StrategicPoint Blog

Misguided Financial Advice

Derek Amey — Thu, 13 Aug 2015 00:00:00 GMT

Last week, one of the most popular articles seen on a variety of investing and financial websites was built around a pithy quote from Jack Bogle, the founder of Vanguard, and his “Surprising Retirement Advice.” The crux of the article is that as investors are saving for retirement, he believes you should resist the urge to look at your statement and just throw it away without opening it. With all due respect, I believe this is some of the WORST financial advice I have ever seen.

My Concern
As a financial advisor I have so many issues with this advice, but my primary source of anger is because I believe most Americans would BENEFIT greatly by opening their statement and doing an honest assessment of their total current retirement savings and from reviewing their current savings rate. Better advice would have been to open your statement to figure out what you have saved. Then, find out how much you’re adding to your account every year. Next, project what those savings may grow to before you reach retirement age and then determine if that’s enough to live on for the rest of your life. Better yet, if you are like the average American and don’t know where to even start to figure any of that out, seek out the help from a professional that can assist you!

Jack’s folksy advice makes far too many assumptions that he doesn’t even mention in the interview. The reality that I’ve seen, both firsthand and from studies that I read, is that ironically many people DO follow Jack’s advice. Whether they feel ashamed or embarrassed or frustrated that they can’t save more, far too many of us don’t open our statements, to our own detriment. It’s not until we finally start to take retirement seriously that we realize ignoring our statements all these years was a wasted opportunity.

Let’s run through some of the bigger assumptions that Jack missed:

Savings Rates
Bogle states that when you get to retirement, only then should you open your retirement statements that you’ve been ignoring all these years. Quaintly he jokes that you should “have a cardiologist standing by” because his inference is that you will have so much money that you will have a heart attack.

While there is no way to guarantee that can happen, there’s one sure way to guarantee it won’t happen, and that’s by not saving enough in! Studies and opinions vary on what is the ideal percentage we should be saving every week for retirement. There are so many variables that can affect the target savings percentage, but a generic rule of thumb is that we should be saving 15% of our income towards retirement. The reality is that the average American is nowhere even close to this number! I’ve written about this before- we see far too many Americans who aren’t even saving enough to get the company match, let alone reach a lofty goal like 15%.

Jack’s advice is predicated on an assumption that you’ve committed the correct amount of savings each and every year of your working life to reach your financial goals. My experience is that far too many of us are falling short and if you don’t open your statement and review the amount you’re socking away every year, you’ll never know. By the way, if you’re unsure if you are saving enough, I encourage you to schedule a meeting with myself or another advisor who can help assess your personal situation. Between Pensions, social security estimates, mortgage balances, inheritances and a myriad of other factors, it’s disingenuous to think one size fits all.

Sadly, if you do follow Jack’s advice and don’t open your statement AND you aren’t saving enough every year towards retirement you probably will need a doctor on hand…..because only then will you realize you’re woefully underprepared to retire.

Investment Allocations
One of Jack’s last comments was “believe me it pays off.” The inference that if you commit to saving and commit to investing without worrying about every gyration in the stock market, that in the long run you will find your retirement savings have grown substantially.

This comment reminds me of one of the earliest discussions I had with a 20-something investor. This investor was just starting their career and was seeking investment advice for the money that they were saving in their 401k. Armed with little investment knowledge, when I began to educate them on how the markets work and how they could lose money the person became concerned about risk and was adamant that they “did not want to lose any of my hard earned money.” They wanted to put all of their savings in a money market, earning a paltry amount of interest but ensuring that they probably would never lose any money.

After we talked some more and I educated them on the benefits of long term investing they began to see the error in their ways. I helped craft them a portfolio suitable for someone with a 40+ time horizon until retirement and one that has a far better chance to grow over their working career than a money market.

I bring this scenario up for this reason: if that person hadn’t sought out help when they started out and they had followed Jack’s advice of throwing their statements away, when they finally opened that statement in retirement, I suspect they would be far more disappointed than shocked at the paltry returns they experienced over their 40 years of working.

Jack’s advice assumes that each of us have a portfolio that has been crafted properly for our time horizon, our financial goals, and our willingness and ability to invest. Again, my personal experience from meeting with folks as an advisor coupled with research on investing allocations in retirement accounts show that the exact opposite is happening. Recent studies show that younger investors aren’t taking enough risk in their retirement portfolios, and at the same time some baby-boomers may be taking too much risk.

My point is that Jack assumes that the investor who throws his statements away is allocated properly based on their own individual goals. The reality is that it’s hard for people to know if they are allocated correctly and IF we know that many Americans are failing to allocate their retirement savings properly, there is very little chance that upon retirement they will be “amazed” at the amount of money they have amassed (as Jack has inferred).

In closing
We need more financial literacy in this country and better financial commentary. One-liners about retirement that seem to insinuate that if you just ignore your retirement savings, that upon that fateful day when you finally reach retirement you will have more money than you ever imagined, isn’t advice. We’d all be better off if more people opened their statements and took a little time to understand how they are invested, how much they are saving every year and trying to figure out ways to save more. If you’ve tried to do this and found the terms and numbers too confusing there are plenty of resources for help, don’t be afraid to ask for help!

Derek Amey serves as Managing Director and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Cash Flow Tips for Small Business Owners

Derek Amey — Mon, 29 Jun 2015 00:00:00 GMT

Whenever I start a meeting with a client, one of the first topics I bring up is “How is your cash flow month to month?” If a client is finding it difficult to juggle all of their financial commitments, I’ll sit with them and prepare a high level budget. This helps me to look for issues and recommend solutions. For many folks, they’d rather watch paint dry than sit down and do a family budget. However, (much like a tooth ache) if you ignore it for too long, fixing it could end up costing you more time and money than if you had just addressed it when the first sign of pain arrived.
When I speak with small business owners, cash flow is frequently a source of frustration. Vendors want to be paid yesterday and clients want to pay tomorrow. Inevitably surprises will come, and the coffers may be empty. Here are some tips that can help manage the process:

Prioritize your bills
Not every bill must be paid immediately. Knowing who needs to be paid and when will help you manage your cash flow. Obviously payroll, rent, utility and taxes all must be paid immediately or your business could suffer major ramifications. However, all other major bills should be reviewed for payment structure and potential discounts. Suppliers and other vendors will often allow flexibility. Don’t be afraid to negotiate and leverage deals and view your key vendors as partners who can help your business succeed.

Create a rainy day fund
Just as we should have an emergency reserve fund for our personal lives, businesses should also work on building up a cash reserve. Unexpected expenses are an obvious reason to build a rainy day fund, but the unexpected opportunity is just as important. A few friends of mine are in construction, and I can’t tell you how many times they were able to scoop up a used piece of equipment from a motivated seller because they had cash on hand. However, keep the reserve reasonable. In today’s low interest or non-existent interest rate environment, having too much cash means it’s not working to grow your business and should be used elsewhere.

Create a cash flow forecasting template
Mastering basic cash flow procedures can increase the viability and profitability of your business. The key is to create a repeatable and structured process. There are many great tools online now that will help you start and manage both your cash flow reports and forecasts. Take a minute to Google “small business cash flow template” and download a few different versions until you find one that fits your needs and your business. These templates will help you map where you are today and your expectations for your business typically over a 12 month period. Think of this as preventative medicine. You are putting the time into doing this so you can identify potential issues and create a game plan now on how best to handle them.

Know when to hire a professional
To keep costs down many small business owners start out doing their own bookkeeping, payroll and accounting themselves. The key is to know when to relinquish control and hire a professional. Ask yourself if the time, energy and stress you feel handling tasks like payroll checks, managing employees benefits and reconciling bank statements is really worth your time. Yes, these tasks need to be completed and it may seem cheaper to do it yourself, but they are taking time away from your schedule that could probably be best spent elsewhere. We’ve heard from many small business owners that it wasn’t until they hired a professional to handle some of these mundane tasks that they realized how poor a job they were doing. Know when to let tasks go, and what your true value is to your company. Sometimes keeping costs down may actually be costing you money.

Running a successful business is extremely hard work. Analyzing cash flow maybe the last thing you want to sit down and do but done properly and with a commitment the benefits can outweigh the costs. With the right approach, many business owners may find that it actually results in costs savings and reduces errors, which should lead to less stress and more time for you to focus on running your business.

See full article in the Rhode Island Small Business Journal

Derek Amey serves as Managing Director and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Buy or lease? A Business Owner’s Dilemma

Derek Amey — Fri, 15 May 2015 00:00:00 GMT

This past February, I authored an article for the Rhode Island Small Business Journal entitled: Buy or lease? A Business Owner’s Dilemma.

One of my friends is a successful small business woman. She’s struggling with a big decision and one that many small business owners face at some point, “Should I continue to lease or look to buy my building?” It is a big challenge for business owners, and many struggle to determine the correct course of action. Conversely, leasing does create business risk that needs to be considered, especially as your business matures.

Location and Portability
Depending on your type of business, your building and its location may not matter. My friend’s business is very retail-oriented. While the business is relatively young, its home has been in the same location for quite some time. Her clients have grown accustomed to the location, and she’s spent time and money upgrading the facilities even though she only rents the space. While it’s difficult to quantify, I personally believe the space she occupies is part of her corporate brand, and moving could potentially affect the success of her business.

My friend’s business requires a large amount of space, so if she was forced to relocate, she may find it challenging to find a space suitable. Determining how portable your business is and identifying how much your current location factors in to your overall sales is important and something you need to consider when deciding whether buying or continuing to lease is right for you.

As we spoke, it became clear to us that she could potentially be forced to move in the near future because the building owner had approached her about selling it. There is some concern that if she passes on the opportunity, the current owners would seek other buyers, and then where does her business fit into the dialogue? Her lease expires next year and she worries that the new owners may force her out. She felt herself leaning towards buying.

