AssetBuilder Inc. - Registered Investment Advisor

Recognizing the Different Annuities

admin — Wed, 20 Aug 2008 20:00:00 GMT

By Scott Burns

Q. I would like to know the difference between a variable annuity and a life annuity. A few years ago I invested $100,000 in a tax-deferred variable annuity. Later, I came to know there is a surrender charge for 7 years. Is a life annuity tax-deferred? Is there a surrender charge? ---V.B., by email

A. Many people get confused when talking about annuities because the same word applies to many insurance products that are very different from one another. Here is a list of the basic types of annuities.

CD-equivalent annuities. The most basic type of annuity is the functional equivalent of a CD issued by an insurance company. You make a commitment for a fixed period of time and receive a stated amount of interest, tax-deferred and guaranteed by the insurance company. You can get quotes from different companies at www.annuityadvantage.com.

Equity-index annuities. These annuities provide a variable fixed-income return that depends on a complicated formula. Unlike equities, the value will never decline, but you also don’t get the dividends equities pay. The formula also generally sets a significant limit on the upside in good years. These products carry very high commissions, which is one of the reasons they are sold with such enthusiasm. But they are neither fish nor fowl and should be avoided.

Variable annuities. A VA allows you to assemble a portfolio of mutual funds or investment sub-accounts inside an insurance contract that provides tax deferral for interest, dividends, and capital gains. The contract can also have options that provide for a guaranteed withdrawal amount. As I have regularly shown in the “Annuity Watch” feature on my website, however, the costs of variable annuity products exceed the value of any tax-deferral benefits. There are simple alternatives that provide better income solutions.

Life annuities. These are insurance contracts in which you give up your principal in exchange for a guaranteed lifetime income. A portion of your monthly check will be considered return of principal and won’t be subject to taxation. The income can be guaranteed for your life only, your life or 10 years (whichever is greater), or for your life and the life of your survivor. The most common way most people get life annuities is through a company pension. Social Security is a life annuity.

Relatively few people buy life annuities directly because they worry about getting their “money’s worth”--- receiving more in payments than they have paid into the contract. While some people will receive less and others will receive more, life annuities have great value in retirement planning. I believe they will be used more frequently as fewer people receive pensions and more workers depend entirely on their qualified plan savings for retirement income. You can get quotes on life annuities at www.immediateannuities.com.

Which annuity products are most useful? CD-type fixed-income annuities have many uses. So do life annuities. I find little to justify the existence of both variable annuities and equity-index annuities. They are sold products.

Q. I roughly follow your 10-block Building Block Portfolio. Recently, I read about WIP, which is essentially an international version of TIP. What do you think about using it in lieu of BWX for the global bond block? ---B. G., by email from Coppell TX

A. WIP, the SPDR DB International Government Inflation Protected Bond fund, is an interesting ETF. While it has the same expense ratio as BWX, the SPDR Lehman International Treasury Bond fund ETF, its average duration (an indicator of interest rate risk) is significantly greater than BWX (9.24 vs. 5.9). It also holds a significant amount of securities with lower credit quality than the BWX portfolio.

You can find the sponsor descriptions of the funds at these links:

When choosing fixed-income funds, many portfolio managers tend to select funds that have shorter maturities and less risk or volatility. The reason for this is simple. If you imagine having a risk “budget,” you want to spend it wisely. That means accepting risk where it has a payoff of higher return. As a consequence, it’s better to save your risk budget for equities.

That, by the way, is the reason some managers take portfolios to the extreme of having cash equivalents and equities rather than bonds and equities. For the same amount of overall risk, the cash and equities portfolio will beat the traditional bond and equities portfolio because it can have a greater allocation to equities.

Tracking the Social Security Benefit increase for 2008

admin — Mon, 18 Aug 2008 20:00:00 GMT

By Scott Burns

The consumer price index for July increased 0.5 percent. It increased the CPI-W to 216.304. The increase over the prior year was 6.2 percent. Here’s the press release: http://www.bls.gov/news.release/cpi.nr0.htm

In case you missed it, my Sunday August 1 column explained why senior citizens were likely to get the largest benefit increase in 25 years, estimating the boost at about 6 percent. That estimate was based on typical “core” inflation increases of 0.2 percent in July, August and September. Here’s a link to that column: http://assetbuilder.com/blogs/scott_burns/archive/2008/08/01/want-a-good-raise-retire.aspx

With this unexpectedly large increase for a single month, it’s now nearly certain that the January increase will be 6 percent or slightly more.

As many readers pointed out, some of this increase will be absorbed by an increase in the Medicare Part B premium. Historically, these premiums have increased at about twice the inflation rate. The current premium is $96.40 a month. The premium for next year has not been announced.

Get Rich Slowly: Leverage, Luck and Living Well: A Conversation with Financial Columnist Scott Burns

admin — Mon, 18 Aug 2008 20:00:00 GMT

Excerpt: I had the privilege to chat with financial author Scott Burns. What was intended to be a brief interview about his new book lasted for nearly two hours. Burns was fascinating. Read more.

Will You Die Broke? Maybe Not.

admin — Fri, 15 Aug 2008 20:00:00 GMT

by Scott Burns

A new study indicates that most Americans will die broke. You may think that’s just more bad news, but read on. I’ll tell you why things may be better.

Ernst & Young LLP, a major accounting firm, recently completed research on financial security in retirement. The study examines the retirement savings and other resources for Americans with $50,000 to $100,000 of pre-retirement income. It considers investment returns, volatility, health-care expenses, and takes into account the eventual death of a spouse. The study concludes that households with a defined-benefit pension as well as Social Security and retirement savings are far less likely to outlive their savings than households that don’t have a defined-benefit pension.

A married couple with pre-retirement earnings of $75,000 that will have a pension has a 31 percent chance of outliving their assets. The same couple without a pension has a 90 percent chance of outliving their assets.

Talk about grim.

The study confirms what economist Alicia Munnell, director of the Center for Retirement Research at Boston College, has been warning for years--- that a smaller role for Social Security benefits, rising Medicare premiums, and disappearing pensions will make the retirement of younger workers far more difficult than the lives of current and past retirees. Worse, in her book “Coming Up Short,” she shows that 401(k) plans are a poor replacement for worker pensions.

So where is the hopeful news?

It’s between the lines and in the assumptions of the study.

Between the lines. Fewer workers can expect to receive retirement pensions from their employer, but it is possible to create your own pension. Just convert some of your retirement savings into a lifetime annuity. A single female without a pension, for instance, has about a 75 percent chance of outliving her assets. With a pension, the odds go down to about 25 percent. The change in the odds is similar for single males. While it’s not so dramatic for married couples (90 percent down to about 54 percent), it’s clear that having a guaranteed lifetime income in addition to Social Security adds major security to retirement.

This finding--- that a guaranteed lifetime income contributes significantly to retirement security--- was first noted by researchers John Ameriks, Robert Veres, and Mark J. Warshawsky in late 2001. Bottom line: If you have a 401(k) but no pension, part of your retirement planning should include converting some of your savings into a life annuity.

Assumptions. The Ernst & Young study, which was done for Americans for Secure Retirement, is like most retirement research done for the financial services industry. It assumes that we need to replace a large portion of the income we are earning immediately prior to retirement. As I have demonstrated in a number of columns--- and as Boston University economist Laurence J. Kotlikoff and I show in “Spend ‘til the End” (Simon & Schuster, $26) --- most of us have never had 70 to 85 percent of our pre-retirement income to spend on ourselves.

Why? Because we’ve made heavy-duty commitments throughout our adult lives--- all four decades preceding retirement. Take those completed commitments (children, a mortgage, etc.) into account, and the income you need to replace in retirement is far lower than the 70-plus percent touted by the financial services industry.

If you are single, rent, have no children and never borrowed for education, the conventional replacement goals are relevant. But if you ever married, had children, and worked on paying off a 30-year home mortgage, you’ve never had 70 to 85 percent of your income to spend on yourself and spouse. Consequently, the income you need to replace may be 15, 20, or even 30 percentage points lower.

Result? The probability of outliving your assets is much lower.

