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Retirement
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Showing Clients How Dividend Paying Stocks Can Help Offset Low Interest Rates |
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Friday, February 17, 2012 16:42
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Tags: dividends | investing for income | retirement planning
Low interest rates have been a serious problem for those approaching retirement and in retirement. Many people thought that they could simply plunk most of the investments into laddered treasury bonds when they retire and live off the income. But with the ten year Treasury bond barely yielding 2% and consumer price inflation running at 3%, this strategy is no longer viable for a lot of people.
There are several ways for advisors to help clients overcome the problem of low interest rates today. In this article I want to focus on getting clients to move some of their money into dividend paying stocks that have a solid dividend yield, are not too cyclical with economic growth, and have shown consistent dividend growth over time.
Let’s look at one such company: Johnson & Johnson (JNJ). Johnson & Johnson currently has a dividend yield of 3.5%, has seen its dividend grow by about 9% annually over the past five years, and they have never failed to increase their dividend on an annual basis since paying their first dividend in 1970.
Let’s compare what types of returns we might expect to see for JNJ vs. a 10 year treasury bond. I ran a total return analysis on JNJ using our free dividend calculator called Total Returns- Dividend vs. Price Appreciation. In the outputs below I assumed a ten year holding period for both investments. I also assumed that the dividend for JNJ grows by 6% per year and, to be conservative, that the stock price doesn’t move.
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Total Return
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Annual Return
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10 Year Treasury
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21.9%
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2.0%
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Johnson & Johnson
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55.0%
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4.5%
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Johnson & Johnson Dividend Analysis (assumes $50K invested and no stock price growth):
Over the ten year holding period in this scenario, JNJ would return nearly 35% more than the ten year Treasury bond.
Let’s look at this another way: How much does it mean to a client’s retirement plan if he is 100% invested in fixed income and he moves half of this money to dividend paying stocks such as Johnson & Johnson? I looked at a plan in our retirement planner where a couple will retire in 5 years at age 65. They have $400,000 saved and all of it is in fixed income returning 2%. They will also receive $25,000 in social security payments starting at age 65 and they have $40,000 in expenses per year.
Under this scenario their funds will run out when they are 89 years old. But what if we move half of their money to dividend paying stocks that return 4.5%? In this case they would not run out of money until age 98, a difference of 9 years.
My goal here is not to get all clients to jump back into the stock market with both feet. But there is a place in many retirement portfolios for mature companies that have shown that they will increase their dividends over time. By showing clients results like I’ve presented today, it might help convince them that they are in fact better off with at least some of their investments in dividend paying stocks as opposed to having everything in treasury bonds. If you're a private wealth advisor, please join Advisors4Advisors (A4A) to get its full benefits. Register now, and we will donate $20 of our $60 membership fee to Bubbles The Clown’s financial literacy program, and you can post an icon on your website saying you support Bubbles' 501(c)3 charitable organization. Plus, get other membership benefits, including: - Analysis daily of issues affecting advisors
- Aggregation of news from dozens of sites targeting wealth managers
- Reviews by advisors of practice management applications
- 30 independent experts blogging on advisor business issues
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Helping Clients Figure Out When To Take Social Security |
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Thursday, February 02, 2012 21:58
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Tags: retirement planning | social security
There seems to be quite a bit of confusion out there when it comes to the ideal age to take social security payments. Some people think it’s best to wait until they’re 70. Some think it’s better to take social security as soon as they can.If you're a private wealth advisor, please join Advisors4Advisors (A4A) to get its full benefits. Register now, and we will donate $20 of our $60 membership fee to Bubbles The Clown’s financial literacy program, and you can post an icon on your website saying you support Bubbles' 501(c)3 charitable organization. Plus, get other membership benefits, including: - Analysis daily of issues affecting advisors
- Aggregation of news from dozens of sites targeting wealth managers
- Reviews by advisors of practice management applications
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For those who are in relatively good health and do not need social security payments to meet current expenses, it can be a good decision to wait until the person’s FRA or even as long as possible (age 70) before taking benefits. The reasoning is straightforward: People will be penalized if they start their benefits early and they will receive a credit if they delay their benefits.