Financing and Titling
One must consider which entity is buying the building and how to finance it. My friend’s landlord offered to do seller financing, whereby the building legally changes hands and the previous landlord acts like the bank...

See full article in the Rhode Island Small Business Journal.

Derek Amey serves as Managing Director and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Worried About a Market Sell-Off?

Derek Amey — Mon, 04 May 2015 00:00:00 GMT

A client recently contacted me asking for my thoughts on an article which referenced that a few money managers had been sitting on “elevated” cash positions. These managers were hopeful that a correction in stock prices would be developing soon and that a sell-off would allow them to buy stocks at a cheaper price than where markets are currently. Below is my response to this client; I thought others may enjoy reading my current outlook on stocks and the economy as a whole.

Q1 was clearly soft. Although from my view, it appears many of the reasons were transitory in nature (the west coast massive port shutdowns were a huge reason for this slowdown). This may explain why stocks continue to make new highs in the face of soft data, meaning many other investors are writing off the weakness as a combination of “one-of” events.

Interestingly enough, Q1 over the last 20 years has shown itself to be consistently weak. See here: https://pbs.twimg.com/media/CDyfcNhVAAIHTxj.jpg

(I haven’t found any studies explaining this phenomenon, although I suspect that winter weather and post-holiday spending slowdowns play a tremendous role)

This earnings season has been mixed, bears keep pointing to subdued beats on the revenue side, bulls point to 67% of companies topping earnings expectations. We want to see a few more months of data points to see if the weakness grows, or if the snapback in economic activity everyone is calling for becomes reality. New England should snap back, following that winter we just had. That seems obvious. What we want to see after the initial pent-up demand subsides, is that the trend in activity is still higher. But we’re also seeing growth around other parts of the US.

Chicago PMI (many look at Chicago as highly correlated with rest of the US) came out last week and it came in above expectations. This was important because reports to start the year were rather weak. New orders in the report surged, as did backlog orders- both key elements we want to see. What is key is if the data continues to trend higher, and at the moment, only time will tell.

Valuations in the US are higher than average, but we’re not even one standard deviation away from the 25-year average. We would have to get to 19 times forward P/E for that to occur. High valuations are not a catalyst for a pullback; they’re merely a part of an overall environment for one to occur. If economic activity does continue to pick up and that translates into higher earnings, we should see further upside throughout the rest of 2015, especially if companies start speaking more positively about the future.

What we don’t see at this moment are conditions that typically mark the end of a bull market. Things like excessive use of leverage, the Fed raising rates numerous times (starting to raise rates has historically not been the end of bull markets), narrowing leadership in equities to a small group of stocks or specific sector, or extremely stretched valuations. None of these are present at the moment.

I think it’s fairly easy to write these articles or insinuate that a pullback is coming. Because of the broken clock theory, sooner or later one will occur, just as a broken clock is right twice a day. It has been about 3 ½ years since a 10% correction has occurred, which is what feeds into many folks prognostication. I agree that it does feel as if we’re overdue and in many ways I would welcome this. So many market commentators have been calling for a correction for so long that I think the market would react positively. I think some folks would say:

“Phew. Now that we got that out of the way I can plow more money into equities.”

The current length of time without a correction isn’t a record (the run from 1990 to 1997 was almost 7 years to the day without a 10% correction) and the 2002 bull market lasted about 4 ½ years.

To summarize, in the short-term (this summer) I wouldn’t be surprised to see a 6-7% correction. I don’t think we will get that 10% pullback because of the fact that so many people continue to sit on cash as the article referenced. I believe that they may be eager to pull the trigger ahead of the magical “10%” correction level in stocks, and so I’m just not sure it would occur. Fear about the Fed and what raising rates will do to the economy and the markets will certainly seep into the day to day fluctuations. But my base case for equities at this point is that they will continue to grind higher along with our economic activity, even if the path to higher prices is a little more jagged than it had been in the past.

Derek Amey serves as Managing Director and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Annual 401k Match: Whoever Heard of Such a Thing?

Derek Amey — Mon, 02 Mar 2015 00:00:00 GMT

A few weeks ago a friend and I were talking about retirement and our 401k plans. His company had recently changed their retirement plan and he’s been reviewing the paperwork for his new 401k.

As he read through his new employee handbook, it seemed to insinuate that his employer would match his contribution just once a year. Clearly irritated, he asked me “Is that even legal?” I’ve spoken before about the importance of making sure folks get their full match. This change to his plan certainly wasn’t encouraging him to save, but it is legal.

Game changer
Typically, as you contribute to your 401k from your paycheck, your employer match is deposited with your contribution. The two contributions then enjoy the benefits of dollar-cost averaging together. See here for a refresher on the benefits of dollar cost averaging. The plan my friend now has changes the contribution rules completely.

Here are the differences:
•   Contribution is made as a one-time lump sum
•   Timing of the lump sum is at the companies discretion
•   If an employee leaves work for any reason, by their choice or their employers, the employee will receive no match. The match is NOT prorated.

The last bullet point is where most frustration lies. In theory you would work for 364 days of a year, get laid off on the last day and you will receive no match for that year.

401k plans such as these take the “match” aspect out of employee’s contributions, and align it more with an annual bonus type structure. In my opinion, it removes a key incentive to encourage employees to save for retirement, and instead makes it more of an employee retention tool, which is frustrating.

A disturbing trend?
Two recent retirement plan studies show that 401k’s with an annual match are so far a minority. Surveys from the past few years show adoption of plans like these range between 8-11%, and most of those plans are the older variety that never adopted the traditional paycheck 401k match. Charles Schwab, for example, has had an annual match since first rolling out their 401k.

IBM switched to an annual match program in 2012. Due to the size of the company and the number of employees, the move garnered much attention, including that from a few United States Senators who wrote to the company trying to stop the change. IBM chose to ignore the outcries and made the switch regardless. In IBM’s defense, they do offer a higher than average match, and they also offer employees access to a financial planner so that employees can get advice one-on-one.

Many were concerned at the time that a shift to an annual match from such a large and household name like IBM would lead to other companies following suit. That has yet to materialize, although AOL tried last year to adopt the same measures. AOL’s proposal was met with huge resistance from employees, who then took the media outlets for support. AOL ultimately reversed its decision and continues to match 401k contributions in the traditional manner. Kudos to the AOL employees on behalf of the rest of us, because by taking the fight to the media and winning, perhaps other companies have changed their mind about making such a move.

What you can do if you have a plan with annual match
If your employer does annual 401k matches there may not be much you can do about changing it. Certainly complaining to your HR department would be one suggestion. In fact, folks working in your HR department should be on your side as they themselves are only receiving the annual match.

For couples who find it hard to save enough every year, you may want to review the plan details for your spouse. I met a couple once who were both saving the identical same 5% from their paychecks. They were doing themselves a disservice however, as the husband’s plan only matched the first 3% while the wife’s plan matched up to 6%. You will need to crunch some numbers, and consider your salaries, as that will determine the nominal difference you might benefit from by overloading one spouse’s plan against another.

We find that typically folks who save in a ROTH or Traditional IRA wait and make a lump sum contribution during tax time. We encourage these folks to switch to a monthly contribution amount, to mitigate some of the effect of the annual 401k match.

Finally, if you have one of these plans we strongly urge folks to review their 401k plan for how contributions are allocated in your account. Since the lump sum could be substantial, the addition of new money could throw off your overall allocation depending on how new money is allocated. We’ve seen folks who forgot that new money was being allocated only to a money market account, and there it sat until the person finally reviewed their portfolio and caught the error.

While 401k plans that have an annual match aren’t an ideal situation for employees, it’s key to remember that saving is your primary goal. Don’t let the timing of the company’s match dissuade you from saving in your plan. 401k plans are a great tool that we have at our disposal and don’t let your frustration lead you to choosing not to contribute!

Derek Amey serves as Managing Director and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Where’s my 1099? {The 2015 edition}

Derek Amey — Wed, 18 Feb 2015 00:00:00 GMT

Last year I wrote a blog about 1099’s and why investors should expect their 1099’s to arrive in late February. I thought now would be a good time to republish this blog, because most of the information is still accurate.

I said it last year, and I will say it again this year; unless there is a major change in tax laws, or a technological breakthrough on tracking gains and losses, the January 31st deadline for 1099’s may never return.

OK, but why?
The primary cause of delayed 1099s has been around since 2003. Back in 2003, the President and Congress passed a bill that changed the tax code for dividends, lowering our taxes on certain dividends. Corporations must now report the breakdown of their dividend payments between ordinary dividends and qualified dividends. The treatment for taxpayers is different between the two dividend categories; thus it must be broken out to ensure proper tax filing. This change was a positive to all of our wallets, but a negative to our poor accountant’s mental state. For many accountants, they’ve lost 28 days in February that they used to have to be able to start returns and instead gained yet another line item that must be entered and reviewed.

Who’s to blame? We’re all to blame a little bit!
I was here at StrategicPoint in 2004. That was the first tax season following the tax law change. It was a very “difficult” tax season as folks saw as many as 5 or 6 revisions to their initial 1099. The clearing firms blamed the mutual fund companies, the mutual fund companies blamed the corporations and the corporations blamed Washington DC and the taxpayers for having the audacity to want lower taxes. The clearing firms were correct because all they could do was report what the mutual fund houses told them. The mutual fund houses were also correct because they had to wait to hear from the corporations on what type of dividend was paid out. Finally, the corporations were correct in that the determination on what type of dividend was paid can and does take time, which delayed the entire process. With each revised 1099, it meant refilling a corrected tax return which meant another charge from the tax preparer. To top it off, in many cases the nominal difference in the categories of qualified verse ordinary was minuscule.

