Hot Off the Web- 25 May 2008
In WSJ’s “Refresh your retirement plans now”  Tom Lauricella suggests that it’s time for a check-up of your retirement account(s). He suggests you start by looking in the following three places: (1) no more than 10% of company stock, (2) asset allocation, judging by target-date funds, for a 60 year old could be 30-63% depending on the fund; he suggests the correct answer is determined by your risk tolerance and whether you have other guaranteed income (like pension), and (3) retirement start date- delaying retirement by a few years can have a dramatic impact on the resulting income in retirement. In the example he gives retirement starting at 62, 65 and 67 results in annual retirement incomes of $26K, $34K and $41K respectively.
Geoff Considine in a well worth reading article, discusses “Choosing your portfolio risk tolerance”  at Seeking Alpha. (A more extensive discussion of risk tolerance can be found at the Asset Allocation section of this website. However, what is interesting in this piece is how he compares various portfolios and reports the combination of market risk and longevity risk using his Monte Carlo based retirement planning tool. He presents nine portfolios and compares the portfolios in terms of 20th percentile failure age (i.e. age at which there is a 20% chance of running out of money) and two-standard deviation annual return (a “’rule of thumb’ for the worst downside that you’ll probably see in any 12-month period”, though it could be worse than that). In his example, choosing some of the highest fixed income content portfolios from his list may result in not only higher risk of running out of money, but also higher market risk. On the other hand, he points out that beyond a certain point (around 50% bond content for his portfolios and capital market expectations), further reduction in fixed income allocation results in little or no additional longevity risk reduction yet market risk continues to increase.
Heather Bell reports on “New PowerShares are ETFs of ETFs” at Three new ETFs were announced, unlike target-date funds, these have fixed income allocations of 40%, 25 and 10% respectively for PCA, PAO and PTO (i.e. three different risk levels), rebalance quarterly. The funds include REITs in the fixed income, international equity and a very small commodity/currency component for diversification. As indicated in my earlier blog “Are ‘target-date funds or is an ‘age-independent’ fixed asset allocation right for you?” . This is not a recommendation of the specific ETFs (they have a 0.25% fee on top of the fees associated with the underlying funds), but as an indicator that the current flow of assets into target-date funds may be starting to shift. By the way, all the issues mentioned with Target-Date Funds , also apply to these PowerShares funds and similar fixed allocation ETFs.
Not everybody is convinced that rising inflation expectations will be fulfilled. In BusinessWeek’s “What’s taking the air out of inflation” James Cooper reports that despite rising food and energy prices, the U.S. economy has barely grown for the past two quarters, i.e. people are not spending on other purchase basket elements, and wages/salaries have barely kept up with inflation. This is a completely different scenario than the one that played out in the 70s, though of course this also assumes that the government published inflation and GDP numbers are correct.
WSJ’s Brett Arends says that “The smart money rents in Miami” . (Well what a surprise?) He calculates the carrying cost of a $400,000 Miami condo: property taxes, condo fees (he didn’t mention insurance and assessments) and came up with about the same annual cost as current rental cost of same condo (since there are lots of empty ones). Of course if you add the carrying cost of a commensurate mortgage or the lost income on the invested cash into the condo and you quickly conclude that the own-to-rent cost ratio is almost 2! (If Florida charged out-of-state property owners the same tax as long-time Florida owners the demand for real estate would not only stop prices from falling, but may even start rising again.
Kelly Green answers a reader’s question if it makes sense to contribute in your 60s to a Roth IRA (U.S.) or the very similar to Canada’s new TFSA in “Deciphering Contributions to Roth IRAs in your 60s” . In short, the answer is yes, and Canadians will have this option starting 2009 to the tune of $5,000 per person, per year.
Rob Carrick in the Globe and Mail’s “How to get the skinny on your fund’s fat fees”  discusses how the Fund Fee Index is used to measure how much value investors are getting for their mutual funds fees. Fund Fee Index is “ calculated by adding a fund’s MER to its five-year compound average annual return to get a gross return. Next, you divide the gross return into the MER and multiply by 100.” So it represents the percent of the available return that’s eaten up by fees; i.e. the smaller the number the better it is.
Jonathan Chevreau in the Financial Post’s “Don’t be a slave to retirement savings”  reports actuary Hamilton’s (correct) view that during the first half of a young couple’s working life, it is better to focus on debt reduction than retirement savings. Hamilton then repeats his previous contention that boomers need to plan for retirement income of just 50% of pre-retirement one. This 50% is in conflict with others’ 70-100% suggested target. (In reality it’s not 50% or 70% or 100% of pre-retirement income, but 100% of inflation adjusted pre-retirement spending is required to maintain pre-retirement life-style. Increases/decreases in life-style (e.g. more travel, second winter home) come with corresponding changes in post-retirement spending requirements). He bases his assumption on the fact that boomers are “frugal”, “you don’t need to travel the world every year” and can be content with “low-cost pastimes like reading, walking, bridge or watching television”. (No doubt that you can make do and even be happy/content with that, but to plan for that, that’s’ a different story, as it doesn’t leave any room for error).

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