November 12, 2015


Dear Friends,
You’ve no doubt read about some major changes recently passed in Congress that may affect couples or ex-spouse strategies. To address this, I’d like to share Robert Powell’s MarketWatch article, “Social Security Changes Will Hit Couples and Divorced Women Hard.
Additionally, many people are concerned with planning when and how to best begin taking their Social Security. In another MarketWatch article by my friend Andy Landis, he spells out “5 Bad Reasons to Take Social Security Early.”
Personally, I waited until 70-1/2 because I didn’t need the money to live on. However, if you need to take money out of savings, take it first from taxable, not tax-deferred accounts, as you’d need to take out more to pay taxes on the tax-deferred.
My advice is that if you have an advisor, speak with him or her and have them explain the changes and how you might adjust your strategies if necessary. If you don’t have an advisor, you can hire one by the hour. The Garrett Planning Network, offers fee-based advice nationwide. Of course, as is true in all professions, advisors have different degrees of competence. To learn how to hire the best and get the most from an advisor, read “Get Smart or Get Screwed“; a free eBook is available at the  homepage of my website.
Andy’s article reminded me of the famous Stanford Marshmallow Study that tested young children for delayed gratification. The study concluded that those who could exercise self-control and wait to eat the yummy marshmallows were more likely to be better students, more socially adjusted adults, superior parents, and do better in life. For more on the Marshmallow Study and what it might mean 50 years after its inception, you may enjoy reading this article with the study’s developer, psychologist Walter Mischel .
Below, please find my answers to some readers’ questions.All Q&A’s are archived at my website. Thank you, as always, for helping spread the word about sound investing and how to enjoy retirement with more money, less risk and more peace of mind.
To your success,
P.S. A free download of Chapter 10 from my book,Financial Fitness Forever, is now available at my website: Moving to action: Twelve numbers to change your life. Please share.
Questions & Answers

Q: How do I figure out what percentages I need in a 50/50 portfolio?


Your ETF recommendations are for a 60% equity/40% bond and 40/60 mixed portfolio. After looking at your Fine Tuning Your Asset Allocation table I’ve decided I should be 50/50 stocks and bonds. How do I figure out what percentages I need in each ETF?
A: Here’s one way to determine the holdings in a 50/50 portfolio. Take the percentage of each equity asset class in the 100% equity portfolio and calculate that percentage of a 50% equity position. For example, in the 100% equity portfolio I recommend 12% of the portfolio be invested in small cap value. To determine how much small cap value to hold in a 50/50 portfolio, multiply 50% times 12%, or 6%.

Q: What’s better than money market funds?


I’ve been worried about rising interest rates for years and sitting in money market funds for most of that time. What do you recommend that’s better than money market funds?
A: You are certainly not alone in your concern about higher interest rates. Most experts have been wrong for years. I think you will find this MarketWatch article of interest. It shows how wrong Wall Street has been on interest rates since 2009. The article also includes a chart on how wrong professional forecasters (surveyed quarterly by the Fed), have been on interest rates for 10 years. My recommendation for the last 15 plus years has been a balance of short-to-intermediate term bond funds. It remains the same today. But for investors that simply want to do better than money market funds, I suggest a short-term corporate bond fund at Vanguard or Fidelity. Before you make the leap, please look at the losses of VFSTX for 2008 (-4.7%). Those losses were not about the fear of rising interest rates but concern for the long-term stability of the U.S. market. Also note the gain in 2009 (14%) when trust returned to the market and interest rates were reduced to help businesses and consumers.

Q: Should 401(k) funds be included in a portfolio review?


