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Good Retirement Issue from Money Magazine!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

As much as I’ve been an unabashed critic of most of the financial media, I can’t help but noting that Money magazine’s October Retirement Guide issue has some excellent articles about preparing for retirement; and I recommend picking up a hard copy to pass around to family members.  Articles in this issue discuss things most people simply don’t think about in advance.

Back in 2005, it became obvious that my parents back in Florida could no longer take care of themselves.  Mom had broken a hip and was in a health center recovering from surgery – and the anesthesia didn’t help the Alzheimer’s which was then in its early stages.  Meanwhile, dad, who was living alone while mom was in rehab, could barely get around.  He had lung cancer, though he hadn’t told us about it and I’m not sure he even knew.

My wife and I made three trips between California and Florida over a six week period:  Arranging  financial and legal matters, home care for dad and mom when she arrived, selling their home, and prepping our home for their arrival, i.e., outfitting bedrooms, bathrooms, etc., and arranging for in-home care in our home for them when they arrived.

There was a lot we didn’t know and we had to learn on the fly.  This issue of Money – look for the Retirement Guide sub-heading –  is certainly worth reading and talking about with your family.  It also asks some good questions like, “Who will change your light bulbs when you can’t?  Do you trust them?”  The answers may not be as easy as you think.

If you can’t wait to get a hard copy, you can read some of the articles here.

Jim

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Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting and wealth management services for individual investors. Opinions expressed are solely those of the author and fictitious names were created solely for their entertainment value and are not meant to represent any person or organization living or dead.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan.  The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com

Written by Jim Lorenzen, CFP®, AIF®

October 31, 2012 at 8:00 am

How Tax Increases and Redistribution Really Works

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

It seems every election cycle brings with it the issue of who should bear the cost of government spending and to what degree.  For many, the discussion begins with taking it from the rich and giving it to the poor.  It’s as old as Robin Hood – probably older.  And, since there are more poor people than rich, it plays usually plays well at the ballot box.    

While most voters may not understand economics, they do know when they’re out of work; and they don’t like seeing their jobs going overseas.[i] Unfortunately, the U.S. tax code has become a ‘book of favors’ – a virtual  ‘jobs protection act’ for elected officials primarily concerned with raising money for the next cycle and insuring votes for re-election.  

How do tax cuts really work?  IMHO the following little story[ii] – entirely made-up – provides a good example of how capital follows opportunity.

Here’s our scenario: Every day, ten men go out for dinner. The bill for all ten comes to $100  (I know, that couldn’t happen, but we’ll pretend).  If they paid their bill the way we pay our taxes, it might look something like this[iii]:

  • The first four men (the poorest) would pay nothing.
  • The fifth would pay $1.
  • The sixth would pay $3.
  • The seventh $7.
  • The eighth $12.
  • The ninth $18.
  • The tenth man (the richest) would pay $59.

So, the ten men ate dinner in the same restaurant every day and seemed quite happy with the arrangement, until one day the owner threw them a curve.

“Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily meal by $20.”

Now the dinner for all ten cost only $80.  The group still wanted to pay their bill the way we pay our taxes.
So, the first four men were unaffected. They would still eat for free. But what about the other six, the paying customers?   How could they divvy up the $20 windfall so that everyone would get his ‘fair share’?

The six men realized that $20 divided by six is $3.33.  But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being ‘PAID’ to eat their meal! 

So, the restaurant owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay[iv].

Here’s how it turned out: 

  • The fifth man, like the first four, now paid nothing (100% savings).
  • The sixth now paid $2 instead of $3 (33% savings).
  • The seventh now paid $5 instead of $7 (28% savings).
  • The eighth now paid $9 instead of $12 (25% savings).
  • The ninth now paid $14 instead of $18 (22% savings).
  • The tenth now paid $49 instead of $59 (16% savings).

Seems fair enough.  Each of the six was better off than before.  And the first four continued to eat for free.   But once outside the restaurant, the men began to compare their savings.

