401k Watch: 11/6/2009

401k Watch - 10/30/2009

401k Watch - 10/23/2009

401k Watch - 10/16/2009

401k Watch - 10/09/2009

401k Watch 10/01/2009

401k Watch - Week ended 9/25/09

401k Watch - 9/18/2009

401k Watch - Week ended 9/11/09

401k Watch - Week ended 9/4/2009

401k Wtach 8/28/2009

401k Watch - Week eneded 8/21/2009

Thinking about mortgage refinancing? Think shorter not longer!

Thinking about mortgage refinancing? Think shorter, not longer.

Finance is about making the best choice for what to do with your money. “ Is there a better opportunity if I did something else with my money?” is the question you must ask yourself before making a major financial decision.
There will always be spending decisions you must make, or cannot avoid, when you can’t factor in an alternative for the money. Food, medicine, clothing, transportation, even insurance are among those financial commitments. But notice I did not mention housing.
Of course we all have to live someplace, and that place costs money. You can buy or you can rent. There is a financial analysis you can do to determine which way is more financially advantageous.
But if you own a home with a mortgage and you’re considering refinancing that mortgage are you mostly being driven by the difference in the monthly payments? Sure it affects the household budget and if you need the savings in the mortgage payment to help pay for other necessities, then it’s an easy decision.
However, if all you’re looking to do is take advantage of lower rates, than deciding to do this just on the basis of lower monthly payments may not be the best way to evaluate the refinancing decision. It’s the term that matters more, not the difference in interest rates. Always think shorter, even if the difference in rates or monthly payments is not that great.
Let’s do a little analysis:

If you currently carry a 30 year mortgage and are 5 years into it ( you paid 60 months) refinancing to another 30 years mortgage at a lower rate will save money; however, it’s not an optimal financial decision.

Here’s why. By staying with the existing mortgage, it’s fully paid in 25 years. At that time you can redirect the monthly payment into an investment program. By refinancing to a new 30 year mortgage, you give up this opportunity, plus you have an extra five years to pay with the new mortgage, an added real cost. The benefits of the lower monthly payments are severely limited by those two costs. You are paying for the last 5 years twice; or, think of it as a 35 year mortgage.

Instead, refinance into a shorter term mortgage, say 20 years. Even if the monthly savings are not as great, the true benefit comes from reducing the back end of the mortgage. Here’s why. You move up the time when reinvestment of the mortgage payments begin – to the end of 20years instead of 25 years; plus you don’t incur the opportunity cost by keeping the old mortgage that has a 5 year longer term. These two benefits far outweigh the benefit (or cost) from the difference in monthly payments.

Illustration:
Assumptions: Original mortgage: 30 year, fixed 6.50%, $300,000, $1,896.20/month
Current balance: $280,833
New 30 year mortgage: 5.25% fixed, $280,833, $1,550.70/month; save $345.45/month
20 year mortgage: 5.10% fixed, $280,833, $1,868.92/month; save $27.28/month
7% reinvestment rate, closing costs $10,000

New 30 Year Mortgage
Present value of monthly savings: $48,891.47
Present value of 5 year reinvestment term current mortgage: -16,743.98
Present value of extra 5 years new 30 year mortgage: -13,693.73
Closing costs: -10,000.00
Net Benefit $ 8,453.76

New 20 Year Mortgage
Present value of monthly savings: $ 3,519.73
Present value of 5 year reinvestment term current mortgage: +23,731.96
Present value of extra 5 years new 30 year mortgage: +23,390.54 Closing costs: -10,000.00
Net Benefit $40,642.24

Yes, there is a temptation to go with the much lower monthly payments of a new 30 year mortgage. However, the monthly payment on a 20 year mortgage is virtually the same as what you’re paying now. Since, you have adjusted your lifestyle to the larger payment of the original mortgage why not roll that into a new 20 year mortgage. A superior financial decision compared to a new 30 year mortgage. You will be mortgage free sooner and more importantly have money to invest sooner, while monthly costs are almost the same.

