your discretion, but consider telling your family in advance what arrangements you have made. Explaining your plan to your family upfront gives you the opportunity to address any concerns, answer questions and clear up misunderstandings. Once you lose capacity or die, it is too late. Many family fights could have been avoided with an open and frank discussion, so everyone is best prepared to handle a loved one's loss of health or life. Eliminating surprises helps eliminate family fights.

In summary, most people who plan do pay enough attention to concerns such as probate and estate tax avoidance. But the best estate plans are drafted with family harmony as a priority.

<hr>See also:<ol><li><a href="http://www.emarotta.com/article.php?ID=335">Achieving Family Harmony in Estate Planning Part 1: Leave Your Estate in the Right Hands</a>

<li><a href="http://www.emarotta.com/article.php?ID=337">Achieving Family Harmony in Estate Planning Part 2: Make Sure Your Plan Fits Your Unique Needs</a></ol>



from http://www.emarotta.com/article.php?ID=337

American Mercantilism Descends into Fascism (2009-05-11)

by David John Marotta

Most people think the government should do something to solve perceived problems in corporate America. In my most charitable moments, I believe these sentiments are well-intentioned naiveté. In my more cynical moments, I believe fascism is on the rise in America.

Fascism is socialism hiding beneath a capitalistic facade. Whereas socialism abolishes private ownership, fascism retains the appearance of private ownership but intervenes in the free markets to bully nominal owners to act in the so-called greater national interest.

The fact that many of you will ask, "What's wrong with the government forcing individuals and businesses to act in the greater national interest?" shows the prevalence of fascist thinking in America today. Mussolini argued that in the fascist state, citizens should honor the nation over their own selfish motives. Hitler argued that the state should retain total control to ensure that property owners could not use their property against the interests of others. Currently, both these dictators would receive accolades all around. Your own first reaction may be in sympathy with these views. But consider carefully before you decide to support the evils of governmental intrusion.

Political theory is lost on most of us without a concrete example. So let's consider my experience with the government's intervention in General Motors (GM). I purchased a GM bond in 2005 scheduled to mature at the end of 2014.

Even when I bought the bond, all was not well with GM. The company's hourly labor costs in the United States were $73.73 an hour, compared with only $48 for Toyota. Both firms actually paid about $40. But at GM, union-negotiated benefits had swamped profitability.

On the positive side, Rick Wagoner, GM's chairman and CEO, was moving toward profitability. GM's foreign production was profitable and growing. Wagoner cut GM's expensive American workforce from 177,000 to about 92,000. He also globalized GM's engineering, manufacturing and design. None of these changes were popular with the UAW, of course. Unfortunately, without enough concessions from the union, GM's international profits couldn't support its domestic labor costs.

Now GM is on the brink of bankruptcy. You might think I would welcome a government bailout. But as a GM bondholder, bankruptcy is not the worst outcome. What would be worse is a restructuring that leaves bondholders with only pennies on the dollar so the government and the UAW can siphon off most of the company's value.

GM has been paying insurance to the Pension Benefit Guaranty Corporation for years. Under current law, if the company goes bankrupt the government must cover retirees. Thus the government has a great incentive to avert bankruptcy. It would save massive pension insurance costs and also pay back the UAW for its support of the Democrat Party.

The union also has a financial motive to avoid bankruptcy because otherwise retirees' benefits would be capped. They would no longer receive company-sponsored health benefits. The government and the UAW are thus motivated to collude in any deal that isn't as drastic as the restructuring under a regular bankruptcy.

But these are both losses that hundreds of bankrupt companies have unloaded on workers and federal pension insurance in equivalent situations. What is completely unprecedented is to force bondholders, who had nothing to do with owning or running the company, to pay these losses. Bondholders are private entities or individuals who loaned the company money, expecting to be compensated. And in a standard bankruptcy reorganization, they are near the head of the line to be repaid.

When the government intervenes in the free markets, overrides the normal legal process and takes a position to help some people to the detriment of others for its own political purposes, that is fascism. The government is not intervening out of a sense of altruism. No benevolence is being shown to the widow whose pension includes a GM bond. The government is not forgoing its savings in the pension insurance program to help the company. Instead, it is taking the lion's share of GM capital when legally it deserves nothing.

Just because we don't see any storefronts with broken glass doesn't mean it isn't fascism. Many average investors are seeing their investment confiscated by political intervention to benefit federal pension insurance money and political special-interest groups such as the UAW.

On March 29, President Obama forced CEO Rick Wagoner to resign. Wagoner was responsible for increasing GM's focus on highly profitable trucks and SUVs at the expense of more politically correct fuel-efficient cars.

As the primary shareholder in a corporation, the government is in no position to experiment with socially engineering that will concentrate on green vehicles, only to turn around and pass tax credit legislation for manufacturing or buying such vehicles. It's this massive corruption and conflict of interests that makes fascism so dangerous.

GM has also gained most of its profitability from overseas manufacturing and sales. But with the government running the company for the benefit of the UAW, it will never approve GM expanding offshore. Even if it makes perfect business sense, the government would never allow GM to build a big new facility anywhere outside the United States. Rather than acting in a responsible fiduciary manner toward its shareholders and making the company profitable, it will pander to the political sentiment that opposes outsourcing jobs.

Many justify government intervention by citing the 1979 bailout of Chrysler under Lee Iacocca. Of all the misguided strategies of the past, the continued failure of Chrysler should be evidence enough. Perhaps if we hadn't rescued Chrysler, some of their market share would have helped make GM more profitable.

In fact, in 1979 it was again the government that profited from the Chrysler loan guarantees by exacting $300 million from the company in stock options. Bailing out Chrysler helped destabilize GM. And bailing out GM will destabilize Ford.

Since I purchased my GM bond, the political winds certainly have changed for the worse. I feel like Captain von Trapp in the "The Sound of Music." Max warns him, "What's going to happen's going to happen. Just make sure it doesn't happen to you."

The winds are blowing cold for free enterprise. I hear the crushing march of jackbooted capitalism. If all of this seems melodramatic, so did the fuss over a few broken windows among some Jewish small business owners in 1938.

And thousands like me have still been preempted in line to get our bonds paid back.



from http://www.emarotta.com/article.php?ID=336

Achieving Family Harmony in Estate Planning Part 1: Leave Your Estate in the Right Hands (2009-05-04)

by David John Marotta

The most important product of estate planning isn't avoiding probate or reducing estate tax exposure, it's achieving family harmony. As a result, we must watch out for personal dynamics that might threaten disharmony when a person dies or becomes incapacitated.

First, think carefully when you choose your executor or trustee. Being selected to manage an estate for someone who can no longer do so because of death or incapacity is an implicit compliment. It shows you trust the person you've named to do the right thing in the right way.

But it is also a very big job. Unfortunately, it can--and often does--feel like a thankless one. And what's worse is that lack of thoughtful planning too often results in irreconcilable family feuds.

We all know that someone must settle our estate when we die. But because people live longer these days, more of us will experience a period of incompetence before our death. We must plan for the possibility that someone will become responsible for our physical and financial well-being long before a final settlement of the estate can be made.

We often choose a close family member, who probably has no knowledge of what's required of a "fiduciary," the term used to describe a person to whom property or power is entrusted for the benefit of another. Taking on a new and unfamiliar task is stressful and difficult, especially if your life is already full.

Remember that serving as a fiduciary, whether as an agent under a power of attorney, an executor under a will or a trustee under a trust agreement, is a post of honor, but it is not an honorary post.

Don't name an oldest child just because he or she was born first. Ask yourself if your oldest has the traits of a good executor or trustee. Is he organized? Is she trustworthy? Will he see a job through to completion? Is she diplomatic and fair-minded? Might he abuse the position to settle old scores and wounds that are sometimes 30 years in the making? Is she sensible? Will she know when she is over her head and needs professional help?

In short, given all your available choices, is this child the best person for the job?

People sometimes want to name more than one executor so no child will feel left out. If you're so inclined, ask yourself, "Am I putting two scorpions in the same bottle?" The administration of an estate is not intended to be a therapeutic exercise that will ameliorate 20 years of bad feelings between brothers. Now don't get me wrong. Coexecutors can be a good way to go. But ask yourself first if they are people who can work together. Will they help or hinder each other?

Second, think through how you are leaving your estate behind. Family disharmony provisions are all too common.

For example, if you are in a second marriage, it's sometimes hard to be fair both to your spouse and to the children of your first marriage. In one situation, a 50-year-old man had concerns about his father's will. His dad left virtually everything in trust for his second wife. Such a trust commonly provides limited amounts of income and principal to the spouse during the surviving spouse's lifetime. When she dies, the assets pass to his children from his first marriage.

But because the stepmother is 55 years old, Dad effectively disinherited his kids. Don't set up a plan where your children are waiting for their stepmother to die to get their inheritance. Think of creative ways to be evenhanded to your present spouse and your children when you die. And there could be problems naming either the stepmother or the children as trustee.

Another planned disaster is leaving real estate equally to all your children. In Virginia, real estate drops like a rock through probate. It's not like money you can divide up equally. If your kids can't agree unanimously on what to do with the real estate, it can be a serious problem, for the only remedy the law provides is a partition suit. To keep the peace, provide an enforceable mechanism for either one child to buy out his or her siblings or for an executor to sell the real estate and divide the net proceeds up among the children.

