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Protecting Yourself from Social (In)Security

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We've all heard of the classic three-legged retirement income stool: pensions, social security, and personal savings. Unfortunately for many upcoming retirees, that three-legged stool only has one leg. That's personal savings.

In a Social Security Administration 2012 study*, 35 beneficiaries received benefits per 100 workers paying into Social Security (e.g., FICA) in 2011. In 2050, that ratio will get worse: we'll have 49 beneficiaries per 100 workers.

The Congressional Budget Office estimated* that beneficiaries in 2033 may get smacked by rising plan costs. Their benefits may be delayed, or not paid at all.

What about pensions? In 1989, 42% of private industry employees had pensions. In 2011, only 22% (and 1 in 4 of those plans were closed to new employees).

Both Social Security and Pensions promise to guarantee an income stream for the rest of a retiree's life. But it's clear these two legs are wobbly.

The last leg may also break for millions of Americans. In an Employee Benefit Research Institute 2010 study*, the average retirement account balance was $69,498. Considering that a healthly couple turning 65 this year faces -- on avreage -- over $300K in medical expenses, $69K in savings won't last long.

Beat the odds -- don't sabotage the last leg you've got in retirement.

We only used to expect magicians to be able to balance on a one-legged stool. In today's world, however, it doesn't take magic.  It takes diligence and smart investment decisions.

* Sources:
The 2012 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, Social Security Administration, April 2012

Long-Term Projections for Social Security, Congressional Budget Office, August 2011

Study of Retirement Account Balances, Employee Benefit Research Institute, 2010

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5 Tips to Save Money This Holiday Season

Dec 04 2012
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Black Friday and Cyber Monday looked the recession beast in the eye and laughed this year. Online Black Friday sales alone jumped 26% over 2011 to over $1B.

Nevertheless, there’s still shopping to do. Keep your head, and follow these tips to potentially avoid a having a financial hangover in 2013:

1. Tax-Loss Harvesting: While not a shopping tip, selling losing positions in a taxable account prior to 2013 may provide you with a write-off on your 2012 taxes. Please speak with your tax advisor before proceeding.

2. Contribute to your 401K or Traditional IRA: Doing either of these (or both) may also provide you with 2012 tax savings by potentially lowering your adjusted gross income or providing you with a tax write-off. Speak to an advisor regarding your eligibility for 401K or a Traditional IRA tax benefits.

3. Negotiate Your Credit Card's APR: Paying for gifts with your credit card and then forgetting to pay off the higher bill traps many people into having to pay interest on holiday purchases in 2013. It's always ideal to pay off your credit card bill. But if you cannot (and if you've maintained good credit), call your credit card company to negotiate a lower rate.

4. Use Online Coupons: Higher online sales encouraged a new breed of online coupon sites that either give you instant savings or pay you back a percentage of what you purchased. is a leader in this space. You can also search for coupons before making a purchase. For example, if you're buying flowers at, search for "Proflowers Coupon" in Google or Yahoo! before completing your purchase.

5. There's an App for That: Use your iPhone or iPad to scan for savings online while shopping at a brick-and-mortar store.  Amazon’s Price Check application is one of the more popular apps for doing this.

This holiday season can be joyful without the dark cloud of overspending creeping into 2013.  Continued happy holidays, my friends, and as always speak to a professional like Price Capital if you’re concerned about your finances.

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Market Got You Down? The Silver Lining: Stocks Still Reign Over Cash

Nov 20 2012
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Most economists agree that 2000 marked the beginning of a secular bear market.

Secular markets describe 10-20 year spans of new market highs (secular bull markets) or market declines of at least 40% (secular bear markets).  Secular bear markets also describe periods where the market is unable to surpass new highs.

Secular markets begin during distinct moments of economic and cultural events.  For example, the 1982 start of the 18-year secular bull market kicked off amid the end of the early 80’s recession and start of Baby Boomer-driven economic expansion.

The 2000 secular bull market began during the Bush/Gore election results debacle, and confirmed itself during the 2001-2002 Iraq war:

While we may have both short (e.g., “cyclical”) bull and bear markets during secular markets, the overarching market (e.g., “secular” market) may still be considered by economists as a bear or bull market.

