Chart of the Day: Unemployment

Today, the Labor Department reported that the unemployment rate increased to 10.2% -- a 26-year high. For some perspective on the current state of the labor market, today's chart illustrates the unemployment rate since 1948. As the chart illustrates, today's move above the 10% threshold marks only the second time such a move has occurred during the post-World War II era. It is also worth noting that the unemployment rate has tended to peak shortly after the end of the recession. Following the previous two recessions, however, the unemployment rate kept rising for many months following the beginning of an economic "expansion."

Get Smart About Debt - Rule #5

Rule #5 of "Get Smart About Debt" is to keep up the good behavior. The tougher lending standards ushered in by the credit crisis are likely to stick around well after the recession is gone. Helping cement them are new laws that focus on consumer protection - such as stricter rules for credit card issuers, which reduce their incentive to deal with less creditworthy customers.

An even bigger factor leading to the longevity of tighter credit is the disappearance of secondary investors willing to buy risky loans from banks. "Over time, those markets will come back to life," says Bankrate.com's Greg McBride, "but bad memories won't fade fast."

The lesson? Don't let good credit habits slide, even if you're not planning to borrow right away. In fact, it never hurts to set up automatic bill payments so you are never late addressing your obligations.

Again, independent fee-only financial planners specialize in these areas. Contact a fee-only financial advisor today for help setting up a debt management program, and more tips for establishing a strong credit report.

Get Smart About Debt - Rule #4

The fourth rule of "Get Smart About Debt" is to eliminate the right debts first. Specifically, you need a one-two punch. First, reduce your spending, and second, use the additional money saved to accelerate payment on the debt that has the highest interest rate. Typically, that's your credit cards. Once you've paid off your highest-rate loan, apply the money to the next-highest rate loan, and so on.

Frequently, you may want to exclude home or student loans from this process. Interest on these types of loans create a tax deduction for the borrower, and consequently, the real interest rate being paid on these loans is less than the amount simply being paid to the bank or the educational institution. To figure out the real interest rate on these loans, multiply the nominal interest rate by one minus your marginal tax bracket. For instance, the real interest rate on a 6% marginal home loan for an individual in the 25% tax bracket is:

6% x (1-.25) = 4.5%

Note that these payments create a tax deduction only if the tax payer is itemizing deductions. If only the standardized deduction is claimed, there is no additional tax benefit.

Accelerating payments on loan balances is extremely beneficial. Consider a $5,000 credit card balance with a 15% interest rate. An individual making a $100 monthly payment would take 6.6 years to pay off the loan, and cost $2,896 in interest payments. Meanwhile, if payments were increased to $150 a month, the loan would be paid off in 3.7 years and cost the borrower only $1,509 in interest payments.

Speak to an independent fee-only financial planner about putting together a schedule to eliminate your debts. The faster you eliminate your debt, the earlier you can begin to invest, and the better your retirement will be.

Get Smart About Debt - Rule #3

Not long ago you might have drawn on a home-equity line of credit (HELOC) for college costs, emergencies, even a new car. Now, lenders have cut these credit lines and real estate values have sunk. In fact, the average real housing wealth declined 13% from 2005 to 2008. Consequently, home equity is no longer easy money. Considering these factors, rule #3 of "Get Smart About Debt" is to tap home equity sparingly.

If you are lucky enough to still have a HELOC, tap it only if you'll be left with at least 20% equity and you live in an area where home prices have leveled off - otherwise you may end up underwater on the loan. If a HELOC isn't viable, use federal loans for college (often better anyway, since their rates are fixed). In an emergency, a 401(k) loan is an option, though you'll miss out on investment growth and owe interest. Plus, typically you have to pay these loans back within 90 days if you're laid off.

Looking for a way to add liquidity to your financial portfolio? Speak to an independent fee only financial advisor who can help you establish an appropriate emergency fund. After all, an emergency fund consisting of three to six months worth of expenses should be established before investing funds elsewhere (including in a 401(k) or an IRA).

Get Smart About Debt - Rule #2

Burned by their mistakes, lenders are now far more cautious. To qualify for any loan, you must prove that you're a low default risk; to get the best terms, you must be a sure bet. Consequently, rule #2 of "Get Smart about Debt" is to position yourself to get the lowest interest rates.