“Hey!  I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man “but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than me!”

“That’s true!!” shouted the seventh man. “Why should he get $10 back when I got only $2?”   He became upset at the injustice.  “The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison.  “We didn’t get anything at all. The system exploits the poor!” 

The nine men surrounded the tenth and beat him up.  Apparently, tax breaks for the wealthy aren’t popular. 
You can probably guess what happened after that.    The next night the tenth man didn’t show up!   So, the nine sat down and ate dinner without him.   

Alas, when it came time to pay the bill, they discovered something important:  They didn’t have enough money between all of them for even half of the bill!   Oops.

It’s a simple lesson many journalists and college Keynesian-schooled professors have problems grasping, yet this is how our tax system actually works!    Tax laws have historically been used to direct the flow of capital.   And, the ones who get the most money back from a reduction are – or should be – those who paid-in the most to begin with.   

Here’s the lesson of our dinner group story:  

Increasing taxes on those we feel have too much capital, simply because they have wealth, destroys their incentive.  As in our story, they just may not show up “at the table” anymore.   They will remind us all there are lots of good restaurants in China, India, South Korea, Europe and the Caribbean.    They know – and we should too – jobs are created where capital is directed.  If we provide incentives to direct capital someplace else, we will simply be draining capital from the economy and the rest of us will be stuck with a bigger bill.

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The Independent Financial GroupJim Lorenzen is a CERTIFIED FINANCIAL PLANNER® and an ACCREDITED INVESTMENT ADVISOR® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan.  The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com, the IFG Investment Blog and by subscribing to IFG Insights letters for individual investors.  Keep up to date with IFG on Twitter: @JimLorenzen


[i] Recommended reading:  The World Is Flat, by Thomas Friedman, a volume on the economic impact of globalization – the leveling of the playing field –  and America’s new place in this paradigm.  Should be required reading for anyone interested in this issue. 

[ii] Not original and I don’t know the author.  It was relayed to me by a colleague about six years ago.

[iii] This is a hypothetical example of a progressive tax system and its impact on a population of taxpayers.

[iv] The restaurant owner figured, as an example, that if the eighth man was paying 12% of the tax before, he should be entitled to 12% of the savings.  12% of the $20 savings is $2.40.  Since he decided it should be ‘roughly’ the same and to make it easier on the diners to figure the bill, he rounded-up (in this case) and decided man #8 should get $3 of the savings.

Written by Jim Lorenzen, CFP®, AIF®

October 18, 2012 at 8:00 am

The Federal Debt Solution

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

If history is any guide, we may already know the answer.

Politicians will take the easy way out.

Given the increasing deficits, the outlook for growth is problematic.  It would appear there are three available options.  Which one do you think the politicians will choose?

(1) Reduce the level of debt, i.e., reduce spending; or

(2) A combination of higher taxes and reduced spending; or

(3) inflation. 

Since politicians can’t seem to get agreement on either of the first two, don’t be surprised if inflation will be the “solution” – the one that will bear no one’s finger prints and allow everyone to blame the other in their next re-election campaign… it’s always good to have another issue in your back pocket, you know.

Inflation is a common solution.  One study has found that in the past 400 years, inflation has been the most common way that governments have dealt with excessively high levels of debt.[1]  The reasons stated above help explain why.

Those of you who’ve been following my pontifications over recent years may remember my going on about this issue before.    

The short version:  Look for the U.S. to simply print money and inflate the currency to repay the debt – and taxpayers will be left paying for their spending to buy re-election.   

While the Main Stage debate will be over tax brackets and deductions, who pays, etc.,  the real action will be off to  the side out of sight:   Hidden taxes through higher prices, taxes buried inside the higher prices, fees we don’t know we’re being charged.  

My guess:  Expect average growth and above average inflation as countries around the globe attempt to deleverage by engaging in competitive devaluation to rebuild their economies.   The U.S. may be attempting to win that race.  This could be a five-year window – maybe more; I doubt it will be less.