401k Watch - week ended 8/14/09

401k Watch - Week ended 8/7/09

The Un Silent Majority

Wakening the Sleeping Giant – The Un Silent Majority

“ I recognize that some of my fellow citizens disagree with the plan for health care I have chosen. Honest and patriotic Americans have reached different conclusions as to how health care reform should be achieved…”

I saw demonstrators carrying signs reading: "Health Care = Human Rights”

“… Well, on the strengths of our free society is that any American has a right to reach that conclusion and advocate that point of view. But as President of the United States I would be untrue to my oath of office if I allowed the policy of the nation to be dictated by the majority who hold that point of view and who try to impose it on the nations by mounting demonstrations in the street.”
“For over 200 years, the policy of this nation has been made under our constitution by those leaders in the Congress and the White House elected by all the people…”

“If a vocal majority, however fervent the cause, prevails over reason and the will of the minority, this nation has no future as a socialistic society.”
“Let historians not record that when America was the most powerful nation in the world we passed on the other side of the road and allowed the last hopes for reform and health coverage of millions of people to be suffocated by the forces of democracy.”
And so tonight-to you, the great silent minority of my fellow Americans-I ask for your support.
I pledged in my campaign for the Presidency to bring health care reform to the country in a way that we could make every citizen dependent upon the government for their existence. I have initiated a plan of action which will enable me to keep that pledge.
“The more support I can have from the American people, the sooner that pledge can be redeemed…”


An annotated version of President Nixon’s “ The Silent Majority” Speech, November 3, 1969.

401k Watch 7/31/2009 S&P Ready to Break Through 1,000

401k Watch 7/24/09 - Best week of the year

401k watch - 7/17/09 - Up again for the year

Roth IRA Conversion - Not a Good Decision

The Roth IRA 2010 Conversion Dilemma – Don’t Do It

In 2010, anyone with a traditional IRA can convert that account to a Roth IRA without having to comply with existing IRS limits for adjusted gross income. Right now, that income limit is repealed for 2010.
There is a strong temptation to want to do this. A Roth IRA allows you to accumulate assets for retirement with no future income tax consequence - no ordinary income tax on dividends or interest; no capital gains and losses are recognized; there is no required minimum distribution at any age; and the ability to “stretch” the Roth IRA across multiple generations still exists.
Great! Right?
Can you pay the income tax on conversion? Traditional IRA distribution rules still apply when you convert, except there is no 10% penalty for the distribution if you are under age 59 ½. You can spread the tax payment across 2 tax years.
Say you don’t mind paying the conversion tax. OK, and then is it a good financial decision?
The answer is a flat out no - not at any age and not at any tax rate up to 52%.
A large segment of the population has saved for retirement through tax qualified plans such as a 401k; they might also have been participating in a profit sharing plan. They have probably built up a substantial amount of deferred tax liability prior to and after the Roth was introduced in 1998.
When you leave an employer, your tax qualified plan balance is usually rolled over into a traditional IRA along with all of its deferred tax liabilities so you don’t incur a 10% premature withdrawal penalty if you’re under age 59 ½ or income tax on the principal.

To illustrate:

You’re 55 years old and have an IRA worth $500,000. The conversion puts you in the highest marginal federal tax bracket – 35%, plus (if you live in NY) 7% for state taxes. Total conversion tax - $210,000.
You’re still more than 15 years away from taking a required minimum distribution (RMD) if you stayed with the traditional IRA. The RMD would start at around 3.8% at age 70½ rising gradually to be more than 9% when you’re in your 90’s. That’s a long way from today when you are 55.
In the diagrams that go along with this discussion you will see why converting to a Roth is not financially sound.
Using the time value of money, let’s employ a 7% opportunity rate to compute the present value today of the future tax liability on RMDs from the time you’re 70 ½ to age 95. Today’s account balance of $500k has been advanced forward to age 70 ½ by 7% as well, to a value exceeding $1.5 million. That’s a lot of tax deferred growth, would you say?
The stream of tax payments beginning at age 70½ totals $941,037 through age 95. It has a present value cost today (age 55) of $132,414 using your normal combined marginal tax rate of 33% and the opportunity rate of 7%.
The conversion tax is $210,000. By itself, the higher lump sum payment compared to the present value of the future taxes, a difference of $78,000 suggests not converting.