What if you invested in a portfolio of stocks that mirror the S&P 500 at the beginning of our current 12-year-long secular bear market, and now wonder if you should have stayed in cash?

The chart below compares a $10,000 investment in the Vanguard Total Stock Market Index fund (VTSMX) versus a $10,000 investment in Vanguard’s Prime Money Market Fund (VMMXX):

Investment Help

The Vanguard Total Stock Market Index fund is a domestic stock fund that invests broadly across sectors and capitalizations.  The Vanguard Prime Money Market Fund seeks to provide current income and preserve shareholders’ principal investment.  The chart above is unadjusted for fund fees.  Past performance does not imply future performance.

While investing in stocks may not be suitable for all savers -- 2008 being a great example -- the above shows that over the long term, stocks still outpace cash even if it doesn't feel like it does.

Watch economic trends in the market.  Especially as you get closer to needing the money that you have invested.  And speak to a professional if you're unsure how to invest for your goals.

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Don’t Call it a (Financial) Comeback

Jul 19 2011
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The New York Times created an interactive calculator to determine the length of time it may take for your portfolio to recover. Given the sideways movement of the market, it may feel as if it's taking longer than normal. But with the right choices giving you the returns that you need plus steady contributions, you may get back in fighting shape in no time.











If you need help in determining how to rebuild your portfolio, consider speaking with an advisor that you know and trust.

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Retiree Portfolio Checklist

Jul 15 2011
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I recently completed Q2 2011 performance reviews with my clients. While strategies shouldn't change drastically from quarter to quarter, it's important to continuously check in to ensure that investments are still aligned with each client's overall strategy. It's synonymous to having an annual physical or a 2x year dental checkup.

Reviews are particularly important for retirees who are living on the money that they saved and need to ensure that their overall assets can support their lifestyle for the rest of their lives.

Morningstar created a video report outlining key points for retirees to check when checking in on their portfolios. These include points that I often reiterate to my retiree clients, including: inflation protection, liquidity (e.g., ease of access to cash), low volatility (e.g., avoiding swings in portfolio value), and estate planning (e.g., arranging to transition your wealth to beneficiaries).

Click here for the video and transcript on Morningstar's site.

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Revisit Your Life Insurance Coverage Before You Retire

Jul 07 2011
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Given the state of the economy and the threat of Medicare and Social Security cuts, "retirement" has unfortunately become the new dreaded dirty word in households.

While plans to cut expenses are being discussed far earlier than retirement in today's world, the expense-cutting is permanent within the context of a retirement discussion.

One area in which to consider cutting expenses is your life insurance premium.  Life insurance is often purchased when the covered individual is younger, with a large enough death benefit to cover one's family, mortgage, estate taxes (where applicable) and other areas should the covered individual pass on.

At retirement, however, that same covered individual may not need to be concerned about leaving money to send children to college or to pay off his or her mortgage.  As a result, there may be room to lower one's premium in exchange for a change in coverage.

Rather than get a new policy -- which may result in higher premiums if you go through the underwriting process again -- consider the following 3 ways to potentially lower your premiums on your existing policy:

1.  1035 Exchange:  If your policy has cash value, discuss with your advisor transferring that cash value into an alternative life insurance policy with potentially lower premiums.

2.  Inquire about Flexible Premiums:  Obtain an illustration from your advisor or agent with a reduced death benefit or the maximum tax-free cash flow that may be obtained without requiring more premium to support you past your life expectancy.

3.  Change Your Financial Plan:  Discuss changing your policy's role in your overall financial plan with your advisor.  For example, consider using a cash value policy as a tax-deferred savings vehicle, a low interest loan source, or tax-advantaged cash flow source.

As with all changes to your insurance policy contributions, make sure you have a discussion with your advisor or insurance agent and receive an illustration first (for example, so that you don't inadvertently turn your policy into a Modified Endowment Contract or MEC, and incur taxes and penalties on withdrawls).

With the right moves, retirement may not stay a dirty word for long.

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Wealth Transfer Techniques

Jun 16 2011
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Given how each president more often than not tweaks the country's tax rules as well of other related policies after entering the White House, it's a good idea to revisit certain techniques in order to reconfirm their effectiveness in a new policy environment. One set of techniques centers around wealth transfer.