We can get an idea of just how much lower by going back to the Ernst & Young report. Faced with findings of such high rates of retirees going broke, the accounting firm made a second estimate. How much would the pre-retirement standard of living have to be reduced to have only a 5 percent chance of running out of money?

Answer: About one-third for married couples without pensions. Less than 14 percent for married couples with pensions. A one-third reduction in consumption takes a 70 percent pre-retirement standard down 23 percentage points.

That’s right in the ballpark with all the income most adults have never had to spend on themselves.

On the web:

Retirement Vulnerability of new retirees:

February 26, 2002: Annuity Income May Increase Portfolio Survival

June 22, 2004: The Power of Debt Elimination

August 27, 2006: Your Retirement May Be Better Than You Think

June 6, 2008: The “N” Factor and retirement planning

Coming Up Short

For Retirement, Make High Probability Bets

admin — Wed, 13 Aug 2008 20:00:00 GMT

By Scott Burns

Q. A co-worker is 65. He is going to start taking Social Security even though he is still working full-time as an engineer, making good money. I am close to being the same, but one year older. I am wondering if I should do the same thing.

His rationale for taking Social Security now is that he can invest it and get a return that is better than the 8 percent a year that Social Security benefits grow. His financial adviser told him he can get him12 percent to 20 percent, even in today’s market, with stocks and funds that return good dividends. Does this ring true? ---H.T., by email from Plano, TX

A. Let me put this gently. Your friend is being led astray by his self-serving adviser. His adviser needs to spend some time studying both the returns that stocks actually earn and the returns managed portfolios of equities actually achieve.

If it were probable that your friend could get a 12 to 20 percent return by investing his Social Security benefits, it would be a reasonable thing to do.

But the adviser has made three major errors. He is ignoring taxes. He isn’t dealing with the perils of high withdrawal rates from investments. And he isn’t dealing with the realities of investment returns. (He has also overlooked the fact that prior to full retirement age, Social Security benefits can be taken back if your earned income exceeds $13,560. Your friend’s full retirement age is 66.)

If your friend were 66, he could get a monthly check from Social Security and invest it. Because he is still working and earning, however, he will probably pay federal income taxes on those benefits.

Here’s a simple example. If your friend were due for a monthly benefit of $1,000 this year, he would collect $12,000 but would probably have to pay income taxes on 85 percent (the maximum) of that amount. In the 25 percent tax bracket that means he’d have only $9,450 to invest after paying income taxes of $2,550.

If he simply defers taking benefits, there is no income and no taxable event--- just an increase in future benefits of about $80 a month, or $960 a year, excluding the inflation adjustment. This means the $9,450 of after-tax income he might have saved would have to provide a reliable, inflation-adjusted annual return of 10 percent to equal deferring Social Security benefits.

Unfortunately, stock values go up and down. Regular withdrawals of 10 percent would exhaust the investment. Your friend can read more about this in the “portfolio survival” section of my website, www.assetbuilder.com. He can also test it for himself at http://fireseeker.com/firecalc.php. When I did it, I found that an investment with 10 percent withdrawals had only a 37 percent chance of survival for a 15-year period. The life expectancy tables say he has a better than 50 percent chance of living at least that long.

Another reality is that very few portfolios come close to achieving long-term returns of 12 to 20 percent. Using the Morningstar Principia database, for instance, I found that there were about 1,250 funds of all types that invested in domestic equities that also had track records of 15 years or longer.

Of that number, only 165 had 15-year returns of 12 percent or more. So a whopping 87 percent of all domestic equity funds failed to reach the lowest return figure this advisor claims is a slam-dunk! The average return was 9.32 percent.

This group, by the way, included every kind of domestic equity fund--- small-cap, mid-cap, large-cap, growth or value, and sector funds. What it didn’t include is the hundreds of funds that have been merged out of business over the same 15-year period, usually because their returns were dismal. This creates something called “survivor bias.” It works to make the performance of managed portfolios look a lot better than what most people experience. In financial services, funds with embarrassing returns simply disappear.

Am I loading the deck by failing to consider international equity funds? Not at all. Over the same period, there are about 646 international equity funds with 15-year records. Of those, only one had a 15-year annualized return greater than 12 percent. The average return for the group was only 5.39 percent.

Your friend’s adviser is selling what is rarely possible. The adviser will get paid today while he takes risks with your friend’s money for tomorrow. That’s good for him, lousy for your friend.

U.S. News & World Report: Here's a New Idea: Invest Conservatively

admin — Wed, 13 Aug 2008 20:00:00 GMT

Excerpt: Here's some advice you don't hear everyday: Invest conservatively in case you need to dip into your 401(k). That's straight from Scott Burns, cofounder of online investment advisory AssetBuilder. Read more.

The Power of Attentive Spending

admin — Fri, 08 Aug 2008 20:00:00 GMT

By Scott Burns

Yes, there is a silver lining in the gigantic cloud that surrounds us. It’s small, but it has a value far greater than most people realize.

I call it the Power of Attentive Spending.

Today, most people are worried about losses in the stock market. They are fretful about low yields on their bonds and CDs. They are anxious about the value of their home. And they are grating their teeth about whether they will ever see a pay raise again. Basically, we’re surrounded by an infuriating collection of things we can’t change, influence, or control.

That’s more Maalox moments than most of us can handle.

But all of those miseries increase the value of something we can actually do: Spend the money we have with care and attention. The August issue of Consumer Reports, for instance, says that a typical household can cut its expenses by $500 a month. And they can do it by examining the cost of only 6 items. Some will save more, some less, but the magazine estimates that a typical household can save:

$65 monthly by getting cheaper car insurance,
$110 by optimizing its life insurance,
$200 by smart food shopping,
$35 in phone costs,
$25 in bank fees, and
$65 by paying off credit card debt. (You can read the article on their website, see link below.)

That’s a lot of money.

It’s also important to note that this isn’t “belt-tightening.” It isn’t the kind of spending reductions that mean a drop in your standard of living. It’s efficiency, not penny-pinching.

With a median household income of $31,987, that $6,000 a year in savings is better than an 18.8 percent raise for the median American household. That’s nearly six years of income increases, according to the wage figures for the average private-sector worker tracked in Economic Indicators. (The average worker’s weekly wages were $606.94 this June, and you have to go back to November 2002 for the average weekly wage to be $510.89.)

Why is the gain from attentive spending better than an 18.8 percent wage gain?

Simple. That $6,000 of savings is after-tax income, not pre-tax income. Spend a few hours--- even a few days--- looking at alternatives, and a typical household can find economic benefits that are worth literal weeks of job-time work.

The benefits are even more interesting if you ask what you’d need to have in investments to produce $6,000 of after-tax investment income. Do that and you learn that your attentive spending “portfolio” is greater than the amount most people have accumulated in their retirement plans.

Suppose, for instance, you have the good fortune to live in a no-income tax state and want to get all your return from a portfolio of common stocks. At a 15 percent tax rate on dividends, you’d have to collect gross dividends of $7,059 to net $6,000 a year. With the S&P 500 index yielding 2.29 percent, you’d need to have $308,246 in your portfolio.

That’s a very impressive number.

Indeed, it compares favorably with the financial assets most households accumulate over an entire career. A recent study done by Ernst & Young for Americans for Secure Retirement, for instance, found that households with $50,000 of income had an average of $105,000 in financial assets as near retirees (age 55 to 59) and $175,000 in financial assets as new retirees (age 60 to 64). Households with $100,000 of income had $280,000 as near retirees and $585,000 as new retirees.

Since a household income of $103,000 puts your household close to the top 10 percent of all households in America, it’s pretty safe to say that 9 out of 10 households would benefit greatly by paying careful attention to how they spend their money.

On the web:

Consumer Reports, pg 16 article

Income and Tax Analysis for 2006

Meet the Diabolical Tax, the Alternative Minimum Tax for the Retired

admin — Wed, 06 Aug 2008 20:00:00 GMT

By Scott Burns

Q. What triggers taxation of Social Security benefits and what does not? Can the tax be avoided?---L.M, by email

A. The only proven way to avoid the tax is to have little or no income beyond Social Security benefits. I call this the Diabolical Tax. It affected very few people in 1983 when it became law, but it affects many people today. It will affect more tomorrow. Few of the lawmakers who passed the law, however, are still in office.

