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A Teaching Moment for Teachers

Our teachers are a very special group. They work long hours for low pay, helping to shape the minds of our young. They are a very important part of our society. So why do the local governments that they serve allow them to be taken advantage of when it comes to their retirement planning?

I am lucky enough to have several clients who are either retired teachers or are planning to be one. In my work with them, I get to know their financial situation pretty well. While teachers don’t make a lot of money, they are one of the few groups who still receive a pension. If they qualify, and most do, the pension provides a monthly income for the rest of their life. But since the benefit amount is based on their income, they won’t be getting rich from the pension. When you add in any Social Security benefits, most teachers will be able to maintain a “modest” lifestyle.

But what if the teacher wants a little more? What if they can save a little from each paycheck to improve that future retirement lifestyle? In the private sector, many of us have access to a company retirement plan; most often, it’s a 401(k). We can have money withheld from our paycheck and have it invested automatically for our future. Our contributions are deducted pre-tax, and grow tax-deferred over the years. Teachers have access to a similar plan, but for them it is known as a 403(b).

In the private sector, the employer selects an investment firm to handle the administration and investing of the plan’s assets. For our teachers, the School Board selects a handful of “approved” providers from which the teachers can place their retirement funds. The problem comes from this list of “approved” providers.

It has been shown, and it just makes sense, that the costs of an investment portfolio are a huge factor in its long-term performance. At Rall Capital Management, we know that we can’t control the financial markets, so we don’t try. Instead, we work to control what we can control, one of the most important being the costs involved in managing the account.

Most of the plan providers that teachers have to choose from are insurance companies. That usually means that the retirement contributions are being invested in an annuity contract, often with layers of different types of expenses. Most of the other providers on the “approved” list are investment firms that put together a menu of funds for teachers to choose from. All too often, the funds on the menu have very high expense ratios, creating an unnecessary headwind for account performance.

The expenses in the plans that are available to our teachers are among the highest. In fact, the New York Times did a 5-part report highlighting the abuses across the country. The first part of the series is entitled, “Think Your Retirement Plan is Bad? Talk To a Teacher.” I think the title says a lot. The article says a lot more. And it showed me that the problem is not just local to Brevard County’s teachers. It’s like this across the country. Why?

I’m not trying to be conspiratorial (or maybe I am) but I would dare to say that there’s some combination of politics and money at the core of the “approval” process. This system has been in place for years and any change is now subject to inertia. There’s not enough of a rank and file movement to improve the choices because most teachers don’t know. It’s been widely reported that most people don’t know how much they are paying to have their accounts managed. Teachers are no different.

It’s so much of a problem that I will typically advise my teacher clients to stop participating. What?? Advise a client to stop contributing to their retirement plan? No; we just advise them to redirect those contributions. Instead of investing in high cost annuities or other funds, I often recommend that they fund a Roth IRA instead. Roth IRA contributions are made with after-tax money and you lose the ability to have it taken directly from their paycheck, but that’s a small price to pay for the money you’ll save.

Inside the Roth, you can invest in low-cost funds that are often 1/10th the cost of many of the 403b accounts I’ve seen from my teacher clients. A 1-2% difference in costs over a number of years will make a huge difference in the value of your retirement account years from now.

One big difference between the 403(b) plan and the Roth IRA plan is the amount you can contribute. Like the private sector 401(k), participants in a 403(b) can contribute up to $18,000/year; $24,000 if you are over 50. You can only contribute $5,500 a year into a Roth IRA, or $6,500 if you are over 50. If you do have the ability to contribute more than the Roth maximum, one option would be to direct the excess to the 403(b) plan.

To become successful financially, you must do a lot of little things right. Not paying exorbitant investment expenses is one of those things.

So, if you are a teacher, here’s your homework: evaluate whether it makes more sense to fund your 403(b) account, or whether it would be better to fund a Roth IRA. If you are not a teacher, but you know one, please forward this article to him/her. They should know this!

A New Year's Resolution We Should All Try to Keep

The beginning of a new year always brings us the opportunity to make positive changes in our lives. Over the years, we’ve all set resolutions to lose weight, quit smoking, save more money, spend less, spend more time with our loved ones, etc. But there’s one resolution that I’ve never seen anyone talk about; one that we should really all consider.

