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Market Commentary - Week of 7/14/14

The Markets

Germany may have clobbered Brazil in the World Cup quarterfinals last week, earning a chance to become the first European team to win the event in Latin America, but things back home in Europe weren’t quite so rosy.

First, a sizeable Portuguese bank startled investors when it failed to make an interest payment on its short-term debt. Investigators have found financial irregularities at the bank’s parent company and don’t believe the problem is systemic, according to Barron’s.

“…but jittery investors didn't hang around to find out the true picture. The missed bond payment sparked an indiscriminate selloff among financials across Europe. Banks in countries at the periphery of the euro zone were particularly hard hit, but the ripples washed over markets at the core, too.”

In addition, Reuters reported a Spanish bank cancelled its bond offering and Greece was only able to place one-half of its debt issue as a wake of uncertainty about Europe’s financial system buffeted investors.

Worries in Europe intensified when industrial production numbers came in below expectation. In Germany, production fell by 1.8 percent. In France, it was off by 1.7 percent, in Britain by 1.3 percent, and in Italy by 1.2 percent. Weak industrial production is a sign the European economy is struggling to find solid footing. By the end of last week, European financial companies had lost 3.7 percent of their value and the Stoxx Europe 600 Index was down 3.2 percent.

U.S. markets moved lower last week, too, as reminders of Europe’s banking crisis renewed investor fear. Barron’s suggested investors’ skittishness also had something to do with the fact that Standard & Poor’s 500 Index has not experienced a 10 percent correction for more than two years. Corrections typically occur about every 25 months helping to, “…wipe out some of the frothy sentiment, reset expectations, and prepare the way for another move higher.”

Data as of 7/11/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    -0.9%    6.5%    17.5%    14.3%    16.9%    5.9%
10-year Treasury Note (Yield Only)    2.5    NA    2.6    2.9    3.4    4.4
Gold (per ounce)    1.3    11.1    3.9    -5.0    8.0    12.6
Bloomberg Commodity Index    -3.0    3.5    1.2    -6.6    2.7    -1.1
DJ Equity All REIT Total Return Index    0.9    17.1    9.3    11.2    24.6    9.5
S&P 500, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

WHAT IS THE VALUE OF HIGHER EDUCATION? DOES IT JUSTIFY THE COST? It appears the value of education is in the eye of the beholder. Aristotle thought education was about learning to think. He said, “It is the mark of an educated mind to entertain a thought without accepting it.” Nelson Mandela, who helped lead South Africa out of apartheid, said, “Education is the most powerful weapon you can use to change the world.” Ben Franklin wrote, “An investment in knowledge pays the best interest.” On the other hand, Abe Lincoln was self-educated and Mark Twain belittled school boards.

The cost and value of higher education have become issues for debate in recent years. During the 2013-14 school year, the average cost of tuition, room and board, and fees at a four-year public, in-state university was more than $18,000 per year or about $72,000 for four years. At a four-year private non-profit university, the cost was almost $41,000 per year or about $164,000 over four years. That’s a hefty chunk of change even without adding the interest owed on student loans and it has left some parents and students wondering whether it was money well spent.

James Altucher, a venture capitalist, Cornell graduate, and father of two young children, wrote an article questioning the value of college. He suggested young people choose not to attend college and instead start businesses, travel the world, and create art, among other things. He has since become one of the leaders of the ‘anti-college’ crusade, said New York Magazine. When asked about his stance on higher education, he told the publication he was trying to reduce demand for college so costs would go down.

Skipping college may not be the best idea. As it turns out, more than 98 percent of the world’s millionaires went to college, according to a 2013 study from Spear’s magazine and WealthInsight, a consultancy group. Just over one percent took a pass on higher education or dropped out before graduating. The dozen colleges and universities with the most millionaire alumni are:

•    Harvard University
•    Harvard Business School
•    Stanford University
•    University of California
•    Columbia University
•    University of Oxford
•    Massachusetts Institute of Technology
•    New York University
•    University of Cambridge
•    University of Pennsylvania
•    Cornell University
•    University of Michigan

Millionaires who participated in the survey typically studied engineering, business, economics, and law, although many did not pursue careers in their fields of study. According to a Spear’s editor, “Entrepreneurs, who ultimately end up being the wealthiest in the world, are innovators, and the top subjects are those which encourage new and smart thinking, whether technical or financial.”

Weekly Focus – Think About It
“It had long since come to my attention that people of accomplishment rarely sat back and let things happen to them. They went out and happened to things.”
--Leonardo da Vinci, Italian inventor

Importance of TOD & JTWROS Designations

The Importance of TOD & JTWROS Designations

A convenient move that could ward off probate on your accounts.

