Manufacturing Income in Retirement

Pennies (Recent Articles)

Imagine your last day at work.  While the psychological impacts of retirement are real and deserve a column of their own, it’s the finances that first get retirees tripped up.  You’ve been saving for this day for thirty years, but you have to wonder how the mechanics of getting paid are actually going to work.

Defined benefit pensions were more commonplace when the last generation retired.  You looked up a chart and using your recent salary, years of service, and age, you could compute your guaranteed fixed payment per month.  In most cases, this monthly pension would increase on occasion for inflation.  When combined with Social Security (at least for private sector employees), defined benefit pensioners received a fairly high percentage of their pre-retirement income.

These pensions were very comforting for new retirees.  You were still getting a regular paycheck, albeit coming from a different source.  Sure pension funds suffered through the calamity of 2008 like the rest of us, but pensioners still received their monthly payments seemingly impervious to the violent market swings.

Pensions have largely disappeared from the private sector, and new public sector employees seem to receive a less generous offer with each new generation.  Now we must do this on our own.  But how?

The easiest method is to purchase an immediate annuity.  For a lump sum provided to an insurance company, you receive a regular payment to you and your survivor every month for the rest of your lives.  If you live beyond your life expectancy, then the insurance company still pays you for the rest of your lives.  Unless you buy so-called riders, if you die soon after purchasing an immediate annuity, your heirs are out the money.

It was also simpler in the days of 6 percent Treasury Bond rates.  You put your savings entirely in what many call the safest investment on the planet.  You collect biannual interest payments that are exempt from state tax, and then live on the interest.  You weren’t worried about the income continuing because you never had to “invade principal.”  You were never forced to sell anything as you lived off the interest of your hard earned dollars.

But now the 10 year Treasury pays well under 3 percent.  You cannot live on 2.5 percent of your savings per year.  Even with retirement savings of $1 million, the $25,000 a year that is generated seems paltry.

The trick is using your entire Portfolio, made up of taxable, IRAs, Roth IRAs, and other accounts saved for the long-term.  Your Portfolio has an optimized mix of bonds and equity mutual funds designed to grow with less risk than an all-stock portfolio.  Every year you sell a percentage of your Portfolio (let’s say 5 percent) in a tax-efficient manner.  The proceeds then go to a Working account that pays at least some interest.

Every month you transfer a fixed amount from the Working to your Spending account.  This Spending account is a checking account that receives your monthly “paycheck.”  While some may state that having three separate categories of accounts is nothing more than a parlor trick, it does help retirees when the market is dropping.  After all, if it drops for a few months, that doesn’t affect your Working or Spending accounts.

You feel an extra level of security if you have 50 percent of your Portfolio in high quality bonds.  Now you have enough in stable investments to fund your Working account for ten years outlasting all but the worst historic bear markets.  We don’t know what direction the stock markets will move over the next year, but we have a pretty good idea what direction it will take over the next ten years.

Roth IRAs: So Misunderstood


Roth IRAs have been around for 16 years and its advantages are well known to investors.  Familiarity in this case does not equate to understanding as there are many myths about Roths that are simply not true.  Before we dive into the details, we care about Roth IRAs because they are the one investment strategy that permits tax-free growth for your lifetime and the lifetime of your heirs.

You can withdraw contributions at any time.  You don’t need to be 59 ½ to withdraw contributions from a Roth free of penalty and tax.  Nor do you need to be a first time homebuyer, disabled, or unemployed.  You don’t need to wait five years from when you open the account.  While I don’t recommend 30 year olds withdraw Roth contributions to pay for a weekend in Vegas, it is perfectly allowable under the tax code.

It works like this.  Let’s say you have a Roth IRA worth $50,000, of which $20,000 came from contributions, $10,000 from conversions from IRAs, and $20,000 from growth.  You’re 35 and need funds to start a business.  If you withdraw $20,000, those funds are considered to be from contributions and are free of tax and penalty.  So if you’re a 25 year old and avoid contributing to a Roth because you don’t want to lock your funds up until retirement, stop it!  You can always access your contributions.  Take advantage of the tax-free growth that the Roth gives you.