When the combination of your income from Social Security and other sources exceeds certain amounts, some of your Social Security benefits must be included in your taxable income. Not more than 85 percent of your Social Security benefits may be taxed.

About 30 percent of all Social Security recipients now pay some taxes on their benefits. The number of retirees paying this tax is rising rapidly because the basic formula is not indexed to inflation. Think of it as the Alternative Minimum Tax for the retired, snagging more retirees every year.

For a married couple, benefits begin to be taxed when income from other sources exceeds $32,000 less one-half of Social Security benefits. So a couple with $20,000 in benefits would start to have some of their Social Security benefits added to their taxable income when their income from dividends, interest, capital gains, pensions, work, rents, and tax-free bonds exceeded $22,000.

For a single person, benefits begin to be taxed when income from other sources exceeds $25,000 less one-half of Social Security benefits. So a single person with $18,000 in benefits would have some of those benefits added to her taxable income when her income from other sources exceeded $16,000.

While income from tax-free bonds must be counted when calculating other income, Roth IRA withdrawals are not included. This is why I favor Roth IRA accounts for younger workers. Unfortunately, it is entirely possible that Congress could decide to make a portion of Roth IRA withdrawals part of the calculation at a future date. Remember, Social Security benefits were never supposed to be taxed, but today they are.

Many people confuse this tax with the reduction in Social Security benefits that can happen to those who take Social Security benefits before full retirement age but continue working. For 2008, for instance, wage earnings greater than $13,560 trigger a reduction in the Social Security benefit being received. (After reaching full retirement age, there is no limit on work earnings.)

Q. I purchased William Bernstein’s "The Four Pillars of Investing" as you suggested in a recent article. While reading it, I became completely convinced an index fund is the way to go, which leads to a quick question. I currently have a taxable mutual fund (Franklin Templeton Founding Funds C shares) that has fairly high expenses. I would rather have these funds invested in the Vanguard 500 Index fund, but am not sure if there is any negative consequence (transaction-wise) in doing this. The last purchase I made with my taxable fund was in May 2007.---C.H., by email

A. The cost basis for your investment depends on when you bought the shares. If you purchased the shares long ago, for instance, you are likely to have a long list of shares owned. The largest number of shares will be the original purchase. After that, you’ll have other shares that were acquired through reinvestment of either dividends, capital gains or both.
You should be able to get this information from the firm that holds your shares and sends you a monthly statement.

This fund, with an expense ratio of 1.83 percent, according to Morningstar.com, has got to be considered very expensive. It is considered to be a “moderate allocation” fund, which means it is about a 60/40 mixture of equities and fixed income.

For that reason, moving to an index fund that is 100 percent equity--- like the Vanguard 500 Index--- would not provide you with much relief--- your risk of loss would increase, not decrease. To reduce expenses AND have similar risk you should move to moderate allocation index fund. That’s why Vanguard Balanced Index (ticker: VBINX) is a better match. It has an expense ratio of only 0.19 percent.

Want a Good Raise? Retire

admin — Fri, 01 Aug 2008 20:00:00 GMT

By Scott Burns

Senior citizens can look forward to a major increase in Social Security benefits next year. Unless there is a sudden rush of deflation in the current quarter, the increase will be the largest in 25 years.

Yes, you read that right: the largest in 25 years. Last year, the increase was a very pinched 2.3 percent. Indeed, there hasn’t been an increase over 5 percent since 1990.

Just how big will the increase be?

Try 6 percent.

To be more precise, it will be 5.7 percent if the summer holds no inflation. That means the Consumer Price Index won’t budge for July, August and September. The benefit increase will be 6.1 percent if inflation runs at the 0.2 percent “core” rate for the same period. And it will be more if inflation is higher than the core rate. The last time there was a larger increase was 1982, when it clocked in at 7.4 percent.

The 6 percent figure was not found in my personal crystal ball. Anyone can make a very good estimate of future benefit increases simply by reading how the annual benefit increase is calculated by the Social Security Administration. Then, use Consumer Price Index figures as they are released.

Here’s how it’s done.

The Social Security Administration uses the CPI-W, the Consumer Price Index for Urban Wage Earners and Clerical Workers, as its inflation benchmark. To figure the annual increase, it averages the CPI-W index figures for the third quarter of the previous year and divides that figure into the corresponding figure for the current year. January 2009 will be the first month retirees see the increase in their checks.

Last year the index declined slightly from 203.906 in June to 203.700, 203.199, and 203.889 for July, August, and September. That’s an average of 203.596 for the quarter.

By June of this year the index had risen to 215.223. So if the index is unchanged for July, August, and September, the increase will be 5.7 percent. Have the June index rise by 0.002 each month for core inflation, and the benefit increase will be 6.1 percent. If the index figure rises more over these three months, the benefit increase will exceed 6.1 percent.

Could the increase be significantly smaller?

Sure. But it would require declining prices.

Will retirees be happy with the increase?

I doubt it. My reader mail regularly contains letters from retirees complaining that those in Washington must be smoking something (or at least cooking the books) to come up with their notion of inflation. Some send changes in their home or auto insurance rates, the cost of electricity, or the cost of their prescriptions. Whatever the facts, the conclusion is the same: The CPI doesn’t measure the inflation retirees face. For the record, I think they are right. Medical expenses loom large for retirees.

If you are one of those seniors, however, I have a suggestion. Bite your tongue. Remember the old saying: “I complained that I had no shoes until I met a man that had no feet.”

The workers who pay the bills--- including Social Security and Medicare benefits--- are doing poorly this year. Worker wages appear to be rising at about a 3 percent annual rate. That’s about half the inflation rate. Medical benefits continue to be squeezed and medical insurance costs continue to rise. It’s not a pretty picture out there in 24/7 land. And that’s not counting the number of workers who no longer have jobs.

Worse, this isn’t a one-year problem. So far this century, retirees are doing as well as workers, perhaps better. Including the 6.1 percent estimate for the 2008 benefit adjustment, retirees have seen their benefits rise slightly more than workers wages have risen since the year 2000 (see table below). This may seem O.K. to some retirees, but it’s not. Workers are working. They are supposed to be rewarded for rising productivity.

But they aren’t. It’s beginning to look like the best way to get a good raise is to retire.

Workers and Retirees, Neck and Neck

This table compares the annual increase in retiree benefits with the annual increase in wages for the average worker.
Year	Social Security Benefit Increase	Average Worker Wage Increase
2008	6.1percent (est.)	2.8 percent (est.)
2007	2.3	3.8
2006	3.3	4.3
2005	4.1	2.9
2004	2.7	2.1
2003	2.1	2.2
2002	1.4	2.6
2001	2.6	2.7
2000	3.5	3.9
Total	28.1	27.3
Sources: Social Security, Economic Indicators

On the web:

June CPI announcement from BLS

Social Security CPI-W figures

Calculation of the COLA

History of COLA adjustments from 1975

Annual inflation data

Economic Indicators, June: Worker earnings

December 18, 2005: Workers, Retirees and the Consumer Price Index

The Rush for Safety Has Reduced Yields

admin — Wed, 30 Jul 2008 20:00:00 GMT

By Scott Burns

Q. Would you give us retirees your view as to the safest place for our hard-earned savings while we are having bank failures?
---H.V., by email (one of many asking the same question)

A. For most people, the $100,000 FDIC insurance limit essentially eliminates any risk of loss. Those who have more than $100,000 in their accounts or CDs should act to limit their deposit amount to $100,000. Many people do this by having accounts at multiple institutions.

If you have a significant amount of cash that you want to “park” in a safe place, an exchange-traded fund (ETF) that invests in short-term Treasury bills is a good option. The SPDR Lehman one- to- three month Treasury Bill ETF (ticker: BIL) may fluctuate slightly in value, but it is close to being a money market fund. Unlike money market mutual funds, however, it has an expense ratio of only 0.14 percent, so you get most of the yield. (The average taxable money market fund, according to Morningstar, has an expense ratio of 0.62 percent.)

