Retiree Withdrawal Plans: Keep It Simple

Despite doubts previously expressed here, that group of retirees known as the Spend-Downs continue to attract the lion's share of attention. Ron Lieber looks at complicated efforts to justify higher withdrawal rates. One approach requires the investor's adviser to calculate the ten-year average earnings for the S&P, adjust for inflation, then create a P/E ratio which signals whether the investor's annual withdrawal should be 4.5%, 5% or 5.5%.

Another scheme allows a retiree's adviser to suggest a 6.5% withdrawal, or maybe 6% – sometimes made without inflation adjustment ( if stocks have a bad year) and sometimes reduced by one-tenth (when stocks have a really bad year).

Aren't we getting awfully complicated? Advisers who fail to keep things simple could face a backlash. Clients may realize there's an easy, "no cost" way to withdraw 5% instead of 4% each year: become a do-it-yourself investor. By disengaging their adviser, they can start spending the one percent or so they've been paying for his services.

Humanizing the Trust Business

Chase Manhattan wasn't the only mid-twentieth-century trust and investment venture seeking to build a less stuffy image through advertising. Picking up on the popularity of contract bridge, Grace National adopted an eager-to-help tone in the 1959 message at left (click on thumbnail for larger view).

What Grace lacked was the graphic punch provided by the iconic Chase nest eggs. In the 1959 example below, the master of the estate is seen checking up on the haying operation. (To Chase he must have looked the very model of a trust prospect; to those of us who actually served time wielding a pitchfork on a hay wagon, he's an example of the idle rich.)

Fiduciary Standards for Broker-Dealers

Brokers make their living handling transactions and accounts for investors. Dealers trade securities. Can broker-dealers also function as fiduciaries? That's the dream of John Bogle and others, and the dream sounds good.

But as the Securities Law Prof warns, realizing the dream won't be easy.

Will it even be possible?

1930 ABA Convention: Boxing, Polo and a Ball

Just in case you are not following our advice to read the news from 1930, here's one of today's items:

Entertainment plans announced for American Bankers' Assoc. convention in Cleveland. Events include a revue entitled Next to Nothing, a “presentation of women's fashions in a musical comedy setting ... while planned to be of interest to the wives of the delegates, has been designed with dramatic plot to interest the delegates themselves as well.” Also planned are “boxing matches and ring entertainments, interspersed with music,” indoor polo games, golf, and a grand ball.

More Charity for Pooches May Depend on Politics

Animal-welfare groups want the trustees of the Helmsley Charitable Trust to hand over some of the loot left by Leona Helmsley. The groups' best chance, opines The Economist, may lie in politics:

This will be a hard case to win, and much may depend on the attitude of the state’s attorney-general, Andrew Cuomo, who has so far supported the trustees. Will Mr Cuomo, who most analysts reckon wants to be the next governor of New York, maintain a position so upsetting to the state’s animal-lovers? *** If the money doesn’t end up going to the dogs, maybe Mr Cuomo’s election chances will.

The War on Wealth

As portrayed at the 1939 New York World's Fair, The World of Tomorrow was a wonderful mirage. But the winds of war were gathering strength. In the ad below, Fiduciary Trust responded with a somber message:

. . . wealth, which investment seeks to conserve, is always engaged in warfare. It is constantly under attack by many economic, technical and social forces which tend to shrink both principal and income.

Risk: "It's the Dollars, Stupid!"

the WSJ's Sunday Journal included a piece on What You Should Know About Risk. A quote from Vanguard's Fran Kinnery, explaining why losses need to be looked at in dollar terms, caught my eye:

"We believe investors are somewhat immune to percentages.Thirty-two percent doesn't have the same impact for someone who has $100,000 as if you said that now they only have $68,000."

He's right, at least in my case. The other day I noticed a listing of the worst bear markets in a Merrill Anderson newsletter. The most devastating, of course, was September '29 - June '32. The value of the S&P 500 dropped 86%.

But that plunge was followed by a 57-month bull market in which the S&P climbed a stupendous 324%. Gee, maybe that bad old Depression wasn't so bad after all.

But it was, measured by dollars. An investor with $1 million in stocks in September '29 had only $140,000 left in June '32. And that "stupendous," 324% recovery only brought the value of his battered portfolio back to $593,600.

Moral: Use dollars to help investors assess risk. Use percentages when they need panic relief.

Roth IRA Conversions

How excited are taxpayers by the removal of the $100,000 AGI cap on conversions of traditional IRAs to Roth IRAs in 2010? Not interested, according to this survey by USAA. Just 9% are on board so far. Still, awareness of issue remains low, the survey reveals, as only 43% even knew about the coming change.