Here is another dilemma that requires special consideration. You might recognize the need for one of your children to have his or her inheritance left in trust because of a poor credit record, mental instability, financial instability or a bad marriage.

Suppose that child resents the arrangement, which is quite possible. Who are you going to name as trustee of that child's trust? Are you going to name a sibling as the trustee of another sibling's inheritance? How will that decision affect the sibling relationship?

And if you name a professional trustee, such as an attorney or bank, are you putting your child at the mercy of that professional trustee? What if they provide poor service after you die? Or raise their fees? All those problems go away if you give someone you trust--such as the child you were thinking about naming as trustee--the unlimited power to fire the professional trustee and appoint a new one. It's no surprise how much better professional trustees perform when they know they can be replaced at any time.

Estate planning begins with selecting the trustee who will handle it best. Probate and estate tax avoidance is easy. Selecting the best trustee is critical. Be sure you structure everything legally in a way that will create unity, not animosity. Make that decision well, and you are halfway to drafting your estate plan with family harmony in mind.

 

from http://www.emarotta.com/article.php?ID=335

Roth Segregation Accounts (2009-04-27)

by David John Marotta

The world of retirement accounts is a confusing tangle of IRS codes. The average family does not take full advantage of the tax laws. They can find financial tax planning equally bewildering.

A complex technique called "Roth segregation accounts" could earn your investments an extra 30% over the next two years, so you'll have to study this column carefully to understand how it works. But trust me. Learning about this strategy will be well worth the time.

There are two types of individual retirement accounts (IRAs): traditional and Roth. With a traditional IRA, contributions are tax deductible for middle- and lower-income families and the values grow tax deferred. But as you withdraw the money, you have to pay ordinary income tax rates on it. If your tax rate is lower in retirement when you take the money out than it was when you originally received the tax deduction, a traditional IRA account can offer great benefits.

Upper-income families don't get a tax deduction if they are an active participant in an employer plan. However they can still contribute to a traditional IRA. Money they put in that didn't qualify for the tax deduction still grows tax deferred. But when they withdraw the money their tax liability is lower. Imagine they contributed $10,000 that was tax deductible and $5,000 that was not because their income had risen above the limit. After many years their $15,000 contribution has grown to $100,000. When they withdraw the money in retirement, 5% of it is not taxed because of that $5,000 after-tax contribution.

Traditional IRAs are also subject to required minimum distributions (RMDs). Starting at age 70 1/2, owners of traditional IRAs must take a certain percentage out of the account and pay ordinary income tax. The government requires the withdrawals because it wants to start collecting tax on the money. But because account values have dropped so much lately, Congress has waived the RMD in 2009. (The government evidently wants account values to recover to maximize the taxes collected.)

With the second type of retirement account, the Roth IRA, there is no tax deduction when you deposit the money. You must pay the tax on the income first and then contribute to the Roth. And only middle- and lower-income families are permitted to contribute. The investments grow tax free rather than tax deferred. Qualified distributions from Roth IRAs are not subject to any income taxes. Roth IRA accounts are to your advantage if your tax rate is higher in retirement when you withdraw the money than it was when you contributed.

With a Roth IRA, you pay tax on the acorn. With a traditional IRA, you pay tax on the oak. Many families have actually lost money by investing in their traditional IRA when they were young and in a lower tax bracket only to find themselves in a much higher bracket during their retirement. In fact, so much money has accrued in retirement accounts that if it were all withdrawn today, it could pay off a significant percentage of the federal deficit.

In fact, you can do just that. In a "Roth conversion," you take money from your traditional IRA, pay tax as though that money is ordinary income and convert it to a Roth IRA. Currently only middle- and lower-income families can do this. But the law will change in 2010, allowing families with any level of income to convert to a Roth.

If you execute a Roth conversion in January of year 1, you may not have to pay the tax on that conversion until April 15 of year 2. You also may change your mind. If you decide the conversion wasn't worth it or you were over the income limits allowed for a conversion in 2009, you can move the money from the Roth account back to a traditional IRA account. This is called a "Roth recharacterization."

Recharacterizing a Roth conversion can be done any time before you file your taxes, including the filing extension. So you can change your mind any time before October 15 of year 2. And you can decide to recharacterize part or all of what you converted.

In the midst of all these changing tax laws, the tax rates are also in flux. At the end of 2010, the Bush tax cuts will expire. The Obama administration is not expected to alter the rates significantly before then. They don't want to be blamed for raising taxes before the midterm elections. They would rather implicate the previous administration for a crazy expiring tax law.

Until then, tax rates are at a historic low. After 2010, counting all the tax changes, top marginal tax rates will probably rise from 44.6% to 62.4%. Thus you will only have to pay a maximum of 44.6% on income you can take before 2011, but after that you may have to pay 17.8% more in tax.

The upside is that you can use all these laws and changes to gain an extra 30% on your investments. During the next few years, tax planning and management will be a significant part of wealth management. But it needs to be put together as part of a larger plan.

Here's the timeline of how to use a Roth conversion to maximize your investments. Early in year 1, do five Roth conversions of equal amounts into five separate accounts. You aren't going to keep them all, so you can convert five times as much as you want to end up keeping and actually paying tax on. Invest each Roth account in a different asset class (e.g., large-cap U.S. stock, small-cap U.S. stock, foreign stock, emerging markets and hard asset stocks).

The five accounts will appreciate differently, but the entire portfolio will be fairly well balanced. Before April 15 of year 2, decide if you will be keeping only one account or more than one. If more than one has appreciated significantly, you may want to keep more than one account's conversion. Compute your tax liability for the year and pay the tax, but instead of filing your return, file an extension.

Before the October 15 extension deadline, decide which of the five accounts you are going to keep. By now, nearly a year and three quarters has elapsed. You can easily determine which account has appreciated the most. Keep that one and recharacterize the other four. Because you only have to pay taxes on the amount you originally converted, it's like betting on the horse race after the winner has already been determined. After recharacterizing the accounts, file your tax return before the October 15 extension.

If all of the accounts decrease in value, recharacterize them all and pay no tax. Financially you are none the worse for having filled out a folder of paperwork. If only one account appreciates significantly, you only keep one conversion. But you have increased the odds of your Roth account going up by five times.

The average return of the S&P 500 is about 11%, but the standard deviation is about 19%. All of the other asset classes have an even higher standard deviation. It is likely, for example, that emerging markets will be either the best or the worst performing asset class over any two-year period. Using this technique you can guarantee that the Roth conversion you keep will have been invested in the best asset class during that year and three quarters.

Segregating each of the five conversions into a separate account allows you to decide to recharacterize or let each account stand separately. The difference in returns between the average and the best account is liable to be 20% or more over the year and a half before you have to choose which accounts to keep. Coupling the 17.8% tax savings and this Roth segregation technique could boost your returns by 30% or more.

In the quite likely event that all five accounts have appreciated significantly, you may decide to keep them all. Once you have reached the maximum tax rate, the top marginal rate does not increase from there. Those most fearful of expectations of higher tax rates soaking the rich after 2010 would be those most likely to benefit from converting everything.

If you are under the threshold for Roth conversions for 2009, you can start this year. This is especially appropriate for people older than 70 who are forgoing their RMD withdrawals. At least convert the same amount as you would have been required to withdraw anyway. Better yet, convert five times that amount in five separate accounts and keep the one which performs the best.

If you are over the income limits for Roth conversions this year, those limits go away next year. You can convert in January 2010 and you'll have until October 15 of 2011 to decide which accounts to keep and which accounts to recharacterize. If you do not qualify to make either Roth or deductible IRA contributions, you can still contribute $5,000 to a traditional IRA for 2009 even though you are ineligible for any deduction. Contribute another $5,000 in the beginning of 2010. Then immediately convert the entire $10,000 to a Roth IRA in 2010. If you do not have any other traditional IRA accounts, you will only have to pay tax on any growth over the $10,000 you contributed but for which you received no deduction.

As if tax matters couldn't get any more complex, Roth conversions during 2010 are taxable 50% in 2011 and the other half in 2012 unless the taxpayer elects to have them taxed completely in 2011. Generally, with rising tax rates, paying the tax in 2011 could be best, but individual situations may warrant spreading the tax over two years.

Even thought this technique could boost your after-tax returns by as much as 30%, be careful. Executing a Roth segregation account requires professional assistance. Such a technique should be just one small part of a larger comprehensive financial plan. And you should seek the guidance of a personal fee-only financial planner and certified public accountant (CPA), who have a legal obligation to act in your best interests. The laws are changing annually, and as a result so is the optimum path.

 

from http://www.emarotta.com/article.php?ID=334

Getting Started With Investing (2009-04-20)

by David John Marotta

There isn't a better time to invest than today. The way to build real wealth is by living well below your means and then saving and investing the difference. The poor buy things; their homes are cluttered with them. The middle class buys liabilities like second homes and boats, and then they are obliged to make payments and upkeep on them for years. In contrast, the rich buy investments that appreciate and pay them dividends and interest for decades.

Despite recent market turmoil, historic long-term returns still average 10% to 12%. At a 10% rate of return, your investments should double every seven years. So $100 invested today becomes $200 in 7 years, $400 in 14 years and $800 in 21 years. Even at a modest 7% rate of return, your investments should double every 10 years.