Why does it seem to be getting later and later every year?
This part is different for 2015. This year hopefully most 1099s will be mailed by February 27th, which was the same day as last year. So even if it seems like they may be arriving later in 2015, they are actually being mailed the same exact day. If an investor owns a complex investment (like a REMIC or some very specific UIT’s) there may be further delays until March. However, for the average investor this should not apply. The delays, like previous years, are being done to save everyone time, money and energy. The hope is that with the delayed mailing date, hardly any revisions will need to me made, which means clients, accountants, and everyone in between will stop finger pointing and just get the taxes done accurately. While the delayed date can fray tax payers’ and the tax preparers’ patience during tax season, knowing that the forms are less likely to be revised means getting taxes done once and right the first time.

Derek Amey serves as Managing Director and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Derek Amey with Frank Coletta from WJAR/NBC 10: Why does it seem like the price of oil goes down every day?

Derek Amey — Mon, 12 Jan 2015 00:00:00 GMT

Building on his December 10th blog, Derek Amey spoke with WJAR’s Frank Coletta about the price of oil.

Why does it seem like the price of oil goes down every day?

Derek Amey — Wed, 10 Dec 2014 00:00:00 GMT

I’ve had a few folks recently ask about the drop in oil prices, and I suspect some of you may have questions as well. I thought I’d pass on my current thoughts.

Right now, the volatility and speed of oil’s pullback has been amazing. However, this is not unusual for commodities. For example, serious coffee drinkers will be able to talk about how coffee bean prices spiked over 20% in the first few months of 2014 following concerns about supply. Keep in mind that commodities do not have a quarterly reporting season. They don’t have cash flows, they can’t declare or pay dividends, and there isn’t a new “iOil Barrel Six Plus with Retina display” release coming out.

So unlike stocks, commodity traders spend a far greater time looking at charts and chart patterns trying to figure out where the price might be headed. The recent selloff in oil broke through some “Fibonacci” support lines, which is a fancy way of saying people freaked out when it broke $82, and then $72. Next up would be a break below $62, which is occurring as I write this.

OK, so what’s going on? And what may happen? Here’s a list, while it’s none of these things individually, I believe it’s a combination of all these factors:

• During Thanksgiving week, oil had huge swings in price, mostly due to the OPEC meeting. The timing of the OPEC meeting was ideal for major moves since the US markets were closed, or holiday-staffed. Those sharp moves created panic and fear.

• OPEC refused to cut production and the price of oil dropped. Heading into the meeting, the outlook was split between a cut and no cut in oil production by OPEC. Without a clear consensus view, volatility was a fore gone conclusion.

• US production is at THE HIGHEST RATE PER DAY SINCE 1986. This is happening at an amazing rate of change too, and as of right now there doesn’t appear to be any stalling. Since 2008, production has increased at an annual rate of almost 9%. In fact, we’ve almost doubled production per day, from the early 2000’s. Look at the chart from the US Energy Information Administration:

•   We have a weaker global economy. Forecasts for total energy consumption around the globe are coming in below expectations, as the Eurozone and China continue to struggle to find economic growth. There’s chatter that next year may be weaker than currently expected as well, so demand for oil is currently moving in the wrong direction to support high prices.
•   Libya, Iran and Iraq have all increased production at a faster rate than originally expected. Libya alone has gone from 200k barrels a day in late 2013, to almost 800k a day now. These may seem like insignificant amounts globally, but it’s all about what’s happening on the margins. This rapid move back online was NOT expected. If these growth rates were to continue, supply will be higher than originally thought.
•   Citibank estimates that the world is producing 700k MORE barrels a day than the world currently needs. That sort of glut doesn’t evaporate overnight. Economics 101: if the supply of something is growing, while the demand is weakening, typically price has only one way to go, DOWN!
•   There’s a LOT of debate around whether OPEC has given up, or plain lost its “control” of the oil market. They still produce 40% of the oil globally, but there was always a belief embedded in projects and production that there is an “OPEC PUT” on prices, meaning that they would defend a higher price to support the government’s in OPEC. Without a clear reason, there are a lot of theories as to why they didn’t cut production.

The most likely explanation is that they are losing market share AND they believe they have some leverage. The cost to get a barrel of oil out of the ground in the US is far greater than it is in the Middle East (though there’s debate about how much it really costs here in the US; some think it’s far lower than reported for places like the Dakotas). Yes, OPEC nations are heavily dependent on the cash flow that higher oil prices support, but they appear to be willing to play chicken with the US producers to regain market share.

So where does all this lead?
Well, for one, inflation should be contained and for much longer than expected. US Consumers are benefitting from a tremendous “tax break” and in turn this could keep wage inflation expectations at bay. Lower inflation could allow the Fed to delay a change in policy for longer than originally expected. Manufacturing and other sectors of the economy that are dependent on oil as a cost input should benefit (i.e., the transportation sector). Retailers and restaurants should also benefit, and we have seen data points over the last months that seem to show that the savings at the pump are being spent in those places. Automobile sales should also benefit. From everything that I’ve read and analyzed, the net effect on the US economy is positive, even if the energy sector is struggling. We believe that lower oil prices should be a tailwind for the US Economy, and that should be supportive for higher equity prices overall.

Derek Amey serves as Managing Director and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Are You Underpaid? Is It Your Fault?

Derek Amey — Fri, 21 Nov 2014 00:00:00 GMT

What would you say if I told you that many Americans are under paid?
You’d probably shake your head yes, and then daydream about how you can get your boss to give you a raise.

Now what would you say if I told you that many Americans are not receiving the full share of their salary, and it’s THEIR OWN FAULT?
You’re probably confused, wondering if you are one of these people, and what the heck I’m talking about.

There was a headline that made the rounds the other day about Boeing employees who collectively left $98 Million dollars on the table during calendar year of 2013. The culprit? The failure of tens of thousands of Boeing employees to contribute enough to get the full match in the Boeing 401(k) plan. According to the article, over 8,400 employees didn’t contribute a dollar to the plan, and another 48,000 didn’t save enough to get the full match. The failure of all these Boeing employees to contribute enough to get the full match that they are due as employees brought the total loss of salary to $98,000,000. Keep in mind, that was just for one year, 2013.

Let me be perfectly blunt, the match to your 401k is part of your total compensation package from your employer! Failing to contribute enough to your retirement plan is the equivalent of taking a pay cut. There’s no one to blame but the employee if they fail to get the full match. Yes, I’m fully aware that many folks struggle to make ends meet, living from paycheck to paycheck. But I implore you to do a monthly balance sheet, and see if there isn’t a way to save enough to get the full match. For some of you, the match you are not receiving is real money! Let’s take a look to see what I mean.

Boeing employees, according to an online handbook, are offered a 100% match on the first 4% the employee defers, and then 50% for the next 4%. This brings the effective match to 6%. This is a fairly robust match, although I know of a few local companies that go as high as 10%.

Let’s assume for a moment that’s a typical match for a working couple. Let’s further assume that a husband and wife are making $100,000 combined. If this couple chooses not to save one single dollar, their missing out on $6,000 a year in savings via their match. That’s $500 a month! Multiply that by 4 years, and you have $24,000, that you aren’t earning.

Be aware that if you are one of these people who are coming up short, more and more companies are starting to be more proactive and address your lack of contributions. I know of one fairly large local company that recently announced that effective immediately, every employee will default to a 7% contribution to their 401(k). This was not by accident, as the 7% is the required amount to get the full match. To opt out of this default, employees must call and talk with a representative who will be armed with information and education to try and convince their employee to stick with the default.

This move is a progressive way of trying to address the overall issue: far too many Americans are not saving enough for retirement. So far it’s one of the most aggressive moves I’ve ever seen, and it will be interesting to see other companies follow suit. Regardless of if they do or not, I can’t encourage folks enough: don’t be like those Boeing employees. The total compensation for the job that you do includes your 401(k) match. Failure to save enough to get the full match is equivalent to taking a pay cut!

Derek Amey serves as Managing Director and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Do-it-Yourself Retirement Planning: When to Enlist a Professional

Derek Amey — Fri, 19 Sep 2014 00:00:00 GMT

My wife and I bought our first home last year. As serial renters for the last 15+ years, we vastly underestimated the amount of time and energy that go into home ownership. As many of you probably experienced when you purchased your first home, my wife and I had a steep learning curve on what it takes to MAINTAIN a home, never mind make improvements! Luckily for us we have some handy relatives, and when in doubt, the internet is full of how-to videos. We’ve been enjoying doing some small projects around the house because the great thing about many do-it-yourself projects is the immediate feedback. The feeling of accomplishment when we lay our tools down has been great.

For example, we had an outdoor spigot that leaked for much of the winter. We watched as giant icicles grew from the leak and as the size of the icicles grew, so did my fear that the pipe would burst. After a few attempts to determine the culprit we were able to apply a fix and thankfully stop the leak. It was a simple process: determine the issue, figure out a plan to address it, apply the fix, and then wait and see if it was successful. The immediate feedback for many projects around the house let you know if you fixed it or if you have to try again.

However, some projects are just too big or the risk is too great for my wife and me to attempt. Last November we had no heat when our boiler stopped working. I admit I was too afraid to attempt this project myself. Messing up a project that involves oil and fire risked my death! I knew my limitations as a “handyman.” I lacked expertise, I lacked the tools and I lacked the time to learn what needed to be done to fix it. I was also worried that even if my heat turned back on, had I merely placed a Band-Aid over a bigger issue? I weighed the thought of doing it myself against the risk and the possibility of me making a mistake, and what the costs would be then if I did. I needed to call in an expert and after a few visits from our local oil company, the faulty igniter was identified and replaced. I believe anyone saving for a financial goal, whether it is planning for retirement or funding for a child’s college, should start thinking along these same lines.