 

Provided by PlanningWorks

   

TOD, JTWROS...what do these obscure acronyms signify? They are shorthand for transfer on death and joint tenancy with right of ownership – two designations that permit automatic transfer of bank or investment accounts from a deceased spouse to a surviving spouse.

 

This automatic transfer of assets reflects a legal tenet called the right of survivorship the idea that the surviving spouse should be the default beneficiary of the account. In some states, a TOD or JTWROS beneficiary designation is even allowed for real property.1

 

When an account or asset has a TOD or JTWROS designation, the right of survivorship precedes any beneficiary designations made in a will or trust.1,2

 

There are advantages to having TOD and JTWROS accounts ... and disadvantages as well.

 

TOD & JTWROS accounts can usually avoid probate. As TOD and JTWROS beneficiary designations define a direct route for account transfer, there is rarely any need for such assets to be probated. The involved financial institution has a contractual requirement (per the TOD or JTWROS designation) to pay the balance of the account funds to the surviving spouse.1

 

In unusual instances, an exception may apply: if the deceased account owner has actually outlived the designated TOD beneficiary or beneficiaries, then the account faces probate.3 

 

What happens if both owners of a JTWROS account pass away at the same time? In such cases, a TOD designation applies (for any named contingent beneficiary).3 

 

To be technically clear, transfer on death signifies a route of asset transfer while joint tenancy with right of ownership signifies a form of asset ownership. In a variation on JTWROS called tenants by entirety, both spouses are legally deemed as equal owners of the asset or account while living, with the asset or account eventually transferring to the longer-living spouse.3

 

Does a TOD or JTWROS designation remove an account from your taxable estate? No. A TOD or JTWROS designation makes those assets non-probate assets, and that will save your executor a little money and time – but it doesn’t take them out of your gross taxable estate.

 

In fact, 100% of the value of an account with a TOD beneficiary designation will be included in your taxable estate. It varies for accounts titled as JTWROS. If you hold title to a JTWROS account with your spouse, 50% of its value will be included in your taxable estate. If it is titled as JTWROS with someone besides your spouse, the entire value of the account will go into your taxable estate unless the other owner has made contributions to the account.4

   

How about capital gains? JTWROS accounts in common law states typically get a 50% step-up in basis upon the death of one owner. In community property states, the step-up is 100%.5

 

Could gift tax become a concern? Yes, if the other owner of a JTWROS account is not your spouse. If you change the title on an account to permit JTWROS, you are giving away a percentage of your assets; the non-spouse receives a gift from you. If the amount of the gift exceeds the annual gift tax exclusion, you will need to file a gift tax return for that year. If you retitle the account in the future so that you are again the sole owner, that constitutes a gift to you on behalf of the former co-owner; he or she will need to file a gift tax return if the amount of the gift tops the annual exclusion.5

 

TOD & JTWROS designations do make account transfer easy. They simplify an element of estate planning. You just want to be careful not to try and make things too simple.

 

TOD or JTWROS accounts are not cheap substitutes for wills or trusts. If you have multiple children and name one of them as the TOD beneficiary of an account, that child will get the entire account balance and the other kids will get nothing. The TOD beneficiary can of course divvy up those assets equally among siblings, but in doing so, that TOD beneficiary may run afoul of the yearly gift tax exclusion.2

 

JTWROS accounts have a potential a drawback while you are alive. As they are jointly owned, you have a second party fully capable of accessing and using the whole account balance.2

 

As you plan your estate, respect the power of TOD & JTWROS designations. Since they override any beneficiary designations made in wills and trusts, you want to double-check any will and trust(s) you have to make sure that you aren’t sending conflicting messages to your heirs.2

   

That aside, TOD & JTWROS designations represent convenient ways to arrange the smooth, orderly transfer of account balances when original account owners pass away.

 

PlanningWorks may be reached at 512 498-7526 or info@planningworks.biz

Market Commentary - Week of 7/7/14

The Markets

Happy birthday, United States of America!

U.S. stock markets gave Americans plenty of reason to celebrate over the Fourth of July weekend. The Dow Jones Industrials Average earned ‘oohs’ and ‘ahhs’ from investors and pundits as it shot above 17,000 last week (a significant gain from March 2009 when it traded in the mid-6,000 range). Barron’s pointed out the Standard & Poor’s 500 Index was no slouch either having closed “above its 200-day trading average for more than 400 consecutive trading days, the second longest streak in the last 50 years.”