Getting started may seem as daunting as embarking on any new hobby, but on average this kind of hobby pays you money rather than costing you. Every hour you spend learning about investments is an hour of free entertainment. It is an hour you are not spending money at the mall or on a more expensive pastime. And ultimately investing will be your engine of income and appreciation. It will subsidize what might otherwise be a subsistence lifestyle based solely on Social Security checks during retirement.

The first step is getting some money together. In the beginning, the amount you save is most important. Later, after you have amassed a significant multiple of your annual spending, the amount you make on your investments becomes much more significant. At that point (at age 40 or when you have five times your annual spending to invest), it's time to seek a personal fee-only financial planner in your area. Visit the website of the National Association of Personal Financial Advisors at <a href="http://www.napfa.org" target=_blank>www.napfa.org</a>. for information.

In step 2, open an account where you can do your investing. E*Trade (<a href="http://www.etrade.com" target=_blank>www.etrade.com</a>) is a discount firm. Account minimums are $2,000 with less than $50,000 in combined assets, and stock trades cost $12.99. TD Ameritrade (<a href="http://www.tdameritrade.com" target=_blank>www.tdameritrade.com</a>) offers accounts with a $2,000 minimum and trades of $9.99 each. Scottrade (<a href="http://www.scottrade.com" target=_blank>www.scottrade.com</a>) offers $7.00 per trade with a minimum of just $500. Charles Schwab (<a href="http://www.schwab.com" target=_blank>www.schwab.com</a>) offers trades at $12.95 with a $1,000 minimum account size. Fidelity (<a href="http://www.fidelity.com" target=_blannk>www.fidelity.com</a>) charges $19.95 per trade with a $2,500 minimum.

Competition continues to force brokerage companies to adjust their charges on a regular basis, so verify the fees before signing up. Be sure to ask about any monthly inactivity charges. Avoid any account with monthly or annual fees. You plan on investing in a balanced portfolio and then going fishing. You don't want to be charged for the 11 months between now and your annual rebalancing. Make sure you know what the account minimums are too. They should never be more than a few thousand dollars. Although you don't plan on transferring your account, ask what the charges are to do so, and make sure they are reasonable, typically about $75.

Each broker has special promotions that may offer free trades, cash or electronic goods. Taking the best promotion is tempting, but evaluate brokers without considering the promotion.

Setting up an account is easy, and you may be able to do it online. If you need to sign account agreements, read them carefully. Not only should you understand what you signing, but this is the first step in your financial education, and your goal is to gain wisdom and experience.

Half of any area of expertise is learning the vocabulary, which gives you both a shorthand for discussing finance and possibly a new a way of thinking about the world of investments. If you don't understand something, check it out at Investopedia (<a href="http://www.investopedia.com" target=_blank>www.investopedia.com</a>) or call your broker's toll-free number.

In step 3, get money into your investment account. Many brokers allow you to link your checking account to your investment account electronically so you can transfer money at any time. Better yet is setting up a monthly automatic transfer. A day or two after your paycheck is deposited into your checking account, an amount you have designated is automatically transferred into your brokerage account.

The principle is to pay yourself first. You deserve to build wealth, and wealth is what you save and invest, not what you spend. Think of a rich person simply as a poor person who has saved a lot of money. Save and invest as little as $100 a month for 46 years earning 10%, and you can retire with a million dollars. And $500 a month grows to an astounding $5 million.

Those 46 years of saving ideally take place between ages 20 and 66. If you are beginning later in life, you may have to invest more to save the same amount. In fact, for every seven years you delay saving and investing, you cut your retirement lifestyle in half.

Today is the day to decide if you want to be financially free. I can't emphasize enough that time in the markets is more crucial than timing the markets. Who among us doesn't wish we had invested as much as possible in the markets at the prices 46 years ago?

Push yourself to save as much as you can automatically each month. No one should save less than $100 a month in their taxable savings, and this taxable savings is in addition to any work-related retirement accounts.

After you have begun adding money into your taxable savings account, it's time for step 4, actual investing. Knowing the best mix of investments requires a great deal of research and analysis. Investment advisors can add significant value for large portfolios. But for small amounts when you are just getting going, how much you save each month is more critical than the asset allocation you select.

To pick a fund, go to <a href="hhttp://www.maxfunds.com" target=_blank>www.maxfunds.com</a>. This is an excellent laymen's site for fund analysis. In the drop-down box "Show me these funds" select the category you want to purchase. I will tell you which categories to purchase later, but for now assume you know. Next, in the drop-down box "That are sorted by," select "Highest MAXFunds Rating." Finally, click "Go."

The tool lists many investment choices, ranked from their highest score downward. If you can invest at least $2,000, buy an exchange-traded fund. These funds are purchased with a transaction fee ($8 to $20). The amount you are purchasing should be significant enough so the transaction costs to purchase the fund are well under 1% of your initial investment. For amounts less than $2,000, consider waiting and accumulating more to invest or else purchase a no-load mutual fund without any transaction fee.

The site puts a yellow star next to their favorite fund, which is a good place to begin. If you are evaluating funds on your own, look for a fund where the TYPE is ETF and the expense ratio (EXP) is as low as possible. That is often the best choice of a fund. The lower the costs, the more you will keep of the return.

Finally, let's talk about investment categories. Start with a fund that follows U.S. large-cap stocks, and then as you gather additional investment money add funds in the order in which they are least correlated with each other. Here is the order for your first five investments.

Launch your investment portfolio with a "Large Cap Value" fund or better yet a "Blend" fund such as Vanguard Total Stock Market ETF (VTI) or iShares Russell 1000 Index Fund (IWB). Make your first investment in this fund at least $3,000. This should cover all the stocks in the S&P 500 and more.

Second, add an "Intl. Diversified" fund like iShares MSCI EAFE (EFA) or Vanguard Europe Pacific ETF (VEA). Third, add a "Natural Resources" fund like iShares Natural Resources (IGE). Fourth, add a "Small-Cap Value" fund like iShares Russell 2000 Value Index Fund (IWN) or Vanguard Small Cap Value ETF (VBR). Fifth and finally, add an "Emerging Market" fund like iShares MSCI Emerging Markets Index (EEM) or Vanguard Emerging Markets ETF (VWO).

After investing in these five funds, you will probably know enough to evaluate your asset allocation with more sophistication than this simple allocation. If you want, go back and add another share to the "Blend" and "Intl. Diversified" allocations. By then you should have over $20,000 and be on your way to growing rich. Getting started can be intimidating, but these simple steps will help you through your first few years of investing.

 

from http://www.emarotta.com/article.php?ID=333

It's Time for a Tea Party (2009-04-13)

by David John Marotta

Some people try to defend the practice of earmarks with three arguments. First that earmarks only account for 1.9% of the budget. Second that earmarks stimulate the economy. And third that earmarks support many worthy causes. But in each case, the harm done by earmarks is much worse than the average citizen believes.

If you think earmark spending represents such a small and identifiable portion of the federal budget, you must believe it would be easy to eliminate. So let's do away with all wasteful spending as an act of responsibility, consensus building and bipartisanship. The impossibility of doing just that shows clearly how earmarks are tied significantly to the way money corrupts. The truth is that all of government spending would change if earmarks were eliminated.

Earmarks represent the graft and bribery that grease the passage of a pork barrel budget. Congress just approved a $410 billion spending bill, 1.9% of which was required in personal kickbacks (called earmarks) to buy votes. That so-called small percentage amounts to 2,484 times the compensation of the AIG executives. Bonuses at AIG were given to 400 employees with only seven receiving more than $3 million. In contrast, the average member of the House received about $18 million in earmarks.

Increasingly, in an attempt to show their transparency and responsiveness, representatives are inviting committees to review and prioritize projects based on efficient-sounding criteria. My own district representative invited the input from local bureaucrats who have the largest stake in feeding at the government trough. This tactic provides enough of an appearance of involvement for political cover without actually taking into account any of the small business owners who really pay the bills.

Earmarks themselves aren't the government waste. They are the price of the graft to corrupt politicians into supporting the real waste. For you who believe $18 million can't corrupt a politician, bear in mind that every congressional district is making off with more money annually than the $11 million perpetrator of our local Ponzi scheme scandal did over several years. Not content with the average $18 million, my representative attached his name to $159,630,155 worth of earmark requests.

This is not partisan criticism. The best we can say about members of one party is they can be bought for less pork or they cover their graft with more worthy-sounding causes. But these comparisons shouldn't lessen our outrage. Nothing can justify what Bernie Madoff did, even if he donated liberally to charity.

The second defense of earmarks claims they stimulate the economy. They do not. Economic resources are clearly limited. Money confiscated and spent by government has alternative uses that in most cases would have better stimulated the economy. Private enterprise can only spend money where their return would be positive, creating new jobs and causing economic growth. No economic growth means it is unsustainable in the private sector.

Not so with government spending. Unlike private enterprise, the government can deficit-spend indefinitely on programs with no redeeming value in the economy. I've looked over the 51 earmarks requested in my district. None of them relates in any way to sustainable business ventures.

My first column for the Charlottesville Business Journal was coauthored with my father, George Marotta, in 2002: "Will the U.S. Go the Way of Japan?" The fall of Enron was fresh in everyone's mind, and our answer to this question was no because "In the US we allow companies to go bankrupt when they cannot succeed in business. In Japan, both banks and corporations that are bankrupt are allowed to continue and drag down the economy. The ruthless culture that allows large companies to go bankrupt in the US hurts less in the long run than the Japanese style of business subsidies. In the US, the government keeps hands off business; in Japan the government interferes with the operations of business and commerce."