If I go it alone, what am I risking and what will be the reward?
Identifying large financial issues should be fairly straight forward. “Am I saving enough for my daughter’s college?”, “Can we afford to retire?”, “How do we balance our current needs with our long term goals?” Following my house analogy, there is an issue with many of these questions in that there is no immediate feedback. Retirement for many Americans is a huge source of stress, and thankfully far enough in the future that current “fixes” can be applied. However, far too many Americans will not know if their “fixes” were real solutions or just a Band-Aid, until it’s far too late.

There’s no shame in asking for professional help.
At first I was frustrated that I couldn’t figure out what was wrong with my boiler, and that I couldn’t fix it on my own. And yes, I was also mentally wondering “how much is this going to cost me?” before the professional even arrived. However, it was all ego and bravado and I quickly got over it when I realized one false move could cause my house to blow up. Once the repairman arrived, I felt relieved that he was there and that a professional was assessing the situation. In fact, he also spotted another problem we had with our current system. Once that was fixed we cut down on the amount of oil I was burning, so in the long run we saved money. I can only imagine how lightly my wife would have slept the night that her husband, with no prior experience and not many tools, was down messing around with the boiler. While retirement planning or saving for a child’s education may not risk physical harm, the damage to one’s retirement lifestyle or college choice due to finances is still great.

I’m not insinuating that everyone MUST seek out the help of a professional. I’d like to think that as a college graduate, that if I had spent enough time reading and watching videos on boiler maintenance I probably could have fixed it myself. How long that would have taken is anyone’s guess, and we were freezing without our heat. Fixing a boiler, or ensuring your retirement plans are on track, can be done by most anyone if the person has the drive and massive amounts of time and energy it takes to become an expert in their task. It didn’t take much for me to know deep down that I wasn’t going to be able to do that and that I would be placing my family in danger by trying to go it alone. Therein lies the biggest question: are you risking too much by attempting to do this on your own? If you’re afraid to admit you need help, I encourage you to swallow your pride and find someone you trust and ask. Huge financial goals are not leaking faucets; for most of us they are broken boilers.

Derek Amey serves as Managing Director and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

The Participation Rate, Explained

Derek Amey — Tue, 02 Sep 2014 00:00:00 GMT

In honor of Labor Day, we thought we’d take a deeper look at one of the most talked about statistics surrounding the US labor market: the participation rate. The participation rate is a ratio that counts the number of people over the age of 16 who are working or are currently looking for work. Homemakers, students and retirees under the age of 64 are not counted as part of the labor force. Thus, you are left with a view of how many folks in US are working, or looking for work, as a percentage of the entire US adult population. The participation rate for much of the past 25 years has hovered around 66%. The remaining 34% of folks would be considered not in the labor force. Recently however, the participation rate has started to drop precipitously, and there’s been a debate as to why that is.

The participation rate is an important statistic for economists and the Fed to judge the health of the labor market. Consider an island with 100 people who are the entire labor force. Imagine that 90 folks are working, and the remaining 10 folks are looking for work but have yet to find jobs. The participation rate of the island would be 100%, and your unemployment rate would be 10%. Now imagine that 5 of these folks who are unemployed just give up looking for work. This is a critical point, because removing these 5 people from the labor force changes the ratios immensely. Removing these folks from the labor force drops the participation rate to 95%. Even more importantly, the unemployment rate drops from 10% to 5.26% (remaining 5 unemployed folks looking for work out of a new total labor force of 95 gets you a 5.26% unemployment rate.) This is because the unemployment rate is the number of people without a job who are looking, divided by the entire labor force. One can easily see that the sudden massive drop in the unemployment rate isn’t the result of an economy producing more jobs; it’s the result of discouraged workers removing themselves from the labor force. Herein lies the current dilemma with the United States and the labor market: the participation rate has been dropping for 10+ years and the drop is skewing the unemployment rate.

Our simplistic island scenario does not translate well to an economy and a pool of workers that is as large as the United States. Even when unemployment was extremely low (the 1990’s), the participation rate was never higher than 68%. The absolute level is important, but the direction of the change in trend is far more telling. There will always be a pool of folks who are out of the labor force for a variety of reasons. This is partly why the Fed, and specifically Janet Yellen, uses a variety of jobs data to try and gauge the health of the labor market. As we saw on the island, using just the unemployment rate to judge the health of the jobs market can be misleading. All else equal, a drop in the unemployment rate that is highly comprised of folks removing themselves from the labor force would be an ominous sign. Since February of this year, the US has averaged over 200k in new jobs per month, the last time America saw job growth of over 200k for six straight months was 1997, a period of robust economic growth. Thus the drop in the unemployment rate has been real, but the drop in the participation rate is cause for some concern.

As you can see in the chart below, the participation rate has seen a precipitous drop since the 2008 recession. The current participation rate is matching levels not seen since the late 1970’s, even as the jobless rate has fallen into the 6% range.

Beginning five years ago, roughly 10,000 baby boomers have retired every single day. In fact that average of 10k per day will run from 2009 until 2030. The massive wave of retirees has had a considerable effect on the participation rate, but determining how much of an effect has been challenging. In May, Janet Yellen said to the Joint Economic Committee, “We really need to figure out what portion of the labor force participation-rate decline is secular and what part is cyclical.” This is crucial, because if a large part of the drop in the rate is not due to changing demographics of the American worker, the drop would be from a rise in discouraged workers. This is a common result of a recession, however looking at the shaded areas of previous recessions in the United States we typically do not see such large drops in the participation rate.

Remember that the participation rate includes those currently looking for a job. This is the crux of the counter argument to low unemployment rates. Folks worry that the unemployment rate is falling for the wrong reason: people leaving the labor force en masse. If these folks were to begin to return to the labor force in large quantities due to a firmer job market, then you could actually see the unemployment rate rise. Since the Fed has a dual mandate to achieve maximum employment and keep prices stable, this is an important data point to review as investors. The Fed could choose to keep rates lower for longer at the expense of signs of inflation, because of concerns about the strength of the labor market. In addition, as the participation rate has fallen, there has been a rise in the use of government assistance programs. We could see taxes rise on the margin to help offset the increased costs of these programs. Changes to Fed policy or changes to the current tax environment could cause asset prices to change rapidly as investors try to analyze and digest what the long term outlook for the US economy could be.

Derek Amey serves as Managing Director and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Derek Amey with Frank Coletta from WJAR/NBC 10: Emergency Cash Reserves: How much do you have on hand?

Derek Amey — Thu, 17 Jul 2014 00:00:00 GMT

Building on our June 30th blog, Derek Amey spoke with WJAR’s Frank Coletta about emergency cash reserves.

94% of Americans have zero idea what their social security estimates are… are you one of them?

Derek Amey — Mon, 19 May 2014 00:00:00 GMT

94%. NINETY-FOUR PERCENT!! Pardon the exclamation points and the capitalization, but the number is so staggering it deserves them. If I had a way to make it flash in bright yellow neon letters to show how mind boggling it is, I would. That number represents the amount of American workers who, since April of 2011, have zero idea what their social security estimates are. How do I know this? The answer is very simple.

Social Security Administration Makes Changes
Prior to April 2011, the Social Security administration would mail annual statements to every working American. Most of us should remember receiving the green statement in the mail confirming your work income history, and the benefits you could expect to receive based on a variety of different scenarios. After April 2011, the Social Security Administration (SSA) suspended mailing these annual statements in an effort to cut costs, and we were all encouraged to register online at http://ssa.gov/myaccount/ to view our earnings record and our estimated benefits directly. 6% of working Americans (or approximately 10 Million folks) have actually signed up— only 94% more to go. Speaking from experience, the sign-up process is fairly painless and takes just a few minutes to complete.

Now I’m not blind to the fact that for many workers (including myself), retirement is so far off in the distance that there’s little immediate value in knowing what your estimated benefits may be in 20+ years. Certainly a large percentage of the Generation X&Y workers barely remember receiving the statements in the first place, let alone understand what they were or how they affect their retirement. I know I’ll be called an overachiever, but I still review my report (online, mind you!) annually to ensure that my earnings record is accurate. Short of changes to the Social Security system (which is a much deeper discussion left for another time), a worker’s earnings history will be used to determine their benefit amount.

Baby Boomers, what’s your excuse?
It’s estimated that 10,000 baby boomers retire in America every day. This trend started in 2010, and is expected to continue for the next 19 years. It’s troubling, but for many of these folks, due to a lack of savings, their Social Security benefits will be their only source of income in retirement. According to some estimates, the Baby Boomer generation represents over 30% of the American Population. Let’s assume for a moment that the 6% who have already signed up for online access to their benefit statement are all Baby Boomers. Even then, there are still millions of Americans in the dark about what their estimates might be. Far too many of the baby boomers are marching towards retirement without current information or perhaps any idea what the potential effects are from taking retiring early, working longer etc.

Their lack of information of their own financial situation is made even more surprising because many polls taken in recent years find that a large percentage of Americans are concerned that they will not have enough savings to retire. Obviously one cannot begin to think about their finances in retirement without current information. Reasons for the low participation can be debated and there are many theories, but the SSA has grown so troubled by the numbers that changes are coming shortly. I suspect for many it’s a case of defeatism, whereby they feel there’s little they can do to change the outcome so they would rather be in the dark about their current situation than face the reality.