You can withdraw conversions after waiting five years.  Few people know that you can take out Roth funds that have been converted from retirement plans or IRAs after waiting five years.  It doesn’t matter how old you are.  Once you have waited five years from conversion those funds are available tax and penalty free.  There is a bonus for being older: if you’re at least 59 ½ you do not have to wait at all.

You can move funds into a Roth regardless of your income or working status.  Once you get into higher income levels above a MAGI of $191,000 for married couples and $129,000 for single filers, it’s true that you can no longer contribute to a Roth.  The same rule applies if you’re no longer working.  But anyone with an IRA or retirement plan from an ex-employer can conduct a Roth conversion.  You can be 80 years old or earn $800,000 a year and still convert all or part of these accounts into a Roth IRA.  It’s true you must pay income tax on the amount converted, but for many this makes financial sense.

You never are forced to take distributions.  Unlike IRAs and retirement plans, you are never required to take distributions from your Roth IRA.  Starting at age 70 ½, you must take required minimum distributions from your IRA and retirement plan while your Roth is left to grow tax-free.  It’s true there are mandatory distributions if you have a Roth account within your 401(k), but that can be remedied by a tax-free rollover to a Roth IRA.  Only when you die and leave your Roth to the next generation are distributions mandatory from the Roth based on the heir’s life expectancy.

High income earners can effectively contribute to a Roth.  I know we just discussed income limits for those contributing to a Roth, but there’s something called a back-door Roth IRA that permits anyone with earned income to effectively contribute to a Roth.  You can search for instructions by querying “back door Roth” on our website or look at this article:  It makes the most sense for those who do not have high traditional IRA balances.

Opportunity for Denver Muni Bonds For Right Investor

Dear Clients and Friends,

For Colorado residents, the City of Denver has announced the issuance of Denver Mini Bonds that pay very good interest rates.  There are several caveats to the offer, which I want you to understand before investing.  Also please keep in mind this is not something you can do with our firm, but must be done directly with the City of Denver.

The bonds have two different terms, 9 years and 14 years, and pay annual interest of 4.38 percent and 4.89 percent respectively.  This interest is tax-free when it comes to federal and state tax.  The City of Denver has a very strong balance sheet as evidenced by AAA ratings.  While these bonds are not FDIC guaranteed like a bank account, they are general obligation bonds backed by the full faith and credit of the City of Denver.

There are some idiosyncrasies that I’d like you to understand before considering these bonds.

Limit of $20,000 per investor.  These bonds are denominated in $500 increments and no more than 40 bonds can be purchased per Colorado person.

You’re not guaranteed access to the bonds.  It’s likely in my opinion that these bonds will be oversubscribed – have more demand for them than there is supply.  For that reason, if you’d like to invest you should do so quickly as there are no guarantees that your order will be fulfilled.

Interest is only accrued and is not paid until maturity.  While these bonds indeed pay 4.38 and 4.89 percent annual interest, bondholders will not receive this interest until the bonds mature 9 and 14 years from now.  If you need the cash flow in the interim, these are not the bonds for you.  If you’re using these bonds to hold your emergency funds, look at other options.

The bonds are almost completely illiquid.  Whatever funds you put into these bonds should not be needed for the next 9 or 14 years, depending on the maturity.  Once you purchase the bonds, it seems there is very little recourse for selling the bonds and getting your principal back.  In essence, the option is to wait until the bonds mature to get your principal (and interest).

You only can use taxable funds to purchase these bonds.  Don’t consider these bonds for your IRA, Roth, or retirement plan accounts.  It doesn’t appear it’s possible to hold these bonds in retirement accounts.  Of course holding tax-free municipal bonds in retirement accounts is rarely advisable.

They cannot be held at traditional custodians.  Unlike most bonds which you can hold with custodians such as Schwab, Pershing, or TD Ameritrade, these bonds must be held directly by you and on record with the City of Denver.

Ultimately I think these can be a great option for the right investor as the interest is significantly above market rates.  But you should read the caveats above and the offering document with the City of Denver to make sure these are the right options for you.

For more information and to purchase the bonds, go here:  The bonds are available only from August 4th through the 8th, although orders can be (and should be) entered before that time.

Clients who have any questions about whether these are advisable in your situation, please feel free to email me.  They are a good opportunity for the right investor.