But times change. Our government's intervention in the financial markets, its dictation of contractual bonuses and the firing of company CEOs is unprecedented statism and deserves to be described as socialism or even fascism.

Senator Charles Grassley of Iowa suggested that AIG executives should "resign or commit suicide." He advocated an attitude in corporate America that would emulate the Japanese model, saying, "People that run a corporation into a ground have violated their trust with the stockholders and maybe even the taxpayers."

The bailouts transform a private mistake into a public crime. A business goes under because of poor management, and the assets are sold or distributed as part of the company's liquidation. But if the government guarantees the enterprise, it becomes a crime against society for the company to fail. Failure now becomes a political scandal.

There must be charges of mismanagement. There must be an inquiry. Those responsible must be held accountable. Those innocently injured must be made whole. And all of this supposedly must be accomplished by government.

As a result, the so-called bailouts will prolong the economic malaise. The government should not have intervened. We would be better off if those over leveraged financial institutions had filed for bankruptcy. No company is too huge to fail. And those that claim to be are too big to subsidize at the expense of hundreds of small companies.

Make no mistake: there will still be a recovery, but it will be in spite of government's actions not because of them. The very livelihoods of scores of employees of publicly traded companies depend on them making a profit. The recovery will be on the backs of millions of workers, but congressional leaders will claim the credit, as always, if and when private enterprise can overcome government disincentives.

And finally, the third defense of earmarks claims they support many worthy causes. I expected this argument to be difficult to refute because discerning "worthy" is very subjective.

Interestingly enough, this claim isn't hard to refute because all the criteria selected are economic. In my district, appropriation requests were prioritized based on criteria that would give representatives economic political cover: (1) the potential to transform our economy, (2) the greatest impact on economic development, and (3) the ability to create or attract jobs.

First, all of the earmark projects were solicited by governmental agencies in and around the district. They are all justified by their descriptions as "This project is a valuable use of taxpayer funds because [fill in blank]." But in each case, simply allowing citizens to keep that money would have been a more valuable strategy. As government spending consumes an ever-larger portion of our economic output, less remains for real investment and economic transformation.

Efforts to attract jobs through subsidies or protectionism that can be done more efficiently elsewhere always lose money. If every district spends $1 million competing to attract new industries from other districts, it is a complete waste of $425 million. Even if the jobs we are trying to steal are outside of the United States, it's still a bad idea. Spending that money to force Americans to take jobs away from developing countries that aren't profitable enough for our citizens by putting incentives in place to make those jobs more attractive is a losing proposition. Why not simply allow our citizens to fulfill the roles in the global economy where we are more competitive?

Small businesses create all the new jobs and profitable industries in the United States. But no incentives are being offered for current entrepreneurs to expand or start new ventures. Two thirds of small business profits are earned in households making more than $250,000, yet every spending program has been justified with promises that it will be paid by those earning over $250,000. The marginal tax rate of these small business owners is expected to rise from 44.6% to 62.4%. At those rates, small business owners will change their behavior.

Business owners will not choose to maintain their level of productivity with a 62.4% marginal tax rate. They will simply work less. This is not a new idea in the history of freedom.

The most productive wage earners are among the hardest workers. According to Steven Landsburg, leisure used to be evenly divided among the classes, but it isn't any longer. Although Americans as a whole have an extra four to eight hours of leisure per week, it is those in the lowest tax bracket who enjoy this extra leisure. Today, more than ever, it is the working rich and the idle poor.

I've been studying the life of John Adams and continue to be impressed by his political insights. He feared our democracy would ultimately vote itself bread and circuses at the expense of individual rights and freedoms. "Property," he wrote, "is surely a right of mankind as real as liberty."

Just because a majority of citizens think it is a good idea doesn't make it so. Half of the country doesn't even pay taxes. Among the remaining half, even a small number in favor of a project tips the scales. Compare it to two foxes and a hen voting on what to have for dinner.

For those of you who would like to vent some of that righteous indignation, Tax Day rallies are held April 15 in nearly every major city. Charlottesville's Tea Party takes place on the east end of the Downtown Mall at 3 p.m. on Wednesday. For information on the Tea Party movement, visit <a href="http://www.taxdayteaparty.com" target=_blank>www.taxdayteaparty</a>.com. More details on the Charlottesville event are available at <a href="http://vateaparty.wordpress.com" target=_blank>vateaparty.wordpress.com</a>.

The organizers are asking people who would like to speak at the rally to keep their speech nonpartisan, supporting fiscal integrity and not a particular party. That makes sense to me because those who truly favor fiscal integrity probably couldn't support either party.

<hr>See also:<ul><li><a href="http://www.emarotta.com/article.php?ID=325">Government-Provided Economic Security Is an Illusion</a></ul>

 

from http://www.emarotta.com/article.php?ID=332

Social Security 6: The 70-66 Strategy (2009-04-06)

by David John Marotta and Matthew Illian

Every retiree has significant choices to make regarding Social Security benefit options. One way to analyze the possible scenarios is by calculating the joint lifetime benefits for couples. This method suggests the higher wage earner should often delay filing to receive a maximum benefit at age 70.

If a higher earning husband opts to delay his retirement, the next decision involves when a lower earning wife should file. Let's consider the case of James and Betty Butterworth again. We have already established that if James is healthy, he should delay his filing. He should only consider the file-and-suspend option if his family history and/or personal health implies a premature death. Betty's short working life means she is only entitled to a small benefit of her own. Thus she will receive a spousal benefit from the point that her husband files, preferably at age 70, for the rest of his life.

You might assume Betty should file as soon as possible because she most likely will inherit James's increased benefit. But this decision may overlook the 25% penalty carried over from Betty's reduced personal benefit to her spousal benefit. Current retirees who file at age 62 have their monthly Social Security check reduced by 25%. If Betty files at 62 for her own reduced benefit, this 25% cut will apply to her spousal benefits. So instead of receiving half of James's increased benefit (e.g., $1,533 = half of $3,066) when he files at age 70, she will only get $1,149 monthly. If she waits until age 66 to file on her own record, her spousal benefit will not be reduced. The 25% cut does not carry over to survivor benefits. So in any case Betty will assume James's full $3,066 monthly benefit when he dies.

To avoid this reduction on both the personal and spousal benefit, Betty should file at age 66. This 70-66 strategy is a smart and very common way to maximize Social Security income for healthy couples. Waiting until age 66 means that Betty will receive her the full spousal benefit when James files. The 70-66 strategy can increase a couple's income 14% over filing early and 22% over both filing at full retirement age.

There's no incentive for a lower earning wife to delay her filing beyond age 66. Because a spouse can inherit no more than 100% of a benefit, filing at age 66 maximizes both spousal and survivor benefits. Thus no benefit accrues if both James and Betty wait until age 70 to file. He should file at 70 and she should file at 66.

If the wife is the high wage earner, her incentives are quite different. Unless she is much older than her husband, she will most likely outlive her spouse. But even in this case the wife should still consider delaying her own filing to secure maximum benefits for herself.

Interestingly, a higher earning married woman's Social Security income maximization incentives resemble those for a single person. Single people and higher earning wives should only consider their own life expectancy when making filing decisions. If healthy, they should delay filing. Filing early only makes sense for people who have reasons to doubt their longevity. Informed decision making should take all these calculations into account.

Delaying your filing means you could likely have a reduced income during these gap years. You may want to use that time to convert some of your pre-tax investments to a Roth IRA.

Converting some of the money in a traditional IRA to a Roth IRA requires paying ordinary income tax rates on the amount in question. If you can orchestrate some years in which your income is as low as possible by delaying Social Security benefits, you can minimize the tax required when the money comes out of your IRA.

To maximize your family's Social Security benefits, you must integrate Social Security legislation with your personal situation: your ages, earning histories and your best guess at life expectancy. Careful tax planning to anticipate future earnings and the potential for Roth IRA conversions should be part of your plan.

Finally, if you are eligible for Social Security disability or have been divorced, the rules become even more complex. Don't make these decisions quickly or carelessly. How you handle your choices about Social Security benefits can be worth more than a quarter of a million dollars.

 

from http://www.emarotta.com/article.php?ID=331

 

Social Security 5: File and Suspend for Soon-to-Be Widowed Homemakers (2009-03-30)

by David John Marotta and Matthew Illian

Our own death or the death of a loved one can be difficult to face. But mortality is one of the most critical factors to consider when making decisions about your Social Security. If you have little earnings of your own and your spouse is in failing health, there is a unique way to maximize benefits.

Don't dismiss this scenario out of hand. It is much more common than you might think. For example, David's grandfather died at age 72 and his grandmother lived until she was six months shy of 100. Men on average are slightly older than their spouses with significantly higher incomes. And we know they tend to die at a much younger age than their wives. When that happens, the difference between the best and worst Social Security choices can be worth over $90,000.

Healthy spouses with little earnings of their own should always encourage their partners to delay filing for Social Security. What changes in this special case is what they should do concerning their own filing.