You may have some difficulty with my analysis for not using the same marginal tax rate during the RMD phase as I did with the conversion tax. O.K., let’s see if that makes a difference. No. While the future tax payments will be in excess of $1.2 million, the present value today is just $168,881, still more than $40,000 below the conversion tax.

However, this is not the true economic cost. By removing $210,000 from your investments now might deprive you of the potential for nearly $3.1 million in investment gains over the next 40 years. Whereas the benefit from the future value of the tax payments that can be invested are approximately $1.9 million at the 33% rate and $2.45 million at the 42% rate results in a net conversion cost on nearly $1.2 million and $.7 million, respectively.

Why is the conversion cost so high? When you owe a debt to someone waiting as long as you can to pay it makes it less expensive. In this case, the future taxes you owe Uncle Sam on your IRA withdrawals are not coming due for many decades into the future. Therefore, on a present value basis the payments are cheap compared to forking over $200 grand to the government in 2010. Plus, converting a large IRA will put you in a higher tax bracket then when you wait to take required distributions after age 70 1/2 making the conversion cost even higher.

Just for the heck of it. What is the highest future marginal tax rate before a conversion has an economic benefit? 52%. This may happen with the pending “America’s Affordable Health Choices Act of 2009”. But, how many of you are likely to be in the top bracket then?

The Roth IRA Conversion in 2010 - Don't Do It

401k Update - 7/10/09 Systemic Risk Rising

401k Update 7/2/09 - Losing Ground Again

401k update 6/26/2009

401k Watch 6/19/2009

401k Watch - 6/12/2009

A Century of Life - The Era of the Great Transition, an Overview

401k Watch - 6/5/2009

For some laughs

http://www.hulu.com/watch/1389/saturday-night-live-dont-buy-stuff

The Great Transition: 2009 - 2022

In “A Century of Life” there will be The Great Transition: 2009 - 2022

We are investing under the belief that the growth in the nation’s debt, specifically public debt, is not thought to be a detriment to our economic well being, as long as the debt and the corresponding federal budget deficit remains within a certain range of GDP (Gross Domestic Product).
Total debt – consumer plus public debt – has risen every year since 1975 and so has GDP, but lately at a slower pace. Y Squared Advisors has developed an indicator, specifically an index, to measure the relationship between total debt per capita and GDP per capita back to 1975. A snapshot of this index – the “National Net Worth Per Capita Index” (NWI, copyright © 2009, Y Squared Advisors) - covering 5 year intervals is presented in figure 1.

We are all familiar with the “T account” – the backbone of modern accounting that says the left side and the right side of the “T” has to add to the same amounts. The right side has two elements that when added together must equal the left side. These two elements are liabilities and equity, or net worth.
Now, see the “T Account” above for the U.S. economy. On the left, or asset side, are real GDP per capita amounts – the nation’s economic output credited to each citizen. On the right, or liability side, are the individual and government debt balances per capita. A positive difference derived by subtracting the right side from the left side equals net worth per individual. A negative amount means there is no equity, but a deficit instead. For the last 30 plus years our national net worth has been declining; and at a more rapid pace since 1995. As of the end of 2008, net worth per capita is gone. If these were the results for a commercial enterprise it would be bankrupt.
As growth in Real GDP per capita has leveled off since 2000, total household and public debt continued to rise and the direct affect appears to be a decline in average intermediate equity returns as shown in figure 2.

Projecting forward by using data extracted from the 2010 federal budget, the public debt portion of total national debt (obviously the largest component) is expected to rise at an average of $1.2 trillion per year from 2009 to 2019. A pace faster than any previous 11 year period and more than 3 times the average rate of increase of the previous 21 year period back to 1981.
While the size of the public debt is projected to more than double during the next 11 years, GDP will not. And, even though it will not, the 2010 federal budget projects the annual growth in GDP to surpass by 91% the average growth in GDP of the preceding 21 years. See figure 3 and 4.