Great Retirement Plans for Solos and Business Owners

Retirement Road Sign with blue sky and clouds.

Being a business owner has its benefits.  Many know that businesses (unlike people) pay expenses before being taxed.  So if there are reasonable business expenses that you might incur without your business, you essentially get to pay those expenses with tax-free dollars.

Even bigger is the ability for business owners to design a retirement plan that can save them thousands a year.  We have clients that are going far beyond the $17,500 401(k) contribution maximum and are putting away over $50,000 annually into a low-cost retirement plan.  Here are the most common small business retirement plans to consider.

Solo or individual 401(k).  This plan is perfect for those who work on their own, with a spouse, or don’t have employees working at least half-time.  The plans can work if you have a sole proprietorship, S-corporation, C-corporation or an LLC that is taxed by those methods.   These plans cost little to set up and allow you to put aside the standard employee contribution of $17,500 a year (up to $23,000 for those 50 and over).

Where things really get interesting with the solo 401(k) is that the employer can put up to an additional 25 percent of your pay with a total annual contribution limit of $57,500 in some cases.    That means depending on your income you and your spouse could put over $100,000 combined into your retirement accounts pre-tax.

SEP-IRA.  If your retirement contribution goals are more modest, consider the often free SEP-IRA.  Setting up a SEP involves little more paperwork than a traditional IRA.    Like the solo 401(k), this plan works out best if you don’t have long-tenured employees.

Any employee who has earned $550 or more in 3 of the last 5 years participates in the plan, which can get expensive for the employer.  The SEP can only accept contributions by the business, and the limits are 20 to 25 percent of each qualifying employee’s pay.  So if you have an S-corporation that employs your spouse and you who are each paid $100,000 annually, the SEP allows the corporation to put aside $25,000 a year for each of you.  Of course if you have employees who have been with you more than 2 years, the business will have to contribute the same percentage of their pay for them.

SIMPLE-IRA.  This is the most basic plan that works for companies with more than a few employees but no more than 100.  Businesses must offer a matching contribution of up to 3 percent of each qualifying employee’s pay or a straight 2 percent regardless of employee contribution.  Employees can choose to defer up to $12,000 of their income, with those 50 and over able to kick in an additional $2,500.  Employees who have earned at least $5,000 a year with you in any two years before the current calendar year must be included in the plan.  If you have employees, this is a nice low-cost option with the downside of not allowing as much pre-tax savings.

Other options.  If you want to offer your employees the ability to defer the maximum 401(k) contribution limit, then you’re looking at setting up a standard 401(k) plan, which can involve a lot of cost and complexity if you’re not careful.  If you’re a prodigious saver and the 401(k) limits are too low for you, a complex and expensive option called a defined benefit plan may allow to you to put aside an additional $100,000 or more a year pre-tax.  This plan favors those who are older and more highly compensated.

Most brokerage firms and mutual fund companies including Vanguard can set up the solo 401(k), the SEP-IRA, or a SIMPLE-IRA for you.  Just be mindful of total costs and investment options.  Once you get into a standard 401(k) or defined benefit plan, you need some more background.  A good start is consulting,, and

Five reasons to forget salary and focus on net worth

Money (Recent Articles)

When it comes to finances, our focus seems to be our pay more than net worth. Applying for a mortgage? You may have a seven-figure portfolio, but not qualify for a loan because your income is relatively meager.

We’ve found that bolstering your net worth is the true way to financial independence, while merely having a high income can make you no more than a big spender.

Here are five reasons why you should focus more on your net worth and less on compensation.

1) Net worth opens up financial independence.

Financial independence means having enough saved that you have life options. You’re not forced to work in your current profession at the same intensity. You’re able to change fields, go into business for yourself without worry, or work at a less hectic pace.

It’s the amount you have saved that determines that you are no longer a “wage slave,” not your income. We determine financial independence by considering your investible assets in comparison to your annual spending.

Notice that compensation does not even enter the picture.

2) Higher salary can delay freedom.

This point is subtle, but real. When your salary increases, spending often increases in lockstep. The more you spend, the more you have to save to be financially free. If you’re spending $6,000 a month, you’re much closer to financial freedom with a $1 million portfolio than if $10,000 goes out the door every month.