This step revolves around a high FICO score, the number used by most lenders to determine your creditworthiness. Today the lowest rates generally go to those with scores of at least 760 out of a possible 850. Boost your score by paying bills on time, reducing credit card balances to less than 20% of their limits, and correcting any errors on your credit reports.

Be sure to order a credit report from annualcreditreport.com. You are allotted a free report from each credit bureau every 12 months. You'd be surprised how frequently errors show up on these reports, and fixing them can increase your FICO score dramatically. While you are on the website, you might buy the Equifax version of your FICO score for $8.

To illustrate the benefit of having a top FICO score, consider two individuals looking to get a 30-year loan on a $200,000 mortgage. An individual with a 670 FICO score may qualify for an interest rate of 5.67%, making total payments on the home equal $416,521. Meanwhile, an individual with a 760 FICO score might qualify for a 5.05% interest rate, making total payments equal just $388,715.

Getting top rates may also require a larger down payment than in the past - 20% for a house, and 10% for a car. Lastly, you will certainly have to prove you have a steady income source.

Again, debt management is an area where a qualified financial planner can certainly add value. Be sure to speak to an independent fee only financial advisor to get objective, comprehensive advice on how to benefit from your credit rather than become a slave to it.

Get Smart About Debt

Money Magazine recently published a brochure about dealing with debt. According to the material, rule number one of debt management is to borrow only when it makes financial sense.

During the boom you barely had to be breathing to qualify for loans. Too many people leveraged themselves silly. By 2007, U.S. households owed $1.33 for every $1 of disposable income. With so much debt, many people couldn't cope when their mortgage rates reset or they lost their jobs.

Before you take on debt, make sure you won't get into a similar situation. First look at your debt-to-income ratio, or your monthly debt payments divided by your monthly pretax income. You want to stay under 30%. Next consider why you're borrowing. Limit borrowing to "good debt," which finances something likely to retain or gain value. Examples are a mortgage or a student loan. Low interest rates and tax benefits are other signals that taking on "good debt" makes sense. Using credit for a vacation or a 50-inch TV? Clearly not financially wise.

Here is a quiz to help determine whether borrowing would be wise:

-Will the investment add to your net worth over time?
-Is the loan's interest tax-deductible?
-Is your credit score high enough that you'll qualify for the lowest available interest rate?
-Will your total debt payments remain less than 30% of your pretax monthly income?
-Can you afford the payments if you are out of work for six months?
-Can you prepay the loan without penalty?

If you answered yes to five or six questions, borrowing may make sense. If you only answered yes to three or four questions, borrowing may not be wise, and if you answered yes to two or less questions you should probably forget the idea now...

Of course, debt management is a primary function of financial planners. Actually, discussing debt management is a great way to determine whether a financial planner has your best interest in mind. Many so-called "financial advisors" encourage their clients to take on more debt in order to afford the products the advisor is selling. This is a huge red flag, and if your advisor is doing this you should run. It is best to speak to an independent fee-only financial advisor who accepts a fiduciary responsibility to act in the clients best interest. These financial planners will help clients manage their debt, not create new debt in order to create a paycheck for themselves.

46% of Unemployed in 2008 Cashed Out Their 401k

Forty-six percent of those leaving a job in 2008 tapped into their 401(k), maintaining an “alarmingly high” rate of people cashing in since 2005, Hewitt Associates said. Sixty-percent of those cashing in were in their 20s, and 33% were in their 50s.

If you are in the unfortunate position of having lost your position recently, I urge you not to cash out your qualified plan dollars. A seemingly small amount in these accounts now WILL become a substantial amount when it comes time to retire. If you want me to do a quick calculation on what your "small" 401(k) balance will become by the time you will truly need it, drop me a quick email.

Industry Groups Urge Congress to Oppose Watering Down a Uniform Fiduciary Duty

Stacy Schultz published this article in Financial Planning Magazine:

"Six leading industry groups wrote a joint letter to the House Financial Services Committee throwing their support behind a fiduciary duty that would cover all who offer investment advice. The organizations also voiced their concerns that new legislation could weaken the current standard stated in the Investment Advisers Act, the accepted highest standard in the industry today.

The groups, in their letter, also called an amendment offeredby the American Association of Life Underwriters "particularly harmful.”

