Retirement Funds Vanish as Bankruptcies Hit Tax-Deferred Scheme : Bloomberg's Erik Larson

The story is about an intermediary and some section 1031 exchanges gone very bad. Money not there. Now I'm neither a CPA nor a tax practitioner. From a very general investment and personal finance perspective, what are the lessons?

Businesses built around the tax code's loopholes can turn out to be very poor places to put your money. There must be a "valid business purpose" somewhere in there. I'm not just talking about such a business purpose for IRS purposes, but for investment purposes, such as "has this thing made money?" and "has it ever paid back the investors' principal?". When a very big tax loophole gets lobbied into existence, legitimate businesses will be built which also accommodate it, and then sometimes more exploitative types come in, for the big, quick bucks which might be hustled. No specific characterizations of such intended here, but generally, it should always be a concern if it is your money that is involved. When the tax consequences of a transaction, or a use of a specific intermediary look to you, as a lay person, to be the key drivers, rather than the making of a profit or gain, then, caveat emptor.

Another lesson, for business owners such as the person mentioned in the story, is to surround yourself with reputable people, to run something like the transaction described in the story by both your lawyer and accountant, and listen to them.

Seek real diversification, not just apparent diversification, when you can. If one thing goes very badly, will you be washed up?

Finally, if in a situation somewhat like the one in the story, if there is not a way to get the favorable tax outcome you would prefer, a way which passes the "smell" test, look for a fall-back approach, perhaps a less aggressive approach, with a still pretty good outcome. Beware people giving you a hard sell on some sure-fire tax-avoidance scheme, which just happens to compensate them handsomely. Ask how they are compensated! Demand specific written disclosure! The proposed actions might look like tax evasion, not tax avoidance, to the authorities. There's a world of difference. Even when the "intermediary" doesn't lose or steal your money.

Bloomberg.com: Exclusive

What to Do if You Can't Reach the Broker -- WSJ Free article

What follows is not investment or trading advice. It's just common sense. If you're worried sick about a market drop, you are most likely too aggressively invested. You can use asset allocation to limit your overall portfolio volatility by diversifying. And you should. When you see on TV or hear on the radio that the market is having a really bad day, that is probably not a good basis to freak out and go and start selling stuff willy-nilly. Because probably tomorrow it will go back up. And you'll not be in there for the bounce-back. You'll be worse off than if you had stayed the course. Do this a lot and it will devastate your returns. Staying in and not selling is a viable choice, presuming you have reasonably good diversification. If you don't know whether you are diversified or not, you should attend to that. Are your stocks all US large-cap growth or tech stocks? Are you heavily into China or Russia or emerging markets? Are you (I hope not,) heavily into junk bonds? If you are an investor, you should learn what real diversification is. Here's a start: Investopedia on "diversification"

The article should have risen above fostering knee-jerk selling.

WSJ: What to do if you Can't Reach your broker

Almost missed this one: Long-term care insurance - the shortcomings (USA Today)

Will they pay or won't they? Make certain you understand how the deductible period works; and look out for underpriced premiums which just keep going up, up, and up; heck, just read it. But do note that the chances are more than three times greater that a woman will require LTC for over two years, so if you can only afford LTC insurance for one spouse, consider getting it for the wife.


Long-term care insurance has its rewards but may not be for everyone - USATODAY.com

Order's important when tapping into assets -- USA Today

A pretty good overview of this subject.

I'll throw out for you one idea not in the article, useful if you have built up your investments nicely, and are blessed with substantial money in taxable, tax-deferred, and even tax-free (Roth IRA) accounts. What follows is of course directed at US readers.

You can tweak where you take the money from to legally play the tax code like a violin, in other words, minimize your taxes. For example, you could take out money up to the top of the 15% tax bracket from your 401(k) or traditional IRA -- these distributions are taxed as ordinary income; than take additional money from the taxable account at long-term gains rates on the portion that is LT gains; finally, even a bit more from the Roth when you have to. All of this bearing in mind the relative amounts you have to work with, and avoiding depleting any one of the three types of sources unduly. Cool, huh? Not always very easy to execute, but the concept is powerful., and it beats a simple-minded "hit the taxable account until it's gone, then the IRA/401(k), then last, drain the Roth" approach. I am an IAR and have my own RIA firm, and am not a tax practitioner now, so before using this or anybody else's neat ideas, you be certain to check out what your own tax adviser says.


Investing: Order's important when tapping into assets - USATODAY.com

WSJ (subscription) "A Cool Million No Longer Buys You a Luxe Retirement"

Yes it's old news, in a sense, but don't give up!