Listen up Americans, your malaise is being rewarded! A change is coming!
According to recent reports, starting this fall the SSA will resume mailing physical statements to millions of Americans. To try and keep costs down, workers will not receive a report every year. Instead, statements will be mailed every 5 years starting at age 25. If you are one of the folks who has yet to register online, statements will be mailed to you the year you turn 25, 30, 35, 40, 45, 50, 55 and the final statement the year you turn 60. Currently those of us who registered online will not receive paper statements, although there are some folks lobbying for that to change as well.
If you or a loved one is close to retiring or serious about determining if you can afford to retire, we strongly suggest signing up. The 5 year interval between statements is probably fine for those of us under the age of 50. However, for those of you over 50 and for whom retirement is not too far in the future, having current and accurate statements from the SSA are a necessity. If retirement for many of us is 20+ years, can you really afford to not take 10-15 minutes out of your day and sign up? Visit http://ssa.gov/myaccount/ for more information.

Derek Amey serves as Managing Director and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Where’s my 1099? {The 2014 edition}

Derek Amey — Wed, 19 Feb 2014 00:00:00 GMT

Last year I wrote a blog about 1099’s and why investors should expect their 1099’s to arrive in late February. I thought now would be a good time to republish this blog, because most of the information is still accurate.

I said it last year, and I will say it again this year; unless there is a major change in tax laws, or a technological breakthrough on tracking gains and losses, the January 31st deadline for 1099’s may never return.

OK, but why?

The primary cause of delayed 1099s has been around since 2003. Back in 2003, the President and Congress passed a bill that changed the tax code for dividends, lowering our taxes on certain dividends. Corporations must now report the breakdown of their dividend payments between ordinary dividends and qualified dividends. The treatment for taxpayers is different between the two dividend categories; thus it must be broken out to ensure proper tax filing. This change was a positive to all of our wallets, but a negative to our poor accountant’s mental state. For many accountants, they’ve lost 28 days in February that they used to have to be able to start returns and instead gained yet another line item that must be entered and reviewed.

Who’s to blame? We’re all to blame a little bit!

I was here at StrategicPoint in 2004. That was the first tax season following the tax law change. It was a very “difficult” tax season as folks saw as many as 5 or 6 revisions to their initial 1099. The clearing firms blamed the mutual fund companies, the mutual fund companies blamed the corporations and the corporations blamed Washington DC and the taxpayers for having the audacity to want lower taxes. The clearing firms were correct because all they could do was report what the mutual fund houses told them. The mutual fund houses were also correct because they had to wait to hear from the corporations on what type of dividend was paid out. Finally, the corporations were correct in that the determination on what type of dividend was paid can and does take time, which delayed the entire process. With each revised 1099, it meant refilling a corrected tax return which meant another charge from the tax preparer. To top it off, in many cases the nominal difference in the categories of qualified verse ordinary was minuscule.

Why does it seem to be getting later and later every year?

This part is different for 2014. This year hopefully most 1099s will be mailed by February 28th, which was the same day as last year. So even if it seems like they may be arriving later in 2014, they are actually being mailed the same exact day. If an investor owns a complex investment (like a REMIC or some very specific UIT’s) there may be further delays until March. However, for the average investor this should not apply. The delays, like previous years, are being done to save everyone time, money and energy. The hope is that with the delayed mailing date, hardly any revisions will need to me made, which means clients, accountants, and everyone in between will stop finger pointing and just get the taxes done accurately. While the delayed date can fray tax payers’ and the tax preparers’ patience during tax season, knowing that the forms are less likely to be revised means getting taxes done once and right the first time.

Derek Amey serves as Managing Director and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Envestnet® is here at StrategicPoint!

Derek Amey — Thu, 30 Jan 2014 00:00:00 GMT

Starting TODAY, StrategicPoint is partnering with Envestnet® for our new client reporting system. For over ten years we have utilized the same portfolio reports to keep our clients apprised of the assets in their accounts and how they have performed. It is time for an upgrade! After extensive research we have chosen Envestnet® to meet our reporting needs. We are planning a staged rollout– beginning with the type of reporting our clients are familiar with. Over time we may be adding additional features and customization to enhance this service.

Who is Envestnet®?
Envestnet® is a provider of integrated portfolio, practice management and reporting solutions to financial advisors and institutions. Reports are updated and reconciled daily, so our clients will always have the facts at their fingertips. We are confident that Envestnet® will help us deliver the highest levels of service and performance our clients have come to expect from StrategicPoint.

Why?
As StrategicPoint continues its path of growth, we have found it necessary to invest in technology to further support our progress. To expand on our service and reporting for our clients, we recognize the need to provide cutting edge reporting tools, and are thrilled to announce that we have partnered with Envestnet® to deliver these features.

When?
Our project team has made excellent progress on the conversion from our existing reporting system over the past year, and the official launch date of StrategicPoint’s Envestnet® platform is TODAY, January 30th. Envestnet® is now live, and our clients are able to log in to see their reports.

What Does This Mean For StrategicPoint Clients?
Once logged in, StrategicPoint clients will have access to customized reporting – clients will continue to have access to the standard reports they have been used to, but now with updated features and more customization options. We hope you share our excitement for this new service offering.

Derek Amey serves as Managing Director and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

How much should I have in my 401k at age X?

Derek Amey — Mon, 13 Jan 2014 00:00:00 GMT

As the calendar turns to 2014, many folks use the month of January to review their retirement balances and see how their accounts have grown. Whether it’s the cold weather that makes people pay more attention or a derivative of a new year’s resolution, January is a great time to open those retirement statements. The difficulty we see for many investors is, after looking at those balances, there’s no frame of reference. Most have a hard time figuring out if they are on the right path. They default to the defeatist attitude that since retirement is 15-20-25 years away, there’s really no point in analyzing their current situation. We disagree wholeheartedly with this mindset, and strongly encourage folks to assess their current retirement balances, regardless of how young or old you may be.

We get this question quite often: ”How much should I have in retirement at “my” age?”, especially from younger investors. Another variation is “What do most folks “my” age have saved?”, as if someone else’s financial situation has any bearing on their own. Our kneejerk reaction is always “the more the better!” Googling the answer will give you a myriad of answers, and the reality is, as one approaches retirement it really will depend on that person’s specific situation. However, one way to start thinking about “have I saved enough?” is to compare your current balance to your current salary. The basic premise is that if you are comfortable with your current lifestyle, how much savings do you need to support that lifestyle once you reach retirement?

One of the most quoted guidelines we see suggests using the following guideposts:

At age 35: 1x your salary ($65,000 salary=$65,000 saved specifically for retirement)
At age 45: 3x your salary ($100,000 salary= $300,000 saved for retirement)
At age 55: 5x your salary ($125,000 salary=$625,000 saved for retirement)
Finally at age 67: 8x your final salary is recommended

The beauty of this methodology is in the simplicity. For younger investors, we can’t praise the KISS (Keep It Simple, Stupid) method enough. Folks in their 30‘s and 40‘s can use these guidelines to get a gauge of where they are and it gives them goals to try and hit along the way to retirement. A common refrain from younger folks is “I’ll never be able to retire” and they seem to give up seriously trying. They may save in their 401k to get their company match or to fund their ROTH IRA’s, but they really aren’t sure they are doing enough. The reality is they are struggling to define their goals and how to determine if they are achieving them. While a financial advisor can work with you to determine more specific goals (college saving, retirement planning, addressing debt), if you are not ready to take that step, these guidelines help quantify goals to achieve as you progress towards retirement. For these investors, they are far better than no plans at all. In fact, these rudimentary goals based on age may start to lessen the blow of how much you need to save as your career progresses.

If you sit down and do the math and you find yourself behind, we suggest trying to save until it hurts. Save until that new purchase, whatever it may be, causes you to pause and think “can I afford this?” or “do I really need this right now?” Clearly we don’t suggest saving over reducing credit card debt or over extending yourself, but there is a middle ground. If you think you can’t possibly save anymore then you already are, perhaps it’s time to sit down and create a budget. Many folks would be amazed at where their monthly budget all goes (I’m looking at you, ridiculously high cable bill!) Saving an extra $100 a month, for 30 years at 6% return, would net an investor over $100,000 in retirement.

For those investors who see retirement perhaps 10 or 15 years away, these guidelines are probably too generic. They maybe great starting points for discussion, but they really should be personalized. At the point where retirement is that close, it is a little easier for you to determine what your final salary could be, AND more importantly what your expenses will be in retirement. This is the challenge with younger investors. Their life will have so many twists and turns that it becomes an exercise in futility to try and guess what their retirement will really look like. A 40 year-old has no idea what their expenses will be, where they will be living and what sort of income they will need, whereas a 60 year-old couple probably has a decent idea of what their needs and what their savings will be to meet those needs. As always, if you are struggling to determine if you are on track, or just need a second opinion we recommend seeking professional help. A financial advisor will be able to sit with you and gauge if you’ve saved enough, what your expenses may look like and if you can afford to retire.

If you’re just starting to get serious about retirement, and have no idea if you are on the right path start with these guidelines, assess how much you’re saving and see if you can squeeze some extra money from your budget. If you’re in between those ages above, do some quick math, come up with a goal and see what you need to do to achieve in the next year, and then next year don’t forget to review it! Hope is not a viable retirement planning strategy, but with a little effort and a specific plan you may find yourself on the right path far sooner than you thought.

Derek Amey serves as Managing Director and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

TV Interview: Retirement Planning for Generation X with Derek Amey

Derek Amey — Fri, 30 Aug 2013 00:00:00 GMT

Building on his August 28th blog on generation x retirement planning, Derek Amey had the opportunity to speak with WJAR’s Frank Coletta about the differences between a Traditional IRA/401k and a ROTH IRA.

Derek Amey with Frank Coletta from WJAR/NBC 10: Retirement Planning for Generation X from StrategicPoint on Vimeo.