The current SEC yield on this fund was recently listed as 1.52 percent on the sponsor’s website (https://www.ssgafunds.com/etf/fund/etf_detail_BIL.jsp). The same site also lists a year-to-date return of 0.99 percent and an annualized one-year return of 3.31 percent. The distinction between these figures is important. It is possible to be confused about the actual yield (as I was) if you rely on the yield figures on some of the major financial websites.

If you look for what BIL yields on Yahoo Finance, for instance, you’ll find a yield of 3.3 percent listed. That is really the trailing one-year return, not the current yield of 1.52 percent (http://finance.yahoo.com/q?s=bil).

Morningstar does the same thing as Yahoo, indicating a yield of 3.31 percent (http://quicktake.morningstar.com/etfnet/Snapshot.aspx?Country=USA&Symbol=BIL).
MoneyCentral (http://moneycentral.msn.com/investor/partsub/funds/etfreturns.asp?ETF=true&symbol=BIL) doesn't show a yield figure. Instead, it provides a YTD return (1.07 percent) and a trailing year return (3.15 percent) that is slightly different from the sponsor figures.

Another way to check on the current yield is to examine the market data figures on the Bloomberg website. (http://www.bloomberg.com/markets/rates/index.html). It shows a current yield on three-month Treasury bills of 1.52 percent. The low yield is a powerful indication that you aren’t the only person seeking safety--- a flood of safety seekers has driven the yield on short-term Treasurys to incredibly low levels. A low yield, however, is the price you pay for safety.

The disadvantage of buying the ETF Treasury bill fund is that you’ll have to pay a brokerage commission to buy and to sell. Assuming a $20 round-trip commission cost, your return would be lowered by 4 basis points on a $50,000 transaction and by 20 basis points on a $10,000 transaction. Selective investing in three- or six-month CDs at another bank is likely to bring a yield closer to 3 percent.

Q. I know I probably should have done something months ago. I’ve lost $2,000 in a year in my (Postal Service) thrift plan by investing in the C fund, the one that invests in U.S. stocks. I have less than $8,000 in the plan. I started to save money late in my career. Should I switch to the international stock fund or maybe the bond fund? I retired a year ago and need to watch my money a little more closely. I was going to roll over my account to a big fund company (Vanguard), but I’m not sure.
---L.M., by email from Seattle

A. If you are going to be a stock investor, you’ll need to accept that the value of your investment will go down as well as up, sometimes by uncomfortable amounts. Living with uncertainty is the price you pay for getting the higher returns that equities have provided to long-term investors.

If you can imagine needing to use every bit of your investment money in only a few years, you shouldn’t be investing in equities. If, however, you can imagine not needing some of your money for at least three years, then you should invest a portion of your money in equities.

One of the reasons financial planners create “balanced” portfolios for their clients is to use short-term fixed-income obligations to provide for unusual cash needs in the short term so that long-term investments don’t need to be disturbed. Remember, while stocks are subject to great fluctuation in value, most markets recover in a year or two.

International investing is a good thing, but it’s not a good choice if your goal is to reduce your risk. Instead, you should be moving some of your money to a fixed-income fund, such as the G fund, the one that invests only in government securities, in the Federal Thrift Savings Plan. And stay with the Thrift Savings Plan.

On the web

State Street Global Advisors website page for BIL

Yahoo Finance page for BIL

Morningstar page for BIL

MoneyCentral page for BIL

Coming Soon? Tax Inflation

admin — Fri, 25 Jul 2008 20:00:00 GMT

By Scott Burns

It has been a long time--- decades--- since we suffered from tax inflation. In the late ‘70s a report from the Bureau of Labor Statistics regularly showed that taxes, not food or energy, were rising faster than all other expenses for most households.

Needless to say, the report embarrassed our friends in government. There, in black and white, the report showed the cost of income taxes rising faster than any other household expense.

Few were surprised when the Department of Labor announced it no longer had the resources to produce the report. Since then, most of the tax code has been indexed to inflation, so government no longer makes a windfall when inflation increases.

Today, we all face a different problem.

Taxes are going to rise. But we can’t be certain of how much, or for whom. All we know is that the candidates for both parties have miraculously found a way to offer tax cuts to the vast majority of all taxpayers.

The rich aren’t included in this, of course. But it doesn’t matter. Their votes, alone, won’t elect anyone president. Instead, both candidates rely on taxing the income of the most wealthy to provide tax cuts for everyone else--- the more than 95 percent of all households that aren’t considered wealthy.

The candidates make these offers in spite of the rising federal deficit, the rising cost of imported energy, our balance of trade, the soaring cost of Medicare, the declining dollar and the ongoing cost of the war in Iraq. The last item, alone, is now clocking past $560 billion. That’s enough to manufacture and put in service over 22 million new fuel-efficient hybrid automobiles and dent the supply/demand balance for energy from the Middle East.

In other words, the candidates from both parties have close ties to the Tooth Fairy.

Let’s consider some basic facts. According to the most recent analysis of IRS data done by the Tax Foundation, an income of about $153,000 would put you in the top 5 percent of taxpayers. Only 1 percent of households have incomes over $388,000. You were in the top 10 percent with $109,000, the top 25 percent with $64,700 and the top 50 percent with $32,000.

If you then go to the Tax Policy Center website and check its analysis of tax proposals from the candidates, you’ll see something very interesting. Both candidates are offering a tax cut to every household with a taxable income under $200,000. Under the Obama proposal, for instance, a household with two earners and no dependents filing a joint return with $200,000 of taxable income would enjoy a tax cut of $6,474. Under the McCain proposal, the same household would enjoy a tax cut of, gee whiz, $6,474.

Candidate Obama would give a larger tax cut, $1,049, to a two-earner household with an income of $75,000 than candidate McCain, $721. Most income levels will find that candidate Obama is offering the greater tax cut (see table).

And a Tax Cut Was Offered To (Nearly) Everyone…

This table compares the tax cuts expected from the programs offered by both presidential candidates for more than 95 percent of all married households. Cuts were similar for single and head of household returns.
Income level	Obama tax cut	McCain tax cut	Difference
$10,000	$606	$0	$606
$25,000	$1287	$0	$1287
$35,000	$1429	$481	$948
$50,000	$1004	$721	$283
$75,000	$1049	$721	$328
$100,000	$3043	$2759	$284
$150,000	$4724	$4921	$(197)
$200,000	$6474	$6474	$0
Source: Tax Policy Center, http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=1840&DocTypeID=7

Do you really believe either candidate will be able to cut taxes for 97 percent of all households by increasing taxes on the other 3 percent?

I don’t.

The political definition of wealth is notoriously flexible. And surprisingly low. After the election, Congress may determine that you are “wealthy” if you are in, say, the top 25 percent of income earners--- $64,700 or a similar level. Remember, these are the folks who decided that you should pay taxes on your Social Security benefits if your income exceeded $32,000 for a couple.

That’s why tax inflation may soon be added, with food and energy inflation, to our list of woes.

On the web:

Tax Policy Center Comparison of Tax Changes for married households proposed by McCain and Obama

Tax Policy Center Comparison of Tax Changes for individuals and heads of households proposed by McCain and Obama

Tax Foundation Income Tax Distribution Analysis:

Clock for Cost of war in Iraq:

Get Rich Slowly: Die Broke: Spend 'til the End

admin — Thu, 24 Jul 2008 13:23:00 GMT

Excerpt: Burns and Kotlikoff stress that you are just as capable as a financial professional to research and choose the best course for your life. Read more.

Mortgages and Retirees Don’t Mix

admin — Wed, 23 Jul 2008 20:00:00 GMT

By Scott Burns

Q. My parents are looking for a house in the Dallas-Fort Worth area. They are retired. They are trying to decide if they should pay cash for the house. They have close to $620,000 in savings (CDs, 401(k)s, IRA) and are looking for a $200,000 house. They also have about $1,300 in Social Security income each month. Mom is 69; Dad is 73. Their combined monthly expenses are less than $1,900 (they currently have no house payment).

They prefer CDs and FDIC-insured accounts over bonds and stocks, but they are slowly warming up to the idea of a low-cost balanced fund. Does it make sense to pay cash for the house, or to finance it? ---A.H., by email from Dallas

A. The basic idea is a good one--- move to be near adult children and move to a city that attracts a surprising number of retirees. But given their caution and age, I wondered: What income could your parents get from an inflation-adjusted joint life annuity, assuming a 75 percent benefit for the survivor?

