July 1st, 2009 07:58am
Tracy Beard
Tracy S. Beard, CFP®
Given the market decline from the fall of 2007, many retirees are trying to determine if they need to reduce their expenses. Adjusting expenses to reflect current asset values may diminish the risk of running out of money. I recognize cutting expenses is never simple or fun. After all, in most cases it involves reducing something you may enjoy. Here are a few tips that may help you reduce the pain of lowering your expenses.
- Charitable Distributions - While we’d all like to maintain a certain amount of charitable donations, perhaps the new budget may not accommodate the same level of gifts made prior to the market declines. Consider making up the difference by volunteering your time or talents to your favorite charity. Do you have a unique skill or talent that you can offer?
- Refinance of Debt - With historically low interest rates, it may make sense to extend out a mortgage at a very low interest cost. While extending out the duration of the mortgage will likely result in higher long-term interest charges, it may allow you to benefit from a higher cash flow now. I would caution anyone on accumulating more debt at this point in time. This is not suggesting you go out and take on new debt. Rather, the focus is on refinancing existing debt.
- Solicit New Quotes for your Insurance – Consider shopping your insurance to make sure you are still getting the best deal.
- Evaluate Your Expenses – Review where you spend your money each year to determine if you still enjoy and obtain value from the budget items. When cash flow is good, we tend to spend money on items that do not add significant utility. The expense is made merely because we can afford it. Reviewing the expenses and categorizing them based on your actual enjoyment may help you reduce unnecessary expenses while keeping those that add value to your life.
- Be a Better Shopper – When cash flow is strong, we tend to place less value on wise shopping. The time spent researching a purchase for a better deal does not appear as important when assets are plentiful. However, during less robust economic conditions, cash may be scarce and time may be prevalent. Use the internet to research new purchases. You may consider used or slightly used products that are offered at a substantial discount. In challenging economic times good used products may be more abundant as individuals sell items to raise cash.
- Dining Out – Consider making lunch time your time to dine out. Lunch menus at nice restaurants usually offer excellent quality food at dramatically lower prices than those found on the dinner menu.
- Avoid Buying the Latest Technology – Consider buying last year’s models at reduced prices. For example, you can get a great portable GPS system for under $200. If you never own the latest GPS, you probably won’t miss any of the new features.
June 30th, 2009 09:38am
Brent Brodeski
Brent R. Brodeski, MBA, CPA, CFP®, CFA, AIFA®
Recently Savant hosted a live webinar for our clients featuring, Scott Bosworth, a Financial Analyst from Dimensional Fund Advisors (DFA). Scott says that behavioral biases stem from the “mental shortcuts” that allow people to make decisions in everyday life. When it comes to investments, however, these biases can lead to poor decision making. During this presentation Scott identifies these biases and how they lead us astray. How can investors recognize their own biases and develop a plan to control for them? To view an online replay of the webinar, click on the presentation link below.
http://dimensional.acrobat.com/behavioralbiases/
June 29th, 2009 11:40am
Kim S. Cady
Kim S. Cady, PPC
Earlier this week I learned that Merriam-Webster picks a word of the year. They have apparently been doing this for a few years now. In 2003 the winner was DEMOCRACY, followed by BLOG in 2004, 2005 went to INTEGRITY, while 2006 gave us TRUTHINESS, and 2007 was W00T. Prior to 2008 the Word of the Year was selected based on the number of lookups on the Merriam-Webster website as well as how these words have slipped into everyday discussions. Thus the reason W00T was chosen for 2007. This term was frequently used by online game players to express happiness. Some used this as the acronym for we owned the other team.