Take the case of James and Betty Butterworth. James is four years older than his wife. Betty worked to help put James through law school, and then he started his own estate planning firm. She raised their five children and served on the boards of three local charities. Despite her lifetime of achievements, Betty is not eligible for Social Security benefits because to qualify requires earnings in at least 40 quarters.

James has just turned 66 and Betty is 62. Their plan was to file for Social Security when James turned 70, which would increase their annual income by more than 46% compared to filing when James is 66 (full retirement age). When James is 70, Betty will start receiving half of her husband's benefits until her husband dies, and then she will inherit his full payment as the survivor. Normally this is the best option, but then the Butterworths' circumstances take an unfortunate turn.

Betty is healthy, but James has just been diagnosed with cancer and probably will only live another five years. Assuming her husband dies in five years at age 71, Betty will begin receiving his full survivor benefit earlier than is typical for a spouse. In this situation, Betty only expects to receive one year of spousal benefits before jumping up to the survivor benefit. This would mean she would receive just a year of half spousal benefits (when she is age 66 and James is 70) before getting full benefits.

But there is a way for Betty to start receiving spousal benefits at age 62 and still inherit all of the increased benefits from her husband's delayed filing.

The Senior Citizens' Freedom to Work Act of 2000 provides an option that can boost total benefits payments for the Butterworths by as much as 10% over the second best choice. This new option is called "File and Suspend." It works this way: When James reaches his full retirement age of 66, he files for Social Security but suspends receiving any benefits.

Now that James has filed, Betty is entitled to apply for spousal benefits when she is 62. She will collect an extra four years of spousal benefits by using this strategy.

By suspending, James continues to earn delayed retirement credits of 8% a year. These delayed retirement credits allow his benefits to grow from 100% of full benefits when he is 66 to 132% of full benefits when he turns 70. And Betty will inherit this amount after he dies.

Betty is not able to step up to a higher benefit when her spouse files at age 70 because she is already receiving spousal benefits. But she will soon inherit a large survivor benefit, and those early years of spousal benefits really add up. James would have to live to at least 75 before Betty would have benefited from delaying her own filing.

Sadly, James loses his battle with cancer a year earlier than expected. He dies at age 70 and Betty inherits his stepped-up survivor benefit. But because they used the file and suspend option, Betty receives an additional $37,582. If she had waited until James turned 70 to file, she would not have received any spousal benefit.

In summary, the primary earner should often delay taking Social Security when the spouse's income has been significantly smaller in order to increase the survivor's benefits. And if the primary earner's health is questionable, consider file and suspend to allow the spouse to collect additional years of spousal benefits.

 

from http://www.emarotta.com/article.php?ID=330

Social Security 4: File, Repay and Refile to Get an Interest-Free Loan (2009-03-23)

by David John Marotta and Matthew Illian

About half of retirees file for Social Security benefits early at age 62. By doing so, they receive only 75% of their full retirement benefits. And unless they die prematurely, they could lose out on more than $250,000 they might have received otherwise. So for many people, filing early is the worst possible decision.

Retirees who delay filing for Social Security until age 70 receive annual payments equal to 132% of full retirement benefits. If you don't mind some added risk, you can combine these file-early and file-late strategies by filing, repaying and then refiling.

To refile, you must repay everything you have received in benefits after you submit the Request for Withdrawal of Application, which also allows for a refund of the taxes you have paid. You can use this opportunity to file, repay and then refile in at least three ways.

First, if you have made the mistake of filing early, you can repay what you have received and then refile at your full or delayed retirement age. This ability to undo your selection will raise your monthly payment by 33% at full retirement age and by 76% at age 70. Some people who were expecting to retire at age 62 may want to repay their benefits because they are still working full time and being penalized on their work benefits.

Here's the second way this method is worth considering. You simply use it to gain a tax-free loan from the government. The only difference between filing late and filing early, repaying and then refiling is an eight-year interest-free income stream of payments from the government.

Refiling at age 70 can offer the best of both worlds. If you die before age 70, you have enjoyed benefits you would not have received otherwise. If you live to age 70, you will have succeeded in getting an interest-free loan from the government.

Consider the case of Leland Rockefeller again. If he files early, he will receive a monthly benefit of $1,742. Between age 62 and age 70, he could receive interest income. Even at just a 4% return, Leland could earn an additional $28,402 of interest before repaying and refiling at age 70. After refiling he will start receiving increased benefits in the amount of $3,066. The survivor benefit for his wife Candy will nearly double. The break-even point will come the year Leland turns 79. The benefits will continue beyond his death for as long as Candy draws a survivor's check.

But filing, repaying and then refiling does have a downside. Significant risks must be considered.

For example, Leland might die at age 69 before being able to repay and refile, having received only seven years of early payments. If Leland was single, his filing early at least would have resulted in getting some money. But because he is married, his young widow Candy could get stuck receiving his reduced benefits simply because he didn't live long enough to repay and refile.

This is not a trivial concern. Any threat to repaying means you might be saddled with one of the worst filing methods and miss one of the best. Before filing early with the intention of repaying and refiling, you must consider the worst case scenario: what will happen if you never get the chance to repay and refile. If Leland and Candy's Social Security benefits were both equally high, Candy would not be hurt too much by Leland filing early and then dying before he had a chance to refile.

Another danger of the refiling scenario is that when it comes time, you may not have the money. If you've invested poorly or spent the money, you may be shackled with reduced benefits for the rest of your life. Given the tendency of most retirees to file early because they can't wait to start spending their Social Security checks, the danger of not having the money when it comes time to repay is too risky for many households.

The potential benefit of filing and repaying is greatly reduced if you continue working beyond age 62. When you take Social Security, any income over $14,600 reduces your benefits by $0.50 for every $1 above that limit you receive as wages. It also doesn't work if you are trying to use the time between age 62 and 70 as low-income years to convert some traditional IRAs into Roth IRAs and thus minimize taxes during retirement.

Finally, a third reason to consider this file, repay and refile strategy is to gain an inflation-adjusted income stream starting at age 70. Repaying Social Security is a better return on your money than any commercial annuity you could buy. In the case of Leland, repaying his Social Security will provide him the benefits of a joint and survivor annuity at nearly half the price of commercial annuities offered through an insurance company.

The Withdrawal of Application asks you to explain why you are withdrawing your initial benefit application. You can simply respond that it's better for you financially or you are now working. About 100,000 people file a Withdrawal of Application each year.

Although filing early and then repaying can be risky, it is the least dangerous for a husband and wife whose benefits are roughly equal. In this case, either partner dying before refiling won't jeopardize the other's benefits. Additionally, both should have stopped receiving any income when the first one reaches age 62. This most commonly happens when spouses are the same age. Also, they should be fairly well off with no temptation to spend what they receive, and they should invest in stable vehicles, such as CDs that mature the year they turn 70.

Although this option of refiling is both riskier and more complicated than the more traditional choices, it can boost your benefit by an additional 3%. For the faint of heart, however, simply filing late provides 97% of the benefit with little of the risk. It also opens up the possibilities of working until age 70 or using those years to take advantage of Roth conversions.

 

from http://www.emarotta.com/article.php?ID=329

Social Security 3: Delay Filing for Younger Wives and Homemakers (2009-03-16)

by David John Marotta and Matthew Illian

Most retirees believe their only choices for Social Security are to file early or to file when they reach full retirement age. Furthermore, married couples make the mistake of only calculating benefits on each person's personal life expectancy. If you are married, look at joint mortality. With a little planning, you can boost your benefits significantly.

Social Security options are complex for married couples. Each spouse qualifies for three different types of benefits. Option 1: They can file for their personal benefit based on their own record of earnings. Option 2: They may file for spousal benefits based on half of their spouse's earnings. With each of these options, they have three choices: file early, file at full retirement age or delay filing and receive up to 132% of full retirement benefits.

Option 3 is for retirees who meet requirements for a survivor's benefits after their spouse predeceases them, based on their spouse's earnings record. Don't overlook this survivor's benefit when you are deciding when to file. Computing how long you must live to take advantage of late filing requires including the projection for survivor's benefits and considering the likelihood that each spouse might be the first to die.

For any couple in a situation where one should take the other's spousal benefits, joint longevity as well as the difference between their ages affects the filing options significantly. There may be many more years to collect survivor's benefits than personal benefits. Because women typically live longer and are more likely to have earned lower personal benefits, many men delay their benefits until age 70. Their wives thus inherit a larger benefit to use through possibly long years as a widow, a wonderful way to protect a loved one from running out of money.

For example, consider Leland and Candy Rockefeller. Candy met Leland in her tai chi class at the country club. Leland's wife had passed away two years earlier, and Candy was just beginning to think about marriage. They fell in love over a couple of bento boxes after class. She'd always wanted to see Tokyo, and he owned a penthouse suite on Shibuya Street. They honeymooned in the Far East.

Despite their age difference, they have been happily married for seven years. Leland is now 62 and considering filing for Social Security; Candy is 25 years younger. Second marriage has kept Leland in good shape, but the men in his family did not live to old age. He may not need the money either way, but he is tempted to take early benefits and get as much as possible while the system is still viable.

Candy, in contrast, has youth on her side. She enjoys excellent health and exercises regularly. And the women in her family have had impressively long lives.

When Leland dies, Candy can begin receiving a survivor's benefit as earlier as age 60. If he files early, she will receive a monthly benefit equal to $1,661 in today's dollars, but if Leland waits until age 70, she will receive a monthly benefit of $2,192. Her many years of receiving benefits far outweigh the possibility that Leland will die too young to enjoy his increased benefits. Clearly he should wait until age 70 before he files for Social Security.