Answer: $2,354 a month on a $420,000 commitment. (The figure comes from the Vanguard website, where such life annuities are offered.) Add their Social Security benefits of $1,300 a month and they would easily have enough to cover their living expenses and the operating expenses of a $200,000 house.

Putting all their money into a life annuity, however, wouldn’t be prudent. A better option would be to pay cash for the house. Then put about $240,000 into an inflation-adjusted joint life annuity that would provide about $1,300 a month. And, finally, invest the remaining $180,000 in a low-cost balanced fund such as Vanguard Wellesley Admiral shares (current yield about 4.3 percent) or Vanguard Wellington Admiral shares (current yield about 3.2 percent).

They would have their basic expenses covered by Social Security and annuity income and a reserve fund that would add a bit more.

You might also have them consider a townhouse or condo where the maintenance costs would be less. In any case, following Ed McMahon and having a mortgage isn’t a good idea.

Q. My broker has told me, on numerous occasions, "Don't worry. You’ll never run out of money!” But I have lost a lot of money. At 85 years, with a mortgage and a wife, I’m worried. Here’s our story:

We were living in New Orleans when Katrina struck. We evacuated to San Antonio. When we returned and repaired the damage to our house, I decided it would be better to move to San Antonio. I sold our home for $288,000 free and clear. I also had $200,000 in a brokerage account.

In San Antonio, my new broker said: “Don’t pay cash for your house. It’s better to have a mortgage and put the money to work for you. You can pay the mortgage and still have more money to live on.” I put $30,000 down on a modest San Antonio home. In September I had $460,000 in my brokerage account. Now I have only $336,000---but I still have a mortgage balance of $112,000.

My investments are in mutual funds like Mutual A shares and Franklin Income A shares and I have lost over $70,000 since September. My concern is that my wife is 54, and I want to leave her the house free and clear, and something for her to live on. What should I do? ---R.T., by email from San Antonio, TX

A. It’s easy for a broker to suggest that your investment will earn more than you’ll pay on a mortgage because the broker will have more money to earn commissions on, even if the investments don’t work out. A mortgage can be reasonable for a young worker. But it’s dangerous for an 85-year-old whose income comes from investments.

Having a mortgage increases your risk. It may also increase your income taxes. In order to make the mortgage payments, you’ll need to take more withdrawals from your investments. This may trigger the taxation of Social Security benefits. While you’ll have an interest deduction to offset some of the investment income, you still may have to pay income taxes on a portion of your Social Security benefits.

Your broker’s fund recommendations are reasonable in terms of expense and historical performance. But to invest most of your money in equities, while recommending a mortgage, is foolish. I suggest that you reduce your risk by redeeming some of your shares to pay off your mortgage.

Sir John Templeton dies at age 95

admin — Mon, 21 Jul 2008 20:00:00 GMT

Sir John Templeton, a legendary investor and wonderfully spiritual man, died last week at 95. I had the good fortune to visit him at his home in Nassau in November, 2004 and to obtain this exclusive interview.

http://assetbuilder.com/blogs/scott_burns/archive/2004/11/21/Sir-John-Templeton-Urges-Caution.aspx

Shortly after that, I ran a wonderful speech of his for Thanksgiving, “And Countless Blessings Yet To Come.”

http://assetbuilder.com/blogs/scott_burns/archive/2004/11/25/_2620_And-Countless-Blessings-Yet-To-Come.aspx

If you are worried about current market events, both links may restore your hope and put perspective on where we are.

Scott

Is It Time to Junk the SUV?

admin — Fri, 18 Jul 2008 20:00:00 GMT

By Scott Burns

I have a confession to make. Do you remember the parsimonious Prius I’ve written about, the one that gets 45 mpg?

Well, it isn’t the only car in the Burns family. Our other vehicle isn’t a Zamboni. And you won’t find it in our garage, because it won’t fit.

It’s a 2002 Chevrolet Suburban.

That’s a Big SUV. To be specific, it’s a Z-71 with four-wheel drive and a towing package.This is one tough vehicle. It will take on any rock pile in Big Bend National Park. It will run on Interstate 40 until they shut the road down. Last winter, on a drive from Santa Fe to Dallas, we passed more than a dozen 18 wheelers trashed on the side of the road. We lost count of the passenger cars crumpled against guard railings, overturned, and generally battered. But the Z-71 plowed on through. It’s the George Patton of SUVs. It’s also big enough to haul our Airstream, if time ever permits.

Like most Suburban buyers, we didn’t buy it because we love seeing big numbers on a gas pump. We bought it for the same reason we bought all the Jeeps that preceded it--- to haul stuff.

It does this at about 13 miles per gallon. So with regular gasoline around $4 a gallon, it costs about 30 cents a mile to keep it moving. The Prius, on the other hand, costs about 9 cents a mile.

The difference is major. Let the gas tank get close to empty, and the Suburban can’t be refilled because most pumps shut down at $75. Small wonder that sales of new SUVs have plummeted and some car dealers are refusing to accept SUVs in trade--- they already have plenty, thank you.

And that opens an interesting question. If an SUV is essentially worthless as a trade, is there a gas price that will compel you to simply junk it?

The answer is yes. But not yet.

Here’s the basic math. If your SUV is worthless, it will be worth junking when the cost per mile of feeding it gasoline is greater than the cost per mile for fuel plus the cost per mile of the depreciation on a new vehicle. (The Junking Moment will be higher if you also consider financing costs and insurance, but we’re going to keep it simple here.)

Let’s also assume that a new car will lose about 80 percent of its value in the first 100,000 miles. That means a new $25,000 vehicle will lose $20,000 in 100,000 miles and cost about 20 cents a mile for depreciation. A $30,000 vehicle will cost about 24 cents a mile for depreciation, and a $40,000 vehicle will cost about 32 cents a mile for depreciation. Depreciation is the largest single cost, by far, of owning a car.

To throw the SUV away, we’d need to find a combination of new car depreciation and gas cost per mile that is less than the 30 cents it costs to run the Suburban.

Can it be done?

Not quite. The table below shows the fuel cost per mile for different gasoline prices and mileage.

Running on Empty

This table shows the cost per mile driven for different prices of gasoline and different fuel efficiencies. Measure the difference between two mileage costs at the same cost of gasoline and you have the amount you can pay for depreciation. Pay more for depreciation and you’ll pay more to drive, not less.
Cost per Gallon	13 mpg	20 mpg	25 mpg	40 mpg
$4	31 cents/mi	20 cents/mi	16 cents/mi	10 cents/mi
$5	38	25	20	12.5
$6	46	30	24	15
Source: author calculations

Subtract the more efficient cost from the less efficient cost and you have the amount you can spend on depreciation. At $4 a gallon, for instance, the difference between my 13 mpg Suburban and a 40 mpg replacement is about 21 cents a mile. So the replacement vehicle would need to cost about $25,000. That isn’t too likely.

If gas goes to $6 a gallon, however, the Suburban would cost 46 cents a mile, 31 cents more than a 40 mpg replacement vehicle. That vehicle could cost nearly $40,000. (A more sophisticated version of this, based on current car values, is available on www.edmunds.com. Look for its “gas-guzzler” calculator.)

So what’s the answer today?

For the Burns family, it’s simple. Don’t buy a new vehicle. Drive less. Drive the gas-sipper as much as possible, the guzzler as little as possible. Use the SUV for what it’s made for, not for trips to the grocery store.

On the web:

The Edmunds car exchange calculator

earlier Prius columns

CNN on dropping SUV sales

If Your SUV Is Worthless as a Trade-In, Is There a Gas Price That Will Compel You to Simply Junk It?

admin — Fri, 18 Jul 2008 18:50:00 GMT

We’re Not There Yet, Says AssetBuilder’s Scott Burns – But We Could Be Soon

DALLAS – July 18, 2008 – With the resale value of SUVs plummeting and some car dealers refusing to accept them in trade, Scott Burns, personal finance writer and chief investment strategist for AssetBuilder, poses the question: “Is it time to junk the SUV?”