If you are young, a few simple actions will make your future much more comfortable. Use your opportunities for tax-deferred investing. Put enough into your 401(k) to get any available employer match. Contribute to your IRAs, both traditional and spousal.

Go beyond tax-deferred. If you can, put something, say, one hundred dollars a month away, for the very long haul, not to buy a flat-panel TV. To get started, put the money in a savings account. Then, when practical, in a taxable brokerage account. Learn how to invest the taxable account money for the long haul, not the fast buck, not as "mad money", and in a tax-efficient way.

Avoid becoming financial-services road-kill. Avoid load funds like the plague. Like the plague. No-load mutual fund accounts, at the fund, are one good way. Companies such as Vanguard and T. Rowe Price are known for low expenses and good investor-friendly values. That's not a commercial, just the truth. I'd suggest avoiding the mutual fund companies which advertise over and over all the day long on CNBC and Bloomberg. Big ad budgets are paid for in high expense ratios! You want financial service pros whose highest priority is good client outcomes, not client-gathering marketing. Never go to an investment "seminar" even to get the free meal. It will really, really cost you. Don't invest through variable life or variable annuities, they're usually heavily-commissioned, "fee and expense you to death", poorly-performing, all around sorry deals. As you might have guessed, I don't like them much. Stir well, wait patiently while it simmers for twenty-five or thirty years, and voila! Magnifique! If at some point along the way you want a financial advisor, find one with low fees who doesn't sell commissioned investment junk products, and emphazises good fiduciary standards.


Getting Going - WSJ.com

Back Again! Equity Index Annuities' Sold to Old People Generating Lawsuits

The fact that these things have significant commissions has absolutely nothing to do with that salesman's desire to sell you one. Whether you will be happy with it several years from now -- well, he'll still have his commission, won't he? You need an investment advisor who is a good fiducuary. Hat tip to the always interesting Kirk Report.



Equity index annuity insurers are facing more lawsuits - InvestmentNews

"E-Gold charged with money laundering" -- from SecurityFocus blog

This looks pretty bad. Interestingly, it is an example of how removed from big moneycenter towns (alleged) internet crime can be, in this case, those financial hotspots, Satellite Beach and Melbourne, Florida. And the (again,) alleged criminal mastermind, an oncologist? Well, it is Florida. If the charges are true, and the story looks pretty damning, this may take something of a bite out of money laundering. Be careful, very careful, when moving money online. There still is value in dealing with established, universally-known, trusted businesses.



E-Gold charged with money laundering

MarketWatch: 'Pollyanna', 'Americans refuse to confront dark side of retirement'

How about you?

A few of Mr. Powell's points:

"More than seven in 10 Americans are either 'very confident' or 'somewhat confident' " [regarding the adequacy of their retirement funding.]

"Yet almost half of workers have less than $25,000" [saved, excluding home or defined pensions]. This stinks. Your pension, if it comes in and stays reliably funded, may not be as much you think it will be. Are you married,and planning to get the 'pays as long as either of us is still alive' option, the amount you get will be reduced by perhaps a fourth. A fourth. the alternative is worse. Don't, please don't (guys) shaft the wife of your youth by taking the single-life option. (Individual circumstances might alter this. I'm talking about the normal case here.) If you do that, then die first, then she is without that ongoing money.

Your social security will only pay in full if you wait until you are 66 or even older. Take it earlier and they cut the payment. Work between then and your 66th birthday or whenever the magic date is for you and they take back a lot. And what you do get from Social Security likely will be "means-tested" at some point. That means you may get less. In other words, if you are not simply destitute, you might get to assist Uncle Sam to reduce his staggering budgetary pressures by getting even less.

The message for those of you in this situation is that you should get very, very serious now about providing for your retirement years. And watch out for the financial services pros who want to cure your apprehension by selling you some cure-all, heavily commissioned wonder annuity. Poor performance, excessive salesman compensation and wretchedly bad disclosure of ongoing costs will not make your situation better. The best solution is learning how to invest well, or, failing that, get some low-fee competent advice. And then you make the very best use of your remaining years in the workforce to get yourself back into the game.



Sunny Americans refuse to confront dark side of retirement - MarketWatch

Bloomberg: "Merrill Rule Decision Will Force Key Disclosure" -- John F. Wasik

More on the decision. Wasik writes: "When you venture into the murky waters of financial advisers, do you know who is a trained planner representing your best interest and who is a salesman?"