3) Insulates you from financial emergencies.

Most of us will experience multiple financial emergencies in our lifetimes. It can be relatively small, such as needing to replace a furnace or a transmission in your car, or it can be catastrophic, such as being out of work for a year or suffering a severe medical condition that disables you.

Regardless of the source of the financial strain, it’s net worth in the form of cash or easily liquidated investments that provides a safety net.

4) High pay can encourage debt.

If your earnings are high, you know that credit is easy to find. You’ll be able to qualify for a mortgage that you may find difficult to afford, take out more credit cards than you can easily repay, and lease expensive cars that detract from your financial well-being.

If you have significant net worth, then you’ll be less tempted to borrow to pay for these things and could buy them outright rather than rob your future income with loan payments for years to come.

5. Higher taxes on compensation.

High income earners know that in many ways it doesn’t pay to earn more money. Of course I’m exaggerating here, but consider what happens when your income goes up to the higher echelons.

Nearly all workers pay 1.45 percent in Medicare tax, but higher earners must pay an additional 0.9 percent. The highest income tax bracket is 39.6 percent.

While there are techniques available to minimize tax, it’s hard to the highest wage earners to completely escape high tax rates.In contrast, those who depend on their portfolio for income find a much more friendly tax system.

If you sell an investment that has doubled in value, most will pay only 7.5 percent federal tax on the proceeds. The long-term capital gains tax rate is 15 percent for most, but of course you’re only paying it on your gains.

Qualified dividends also get an advantageous tax rate and rental real estate has its tax benefits as well.

A higher income can make many aspects of life easier, no doubt, and can fuel high savings. Just make sure you save at least 15 percent of that income to build your net worth so one day you can enjoy the freedom of financial independence.

The Worst Way to Pick 401K Investments

Nest Egg

If you’re like many investors, you may be using a method to pick retirement plan investments that is almost guaranteed to delay your financial independence day.  Before we look into this doomed-to-fail strategy, log into your 401(k) or other retirement plan web site.  Look at your current investments and which of them are receiving new contributions.  Now think about how you chose those investments.  You may have looked at their performance when you started with your company, picked out the best earning investments at the time, and haven’t given it another thought.

Those of you who are more actively involved with your savings may scoff at this neglect.  Unlike your colleagues who may “set it and forget it,” you scrutinize your investment mix each year.   You track the performance of the investment choices and regularly move your portfolio into the best investment of the last year.  We’ll call it the Chasing Portfolio.

It turns out the Chasing Portfolio is a disastrous investment scheme.  How bad is it?  It’s about 5 percent worse annually than simply placing your savings in a balanced fund.  Plus the Chasing Portfolio is much riskier, so on a risk-adjusted basis is even worse than it initially seems.

Craig Israelsen, who teaches at Utah Valley University, looked at the returns of twelve different asset classes between 1999 and 2013 to evaluate the Chasing Portfolio.  He includes eight equity-type asset  classes including US large cap stocks, commodities, and real estate.  Also four fixed-income asset classes are considered such as cash, US bonds, and TIPS.

In 1998, US large cap stocks earned 28.7 percent.  His study then simulates the Chasing Portfolio by moving all funds into that asset class for the next year.  This strategy seductively did pan out in 1999 with large cap stocks earning 20.4 percent.  Once 1999 was over, all funds were shifted into emerging market stocks, which had just had eye-popping returns of 61.8 percent that year.  For 2000 this asset class got clobbered with -27.5 percent return.  The study continues this strategy through 2013 with every year moving the entire retirement plan balance into the best performing asset class of the previous year.

According to Israelsen, picking last year’s winners during the 15 year period earned 2.7 percent annualized return.  The most common measure of portfolio risk, standard deviation, for this portfolio was a relatively high 23.7 percent.  Remember with standard deviation, the higher the number the more volatile the asset price.  In short, this Chasing Portfolio has awful absolute performance and on a risk-adjusted basis is almost unbelievably poor.   

You may be thinking that if investing in last year’s best performing asset class doesn’t work, what about investing the worst performer in the previous year?  You could call it the Loser Portfolio.  Strangely enough, if you had enough fortitude to move your entire balance into the last ranked asset class each year, your performance would have been much better than the Chasing Portfolio.