For most people, Burns says, probably not. But should fuel prices climb to $6 per gallon or more, it might be time to walk away from your gas guzzler.

“To determine if your SUV is worth junking,” Burns explains, “you should compare the cost per mile of feeding it gasoline to the cost per mile for fuel plus the cost per mile of the depreciation on a new vehicle. Depreciation is the largest single cost, by far, of owning a car. The Junking Moment is when the new-car costs are less.”

Burns offers a hypothetical example:

“Let’s assume that a new car will lose about 80 percent of its value in the first 100,000 miles. That means a new $25,000 vehicle will lose $20,000 in 100,000 miles and cost about 20 cents a mile for depreciation. A $30,000 vehicle will cost about 24 cents a mile for depreciation, and a $40,000 vehicle will cost about 32 cents a mile for depreciation.

“To throw your gas guzzler away, you’d need to find a combination of new car depreciation and gas cost per mile that is less than the cost to run your SUV.”

Burns says this might be possible to find today – but not probable.

If your SUV gets 13 miles per gallon, it costs 31 cents per mile to drive it when gas prices are at $4 per gallon, Burn explains. If you were to purchase a new car that gets 40 miles per gallon, the cost to drive that vehicle is 10 cents per mile. That’s a difference of 21 cents per mile.

If you can find a new car that gets 40 miles per gallon for $25,000, it may be worth trashing your SUV, Burns says. But that’s unlikely.

If gas goes up to $6 per gallon, however, it’s a different story. Then even paying $40,000 for a fuel-efficient new car would be better than sticking with your SUV.

Read more of "Is It Time to Junk the SUV?" at www.AssetBuilder.com.

About Scott Burns

Scott Burns is a newspaper columnist and author who has covered personal finance and investments for nearly 40 years. Today, he is one of the five most widely read personal finance writers in the country, according to The Dallas Morning News. In 2006, he co-founded AssetBuilder, a Registered Investment Advisor, where he serves as chief investment strategist.
Burns and Laurence J. Kotlikoff are co-authors of “Spend Til' the End: The Revolutionary Guide to Raising Your Living Standard -- Today and When You Retire,” published in June 2008 by Simon & Schuster.

About AssetBuilder

AssetBuilder offers weary investors a science-based alternative to the unnecessary costs, risks and complexity of traditional Wall Street firms. With fees that rank among the lowest in the financial services industry, AssetBuilder provides customers a menu of pre-constructed, risk-managed portfolios that make choosing and implementing a personal investment strategy simpler than ever. Co-founded by personal finance writer Scott Burns, AssetBuilder’s portfolios are an extension of Burns’ widely praised “Couch Potato” methodology. Based in Dallas, AssetBuilder is a Registered Investment Advisor. For more information, visit the company’s Web site at http://www.assetbuilder.com/.

IndexUniverse: Are You Saving Too Much for Retirement?

admin — Fri, 18 Jul 2008 13:22:00 GMT

Excerpt: Besides trying to educate investors through his books and columns, Burns serves as chief investment strategist at AssetBuilder. Read more.

Steps for Getting a Guaranteed Lifetime Income

admin — Wed, 16 Jul 2008 20:00:00 GMT

By Scott Burns

Q. I am 73 and have investigated buying back the Social Security benefits I took at age 62. The buyback number is $158,529. My current monthly benefit is $1,231. A total buyback would give me a new monthly benefit of $2,019. This is a difference of $788 a month. My spouse is approaching 59 years of age.

We currently invest in property with good results (6 percent to 8 percent return, excluding appreciation), and our investments are in CDs, money market and Vanguard funds (about $300,000). We have the ability to buy back the benefits.

Our property consists of two homes and one condo with no mortgage (about $650,000), and another condo valued at $165,000 with a $100,000 mortgage. I am in excellent health, and we own a small business that returns 35 percent gross on sales of $1 million annually. Should I do the buyback or invest the $158,529 in something else? ---H.G., by email from Dallas, TX.

A. It is best to go through the reapplication process before age 70 when the increase in benefits stops. Since the increase in benefits stops but the requirement to return paid-out benefits remains, the relative value of the deal is diluted by the years of benefits returned with no offsetting increase in benefits. Even so, it is likely to be a good trade compared to investing the same sum.

Using the Vanguard life annuity calculator on its website, for instance, I found that a joint and survivor life annuity of $788 a month with inflation adjustments for a 73-year-old male married to a 59-year-old woman would cost $198,386. That is a good deal more than the $158,529 that you will have to pay back.

The life annuity guarantees that as long as one of you is alive, that income will be paid out. This works to overstate the value of the annuity somewhat because your wife’s future spousal benefits will be replaced by a benefit equal to your benefit if she becomes your widow. Even so, this is probably a good choice to make if you are concerned about your wife’s ability to manage her finances and investments after your death.

Another factor to consider is that the cost of what you return, that $158,529, will be offset somewhat by a credit for all the income taxes you have paid on the portion of your Social Security benefits that have been subject to taxation since you were 62. The more Social Security benefits you paid taxes on, the lower the net cost of reapplication.

This is NOT something to do without good accounting advice, so I suggest you test the entire transaction out with a good tax accountant.

Readers who are unfamiliar with the idea of reapplying for Social Security benefits can learn about this rare but interesting option by reading my earlier column on the subject on my website, www.assetbuilder.com. Readers who would like to test the value of deferring Social Security benefits can price inflation-adjusted life annuities on the Vanguard website (http://www.aigretirementgold.com/vlip/VLIPController?page=RequestaQuote ).

Q. Can you tell me how to calculate the cost of an annuity with the following conditions?
Recipient is a 61-year-old male. He would receive $2,000 per month starting at age 75 (14 years from now). He is in average health. How much would it cost to buy an annuity to pay the $2,000 per month considering his life expectancy at age 75? ---R.S., by email

A. You won’t be able to calculate an exact figure because interest rates will change over the period. But you can get a pretty good “guestimate” by taking the following steps.

First, get the cost of a life annuity in the amount of $2,000 a month from the www.immediateannuity.com website. The cost for a life-only annuity for a male, for instance, was $220,000. The cost of the same annuity with 10 years of payments guaranteed was $250,000. If interest rates rise in the next 14 years, the annuity will cost less. If interest rates fall, the annuity will cost more.

Second, discount that value by the interest rate you might earn on a CD-like tax-deferred annuity. For a large annuity deposit, you’re likely to be able to get a guaranteed rate of about 5 percent for 10 years. Discounted at 5 percent, you’d need to put aside about $111,000 today for the $220,000 life-only annuity in 14 years and $126,000 for the 10 years of guaranteed payments annuity.

South Florida Sun-Sentinel: Retirement strategies as the stock market plunges

admin — Mon, 14 Jul 2008 13:21:00 GMT

Excerpt: This is an idea that goes against what you might think, says Scott Burns, who is a personal finance syndicated columnist and chief investment strategist for AssetBuilder Inc. Read more.

Invest for YOUR Future, Not the Financial Services Industry

admin — Fri, 11 Jul 2008 20:00:00 GMT

By Scott Burns

Securities attorney and investment adviser Daniel R. Solin has saved our bacon once again, just as he did at this time last year. That’s when he offered a short book on investing for everyone--- even those sitting at the beach, smudging pages with sun-block-smeared fingers.

Now he offers “The Smartest 401(k) Book You’ll Ever Read (Perigee Books, $20). Like his earlier book, “The Smartest Investment Book You’ll Ever Read,” the new book is short.

How short?

Try 200 pages divided into 53 chapters. That’s less than 4 pages a chapter.
Even that measure, however, may give the impression of verbosity because the first 52 chapters are done in 166 pages--- just over 3 pages a chapter.

We’re talking brief here.

The last chapter, “Who Says So?” is for data geeks. It quickly takes you through all the supporting research for the preceding 52 chapters. This book is so short and to the point that even a congressman or senator could read it.

And, trust me, they should.

Mr. Solin lays out how most of us are getting messed over in our 401(k) plans and 403(b) plans. It’s also a blueprint for how to improve them. If they were improved, all of us who actually work for a living and try to save money might live to see our plans bear fruit rather than losing it to the excesses, expenses, and marketing hype of the Retirement/Investment Complex.