Seems like a marketing opportunity to me.

The Trend Is . . . Trust Companies!

More advisory firms seek to retain clients and enhance client relationships by forming trust companies, according to this Investment News story.

Vacationing Before Plastic

Here's a blast from the past, from an August 18, 1930 WSJ editorial:

“With unemployment and destitution in evidence” people are more inclined to provide for the future of themselves and their children; in boom times this is easily forgotten. This trend is seen in savings deposits - they gained $273.8M in the first half vs. a decline of $82.7M in second half of 1929; July has shown a further gain for the first time in six years (normally people withdraw money to pay for vacations, etc).

A quarter-century later, economists still cited such "normal" fluctuations in bank deposits at vacation time. Now, thanks to the abundance of plastic spending tools, the seasonal norm is for increases in borrowing rather than in withdrawals from savings.

The founder of The Merrill Anderson Company did not approve of this trend, as I learned early on. See Tales From the 20th Century: Borrowing Trouble.

Yesterday on TV, someone was worrying that new credit-card regs might create difficulties for "credit consumers." Wonder if Merrill would have understood that term?

Not sure what it means myself. When you finish "consuming" your credit, aren't you most likely bankrupt?

The Rich Get Poorer

Gleanings from the NYT front-page story, Rise of the Super-Rich Hits a Wall:

• Monthly income from dividends on stocks has fallen more than 20 percent since last summer.
• The number of people with investable assets over $1 million dropped by about 500,000 last year.
• The Mei Moses index, which tracks the price of art, has dropped 32 percent in the last six months.
• The fortune of John McAfee, the antivirus software tycoon, has dropped from a high of $100 million to about $4 million. (Investing in Lehman bonds didn't help.)

Why did the stock market do so well in July?

Because investors pulled $48 billion out of their money market accounts to invest in stock and bond mutual funds,Financial Planning magazine reports.

Estate Planning? Forget About It

Got less than $3.5 million? Forget about a lawyer-drawn will.

Got $10 million? Not to worry. Most likely your executor can probate your estate in a matter of minutes.

For these and other stimulating insights, see Smart Money's 10 Things Estate Planners Won't Tell You.

Tech update

Andy Kessler explains Why AT&T Killed Google Voice in today's Wall Street Journal. The article is essentially an argument for allowing creative destruction to proceed in the telecom industry. BTW, I knew texting was expensive (and nearly 100% profit) but I did not realize that the a la carte fee comes to $5,000 per megabyte!

Tax Reform: How ‘Bout VAT?

Dave Carpenter's AP dispatch offers a partial answer to Jim Gust's question about tax reform. The guess that consideration of a Value-Added Tax won't get serious until after the mid-term election seems plausible.

What happened to tax reform?

According to BNA Software, Congress continues to work quietly on fundamental tax reform. However, not much has been heard from the Presidential commission on tax reform, headed by Paul Volcker.

A Brand New 180-Year-Old Business

In the age of Madoff, fairy tales like last April's post, Yes, Cindy, There is a Lobster Claus! invite scepticism.

Had a miracle really saved Maine's 180-year-old family business – the Frisbee Store and adjoining Cap'n Simeon's Galley? Memorial Day came and went. Ditto for the Fourth of July. No signs of new life.

End of fairy tale? No, merely an indication that restructuring evidently takes time. Last week Frisbee's 1828 Market and Cap'n Simeon's Galley held their grand reopening, complete with an appearance by Mr. and Mrs. Lobster Claus.

When you're driving up or down the New England coast, shop the Kittery Outlets by all means, but save time for the short jaunt down to Kittery Point and a meal at Cap'n Simeon's. The view is awesome.

Fall and Rise of the Estate Tax Exemption

That "insider tip" about Congress simply extending the estate tax for a year – thus preventing its repeal – might be on the mark. Today's WSJ suggests the House may vote to do just that.

If the one-year patch materializes, the estate tax exemption will remain at its all-time high of $3.5 million for another year. After that? As noted here recently, tax legislation sometimes takes surprising twists.

As this table (compiled for my own education) shows, the notion of how rich a family needs to be for its wealth to be redistributed has taken remarkable swings. (The exemption doesn't tell the whole story. Definitions of "estate" fluctuated, as did rates. In the mid-twentieth century, the stingy $60,000 estate exemption was paired with a separate $30,000 gift exemption.)


