#241 Coinage, Ancient and Present

I recently traveled to the site of ancient Lydia (now part of Turkey) where it is believed that the first coins made of precious metals were created in the fifth century--how fitting!

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Thanks to everyone who participated this week, especially Mark, the Best Producer in the World. Here's how to contact us:

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#240 Spanning Continents

Mark is in London, I am in Turkey and we're still answering your financial questions, from wherever you are!

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Thanks to everyone who participated this week, especially Mark, the Best Producer in the World. Here's how to contact us:

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#239 Mark's First Show from London

Instead of hanging with the Royals, the Best Producer in the World is toiling on our behalf from the U.K.!

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Thanks to everyone who participated this week, especially Mark, the Best Producer in the World. Here's how to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet us: @jillonmoney and @MTalercio

Americans Get Failing Grade on Social Security

Whenever I write about Social Security, I am inundated with follow up questions. It’s no wonder, since there are about 2,800 rules that govern the system and thousands of retirement claiming strategies. What is worrying about Social Security is NOT that it is going to run out of money (there are a number of ways to address shortfalls), but that there is so much confusion around an eighty-year-old entitlement program. According to a survey released by the Financial Planning Association and AARP, about half of Americans ages 45 to 64 expect that Social Security will be a major source of their household retirement income. But according to the Certified Financial Planners who provide advice to consumers, those numbers are way off: 94 percent of CFPs surveyed said that SS will provide 50 percent or less of clients’ retirement income.

What explains the gap between what the pros and consumers think? As the report notes, “Overall, Social Security knowledge is lacking for Americans.” Just 9 percent of consumers believe they are very knowledgeable about how Social Security benefits are determined and another 38 percent believe they are somewhat knowledgeable about how their benefits will be determined. CFP^® professionals think those numbers are high—just one percent of the planners think that their clients are very knowledgeable and 31 percent said their clients are somewhat knowledgeable.

In fact, the survey revealed that most soon to be retirees did not know the nuts and bolts of claiming strategies, like waiting to claim benefits can result in a significantly higher benefit over the course of retirement. 67 percent underestimated the impact on waiting until full retirement age to claim benefits and there was great confusion about claiming benefits on a former spouse. In fact, the vast majority of questions that I fielded about Social Security centered on claiming benefits after a divorce.

To clarify the issue, I consulted with nationally recognized Social Security expert, Mary Beth Franklin. Mary Beth writes regularly about retirement income planning, including her valuable downloadable book, “Maximizing Your Social Security Benefits”. Franklin said “The basic rule about claiming benefits on a former spouse is that you must have been married for at least ten years before you got divorced and you must be currently single, (single or widowed from a subsequent spouse). Many were concerned that claiming benefits on an ex’s record would diminish the benefit for the ex, him or herself. Not so, says Franklin.

There were also a lot of questions about whether an ex can claim retirement benefits as early as age 62. “The answer is yes, with a caveat. You can claim on your ex, but the other Social Security rules apply. That means that you would have to claim a reduced benefit (usually about 25 percent and it is permanent) on your own record and then if one-half of your ex’s benefit is greater than your own, you could collect the difference.

Here’s an example: Jack (67) and Jill (62) were married for 20 years and then divorced. Jill is currently single and would be entitled to $1,000 per month on her own record, if she were to wait until her full retirement age (FRA) of 66. Instead, she wants to claim at 62, which reduces her monthly benefit to $750.

Jack claimed his $2,500/month benefit at his FRA. If Jill had waited until her own FRA, she would have been entitled to one-half of his benefit, which would have been $1,250/month. BUT, because she is claiming at 62, her share of his benefit would also be reduced, so she would only be entitled to $875/month. (From the perspective of SS, Jill would be entitled to two benefits at age 62: her $750 + $125 from her ex-husband, for a total of $875.)

Pretty confusing, right? And that’s just one example of the intricacies of the system.