 Jim

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[1] Carmen Reinhardt and Ken Rogoff paper, “Debt Overhangs: Past and Present”IFG Blog

Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan.  The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com, the IFG Investment Blog and by subscribing to IFG Insights letters for corporate plan sponsors and individual investors.  Keep up to date with IFG on Twitter: @JimLorenzen


 

Written by Jim Lorenzen, CFP®, AIF®

October 16, 2012 at 8:05 am

Abnormal Markets – Abnormal Times

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

When the Fed announced an open-ended QE3, the stock market rallied.  In fact, the market’s been trending up since 2009 after the meltdown when all the government spending began.  But, was that good?  Have those stock gains been real?

Since the meltdown, people have been chasing returns whereever they could find them, whether it was with high dividend-paying stocks or  buying gold – a demand largely fueled by all those tv commercials.

The financial industry, of course, has responded to both fear and greed by packaging yet another series of products, some of which come with either high or hidden costs… and sometimes both.

The question, of course, is whether all these “black box” solutions are really the answer… or whether the ‘basics’ are still relevant.

After all, companies that declare dividends are adjusting the price of the stock downward to compensate – you could arguably simply buy growth stocks that don’t pay dividends and simply sell what you need for income and still arrive at the same result! 

And, while gold has increased in value – in terms of the numbers of pictures of presidents you receive for each ounce – have you really received more value when adjusted for inflation?  Some say ‘yes’ but a J.P. Morgan study says something else.

We have more about this in our IFG Insights E-zine, which is appeared earlier this morning and is available in our archive.

It’s my guess much of the increase we’ve seen in virtually all equity categories, have been more nominal than real and are driven by the growth of debt.

We’ll see, won’t we?

Jim

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Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.  

Additional IFG Links:

IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG does not provide legal or tax advice and nothing contained herein should be construed as  securities  or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization. 

 

We’ve Been Here Before!

IFG BlogIf you’re wondering – and you probably aren’t, and rightly so – why nothing is being done in Washington, it’s because it’s election time; but, most people don’t pay much attention during the summer months because, unlike politicians, they actually have lives.

The news media knows this, too.  That’s why news coverage is about gaffs rather than real issues.

“There comes a time to put principle aside and do what’s right.”

                       (anonymous congressman, most are)

Conventional wisdom says that most people won’t begin paying attention until after Labor Day, which means ‘conventional wisdom’ assumes most Americans can afford to take vacations and doesn’t mind unemployment.

“These are not my figures I’m quoting. They’re from someone who knows what he’s talking about.”

     (anonymous congressman during a debate)

Of course, the current spending debate isn’t new.   Much as we’re accessing capital from China today, we were doing much the same thing as far back as the 1830s, still dependent on British capital despite the Revolutionary War and the War of 1812.  Back then, while foreign capital was used in an attempt to stimulate economic development, interruptions in the availability of credit during times of uncertainty often had ruinous consequences for American borrowers.[1]  The inflow of foreign capital, combined with the expansion of the paper money supply drove up prices making American products less desirable on the foreign market.  At the same time, the profligate spending of several states left them deeply in debt.  This was also a time when Americans felt uneasy about the international banking system – a machine that few Americans only dimly understood.[2]  By the time Andrew Jackson left office in 1837, Eastern cities were experiencing bank failures and factory closings, making the U.S. dependence on foreign capital more apparent than ever. 

We’ve been here before.

“We’ll burn that bridge when we get to it.”

  (Anonymous)

Jim Lorenzen, CFP®, AIF®

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Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. 

Additional IFG Links:


[1] Unfinished Revolution, Sam W. Hayes, University of Virginia Press, 2010

[2] ibid

Written by Jim Lorenzen, CFP®, AIF®

August 7, 2012 at 8:11 am

How Does Inflation Affect the Markets?

