Financial Planning to Help You Stop Worrying About Money
The post-BREXIT surge has taken the accounts we manage to all-time highs. The last month in particular has added a few more percent to the already good returns we’ve seen this year (actual return depends on portfolio).
Rather than celebrate this fact we’re viewing this increase with skepticism. Stock prices are high, corporate profits are falling, and the world seems to be tearing apart at the seams. Meanwhile the S&P 500 powers higher in a relentless Continue reading “Time for TINA”
“Boeing can afford to make costly investment mistakes, but the average retiring investor cannot.”
Major investing mistakes cost Boeing big-time last November. Although Boeing admitted no fault, they settled a lawsuit alleging they used high-priced investment options and had poor management of those funds in their 401(k). That cost them the second largest settlement of all time in 401(k) disputes of $57 Million. Only IBM has settled a 401(k) dispute for a larger amount.
Here’s the thing, Boeing can afford to make costly investing mistakes, but the average retiring investor cannot.
In working with retiring Boeing employees we found that the mistakes Boeing made are not uncommon among investors. In fact, we have too many people come to see us who have either paid too much in fees or received terrible investment advice and it ends up negatively affecting their retirement. This article will briefly talk about how to avoid these mistakes and find a better strategy.
The first thing any retiring Boeing employee should do before they roll their 401(k) anywhere is to ask about the price, fees, commissions, and anything else that will be paid. Make the advisor squirm a little by asking them to compare their product or strategy with a cheaper alternative and explain the pros and cons.
Some products (index or variable annuities and mutual funds) make it difficult to find the total fees (we even have trouble finding them all!). But, they can be high. Variable annuities may cost upwards of 3% per year and can have surrender charges that lock up your money for 7-10 years. They need these high fees and long lock up periods because the advisors can make 5-10% commission to sell these. That can be a $25,000 – $50,000 payday on a $500,000 account for a few hours of paperwork. Does that sound appropriate? We don’t think so either.
There are many reasons not to buy annuities. Please do yourself a favor and stay away from any investment that pays the advisor commissions. Contact us for more information on this.
It’s far better to select a Certified Financial Planner (CFP®) who will work with you on a fee basis. This means the planner will take a smaller amount of your investment (closer to 1% of assets under management instead of 3%) every year. A fee-based CFP® also has no way to generate commissions on your investments, and typically has no surrender charges in this situation. The beauty of this is if you become dissatisfied, you can move to a different advisor at any time. This is a much more reasonable approach, and it just happens to be how we do business… big shock, I know.
The other mistake Boeing made was not getting great advice on the quality of investments being offered within the 401(k). As an investor it’s imperative to know where the investment advice is originating from. Getting advice from a random advisor can be scary. It’s important to learn where he or she is getting their information from. If they say they “figured it out on their own” that’s not a good sign and you should move on.
After a dozen years now we’ve found a great resource in Morningstar, a Chicago based company specializing in investment analysis for planners like us. They have a great reputation and rock-solid advice backed up with a great track record that we implement for our own portfolios as well as our clients.
One of their portfolios is income focused and invests in individual stocks of well known companies (Johnson & Johnson, Kraft, Chevron, Clorox…) with growing dividends. This is what most of our retired clients are invested in and it has provided a great source of income of approximately 4-5% per year from dividends and growth as well.
There are also other resources we follow to help with investing and financial planning including Motley Fool, TD Ameritrade, Bob Doll, CFA society, CFP board… We never claim to be the smartest minds in this business, but over the years we believe we’ve found the best and the brightest and we pay for their advice to help us benefit our clients.
It’s imperative a retiring investor use a proven strategy. I won’t go into annuities again, but Boeing employees who have the guaranteed monthly pension most likely do not need more guarantees that come with annuities (depends on risk tolerance). Also, banks are not a great source of return either with rates on CD’s and money markets at historical lows.
Given the limited options for getting a decent return on investments outside the stock market, retirees have been forced to consider stocks. But how should they invest? Mutual funds or individual stocks? Growth or income? Day trade or buy and hold? Our answer is to keep it simple and use the illustration of the goose and the golden egg.
With many retirees now living three decades after retirement, spending down the total investment (a common strategy) robs the future by killing the goose. Instead, retirees should live off monthly payments the investment produces called dividends (interest from bonds). We specialize in helping retirees implement this strategy. We do this with research from experts with decades of experience.
If you’d like to talk any of this over with us please feel free to Contact Us or you can visit Our Offer page to learn how you can test drive our services free of charge. We’re happy to spend time with prospective clients reviewing their situation and doing some planning to help them determine if we’re a good fit.
Thanks for taking the time to read,
-Tim Porter, CFP®
(503) 387-3222
[email protected]
June 23, 2016
About 10pm last night we got the news that Britain voted to leave the European Union (EU). A relationship that’s been in place since 1973. It appeared this was going to be a wild day in the stock market with indications of a -5% pullback overnight, but as we watched the market open that was reduced to -3% as of the time of this writing (10am).
One reason tensions have eased somewhat is perspective. Mohammed El Erian with Allianz investments, said very succinctly, “…at least it’s not Lehman Brothers.” This quickly puts in perspective the magnitude of this change in comparison to one of the major events of the financial crisis in 2008. No, this event is more like an orderly divorce.