The Telegraph observed, however, market highs sometimes cause investors to engage in emotional behaviors like anchoring – assigning random meaning to numbers or milestones. The online publication suggested some investors may decide the Dow surpassing 17,000 means the market is overvalued and they should sell even though they have no specific evidence to support the idea of overvaluation. Not everyone agrees that’s the way investors will roll. Experts told MarketWatch.com they expect the new high to spark buying rather than selling particularly if herd instincts are set off. Herding describes a situation in which investors gravitate toward specific investments because everyone else is doing it.

These emotion-driven investment behaviors can lead to investment mistakes. The Telegraph also suggested it’s better to choose a tangible valuation measure when trying to determine whether a company’s shares are fairly valued. A valuation measure they recommended is dividend yield: the dollar amount of the dividends a company pays investors each year divided by the company’s share price. In late June, Yahoo! Finance reported, “There is now an extraordinary crowding of big U.S. stocks around the 3% dividend yield level, a threshold that seems to exert a gravitational pull as investors bereft of easy sources of income bid up equities until they yield just a bit more than the 10-year Treasury note.”

Emotions also were running high during the second quarter for reasons having nothing to do with markets. A publicly-traded social media site let it be known it had conducted a psychological experiment on about three-quarters of a million users without their express knowledge. The study’s over-the-top name, Experimental Evidence of Massive-scale Emotional Contagion through Social Networks, brings Austin Powers movies to mind.

Bond markets, as they have throughout much of 2014, continued to confound investors and analysts. According to Barron’s, last week’s strong jobs report, which is credited with pushing stock markets to new highs, may have given investors a déjà vu moment when 10-year Treasury yields rose and then settled back down. The bond market had responded to the Labor Department’s May report in almost the same way. Strong domestic economic news pushed 
rates higher and then they retreated. Foreign demand for U.S. Treasuries was thought to be the reason rates pulled back.

Also, during the second quarter, the Federal Reserve confirmed and reconfirmed the ongoing need for accommodative monetary policy. Recently, Chairwoman Janet Yellen said, “…monetary policy has powerful effects on risk taking. Indeed, the accommodative policy stance of recent years has supported the recovery, in part, by providing increased incentives for households and businesses to take on the risk of potentially productive investments. But such risk-taking can go too far, thereby contributing to fragility in the financial system.” She also said she saw no immediate need to tighten monetary policy by raising interest rates.

The World Bank expects the global economy to gain momentum during 2014. Its June report found economic growth in developing countries is likely to be disappointing this year coming in below 5 percent largely because of first quarter’s weakness. Developed market economies have fared better year-to-date. The Euro Area is expected to grow modestly during 2014. Expectations for the United States were revised lower after first quarter’s contraction, but our economy is expected to grow during the remainder of 2014.

Data as of 7/3/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    1.3%    7.4%    22.9%    14.1%    17.2%    5.9%
10-year Treasury Note (Yield Only)    2.7    NA    2.5    3.1    3.5    4.5
Gold (per ounce)    0.0    9.7    5.4    -4.1    7.2    12.7
DJ-UBS Commodity Index    n/a    n/a    n/a    n/a    n/a    n/a
DJ Equity All REIT Total Return Index    -0.3    16.1    12.6    10.8    23.7    9.4
S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

HARVARD DOES IT. MIT DOES IT. UNIVERSITY OF CHICAGO AND STANFORD DO IT. It doesn’t cost a fortune either. In fact, it’s often free. The world’s best colleges and universities (along with organizations like The World Bank, Museum of Modern Art (MoMA), and National Geographic) are offering massive open online courses (MOOCs) as well as interactive online classes. The offerings are available to anyone with Internet access anywhere in the world. 

As The Economist tells it, rising costs, changing labor markets, and disruptive technology are conspiring to overthrow higher education as we know it, and the revolution could send colleges and universities down a path previously taken by print newspapers. The success of online education is uncertain, however. It’s held back, in part, by lack of a formal system of accreditation, although some universities have begun to accept MOOC credits toward their degrees.

“Traditional universities have a few trump cards. As well as teaching, examining, and certification, college education creates social capital. Students learn how to debate, present themselves, make contacts… The answer may be to combine the two... Students could spend an introductory year learning via a MOOC, followed by two years attending university and a final year starting part-time work while finishing their studies online. This sort of blended learning might prove more attractive than a four-year online degree.”

Needless to say, the revolution in education could have significant implications for parents and students who are contemplating the costs of higher education as well as workers who need to develop new skills to find places in the labor force.