Why I told a gen-x friend to slow contributing to his 401k, and what I told him to do instead

Derek Amey — Wed, 28 Aug 2013 00:00:00 GMT

Over dinner a few weeks ago, a friend of mine announced to no one in particular that he had no intentions of working past 65. Since we’re the same age, I was shocked at his confidence in his current financial situation to make such a proclamation. We’ve been friends for a long time so I didn’t hesitate to start peppering him with questions. I started asking him about his finances, how much he makes, what his current expenses are, what he has saved for retirement so far, and finally where that retirement money is saved.

In his case, it turns out he saves over 10% of his salary in his company’s 401k. He’s single, owns his own home, has very little debt and makes just below six figures. His emergency reserve was well funded, and in fact he acknowledged that he is sitting on a little too much cash. Years ago he had an advisor put together a financial plan, the two of them review it annually and he is still on track to achieve his goals. From the sound of it, I had to agree that he certainly has put himself in a position to succeed at his retirement goal of 65.

As our discussion continued, he confessed that he had recently received a raise and was contemplating raising his 401k contribution. When he asked me what I thought, I asked if he had a ROTH IRA. I got a puzzled look for an answer.

Derek Amey with Frank Coletta from WJAR/NBC 10: Retirement Planning for Generation X from StrategicPoint on Vimeo.

“I’ve heard of a ROTH IRA, but what is the difference again?” he asked.

Traditional IRA’s and 401k accounts are funded with pre-tax contributions. As the account grows, the taxes are deferred. When you start withdrawing the funds in retirement, your withdrawals are taxed then, at whatever your tax rate is. In simple terms, you avoid the taxman now when you make the contribution, and then he arrives when you start taking your money out.

ROTH IRA’s are the opposite. Contributions are made with after-tax dollars. The account still grows tax deferred like Traditional IRA’s and 401ks, however in retirement withdrawals are made tax free. So you pay the taxman today, for the benefit of avoiding him in retirement. Another difference for ROTH’s is that the amount you may contribute each year depends on your MAGI (modified adjusted gross income). As of 2013, if you make over $127,000 as a single filer, or $188k as married couple filing a joint return, you are ineligible to use a ROTH IRA. Note: these levels change year to year, so be sure to contact your advisor or accountant to determine if you are eligible.

My friend laughed at the current limits because they are so much higher than his current salary. However, with a few more raises and if the current income limit remains the same, he may find himself prevented from using the ROTH. Like most decisions about retirement, the sooner he decides and starts saving, the better off he may be.

“OK, so how would a ROTH IRA potentially help me in retirement” he asked.

For gen-x, and even most baby-boomers, the largest pool of retirement funds is in their 401k or 403b accounts. Every withdrawal made from these accounts in retirement is taxed as regular income. Obviously to maintain your lifestyle in retirement you will have to start to draw down your savings. Take out too much and you could push yourself into a higher tax bracket, costing you savings. Another reason to keep an eye on withdrawals is that monthly Medicare premiums rise as your income level rises so every withdrawal made from an IRA moves the retiree closer to a higher premium.

For my friend, the ROTH IRA could be a great option for his retirement planning. Obviously we have zero way of knowing what the tax laws will be when he reaches retirement, however a ROTH IRA provides him with tax diversification. Tax diversification is achieved by having various sources of savings, which are taxed differently when the funds are withdrawn. This flexibility will allow him withdrawal and spending options in his retirement that he is currently missing. A ROTH still allows his savings to grow tax-free while he’s working, and then in retirement will provide a source of savings that can be used to manage his tax exposure in retirement.

Keep in mind that there are some other factors that need to be considered prior to deciding on saving extra income in a ROTH versus using a 401k or Traditional IRA. Besides looking at your current situation, one also has to have an idea of what the future may hold as well. The decision to use a ROTH over another retirement account does not need to be complex, but we do recommend speaking with a financial advisor to make sure your current factors and future assumptions are realistic. As for my friend, he spoke with the advisor who created his retirement plan and then decided to start funding a ROTH. That dinner we had may end up being the best thing that happened to him all summer!

Derek Amey serves as Financial Advisor and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Don’t Be So Afraid of Tapering!

Derek Amey — Wed, 17 Jul 2013 00:00:00 GMT

It seems that much of the recent volatility in stock prices (and to a greater extent the bond market) can be attributed to one word: tapering. Stock prices dropped precipitously in mid-June following a news conference where Ben Bernanke confirmed that if the economy continues to strengthen, that the Fed could start the process of ending Quantitative Easing by the end of 2013. The word “tapering” was then suddenly the buzzword of the financial world. Tapering is not an exit from stimulus- it’s merely a slowdown in the current amount of stimulus. From the knee-jerk reaction in equity prices, it seemed as though some were misinterpreting the comments as more of a sudden end to the QE program.

Since that time, equity prices have recovered and it seems as if investor’s comprehension of the word “tapering” has changed. As they had time to digest the news- and Bernanke was allowed to clarify his original comments- it seems that the markets have realized the Fed will practice a gradual slowing of QE, and not a sudden halt to the program. It’s key to remember that depending on the motives of the commentator, even a slowdown in the Fed’s QE program can be warped to create a sense of sudden doom. However, when you start to think about why the Fed would start considering slowing the amount of stimulus it’s putting into the economy, you might suddenly feel better about the future.

The patient is in the Intensive Care Unit
Clearly in 2008 the US economy a.k.a. the patient and many global economies were very sick. One can argue about the severity of the results from many “tests” performed on the patient during that time frame, but the response from central banks around the globe was to try and stabilize the patient before recommending real treatment of the disease that caused the illness. The most widely administered drug in this case was in the form of cheap money via low interest rate policy. The announcement of the quantitative easing programs here in the United States allowed companies and households the ability to deleverage their balance sheets. For those of you who may not be sure how a consumer deleverages, refinancing your mortgage is the largest and easiest way, followed by saving more and then using those savings to pay off various types of debt, like credit cards or home equity loans. Deleveraging is obviously made easier by lower rates, because every payment someone makes sees more go to their principal than interest, all else being equal. When the Fed started buying Treasuries and mortgage-backed securities, it committed to keeping rates low for the foreseeable future. They chose not to set a time frame for an end to QE- rather, they would slow the purchases as they saw strength in the labor market. For many investors, the hazy description of an ending to the QE programs meant they cynically thought there would never be an end.

Checking the patient’s vital signs
Since the Fed has identified jobs as the metric, let’s review the labor market to see how far we’ve come. A year ago, the employment situation was extremely weak. The 3 month average gain in jobs for April-May-June 2012 was 66,000. Over that three month span in 2012, the US added a total of 200,000 new jobs. Compare that to our current 3 month average of 155,000, for a total of 466,000new jobs. Extend that time frame to 6 months and our current average jumps to 195,000! A year ago, we barely added 195,000 new jobs over three months, and so far in 2013 we’ve just about averaged that every month. For those who may be skeptical, a quick review of the weekly jobless claims confirms this improvement as claims are near post-recession lows. Yes, on a nominal basis this growth is still extremely weak by historical standards. And yes there are still many Americans that are “underemployed”, meaning they are working part-time or in a position for that they are overqualified for. However, one cannot argue t that on the margin the job market has improved dramatically and the Fed has been watching.

The patient is now in the general ward
If job growth is the heartbeat of our patient, than it is clear our patient’s condition has improved. What do doctors do after administrating medication, and seeing signs that the patient is starting to recover? They usually start to lower the dosage. Traditionally they won’t stop it immediately, but gradually over time they begin to wean the person off a high dosage. The goal will be to work the patient down to a point where they no longer need the medications. Doctors don’t continue to give more and more drugs to the patient; they allow the healing process to take effect. In my opinion, the fact that the Fed is in fact debating tapering QE may be a positive sign. Investors are starting to realize that if the Fed was still extremely worried about the ability of the US economy to grow, this debate would probably not even be occurring.

This does not mean that the “all clear” sign has been given for investors. Keep in mind that the stock market and the economy traditionally do not move in tandem. Some of the strength in equities so far through 2013 is most likely due to investors’ growing optimism in our economy. Auto sales and home purchases have been two of the beacons of strength in the economy. However, as borrowing costs for the consumer becomes more expensive, there is some concern that the strength in activity in these two areas could be affected adversely. There is also the issue that with the low level of growth in the economy it is still in a precarious position where any exogenous shock could quickly turn our growing economy into a stalled one.

When will the patient be cleared to go home?
Due to the sheer size of the QE programs and the current below-trend growth expectations, it seems likely that the patient will remain under the watchful eye of the doctor for quite a while. The Fed will most likely continue to preach that it stands ready to rush the patient back into the ICU should a major issue arise. Confidence amongst investors has been growing in both the economy and the market recently and perhaps the patient is closer to going home than most realize. Ultimately we will all have to watch the Fed and perform vigilant reviews of their statements and discussions on what they see happening in the economy to determine when the patient will be allowed to go home. Until that happens, understand that tapering isn’t necessarily something to be feared, it’s a sign the patient may actually be getting better.

Derek Amey serves as Financial Advisor and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

How Your Evening Commute May Make You A Better Investor

Derek Amey — Wed, 05 Jun 2013 00:00:00 GMT

Commuting can be a very monotonous task. A large part of the journey is extremely repetitive, and then is interspersed with moments of hair-raising, oh-my-gosh-what-is-that-other-person-trying-to-do panic. It’s a mundane task because you already know your destination. For most of us, the actual action of driving to get to where you need to be isn’t that exciting-- thankfully.

Even though there are signs to guide you home, most of us don’t need to read them. When you get close to your exit, you instinctively know to slow down and get off the highway. However, the signs are always there for those who may need them for direction. Well placed signs allow drivers to have enough time to reduce their speed before exiting. For major exits, there will sometimes be three or four signs to alert drivers. Think of the chaos that would ensue if the only time an exit sign existed was 2 feet before the exit ramp began!

