Tuesday, January 25, 2011

Fountain of Youth

While man has yet to find the fabled “fountain of youth,” actuaries are learning more and more every day about what determines longevity for each of us. A recent analysis performed by actuaries at Rest-of-Life Communications found that working longer is highly correlated with longer life expectancy. The difference is substantial and will likely surprise you- death rates for men age 50-70 who aren’t working are 60% higher than those who are working. This may not measure up to the sought after effects of the fountain of youth, but certainly isn’t anything to frown upon.

As economic conditions continue to challenge financial security and long-term financial goals it seems one “release valve” is a longer career and extension of earnings introduced into ones wealth plan. As retirement dates are extended out of financial necessity (for baby boomers and generations that follow) this is welcome actuarial news for those looking forward to a later retirement.

Wednesday, January 19, 2011

Missing the Best Days

We often hear about the importance of not trying to time the market and a current study from BTN Research reaffirms this for us. The total return for the S & P 500 index over the past 50 years (1961 through 2010) was 9.7% per year. If you remove the 50 best percentage gain days from the calculation, your annualized return drops by more than half to 4.5% per year. There were 12,586 trading days in the US over the past 50 years, so missing just 0.4% of the biggest up days in the market would have significantly cut into investor returns. This reinforces the philosophy that “time in the market” NOT “timing the market” is the best recipe for creating wealth over the long-term.

December 2010 Market and Planning Update (Posted to our blog two weeks after sending to clients.)

Year's end is neither an end nor a beginning but a going on,
with all the wisdom that experience can instill in us.

Hal Borland, American Author (1900-1978)


For many, year end is a time to reflect on the past 12 months- accomplishments, failures and significant events. More importantly it is also a time to focus on the future and what opportunity it holds. Wisdom, of course, often comes from not only learning from past failures and experiences but acting on them when finding the courage to make difficult decisions about our future.

For the planning community, 2010 was a tumultuous year- last minute income and estate tax changes, a fluctuating landscape surrounding IRAs and Retirement Plans, persistence of the lowest interest rates seen in a generation or more and widespread uncertainty characterize the year. These experiences have reminded us that we face an ever-changing world that constantly presents new challenges and opportunities. The importance of timely action will certainly become more and more valuable as a result.

The first baby boomers will file for Medicare benefits next year amid a struggling economy and record deficits. The Social Security system will soon face its own form of bankruptcy and this eventuality is being accelerated by our leaders’ decisions (for example, Social Security taxes collected in 2011 will be decreased from 6.2% to 4.2%). What used to be reliable high single or low double- digit returns from a portfolio to support one’s planned spending will likely be much less now due to a multitude of issues.

This all means we face great challenges but will enjoy greater rewards for making decisions about what is in our control. Consistently saving toward an important financial goal will help avoid having to make drastic changes to those goals in the future. Being smart about allocation of resources on a balance sheet amongst various asset options (example IRA versus Roth IRA) will reduce the impact felt due to tougher tax obligations in the future. Keeping an eye on future goals and consistently reevaluating them to adjust for changing circumstances provides a methodical process to accomplish those goals over one’s lifetime.

Instead of acting as the end or beginning, this New Year’s period should reenergize us all to continue striving to seize opportunities that better our families’ futures.


As we look back on 2010 the view shows a U.S. stock market that returned about 15% for the year (as measured by the S&P 500 stock index). The broad U.S. bond market returned about 6% in 2010 (as measured by the Barclays Capital U.S. Aggregate Bond index). There are many other markets that also did pretty well in 2010, including developed international stocks (EAFE index up 7% in 2010) and emerging international stocks (Emerging Markets index up 17% in 2010).

Although 2010 started off in positive fashion, markets worldwide deteriorated in the middle of the year as worries about another possible dip back into recession dominated headlines. A variety of European sovereign debt problems added to these concerns. In the fall the U.S. Federal Reserve stepped on the gas with their QE2 program to purchase U.S. Treasury debt and markets saw this as a reason for financial assets to increase in price. Although double dip concerns eased, we saw concerns about inflation combined with strengthening economic forecasts to pressure fixed income (rising interest rates are generally bad for fixed income holdings).

As we look forward it is important for us all to remember that the issues that came to a head in the 2008 credit crisis are still not resolved. Major areas of potential future problem include continuing high U.S. budget deficits (and resultant increases in debt as a percentage of GDP) and even worse debt problems in many European countries. These problems are a natural outgrowth of governments stepping in to support the private sector in the 2008 credit crisis. We are also faced with the demographic problem of the first wave of baby boomers (born between 1946 and 1964) beginning to turn 65 in 2011 and the increased demands that this generation will make for retirement and medical entitlements.

We continue to counsel others (and ourselves) to follow a disciplined investment policy allocation, while at the same time looking for tactical opportunities as certain areas reach extreme levels of overvaluation or undervaluation. It is somewhat concerning to hear the market “experts” from so many different firms discuss their positive view of 2011—makes us think people may be getting too optimistic in the short-term.


We look back on 2010 somewhat fondly, as a year of partnering with our clients to some successes in both the areas of investments and planning. We see much to look forward to in 2011 but also recognize that many challenges lie ahead. As always we are grateful for you, our client, and the trust you place in each of us and our firm.

Tuesday, January 11, 2011

Tax Trivia

Along with a reflection on the tax package passed in December 2010 it seems helpful to also review where tax rates have been in the past. While current rates may already seem high to many, in retrospect they’re favorable versus historical figures.

According to J.P. Morgan, as of 9/30/2010 the 40 year average for the top marginal ordinary income tax rate (federal) was 47.9%. The top marginal rate today is 35% due to the tax package mentioned above extending the “Bush-era” tax cuts. Also note the marginal federal income tax rate historical high is 94%, imposed during 1944 and 1945. Tax rates on qualified dividends are an even greater divergence- the 40 year average is 44.6% versus a current 15% top rate.

It helps to review these figures when attempting to understand not only where we stand today and what direction rates may go in the future, but also the potential magnitude of future changes in rates.

Friday, January 7, 2011

Turning Point?

Prior to the release of Friday’s jobs report, commentators on Bloomberg were giddy with excitement. Economists had been revising their employment forecasts upward over the past several weeks. Consensus expectations were that 175,000 jobs would be created in the month of December. So the commentators were asking and debating amongst themselves if we were about to see a major turning point in the US employment picture.

Unfortunately, job growth fell short of expectations. We did see 103,000 jobs created in December and our unemployment rate fell to 9.4%, its lowest level in 19 months. Government revisions also show that more people were hired in October and November than previously estimated. In fact, during the fourth quarter the economy added an average of 128,000 jobs per month. These are positives and point to signs of continued recovery, but not a major tuning point as had been hoped.