If a person decides to receive benefits before reaching the FRA, the benefit amount will be reduced by 0.56% for each month before that age, up to 36 months. If they receive benefits more than 36 months before the FRA, the benefit is further reduced by another 0.42% per month. But by delaying the first year in which they receive social security benefits until after the FRA, the monthly checks will be higher over the long-run by as much as 8% each year until the recipient reaches age 70.
The best way to take the benefits, penalties, and any credits into account is to look at a break-even analysis, which I performed using our free calculator called When to Take Social Security. I also used our retirement planner to analyze the situation by running scenarios on social security payments.
It is very informative to see at which age the total accumulated benefits break-even with, and then surpass, the accumulated benefits that occur when taking social security at earlier ages.
The chart above assumes that this person turns 62 next year and has made $70,000 per year (in today’s dollars) for the past 35 years. Also, all projected dollars are in today’s dollars and are not adjusted for inflation.
Let’s start by looking at how this person fares when taking benefits at age 62 vs. age 65. By delaying the first social security payment to age 65 this person will break-even vs. taking the first payment at age 62, in terms of accumulated benefits, when he is 77 years old. If he then lives until age 90, he will receive over $66,000 more during his retirement. Waiting until age 70 gives this person a break-even that is similar. The break-even vs. taking the first payment at age 62 would be 78 years old. The difference in accumulated benefits, if he lives until age 90, would be nearly $162,000.
Read more...
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How Will A Long Period Of Low Bond Yields Affect Retirement Plans? |
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Monday, January 30, 2012 17:05
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Tags: Federal Reserve | interest rates | retirement planning
The Federal Reserve recently said it will keep short-term interest rates near zero for about three more years, and that it may resume buying longer term bonds to lower yields. Though stocks rallied on the news, it poses a problem for retirees and other income-oriented investors. How will a long period of low interest rates affect retirement portfolios?
Just how big a problem is low interest rates for those invested in fixed-income? To get an idea,
If you're a private wealth advisor, please join Advisors4Advisors (A4A) to get its full benefits. Register now, and we will donate $20 of our $60 membership fee to Bubbles The Clown’s financial literacy program, and you can post an icon on your website saying you support Bubbles' 501(c)3 charitable organization. Plus, get other membership benefits, including: - Analysis daily of issues affecting advisors
- Aggregation of news from dozens of sites targeting wealth managers
- Reviews by advisors of practice management applications
- 30 independent experts blogging on advisor business issues
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I ran a few scenarios in our retirement planning application.
I modeled a plan using a couple where each person is 62 years old, they plan on retiring when they’re 65, and they have 50% of their money invested in Treasury bonds earning a 1% yield and half in equities with an assumed rate of return of 5% per year. Between the two, they have $600,000 in investments and will receive a combined $30,000 a year in Social Security. Inflation is assumed to be 2% each year and their annual expenses are $50,000. Here is what we learned:
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Investment Value at Retirement
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Age When Funds Run Out in Retirement
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$645,597
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94
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Under this scenario this couple will have a little over $640,000 when they retire and they’re projected to run out of money when they’re 94 years old. It’s not a terrible situation, but running out of money at 94 is early enough to give a lot of people stress. Let’s take a look at their situation if 75% of their funds are in fixed income.
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Investment Value at Retirement
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Age When Funds Run Out in Retirement
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$630,908
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91
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Life just got a little more stressful for this couple. And this assumes that inflation stays relatively low at 2%. It used to be that those approaching retirement could count on bonds giving them enough income, combined with social security and pension payments, such that they wouldn’t even have to dip into their principal most years. Let’s take a look at just how important a higher yield is for a retirement plan that is invested mostly in fixed income. Using our retirement planner’s scenarios capabilities, I came up with the following results:
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Yield on Couple's Bond Fund
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Age When Funds Run Out in Retirement
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1.0%
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91
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2.0%
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92
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3.0%
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95
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4.0%
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98
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5.0%
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101
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If interest rates simply move back to where they were in 2007, and inflation remains stable at 2%, this couple would see their funds extended by 10 years in retirement. Needless to say, bond yields can significantly impact retirement plans.