Weekly Focus – Think About It

“Education is not the filling of a pail, but the lighting of a fire.”
--William Butler Yeats, Irish poet

Market Commentary - Week of 6/30/14

The Markets

Last week, the U.S. Department of Commerce delivered news that was about as welcome as a report of a great white shark sighting off a popular beach during the Fourth of July holiday. The Commerce Department’s third revision of its estimate for economic growth in the United States during the first quarter of 2014 was revised downward – by a lot. Instead of contracting by 1 percent, the economy shrank by 2.9 percent. It was the worst single-quarter contraction in five years.

According to Barron’s, “The number was so bad… it suggested that something more than the weather was to blame for the plunge in economic activity – and that a recession could be in the offing.” Other factors did contribute to the economy’s first-quarter reversal including a reduction in healthcare spending sparked by the Affordable Care Act and the end of emergency unemployment benefits in January.

However, experts warned against making too much of backward-looking data. ING economist James Knightley told The Guardian reaction to the news should be fairly muted as many economists expect second quarter numbers to show significant improvement. PNC Financial Services senior economist Gus Faucher, who was also quoted in the article, concurred:

“The contraction in the first quarter is old news, and things are looking much better for the rest of this year. Most importantly the labour market remains solid… Job gains are allowing households to increase their spending, with higher stock prices and home values also helping. Recent data have been solid, with big jumps in new and existing home sales in May, and consumer confidence recovering after it took a hit in the winter. An expanding global economy will help boost exports...”

Comments from St. Louis Federal Reserve President James Bullard reinforced the view that economic growth remains steady. Last Thursday, he predicted the Fed would raise interest rates early in 2015. Bloomberg.com reported Bullard expects the jobless rate to drop below 6 percent and inflation to close in on 2 percent by the end of 2014.

Data as of 6/27/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    0.1%    6.1%    21.6%    15.3%    16.2%    5.6%
10-year Treasury Note (Yield Only)    2.5    NA    2.5    2.9    3.5    4.7
Gold (per ounce)    0.4    9.7    6.9    -4.2    7.1    12.5
DJ-UBS Commodity Index    -0.5    8.1    8.4    -4.2    1.7    -0.6
DJ Equity All REIT Total Return Index    0.2    16.4    12.5    12.7    23.6    9.6
S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

THE BULL MARKET IN BONDS HAS PERSISTED FOR MORE THAN 30 YEARS. It began when The Cosby Show was in its heyday, when the first Apple Macintosh computers arrived in homes, and when Clara Peller famously asked, “Where’s the beef?” in a popular television commercial. The bull market began late in 1981 when 30-year U.S. Treasury bond rates hit an all time high of 15.2 percent and 10-year Treasuries topped out at 15.8 percent. Thirty-three years later, in mid-2014, 30-year Treasuries and their 10-year brethren offered rates in the low single digits.

MarketWatch.com says the lengthy bull market in bonds has important implications:

“… Assuming the typical investor doesn’t seriously start thinking about investing until he is 25 or 30 years old, especially about investing in bonds, that means that anyone today not in, or very close to, retirement has only known a bond bull market. That’s an amazing historical and psychological fact, the significance of which cannot be overstated. It means that very few investors today have the long-term perspective with which to properly assess whether bonds are likely to suffer major declines in coming years.”

After 30-odd years of declining interest rates, some experts believe investors should prepare for a period of rising rates. Since there is an inverse relationship between bond prices and interest rates, higher rates could mean declining bond prices. How much could the price of a bond decline? It all depends on the bond’s duration. Duration is expressed as a number of years and measures the sensitivity of a bond to interest rate movements. The longer the duration of a bond, the more sensitive it is to changing rates, and vice-versa. Investopedia.com describes duration like this:

“The duration number is a complicated calculation involving present value, yield, coupon, final maturity, and call features. Fortunately, for investors, this indicator is a standard data point provided in the presentation of comprehensive bond and bond mutual fund information. The bigger the duration number, the greater the interest-rate risk or reward for bond prices.”

If rates move higher, a portfolio with long-term, long-duration bonds may experience a significant reduction in value.

Weekly Focus – Think About It

“Hard work spotlights the character of people: some turn up their sleeves, some turn up their noses, and some don't turn up at all.”
--Sam Ewing, American baseball player

Tax Efficiency (Updated 2014)

Tax Efficiency

What it means, why it counts.

 

Provided by PlanningWorks

 

A little phrase that may mean a big difference. When you read about investing and other financial topics, you occasionally see the phrase “tax efficiency” or a reference to a “tax-sensitive” way of investing. What does that really mean?

 

The after-tax return vs. the pre-tax return. Everyone wants their investment portfolio to perform well. But it is your after-tax return that really matters. If your portfolio earns you double-digit returns, those returns really aren’t so great if you end up losing 20% or 30% of them to taxes. In periods when the return on your investments is low, tax efficiency takes on even greater importance.