An Update on Fiduciary

The Financial Planning Association’s (FPA) National Conference last weekend could have been presented by “The F-Word”: Fiduciary. The weekend brought together 2,000 CFP® professionals, all of whom adhere to the fiduciary standard. This is the standard of care, which requires that financial professionals to put the interests of clients first. (Those financial professionals with the CFP® certification from the Certified Financial Planner Board of Standards (CFP) are fiduciaries, as are CPA Personal Financial Specialists, members of the National Association of Personal Financial Advisors (NAPFA), as well as 17,000 of the 24,000 members of the FPA. That principal might seem obvious to consumers. Of course someone who is talking to me about my financial life should put my interest before his or his company’s interest, right? That’s why according to a recent survey conducted by the CFP, 9 out of 10 Americans agree that when they receive financial guidance, the person providing the advice should put the consumers’ interests ahead of theirs and should have to tell consumers up front about any conflicts of interest that could potentially influence that advice.

Unfortunately, while many consumers are increasingly turning to professionals to help guide them (40 percent of respondents, up 12 percent from five years ago), many of these individuals are working with folks who are not required to put the interest of clients first.

This survey was conducted as a quiet battle is going in Washington DC. Earlier in the year, President Obama endorsed a Department of Labor proposal, which would require all financial professionals to act in a customer’s best interest when working with retirement investors. The Securities Industry and Financial Markets Association, the lobbying arm of the financial world, said “This proposal would lead to a number of negative consequences for individual investors.” A number of large firms that provide retirement services echo the SIFMA sentiment and have submitted alternative proposals to DOL.

The Financial Planning Coalition, which is comprised of the CFP Board, the FPA and NAPFA support the fiduciary rule and note that the change “is a long overdue and much-needed update to the 40 year-old definition of ‘fiduciary’ under the Employee Retirement Income Security Act (ERISA).” The coalition dismisses alternative proposals from financial services organizations and firms, saying that they would dilute “the basic requirements of a true fiduciary standard under either ERISA or securities law.”

Paul Auslander, the former Chairman of the Board of Directors of the Financial Planning Association and Director of Financial Planning at ProVise Management Group, LLC, told me that considering that most consumers believe that they are receiving untainted financial advice, the rules should be updated to do so.

“It’s no wonder that consumers are confused,” says Auslander: “Many professionals call themselves ‘advisOrs,’ but only those who are registered under the Investment Adviser Act of 1940 are ‘advisErs’.” Notice the spelling: Financial advisors (with an “o”) “tend to be titles for salespeople in financial services, while those who are advisers (with an “E”), are likely to follow the fiduciary standard”.

As a veteran of the industry, I asked Auslander why some companies are pushing back so hard against the change. He believes that there is a unique business opportunity that these fearful firms are missing. “The company that has the professional guts to be the first to plant the flagpole on top of the fiduciary mountain will be richly rewarded by consumers, who will flock to the early adopters of a true, legally-binding client-first model. It's mind boggling to me how few senior executives get this.” And for those financial professionals who are resistant, Auslander reminds them “Doing the right thing is a huge differentiator, and being legally obligated to be accountable for your company's actions is the only way to do it.”

To find a fiduciary adviser, you can use the Financial Planning Association's tool, the CFP Board's search engine or for fee-only advice (those who do not take any commission), you can go to NAPFA.

Janet Yellen Pulls an Emily Litella

There are just three more jobs reports before the December Federal Reserve policy meeting and each one is carries even more weight than usual. The September data are out this Friday and the consensus is for the economy to add 200,000 jobs and for the unemployment rate to remain at 5.1 percent. While the pace of job creation has slowed from last year (it was hard to imagine that we could sustain 300,000 per month), even the Fed had to admit that gains in the labor market have been “solid”. So what are the central bankers looking for to convince them that labor market slack is diminishing? My guess is that high on the list would be to see annual wage growth pick up from the sub-par 2 percent level and move towards 2.5 percent; an increase in the participation rate (the number of people employed or actively looking for a job); a continued drop in part time workers who are seeking full time positions; and a decrease in the number of long-term unemployed.