What is an advisor to tell clients in this situation? Many will have their clients move more of their funds into equities. But a lot of clients flat-out refuse to move more funds into stocks after being burned in 2008 and 2009.
That leaves an advisor to work with a client on variables clients can control.
Read more...
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IRS Extends Theft-Loss Deduction Safe Harbor For Ponzi Scheme Losses |
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Thursday, January 12, 2012 22:54
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Tags: IRS Investors conned into Ponzi-scheme losses used to be out of luck in claiming theft-loss deductions if the scheme leader died before a criminal conviction. New IRS revisions of Revenue Procedure 2009-20, 2009-1 C.B. 749, however, extend the safe harbor for investment theft-loss deductions and ensure investors' proper tax treatment of losses.
If you're a private wealth advisor, please join Advisors4Advisors (A4A) to get its full benefits. Register now, and we will donate $20 of our $60 membership fee to Bubbles The Clown’s financial literacy program, and you can post an icon on your website saying you support Bubbles' 501(c)3 charitable organization. Plus, get other membership benefits, including: - Analysis daily of issues affecting advisors
- Aggregation of news from dozens of sites targeting wealth managers
- Reviews by advisors of practice management applications
- 30 independent experts blogging on advisor business issues
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IRS revenue procedure revisions help victims claim a Section 165 theft-loss deduction for Ponzi scheme losses if the Ponzi scheme leader dies before conviction
In previous revenue rulings certain investors were allowed to claim theft loss deductions under Section 165 of the Tax Code if the leader of the scheme was charged by indictment, information, or a criminal complaint with a theft crime.
During the investigation of recent Ponzi schemes, the death of the scheme leader has precluded criminal charges, thereby foreclosing on investors’ opportunities to claim loss deductions.
Revenue Procedure 2011-58 modifies Section 4.02 of Revenue Procedure 2009-20, 2009-1 C.B. 749 so that the criminal conviction requirement merely require only that the charges were not withdrawn or dismissed for a reason other than the death of the “lead figure.” Moreover, now a civil complaint made by an administrative agency before the lead figure’s death that alleges facts which substantially comprise the elements of an appropriate crime is sufficient.
The term “discovery year” has also been changed to the tax year in which the criminal complaint is filed. “Discovery year” is alternatively defined as the tax year when the agency-made civil complaint is filed or the death of the lead figure occurs, whichever is later.
This revenue procedure is an appropriate response to recent events. The language ensures taxpayers, who would otherwise qualify, do not find themselves unable to claim the theft-loss deduction. It ensures that victims of ponzi schemes and other fraudulent investment arrangements are treated similarly.
Read more...
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Securities America Finds Another Fiduciary Partner To Handle 401(k) Administration |
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Wednesday, January 11, 2012 15:40
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Tags: 401(k) Far from keeping a low profile after its near-demise and sale last year, Securities America is actively courting retirement plan sponsors in an effort to capture some of what could become a trillion-dollar business.
If you're a private wealth advisor, please join Advisors4Advisors (A4A) to get its full benefits. Register now, and we will donate $20 of our $60 membership fee to Bubbles The Clown’s financial literacy program, and you can post an icon on your website saying you support Bubbles' 501(c)3 charitable organization. Plus, get other membership benefits, including: - Analysis daily of issues affecting advisors
- Aggregation of news from dozens of sites targeting wealth managers
- Reviews by advisors of practice management applications
- 30 independent experts blogging on advisor business issues
- 24/7 access to webinars with 50 hours of CFP® CE and 100 hours of IMCA CE
Register Now | |
The latest demonstration that the firm is serious about capturing small 401(k) accounts is its alliance with Mutual of Omaha.
Mutual of Omaha will act as fiduciary on these accounts, freeing up Securities America reps to make their presentations, sign the sponsors, and then move on.
Not coincidentally, this gets Securities America around any looming regulatory issue on the limits of fiduciary responsibility for plan advisors. Mutual of Omaha will act as fiduciary and partner Mesirow will design the investment menus.
As such, the brokers themselves simply sell into the Mesirow platform and Mutual of Omaha picks up the responsibility.
Mutual of Omaha has been touting this program for months now but so far few big brokerage firms have picked it up.
Read more...
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