Here are some of the big points in the book:

Solin says that expenses count. They always count. A young college graduate who saves $200 a month for 40 years and earns 8 percent before expenses of 2 percent will accumulate $400,290. But the same college graduate investing in funds with expenses of 0.3 percent would have $644,484. Quite a difference.
Active management doesn’t cut it. While some managers may beat their appointed index for a few years, very few beat it for any period of time. This doesn’t mean it’s impossible. It’s just not very likely. Meanwhile, hundreds of failed funds are quietly buried or merged every year. Over the last 5 years, for instance, nearly 30 percent of all actively managed domestic equity funds were shut down or merged.
Company stock in your 401(k) plan may benefit the management of your company, but it’s a big gamble. A plan that actually looks out for the worker’s future would limit or eliminate holdings of company stock.
Frustrated with your plan and what it offers? Consider going straight IRA or using an IRA to buy investments that are closer to what you should be holding--- low-cost index funds.

Take those steps--- cutting costs by indexing and building a simple Couch Potato Portfolio-like retirement plan--- and you’ll have a good shot at accumulating about 50 percent more by the time you retire. That’s not small change.

Mr. Solin reserves some of his harshest words for 403(b) plans. He is not alone in this, of course. William Bernstein has written that 403(b) plans can be found in the “dankest, foulest smelling cellars of the financial world.”

This ugly situation exists because 403(b) plan marketing is dominated by the insurance industry. That industry spends a lot of money to influence legislators and some of the institutions that purport to help teachers. He points out that the National Education Association (NEA) received $50 million in royalties in a single year from the annuities and other insurance products that it endorsed. With friends like that, who needs enemies?

I guarantee that you will become very angry as you read this book. It makes very clear that no one is looking out for workers. Not Congress, not the regulators, not corporate executives, not education unions, and certainly not the financial services industry. To all of them, you and I are just lunch.

Anger without redress, however, is wasted energy. Fortunately there are remedies.

Today, not tomorrow, anyone who has a plan that sucks can do better simply by investing in a low-cost IRA with index funds. You can also agitate for better plan choices.

Your company may not care about you, but it doesn’t matter. The dorks with MBAs don’t want to be revealed as idiots, and our relentlessly self-serving top dogs hate litigation.

My suggestion: Read this book and take action. The difference will all be in your pocket.

On the web:

Sunday, July 6, 2007: The Perils of Hyperactive Investing

His website

The book on Amazon

AssetBuilder’s Scott Burns Earns Acclaim for New Book on Financial Planning

admin — Thu, 10 Jul 2008 13:00:00 GMT

AssetBuilder’s Chief Investment Strategist Dispels Wall Street Myths
and Advocates Low-Cost Index Investing in “Spend ‘Til the End”

DALLAS – July 10, 2008 – Scott Burns, chief investment strategist for AssetBuilder, is earning national media attention and critical kudos for his new book on financial planning, “Spend Til' the End: The Revolutionary Guide to Raising Your Living Standard -- Today and When You Retire.”

Burns -- a personal finance columnist for the Dallas Morning News from 1985 to 2006 whose column is currently syndicated nationwide -- takes on Wall Street financial planning myths and offers alternative strategies in “Spend ‘Til the End,” co-authored by Laurence J. Kotlikoff and published by Simon & Schuster.

U.S. News & World Report writes of the book: “The conventional wisdom about retirement may be worth re-examining, say two financial-planning mavericks [who] systematically test and often debunk the collective wisdom of financial planners.”

Since the book’s release, Burns has appeared on radio broadcasts from coast to coast, in media markets such as New York, Los Angeles, Chicago, Boston, Denver and Seattle. Burns, the book and/or AssetBuilder have also merited coverage in Kiplinger’s Personal Finance Magazine, NPR, the Fox Business Network and other media outlets.

Burns has taken a hands-on approach to helping investors since leaving the Dallas Morning News, co-founding AssetBuilder, a fast-growing Registered Investment Advisor that combines the use of low-cost index funds with research-based diversification strategies. In just over a year in business, AssetBuilder has added more than 300 clients across 24 states, representing $124 million in invested assets.

"AssetBuilder issues a simple challenge to Wall Street: Prove that your stock pickers and mutual fund managers are worth the fees you charge for them. In most cases, they aren’t," Burns says.

"We believe that real value is delivered not in trying to outperform the market, but in constructing portfolios that capitalize on the market’s long-term growth. That’s what AssetBuilder portfolios are built to do -- at lower cost and with lower risk than traditional financial services firms can deliver."

Adds Kennon S. Grose, AssetBuilder’s president and CEO: “Word is spreading about Scott and AssetBuilder, and the message is clearly resonating with investors. Together, we are on a journey – a mission to challenge Wall Street’s entrenched system of unnecessary costs, risks and complexity. We’re well on our way.”

About AssetBuilder

Your Broker is a Hammer, Don't be a Nail

admin — Wed, 09 Jul 2008 20:00:00 GMT

By Scott Burns

Q: I like my broker, but she and I differ on what type of fund to be in. I prefer a low-expense fund. She says: Forget expenses if the 10-year returns bear more fruit.

I have $400,000 to invest. I want to do the following: 35 percent in Vanguard Total Stock Market Index, 20 percent in Vanguard Total International Stock Index, 20 percent in T. Rowe Price New Horizons and 15 percent in Vanguard Value Index.

This gives me exposure to a large domestic blend, an international fund, a mid-cap and a value fund. All are low-expense funds. She wants me in Hancock Large Cap Equity C, Goldman Sachs BRIC C, Blackrock U.S. Opportunities Inv. C, Fidelity Advisor Canada C and Fidelity Advisor Small Cap C. All are high-expense funds.

I am 55, married and own my own business with no debt. I have an additional $800,000 in four accounts (including two IRA accounts) invested in about 18 different stocks from all sectors except financials. -- N.C., San Antonio

A: Have you ever heard the expression "To a hammer, everything is a nail"? Well, that's what is happening here. Your broker needs to make a living. Her income comes from adviser fees on those "C" share funds. Her world is defined by the funds she can make a living selling.

This isn't evil. But it sure blunts her sensitivity to statistical reality.

These fees have to be added to the basic expense ratio of the funds she recommends. Those C shares include a large 12b-1 fee (0.75 percent to 1 percent). That's why every single one of the funds she suggests costs more than 2 percent a year. That's 10 times as much as the cost of most of the funds you want to buy.

She can't make a living at her current firm by putting you into low-cost index funds. She's part of the outmoded legacy distribution system that I wrote about earlier this year.

I've heard brokers say that "expenses don't matter if the return is there" for more than 40 years. It's absolutely true, except for one problem. Expenses are constant. Performance is uncertain. Invariably, today's top manager outruns his selection luck and performance deteriorates. Long-term, odds are that managed fund performance will be well below the performance of an index fund.

It helps to understand the math and probability behind this. Historically, about 70 percent of all managers fail to beat their appointed index. So when you pick managers -- or pay someone to pick them for you -- you have only a 30 percent chance of beating an index fund.

Those aren't very good odds, particularly when the additional expense is considered. Over the 15 years ending March 31, for instance, the Vanguard Balanced Index fund provided an annualized return of 8.30 percent. It outperformed 64 percent of its managed moderate allocation competitors. It did this with an expense ratio of only 0.20 percent.

Just to overcome the 1 percent added cost of C shares, your broker would have to find a fund with a pre-fee return of 9.30 percent. Only 20 percent of the managed funds did that. Basically, the odds are 5-to-1 against just recovering the cost of having your broker make the selection. She, of course, is willing to take the chance because your money is her lunch.

Worse, the higher the expense ratio of a fund, the worse the odds it will provide a superior performance. The average expense ratio in the top 20 percent of moderate allocation funds, for instance, was 1 percent. The average expense ratio in the bottom 80 percent was 1.41 percent. As I've written before, you can raise the odds of achieving superior performance simply by having a bias toward low-expense funds. Since your broker is selecting from a tool box of funds that already have above-average costs, the odds of achieving superior long-term performance are really, really poor.