Investing can be much like your commute, but the key is to pay attention to the signs. Not every sign is obvious like a flashing “bridge out ahead” sign. Traditionally, they are more subtle and sometimes more difficult to read. Knowing which signs are important to you and your investments is where the real skill is. Much like different towns have different exits, every investment has a different sign that it may be time to exit, or sell the position. Identifying these signs at the time of making the investment will help keep you on the path to your destination.

Take gold for example. Gold has lost over 15% so far in 2013. If you bought gold following 2008 as the Fed ramped up quantitative easing and the threat of inflation increased, your investment probably did quite well. However, do you remember the road signs that you were looking for to exit the investment? Some of the road signs that investors in gold have already passed this year include continued low inflation, rising interest rates, stronger employment growth, and finally a Fed that has started to discuss exit strategies. Those signs have appeared at different times, and you may have missed the first or even second sign that a good time to exit gold may be approaching. However, other investors didn’t miss them and as they exited the highway, the price of gold has dropped.

As tactical asset investment managers, we ask ourselves this question all the time: “What would make us reconsider our investment thesis?” The ability to first identify potential road signs that we want to keep an eye out for prior to making the investment can make it easier for us to decide what to do should we see them. Like many evening commuters you may not see that first exit sign, and perhaps you may see the second sign and think “Hey, I still have time to get over to the slow lane before it approaches.” But when that exit finally does approach, you have to be prepared to get off. Otherwise, your investment and your entire portfolio could be going somewhere you never wanted it to.

Derek Amey serves as Financial Advisor and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Remember that old 401k?

Derek Amey — Tue, 07 May 2013 00:00:00 GMT

Derek Amey has some tips on reducing financial clutter and simplifying your path to retirement!

It seems like winter has dragged on forever around these parts, but I started to pull out the shorts and golf shirts from storage this weekend. More than once I said “Hey I forgot about this shirt!” Maybe (as my wife would say,) that’s a sign I have too many golf shirts, or maybe it’s just human nature that once something is out of sight, it really is out of mind. Even though I packed my summer clothes away in October, I had already forgotten some of the things I owned.

Did you forget about that golf shirt you own?

One of the first things I do when I sit and meet with a new client is try and understand their current financial balance sheet. It used to amaze me when folks would walk in with stacks of statements from a variety of mutual fund houses, brokerage firms and old 401ks. How can you keep track of everything? How do you know if your retirement funds are allocated correctly? Do you know what your options are for these old accounts? How can you even deal with all this financial clutter?! The answer is usually evident when I sit with them and realize that many of their statements are still in sealed envelopes.

It’s time to SIMPLIFY your financial life!

401ks are notorious culprits for this financial clutter. It’s typical now that the average American worker will have 10-12 jobs in their working careers and with every job change there is likely an orphaned 401k that sooner or later will get forgotten about. Did you know you can consolidate these orphaned 401ks? If you did, and you still haven’t done it, stop right now and put it on your TO-DO LIST!

The “best” place to consolidate these old 401k accounts can vary, so as always feel free to contact a professional if you feel you need help deciding. While each plan will offer a few different options, in general we advise our clients to do one of the following:

• Open an IRA and consolidate all your old orphaned 401ks into one place. This option will usually give you the most flexibility in where you want your assets to be held and the investment options (stocks, bonds, mutual funds, etc.) available to you. For some this ability to move it anywhere can be confusing and overwhelming. There’s no shame in admitting that you need help, so feel free to ask a financial advisor for some advice on what option they feel is in your best interest.

• Roll the old 401k into your new 401k plan. Contact your new HR department and inquire about how to move your money from your old plans over to your new plan. In the past this was a laborious effort, however most plan sponsors have simplified this process, and you may find a 10 minute phone call is all it takes. While this choice will simplify your financial clutter, there are a few reasons why this may not be the best choice. You should review items such as the investment options in the new plan, as well as fees in your new plan before making your final decision.

Why do I want to do this?
It’s important to remember why you started saving in the first place: to achieve your retirement goals. The basic crux of retirement planning is developing a plan, monitoring your progress towards your goal and as your life changes, making adjustments to reflect the new information. Now ask yourself, how efficiently can you monitor your progress when you have 4 or 5 or 6 different accounts? It may not be impossible, but there could be a better way. You should find after consolidating all these old accounts, that monitoring your progress has never been easier.

Derek Amey serves as Financial Advisor and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Lessons From the Gold Selloff

Derek Amey — Tue, 16 Apr 2013 00:00:00 GMT

Over the past few years there have been numerous superlatives used to describe gold: hyperinflation-fighter, hedge for the end of the world and a currency that is not subject to government printing presses. The past few days, however, one word can be used: UNLOVED.

Between April 12th and 15th gold lost 13%, in just two trading days! This was the biggest drop since 1980. The downside momentum gained so rapidly that market pundits have been sent scrambling to find an explanation. There have been many ideas thrown around including: programmed sells that only trigger after a certain percentage move; margin calls for investors who leveraged up their buying power suddenly being forced to sell as their accounts drop in value; rumors that Cyprus may be forced to liquidate gold to shore up their balance sheet; some hedge fund is in trouble and is selling everything and anything without concern of price; and of course concern that the Fed may soon curb the amount of QE. Some combination of all of these theories is likely to blame.

The sudden unexplained selloff is made more challenging with a commodity, especially gold which is not a company. It does not have an earnings season, where investors and analysts can pour over a balance sheet to see how healthy the income statement is. There is no CEO, who can speak about the outlook for a new product or new service offering. Gold cannot pay a dividend to shareholders, nor can it take earnings and invest in new technology or a plant to help grow future earnings. Although gold can be a highly sought after commodity for vanity purposes, the ability to analyze its current value or potential future value is challenging. In my 11+ years here at StrategicPoint, we’ve had an allocation to gold quite frequently, although not currently. As with all of our allocations, there are targeted limitations; gold is no exception.

The massive selloff is a reaffirmation of the need for diversification for many investors because RISK happens, and it can happen QUICKLY. Unless you are a day trader constantly digesting the rapidly changing news for opportunities or in this case sudden abrupt selloff, a properly diversified portfolio can help reduce both volatility and risk. We all know someone who’s been loading up on gold for the past few years. As with clients who have a large portion of their portfolio in a single stock, we’ve tried to educate them about how quickly things can potentially change. We’ve tried to remind them that if your savings are highly allocated to one specific asset, the potential for loss is heightened, no matter how sure you are that a company will succeed or that the price for gold will skyrocket.

The definition of “large portion” can be different from one investor to the next, and this an area where an advisor can help you understand if you are too heavily weighted towards one specific asset class. For our clients, we’ve long believed in the use of diversified ETF’s and mutual funds to compensate for the potential issues that single assets can present. If this selloff in gold has caused you to fret about the losses your portfolio is experiencing, perhaps that is a function of not having enough diversification. If you are unsure or confused, now may just be the time to seek out a second opinion.

Derek Amey serves as Financial Advisor and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Attention Generation X: It’s time to address the potential problem with your 401k

Derek Amey — Thu, 21 Mar 2013 00:00:00 GMT

As someone born in 1975, smack in the middle of Generation X, I meet more and more folks my age suddenly trying to tackle financial planning topics. I get asked about strategies to pay down debt, choosing life insurance, college funding for their children, setting up a will and even –gasp- retirement projections!

If you’re like most of Gen-X, your parents originally pushed you into contributing to a 401k. They probably ranted on and on about how the Social Security system won’t be there for us when we retire, and how only you can be responsible for your retirement. The problem for most of you is that is the precise moment when the advice stopped.

Week after week you have been contributing to your 401k, diligently plugging away for the past 10-20 years. Since you have been committed to it consistently, you could have a sizeable nest egg by now. This is great, but saving is just part of the equation. As investors get older, the dollars get larger, the swings in account value can become more volatile and thus the need for a correct asset allocation grows.

Asset Allocation is the process of dividing your investments amongst different types of asset classes, to optimize the risk and reward based on your ultimate goal for your savings. The common error we see for most 30-40 year olds is that they picked an asset allocation when they first opened the account, and then thought they were done. If this sounds familiar, let’s go over some of the most common answers to the question: “How did you choose which funds to buy in your 401k?”

I copied what my mother/father did in their 401k
Sounds like an okay idea, until you consider your time horizon and your risk tolerance. Our parents are fast approaching retirement age, and that means they will start dipping into their savings shortly. For most of them, this causes them to become risk averse and prefer a 401k allocation heavily weighted towards bonds. Bond funds play a key role in asset allocation, but for most of us, retirement is 30+ years away. If your 401k asset allocation looks quite similar to your parents, most likely one of you is investing incorrectly.

I asked a co-worker what I should do
This one is quite common for the college graduate. Faced with a stack of papers from their HR department that most of them have never seen, the 401k allocation worksheet can be a maze difficult to navigate. In a rush, they ask the person sitting next to them what they are doing, and figure “I’ll figure this stuff all out later.” The problem is that the person they asked could have an entirely different view of risk. Risk tolerance is defined as a measure of an investor’s willingness to handle declines in their investment portfolio. How investors feel about risk is quite personal and individualized. Investors should use their perception of risk to help construct a 401k allocation that helps them achieve their goal of retiring while allowing them to sleep at night. The co-worker you asked may drive home at 100mph, something you would never do. How do you know he or she didn’t give you a 401k allocation that is the equivalent of speeding down the highway?

I put everything in the Money Market. I don’t want to lose any money!
We Gen X’ers have had a difficult time with investing. Most of us were just starting out when the dot-com bubble burst. After a few years of modest growth and stability the debt crisis hit and markets crashed. For some investors it was enough to turn them off from investing entirely, I beg of you…do not be one of these people.