But for 2008, Merriam-Webster decided to switch their procedure to consider just the volume of lookups. I’m sure the selection for 2008 won’t be much of a surprise to you; it was definitely heard in households over and over again during the year. The 2008 Word of the Year was BAILOUT. This is a very simple word with little need for an interpretation of its meaning even if you are not a wordsmith. The definition is just as simple: a rescue from financial distress. So why would this uncomplicated word have so many lookups? In fact it received the highest intensity of lookups online over the shortest period of time. If we needed confirmation of the general idea of this term, I’m assuming it’s because of the context in which it was being delivered; with perhaps the use contradicting the meaning. If that’s the case, I wonder what 2009 will bring us. Hmmm I just got an idea for my next blog…
June 26th, 2009 07:54am
Brent Brodeski
Brent R. Brodeski, MBA, CPA, CFP®, CFA, AIFA®
Back in early March, many thought the sky was falling, and the entire free enterprise system was near total collapse. To many, it was obvious we were all toast! Savant has written a letter to address the state of the market over the past three months and what it means to clients. We encourage you to read the full letter in the link below for more perspective. Click here what-a-difference-three-months-make.pdf
June 24th, 2009 08:46am
James A. Carter
James A. Carter
A reverse mortgage is a type of mortgage that is offered through the FHA (Federal Housing Administration) and is available only to homeowners aged 62 or older. It is different from other types of mortgages because it is a loan that does not have to be repaid for as long as the homeowner lives on the property. A reverse mortgage is often used to fully pay off an existing mortgage, which means the homeowner no longer has to make monthly mortgage payments. The second most common use, according to AARP’s 2006 survey, is to pay medical and daily living expenses.
A reverse mortgage has no income or credit requirements, and instead of making monthly payments, the homeowner receives payments. Payments may be received in one of the following ways: (1) receive a lump sum of cash at closing, (2) receive equal monthly payments as long as the homeowner lives in the home, (3) receive equal monthly payments for a fixed number of years, or (4) draw any amount at any time until the line of credit is used up.
In the event of death, or when the home ceases to be the primary residence, the homeowner’s estate can choose to convert the reverse mortgage into a traditional mortgage if they want to keep the house. Or, they can sell the home to pay the balance, which would include the amount borrowed, plus interest and fees. If the equity in the home is worth more than the balance of the loan, the remaining equity belongs to the heirs. If the sale of the home is not enough to pay off the reverse mortgage, the lender must take the loss and request reimbursement from the FHA.
For more information go to http://www.hud.gov/buying/rvrsmort.cfm.
June 22nd, 2009 03:56pm
Brian Conroy
Brian P. Conroy, CFP®
In the emerging field of “behavioral economics” academics are studying what makes us tick as investors and how we make investment decisions. You’re probably not surprised to learn that the process of investment decision-making is not always rational. Often times what we know we should do and what we actually do are vastly different. We often buy high, sell low, and succumb to panic selling. We attempt to time markets in spite of the preponderance of academic evidence suggesting that this is a fool’s errand. Often our emotional brains lead us to make investment decisions that don’t make any logical sense. Our emotional investment minds often lead us to false conclusions.
One such cognitive error that investors often make is sometimes called predictability error, hindsight bias or simply “Monday morning quarterbacking.” Oftentimes we believe events are more predictable after the fact than before. Hindsight bias often causes us to remember only our investment successes (or successful predictions), and forget our investment failures. It can cause us to believe that the market and the economy are far more predictable than they really are. This bias causes investors to be overconfident and underestimate the risks of investing.
Already we are seeing many articles and books being hastily published detailing a blow-by-blow account of how the seeds of the current mortgage crisis began decades ago with well-intentioned government policy, collided with a failure of risk management on Wall Street, and culminated with a “great recession” and the worst bear market since the 1929 crash. While gaining perspective on how we got here is very important, remember that those who are detailing the process are benefiting from the 20/20 of hindsight. The “experts” are pointing to the mortgage meltdown as if it should have been obvious and self-evident all along. The truth is that governments around the world, individuals, central banks, the profession of economics, and Wall Street all largely underestimated the risk of housing depreciation and how this might cascade through the global economy and markets. The error of hindsight bias causes us to believe that the future is easily predicted if only one were to study harder. It all seems so clear and logical now…after the fact. This false conclusion sometimes leads us to attempt to time markets. These attempts, more often than not, results in getting into the market too late, and out of the market too late. Right now (after the dramatic rally in the last 2 months) this error is causing a paralysis, as investors wait to see if there will be a “downside correction” that gives them the opportunity to get back in. They wonder, am I too early or too late? Alas, the course of market events in 2009 will look very predictable and very clear when we are looking back a year from now.