The letter was written and signed by the CFP Board of Standards, the Financial Planning Association, the Investment Advisers Association, the North American Securities Administrators Association, the National Association of Personal Financial Advisors, and the Consumers Federation of America.

In the letter, the groups urged Congress to add a strong provision to the proposed Investor Protection Act, that would hold all those giving financial advice to the fiduciary duty standard set up in the Investment Advisers Act.

Independent registered investment advisers currently adhere to this standard. A fiduciary must act in the “best interests” of a client. But registered representatives generally rely on the “suitability” standard. That is they can recommend products that are deemed suitable for a client.

The groups pointed to several concerns over the proposed legislation. First, they expressed concern over the phrase in the proposed act that says, “when providing personalized investment advice.” The groups fear that phrase might be used to argue that so-called “hat switching” by brokers is allowed. “By ‘hat switching’ we are referring to the common practice where the same financial intermediary provides investment advice under a fiduciary duty and then executes the recommended transactions under a lower suitability obligation,” the groups said in the letter. “Brokers have consistently sought to limit the fiduciary duty so that it would not apply to the sales recommendations intended to implement the advice.”

Second, the groups, in their letter, pointed to the language requiring rulemaking by the Securities and Exchange Commission that addresses personalized advice to retail clients. “Currently, an advisor’s fiduciary duty under the Advisers Act does not vary depending on the type of client served. We do not believe it is appropriate to have different standards for different types of clients. All investors receiving personalized investment advice should benefit from the protections of the Advisers Act fiduciary duty,” the groups’ letter stated.

The groups, in their letter, also called an amendment being put forward by from the American Association of Life Underwriters “particularly harmful.” That amendment, the letter said, “would limit the definition of ‘investment advice’ to situations in which commissions are not part of the fee paid to the services provider.” The groups complained that the amendment “would allow brokers to provide investment advice under the lower suitability standard. It would also restrict the options available to investors by eliminating the ability of investors to receive a combination of fee-based investment advice and commission-based implementation all subject to a fiduciary duty. We urge you to strongly oppose this or any similar amendment that may be offered."

6.6 Million Americans Age 65 or Older Unemployed

The following article was published by Money Management Executive:

While the recession has forced many Americans to delay retirement, one of the hardest hit are those already retired in search of work. There are 6.6 million Americans age 65 or older who have lost their jobs in the recession, 61% more than the 4.1 million unemployed in this age group in 2000, The New York Times reports.

This is five times the number of people in this age bracket who were unemployed in the Great Depression. Making matters worse, many older Americans still owe money on their mortgages.

In terms of percentages, 6.7% of older Americans are out of work. While that’s below the 9.8% national average, it’s far higher than the 1.9% who were unemployed earlier this decade. And among those who successfully find other gainful employ, it takes an average of 36.5 weeks, or more than nine months. That’s 40% longer than other unemployed folks.

According to the Congressional Research Service, the median income for those 65 and older is $18.208, with nearly 25% of this population receiving $11,139 or less a year. The average Social Security benefit is currently $12,437 a year.

This information emphasizes the importance of a financial plan. First, unemployed individuals age 65 and older with written financial plans likely have sufficient emergency funds to support themselves through their job search. Second, individuals who have been guided by a written financial plan are much more likely to have established considerable savings, making finding new employment more a luxury than a necessity.

Stocks and Gold Team Up

So far this year, an odd couple has emerged as big winners in the financial market. The Dow Jones Industrial Average is up 14 percent, while gold futures are up 19 percent.

Traditionally, an increase in the stock market reflects a majority bet on an economic recovery, while an increase in gold prices represents a rising fear of instability. Consequently, these two investment options are usually at odds. However, low interest rates and heavy government stimulus have poured cheap money into financial markets, helping stocks. Yet the creation of all that money, together with the Federal Reserve's maintenance of near-zero benchmark interest rates and the prospect of heavy government borrowing to fund deficits, threatens to weaken the dollar and fuel inflation and economic volatility. This, in turn, creates a growing interest in gold.

While many institutional investors place large bets on gold, I believe gold futures should not compose more than 5 percent of a portfolio for an individual who is preparing for or already enjoying retirement. While it's true gold futures have quadrupled to $1,055 a troy ounce from just $250 in 1999, after adjusting for inflation gold would still have to double to $2,291 to reach its 1980 high, indicating this investment has not been a solid long-term investment. If you are interested in gold, be sure to purchase gold futures on a legitimate exchange, not those corny gold coins you see on television.