Modeling 2019, the Net Worth Per Capita Index (Copyright © 2009 Y Squared Advisors) based on the 2010 budget assumes GDP grows by 4.1% annually and results in an index of -.277 in 2019; and it does not turn positive unless GDP grows at 8% annually. Using growth rates of 2% or 3%, which is more likely giving the current economic environment, the index would fall to all time lows with U.S. equity returns likely to do the same.

See figures 5 and 6.

My conclusion is it is more likely for the debt – a controllable variable -to grow to the levels projected in the budget than it is for GDP to grow to its projected level, since GDP is an uncontrollable variable and therefore has a more uncertain outcome. The result, in my opinion, is more pronounced systemic risk for investors for the next decade which will constrain U.S. equity returns – hyper taxation is more likely than hyper inflation to be the drag on the U.S. economy for generations to come.
We are entering an extended transition period that will likely run until 2022 – when the bulk of the “B” Generation has fully retired and generations X and Y can stand on their own economically and politically. The consequences of more debt and less GDP per capita, along with rising income taxes per capita, will manifest itself in a brutal decline in the standard of living for the “B” generation.
There are no historic parallels in America for this transition because this era is unprecedented due to demographic and economic conditions that we have never experienced before. There are 4 generations of cohorts living at the same time. The oldest generation is the only one that is solvent. Whatever wealth they have not consumed for their long term care needs will be transferred to the “B” generation, who will likely use it to fund their large and growing retirement and health care liabilities. This occurs as the general population tries to figure out how to recover from a decade of no returns on equity investments following the almost complete demise of the traditional pension benefit in the private sector, and now a permanent decline in home equity.
The chart in figure 7 illustrates what a boomer who only has a 401k account (hopefully making maximum contributions) needs to accumulate in assets and realize in equity returns if they hope to retire with something close to the quality of life they have now.
Investors would be better off in the international markets, particularly in countries with low consumer and public debt and rising GDP. The problem for many U.S. citizens is they have to be weaned from their home country bias when they invest.
It’s not just “Good night and God bless America” but “Good luck America, and may God bless you”!

(The data used in this document was obtained from official U.S. Government sources including the Bureau of Economic Analysis in the Commerce Department, the U.S. Treasury, the U.S. Census Bureau and the NY Federal Reserve. Graphs and analytical diagrams were prepared by Y Squared Advisors and may be used without permission. The National Net Worth Per Capita Index is a proprietary index developed by Y Squared Advisors, Copyright © 2009 all rights reserved.)
This is not investment advice nor is it meant to provide any specific investment strategy or recommendation.
Thomas Warren, CFP®

Figures 1-7

401k Watch - 5/29/09 S&P 500 Back in the Black

401k Watch - 5/22/09

Out of time and not enough money

Out of time and not enough money - How shifting the retirement liability bankrupted the “B” Generation

Of all the economic and political changes that have occurred in this country over the last 35 years, nothing has had more of an impact on the “B” Generation than the demise of the pension and the rise of the 401k plan as the replacement for financing retirement.
There was nothing of substance put in place to assist the boomers with taking over this burden from the corporation. If you think about it, the success corporations had with shifting this liability to the employee gave them the idea that financing other employee benefits, like health care insurance, could also be shifted to the employees, also with little or no assistance for them, and free up even more balance sheet capacity for the corporation.
It is my belief that when the country’s major corporations accelerated the termination of their pension plans in the 1990’s, they disposed of the assets supporting this liability to the employees who were all to eager to buy them for their own retirement account bidding up their price. This partially explains the bull market condition that existed until 1999 and why new, younger and even legacy companies that shed these liabilities saw their stock process rise dramatically during this time.
We see the difference now with many legacy companies that did not or could not transfer these liabilities to their employees now having a significant competitive disadvantage, e.g. the U.S. auto makers, and their stock prices have plummeted as a result.
I honestly believe the next leg of this issue will manifest itself with the state and local governments which are bound by law to retain the liabilities for their employee’s retirement and health care causing massive budget deficits for several more generations. A great time to be a near-retirement government employee because a substantial part of their retirement income and health care benefits have been secured for the rest of their lives. How long before this become a nasty political issue as the private sector employee continues to lose their entitlements and see their retirement assets dwindle in value due to the massive build up of government debt that will have to be financed by higher taxes on everyone sooner or later.
An interesting irony that the private sector employee will see their standard of living decline while supporting the same if not better standard of living for retired government employees through taxation. They will see government services curtailed as more and more of their future taxes go towards paying for public employee retirement and health care obligations carried on the balance sheets of government at all levels. I believe many boomers in the private sector thought it would be the other way around.