Although the jobs report is the main focus the week, the Fed is also likely to examine data on manufacturing. And spillover from the slowdown in China and other emerging markets is likely to be seen in that sector. If manufacturing indexes hold steady, it would likely provide some solace to Fed officials concerned about a global economic deceleration.

Meanwhile, last week, Yellen seemed to brush aside the China worrywarts, when she said “we do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy.” In that same speech, Yellen also said that she expects “inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane”.

So if the labor market is solid, global slowdown worries are overblown and inflation is likely to gradually increase, why didn’t the Fed raise rates at the last meeting? As Weekend Update’s Emily Litella (Gilda Radner) would say “Never Mind”.

But wait; maybe Congress will trump the Fed’s rate increase mission. Even if lawmakers pass a continuing spending resolution to keep the Federal government open through December 11^th, that’s just FIVE days before the last Fed meeting of the year. It could be déjà vu all over again (RIP Yogi), as we hurtle to the end of the year, talking about the raising the debt ceiling and defaulting on our obligations. Isn’t this fun?

MARKETS: The biotech sector is under siege again, as it has been at various times over the past couple of years. The biotech index tumbled 13 percent on the week and is now in bear market territory, off 22 percent from its recent high in July.

• DJIA: 16,314 down 0.4% on week, down 8.5% YTD
• S&P 500: 1,931 down 1.4% on week, down 6.2% YTD
• NASDAQ: 4,686 down 2.9% on week, down 1% YTD
• Russell 2000: 1122, up 3.5% on week, down 6.8% YTD
• 10-Year Treasury yield: 2.17% (from 2.19% a week ago)
• November Crude: $45.70, up 1.5% on week
• December Gold: $1,145.60, up 0.6% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.29 (from $2.30 wk ago, $3.34 a year ago)

THE WEEK AHEAD:

Mon 9/28:

8:30 Personal Income & Spending

10:00 Pending Home Sales

Tues 9/29:

9:00 Case Shiller Home Price Index

10:00 Consumer Confidence

Weds 9/30:

8:15 ADP Private Payrolls

9:45 Chicago PMI

3:00 Fed Chair Janet Yellen speaks at Conf of State Bank Supervisors

Thurs 10/1: 9:45 PMI Manufacturing Index

10:00 ISM Manufacturing Index

10:00 Construction Spending

Fri 10/2:

8:30 September Employment Report

10:00 Factory Orders

#238 Social Security Questions Answered

Since her last appearance on the show, I have been saving your Social Security questions for nationally recognized SS expert, Mary Beth Franklin. Mary Beth is a contributing editor at Investment News and writes regularly about the latest research and thought leadership on retirement income planning. You can follow her on Twitter here and download her book, “Maximizing Your Social Security Benefits” here.

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Thank goodness for Mary Beth, because it is so difficult to wade through the SS system’s 2,800 rules! The part of the program was devoted to the strategies around claiming SS benefits on the record of an ex-spouse.

The basic rule is that you must have been married for at least 10 years before you got divorced and you must be currently single, which also could include being widowed from a subsequent spouse. We fielded a lot of questions about making the claim retroactively, but Mary Beth notes that you must be at or beyond full retirement age (FRA), the maximum retroactive benefit is six months.

There were a lot of questions about whether an ex can claim as early as 62. The answer is yes, with a caveat. You can claim on your ex, but other SS rules apply, so you would have to claim a reduced benefit on your own record and then if ½ of your ex’s benefit is greater than your own, you can collect the difference.

Here’s an example: Jack (67) and Jill (62) were married for 20 years and then divorced. Jill would be entitled to $1,000 per month, if she were to wait until her FRA, but instead, she claims at 62, which reduces her monthly benefit to $750—remember, if you claim early, the reduction is permanent! Let’s assume that Jack has claimed his $2500/month benefit at his FRA. If Jill had waited until her own FRA, she would have been entitled to half of his benefit, which would be $1250/month. BUT, because she is claiming at 62, her share of his benefit is also reduced, so she would only be entitled to $875/month. From the perspective of SS, Jill would be entitled to two benefits at age 62: her $750 + $125 from her ex-husband, for a total of $875.

