Portfolio Income Buckets

 

I help Purdue faculty make the most of their benefits and 403(b) retirement plan.
ncarmany@thewatermarkgrp.com
317-805-0840

TOPICS:

How to generate income from your portfolio.

Asset Allocation

 

Personal Benefit Buckets

I help Purdue faculty make the most of their benefits and 403(b) retirement plan.
Contact Information: ncarmany@thewatermarkgrp.com, 317-805-0840
TOPICS
The sources were income and benefits originate.
Social Bucket- Generally, government sponsored programs.
Private Bucket- Items a person controls directly.
Public- Traditional investment vehicles.

Traditional Financial Planning vs Values Based Financial Planning

I help Purdue faculty make the most of their benefits and 403(b) retirement plan.
ncarmany@thewatermarkgrp.com
317-805-0840

Build Your Financial House Mini Series

TOPICS

Like the three little pigs, financial houses may be constructed of weak straw or sticks while sturdy homes are built with bricks.

– Traditional planning focuses heavily on returns.

-Values Based Planning focuses on promoting and living in accordance with your personal values.

 

How happy are you?

I help Gen X families make the most of their benefits and retirement plan.

Contact info:
ncarmany@thewatermarkgrp.com
317-805-0480

Two kinds of happiness:
1. Moment to moment
2. The feeling that one’s life is being lived virtuously

Major themes:
1. Giving is important and good for increasing happiness
2. Spending on experiences tends to make people happier than buying things. As we can relive them over and over. We tend to become ”happier about them over time.”
3. Real life examples

Resources
http://www.thinkadvisor.com/2016/02/01/advisors-in-pursuit-of-happiness

Beyondthepurchase.org
Books
Happy Money: The Science of Happier Spending- Elizabeth Dunn
Carol Graham- The Pursuit of Happiness: an Economy of Well-Being

Purdue Benefits Planning

 

I help Purdue faculty make the most of their benefits and 403(b) retirement plan.

Vlog Introduction.
Topics:
Purpose of the Vlog- Who is it designed to help.

Interaction- Videos, future blog roll out, one-on-one interactions

Background- Why work with Purdue University Faculty?

Fed Fundamentals

As bond market volatility increases, analysts areMarketVolatility-image-3 heightening their watch on Federal Reserve commentary. Turn on any financial channel and see how long it takes to hear the word Fed or Federal Reserve.  While many of the organizations provide insight (with no lack of opinion,) it would be a good idea to explain a few basic principles of the Federal Reserve and then review the tools it can use.

First, let’s start with the dual mandate which Congress amended in 1977. The Federal Reserve Act.  The stated objectives follow:

“The Board of Governors of the Federal Reserve System and the Federal Open Market federal-reserveCommittee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” (1)

So what tools does the Fed have in the toolbox to help manage the economy? Traditional tools which typically help fight off high inflation are listed below:

Open-Market Operations- the Fed can buy and sell U.S. government bonds to increase or decrease the money supply, thus helping keep inflation in check.

Discount Rate- This is the rate banks pay on short-term loans from the Federal Reserve. This is closely linked to the federal funds target rate, a rate banks charge each other for overnight lending.  The Federal Open Market Committee, FOMC, publicly announces their preference for the rate. The FOMC does not directly control the fed funds rate.

Reserve Requirements- The amount banks are mandated to keep against their deposits are known as reserve requirements.  While the tool is not one normally used over the short run, it directly affects the aggregate dollar amount in loans.

What does this mean in light of the recent bond market volatility and media coverage?

Most analysts point to the raising of the fed funds discount as source of worry since an inverse relationship exists between the price of a bond and the yield.  However, this blanket and often sighted relationship implies the entire yield curve moves equally up or down across all maturities. The investing environment does not really behave in a uniform fashion. For example, one can review the last interest rate hikes in 2004-2006 and see that shorter term rates were altered less than their longer brethren. After a self study, one will understand the Fed does control short-term rates; one additionally observes the intermediate and longer maturities will be moved by market forces, not the Federal Reserve.

What about the other tools mentioned? The discount rate and reserve requirements do not change very often.  Recently, the FOMC exercised on a grand scale program to buy large amounts of bonds which reached $85 billion of bonds per month for a while. 0930_high-interest-rates_327x185

The next time an analyst discusses the Fed raising interest rates, notice if the commentator illustrates how his view relates directly with the dual mandate or is he just sharing his opinion with a few numbers thrown in for good measure. As the global economy moves forward, conditions will warrant flexibility in changing the interest rate which will likely happen at a measured pace.  However, no one can exactly predict when this will transpire.  There are other various forces influencing conditions such as: other central banks, strength of the dollar, lack if inflation and lower expectations for growth, aka new market realities.

Sources:

  1. https://www.chicagofed.org/publications/speeches/our-dual-mandate
  2. http://bea.gov/faq/index.cfm?faq_id=1000

Pension: Lump sum payout or Annuity payout?