For a history of the estate tax, see Ninety Years and Counting.

“Grr, Yap, Snarl!”

Animal-welfare groups believe the fortune Leona Helmsley left to the Leona M. and Harry B. Helmsley Charitable Trust should go largely to the dogs. The groups have gone to court on behalf of the four-legged beneficiaries.

The Helmsley trustees disagree. See their statement.

•

Cheer up, pups! At least prospects for canine inheritance are looking up in Connecticut. H/T to the Wills, Trusts and Estates Prof for news that the state has enacted a pet trust statute.

Forewoman of Astor Jury Attacked

The Plot Thickens . . . ?

You Get What You Pay For

An article by Asher Hawkins in the August 24 issue of Forbes cites some interesting stats from FINRA, Cerulli Associates and Prince & Associates.

85 Number of financial planner “certifications.”
17% Share of advisors paid by sales commissions.
21% Share of advisors paid by client fees.
63% Share of investors with $1 million-plus planning to move some money from
current advisor.

That last stat could mean boom or bust for some investment advisors.

By most indications bank trust departments and wealth management groups have a great opportunity to be on the receiving end of the “money in motion.” Merrill Anderson can help you quickly rev up your marketing and sales efforts to take advantage of the
opportunity.

Another scenario for estate taxes

North Carolina Estate Planning Blog has suggested, based upon insider reports, that because health care reform has consumed so much of the Senate's time, the clock will run out on estate tax reform this year. In December Congress will enact a one-year patch of the estate tax, preventing its suspension next year. Then, if Congress does nothing more, a real possibility given all the partisanship, we will drop back to a $1 million exemption in 2011 and all later years, just in time to provide much needed debt service.

Which would leave in place the incentive to "pull the plug" on elderly patients in 2010—and that would save on health care costs!

Makes sense to me.

Two Toughest Marketing Challenges?

Will most Americans ever buy small, fuel-efficient cars?

Will most American investors ever seek guidance from fee-based advisers rather than brokers?

The battle to market small automobiles in this country has been long ongoing and, give or take a Mini Cooper, unsuccessful. The sprightly ad for U.S.-made Austins, left below, dates from the summer of 1930. So does the ad to its right, depicting the vehicle Americans actually dreamed of owning that year.

Click on thumbnails for larger images

The battle to convince investors that impartial advice for a fee might be cheaper than brokerage charges has also been an uphill battle. According to the Aite Group survey Jim Gust mentioned, only about 11% of investors work with independent investment advisers. The percentage smart enough to seek guidance from corporate fiduciaries remains minuscule. The great majority prefer brokers.

Will the tide ever turn? If so, how?

“Every Day, Another Maga is Born in America”

"Maga" is Nigerian-speak for victim – victim of a Nigerian scam. In happier times, the Washington Post reports from Lagos, an inventive young scammer might make $30,000 a month. Now, Worldwide Slump Makes Nigeria's Online Scammers Work That Much Harder.

CBO releases federal estate tax alternatives

The Congressional Budget Office has released a mammoth compendium of choices for reducing revenue and increasing taxes to bring down the federal deficit. Of particular interest to us are the choices for the federal estate tax. From the PDF of the report (which accounts for the shortened line length) (emphasis added by me):

Alternative 1 would set the exemption for the combined
tax at $5 million starting in 2010, index that
amount for inflation, and set the tax rate equal to the
top rate on capital gains (currently set for 15 percent
in 2010 and 20 percent thereafter). Stepped-up basis
would apply to assets transferred from a decedent. No
deduction or credit would be given for state death
taxes. This alternative would reduce revenues by
$128 billion over the period from 2010 to 2014. In
2014, approximately 5,300 estates would be required
to pay some federal estate tax under this alternative,
compared with about 58,000 under current law (after
EGTRRA’s expiration).

Alternative 2 would make the same changes, except
that instead of a single tax rate, two would apply. The
first $25 million of the taxable estate would be taxed
at the top capital gains rate, and taxable transfers
above $25 million would be taxed at 30 percent. (The
$25 million threshold would be indexed for inflation.)
Through 2014, revenues would fall by $117 billion.
In that year, some 5,300 estates would have federal
estate tax liabilities, compared with about 58,000
under current law.

Alternative 3 would set the exemption at $3.5 million
beginning in 2010, index that amount for inflation,
and set the tax rate at 45 percent. The stepped-up
basis would continue to apply to assets transferred
from a decedent, but unlike the other three
approaches, this alternative would retain EGTRRA’s
deduction for state death taxes. Those changes would
reduce revenues by $65 billion over five years. About
9,400 estates would pay some federal estate tax in
2014 under this alternative, compared with about
58,000 under current law.