My suggestion: You're already doing the right thing on your own. Keep doing it. If you want to gamble on your broker, sell some of your individual stocks and let her suggest a small portfolio of funds. Then track it against your portfolio of index funds. Just remember you are betting on a long shot and that the odds are better than 5-to-1 against her. Personally, I don't think it's a good idea to bet your retirement on a long shot.

ON THE WEB

"What 'Financial Adviser' Means 95 Percent of the Time" (2/29/08)

"Measuring the Cost of the Legacy Distribution System Over Your Working Career" (3/7/08)

"Fees and the Top and Bottom 25 Percent" (3/14/08)

"How to Improve the Odds of Selecting a Superior Mutual Fund" (8/3/07)

FiveCentNickel: Consumption Smoothing and You: Save While the Saving's Good

admin — Wed, 09 Jul 2008 13:19:00 GMT

Excerpt: You’ve heard it all before. If you want to retire comfortably, you need to save a fixed percentage of your income year in and year out until the cows come home. Read more.

AssetBuilder’s Scott Burns to Sign Copies of “Spend ‘Til the End” in Dallas on Thursday, July 10

admin — Tue, 08 Jul 2008 15:32:00 GMT

The Personal Finance Writer and AssetBuilder Chief Investment Strategist
Challenges Wall Street Conventional Wisdom in His New Book

DALLAS – July 8, 2008 – Scott Burns, chief investment strategist for the Plano-based investment firm AssetBuilder, will appear at the Borders bookstore at 10720 Preston Road in Dallas on Thursday, July 10, to sign copies of his new book, “Spend Til' the End: The Revolutionary Guide to Raising Your Living Standard -- Today and When You Retire.” The event runs from 7 p.m. to 8 p.m.

Burns has taken a hands-on approach to helping investors since leaving the Dallas Morning News, co-founding AssetBuilder, a fast-growing Registered Investment Advisor (RIA). In just over a year in business, AssetBuilder has added more than 300 clients across 24 states, representing $124 million in invested assets.

About AssetBuilder

Letter From Maine: Reinvention Trumps Loss

admin — Fri, 04 Jul 2008 20:00:00 GMT

By Scott Burns

Belfast, Maine -- It's hard to believe, sitting here at a cottage window, that the world is having its daily crisis, that billions are being lost, that oil prices are yet higher, and it is all the subject of important -- no, pressing -- chatter on the Internet.

Here, life just goes on, paced by blooming lupines, the scent of freshly mowed grass and the distant sound of seagulls. From our windows I see the quaint little cottages of Bayside in one direction and a brisk sweep down Penobscot Bay in another. It occurs to me, however, that Maine weather is a bit like the stock market -- moments of crystalline exuberance followed by days, weeks, or maybe forever, of unrelenting fog.

It would be really easy for me to trot out yet another story of real estate misery. From Boothbay Harbor to Stockton Springs, the landscape seems to have sprouted an overflow crop of "For Sale" signs. Asking prices have come down, but they are still well over what people who actually work for a living can afford. One resident observes that we might see more signs, if many sellers hadn't taken their houses off the market.

But I will spare you that story. There is also a more positive, if subtle, message here. It is this. Some people would have us focus on loss. We in media-land excel at that.

But if we focus on loss, we'll miss seeing the things that are not lost, but restored. We'll also miss the things that are reinvented, rather than restored. Here are two examples, both from this little stretch of Midcoast Maine.

Reinvention.

On Thursday, June 19, the Republican Journal, the weekly paper of Belfast, announced that it and five other weekly newspapers in the Midcoast area were being purchased by Village Net Media Inc., an affiliate of www.villagesoup.com. The goal will be to weave together the Internet platform of Village Soup with the print circulation of small newspapers that can trace their history back well over a century. The Belfast Republican Journal, for instance, began publication in 1829.

This is the technology version of your basic man-bites-dog story.

Small newspapers have been threatened with extinction before. In the late '60s small newspapers were dying because of costs, primarily the incredible burden of setting hot type. Then Boston inventor William Garth invented a small and inexpensive photo-typesetting machine. A small newspaper could switch to photo-typesetting for an investment of about $5,000 in one of the machines Mr. Garth's company, Compugraphic, manufactured. Later, linking computers to photo-typesetters eliminated redundant key-boarding and improved the economics of small papers still more.

Through the '70s and '80s there was much media hand-wringing over the decline of newspaper circulations. The decline, however, was limited to major metropolitan papers because small weeklies and dailies were enjoying healthy circulation increases.

Will Village Soup-like changes slow or stop the current decline of traditional newspapers? I don't know. Recently, major newspaper stocks like The Washington Post, New York Times and Gannett were off 26 percent, 38 percent and 59 percent, respectively, over the last 12 months. The stock market is predicting a quick death.

This may be a lousy time to own the shares of legacy newspaper companies, but it's a great time for communication between human beings. Never has so much been possible, so easily. Reinvention trumps loss.

Restoration.

Three days later, a Belfast boat builder, French and Webb, launched three magnificently restored Buzzards Bay 30s from the town boat ramp, amidst the cheers of nearly a thousand people. These lovely N.G. Herreshoff designs were first built in 1910. They represent artful skills that are rapidly being lost. But master boat builders like French and Webb are keeping those skills alive.

Few can afford these works of art -- my brother and I joked that our shared 1980 J30 sloop probably cost less than the last round of varnish work done on any one of these boats -- but it is still a thrill to see the best of an era, to see both exquisite workmanship and appreciation for what has gone before.

As for the stock market, I don't mean to sound cavalier but, well, it's only money. It only dimly represents what we can do.

ON THE WEB

Village Soup Web site

Bangor News story on Buzzards Bay 30 launch:

French & Webb site

Sunday, July 10, 2005: "What I Learned on My Summer Vacation" (7/10/05)

"A Floating Retirement" (3/18/04)

J30 sailboats

AssetBuilder Inc. - Registered Investment Advisor

Recognizing the Different Annuities

Tracking the Social Security Benefit increase for 2008

Get Rich Slowly: Leverage, Luck and Living Well: A Conversation with Financial Columnist Scott Burns

Will You Die Broke? Maybe Not.

On the web:

For Retirement, Make High Probability Bets

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Meet the Diabolical Tax, the Alternative Minimum Tax for the Retired

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Coming Soon? Tax Inflation

And a Tax Cut Was Offered To (Nearly) Everyone…

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Get Rich Slowly: Die Broke: Spend 'til the End

Mortgages and Retirees Don’t Mix

Sir John Templeton dies at age 95

Is It Time to Junk the SUV?

Running on Empty

On the web:

If Your SUV Is Worthless as a Trade-In, Is There a Gas Price That Will Compel You to Simply Junk It?

We’re Not There Yet, Says AssetBuilder’s Scott Burns – But We Could Be Soon

About Scott Burns

About AssetBuilder

IndexUniverse: Are You Saving Too Much for Retirement?

Steps for Getting a Guaranteed Lifetime Income

South Florida Sun-Sentinel: Retirement strategies as the stock market plunges

Invest for YOUR Future, Not the Financial Services Industry

On the web:

AssetBuilder’s Scott Burns Earns Acclaim for New Book on Financial Planning

AssetBuilder’s Chief Investment Strategist Dispels Wall Street Myths and Advocates Low-Cost Index Investing in “Spend ‘Til the End”

About AssetBuilder

Your Broker is a Hammer, Don't be a Nail

ON THE WEB

FiveCentNickel: Consumption Smoothing and You: Save While the Saving's Good

AssetBuilder’s Scott Burns to Sign Copies of “Spend ‘Til the End” in Dallas on Thursday, July 10

The Personal Finance Writer and AssetBuilder Chief Investment StrategistChallenges Wall Street Conventional Wisdom in His New Book

About AssetBuilder

Letter From Maine: Reinvention Trumps Loss

Reinvention.

Restoration.

ON THE WEB

AssetBuilder’s Chief Investment Strategist Dispels Wall Street Myths
and Advocates Low-Cost Index Investing in “Spend ‘Til the End”

The Personal Finance Writer and AssetBuilder Chief Investment Strategist
Challenges Wall Street Conventional Wisdom in His New Book