Investing all of your funds in an S&P 500 fund would have yielded much better returns with less risk at 4.6 percent return and standard deviation of 14.4 percent in the same period.  A low-cost balanced fund performed still better with 5.7 percent annualized growth with much less risk.

The best return of all was saved for those who invested in twelve disparate asset classes, and then rebalanced every year.  The returns at 8 percent annualized and risk at 12.8 percent standard deviation were phenomenal by comparison.  While this success may not continue, it’s safe to say that you should avoid a Chasing Portfolio (and investing mentality) at all costs

Five Costly Tax Mistakes to Avoid


While most tax returns do not feature a four or five figure blunder, they happen more commonly than you’d think.  Working with a professional tax preparer can help limit these errors, but even pros are not immune.

We request copies of their recent tax returns when we start working with clients.  Mostly this is to understand their finances.  But I confess we have an ulterior motive.  We absolutely love making recommendations to clients to reduce their taxes when merited, including filing an amended return if needed.  While seeking solid investment returns with clients is rewarding, securing tax refunds is downright exhilarating.  Those of you who have been paid interest by the IRS know what I mean.

Properly accounting for stock options.  Stock options, including Incentive Stock Options (ISOs) and Nonqualified Stock Options (NSOs) usually perplex taxpayers.  Often tax pros are bewildered with their complexity.  When you exercise an option and sell the related stock, it’s critical to get it right.  We’ve seen tax returns with double income taxes due to an option exercise and the sale of the related shares.  When you take action on stock options, seek out help with this expertise.

Required distributions from IRAs and retirement plans.  If you’re far from retirement age, you may not be aware of the rules that require annual partial distributions from IRAs and retirement plans upon reaching age 70 ½.  Luckily your financial institution will remind you of this. It’s a good thing because the penalty for failing to take a minimum distribution is 50 percent of the distribution you should have taken.

Pitfalls with assets abroad.  Many Boulder County residents have financial assets overseas.  If you are a US person, generally defined as a citizen or resident, you must report worldwide income on your US income taxes even if the asset is held overseas.  Plus there are additional requirements to disclose the existence of financial accounts, even if they’re not generating income.  If you hold a combined total of over $10,000 in overseas financial assets at any point in the previous year, then you must file a so-called FBAR report with IRS.  The penalties for not doing so are unbelievably harsh even if you have not intentionally misled the government.  Make sure you work with a tax preparer that understands the ins and outs of disclosing the existence of these assets, particularly if you failed to do this in previous years.

Inherited assets.  Assets that you inherit generally receive a step up in basis to the value of date of death of the deceased.  So if your father left you a house in the Newlands worth $750,000, that your parents paid $28,000 for in the 1970s, then no taxes may be owed on its sale. The same rules apply to inherited stocks and other assets.  Make sure your tax preparer and the custodian of your investments understand that there’s a new (presumably higher) basis.

Losing track of previous year tax benefits.  If you take a big loss on the sale of an asset, most likely you have a capital loss carryover.   This loss can be used to offset future gains and $3,000 of ordinary income every year.  But you need to track it from year to year.  You may have basis in IRAs because of after tax contributions.  But if you don’t document this on IRS Form 8606 each year, you could end up paying taxes on this money twice.  If you exercise stock options, you may generate an AMT credit that can reduce taxes in future years.  All of these data points must be collected every year.  Every time you switch tax preparers or software packages, pay particular attention that this information is preserved.

Can't retire now? Seek financial independence


If you’re in your 50s or younger, you may think that traditional retirement will be possible much later than desired.

While this may be the case, the key could be seeking financial independence and enjoying its fruits long before you could afford to stop working altogether.

For a number of reasons, it’s getting harder to stop working at the typical age of 62.

Social Security full retirement age is 67 if you were born in 1960 or later. While there have been no recent Social Security benefit reductions, some experts predict decreased cost of living adjustments.

While your benefits under current law are not means tested, this may change in the future.

We have also entered the era of the long retirement. If you’re a member of a non-smoking couple aged 62, there’s an even chance that one of you will live until age 92. That means your income stream will need to last for 30 years, stretching the resources of the most ardent savers.

We’re also witnessing the slow death of traditional pensions.