To get to the point, the shift of the retirement liability from the corporation to the employee was one of the first transfers of risk to the new ownership society. There after companies became almost completely hands off in helping employees manage this new huge responsibility for their retirement. Guidance on investment selection and risk management were outsourced to a cadre of advisers from the insurance companies, asset managers and brokerage firms who were attracted by the fees and gave largely perfunctory service to employees and many did not even know that advice was available.
But I think the most egregious mistake was that companies never told their employees the amount of the retirement liability that was being transferred to them, putting millions of employees at risk for under funding their retirement. I think most people assumed that if they deferred from their salary the maximum allowed for that year then they were adequately funding the same standard of living they had while employed. How wrong this assumption is. At least with a traditional pension, employees got an annual statement showing them what their pension income would be once they were eligible to retire.
To keep this balanced, I am not totally sympathetic to employees who never embraced this responsibility, or treated it too lightly by not saving enough. But this is where it ends.
Somewhere in the shift of this liability was a breach of a fiduciary obligation by companies for not properly preparing their employees to manage this responsibility and not disclosing the retirement liability the employees had assumed. Would you just hand you car keys over to your teenager whose only exposure to driving was watching how you did it?
It’s imperative that the generation “X” and “Y” cohorts recognize that if they work in the private sector, the self funded pension is here to stay and that meeting your future retirement liability requires almost a century of life of saving. Sad, but true, most have already lost the compounding benefits for a quarter of that century since birth – literally, no different than what happened to the “B” generation who were deprived of compounding benefits during the first 15 years of their career when the traditional pension benefit was withdrawn for most.

Andrew, sorry I still can't find a more positive topic to discuss. But I will.

401k Watch 5/15/09 - S&P Slips Back into the Red for the Year

S&P Crosses the Mendoza Line for the Year

401k Watch - 5/8/2009

A Century of Life in the Era of The Great Transition

A Century of Life in the Era of The Great Transition

In the 21st century, economic theory has to evlove with new thinking to manage the transition of our society out of the hands of the “B” generation to the generations in waiting – X, Y and Z.

The planning that has paved the way from the end of World War II to the end of the last century raised our standard of living to be the highest in the world – unfortunately, the methods used in this period may not be sufficient to manage the natural demographic changes yet to come.