I recently started working with a Fidelity advisor. I was surprised he did not address any funds in my 401(k) plan, which is about 6% of my investable assets. Shouldn’t these funds be included in a comprehensive portfolio review?
A: Your experience is not unusual.  A lot of advisors, brokers and insurance agents only focus on the portion of a portfolio where they get compensated. I think that’s unacceptable. I believe it’s the responsibility of an advisor to make recommendations on all portions of a portfolio, regardless of compensation. That would be true of any professional who wants to be your advisor for a lifetime. One of the reasons I am an advocate for independent advisors is their career path is normally to be an advisor for the rest of their career. They are similar to a family doctor. They are not working their way up the corporate ladder of a large organization like Vanguard, Fidelity, Schwab, etc. There is nothing wrong with eventually being the head, or high ranking and high paid officer of any of those companies. It’s simply not the path of a committed advisor.
Q: Should I use my IRAs to hold real estate funds so I minimize the tax liability?
A: Yes. IRAs and 401(k)s and other tax-deferred investments are appropriate for REITs. There is a lot to know about REITs in terms of taxes and investment strategies. Some REITs hold strictly equity positions while others specialize in holding mortgages. For a better understanding of REITs I suggest a reading of the Investopedia page on the subject.
Q: Should I invest in a managed account instead of an index fund?
I just invested about 15% of my investments in a Fidelity S&P 500 managed account with expense ratio of .4%. The advisor says the managers will manage tax-efficient strategies including tax loss harvesting and tax lot management that will “ultimately put more money into my pocket.” He is recommending I invest in this strategy instead of putting the money into Spartan 500 index or Vanguard 500 index. What do you think?
A: The strategy has only been managed for 3 years so they have not had a chance to see how it works in good times and bad. While their goal is to produce better after-tax returns than the S&P 500, the odds are not in their favor. The first challenge is they will only hold about 150 stocks. That means they have to identify the better performing S&P 500 companies, and then manage the taxes through tax-loss harvesting. The probability is the return will be lower than the S&P 500 due to fees that are about 8 times higher than the index.
Fidelity Magellan, a famous Fidelity fund, has some of the best managers in the industry and holds about 150 companies, mostly from the S&P 500 like the strategy in question. Over the last 15 years they have underperformed the S&P 500 by about 2% a year. There is absolutely no way to know which stock pickers (mutual funds) will do the same, better or worse than the S&P 500. But you can be guaranteed getting the index return with a very low fee. Their claim should not be that they WILL “ultimately put more money into your pocket.” Their claim should be they MIGHT make you more money. They could even add, “We probably won’t but we guarantee we will try.”

Q: What Fidelity inflation-protected fund do you recommend?


I am trying to set up an account using your Fidelity recommendations. According to the Fidelity folks, I cannot purchase the Inflation-Protected Bond Index (FIPBX) you recommend. Do you have another Fidelity fund to use in its place?
A: My mistake. The fund I recommended is only available for 401(k) plans. I have changed my Fidelity portfolio to reflect my new recommendation. FSIYX is an inflation-protected fund with a $10,000 minimum and .10% expense ratio. For those who can’t meet the minimum, I recommend FSIQX, with a $2500 minimum and a .20% expense ratio.
Q: Why do you recommend Vanguard International Value fund, and why is it such a large allocation?
A: One of the challenges in matching my recommendations for funds at Vanguard, Fidelity, and T Rowe Price is the lack of funds for all the asset classes I recommend. In the case of Vanguard, they are missing an international small cap value fund. To make up for the missing fund I have increased the exposure to their large cap value fund. I will be updating this portfolio in January.
Q: After fully funding my 401(k), what should I do next? Should I put additional money in a taxable account or an IRA?
A: I assume the additional money is for retirement so I would normally recommend putting the additional money into an IRA. Consider putting the next money into an IRA for a non-working spouse. In many cases I find couples overlook the ability to set up an IRA for a spouse who doesn’t have any earned income. If you are close to retirement and all of your money is in tax-deferred investments, it makes sense in some cases to put some money aside in a taxable account for the first years of retirement. This is one of those decisions that depends on your personal situation.
FYI,if you are planning for 2016, contribution limits to 401(k) retirement plans for next year remain unchanged based on inflation adjustments made by the Treasury Department. Maximum contributions to 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan for 2016 will stay at $18,000, with 401(k) catch-up contribution limit for employees age 50 or older remaining at $6,000. Also, annual contribution and catch-up contribution to an IRA for 2016 will be capped at $5,500 and $1,000, respectively, the same as the limits imposed for 2015.
Q: Do you still think DLS is a good ETF to add to my Vanguard portfolio?

I didn’t purchase it yet because Vanguard charges a fee. However, I found out it is only $7 a transaction for the first 20 trades, so I’m thinking about plowing in $10,000. Thoughts?
A: I like Wisdom Tree International Small Cap Dividend Fund. Vanguard doesn’t have an international small cap value fund, so DLS is a good choice for those who don’t mind paying a small commission. For a $10,000 investment $7 is certainly justified. When I update my portfolios in January I will add recommendations for funds to fill in the missing asset classes.
Q: If I retire at 52, what percentage of assets can I use each year and not run out of money? 
I’m 52 and have a good size portfolio. I plan to retire soon. I’ve read all your articles and heard your podcasts and understand the 4% rule and the flexible distribution approach. These all seem to focus on someone nearer the “normal” retirement age. What percentage of assets can I use each year and not run out of money?
A: It depends how much you have saved and how much money you need to meet your cost of living. Let’s assume you could live on $40,000 and have $1,000,000 to invest. This suggests you shouldn’t take anymore than $40,000 as you will need to adjust future payments by inflation. With interest rates being so low, many advisors recommend a 3% distribution rate in this circumstance-especially considering your young age.
But if you had $1,500,000 and a need for $40,000, I think you could take out 4.5% or 5% on a variable basis. That would allow taking more than you need. If I were in your position I would find an experienced advisor to look at all the variables in your situation.

To learn how to hire the best and get the most from an advisor, read “Get Smart or Get Screwed“; a free eBook is available at from the homepage of my website.

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