I’m talking about creating or reviewing our estate documents. Yes, estate planning. Ok, so now that I’ve probably lost half of the people reading this, I’ll speak to the other half. Nobody likes to think about, let alone do, estate planning. We don’t want to think about our death, even though I’m pretty sure it’s eventually going to happen to all of us. But planning for how things are handled at our death is only one part of estate planning. The other part is planning for the possibility of becoming incapacitated. But no one likes to think about the possibility of a terrible illness or accident either.

As much as we don’t want to go through the estate planning process, it’s important that we do so. After all, estate planning is simply capturing the way we want things to be handled in the event of our death or incapacity. And who is better equipped to make those decisions besides us? And, if we take care of it, then we spare our loved ones from having to make hard decisions during a very difficult and emotional time.

For most people, an estate plan consists of a few simple documents. First, there’s a will. The main purposes of the will are to name the person you want to handle your estate and to document how you want your assets distributed when you pass away. But, if you are a young parent, there’s another very important reason to have a will. It will let the courts know who you want to serve as your child’s guardian if something were to happen to you.

Then there’s a document known as Health Care Directives. It can serve as a living will, which will detail the level of medical treatment you desire in the event that you are not able to communicate. It will also allow you to name a person who you want to make health care decisions for you if you can’t.

Next, there’s a Durable Power of Attorney. This document allows you to appoint the person who you would like to make financial decisions for you if you are unable to.

Finally, you should also consider your digital estate plan. This is something relatively new, but it reflects the age in which we live. If something happens to you, how do your loved ones handle your digital assets like your online photos and Facebook account? And how do they access your computer and passwords to all of your online accounts? Having a plan in place to answer those questions can make it much easier on our loved ones.

It is often said, that if you don’t have a formal estate plan in place, then your state has one for you. It’s true, the state has regulations in place on how things are handled when someone does not have estate documents. But wouldn’t you rather make the decisions than some government agency?

So, if you don’t have an estate plan in place, you could make it a resolution to get it done as soon as possible. There are a number of ways to get it done. We always recommend seeing an attorney who specializes in estate planning; then you know that it’s done properly. And, it’s not very expensive.

If you do have an estate plan in place, make a resolution to review your plan to see if it’s still appropriate. Lives change and laws change, so it’s important to make sure your plan is still up to date.

Putting an estate plan in place is not fun, and involves thinking about some unpleasant possibilities. But, but once you have it done, I can guarantee you’ll feel good about having checked it off your to-do list. And then you can get back to working on those other resolutions.

Happy New Year - 2017!

Happy New Year!

The old cliché’ is that the time goes by faster as you get older. Well, I seem to have reached the age where Father Time feels like he’s running at full speed. I hope that you had a warm and wonderful holiday season. We’d like to start this year with a wish for a happy, healthy, and prosperous 2017 for all of us!

2016 was quite a year. When I looked back at the news stories that made headlines this year, it was pretty amazing. Obviously, the presidential campaign and the election were the stories that gained most of the attention throughout the year; but there were plenty of other headlines that were of interest.

Sadly, several terrorist attacks once again dominated the news and kept us all on edge. There were major attacks in Turkey, Brussels, Nice, and Berlin. There were also several events on our soil, the closest to home being the devastating attack at the Pulse Nightclub in Orlando. We also had the ambushes on police departments in Dallas and Baton Rouge.

We had to deal with news like the Zika virus, the transgender bathroom issue, creepy clowns, the Wells Fargo scandal, and Hurricane Matthew. Although, for most of us here in Central Florida, we got lucky when it came to Hurricane Matthew; not so much for our friends up the coast in North Carolina.

Then there were those stories that were harder to classify as "good" or "bad". The big news this summer was Brexit, England’s decision to leave the European Union. Also in the “not sure if it’s good news or bad news” category, we had the breakup of Brad and Angelina, or Brangelina, and the Pokemon Go craze, which seems to have already mostly faded away…thankfully.

But it wasn’t all bad news last year. It was announced that NASA’s Kepler Mission had discovered 1284 new planets. We saw self-driving cars finally making it to the marketplace, at least for limited commercial use. We had a peaceful and fun Summer Olympics, although Ryan Lochte tried to spoil that for us. 2016 also brought us the Chewbacca Mom. If you don’t know what that means, Google it. She’s had 135 million views. You will shake your head, but you will laugh.

Bob Dylan won a Noble Prize in Literature, and we saw the city of Cleveland win their first sports Championship in more than fifty years. But of course, the big sports story of the year was that the Cubs winning their first World Series in 108 years.