The one representing your best interest is, in other words, a fiduciary. The one who is a salesman is a broker.



Bloomberg.com: Opinion

MarketWatch's Chuck Jaffe: "Hold everything - here's how your banker lives off the float even if you can't."

Yes, it is rather outrageous. You've written the check, the money's gone from your account, but it's not there at your payee yet. Overnight interest rates being the way they are, don't look for much improvement. Funny how a pretty evenly balanced Congress gave relief to the financial intermediaries, and left us voters out twisting in the wind. It is typical behavior for a financial services industry which has a lot of clout. A lot of clout. On a similar note, how about the electronic, online bank payment you make, when the money is gone that day from your account, but the payee needs two business days (plus perhaps a weekend) to "process" the payment? Sweet, for them.

Your obligation is to know what's going on. You may not be able to do much about it, but you have a better chance to cope, if you stay tuned-in on the discussion. Time really is money.



Here's how your banker lives off the float even if you can't - MarketWatch

Are People Saving Too Much For Retirement???

Naahhh. Seriously, there is a debate on this. And while there is something to be said for not unnecessarily living the life of an ascetic, there is certainly the necessity in this life for most people to be a little bit prudent about saving for their retirement years. Ms. Rowley does a nice job, as usual, of reviewing the issue. The important thing, if you are not saving, is to start, and stick with it. Saving something is better than saving nothing. Saving a little more is better than saving a little less. Take a step for your future. This month.


here's the article

Managing Your 401(k) -- Just a Gentle Nudge

So, if you are having difficulty funding the kind of contributions you know you should be making to your 401(k), if it is a question of your lifestyle hindering your future, here are a few helpful ideas.

Importance of Wise Choices of Mutual Funds

One choice, 35 years, two outcomes.

Can you look at the chart above and get it? Can you see the cost to you of a lifetime of underperforming investments? What you see in the chart is two outcomes, one of which is much, much better.

This is not intended to kick Fidelity Contrafund around. Contrafund is certainly better than many other funds that are out there. But you have a strong interest in getting it right. Getting it right with excellence.

How not to get it right: If you watch TV to learn how to invest, all you will hear is some character yelling and jumping up and down making simian sounds telling you how to trade too much in going after short-term gains. And I am not referring to the commercials! Or you may see some less-diverting version of the same thing. A few exceptional programs exist. If you get lucky and make some short-term gains, then Speaker of the House Rep. Nancy Pelosi will want to tax them away from you. (Sorry, Madam Speaker!) That isn't investing, it is speculating on the stock price. Investing is a bigger, better thing, that even regular people can do well. So, what is real investing? Rummage around in the old posts here. Subscribe to the RSS feed. Come back for more. Bring a friend. We'll get there.

Parting thought: The really stunning thing isn't on the chart. The evidence is in and the research has been done. There is something even more important than what fund you choose. It is which and how many asset classes your portfolio holdings include and how you allocate your money among them. Then, you flesh out the portfolio with excellent holdings. That's getting into investing. But some things come even before those. [mostly involving the customization for each client's needs, and they can't all be dealt with in one blog post.]

Post edited 1/21/07 to correct Ms. Pelosi's title. My mistake. And to add the last few bracketed words.

A Thoughtful Columnist's Take on Retirement Funding and a Question

Are you ready to retire? I mean, are you financially ready to retire? Here is one columnist's take on the question.


Martha M. Hamilton - Age 65 and Not Ready or Able to Go - washingtonpost.com

I will get one thing off my chest right now. If you go into an office and do not see anyone with gray hair, it may just say something about that place's attitude toward older employees. They may not want any. But if their marketing efforts include reaching seniors as customers, then perhaps there is a big disconnect. If a business is not senior-friendly as an employer, then do they deserve to make any sales to seniors? If they wouldn't want you as an employee, well ...? Well?

You might even ask this question of your stockbroker!

from WSJ Weekend Edition -- "Smart Retirement Shopping" - Updated

"Smart Retirement Shopping. High-Pressure Tactics target Seniors' Savings; Avoiding the Hard Sell"

The lead sentence: "Winston Wong first learned about reverse mortgages over a plate of chicken."

It's worth a trip to the library if you aren't a print or WSJ Online subscriber. It's on page "B1", and it is an eye-opener. The paid-subscription link is here.