Corporate pensions for new and recent employees are almost non-existent and most employees won’t work there long enough to qualify. Public pensions, while more common, are threatened by government budget crunches. Now the rule is that each generation of public employee gets a worse deal.

Now that you’re thoroughly depressed about your retirement prospects, consider that financial independence may be more achievable now than in years.

We define financial independence as when your investment assets can provide enough earnings to support at least half of your living costs. This is when your portfolio exceeds about seven times your annual expenses.

With financial independence, you haven’t saved enough to stop working completely, but are able to downshift or switch to a more fulfilling career.

Here are some key tools to bring financial independence within reach.

Affordable Care Act

Love it or hate it, the Affordable Care Act has begun to cleave the odd bedfellows of health insurance and the workplace.

For the first time in decades, you don’t have to wait until age 65 to qualify for affordable health insurance.

The ACA , through the Colorado Health Exchange, makes available scores of plans that are not subject to health underwriting.

Right or wrong, there are generous subsidies extended as long as your income does not exceed 400 percent of the poverty line and other rules are met.

A 58-year-old couple earning $30,000 could qualify for health insurance for $150 a month. It doesn’t matter if you have a six- or seven-digit investment portfolio.

Decouple spending from earnings

It appears we have largely forgotten the lessons of the Great Recession, when savings rates as a percentage of income briefly exceeded 8 percent. Now we’re back down below 4 percent.

In order to make financial independence a reality, we need to ramp up our savings rate dramatically by decoupling our spending from our earning.

By reducing our relative spending compared to our income, not only do we increase our investible assets to support us, but we also decrease the income needed to be generated by our portfolio, a virtuous cycle.

Flexible job arrangements

Many of us are working part-time by choice, from home or a remote location, while others have negotiated sabbaticals and more generous vacation benefits.

Companies will become more open to the priorities of the millennials, who often prize job flexibility. As costly health insurance becomes less tied to the workplace, companies will be more open to untraditional work arrangements.

Accepting a flexible job arrangement could enhance your quality of life dramatically even if your pay decreases. While you may work longer, your quality of life will be better.

So while traditional retirement may be more challenging than in the past, financial independence grows as an option that allows us to shift to a more enjoyable life long before age 65.

Stable Value Fund a Good Option for 401(k) Investors?

Nest Egg

Stable value funds.  The very name induces a glazed eye torpor that would take a couple of hot IPOs to break.  But for those who have the patience to get to the bottom of their 401(k) investment menu, stable value funds offer some key advantages that merit inclusion in your retirement plan.

When looking at your 401(k) plan options, your investor mind probably didn’t register the humble stable value fund.  We have the recent, eye popping returns of the US stock market to thank for that.  Who cares about 2.5 percent interest when 20 percent equity returns were common last year?  Clearly it’s not a replacement for a stock fund, but stable value funds offer their own advantages.

 Stable value funds are among the safest of your 401(k) investment options, provided your plan is one of the roughly half that offer it.  I’m specifying your retirement plan because for most that’s the only place you can find a stable value fund.   They are generally not available with self-directed accounts such as IRAs.

Retirement plan investors have historically relied upon money market funds for safety.  But with these funds yielding close to zero, the recent performance of stable value funds is impressive.  Long-term performance of 4.5 percent over the last 15 years is even better.

 Stable value funds invest in short and intermediate-term government and corporate bonds, guaranteed insurance contracts, CDs, and asset backed securities.   Plus many funds purchase insurance to keep its price stable in contrast to traditional bond funds.  This distinction is important when we look at an economic environment when interest rates are expected to increase.

When you purchase individual bonds or bond funds, the value of your investment will decrease in value as interest rates increase. Longer-term bonds are at the highest risk of losing value.  For example, Vanguard’s Long-Term Bond fund was down about 5 percent in two successive months last year with interest rate increases on the horizon.   In contrast, stable value funds generally ticked along earning over 2 percent last year.

Remember that you don’t invest in stable value funds seeking long-term growth.  They are never going to perform as well as a good equity fund over time.  But almost everyone should have a portion of their portfolio in interest-earning investments.  They provide safety in times of financial distress as in 2008, and can supply mental steel when resisting the urge to liquidate your stocks in the midst of a bear market.  It also offers a good source of funds when rebalancing your investment accounts after a market decline.