Even if Leland dies at age 70 and does not receive a dime of benefits, so long as Candy lives past 76, it will have been worth it. Candy finds it enormously reassuring to know that even if she lives to be 100 she will have received $1,052,160, or 11% more benefits, because of Leland's wisdom in waiting to file. And if Leland lives to an average life expectancy of 81 and Candy lives to age 84, which is typical for women in retirement, they will collect $182,664 more because of Leland's delayed filing.

Healthy spouses with little earnings of their own should always consider encouraging their partners to delay filing for Social Security. Having little, if any, benefit accrued on their own work record, they will need to rely on their spousal and survivor's income benefits. This is a situation that homemakers and younger wives share. Only in a situation where both the spouses have a shortened life expectancy does it benefit a couple to file early. Delaying your filing for Social Security also allows you to earn additional income and save money without penalizing your benefits.

Another reason to delay filing is to gain a measure of longevity insurance. Dying young never jeopardizes a retirement plan financially. It's only when you live a long time that you risk running out of money. Filing late increases the money you will receive. And if you live a long life, the benefit of a later filing increases the longer you live.

Anyone who delays filing for Social Security should also consider another choice: filing, repaying and then refiling. This option is both riskier and more complicated, but it can boost your benefit by an additional 3%. We discuss this scenario in next week's column.

Too many impatient retirees take Social Security as soon as possible and miss out on thousands of dollars. Run the numbers and consider all your options before you make the decision when to file.

 

from http://www.emarotta.com/article.php?ID=328

Social Security 2: File Early If You Plan to Die Young (2009-03-09)

by David John Marotta and Matthew Illian

Social Security may be a Ponzi scheme, but it differs in one important way. Those who get paid early won't have to give the money back. Perhaps this explains why many people choose to start taking payments as soon as possible.

About half of all Americans file early for Social Security at age 62. In addition to their concern that promised payments may dry up in the future, many other factors motivate them. Some are behavioral finance mistakes, but others are legitimate.

Filing early exacts a steep price. Your Social Security benefits are permanently cut to 25% less than the amount calculated at full retirement. In 2009, full retirement benefits require waiting until age 66. So filing at age 62 translates to several years of early payments followed by getting 25% less for the rest of your life. Waiting beyond age 66 means getting extra benefits above the full retirement amount. Waiting until age 70 results in receiving 132% of full retirement benefits. People who file early receive about 44% less Social Security income over their lifetime than those who wait until age 70 when the maximum benefit is available.

Consider the case of aging rock star Capitan Danger. After decades of free love and rocking on, he finally began working steadily after he reached 50. By recording soundtracks for video games, he now has more than 10 years (40 quarters) of on-the-books income that has qualified him for Social Security benefits at age 62. At this point Danger has to decide if he wants to take retirement benefits early or wait until as late as age 70 to receive the highest benefit.

Studies show that if we refrain from smoking, exercise regularly, only drink alcohol moderately, and eat five servings of fruit and vegetables a day, we will enjoy an average of 14 additional years of life compared with people who adopt none of these behaviors.

Capitan Danger adopted none of those behaviors.

Although the average 62-year-old might live another 19 years, Capitan Danger will be lucky to survive more than 5 years. His body is beat up from his heroin addiction in the 1970s, and alcohol abuse has damaged his liver. And of course he doesn't ever pay much attention to the future consequences of anything.

Capitan Danger should file early for Social Security benefits. He can make his decision independently. Although he has known the love of many women, he never married any of them. One of the characteristics he seeks in a partner is her ability to support his lifestyle. Accordingly, his current girlfriend is years from retiring and earns more than he does anyway. She certainly won't need or be eligible to claim his Social Security benefits when he dies.

During retirement the Capitan has a disincentive to work. He must not earn more than $14,160 in 2009. Any overage will be taxed at 50%. That's fine with Danger because working too hard cramps his musical style.

He would have received a monthly benefit of $1,562 if he had waited until age 70. Beginning at 62, however, Danger will only get $887. By starting his Social Security payments early, he will realize $95,823 in today's dollars by age 70. It takes a while for the larger benefit that comes from delaying filing to overcome the immediate windfall of starting early.

Danger's break-even point is at age 80. He will receive the greatest benefit from filing early if he dies exactly at age 70. After that, no benefit will accrue in delaying his retirement income. He will no longer receive the delayed retirement credits that increase his benefit 8% in addition to the cost-of-living adjustment for each year he waits. If the Capitan lives to 82, he will have lost $20,016 by taking benefits early. At age 90, he will be $84,750 behind, and by age 95 his present hedonism will have cost him $125,209.

Sadly, Danger's hard living catches up with him and he dies at age 69, having used his extra retirement money as deposits on costumes and venues for a failed reunion tour of The Thankful Corpse, his former band.

People with shorter life expectancies and singles who will not be passing their benefit along to a surviving spouse are the best candidates for filing early for Social Security. Others are better off looking at other options. Women obviously tend to live longer than men. But Social Security does not discriminate by gender, so single men have an actuarial incentive to file before single women. Both minorities and poor people typically live shorter lives, which is also an incentive to file early.

You can see how critical it is to plan carefully before you file for Social Security. Because of all these moving variables, maximizing benefits changes every year as the age to file and receive full benefits keeps advancing upward. And it changes with every retiree's specific situation. But in each case, analysis begins with an estimate of projected benefits for both you and your spouse.

If you do not have a copy of the benefits estimate that Social Security sends out annually, you can request it at <a href="http://www.ssa.gov/estimator" targer=_blank>www.ssa.gov/estimator</a> and then print the results. Or call the Social Security Administration at 800-772-1213. You can also get a copy of "Retirement Benefits" (Publication No. 05-10035) online.

On March 11 from 7 to 8:30 pm, the nonprofit NAPFA Consumer Education Foundation is giving a seminar, "Everything You Need to Consider Before Filing for Social Security," at the Northside Library Meeting Room in the Albemarle Square Shopping Center. Financial advisors Matt Illian and Frank McCraw will be presenting. For more information, visit <a href="http://www.napfafoundation.org/NAPFAfoundation_Charlottesville.htm" target=_blank>http://www.napfafoundation.org/NAPFAfoundation_Charlottesville.htm</a> or e-mail <script language="JavaScript">eval(unescape('%64%6F%63%75%6D%65%6E%74%2E%77%72%69%74%65%28%27%3C%61%20%68%72%65%66%3D%22%6D%61%69%6C%74%6F%3A%43%68%61%72%6C%6F%74%74%65%73%76%69%6C%6C%65%40%6E%61%70%66%61%66%6F%75%6E%64%61%74%69%6F%6E%2E%6F%72%67%22%3E%43%68%61%72%6C%6F%74%74%65%73%76%69%6C%6C%65%40%6E%61%70%66%61%66%6F%75%6E%64%61%74%69%6F%6E%2E%6F%72%67%3C%2F%61%3E%27%29'))</script>.

 

from http://www.emarotta.com/article.php?ID=327

Social Security 1: Planning Is Crucial (2009-03-02)

by David John Marotta and Matthew Illian

Social Security benefits can represent a big stack of cash. A typical monthly benefit of $2,200 has a present value well over $500,000. Consider all your Social Security options carefully to avoid making a costly mistake.

Like all government law, Social Security is not a simple piece of legislation. Since the Social Security Act became law in 1935, hundreds of amendments have added to the complexity. To make the best decision, you must consider health, income before retirement, income during retirement and taxes.

Retirees cannot rely on commonly held beliefs. Don't assume that simplistic rules such as "Always file for early benefits" or "You need to stop working to receive benefits" are correct. There are specific cases that break every rule of thumb. And these one-size-fits-all answers leave many retirees failing to maximize the benefits they have earned.

At least four methods are used when electing how to take Social Security. And if you are married, the two of you can mix and match these in more than 16 different ways. Each one results in a different cash flow. By using the cash flows and the time value of money, you can determine which method will result in the highest net present value and offer you the best maximum value.

These methods differ significantly. They depend on your historical earnings, marital or divorce status, continued work in retirement, longevity and rates of return. The choice may be worth $250,000 of income or more. Filing options include "early filing," "standard filing," "delayed filing," "file and suspend," and many combinations of these options for married couples. It is certainly worth careful study and analysis of each one. Yet a majority of Americans make their choice impulsively and emotionally.

The decision is even more critical for women. For 42% of single women older than 62, Social Security is their sole source of income. Women on average outlive men. Thus planning for retirement is much easier for men, who tend to have more assets and die young. Widows are twice as likely to live under the poverty line as men who have lost their wives. And the poverty rate for elderly single women is 23% compared with just 5% for retired couples.

Couples must take their joint longevity into account before either one files for benefits. The person with the longer life expectancy will inherit either a wise or a foolish decision that will last a lifetime. Given that a husband's benefits are often higher and the wife's life expectancy longer, each case needs to be analyzed carefully.

Unfortunately, many people file after considering only one or two options in isolation. The Social Security Administration's new online filing system enables quick decision making. People can easily submit their request without any professional advice or planning.