Mary Beth also covered survivor benefits; how to execute a Social Security “Do-Over”; some of the rules around SSDI; the two rules that may limit your Social Security benefits: the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO); and of course, Mary Beth’s GOLDEN RULE FOR SOCIAL SECURITY!

Thanks to everyone who participated this week, especially Mark, the Best Producer in the World. Here's how to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

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The Fed Fails to Soothe Investors

Citing the slowdown in China and other emerging markets; a strengthening US dollar; global market volatility; and persistently low inflation, the Federal Reserve kept short term interest rates at 0-0.25 percent, which is where they have been for nearly seven years. Although the central bankers believe that these issues are “transitory,” they decided to err on the side of caution and do nothing. If Fed officials meant to soothe investors, they failed, at least in the short term. In the category of unintended consequences, the Fed’s inaction, which was meant to assuage, may have had the opposite effect, by reinforcing investors’ worries about the global economy. Previous fears about China’s growth, which caused the summer stock market correction, went straight to the front burner, despite scant evidence that the global slowdown has hit US shores.

Stocks edged lower the afternoon of the decision and tumbled the following session. Although a rate increase may have done even more damage to stocks, the fact that the Fed did not follow through on a rate increase, after telegraphing it for months, has led some analysts to question they can trust what officials are communicating to the public. Paul Ashworth of Capital Economics wrote “A few months ago it was Greece, now it is China. According to the Fed’s accompanying statement ‘recent global economic and financial developments may restrain economic activity somewhat." [His emphasis] In another couple of months it could be the debt ceiling or who knows what else that is generating the uncertainty.”

While the status of the world’s economy may be uncertain now, one thing is clear: median household income in the US is stuck. With all eyes on the Fed, few paid attention to the mid-week release of a Census Bureau report, which showed that median household income was $53,657 in 2014, an $805 decrease from 2013. This is the third consecutive year that the annual change was not statistically significant, following two consecutive annual declines.

More sobering is that when adjusted for inflation, the median household is 6.5 percent lower than it was in 2007 ($57,357), on the eve of the recession and 7 percent lower than it was 15 years ago in 2000 ($57,724), prior to the previous recession. (Income data from Sentier Research are a bit better, but show a similar trend—the median household income in July was 2.6 percent lower than when the recession started and 3.8 percent below January 2000 levels.)

Median income peaked in the mid-1990’s and since then, has gone nowhere fast. Despite hopes for overall wage gains in the current recovery, most of the progress on incomes has been clustered around the top 5 percent of all earners. The gap between high earners and low earners has increased 5.9 percent from 1993, the earliest year available for comparable measures of income inequality.

I hate to end on such a sour note, so perhaps wages will soon start to show improvement across all income levels. Chairman Janet Yellen said that the pace of job gains has been “solid” and fed officials raised their growth forecasts for this year, so maybe, just maybe, the income numbers will start to pick up. Even if they don’t, a sunnier outlook in the fourth quarter is likely to prompt the Fed to raise rates by a quarter-point, either in October or December. 

MARKETS:

• DJIA: 16,384 down 0.3% on week, down 8% YTD
• S&P 500: 1,958 down 0.2% on week, down 4.9% YTD
• NASDAQ: 4,827 up 0.1% on week, up 2% YTD
• Russell 2000: 1163, up 0.5% on week, down 3.4% YTD
• 10-Year Treasury yield: 2.19% (from 2.19% a week ago)
• October Crude: $44.68, down 0.01% on week
• December Gold: $1,137.80, up 3.1% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.30 (from $2.35 wk ago, $3.36 a year ago)

THE WEEK AHEAD:

Mon 9/21:

8:30 Existing Home Sales

Tues 9/22:

Weds 9/23:

Thurs 9/24: 8:30 Durable Goods Orders

10:00 New Home Sales

5:00 Janet Yellen Speaks at UMass/Amherst

Fri 9/25:

8:30 Q2 GDP (final reading)

10:00 Consumer Sentiment

#237 Surviving Market Volatility with Michael Goodman

Have the recent market swings freaked you out? Listen to the wisdom of CPA and CFP Michael Goodman and you will likely feel a lot better. Michael is the President of Wealthstream Advisors and began his career in financial services as a CPA, before opening the doors to his own financial planning and investment management firm.