We lost of lot of famous people in 2016. The band that makes up Rock and Roll Heaven got some new talent this year with the passing of David Bowie, Prince, George Michael, Glenn Frey and Merle Haggard. In the movie and television category, we saw Gene Wilder, George Kennedy, Garry Shandling, Florence Henderson, Zsa Zsa Gabor, Patty Duke, Carrie Fisher and Debbie Reynolds all take their final bow. We lost some legends in the sports world, most notably Muhammad Ali and Arnie Palmer. Sports enthusiasts also mourned the loss of Craig Sager, Gordie Howe, Pat Summitt, Buddy Ryan, and Jose Fernandez.

Beyond sports and entertainment, we lost some other notables. John Glenn, an American Hero, took his final journey. Antonin Scalia, Nancy Reagan, and Janet Reno also passed this year. And Fidel Castro is finally gone from Cuba.

When we turn our attention to how the investment markets performed in 2016, we see that it was most likely a decent year for your portfolio. US Stocks had a pretty good year. After the worst start of a year ever, the equity markets recovered, and then rallied after the election to hit new all-time highs. In the final weeks of the year, the Dow came close, but couldn’t break through, the 20,000 level.

Bonds had a bit of a volatile year, but basically ended up the year about where they began. The 10-year US Treasury note started the year with a yield of 2.27%, hit an all-time low of 1.36% in July, and move higher at the end of the year, finishing 2016 at 2.45%.

Oil prices hit bottom in February, sliding into the mid-$20s for the price of a barrel. But since February, OPEC seems to have gotten serious about cutting production, or at least promising to do so, and prices have doubled since then.

At Rall Capital Management, we diversify your portfolio by asset class. A quick review of the performance of the asset classes we use shows that the portion of your portfolio allocated to US stocks gained about 13%. Stocks from developed international countries didn’t fare as well, showing a gain of 2-3%. Emerging Market stocks rallied about 12%, and real estate also had a pretty good year, up about 8%. On the bond side of the portfolio, short-term bonds were up just over 1%; intermediate-term bonds were up 2-3%; and Treasury inflation-protected bonds gained a little over 4%. Of course, the performance of your portfolio depends on your specific allocation and any cash flows into or out of the accounts.

It was a good year for Rall Capital Management. While there were a number of positives that we could reflect on, the highlight of the year for our firm came in July. TD Ameritrade, the custodian we use to hold our clients’ assets, selected us to be the subject of a promotional video. They wanted to capture our story of being a family-owned-and-operated advisory firm and to learn more about us and our business. They sent a professional film crew to spend a couple days with us, in both business and personal settings. We recently received the videos that they produced and are thrilled with them. We just placed them on our website and would like to invite you to take a look. You can find them here.

It is a new year, and like many of you, we have some New Year’s Resolutions too! We will be introducing some new tools that we will use to help make sure you are on track to reach your financial goals. We are looking forward to sharing them with you.

Thank you for being a friend of our firm. We wish you and your family the best of everything in the new year.

The Election and Your Portfolio - Part Two

In this short video, we address the surprising results of last night's election, and the just-as-surprising turn that the market took in response.

Bob Rall, CFP®

The Presidential Election and Your Portfolio

 

Here's our take on the upcoming Presidential Election and how it might affect your portfolio.

 

 

Bob Rall, CFP®

Hurricane Matthew - We Dodged a Bullet!

This message is mostly intended for our clients and friends along the east coast, but there is a good lesson here for all of us. When Hurricane Matthew came to visit recently, there was the potential for devastation like we haven’t seen since Hurricanes Andrew and Katrina. Until the last minute “wobble” that took the storm 15-20 miles farther east than projected, it looked like it was taking aim directly at Cape Canaveral. Had the eye of the storm passed over that area, we would have faced untold damage from winds and possible severe flooding from the projected ocean surge. We definitely dodged a bullet!

We hope that, by now, everyone in the Central Florida area has finished cleaning up and making whatever repairs were necessary in the aftermath of the hurricane. We have heard from many of you and are happy to report that most had only minor damage, if any, and were mostly dealing with yard cleanup; although, I have heard from a few that are going through some major repairs. And we only need to look to the deaths and devastating flooding that occurred in North Carolina to realize how lucky we were.

A major storm like Matthew is a great reminder of how important it is to make sure that your homeowner’s and other property insurance coverages are adequate. As the storm approached, my wife and I and our pets evacuated our home on Merritt Island for the safety of the mainland. I must admit that, as much as I dislike paying my flood insurance premium each year, I felt a certain degree of comfort that if a storm surge damaged our home, we were covered.