Before filing, then, you obviously should be informed about all the options. To begin, you need to know your personal Social Security earnings and the projected benefits for both you and your spouse. You can request an estimate at <a href="http://www.ssa.gov/estimator" target=_blank>www.ssa.gov/estimator</a> and then print the results. Or call the Social Security Administration at 800-772-1213. You can also get a copy of "Retirement Benefits" (Publication No. 05-10035) online.

Social Security planning is crucial for everyone. People with significant assets should carefully consider both the lifetime benefits and tax consequences of Social Security in light of their overall portfolio strategy. For the less well off, Social Security benefits will dictate their retirement lifestyle. Proper planning could well determine what they can afford to eat.

To help you understand your options before locking in the wrong choice, attend the nonprofit NAPFA Consumer Education Foundation seminar, "Everything You Need to Consider Before Filing for Social Security," on March 11. This free presentation will be held at the Northside Library meeting room in the Albemarle Square Shopping Center from 7 to 8:30 pm. Financial advisors Matt Illian and Frank McCraw are leading the seminar. For more information, visit <a href="http://www.napfafoundation.org/NAPFAfoundation_Charlottesville.htm" target=_blank>http://www.napfafoundation.org/NAPFAfoundation_Charlottesville.htm</a>. Or e-mail <script language="JavaScript">eval(unescape('%64%6F%63%75%6D%65%6E%74%2E%77%72%69%74%65%28%27%3C%61%20%68%72%65%66%3D%22%6D%61%69%6C%74%6F%3A%63%68%61%72%6C%6F%74%74%65%73%76%69%6C%6C%65%40%6E%61%70%66%61%66%6F%75%6E%64%61%74%69%6F%6E%2E%6F%72%67%22%3E%63%68%61%72%6C%6F%74%74%65%73%76%69%6C%6C%65%40%6E%61%70%66%61%66%6F%75%6E%64%61%74%69%6F%6E%2E%6F%72%67%3C%2F%61%3E%27%29'))</script>.

 

from http://www.emarotta.com/article.php?ID=326

Government-Provided Economic Security Is an Illusion (2009-02-23)

by David John Marotta

The various congressional bailouts have been touted as essential to the nation's economic security. So long as the notion of economic security remains vague and abstract, it has wide support. But anyone who examines the details should realize this so-called security threatens our freedom and stability.

Security can be understood in two different ways. The first is having enough to eat, a place to live and clothes to wear. We all can agree that in our affluent society we can afford to provide every citizen some minimum standard of living so those falling on hard times may be given a hand back up.

The second way to understand security is the assurance that whatever salary or assets you have earned, including your current position and rank in society relative to others, are yours to keep. Often this second type of security is overlaid with a moral judgment that the people benefiting from this support are more deserving than the rest of society.

With today's level of productivity we can provide the first type of security without endangering freedom or promoting corruption and preferential treatment. Even so there is still serious debate about this support. We should question if government is the best vehicle to deliver it or if private charities do a better job. With increasing globalization, we should also ask the moral question if our safety net should provide a level of support well above 95% of the world's population.

Nevertheless, security of this first type generally protects people against calamities they would naturally want to avoid under any circumstances. It helps them preserve their health, ability to work and the possibility of regaining a foothold if needed. In other words, it gives them a safety net, not a hammock.

The second type of economic security is much more of a threat to freedom and certainly more prone to corruption. Under this type of security, society tries to protect certain sectors of society from the natural and regular fluctuations of economic activity by subsidizing some or all of their losses from failed ventures. Some automakers get money, and others do not. Some banks are subsidized, and others are allowed to fail.

This form of economic security is ultimately designed to protect certain classes from loss of either their annual income or their accumulated wealth. In a free-market economy, people spend their money on those goods and services they believe are the most valuable. They are free not to spend money on things they deem less valuable. The behavior of consumers is an objective way to measure the value placed on particular goods and services.

Any supplement of the value that people are actually willing to pay for goods and services can only be based on subjective bias away from the fair market value. It may correspond to some perception of effort and intentions, but it will still be subjective bias, trumping an objective willingness to pay freely.

To understand these two kinds of economic security, consider that people are more willing for the government to bail out the consequences ensuing from a large disaster than a personal tragedy. The more people who are killed or inconvenienced, the easier it is to garner public support, even though a family is no less devastated by a single fatality in a car accident or a lightning strike. Helping people in need is always a kind and gracious act when freely given. But making it an entitlement of public policy is not.

Again, I'm not talking about efforts to help rescue families subject to the misfortunes of market forces by providing basic needs. I'm questioning the wisdom of bailing out the industries themselves so those who are employed keep their middle- and upper-class lifestyles. Ensuring security in some sectors of the economy comes at the expense of other sectors. Securing one sector against market fluctuations destabilizes all the other sectors, causing the latter to bear the brunt or needlessly fail themselves.

When a few receive the largess of a specifically targeted bailout, the rest of society is left to pay the consequences. The cost of the resources bestowed on the privileged drives up the cost for everyone else. The tax revenues directed toward the enfranchised are often taken from those of lesser means. And the trillions spent devalue the accumulated savings of those who received no government boon.

This problem is not simply that the free market gives people an incentive to do their best. Rather, the bailout removes any yardstick by which they can even judge what is best. The bailout changes a private mistake into a public crime. When private businesses fail, it need not be a public matter. The business goes under because of poor management, and the assets are sold or distributed as part of the company's liquidation. If there are fewer banks in town, I am not hurt. If one car company stops production there will still be competition to sell me a new car. But if the government guarantees the enterprise, then it becomes a crime against society for the company to fail. Failure now becomes a political scandal.

There must be charges of mismanagement. There must be an inquiry. Those responsible must be held accountable. Those innocently injured must be made whole. And all of this must be accomplished by government.

It doesn't matter that other companies, perhaps even in the same industry, were well managed. They will not receive support. And worse, they will experience an unfair disadvantage in the marketplace when their direct competitors are subsidized. To every grant of security bestowed on one group, every other group grows more unstable and finds its freedom compromised.

Government spending is often taken to have a wholly positive effect on the economy. It is assumed that as the money is spent, jobs are created, companies become profitable and the money received in taxes is spent again, creating a higher gross domestic product and a higher tax base. Such thinking is obviously false. No family can spend their way out of debt or financial troubles. Neither can society as a whole.

If the government had allowed the money to remain in the hands of the taxpayers, they too would have been able to spend the money, creating jobs and empowering the economy. Although you can argue that governmental choices are superior to the choices that individuals might make, you can't argue with the fact that individuals, free to make their own choice, would have chosen to spend their money differently.

In free markets, transactions are voluntary. They do not continue unless both parties believe they are better off making them rather than not. But government policies are not voluntary. They can continue indefinitely even if they impoverish society as a whole. Government doesn't have any productivity of its own. It can simply take money from some and give to others. And because government's pie is fixed, if it guarantees a set portion to one group of constituents, it inevitably diminishes the share apportioned to everyone else.

As a result, security becomes a political privilege and more difficult to achieve. We can only look to politicians to provide it. As a scarce and thus more valuable commodity, security soon overshadows other measures of success. Controlled areas of the economy cause other sectors to fail in an increasing spiral. And when they do not succeed, it is perceived as a failure of the free markets. Unregulated parts of the economy won't be able to take risks. And both the risk of failure and the potential windfall profits are then viewed as moral failings.

Put another way, the very engine of entrepreneurial capitalism is increasingly implicated as the problem. Lack of regulation is blamed until security is imposed on more parts of the economy. It doesn't matter that government intervention in the free markets provoked the failure. Government causes the problem in the first place and then gains sweeping powers as society relies on it to solve the crisis.

Unquestionably, both the Bush administration and the Congress dominated by Democrats are to blame for poor bailout legislation packages. We need a new political paradigm, one humble enough to acknowledge that regulation caused many of the crises we are currently facing. Intervention is prone to all that is worst in Washington special-interest lobbying. And intervention disrupts much of the equilibrium in the markets and makes security less likely. We must recognize that attempts to impose security are apt to destabilize rather than ensure people's security.

 

from http://www.emarotta.com/article.php?ID=325

Safeguard #6: Recognize and avoid financial hooks (2009-02-16)

by David John Marotta

To safeguard your money, you must be able to extricate yourself from any bad investment quickly. Of course, the companies that sell mistakes don't want you to be able to do that, so they use financial hooks to hold your money captive.

Any financial product with a surrender value significantly different from the net asset value has financial hooks. For example, take the different classes of mutual funds from the giant American Funds: Growth Fund of America.

Shares come in five different sales classes. Class A shares have an expense ratio of 0.65% in fees and expenses. Additionally, there may be a front-end load of 5.75%.

If you invest in class B, there is no upfront sales charge. But if you sell shares before you have owned them for seven years, you must pay a sales charge that starts at 5%. And while you are holding class B shares, the expense ratio is 1.39%.

Class B shares are the most gut wrenching. If investors have been holding them for nearly three years, they are still hit with a 4% redemption if they sell them early. It doesn't matter if they should sell large-cap U.S. stocks and diversify into another asset class. It doesn't matter that the company has already collected 4.17% in ongoing expense ratios.

Investors are still faced with the decision of holding the fund another four years, at an ongoing expense of 5.56%, or selling the fund and paying a contingent deferred sales charge of 4.00%. The angst of these kinds of hooks in their investments deters many people from selling, even though they know diversification is critical to their portfolio.