 

Tax-sensitive tactics. Some methods have emerged that are designed to improve after-tax returns. Money managers commonly consider these strategies when determining whether assets should be bought or sold.

 

Holding onto assets. One possible method for realizing greater tax efficiency is simply to minimize buying and selling to reduce capital gains taxes. The idea is to pursue long-term gains, instead of seeking short-term gains through a series of steady transactions.

 

Tax-loss harvesting. This means selling certain securities at a loss to counterbalance capital gains. In this scenario, the capital losses you incur are applied against your capital gains to lower your personal tax liability. Basically, you’re making lemonade out of the lemons in your portfolio.

 

Assigning investments selectively to tax-deferred and taxable accounts. Here’s a rather basic tactic intended to work over the long run: tax-efficient investments are placed in taxable accounts, and less tax-efficient investments are held in tax-advantaged accounts. Of course, if you have 100% of your investment money in tax-deferred accounts, then this isn’t a consideration.

 

How tax-efficient is your portfolio? It’s an excellent question, one you should consider. But this brief article shouldn’t be interpreted as tax or investment advice. If you’d like to find out more about tax-sensitive ways to invest, be sure to talk with a qualified financial advisor who can help you explore your options today. What you learn could be eye-opening.

 

PlanningWorks may be reached at 512 498-7526 or info@planningworks.biz

Market Commentary - Week of 6/25/14

The Markets

The Federal Open Market Committee (FOMC) press release wasn’t quite as catchy as España Cañí — the Spanish song played to rile crowds at events as varied as baseball games and bullfights — but it helped motivate investors as they pushed American stock markets higher last week.

The markets’ optimistic surge was a bit difficult to understand. Since April, the U.S. economy has offered mixed signals. As it turns out, the economy actually suffered a contraction — not a slight expansion, as was originally thought — during the first quarter of 2014. Unemployment has been relatively steady with employers adding about 200,000 jobs in each of the last four months.  However, inflation numbers have some pundits concerned.

The Bureau of Labor Statistics’ Consumer Price Index Summary (CPI) showed the CPI increased by 0.4 percent in May, but that doesn’t really tell the whole story. The price of food was rising faster (0.7 percent) than the CPI and in May, the food index posted its largest increase since August 2011. In addition, the cost of electricity and gasoline rose 0.9 percent.  When questioned about the discrepancy, Chairwoman Janet Yellen indicated the numbers around inflation could be just ‘noise.’  The Fed’s attitude toward inflation had The Guardian accusing it of magical thinking.

“…Consumers are surrounded by rising prices on all sides – paying higher bills, paying more money at the market, paying more just to get to work. At the same time we’re shelling out more for these necessities, our incomes are stagnant. No more money is coming in. Yet the Fed, which just wrapped a two-day meeting to diagnose the economy, is dismissing these real-world costs as a trick of the charts – a mere math problem rather than a real snapshot of the challenges facing Americans.”

If economic signals are mixed, why were markets so optimistic? Reuters suggested investors’ confidence had a lot to do with the markets’ resilience during 2014 to-date (in the face of events in Ukraine and the Middle East, among others), as well as economic improvement, earnings growth, and the availability of cheap credit.

Data as of 6/20/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    1.4%    6.2%    23.6%    15.4%    17.1%    5.7%
10-year Treasury Note (Yield Only)    2.6    NA    2.4    3.0    3.7    4.7
Gold (per ounce)     3.1    9.2    1.6    -5.3    7.4    12.8
DJ-UBS Commodity Index    1.3    8.6    6.6    -4.9    2.5    -0.7
DJ Equity All REIT Total Return Index    1.5    16.1    19.1    12.2    24.9    9.7
S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

DECIMATE IS A VERY INTERESTING WORD…In the early 1500s, according to OxfordDictionaries.com, decimation (an earlier version of decimate) referred to tithing—paying a tenth of your income to an organization that was usually religious in nature. By the end of the 1600s, “An English Dictionary defined [decimate] as both ‘to tythe or take the [tenth]’ and ‘also punishing every tenth man.’”  More recently, decimate has been defined as destroying a large portion of something or drastically reducing the strength or effectiveness of something.

When it comes to retirement, the great decimator could be healthcare costs. The Employee Benefits Research Institute (EBRI) estimated that, in 2013, men needed $65,000 and women needed $86,000 to have a fifty-fifty chance of covering healthcare expenses during retirement. At least, that’s how much they needed to pay for Medigap premiums, Medicare Part B premiums, Medicare Part D premiums, and out-of-pocket expenses.