The story is called "Smart Retirement Shopping", and it would be a genuine public service if they made this article freely available -- it's that good. It's got an overview of today's commonly-seen abusive high-pressure sales pitches and inappropriate products being hustled about by unscrupulous salespeople with seniors' money in mind. It has the products, discussion of the hard sell, the pros and the cons, and how to fix it, if possible. Not everything is bad with these products; some of them have a place, or less-expensive versions or alternatives that exist. And some of the people selling these things actually do have things in mind in addition to getting their next commission check.

Discussed are:

(1) Life settlements, which provide a way for a salesman to get another fat commission buying back your life insurance policy (for which he or another salesman already got a big, fat commission when you bought the policy -- do you see a theme here?) so you can get some of your cash back when you need it.

(2) Reverse mortgages, which have their uses but are usually pretty expensive.

(3) Variable and indexed annuities. Be careful. Be really careful with these. I have written before on these, and the problems with them are big. A very few "no-load" variable annuities exist, and some even have sub-accounts with excellent index and asset-class replication funds to work with. Here is a suggestion. Before you sign on the dotted line for one of these, do yourself a favor -- first, demand a signed, full written disclosure in plain English of how much the salesman will receive as his commission, in dollars, both immediately, and in "trails", or afterward, for selling this thing to you. Then, again before signing, do yourself another favor. Do an internet search for "no load variable annuities" and work very carefully from there. you could save yourself a lot of money! I do not have one good word to say about equity-indexed annuities. They are the salesman's best friend. In my opinion, you have a number of better choices.

(4) Life insurance. You just have to read it.

(5) Living trusts. The focus of the article is the folks who are not [I accidentally left out the word "attorneys" here!] sell these things whether they are really needed or not, just to charge you $1,500 for a boilerplate template, or even worse, to find out what you have, so that they can sell you something else and make another commission.

I'm sorry, but there is no free link for this one. If you are in the market for the things discussed, arm youself with all the knowledge you can get. It's a tough financial services world out there.

The Rebirth of Henry Blodget

You really should read this. Mr. Blodget's name became a byword after the "tech wreck" and the 2000-2002 bear market, and he has been watching and learning a lot, it would seem, as he is confined to the sidelines now. Riveting reading, and it's simply remarkable to see him talking about real investing, not just stock picking. I kept expecting to see things with which I would seriously disagree, but it wasn't like that. I was rather impressed. These are excerpted and adapted from Mr. Blodget's new book, The Wall Street Self-Defense Manual, published this month by Atlas Books and Slate.





The first part is here:

The Wall Street Self-Defense Manual. - By Henry Blodget - Slate Magazine



The second part, just as powerfully written, is Here.

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Good and Interesting NYT Article on Wills

Some good take-aways from the article: If you set up a revocable living trust, fund the darn thing! Fund it! Fund it! Probate is much more time-consuming and expensive! (And read the article's suggestions on leaving detailed lists of assets and your wishes.) Don't set your children up for expenses, more pain or even fights.

What the article does not say but might have. Talk to your mom or dad, perhaps print out the article, and show it to them. Get the lines of communication open, and keep them open. Talk to your siblings. It's better to get things understood before, when the pressures are not so heavy as they may be later.


Planning: After Writing a Will, You Still Have I's to Dot

The January Effect

The article linked below is a good overall look at the "January effect", one way of looking at the small-cap effect (broad market-beating nice returns in other words,) but with a substantially flawed conclusion -- that it is real, but that you cannot exploit it. You can. Several good vehicles exist, in exchange-traded funds and in open-end mutual funds, the best couple of which aim to replicate the returns of the entire U.S. micro-cap stocks "universe". My critique of the author's conclusion (and the research he is working from) is that he is thinking in terms of single-stock ownership, using some sort of short-term trading in conjunction with some sort of active management to try to capture the "effect". The solution, I would argue, is in a carefully-weighted inclusion of these stocks as a group using a suitable low-cost vehicle, and as part of an overall long-term portfolio strategy. In all honesty this is certainly not an approach unique to my advisory practice. It's not as exciting as some approaches, but some kinds of investment 'excitement" you really can do just fine, better really, without.



Stocks: Why you can't cash in on the 'January effect' - Dec. 18, 2006

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The Two Smartest Guys at Marketwatch?

And Paul Farrell is the other. He and Jaffe consistently offer pretty classy content. Think about what he says in this column!



Ten New Year's resolutions for us irrational investors - MarketWatch

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Some Good Personal Finance Ideas for 2007

It's a pretty nice collection of ideas. Chuck Jaffe is one of my two favorite writers at Marketwatch. He always strikes me as having good sense.



A dozen worthy targets for your financial goals in 2007 - MarketWatch

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