Because we live in a world that has yet to discover the elusive “crystal ball”, we are forced to invest in a manner that makes sense despite the fact that we don’t have one. Diversification has sometimes been called the “worst investment policy, except for all the others that have been tried”. Being aware of predictability errors (hindsight bias) is one step towards making better decisions and creating a more successful investment experience. If we admit that only the past is clear and the future remains murky, we are led towards an investment policy that includes broad global diversification, cost management, tax management, and a disciplined (hopefully unemotional) approach to rebalancing and risk management.
June 17th, 2009 08:48am
Tracy Beard
Tracy S. Beard, CFP®
We are all aware of the significant market decline witnessed since the fall of 2007. Stocks around the world were down as much as 50-60% at one point. Given these declines, it may be important to review and update all of your beneficiaries. This includes beneficiaries listed in retirement accounts, insurance policies, and your estate planning documents (i.e. wills or trusts).
When creating an estate plan, most individuals identify how much of their assets they would like to go to various groups. The two most popular groups are charities and family members. For tax purposes, it may be more efficient to give IRA assets to the charitable beneficiaries since the charity (if qualified) may not have to pay the taxes on the IRA. In contrast, if the IRA is left to family members, the taxes on the IRA will be paid by the family members receiving the IRA distributions.
Let’s assume for a moment the client wanted 50% of their estate to go to the charity and 50% to go to family members. For illustration purposes, we will also assume the client has a balanced portfolio owning both stocks and bonds. If the bond portion of their portfolio was held in the IRA to shelter the interest income, the IRA may have held its value better during this bear market. The stocks held outside the IRA could have fallen significantly in value. Without any adjustments, the client’s death would result in a reduced inheritance to the family. The charity would get the IRA assets. However, the family would inherit the stocks that diminished in value.
This above example should not be considered advice. Rather it was used to illustrate how an estate plan can get out of balance during volatile markets. This is a good time to reconsider how you want your assets distributed upon your death. After identifying your goals, you may consider reviewing all of your beneficiaries to make certain they accommodate your objectives.
June 15th, 2009 08:24am
Tom Muldowney
Thomas A. Muldowney, MSFS, ChFC, CLU, CFP®, CRC, CMP®, AIF®
From time to time, lines are drawn in the sand.
Over the course of the past several months, the big brokers and financiers on Wall Street have apparently earned a black eye for what has been described as “unhealthy greed.” The unhealthiness lead to a substantially gargantuan loss of wealth over the whole world. As expected there has been fallout from this tragedy. One big ballyhoo has been about investment brokers versus investment advisors. It is apparently true and perhaps sad, that for the public at large, there is no distinction at all.
I will split a few hairs here to provide a meaningful distinction.
“Brokers” usually sell investments or investment products on behalf of an investment warehouse or wirehouse. They get paid a commission for serving as the middleman. The “broker” is the link between a buyer (the consumer) and a seller (the investment warehouse) and gets paid a commission for doing so.
Various and nebulous definitions of the word “broker” identify that a “broker” is a party between a seller and a buyer.
“Advisors” have taken an entirely different tack. “Advisors” recognize that investments are available without the need for a “broker.” Since the advent of commission-free investments, products that are really “no-load” have become readily available and can be purchased directly from the manufacturer without the need for a broker or middleman. For example, you can go directly to certain mutual fund companies (like T. Rowe Price, Vanguard, or Fidelity) and make your investment without having to pay a sales commission.
Various and nebulous definitions of the word “advisor” suggest that an “advisor” is one who offers advice or a service – not a product. When a consumer hires an advisor, he already knows that “no-load” investment products are available. They come to the advisor to determine how to use these many “no-load” investments.
Brokers suggest that they, too, are able to provide investment advice, however the SEC (US Securities and Exchange Commission) has identified that the ”advice” offered by brokers must be limited and incidental to the potential customer purchase of the product being sold.
Clearly both parties get paid…one gets paid a commission and one gets paid a fee. Both methods of compensation are paid by the consumer. Both parties are held to certain standards and the standards are different.
The difference is that “line in the sand” that I mentioned at the beginning. The “line in the sand” is the appropriate standard to which the advice is given or the product is sold.