In this example, because the fund has been held just under three years, waiting a few months until the third anniversary lowers the redemption charge to 3%, probably the wisest decision. There is an obvious 3% hook if you sell, and a hidden 5.56% hook if you hold the investment.

Class C shares have a contingent deferred sales charge of 1.00% in the first year and an even higher expense ratio of 1.44%. Needless to say, we don't recommend A, B or C shares. These are all loaded shares, meaning they are laden with sales charges.

Fee-only financial planners recommend two classes of shares at American Funds that are no load. The F1 class has no front- or back-end sales charges and an expense ratio of only 0.63%. The F2 class is used in retirement plans and eliminates the 12b-1 marketing fee. It has the lowest expense ratio, only 0.43%. A fair comparison can be made between C shares with an expense ratio of 1.44% and F1 shares with an expense ratio of 0.63%. The savings of F1 shares is 0.81%.

Mutual fund salespeople claim this difference is less than the 1% of assets under management that many fee-only financial planners charge. But you are not getting any real value for a mutual fund sales charge. A different way of looking at it is that fee-only financial planners could earn 81% of their fee simply by reducing your expense ratios. Given an 81% discount, that would make their comprehensive financial planning available at a cost of the other 19% of their fee.

Our example only looked at the five different share classes of Growth Fund of America. A fee-only financial planner has the entire world of investment options to choose from and may find better selections available at even lower expense ratios.

B shares are just one example of the many investment choices with financial hooks. Whole life insurance also has a surrender value significantly lower than its fair market value. And annuities are sold with financial hooks that can lock your money up for several years.

Private equity investments require even longer commitments of capital. Once you are invested, it is very difficult to get your money out until the fund liquidates many years later. During those years you may not even know if your investment was a good one.

Because no public pricing exists for private equities, they continue to be priced to investors at their initial cost. That cost, minus fees, expenses and write-offs, typically produces a negative return over the first half of the investment. Private equity also may require you to commit to additional investments through the life of the investment. So not only is your initial investment held captive, but you must keep a sizable chunk of cash liquid to pay the private equity's capital calls. Finally, the fees are charged on the basis of this committed capital, not just the amount you have already invested.

It was these capital calls that recently hurt the investment strategy of the University of Virginia endowment. Having had significant investments in private equity, after the drop in their regular investments, much of the remainder will be needed to satisfy capital calls on their private equity. The result will be a much higher than desirable portion of the endowment in private equity investments.

Private equity may be acceptable for an endowment with an infinite time horizon, but it is not for average investors who want access to their money during retirement.

Hedge funds are poor investments for similar reasons. They typically require your investment to be committed for years, called a lockup period. During that time, managers not only take 1% to 2% of assets annually, but they also collect 20% of returns, both realized and unrealized. These extra fees are collected any time the fund exceeds its high-water mark.

This compensation scheme is ripe for abuse. Many of the hedge funds that opened after the fall of 2002 hit their high-water marks in the summer of 2008. When the markets are behaving themselves, hedge fund managers enjoy the ride up, gaining 20% of the profits of markets trending upward. During this time, your money is held captive during the lock-up period, and redemptions are not allowed.

If a typical fund charges 2% plus 20% of profits, and gains average 10% to 12% because the markets generally go up, the average fees being paid are in excess of 4%. You might imagine that would be enough money to keep hedge fund managers loyal to their captive customers, but it is not.

But when the market winds blow south, fund managers defect. Many hedge funds are now closing. There is no sense running a fund that is 50% below its high-water mark. Without the incentive of proximity to the high-water mark and a good chance of making 20% of the profits, many hedge funds are not interested in merely serving the client.

So hedge funds can hold your money captive when they are making high fees and abandon you and start a new fund after a significant market correction. This explains why hedge fund companies often have several different hedge funds, each with a different inception date. They can drop those that have poor returns and advertise those with good returns.

As a result, the average life of a hedge fund is only three years. Every three years a market downturn provides the incentive for hedge fund managers to close the current fund and reboot to a lower high-water mark. Three years is also the average lockup period after which disappointed investors can finally get their money out.

To add insult to injury, hedge funds are unregulated, which means the reporting of a hedge fund's return is completely voluntary. There is a hedge fund index that aggregates these voluntarily reported returns, but the number isn't reliable. Hedge funds with poor returns don't report, and hedge funds that fold and go out of business stop being included.

Unrealistically high reporting of returns to attract customers, a three-year lockup period and exorbitantly high fees sounds like a way to make money for the fund but certainly not for the average investor.

My final example of financial hooks involves captive trustee accounts. Sometimes estate trusts are established in legal documents that name a bank or other financial institution as the trustee with no method to change that trustee. The banks call these "captive" accounts for a good reason. Beneficiaries cannot take their business elsewhere and may have to suffer poor service or high fees.

Banks may charge fees as high as 4.5% while better service options are available for a fraction of a percent. A bank here in Charlottesville pushed one of our clients to get their estate documents drawn up by an attorney who charged the client thousands of dollars and then wrote the bank in as the trustee in the estate's legal documents.

I've learned through experience that the more financial hooks keep you captive to a particular financial services company, the poorer the service. And without a way to extricate your investment, you are stuck receiving inferior returns for years. It's a simple but powerful lesson: Avoid anything that puts financial hooks on your investments.



from http://www.emarotta.com/article.php?ID=324

Safeguard #5: Understand Your Investment Strategy (2009-02-09)

by David John Marotta

I often write about the importance of a financial advisor being a fiduciary and the responsibilities accompanying that legal obligation. But clients also have their part to play in financial planning. Certain responsibilities cannot be delegated to others. Understanding and maintaining your role in the process is critical to safeguarding your money and consequently your financial freedom.

Advisors are coaches, not players. They motivate and assist their clients in completing all the actions necessary to implement the plan and thus achieve their financial goals. Most clients have a vague list of worries that reflect more anxiety and frustration than direction. A good coach on your team can make a big difference in the outcome of the game, but the contest is still ultimately in the hands of the players. Your active participation is necessary to secure your financial future and cannot be delegated.

As fiduciaries, we strive to act as you would if you had our time and expertise. But without you taking a real role in the process, we would be unable to gather the information and resources needed to help you set and meet reasonable and realistic goals. Without committed participation, the process of assisting clients to meet their stated financial goals can end up frustrating both parties.

This scenario is very different from dealing with brokers or agents, who may only be interested in satisfying the suitability rule in order to sell their products and services. Without the burden of acting in their clients' best interests, they may be personable to work with, but wealth management isn't just about the relationship. It is about reaching your goals, and sometimes the most effective coach can't be your best friend too.

The best advisors are quantitative and analytical. They may buy you lunch or send you a birthday card, but their genuine strengths lie elsewhere. Expert advisors have substantial knowledge and offer sophisticated services.

To extend the sports metaphor, if a fiduciary advisor is a coach, then brokers and agents are there just to sell you equipment. But a shin-guard salesperson isn't going to help you play a better game of soccer. Personality can be an effective sales tactic because salespeople know you are most likely to say "yes" to someone you like. In contrast, a good coach is not your buddy but rather someone who asks things of you. But he or she is also going to support you with a winning team and help you interact with that team to score goals.

A player can't sit back in the bleachers like a fan and cheer the team on. When you as the client are not interested in understanding enough of the investment strategy to play your position, you won't be able to achieve your goals.

Don't trust any investment strategy you don't understand, and don't trust any advisor who won't or can't take the time to explain exactly why and how he or she operates. An advisor's investment philosophy is the most important and valuable resource you are purchasing. If you don't trust your advisor's knowledge and techniques, you shouldn't entrust your financial future with them. In other words, don't invest in anything with anyone that you either do not understand or with whom you feel uncomfortable.

"Distressed emerging market risk arbitrage" may be a surefire way to make loads of money, but if you don't understand the process and feel at ease being part of the team that executes that move on the field, you would be better off sitting on the bench and investing in Treasury bills.

Note that I am not advocating "invest in what you know," which is called familiarity bias and can cause your portfolio to be inadequately diversified. Only investing in what you know may help you avoid some crazy investment schemes, but the resulting concentration can be dangerous in other ways.

Instead, the better rule of thumb is "know what you are investing in," which requires active participation by both you and your advisor. It is best to have an advisor who is a patient and skilled teacher or mentor at heart. And to be a good coach, your advisor should be willing to contradict you when it will help you better meet your goals. At the end of the day, your coach will still be your coach, but you should also be a better player as a result of the relationship.

With a good advisor, your investment approach should be simple and straightforward enough that you understand why the approach is being taken and how it is being implemented. It should never be a black box where you put your money in the top, let the advisor crank the handle and hope the return that comes out the bottom is good enough to meet your goals.

The box should be sufficiently transparent so you know these three simple pieces of information. You know how others are making money off your investments, you know what your investments are composed of and you know how and by what measure your portfolio will be monitored and reviewed.

Sales pitches are notorious for trying to confuse investors about the real composition, execution and compensation structure of the underlying investment. They generally ask investors not to worry about the details and to trust the reputation of brainy academics or else look at the pictures in the glossy four-color brochures instead.

Don't be fooled and don't be foolish. Understanding your investment strategy is critical to safeguarding your investments against reckless schemes. With a good coach and mentor, you can become a better team player and help your family achieve both their financial goals and peace of mind.

 

from http://www.emarotta.com/article.php?ID=323