If you haven’t reviewed your property insurance coverages recently, this should be your wake up call. This is especially true for those of us who live in Central Florida, where hurricanes are a part of life. If you are unsure of your coverages, or would like to have us review them for you, please reach out to schedule a meeting. Remember, that as a Fee-Only advisor, we don’t sell insurance products. Our motivation is simply to make sure that you are properly covered so that when the next big one heads our way, you have the peace of mind that comes with knowing that you’re covered.

By Bob Rall, CFP®

It's Never Time to Time the Market

[embed]https://youtu.be/fqbuETXCzRE[/embed]  

In this week's video blog, we explain why it's never time to time the market.

 

 

It's Summertime! A Perfect Time for a (Credit) Freeze!

Originally posted July 28, 2014.

The words "identity theft" in red binary code on computer monitor.

The words "identity theft" in red binary code on computer monitor.

One of the first steps in building a financial plan is to make sure that the assets you own are properly protected.  When we talk about protecting your assets, most people think of making sure their auto, homeowners and liability insurance policies are in place and sufficient.  If you are working, it's also important to make sure you are protecting your biggest asset, which for most people is the ability to get up and get out the door to earn a living.  We protect that asset using disability and life insurance.

But this article is going to focus on an asset you have worked hard to build and protect, and which is under constant attack.  We are talking about your identity.  Identity theft occurs when a thief pretends to be someone else by using their personal information to gain access to their credit, or other resources and benefits.

Identity theft is a term that was originally coined in 1964 and has been a growing problem for years. Advances in technology have turned this into a huge issue over the last several years.  Last year a new identity theft victim was hit every two seconds in America!  The number of victims climbed to 13.1 million in 2013 - an increase of more than 500,000 from the year before.

While it is obviously not possible to literally steal an identity, there are several ways that criminals make it pay:

  • Criminal identity theft occurs when someone is arrested for a crime and poses as another person to law enforcement.

  • Financial identity theft happens when the criminal uses your identity to obtain credit and buy goods or services

  • Identity cloning is when a person uses another person's information and assumes that identity in their daily life.

  • Medical identity theft occurs when the criminal uses someone else's identity to obtain medical care or drugs.

  • Child identity theft, which is generally the hardest to detect, is when the criminal uses a minor's Social Security number for some personal gain. The thieves can often establish lines of credit, get a driver's license or even buy a house using the child's identity. Sadly, this version of the crime is often carried out by a family member or friend of the family. Also, this type of identity theft can go on for years because the damage can go undetected until the child grows up and tries to access or establish credit.

As a financial advisor, I’m going to focus on the financial identity theft problem.  The potential for being a victim will only grow as we continue to move more of our financial lives online, where the thieves will continue to focus more and more attention.  So, what can we do to protect ourselves?  

Closeup of ice crystals with very shallow DOF

Closeup of ice crystals with very shallow DOF

Freeze It

While there are some companies that say they offer "identity theft protection", they tend to be expensive and of questionable value.  The single best thing you can do is to freeze your credit.  A credit freeze will prevent anyone from opening new credit in your name.  It's also very simple to do and it's inexpensive...in fact, it's free in some states.  It used to be that you had to be a victim of identity theft to get the bureaus to freeze your credit.  But a few years ago, the three major credit bureaus gave everyone access for a small fee...usually $10 per agency.  Each state has their own rules, but in Florida, the fee to freeze is $10 per credit bureau… and it’s FREE if you are over 65!

If you freeze your credit, there is no impact on the existing lines of credit that you have.  You can go on using whatever credit lines and credit cards you have just as you were before the freeze.  You can also “thaw” your credit freeze if you need to access your credit files for a creditor, like a new car or home loan, or a new credit card.  There is typically a $10 charge to thaw your account.

Computer hacker stealing data from a laptop concept for network security, identity theft and computer crime

Computer hacker stealing data from a laptop concept for network security, identity theft and computer crime

Protect your financial identity by going online to the three credit bureaus, Equifax, Experian, and TransUnion.  Follow the directions at each of the links to freeze your credit with that bureau. After submitting your request, you will be given a Personal Identification Number (PIN) that you need to lock away and make sure you know where to find it.  This PIN is what you will need to thaw your credit when you need to. The next time that you need to apply for a new line of credit, ask your lender which credit bureau they'll be using, and you can unfreeze just that one.