620-stay-at-home-mom-social-security-questions-hinden.imgcache.rev1408719990575.webFrequently, people will ask for help answering the question if a lump sum or annuity payments should be chosen when a pension fund offers a buyout. While the topic has been examined in many blog posts, articles, and other financial media, here we want to review the subject while providing a history on how we got here. The resulting information produced two articles, one with considerations for the dilemma at hand while the second discusses the technical background of the companies offering payout options on a grand scale.

Evaluate your cash flow need

People whcash-flow1o examine the payout options on their own frequently limit their analysis based on the moment.  Many take the lump sum, spend the funds and end up owing a large tax bill.  Before anyone gets to this point, list out all of your sources of income to be received later in life.  You know in fact, that social security will be a source that will not pay out a lump sum, but rather a monthly cash flow.  How much will you need to support your standard of living, and how much income will need to be generated from sources not producing regular and predictable cash flow from sources like Social Security and annuities? Some individuals will include dividends and interest from their portfolios as part of a regular income.  Will these sources be enough to cover your essential expenses? If yes, the lump sum may be more attractive.  If the answer is no, the edge may lean towards the recurring monthly payments.

Evaluate your likely lifespan

Does longevity run in your family? If so, you need to weigh the fact most pensions do not adjust for inflation, but a reciprocal benefit is knowing you will not outlive the income stream.  Additionally, if your expected lifespan is short, a lump sum creates more flexibility in passing assets on to heirs besides a spouse. While this is not a promotion nor an endorsement of any site, the links below may help give you clarity on answering how you long you may live.

http://www.socialsecurity.gov/cgi-bin/longevity.cgi

https://www.livingto100.com/

How important is flexibility for you?

People in general like options; however, too many options can also most paralyze one from making a decision.  Most companies offer the typical payment choices, but if you take the lump sum, you can also look at buying an annuity later transferring the longevity risk back to another institution.   One should note, however, at the time of this writing, more monthly payments from a pension are higher than an immediate annuity.

How disciplined are you?

Let’s face the fact some of us are more disciplined than others regarding money. For those of us who have a hard time keeping funds in a checking account, the monthly income will provide sustainability to our situation. If you are disciplined, still consider those who will end up with the income or asset after you are gone.

What is the state of the pension fund?

pension-piggybank-art-

Part of evaluating options mean assessing the motive of the corporation offering the lump sum payout.  Is the company in trouble financially, which could increase the probability the Pension Benefit Guarantee Corportation, PBGC, may take over the liabilities.  Is the company looking to get the obligation off its books to reduce any future burden?  You may not be able to clearly articulate the motive, but look for signs of financial distress.

Comparison Points

So you have given adequate thought to the points above, maybe you have come to the point of comparing lifetime cash flows or break-even points. What rates of return were used, are the rates realistic, was inflation a consideration?  As you can see, the math becomes complicated very quickly. Here is a site that may help you in evaluating the cash flow.

https://www.pensionbenefits.com/calculators/

After evaluating the points above, you should have an indication of which option is best for your situation. If not, contacting an advisor to assisting should be the next step.

DOES A MORNINGSTAR RATING MEAN ANYTHING?

The third quarter is coming to a close in a few weeks and soon people will start asking where the year has gone.  Considering the recent market volatility, people will start wondering where their portfolio returns have gone or where will they come from to finish the year strong.  When investors start this cycle, Morningstar ratings are frequently used to help identify “opportunities” when a fund gets an upgrade to a four of five stars or to avoid pitfalls if a downgrade happens to one or two stars.  Does the star rating give the investor anything meaningful to make an informed decision?

How are Morningstar ratings figured?

Start by examining language directly from Morningstar:  “The Morningstar RatingTM for funds methodology rates funds based on an enhanced Morningstar Risk-Adjusted Return measure, which also accounts for the effects of all sales charges, loads, or redemption fees. Funds are ranked by their Morningstar Risk-Adjusted Return scores and stars are assigned using the following scale:

Examine the table above, noting that a new fund of fewer than five years of age will have an overall rating of the three-year rating.  As the fund gets older, the weighting changes for the overall star rating.  If a novice investor is reviewing his 401k options, for example, and looking at the overall star rating with a 12 year old and say a three year old fund, the same overall star rating will not be an apple to apples comparison.  The older fund will have likely gone through a market cycle or two while the younger fund may have luckily entered the marketplace at the right time.

Vanguard Comparison

Vanguard completed a study in 2010 asking two questions. 1. Why do index funds tend to receive average ratings? 2. Do ratings provide any actionable information?  Even though Vanguard is noted for low-cost index funds, the study did confirm the important point that cost does matter, but it also highlights other important factors (1.)

The study notes the probability of excess returns with the following graph. Note the one-star funds have a seven percent better probability of generating excess returns than the five-star funds on average.