Of course, these type of investment decisions and building a well-rounded portfolio can get complex, and a financial advisor can help. It's best to speak with an independent fee-only financial planner to make sure your investment portfolio represents your risk tolerance and investment goals before taking any action.

Audit: $636 Million in Bogus Homebuyer's Credit

The following findings were published by webCPA.com:

The First-Time Homebuyer Credit program that kept the housing industry afloat this year also led to hundreds of millions of dollars in fraudulent or erroneous claims.

The program allows a first-time homebuyer to claim a refundable tax credit of up to $8,000. The credit is supposed to expire on December 1, but the real estate and construction industry, and some members of Congress, are pushing to extend and expand the program beyond the cutoff date. However, a new report by the Treasury Department’s Inspector General for Tax Administration (TIGTA) uncovered a widespread amount of fraud or misapplication of the credit.

TIGTA’s report found that 19,351 taxpayers claimed $139.4 million in credits for homes they had not yet purchased, but would allegedly purchase in the future. In addition, 70,005 taxpayers claimed more than $479 million in credits, despite indications that they were not first-time homebuyers. TIGTA also identified 582 taxpayers under 18 years of age who claimed almost $4 million in credits. The youngest taxpayers receiving the credit were four years old.

“Contract law generally exempts children under the age of 18 from being bound by the terms of a contract,” said TIGTA Inspector General J. Russell George in testimony before the House Ways and Means Oversight Subcommittee on Thursday. “Therefore, it is unlikely that these taxpayers would have entered into an arm’s-length transaction for the purchase of a home.”

As of Aug. 22, 2009, over 1.4 million taxpayers have claimed the credit for homes purchased in 2008 and 2009, representing foregone tax revenue of about $10 billion, according to preliminary IRS data cited in a report by the Government Accountability Office. Fifty-nine percent of the taxpayers claiming the credit had an adjusted gross income of less than $50,000 and the credit was disproportionately claimed by taxpayers in the $25,000 to $100,000 AGI range.

If you have questions concerning your eligibility for the credit, it is best to speak with a qualified tax professional or an independent Certified Financial Planner. A fee only financial advisor is also best qualified to help you make good use of the tax credit.

Inflation in Check, Education Costs Keep Soaring

According to Joseph Pisani of CNBC News, the cost of attending a four-year nonprofit private college increased 4.3 percent in the 2009-2010 academic year compared to a year ago, bringing the average annual price to $35,636. Meanwhile, over the past 12 months, the Consumer Price Index (a measure of inflation) actually decreased 1.3 percent.


Growing at an even greater rate was the cost of going to a public college. Public in-state college costs rose 5.9 percent, bringing the average cost to $15,213. Out-of-state students saw their costs rise 6 percent to $26,741, according to the College Board, a non-profit association of schools, colleges and universities. (All costs include tuition, fees and room and board.)

Interestingly, one reason college costs continue to measurably outpace the rate of inflation is because schools are suffering severe drops in their endowments due in large part to the financial crisis. Some of the largest endowments in the U.S. at places like Harvard, Princeton and the University of Michigan have suffered declines of over 20 percent during the fiscal year that ended June 30, 2009.

Of course, Ben Franklin's word still ring true: "an investment in education pays the best interest." In fact, over a lifetime a high school grad earns an average of $1.2 million, while a college grad earns $2.1 million. Consequently, it is more important than ever to sufficiently plan for college tuition costs. Speak to an independent fee-only financial advisor to ensure you are taking the right action to be sure you are ready when your student is ready.

Educational Workshop - November 12

Attend this free educational workshop to learn about the latest strategies to prepare for and succeed during retirement.

• Determine if you still have enough money to retire
• Find a trusted advisor - discover fee-only planning
  
• How investment policy statements protect you
• Common hidden costs that deplete your nest egg and what to do about them
• Opportunity knocks - is a Roth IRA conversion right for you?

Attendees will receive a complimentary copy of The Retiring Boomer’s Financial Handbook.

Hosted by Net Worth Advisory Group, a fee-only (no commission) financial planning firm specializing in helping clients prepare for retirement.