The salesperson/broker is held to a commercial standard; one of a salesperson selling a product on behalf of a product maker…generally for a sales commission. For the SEC the standard to which the broker is held is whether the product being sold to the consumer is “suitable” for that consumer.
The advisor is held to a different, perhaps more noble, standard, that of a “Fiduciary.” The term Fiduciary comes from the ancient Latin root word “fides” meaning “loyal.” You have heard the name “Fido” used for many loyal dogs…man’s best friend…”Fido” meaning loyal, comes from this very root for “faithfulness.”
In the simplest of contexts, the fiduciary advisor has a duty to be loyal to his client…a duty that has been defined by law and in the courts…the fiduciaries have a duty, that is, an obligation, to place their client interest ahead of their own personal or commercial interests.
As you look about for advice on how to hold, manage, and invest your financial assets, consider strongly the benefit of hiring an advisor who willingly places your interest first…consider the “Fiduciary Advisor.” It is “OK” to ask, ”are you a fiduciary advisor?”
June 10th, 2009 10:23am
John Schissel
John D. Schissel, QPA, CPC, CLU
A recent Hewitt Associates report indicates that three out of four investors held steady in their 401 (k) contributions and the average savings deferrals declined only slightly, but still remained comfortably above 7% in turbulent 2008. The majority of plan participants continue to save for retirement amid the difficult economy. Workers, young and old, are realizing if they are going to retire comfortably they must do it themselves. The tool they use is the consistent payroll deductions to accumulate the dollars for the future. Contributions among those less than forty are steady and growing stronger. In my conversations with this young group, they place less faith in the retirement benefit of Social Security than older workers.
The historic reductions in participant accounts has caused many to reduce their investment exposure in stock, less than 60% according to Hewitt and the lowest percentage since they have tracked data. Now more than ever these investors should make sure they are investing in the right funds to generate the long term investment results they need to accomplish their goals.
The lesson is to continue to systematically and in a disciplined manner accumulate and develop a long term investment strategy. For those who sought the comfort of the less volatile fixed income it might be time to gradually begin the process of adding more stocks to their portfolios. Stocks are on sale today.
June 8th, 2009 09:49am
Tracy Beard
Tracy S. Beard, CFP®
My wife and I recently decided it was time to help support the economy. We have driven our MPV Van for six years. Having survived the abuse of two toddlers, she was showing her age. With rust creeping up the side, we knew it was time to begin looking at a replacement.
We are extremely cautious buyers. We don’t make quick decisions, and we always engage an extensive research project for major purchases. Some people find buying a new or used car an intimidating process. However, with the tools available today, buying a new or used car can be quite simple. I’d like to share with you a few websites that we discovered during this process that created a more level playing field between the buyer and the seller.
1. consumerreports.org - The consumer reports website allows a buyer to purchase a New Car Price Report on any new vehicle. This fact sheet will give the potential buyer the opportunity to see the dealer’s true cost paid for any particular model. The sheet includes any special incentives the dealer may receive. Understanding the dealer’s true cost is a good starting point for negotiating. This service is not specific to one car. While we did not use this particular service, it may be helpful to some buyers. The report will cost $12-$14 dollars.
2. edmunds.com – Once you identify the car and the dealers cost, you may consider referencing this site. Edmunds will help you quickly send out quote requests to numerous dealers in your area. Since the dealers know you have requested competing bids, they may be more likely to come back with a competitive offer. This may save you from having to negotiate from a higher starting price once you identify a dealer you feel comfortable using.
3. autotrader.com – We used autotrader to search for both new and used vehicles on the web. As we began to receive offers from the work done though the Edmunds site, we broadened our search using autotrader. The website was very easy to use. It clearly identified the car’s mileage and all of its relevant features. We also searched for demos or slightly used cars on this site. What I also found helpful is that many of the dealers offer a free carfax sheet for the cars they are selling. I noticed on several requests the cars with a lower price were former rental cars. I personally preferred to stay away from the cars used by major rental companies.
I hope this is helpful in your new or used car purchases.
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Tracy S. Beard, CFP® 