IFG BlogDo all markets react to economic forces the same way all the time?  As any good consultant worth his salt will tell you, “It depends.”

Asset classes, for some reason, seem to have this annoying habit of reacting differently to different environments – probably because investors react differently to varying environments, and all these indexes we keep talking about are only reflecting what investors are doing with their money.

For example, it should come as no surprise to most that bonds and commodities generally react differently in high inflation environments, whether inflation is rising or falling.

Here’s a chart from JP Morgan Asset Management that depicts how different asset classes have reacted to varying inflation environments since 1972.  It’s important to remember this represents a forty-year period and that during those forty years, these asset classes have rarely moved in tandem.

Which environment are we in now?  It depends on what inflation number you use.  While the core consumer price index (CPI) excluded food and energy, the broad CPI today isn’t too different from the median CPI reflected above.   Since we seem to be coming off a low inflation base and can realistically expect a rising inflation scenario – the government hasn’t stopped printing money – the lower left quadrant does get our attention.

Does this mean you should avoid bonds and cash?  Not likely.   Asset allocation is about diversifying risk – and that’s all about blending correlations in a way that brings portfolio volatility (standard deviation) in line with a given investor’s risk profile.

The central question to the puzzle:  How can we best diversify assets to achieve an investor’s long-term goals while staying within defined risk parameters? 

That’s the $64,000 question.  And, for many people, not knowing the answers or how to allocate assets, has been far more expensive than that.

Jim Lorenzen, CFP®, AIF®

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Jim Lorenzen, CFP®, AIF®Jim Lorenzen, CFP®, AIF® is founding principal of The Independent Financial Group,  a fee-only registered investment advisor serving retirement plan sponsors and selected private clients.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan.  The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com  and by subscribing to IFG Insights letters  for corporate plan sponsors and individual investors.  Follow Jim on Twitter: @JimLorenzen

Written by Jim Lorenzen, CFP®, AIF®

June 7, 2012 at 8:00 am

Market Swings: Good or Bad?

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

It depends.  If you’re a retiree seeking a dependable income stream, it may actually depend on the size of your asset base.  Those with modest portfolios will likely need some long-term allocation to equities simply to keep pace with inflation, while those with very large portfolios may not have inflation issues to worry about – Let’s face it, Bill Gates isn’t worried about inflation.

But, for most us Americans still working in the real world, we’re still trying to grow our assets long-term to provide for a secure future.

For those still contributing to their company retirement plans, market swings can actually be your friend!  Unfortunately, too many plan participants seem to be unaware of the opportunities these swings represent since their contributions can buy more shares during the dips and just before markets recover, as they always seem to have done so far.

The February issue of Financial Planning contained a chart from ICON Advisors that illustrates economic conditions at various market peaks and the subsequent returns.

Here’s a brief sampling from the eighteen periods they cited:

Surrounding Conditions Year Subsequent S&P50052-week return
Post 1929 Market Crash 1929

-9.9%

Depression Market Bottom 1932

40.3%

Pre-Cuban Missile Crisis 1962

19.2%

Recession Bear Market Bottoms 19701974

1982

27.6%

33.5%

19.2%

Post 1987 Market Crash 1987

15.2%

Technology Bubble Break 2000

-12.3%

Recession, Financial Crisis Low 2009

22.6%

European Debt Problems 2010

24.4%

European Debt Problems, Round 2 2011

????

As I indicated, ICON’s table included 18 different market conditions.  The best recovery came after the Great Depression market bottom at 40.3%; the worst came after the terrorist attacks in 2001, at -18.9%.

Their conclusion:  Using the rear-view mirror to reduce volatility may risk long-term underperformance.  Remember, those who are recognized as America’s most successful investors seem to have one thing in common:  They tune-out the `white noise’ of the media and invest in quality for the long term.

Jim

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Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Written by Jim Lorenzen, CFP®, AIF®

February 21, 2012 at 8:00 am