Retirement plan sponsors have been concerned about two situations that could threaten the performance of these funds.  How would stable value funds perform in a time of financial calamity and would they navigate an increasing interest rate environment?  Now we have the benefit of living through 2008 when some of the very insurance companies that issue investments held by stable value funds needed to be bailed out by the government.  In spite of the financial worries, the average stable value fund returned 4.6 percent that year.  Last year saw increasing interest rates to a moderate degree, and stable value funds continued their positive returns in contrast to most bond funds.

While investors should not confuse stable value funds for a CD or other FDIC-guaranteed asset, they can be an important part of your overall investment strategy when combined with equity investments.  One final caveat is that there are usually limits on how often you can transfer money in and out of stable value funds, so be mindful of these limitations before you invest.

Is Your Advisor Worth It? Vanguard Weighs in.


You are most likely paying for an investment advisor.  The fees can be in the form of commissions if you’re working with a broker, be a percentage of your assets, and less commonly charged on an hourly basis or a flat annual fee.  But how do you know you’re getting your money’s worth when working with a financial advisor? Certainly peace of mind is a big part of the value proposition for most clients.  One colleague is in the habit of saying that “we sell sleep.”  But how do you quantify the value of psychological well-being because you’re working with a competent financial planner?  You can’t.

 In a report issued last month, mutual fund behemoth Vanguard weighs in on the value of an investment advisor.  While it acknowledges the importance of peace of mind, the report does a rigorous job of delving into the more measurable aspects of working with a wealth manager.  Calling it “Advisor’s Alpha,” Vanguard describes the particular strategies that most help clients.

Now keep in mind that the folks at Vanguard are notorious cheapskates – and I say that with complete admiration.  Their fees are rock bottom and they are well known as the all-around lowest cost investment company.  So when this do-it-yourselfer company looks at the value of an advisor, my suspicion is that they would see little at all.

Vanguard’s surprising conclusion is that a quality wealth manager could add 3 percent annually of value to a portfolio.  Luckily for us, they broke these value components down so you can see whether your current or future advisor uses these techniques.

Behavioral Coaching.  Providing a whopping 1.5 percent of extra return a year, having your advisor work with you to stick to a strategy in good and bad markets is vital.  In good markets, this can take the form of encouraging and educating you to not invest everything in stocks while the markets are rallying.  In poor markets such as 2008, a good advisor can work to keep you invested even when global financial calamity seems to be at the door.

Asset location.  This can add up to 0.75 percent a year to returns, depending on your situation.  Asset location is the concept that there are different types of investment accounts: taxable, tax-deferred (IRAs and 401ks), and tax-free (Roth IRAs), plus some hybrids such as annuities and cash value life insurance.  You should seek to optimize your tax situation by ensuring the right type of investment is in the right type of account.  Do you hold a REIT Fund or a US small cap stock fund?  Those could be great options in a Roth, an account where you’re never taxed on its gains as long as you follow the rules.  Bonds and other interest generating options are good fits for tax-deferred accounts.  By optimizing the asset location, your wealth manager can keep your tax bill down for years to come.

Spending strategy.  While in retirement, you have a choice of different accounts to draw from when generating cash for your living expenses.  Through prudent decisions on IRA distributions and drawing from other accounts, Vanguard estimates that up to 0.7 percent annually can be added to returns.

Rebalancing.   A systematic method of selling your winners and investing the proceeds in your losers can add 0.35 percent a year to overall returns.  Rebalancing sounds very simple when first considered, but care must be taken to do this on a regular basis and in a manner that minimizes taxes.

Cost-effective investing.  Clearly Vanguard has a stake in this question, but they conclude that that careful selection of low-cost funds and other investments can mean 0.45 percent per year in value-add.

Asset allocation.  Vanguard didn’t estimate the value of a prudent investment allocation – the percentage of portfolio in stocks and bonds – and portfolio diversity.  Nevertheless, they state it’s the most important component of overall returns and portfolio risk.

What should we take from the Vanguard study?   That there are many ways for a qualified wealth manager to help you in a way that exceeds their fee, but they must be diligent in using these elements in order for it to be worthwhile.  The study can be found at