Of course, if they wanted better odds, people had to save more. Let’s say a person wanted a 90 percent chance of having enough money to pay the healthcare costs listed above. In that case, a man needed $122,000 and a woman $139,000. A married couple (both with drug expenses in the 90th percentile) needed $360,000 in savings. EBRI Notes said, “Individuals can expect to pay a greater share of their costs out-of-pocket in the future because of the combination of the financial condition of the Medicare program and cutbacks to employment-based retiree health programs.”

Of course, it’s important to note that these targets don’t include any expenses associated with early retirement or long-term care costs. A new study estimates that a couple retiring at age 62 will pay about $17,000 in out-of-pocket expenses each year until they become eligible for Medicare.  No matter when they retire, 70 percent of Americans eventually need long-term care services and support, according to LongTermCare.gov.  The cost of long-term care depends on the services required, but it is not insignificant. One survey estimated that the average cost of care for one year in a private nursing facility was about $96,000 in 2014.

Putting sound financial strategies in place can help prevent healthcare expenses from decimating your retirement.

Weekly Focus – Think About It
“People who think they know everything are a great annoyance to those of us who do.”
-- Isaac Asimov, American author and biochemistry professor

Preparing to Sell Your Business

Preparing to Sell Your Business

Do you have a strategy to follow?

 

Provided by PlanningWorks

 

Have you created a company that someone will want to buy? Your children won’t necessarily want to take over your business, so an exit strategy is essential to getting the outcome you want. You must prepare your firm for the transition – and you must be prepared as well.

 

When should the planning begin? Think five years away from the date of sale – at least. You could even start ten years before.

 

Readying yourself. Have you thought about what your life will be like after selling the business? If you have what amounts to a lifestyle company, to what degree has it paid your personal expenses? Can you arrange new income streams to replace the business income? A needs analysis may help you estimate how much money you will need to keep living well.

 

Readying the business. Look at your company and its immediate rivals. How attractive is it in comparison? What do you think it is worth?

 

What kind of unique selling proposition (USP) has your business developed? Has the service and performance of your employees strengthened your USP, or weakened it? Is your customer base growing, or stagnant? Does your online presence need a facelift? Do your financial systems need improving? Make a to-do list of some potential business upgrades and schedule their implementation.

 

What would a buyer want most when purchasing a business in your industry? Strong potential for further growth? Superb profits? Significant working capital that converts to cash in reasonable time? Freedom from having to make new capital investments? In addition to determining this, you will want to figure out the strategic value of your business with respect to a particular buyer, not simply the stand-alone value.

 

Marketing & preparing your company for sale. Who are you going to market to – a strategic buyer or a financial buyer? Do you think it would be better to sell your company to a major player in your industry, an up-and-comer, or even an old friend? Would a private equity firm be intrigued? Would a foreign buyer be a better bet? Your marketing strategy should be strong enough to attract multiple offers, whether pursuant to an asset sale or a share sale.

 

Dealing with the taxes. What will the tax impact of the sale be, and to what degree can you reduce it? Would changing the business structure help?

 

Negotiating the sale. If you use a business broker, use a properly licensed one (if you don’t, you may be inviting regulatory risks depending on your industry) and certify that he or she really wants to see you get a good deal (as opposed to just closing any deal). Set a sensible floor price, and walk away if an offer comes in beneath it; a pause after the receipt of a lowball offer sends the wrong message.

 

If you want to sell a company and start up another in the same industry, the buyer may demand that you hammer out a non-compete agreement, stating that you will not start a company in industry A, B, or C (or in your geographic region) within the next 5 or 10 years. Some states permit non-compete agreements and others prohibit them (most notably California).1

 

You might be able to convince the buyer to accept a non-solicitation agreement instead. These agreements promise that you won’t raid your old client base or hire your former employees as you build your new business, or alternately that your new firm won’t sell specific products that the business you sold still sells.

 

The prospective buyer may suggest an earn-out to you. Earn-outs are irritating conditions of sale in which the buyer links some of the seller’s eventual compensation to the business reaching certain financial milestones in the future. Earn-outs amount to stealth non-compete agreements, as they discourage a seller from remaining in the same industry. An earn-out might be acceptable if the remaining compensation comes to 10% or less of the sale price, or if bonuses can be arranged for you should the business perform exceptionally well under new ownership in the near term.

 

An extensively detailed, non-binding term sheet is critical in a negotiation. It can go on for several pages if needed, and it can serve as a precise cue sheet for any attorneys hired to write up the final sale agreement.