Thursday, November 12
7:00 PM

SLCC Miller Campus
MFEC Building, Room 223
9750 South 300 West
Sandy, UT 84070
View Map

To reserve your spot in the class please contact:
Lon Jefferies
Net Worth Advisory Group
801-566-0740
lon@networthadvice.com
http://www.networthadvice.com/

"Roth IRA Conversions" - Utah CEO Magazine

I wrote an article appearing in the October issue of Utah CEO Magazine which describes the benefits and drawbacks of converting your traditional IRA to a Roth IRA. The article, titled "Roth IRA Conversion: Is it Right for You?" explains the new rules governing these conversions, the special tax opportunity presented by these conversions in 2010, and the protection offered by these conversions in the event the market declines. Swing by a news stand and pick up a copy. Of course, any feedback is welcome.

As always, its best to speak to an independent fee-only financial planner to learn how to best apply this strategy to your situation.

Investment Performance vs. Peace of Mind

One of my clients is a State employee, and has his 401(k) invested with Utah Retirement Systems (URS). I'm a big fan of URS -- their funds have a history of outperforming the market, and they keep expenses at a minimum.

While preparing for my six-month review with this client, I thought it would be interesting to compare the investment performance my client's 401(k) has achieved at URS with the performance of his IRA managed by Net Worth Advisory Group. Unfortunately, this individual has only been one of my clients for a little over a year, so for now, I can only compare performance during that time period. Below is a table comparing investment performance of various asset classes from 10/10/08 to 10/09/09:

First, it looks like the funds managed by Net Worth Advisory Group had a pretty good year. Of course, one should not place much emphasis on one-year performance, and past investment results are not an indicator of future investment success. Investment results will fluctuate over time, and I told this client to not expect such favorable comparisons going forward. Frankly, my goal is to produce results that, after subtracting fees, are comparable to the market. My client was surprised by this comparison, and until I brought it up, I'm not sure he could have cared less.

The real point here is that most of my clients view superior investment performance as nothing more than a nice bonus. At the end of the day, clients hire me, retain my services, and refer me to their friends and family because they truly value the peace of mind that comes with knowing they have a passionate financial professional who is always looking out for their best interest. The six-month reviews I conduct means my clients always know exactly where they stand in relation to their retirement goals, and consequently, they have one less thing to worry about. The bonus provided by great investment performance is simply that clients may reach these goals sooner than anticipated.

Why Fiduciary Matters More Than Ever

Today, I attended a National Association of Personal Financial Advisors (NAPFA) study group revolving around ethics. Our guest speaker was Connie Nowland, who is the Market Conduct Examiner for the State of Utah Insurance Department.

Mrs. Nowland shared many cases that intensify how proud I am to be a fee-only financial advisor who accepts a fiduciary responsibility to always act in the best interest of my clients. Everyone has heard these types of stories: the insurance salesman who convinced a couple in their 70's to take out a home equity line of credit on their paid-off home so they can purchase the annuity he was selling (the couple has now lost their home), or the annuity salesman who sells products with a 22-year surrender period attached to them, completely removing the liquidity from the investment.

(On a side note, Connie made clear that Utah State Law changed in 2002 making it illegal to sell an annuity with a surrender period exceeding 10 years and the surrender charge must decrease by at least one percent per year. Thus, if anyone tries to sell you an annuity that doesn't meet these requirements, REPORT THEM!)

However, the most alarming news communicated in the meeting is how understaffed Utah's Insurance Department is. Most financial advisors do not accept a fiduciary responsibility to their clients. These financial planners are held only to a suitability standard, meaning they must make recommendations that are suitable for their clients (a dramatic difference from always doing what is best for clients). I always took comfort in knowing that consumers at least had regulatory agencies keeping a close eye on these salesman, but here is the real shocker: according to Mrs. Nowland, the State of Utah has never prosecuted anyone for violating the suitability standard. Regulators are simply too understaffed to enforce these compliance issues.

Clearly, a home equity line of credit was not a suitable recommendation for the couple in their 70's, but the insurance salesman who took advantage of these people was never punished. This would suggest that although most financial planners and consumers believe regulatory agencies will ensure the advisors they work with are acting within the law, the current environment is accurately described as "buyer beware." Consequently, it is more important than ever to work with an independent fee-only financial advisor who gladly accepts a fiduciary responsibility to always act in the best interest of their clients.