A common question that recurs every few years is what are ways to pass money to future generations in the family without increasing the donor's nor the beneficiary's tax burden?

Below are five techniques to consider:

Life Insurance: While it's slightly more common to use life insurance to support surviving family members after the death of a loved one, it also may be used to pay taxes on estates. And if the insurance is payable to beneficiaries through an irrevocable trust, you may avoid having the proceeds count towards the value of your overall estate.

Business Buyout: Many families in this economy are launching their own businesses. Retiring shareholders can sell their portion of the business to younger generations in the family in an internal family buyout. The retiring shareholder then receives cash to help fund retirement, and the family sustains the independence of their family's company while receiving potentially substantial tax benefits if the buyout is structured correctly.

Account Beneficiaries: Adding a beneficiary to your 401K/IRA/Life Insurance/et al enables beneficiaries to have more choices in how they receive the proceeds from an inherited account instead of forcing a family member to receive a lump sum and an immediate ordinary income tax bill.

Gift Transfers: "Giving while living" has the benefits of reducing one's taxable estate while leveraging the kinder gift tax rules to transfer wealth. This technique may generate estate tax savings upwards of 25%, and in some cases even more savings may be possible.

Transfer on Death: Non-retirement accounts may be enhanced with a transfer on death policy, which may be beneficial if your non-retirement account has securities bought at a much lower price than the present day value (e.g., low cost basis securities). The basis or purchase prices of your securities are adjusted to their fair market value upon your death, which may provide your beneficiary with tremendous capital gains tax savings if this results in a step up in basis.

Regardless of the method, talk with a qualified advisor to help ensure that your wealth transfer strategy reflects the latest policy changes.

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Baby Boomers May Be the New Winners

Jun 08 2011
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Baby Boomers have nine lives. As teenagers, they benefited from profound yet positive social change in the 60's and 70's. As young adults, they profited during the "Greed is Good" era of the 80's. As adults approaching middle age, they fluffed their nest eggs during the startup boom in the 1990's and the reduction in taxes in the early 2000's.

Not all has been rosy for Baby Boomers. Nevertheless, of all the generations alive today the average Baby Boomer who played his or her cards right in past decades may actually have the most economic stability of them all. So while 50 to 60 year old Baby Boomers are not only the new 40, they may also be the new winners.

For example while all of our retirement accounts have been impacted by multiple market hits over the past decade, the average Boomer has been invested for a longer period of time than investors in Generations X and Y. As a result, a Baby Boomer investor may have a lower cost basis on his or her investments as well as greater diversification which may have helped temper risk and volatility.

Since Baby Boomers are starting to retire, they ideally have already positioned their portfolios into Large Growth or Value and dividend-paying stocks. If the market continues to be range-bound as we collectively attempt to determine which end is up, dividend-paying investments may help support portfolio growth while prices stay flat.

Boomers also generally began working prior to the introduction of 401K's as the primary retirement savings vehicle for employees approximately 30 years ago, and thus may have the elusive pension plan. The jury is still out on whether states will be able to support pension payments given the state of the economy, but if local governments are smart they'll figure out how. Regardless, a Boomer's career is often characterized by consistent and long-term employment at one employer which may have translated to consistent 401k or IRA contributions.

Boomers also may have purchased their current home in the 1980's or 1990's, and may not be saddled with an underwater property.

All generations have their own troubles, but it's no coincidence that it's the Baby Boomers of the family whose shoulders other family members are generally leaning on in today's economy. Money and economics are relative. So while Charlie Sheen may have declared himself as a winner recently, he may have nothing on the baddest generation of them all.

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Risk or Return…or Both?

Jun 01 2011
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Imagine for a moment you were presented with the opportunity to swim across the Hudson River in a contest for $1M.  The unique aspect of this content is that as long as you crossed the river from New York to New Jersey in under 20 minutes, you would be given $1M.  You didn't have to be first -- you just had to beat 20 minutes.

What would you do?  Would you jump in the water and swim as hard as you could for 20 minutes and pray that you made it in under 20 minutes?  Or would you determine the best area of the river to make the journey, put on a life vest and swim hard enough so that you could sustain your endurance yet cross in under 20 minutes?