 

Handling change. You may want (or need) to put someone else in charge of things during the ownership transition. In addition to being a good manager, that person needs to care about your clients/customers as much as you do and uphold the values with which you started the company. That is non-negotiable.

 

Selling a business is a big effort, but a necessary one. Turn to a financial or tax professional to help you plan for the sale and the transition.

 

PlanningWorks may be reached at 512 498-7526 or info@planningworks.biz

Market Commentary - Week of 6/16/14

The Markets

Investors remain oddly complacent even in the face of unexpected events that have the potential to disrupt global markets.

Last week, news media reported civil war in Syria has boiled over into Iraq, and ISIS (Islamic State of Iraq and Syria), a Sunni extremist group, has seized control of hundreds of square miles. According to CNN.com, the group’s ambition is to create an Islamic state that encompasses the Sunni regions of both Iraq and Syria. [1] The Economist pointed out the potential for volatility in world energy prices is enormous because significant portions of the world’s energy reserves are controlled by Middle Eastern nations (factor in Russia and Venezuela, too). [2]

Governor of the Bank of England, Mark Carney, let markets know the United Kingdom’s central bank may raise rates sooner than expected to help turn the country’s recovery into a durable expansion. [3] His speech sparked speculation about the timing of rate hikes in the United States. President of the Federal Reserve Bank of St. Louis, James Bullard, told The Wall Street Journal the Fed is likely to raise rates sooner than expected if the U.S. economy meets performance expectations during 2014. [4]

Russian politicians are encouraging a de-dollarization of their economy, and leaders of several Russian banks have indicated they are bypassing the U.S. dollar in their international transactions. [5] China and Brazil are settling some of their trade with their currencies, the renminbi and the real (respectively). According to Barron’s, “The world is actively seeking an alternative to the greenback. Major nations don't want to pay the virtual toll in the cost of acquiring dollars to conduct trade. The maturation of their own financial markets increasingly allows them to bypass the dollar-centric financial system.” [6]

U.S. stock markets largely finished the week lower; however, the CBOE Volatility Index (VIX) (the so-called fear gauge) remained at levels suggesting investors remain relatively unruffled. [6]

Data as of 6/13/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    -0.7%    4.8%    18.3%    15.0%    16.0%    5.6%
10-year Treasury Note (Yield Only)    2.6    NA    2.2    3.0    3.7    4.9
Gold (per ounce)    2.0    6.0    -8.1    -5.9    6.4    12.7
DJ-UBS Commodity Index    0.8    7.2    3.6    -6.3    1.4    -0.7
DJ Equity All REIT Total Return Index    -2.2    14.4    10.3    12.7    22.8    10.0
S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

PAUL, THE GERMAN OCTOPUS ORACLE, DID PRETTY WELL PREDICTING outcomes of 2010 World Cup matches. Paul’s approach wasn’t too scientific and, now that he is gone, a lot of folks are turning to animal prognosticators. China has a team of baby pandas and Germany has put Nelly the elephant on the task. [7]

In case you’re not a soccer aficionado, The World Cup – soccer’s version of the Super Bowl, World Series, Stanley Cup, etc., etc. – began last weekend. SBNation.com’s soccer glossary describes the event like this:[8]

“The World Cup is the most important soccer tournament on the planet. It is contested over 64 games by 32 national teams every four years and tends to be watched by a significant fraction of the global population… Long story short: it's the most important trophy in the world's most popular sport.”

The World Cup also provides a lesson on sentiment-driven markets. Market sentiment reflects the optimism or pessimism of investors on the whole – crowd attitude – and it can send markets higher or lower. It can affect markets even when there’s no change in underlying fundamentals. [9]

So, how does it work? Goldman Sachs publishes a 67-page report, complete with a dream team line-up and interviews, titled The World Cup and Economics. It could be a program brochure for the event. Regardless, the report includes data about the performance of countries’ stock markets following a victory or defeat in the finals. [10]

Stock markets in winning countries tend to outperform by about 3.5 percent for the first month after the win but gains fade by the three-month mark, and markets tend to underperform the following year. When you remove significant outliers, runner-up countries’ markets typically underperform during the three months following the loss. It seems nobody is too pleased about coming in second. [10]

Weekly Focus – Think About It

“Some people think football [soccer] is a matter of life and death. I assure you, it's much more serious than that.”
--Bill Shankly, Scottish footballer and manager of Liverpool Football Club [11]

Average retiree health costs could overtake Social Security benefits

“Average health care costs for middle-income retirees are on a path to exceed their Social Security benefits, according to a newly created Retirement Health Care Cost Index.” Click to read more: http://www.investmentnews.com/article/20140417/FREE/140419921

Market Commentary - Week of 6/9/14

The Markets

“Is there any point to which you would wish to draw my attention?”
“To the curious incident of the dog in the night-time.”
“The dog did nothing in the night-time.”
“That was the curious incident,” remarked Sherlock Holmes.”