So, for a total of $30 you can lock down your financial identity so that no one can possibly access credit in your name…even if they have all of your personal information.  A thief can have your social security number, date of birth, and even your driver’s license number, but if you have put a credit freeze on your finances, it won’t do them any good.

For more ways to protect yourself in the digital age, see our newest blog post!

By Bob Rall, CFP®

What is Your Most Valuable Asset?

Your most valuable asset might not be what you think it is; in this video, we reveal what it really is for most people, and list some of the ways you can protect it.

End of Quarter Update for Q2, 2016

End of Quarter Update for Q2, 2016

I know that it’s hard to believe, but a quick look at the calendar will confirm, 2016 is more than halfway over! Whoever said that time goes by more quickly as we get older was certainly correct.

On June 30th, we ended another quarter, and the end of a quarter is always a good time to update our clients on what’s been happening in the financial markets.

Obviously, your investment portfolio is an important part of your overall financial picture. However, it’s not the only part. We want to make sure that your retirement plans, estate documents, insurance policies, and other pieces of your financial picture are in order as well.

But, it is the end of a quarter and that makes it a good time to review the investment piece of your financial picture. So, let’s dig in…

Overall, it was a pretty decent quarter for a diversified portfolio. I’ll run through each asset class that we use in your portfolio for a bit more detail.

US stocks were up a little more than 2% for the quarter. As of June 30, the Total Market Index, which includes over 3,000 US stocks, was up 4% year to date, although the index was down a little more than 1% for the month of June because of the Brexit selloff.

International stocks have been a bit of a drag on the rest of the portfolio. When I talk about International stocks, I’m referring to the developed markets, which includes Europe, Australia, and the Far East, and includes large companies, medium sized companies and small companies. The index was up for most of the second quarter, until the Brexit selloff hit and wiped away the gains. They finished flat for the quarter, but had a tough month in June, down 5% for the month. The index is up just over 1% year to date, as of June 30th.

The next asset class provided a strong lift to our portfolios, after a tough year in 2015. Emerging Markets consist of companies in countries which are still developing, like Russia, China, India, Latin America, and similar places. This can be a dicey asset class, which is why we give it a small allocation in our portfolios. But so far,this asset class has been hot. We saw a gain of 3% in the month of June, 4% for the second quarter and 11% year to date.

Speaking of hot asset classes, the real estate sector has been the portfolio leader for the year. Remember that in an investment portfolio, real estate means the companies that own real estate of some type and generate rental income from it…like hotels, storage facilities, apartment complexes, and malls. This asset class gained 7% in the month of June alone. It finished up 9% for the second quarter and has given us gains of 14% year to date.

Next, we move over to the bond side of the portfolio. Like I’ve often said, bonds will never leave us too excited, or too depressed. However, a continued drift lower for interest rates has led to some decent gains on the bond side. Short term bonds, those with maturities of less than 3 years, are up just over 1% for the year, as of June 30th. Intermediate term bonds, those with maturities from three to ten years, are up a little more than 3.5% year to date and a little more than 1% for the quarter. TIPS, which are Treasury Inflation-Protected Securities, basically a government bond with an inflation rider, are up more than 3.5% year-to-date, and 2% for June and for the second quarter.

So, what does that mean for you? It might mean that your portfolio will be a little overweight in the emerging markets and real estate asset classes because they’ve moved up a good bit. It also means you might be a little underweight in international stocks, and maybe bonds. If so, when we do our regular monthly rebalance, we’ll selling a bit of the asset class that you are overweight in, and buying some of those where you might be a bit underweight. Remember, buying low and selling high is what we’re trying to do.

That’s it for portfolio news. The quarterly reports were uploaded to Document Center at the end of last week, so don’t hesitate to call with any questions once you’ve received them. One improvement we’ve been able to implement this quarter is that, in the interest of doing everything we can to protect your private data, we’ve been able to block out all but the last four numbers of your account numbers, so that if the statements were to somehow fall into the wrong hands, they won’t have any more details on your account than the last four digits.

And finally, we’ve just rolled out a new website and would love for you to check it out (if you're viewing this as a blog post, you've already seen it!) The address is the same…www.RallCapital.com. But the site has been updated and has some new features we would like you to try. Any feedback you might have on the new site is also welcome and appreciated.

Thanks for being a valued client of Rall Capital Management.