Wall Street Journal Investigates

The Wall Street Journal produced an article in the 9/7/2014 publication titled “Mutual Fund’s Five Star Curse.”  Most top performing funds lose their five-star rating. In fact, only 15% maintained the highest rating over the ten-year period examined by the study.  Other noteworthy points include:

  1. Watch for growing pains in the fund. As a fund performs better and the rating increases, funds may have a large influx of cash. The manager may become paralyzed on where to invest the funds.
  2. Keep it simple. The article highlights the easy articulation of the DFA Core Equity 1 fund.
  3. Get the balance right. Highly rated funds that maintain a balance of stocks and bonds tend to maintain a consistent Morningstar rating.

Next Steps

When your 401k statement comes, be mindful of how you evaluate or choose your mutual fund investments.  The Morningstar rating is not a buy or sell recommendation.  Talk to your advisor or use an online assessment tool to help you develop a holistic investment plan.

Please remember Morningstar even notes “(The) Ratings are objective, based entirely on a mathematical evaluation of past performance. They’re a useful tool for identifying funds worthy of further research, but shouldn’t be considered buy or sell signals (3.)”

 

Sources

  1. http://www.vanguard.com/pdf/icrwmf.pdf

 

  1. http://corporate.morningstar.com/US/documents/MethodologyDocuments/FactSheets/MorningstarRatingForFunds_FactSheet.pdf

 

  1. http://www.morningstar.com/InvGlossary/morningstar_rating_for_funds.aspx

Student Loan Forgiveness

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As a college graduate from the class of 2000, I was fortunate enough to limit my total student loan borrowing to $2500 through a combination of grants, and academic scholarships, and living at home.  Today, the average student is not the benefactor of similar circumstances.  If fact, the total amount in student loans in 2004 was $260 billion (1).  A rather large number, but the amount of 2004 is still small in comparison to the $1.2 trillion in outstanding loan debt as of 2014, with average graduate borrowings of $33,000 (1.)   Personally, we all know or have heard stories of young workers trying to figure out how to find their way out of the crater created by their student loan borrowings.    Here, I will outline a few options for student loan debt forgiveness, starting with the two most popular programs.

Public Service Loan Forgiveness

In order to qualify for this program, a person needs to be on a qualifying repayment plan, work at an approved service organization for ten years while making student loan payments, and will need to submit paperwork annually to the student loan provider (2.)

A qualifying employer is almost any level of government, 501 (c) 3 organization, or private company that provides public services. Additionally, the loans need to be issued through the Direct Loans Program.  Federal loans through Perkins, FFEL (prior to 2010), Parent PLUS, and private loans do not qualify.  However, one can consolidate FFEL and Perkins may be consolidated into the Direct Loan Program (3.)

Teacher Student Loan Forgiveness

This program states the person needs to teach for a minimum of five years and teach at a Title 1 school where 30% of the students are classified under Title 1 (2.). (Title 1 passed in 1965 as a means to reduce “students at risk of failure and living at or near poverty.” (4.)) This plan will only forgive up to $17,500 and the loans cannot have a default status (2.)  As a side note, Perkins loans under this structure are treated differently.

State Level Forgiveness Programs

Some states offer an annual debt reduction amount to borrowers employed in specific jobs.  Typically, these areas include health services, social work, veterinary services, and legal work (3.)

Perkins Loans

These are loans normally made by colleges and universities for students in financial need.  Cancellation of the debt may take place if you are employed in education, on active military duty, health services, or public safety (3.)  As noted earlier, these loans may be consolidated to the Direct Loans Programs which may increase the options for student loan forgiveness.

Military

Individuals in the National Guard, Army, Air Force, and Navy may be covered if serving and holding student loans.  Even former military service persons may see relief if there was a transition to the health services field.

Income-Driven Repayment

After 20-25 years of making on time payments on an income repayment plan, students can get the remaining balances of their student loans forgiven.

Final Thoughts

The programs listed above may be helpful if you qualify, however, most student loan borrowers will see minimal if any benefit.  Each of the programs have numerous details, and the intent of this post is to share the information on a high level.

While completing the research for this post, Gradible.com was found.  It is a site that walks someone through the debt relief programs by having one fill out a profile and answering questions.

 

For those looking seek assistance, the website mentioned above may provide a starting point.  It may also help to discuss your details with an advisor, who is knowledgeable about student loans and repayment programs.

Here is an article for Indiana residents

http://www.insideindianabusiness.com/contributors.asp?id=2210

 

Sources:

1.       https://www.debt.org/students/

2.       http://www.forbes.com/sites/robertfarrington/2015/01/12/the-dangers-of-student-loan-forgiveness/

3.       http://www.businessinsider.com/how-to-get-your-student-loans-forgiven-2015-8

4.       http://www.brighthubeducation.com/teaching-methods-tips/11105-basics-of-title-1-funds/