Alternative 4 would make EGTRRA’s provisions for
estate and gift taxes in 2010 permanent rather than
temporary. Thus, the estate tax would not be reinstated,
and the gift tax exemption would remain at
$1 million. In addition, this alternative would permanently
retain the modified carryover basis that
EGTRRA specifies in 2010 for some transferred
assets. Together, those changes would reduce revenues
by $163 billion between 2010 and 2014, and no one
would pay federal estate taxes in 2014.

The baseline for comparison that leads all of these proposals to lose revenue is the return to a $1 million federal estate tax exemption, which no one supports. Alternative 3 is closest to what the President proposed in his May budget. I'm surprised that the loss from eliminating the estate tax completely is so low, but the substantial offsetting revenues from carryover basis are what make it so.

As trust marketers, which of these proposals would help you the most?

No surprise: Federal tax revenues plummeting

The Associated Press reports:

Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.

I'm surprised that Social Security isn't down much more, given the high unemployment rate. The disproportionate declines in personal and corporate income taxes are an indicator of how progressive the tax system has become.

I don't believe that the government's economic models predicted tax revenue declines this steep. The overdue mid-year budget review should be interesting. I predict it will be released on a Friday afternoon.

Why the Elderly Need Fiduciaries

A retired Air Force general and his wife invested millions with San Antonio broker Jeremy McGilvrey. Now most of it's gone, and McGilvrey faces a police investigation.

See extensive coverage of the story by John MacCormack in the Express-News here and here.

Estate tax resurrection

The Leimberg estate planning subsription service reports that, in its quest for more revenue from "the rich," Delaware has restored its estate tax, which had been repealed in 2005 with the final lapse of the federal death tax credit.

The "temporary" estate tax applies to Delaware residents who, through a failure of planning, die after June 30, 2009 and before July 1, 2013. Tax rates are derived from the now-repealed federal death tax credit table. The filing threshold is linked to the federal estate tax exemption, but won't go below $3.5 million in the unlikely event that Congress fails in the task of estate tax reform this year. Interestingly, it is not clear from the legislation that the full $3.5 million will be exempt from tax if the threshold is breached. According to the article, the Delaware taxing authorities are expected to clarify this in the taxpayer's favor.

When Maryland imposed a "millionaires surtax" a few years ago, the number of millionaires mysteriously dropped by fully a third in a single year. Some of them may have moved to nearby Delaware, because it was a tax haven when compared to Maryland. If so, the trend is now likely to slow.

Could Delaware's action be a harbinger of what's to come in other tax-hungry states, most notably California?

The Birth of Estate Planning

Both the Civil War and the Spanish-American War prompted Congress to tax estates – but those taxes proved temporary.

In 1916, Congress tried again: The new tax had a top rate of 10% on estates over $5 million (something like $100 million these days). This estate tax is with us still, though in much altered form.

When the 1916 tax was introduced, Connecticut insurance man Charles Ives saw an immediate opportunity:

[L]aying the foundation of the modern practice of estate planning. Ives published Life Insurance with Relation to Inheritance Tax in 1918, the Bible of estate planning at the time.

You probably know Charles Ives from his moonlighting as a Pulitzer-prize-winning composer.

Charles Ives, 1913

401(k) Expenses Handicap Small Businesses

0.49%
Annual fees as a percentage of plan assets paid by 401(k) plans of big employers – those with 10,000 or more plan participants – according to a Deloitte survey cited in the WSJ.

0.89%
Annual fees for plans with 100-999 participants.

2.03%
Annual fees for plans with fewer than 100 participants.

Money in motion

Wirehouses lost some $225 billion in client assets in 2008, according to Aite Group, LLC. The winners? Independent broker/dealers, independent registered investment advisers and online brokerages.

A 3% Real Return? "It Doesn't Sell"

From In Search of Competent (and Honest) Advisers in the NYT:

Investors focus on relative and real returns. But Thornburg Investment Management has published a report saying they should also look at a different number — the return after fees, inflation and taxes. A more realistic number going forward is around 3 percent. To achieve it, a balanced portfolio needs a nominal return in the high single digits.

George Strickland, managing director at Thornburg, said most advisers will not tell their clients this because no one wants to hear it. “The vast majority say, ‘That may be true, but that doesn’t help me promote my business. I just can’t sell 3 percent. I can sell 10 percent. I can sell 15 percent,’ ” he said.