If you're a rational person, you likely picked the latter.  With your goal in mind, you would cross the river with a plan for managing the unexpected.  If that's your perspective for crossing a river in a mythical contest, why is that perspective often lost in the real world of investing?

Money can breed emotions that often aren't rational.  Which is why working with a professional that you know and trust and who may be more objective may be suitable for some investors.

I always say to my clients that it's very easy to put together a portfolio of investments.  The difficult part of an advisor's job is putting together a portfolio that has a strong probability of meeting a client's objectives.

Step one is determining the return that a client needs in order to hit his or her goal.  The next critical step is determining the appropriate level of risk that may be taken in order to reach that goal.  In portfolio construction, both go hand in hand.

Future return may be estimated by looking at a portfolio's historical returns -- ideally, during similar times in the economy such as during a past recession.  Past performance is not a definitive indicator of future performance, but may help you gain clarity on how an investment may perform.

Risk in my book is the chance that your portfolio won't provide the performance, or return, that you need in order to hit your goal.  This a Modern Portfolio Theory point of view.  As a result, leveraging factors such as a client's personal tolerance for risk, the portfolio's standard deviation (which is a tool for measuring volatility), R-squared, beta and alpha may help determine the chance that a portfolio may or may not hit a return goal.

A common misconception is that in order to produce higher returns, you have to take on higher levels of risk in your portfolio.  But if you know for a fact that you'll receive higher returns, the implication is that the investment is not necessarily riskier given the certainty of making high returns.  Unfortunately, there's no guaranteeing returns.  There is more guarantee, however, in managing against not landing in the ballpark of the return that you need.

By doing the latter, you may put yourself in a better position to cross the river instead of being hit by an unexpected wave and petering out midway through your journey.


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When the Crowd Yells For Defense, What Would You Do?

May 24 2011
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The Oklahoma City Thunder recently lost a 15-point lead in Game 4 of the Western Conference Finals. What made this newsworthy was the fact that the Thunder's 15-point lead was wiped out in five minutes.

No doubt the crowd screamed for better defense during those fateful five minutes. Noone could have predicted that a series of 2 to 3-point baskets by Dallas would have chipped away at the entire lead in such a short period of time. However, after the first 7 or 8 points I hope that the Thunder realized that it was completely possible and amped up their defensive strategy.

The same mentality applies to investing. If you're invested in the market with a equity-based growth-oriented portfolio that is positioned to take advantage of a rising market, what happens if a key sector in your portfolio is exposed to an event that may impact earnings? Like a natural disaster? Or a war?

In life, we hedge against unplanned events with insurance.  If your portfolio's stocks could talk, they may also beg for a defensive strategy to protect against unexpected events.  Especially if tide-turning events are imminent, including:

  • a transition into higher rates of deflation or inflation
  • a significant market downturn
  • a recession
  • a depression
  • stagflation
  • a significant rise in commodity prices

As with Game 4, once the losses start to happen it's human nature to feel shell-shocked at first. So rather than attempt to make a decision in the midst of an event you never hoped would happen, ensure that a solid defensive strategy is in place prior to the event happening.

Looking at a basketball team, not every player is a forward. A solid team also has guards and a center who can either rebound or take a shot depending on the situation.

When constructing your portfolio, a similar strategy can apply. A percentage may be in small and mid cap stocks, emerging markets and growth-oriented sectors (often characterized by low to no dividends). Another percentage can be defensive against flat markets and downturns while still potentially able to provide growth in strong markets -- for example, dividend-paying blue chips, large caps and developed market investing.

But what about "long-tail statistical events" -- e.g., events that are statistically estimated to happen infrequently such as the 2007 Financial Crisis? Investment managers may plan for low-probability yet high impact events with derivatives (for example, buying puts or writing calls), with low or negative correlation portfolio construction, interest rate/currency/commodity/et al hedges, or even a strategy to get out of certain types of investments or sectors and hold cash if prices fall by 5-10%.

It's very easy to buy a portfolio of investment, as is to put together a group of great individual basketball players. But a team with Michael Jordan and Karl Malone may not have done as well over the long term without Scottie Pippen and John Stockton. Be the coach of your portfolio, and ensure that you have strategies in place to withstand the unexpected so that you don't end up sharing a beer with the Oklahoma City Thunder, wondering what just happened and what could have been.


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