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When those white-knuckle market gyrations occur, Michael says go back to the basics and remind yourself why you are investing and what your long terms goals are. He also makes the case that some people do not need advisors and can go it on their own.

Allison's husband is in the market for disability insurance, but when we were able to dive into the details of their lives, it became clear that there were many more issues than DI!

Brian needed advice about how to maximize his retirement plan contributions and Paul asked about consolidating retirement accounts.

Thanks to everyone who participated this week, especially Mark, the Best Producer in the World. Here's how to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet us: @jillonmoney and @MTalercio

Financial Crisis Anniversary: What Have we Learned?

This week marks the seventh anniversary of the financial crisis. Sometimes people forget just how close to the brink we were. Yes, the U.S. and global financial system was brought to its knees, but it did not crumble. To measure our progress, it might be helpful to remember just how intense it was in that first week.

• 9/15/2008: Lehman Brothers Holdings filed for Chapter 11 bankruptcy protection; Bank of America announced its intent to purchase Merrill Lynch
• 9/16/2008: The Federal Reserve Bank of New York lent $85 billion to AIG
• 9/16/2008: The net asset value of shares in the Reserve Primary Money Fund fell below $1. When the fund “broke the buck,” it caused panic among investors who considered money market accounts nearly the equivalent of bank savings accounts
• 9/19/2008: The Treasury Department announced that it would insure up to $50 billion in money-market fund investments. The year long initiative guaranteed that the funds' value would not fall below the $1 a share.
• 9/21/2008: The Federal Reserve Board approved applications of investment banking companies Goldman Sachs and Morgan Stanley to become bank holding companies, so that they could access money from the Federal Reserve and to fund their daily operations

Many people thought that the government’s intervention was over the top. “Let them fail!” was the rallying cry, but I always believed that saving the system was paramount, even if I did not necessarily agree with the terms of the various bailout deals (I thought that taxpayers should have gotten more of the upside of the financial service companies’ recovery, rather than simply receiving a repayment of the dollars, with interest) and the government’s more than $800 billion stimulus plan (“The American Recovery and Reinvestment Act of 2009"). Still, while both of the shotgun measures could have been more effective, they likely helped the country avert what could have been a Depression, rather then the horrible recession that we endured. The so-called Great Recession, which started in December 2007 and concluded in June 2009, was the worst contraction since the Great Depression.

Seven years later, what have we learned? Because the financial crisis stemmed from too much easy borrowing and lending in the housing market, one of the best lessons was the concept that borrowing can be dangerous. Just because some bank is willing to lend you a lot of money to buy a house or will extend to you a giant credit card limit, does not mean that you should take it. For most people, putting down a 20 percent down payment for a house is prudent. Even if FHA will allow borrowers to put down less than 10 percent to qualify for a mortgage, there is a good reason that the 20 percent down rule of thumb exists: just in case the housing market collapses, you have more equity in the house. Similarly, even if you have the ability to buy a lot of fun stuff on your credit card, you should only be charging what you can pay off on a monthly basis.

A corollary of the loan warning is to read the fine print on all documents. There were too many instances when borrowers really did not understand the terms of the loans that they were assuming. Although many regulations now require more transparency and disclosure on everything from mortgages to credit card statements, after the financial crisis we still must be vigilant in reviewing documents to protect ourselves.

The crisis taught us that an adequate emergency reserve fund (6 to 12 months of expenses for those who were employed and 12 to 24 months for those who were retired) could prevent us from selling assets at the wrong time and/or from invading retirement accounts. And of course for investors, we learned that a diversified asset allocation plan, that takes into consideration your risk tolerance and when you need to access your funds can prevent a lot of sleepless nights. Nobody wants to test these lessons any time soon, but let’s heed them.