Sometimes, it’s what doesn’t happen that deserves our attention. In the case of what’s missing in U.S. markets, according to The Economist, is volatility: 

“Certainty about monetary policy has stripped volatility out of bond yields which in turn has drained a major source of uncertainty out of stock prices. At root, volatility simply represents uncertainty about the value of an asset's cash flows, so when volatility falls, the risk premium required to hold the asset also falls, driving price-earnings ratios for stocks up and bond yields down… I do worry that by squeezing out short-term volatility, we may be storing up long-term volatility.”

In the United States, the CBOE Volatility Index (VIX), a.k.a. the fear gauge, has been falling for some time. According to Reuters, some experts believe when the VIX trades below its historic averages, the market is getting toppy and investors may be in denial. Only time will tell whether this view has merit. In the meantime, let’s review what has happened so far during the second quarter of 2014:

Strength in America
The U.S. Federal Reserve continued to goose the U.S. economy with accommodative monetary policy. Toward the end of this quarter, the Fed was buying $45 billion of Treasury and mortgage-backed assets each month rather than $85 billion as it did prior to tapering. At this rate, its quantitative easing efforts will end in late fall or early winter.

The U.S. economy appeared to rebound after contracting slightly during the first quarter of 2014. Better-than-expected economic data late in this quarter spurred optimism in markets across the globe.

Redirection in Russia
Tensions between Russia and Ukraine remained high. At the St. Petersburg International Economic Forum, Russian President Vladimir Putin told CNBC, “The standoff with Ukraine and the threat to European gas supply are ‘not due to Russia but to the situation in the Ukraine, which abuses its position.’”

Meanwhile, one of Russia’s large state-backed energy companies signed a $400 billion, 30-year contract to supply gas to China. Reuters reported China received a significant discount on the deal which was priced at about $10 to $10.50 per million British thermal units (BTUs). This is well below the current price level of around $13 per million BTUs.”

Not long after that deal was announced, Russia, Belarus, and Kazakhstan signed documents creating a Eurasian Economic Union (EEU) late in this quarter. The Diplomat reported Russia was pushing for a common parliament, common passport, and common currency within the EEU; however, the other member states preferred a purely economic union. According to Reuters, forming closer ties between Russia and China is at the heart of the EEU.

Slow growth in China
China missed its government’s gross domestic product (GDP) growth target for the first quarter of 2014. The bull’s eye was 7.5 percent growth. China delivered 7.4 percent. The Chinese government took measures to encourage growth, and The World Bank recently reported China’s growth is expected “to slow to 7.6 percent in 2014, and 7.5 percent in 2015, from 7.7 percent in 2013.” The report said economic growth could be slower due to high levels of local government debt, issues in real estate markets, or economic weakness in developed countries.

Data as of 6/6/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    1.4%    5.5%    20.2%    14.9%    15.7%    5.5%
10-year Treasury Note (Yield Only)    2.6    NA    2.1    3.0    3.9    4.8
Gold (per ounce)    -0.2    3.8    -10.9    -7.0    5.7    12.2
DJ-UBS Commodity Index    -0.1    6.3    1.5    -6.7    1.2    -1.1
DJ Equity All REIT Total Return Index    1.7    17.0    11.3    12.6    21.6    10.0
S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

WE’VE ALL TALKED ABOUT SPENDING TIME, BUT HOW MANY PEOPLE really think of it as currency? The Economist offered an interesting commentary on the value of time last week or, more accurately, on the hidden cost of wasted time. It seems two billion people around the world have watched the Korean music video “Gangnam Style” on YouTube. The Economist commented, “At 4:12 minutes, that equates to more than 140 million hours, or more than 16,000 years.” That’s about how long it would take to build:

•    20 Empire State buildings
•    4 Great Pyramids of Giza
•    6 Burj Khalifas (skyscraper in Dubai, United Arab Emirates)
•    Another Wikipedia (write and edit all revisions)

So, was that time poorly spent? The Economist pointed out the opportunity cost was fairly high. The opportunity cost of a choice (watching a music video instead of doing something else) is equal to the value of the choice that has not been made. Of course, if watching the video gets the creative juices flowing and inspires an invention or innovation then, depending on how profitable the idea is, the opportunity cost may be negligible.

Weekly Focus – Think About It

“Most folks are as happy as they make up their minds to be.”
--Abraham Lincoln, 16th American President

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