Going forward different and in many cases experimental planning has to evolve and much of it will occur on a just in time basis. For most individuals this means coming to terms with all of their unfunded life liabilities and then preparing to transition any remaining assets to each successor generation.
The Great Transition will fill the minds of our younger people with tremendous doubt and uncertainty as they struggle to find employment that matches their ever increasing skill levels. Even though our multi national corporations dominant the planet in so many different industries, they have little or no allegiance to any particular country or economy, the U.S. included. Their ability to resettle the production of goods and services to the lowest cost regions around the world, enabled in large part by the vast technology changes since 1980, has forever altered our ability to feel financially secure working for any of these companies.
All the while our legacy industries have accumulated so much unfunded liabilities that the U.S. government will be more a lender of last resort than an enabler of economic growth, as private capital exits the country as the public debt mounts for the next 40 years. Our personal financial security has become a casualty of the political conditions that prevailed throughout the first decade of this young century.
We all have to face the new economic reality that many of us are bankrupt but don’t know it and a vast majority of us will not have the money to sustain the same standard of living we enjoyed in the last two decades of the 20th century.
The Great Transition will be particularly hard on the “B” generation because they had so many promises broken by the government and their employers costing them precious time to find alternate channels for acquiring the resources to maintain their quality of life once in retirement.
The generations in waiting – X, Y and Z, will alter the economic landscape in ways that are far more exciting and unpredictable than we can imagine, and they will also have their moments of discontent and muted euphoria just as the “B” Generation had.
With 4 generations coexisting side-by-side, the amount of bargaining amongst them will determine each generation’s financial security. We are about to undergo an economic transition over the next 10 to 15 years that the U.S. has never experienced before with its government implementing policy on a just in time basis. Anyone who thinks that history will repeat itself is dead wrong.

The grandparents of the “B” Generation still living today will face their ultimate demise in this time. They are the only living generation that is solvent and whatever resources they have that have not been consumed by their long term care needs will be left in the hands of the “B” Generation so they can pay off their debts.
This may be too little and too late as the unfunded liabilities of this generation continue to build. When it’s their time to retire, their unencumbered assets – primary residences and diminished retirement accounts – will be put out to bid to generations X and Y in what is likely to be the largest bargain basement sale ever in the world. There just will be more sellers than buyers for the next 30 to 40 years! How the younger generations manage this economic calamity is beyond my imagination. They lack the formal economic education to manage demographic changes of this magnitude.
I honestly believe that if the government of the United States were to offer every citizen a life time of financial security, albeit with a lower standard of living, 80% of the population would say yes.
So let’s get on with the hard work of making sure this is a decision you never have to make. Remember we are in an economic transition period that no one has ever dealt with before. The more you learn - the more you know - and the more you are prepared: help yourself with the struggle to achieve financial security in this country.

As the path ahead becomes shorter for many of us, does that mean the end is in sight and the journey is almost over? Or, is it just another stop along the way? Or, maybe it’s both.

We Owe How Much?

What Say You

There are those of us that do (Y Squared) and there are those who criticize what we do (X).
I remember what my old friend who was an executive where I worked said to me - "Tom, there are people who never do anything but criticize what other's do because they are afraid to take a risk."

What say you?

401k Watch - 5/1/2009

Don't be a Square - Be Y Squared

Don't be a square, be "Y Squared".
Join us. It just takes being your self.
We all have Y Squared within us. Our shyness and fear of rejection keeps it hidden.
Oh, what is Y squared?
Do you think outside the box?
Do you you have an idea that no one ever thought of and want to express it but are afraid to?
Do you hate the status - quo and wish you could change things?
Do you have a point of view about life, politics, finance, relationships and you want an outlet to let it go?

Become Y Squared.

Exress youself.
We are what makes a difference in the world.
We have integrity.
We are willing to risk popularity to express our selves.

Enter your Y Squared ideas on this blog. It will not be stolen. Look at this site as a safe have to say what you want to say - but no trashing and no profanity - just Y Squared ideas and thoughts.
Be constructive not destructive. Be an individual in the Y Squared population.

Don't be square - be Y Squared!

Tom

National Net Worth Index Declines in First Quarter 2009

National Net Worth Index declines to -.2069 from -.066 at 2008 year-end, as U.S. real GDP fell at an annual rate of 6.1% and government borrowings grew.

U.S. national debt rises 11%, or $1.1 trillion to $11.1 trillion in the quarter

U.S. consumer debt showed no change at $2.6 trillion at the end of the quarter

The S&P 500 index declined 11.67% in the quarter

GDP and debt data sourced from the U.S. Commerce Department,

The U.S. Treasury and the Federal Reserve Bank of New York. S&P results sourced from Standard and Poors. The charts are derived by Y Squared Advisors and The National Net Worth Index is a proprietary index. All rights reserved.

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401k Watch - 4/24/09

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