blog10aug2008

Hot Off the Web- August 10, 2008 If you are wondering what Jonathan Clements, the recently departed WSJ excellent personal finance columnist is doing, read about it in Ron Lieber’s NYT article “Even small nest eggs need advice” . Jon Clements became Director of Financial Guidance for Citibank’s upcoming myFi  offering. You may also want to read myFi’s Wellness Guide  . According to Lieber the myFi offering, aimed at clients with small nest-eggs, will likely be a $75/ month subscription service which includes “all handholding, investment advice and trading costs” and they intend to operate it as fiduciaries. Ron Lieber also adds that Clements’s “presence gives the entity a conscience it might not otherwise have had”. Best of luck to Jon in his new career.

NYT’s Catherine Rampell in “In various ways economists try to find right price for a home” discusses approaches to determining when the real estate market has bottomed. While this is clearly unpredictable she mentions a few indicators that you may be able to use as a gauge (need to use local numbers): (1) add the historical (U.S.) 1.6%/year increase above inflation to prices 10 years ago, (2) price-to-rent ratios compared to historical values, (3) home price-to-per-capita income compared to historical values. (I like to also use annual total-cost-to-own (including cost of money, taxes, and maintenance fees) to cost-to-rent ratio.)

Dale Jackson in Globe and Mail’s “Income alternatives for young retirees” states that the critical retirement strategy question is always; “Will my money outlast my life?” He refers to Ted Rechtshaffen for his four sources of retirement income for young retirees: (1) home (secured line of credit or second mortgage), (2) RRSP (sometimes it makes sense to dip into it before 72 for tax considerations), (3) insurance policy (people in their 30s can take out a policy on their parents, and when they die the payout is their retirement asset and they may even be able to get a loan on the cash value in the interim), (4) non-RRSP investments (high-dividend paying stocks, and when a significant amount of funds are outside RRSPs then minimize moneys in MMFs, GICs and high interest savings accounts.

In WSJ’s “When 401(k) investing goes bad” Jennifer Levitz discussed a number of representative instances how employees who were forcibly switched by their employers from traditional DB pension plans to DC 401(k) plans are now finding that they have meagre accumulated assets for retirement. Some/few (knowledgeable) employees did quite well with 401(k) plans, but “studies are starting to show that traditional pension plans, which are typically overseen by professional money managers outperform programs in which workers control an investment account”. (This is true so long as the employer insures that the plan is fully funded or does not go bankrupt with an unfunded plan.)

Shefali Anand’s “FAQs on ETNs” in the WSJ reviews the good and the bad of ETN’s (as opposed to ETFs). The good is that they are often the easiest means for a retail investor to participate in some asset classes such as commodities, leverage and some tax advantages (cap gains at maturity). The bad is that ETNs are exposed to the credit risk of the issuer and about 2/3 of them have under $10M under management (lack of liquidity prior to maturity).

In the latest “Evercare 100@100 Survey” of hundred year olds, the conclusion is that “After three years of conducting this survey we’re starting to see some common themes emerge when it comes to the keys to living longer,” said Dr. Mach. “It’s more about the things under our control – our lifestyle choices, our spirituality and our interest in staying engaged in the world around us. Centenarians are a remarkable generation of Americans whose life experiences, positive outlook and desire to continue to try new things should be an inspiration to us all.” The other interesting piece of information is regarding the extent to which 100 year olds use technology to stay connected.

A sign of things to come WSJ’s Patrick Yoest reports “Raise retirement age now, U.S. actuaries say” Given that life expectancy of 65 year olds has increased by five/six years since 1940 for men/women, the recommendation is to increase Social Security eligibility age to 68 or 69, from current 65 for those born before 1960 and 67 for those after.

Daisy Maxey of the WSJ reports that “Battle looms on indexed annuities” . The SEC is proposing to regulate equity indexed annuities as securities. According to Maxey “Equity-indexed annuities guarantee an investor’s principal and a minimum return, but may pay more based on the performance of a stock- or bond-market index.” The disruption created by this would be that insurance sales forces would be replaced by brokers as distribution channels. (The SEC is worried that seniors don’t understand that the extent to which they are exposed to the volatility of the stock market, whereas the real issue with these products is the usually high annual fees associated with them, so the expected upside is minimal investors end up with low CD-like returns.)

And finally, Jonathan Chevreau of the Financial Post tells us “When you can tell your boss to drop dead” . It appears that he, and others that he asked, come down on the side of “financial independence” as the answer, which is a result of a combination of finding the optimum balance between controlled spending level to support an acceptable lifestyle, secured by assets and/or pensions which allow one not to have to worry about the volatility of the markets; i.e. be independent of a paycheck.

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