Putting your 401k contributions into the money market or stable value fund is not investing, it’s just saving! There may be times where this makes sound financial sense. However, if this 401k is going to be used for your retirement and that retirement is still 20-30 years away, money markets returns may be eaten alive by inflation. The basics of investing, in my opinion, revolve around creating a diversified portfolio, investing consistently and reviewing and rebalancing your portfolio on a regular basis. If you open your 401k statement and the only fund you own is the money market, it’s time to strongly consider making a change.

I put a little money into each, isn’t that what diversification is?
Diversification is a strategy whereby the individual positions in a portfolio have different risk parameters and by combing different asset classes with different economic risk characteristics, the overall risk of the portfolio is reduced. Far too often we meet folks who think by owning 9 different funds they have achieved a diversified portfolio. The problem is that those 9 funds could most likely be equity funds. Owning 3 different small cap equity mutual funds and 5 large cap equity funds means you are still at the mercy of stock returns.

Alternatively, owning some bond funds would reduce the risk of the overall portfolio, because in general, bond funds tend to outperform equities when the economy struggles. Commodity funds could do well in periods of high inflation and diversify a portfolio because their performance can be far different from equities funds or bond funds. In a year like 2008 when markets were crushed, the lack of diversification in investors’ portfolios really hampered their returns. If you don’t fully understand diversification, it might be time to seek professional help so that when the next period of market turbulence hits, your investments can ride out the volatility.

I have zero idea
This is another honest answer that is seen far too often. Someone once said “Hope is not a viable investment strategy”, and for the folks who fall into this camp, hope is about all they have to hang on to. When you were in your 20’s, and your 401k balance was in the “four figures”, this wasn’t an ideal investment strategy, but learning to budget and save consistently was far more important than asset allocation. It’s now time to wake up and realize we’re not in our twenties anymore and how your investments perform is an important part of being able to achieve your retirement goals.

OK, Now What?

Look in the mirror and figure out if you really want to do this by yourself
This is the first and most important step. There are plenty of online tools to help the do-it-yourself investor, and with hard work, dedication and consistent attention you may achieve your financial goals. However, you need to do some soul searching to figure out if you really are dedicated to doing this consistently over the next 20-30 years. The financial world can be a challenging maze to navigate, and if you aren’t committed maybe it’s time to meet with a professional.

If you still prefer to “go it alone”:

•   Get a sense of what your basic financial needs in retirement will be
Google “Retirement Calculators” and you will find a plethora of offerings. Try a few out just to get a basic idea of where your goals might be.
•   Take a risk assessment questionnaire to get a sense of your risk tolerance
Google “Risk Assessment Questionnaire” or “Risk Tolerance Questionnaire” and fill out a few to get a sense of how you perceive risk. StrategicPoint has one here.
•   Get educated
Visit your 401k provider’s website and review your plan. If you work for a large organization, contact your HR department and see if they have any resources to help you plan and strategize.

Derek Amey serves as Financial Advisor and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Do I dare ask Mom & Dad about their Retirement?

Derek Amey — Thu, 28 Feb 2013 00:00:00 GMT

A few years ago my older sister asked me “Do we have to worry about supporting Mom & Dad in retirement?” I remember laughing it off at first, but then the financial advisor in me became scared. I was worried because, at the time, I didn’t really know very many specifics about my parent’s financial situation. Frankly, I couldn’t answer my sister’s question because at the time I didn’t have any answers to even the most basic retirement questions:

How much have they saved?

How much debt do they have?

Are their legal documents (wills, health care proxies, insurance policies, etc.) in good order?

What kind of retirement do they see for themselves?

Discussing finances is NOT something that comes easy in most families, mine included. It’s a toss-up between which side is more uncomfortable, my parents or me and my sister. As much as we may want to delay these discussions, the reality is that you cannot avoid the conversation forever. The sooner you start talking about it, the more time you have to prepare and the less likely you will be caught off guard when the situation ultimately arises.

As I thought about the best way to broach the topic with my parents, I decided that for me, the best mindset was to realize that this was going to be a multi-step process. I was not going to try and get every answer to every planning question I had. Also, I didn’t want to overwhelm them. Retirement can be scary for anyone. Having their children pepper them with questions they may not know the answer to themselves can cause them to shut down. If you take the plunge and start the discussion, be prepared you may find both you and your parents have more questions than answers. This is normal. There are plenty of experts out there to assist you and your parents in finding answers and solutions to the issues at hand.

Perhaps your parents will be accommodative and have answers, but my point is that you want to keep the lines of communication open. The reality is as people live longer and longer these days, these discussions may only happen once or twice a year as retirement approaches. However, the deeper into retirement they go, the more often you’ll find yourself talking about your parent’s finances. How to start this conversation for a family is a personal issue. What works best for the Amey’s will not work for everyone. The key, however, is to start!

As it so happened, my mother and father had already talked as a couple, and they had made some key decisions with respect to their retirement. For our first "family" discussion, I think it went pretty well as we were able to go over some of the big key issues. To be honest, they surprised me: they were ready and willing to discuss. It may not always be that easy. If you find your parents are unwilling to answer some basic questions, perhaps they just aren’t ready but at least they know you are there to help if and when they need it.

Derek Amey serves as Financial Advisor and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Where’s My 1099?

Derek Amey — Thu, 14 Feb 2013 00:00:00 GMT

Tax season has just started, and the annual wrangling over documents for our accountants has begun. For you early birds, the delay in 1099’s every year is a major nuisance. Let’s get something out right away: unless the tax laws change or technology increases dramatically, the January 31st deadline for 1099’s may never come back.

OK, but why?

The primary cause of delayed 1099’s has been around since 2003. Back in 2003, the President and Congress passed a bill that changed the tax code for dividends, lowering our taxes on certain dividends. Corporations must now report the breakdown of their dividend payments between ordinary dividends and qualified dividends. The treatment for taxpayers is different between the two dividend categories; thus it must be broken out to ensure proper tax filing. This change was a positive to all of our wallets, but a negative to our poor accountant’s mental state. For many accountants, they’ve lost 28 days in February that they used to have to be able to start returns and instead gained yet another line item that must be entered and reviewed.

Who’s to blame? We’re all to blame a little bit!

I was here at StrategicPoint in 2004 as many of you may have been as well. That was the first tax season following the tax law change. It was a very “difficult” tax season as folks saw as many as 5 or 6 revisions to their initial 1099. The clearing firms blamed the mutual fund companies, the mutual fund companies blamed the corporations and the corporations blamed Washington DC and the taxpayers for having the audacity to want lower taxes. The clearing firms were correct because all they could do was report what the mutual fund houses told them. The mutual fund houses were also correct because they had to wait to hear from the corporations on what type of dividend was paid out. Finally, the corporations were correct in that the determination on what type of dividend was paid can and does take time, which delayed the entire process. With each revised 1099, it meant refilling a corrected tax return which meant another charge from the tax preparer. To top it off, in many cases the nominal difference in the categories of qualified verse ordinary was minuscule.

Why does it seem to be getting later and later every year?

The reality is that it is getting later. This year most 1099’s will not be mailed until February 28th. This is being done to save everyone time, money and energy. The hope is that with the delayed mailing date, hardly any revisions will need to me made, which means clients, accountants, and everyone in between will stop finger pointing and just get the taxes done accurately. While the delayed date can fray tax payers and the tax preparers patience during tax season, knowing that the forms are less likely to be revised means getting taxes done once and right the first time.

Derek Amey serves as Financial Advisor and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Hello World

Derek Amey — Tue, 29 Jan 2013 00:00:00 GMT

Hello World:

When we first contacted our strategy and design firm about adding a blog to our site, the question they asked was: “Why a Blog? Why Now?”

What a simple question. It’s one that you may be asking yourself. We’re excited about this opportunity that will allow StrategicPoint advisors to write, discuss and engage with folks on a myriad of topics. Unlike our weekly financial market update, which will continue, our blog posts will not always center on market related news. Every advisor here at StrategicPoint has a unique voice, and we each have individual interests and topics that we are passionate about, so you can look forward to a variety of contributed pieces in the future.

So, Why a blog?

Sit in a crowded mall or next to a table full of young adults and one thing will become abundantly clear: the way we communicate is changing. While we don’t aim to compete with the rapid fire texting capabilities of a teenager, we do feel that we need a new platform to communicate with individuals. We want a place where we can share ideas, reach new readers and get everyone engaged. We know that many of the challenges our clients face are quite similar to those that others encounter. We’re looking forward to sharing ideas and opinions for the best way for folks to overcome these challenges. In fact, sharing our content will be highly encouraged, and we will patiently wait for the day we receive our first “Thanks, this was helpful!” from someone we don’t know!

Why Now?

It wasn’t all that long ago that StrategicPoint used to post a “StrategicPoint of View” every day. We were blogging before we even knew what to call it! Our audience, however, wasn’t ready. The technology wasn’t ready either. Back then, social networks did not exist, nor did the technology allow for a two way conversation between the writer and the audience. We were early adopters, but became frustrated at the lack of traction and focused our efforts on other initiatives. Since then, great strides have been made in blogging technology - its adoption and audience’s participation. We’re ready to return and see what we’ve been missing.

What can you expect?

We plan to produce blog posts on a variety of topics from our advisors. Our staff is as broad as our audience and we hope that you get a chance to see a different side of each of us. We have the pleasure of talking to many people each day about a variety of issues. Our plan is to cover financial planning topics, market analysis and local news related events that are all relevant to you, the reader. We’re also excited to see what our audience suggests or recommends. We hope to meet and uncover other local bloggers who may want to guest post on a topic that they specialize in. Again, our blog will not replace the Weekly Financial Market Update. Ultimately, our hope is to create content that is creative, thought provoking, actionable and educational to our readers.

Derek Amey serves as Financial Advisor and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.