June 20, 2016
The Value of an Income Stream
As I sit in our office there remains 2 days 5 hrs and 30 minutes until the British exit (BREXIT) vote from the European Union (EU). This vote will decide if Britain will remain as part of the EU or if they will strike out on their own without the financial support of the remaining member countries.
Leaving the EU will have a negative impact on the UK’s credit rating as seen from this chart.
However, the BREXIT movement appears to be focused less on credit risk and more on gaining independence from a group that some feel is expensive to be apart of, and not real helpful.
Regardless, we have no way to know which way the vote will go. Polls suggest the risk of Britain leaving is subsiding which is helping reduce uncertainty, this is why stocks are up today. Most of the impact of this vote will be felt in Europe, but there will undoubtedly be ripple effects felt here in our country as currency valuations and bank stability are now global concerns. Continue reading “The Value of an Income Stream”
Will Xerox Executives be U-SERP-ED?
After addressing the challenges the Xerox salaried employee pension will have after the Carl Ichan endorsed split (article found here), I was asked to research another Xerox pension, the Supplemental Executive Retirement Plan (or Xerox SERP). I found there’s precious little information available on these plans, but what I did discover raised serious concerns.
One case study that was relevant was the Daimler/Chrysler SERP as one potential outcome for Xerox executives. In the late 90’s Daimler’s business was struggling and through a merger and subsequent bankruptcy ended up discontinuing their SERP plan. Executives fought back to retain some of their benefits, but they ultimately walked away with nothing. More details of this situation are available here from a legal firm that wrote about this in 2013.
While Xerox is not on the brink of bankruptcy, they are losing money every year and taking drastic measures to stop the bleeding. The upcoming split is being pitched as a cost-cutting measure ($2.4 Billion over three years), but some believe it is positioning the company for a sale of one of the remaining pieces. If bought, would the new buyer honor the existing Xerox SERP? The buyer of Daimler put in writing that they would.
Areas of concern:
No protection
Unlike the salaried employee pension plan that’s protected by the Employee Retirement Income Security Act (ERISA), the SERP is only offered to executives who are assumed to be able to understand the terms. This means it’s up to the execs to fend for themselves if the company goes sideways and is unable to pay.
The salaried employee pension is also protected by the Pension Benefit Guarantee Corporation (PBGC) which continues payments to pensioners (with limits) that are no longer able to be supported by the offering corporation. The SERP has no guarantee like this.
The right to change
The Xerox SERP has a caveat that allows them to change the terms at any time. Does this caveat allow them to change for any reason, or do they need to be in or approaching bankruptcy to make this change?
Document or Services?
In a statement made by Xerox and reported by Moody’s, the objective of Xerox moving forward is to maintain an investment-grade credit rating. The SERP is a financial obligation and when corporations have too many of these, they lose their investment-grade rating. How far would the company be willing go to reduce these financial obligations if they continue to lose money?
Another question is on which side of the business will the SERP reside? The stronger Services side or the legacy Document side?
Is there a solution?
Knowing these concerns, one reasonable strategy seems to be to try to negotiate a lump sum settlement.
For example, SERP benefits paying $93,000 per year for life ( with nothing continuing to a beneficiary) for a 70 year old male would be worth a lump sum of approximately $920,000 according to multiple insurance companies.
If Xerox wanted to reduce liabilities they might consider offering a lump sum of less than that to reduce obligations for the future. A concerned executive might consider negotiating a portion of their benefits rather than nothing at all if Xerox’s business continues to suffer.
If this is something you’d like to pursue, we’d be happy to discuss your specific situation with you or put you in touch with the executives we know of that are also interested in this same option. Please visit our contact page to get in touch with us.
-Tim Porter, CFP®
May 23, 2016
As we approach the summer the stock market is calm and news is light. Some developments we’re watching that could affect the markets in the near future are Britain’s proposed vote on exiting from the European Union June 23rd, the second interest rate increase in almost a decade speculated to be coming in a Fed announcement June 14th or 15th, and of course, the presidential election we read about every day.
While we wait to see what challenges these events will bring, we’ve made adjustments to the accounts and most recently finished updating our growth portfolio. In doing so we thought it would be a good time to share with our (mostly income) clients some differences between the growth and income strategies we use from Morningstar.
The goal of the growth portfolio is to outperform the S&P 500 Index over a full market cycle. Companies in this portfolio tend to be faster-growing, with both higher risk and higher return potential than the income portfolio.
The goal of the income portfolio is to earn 8-10% per year over the course of a market cycle, of which 3-5% will come from dividends with 4-6% annual dividend growth.
The downsides of the growth portfolio are inconsistency and volatility. With insufficient dividends to rely on every year and volatility 33% higher than the income portfolio, growth is good for a younger person with a longer time horizon, or as a smaller part of a whole portfolio. The income portfolio is better for investors in or near retirement looking to start making distributions from their accounts.
The total returns as reported from Morningstar of the growth and income portfolios over the last ten years are almost identical – approximately 9.4% per year. We attribute this parity mostly to the great recession we saw in 2008-9. When the economy struggles the more conservative income portfolio will have the upper hand. We would expect the growth portfolio to outperform in any decade with less of a dramatic pull back.
If this more aggressive portfolio is of interest to you or someone you know, please don’t hesitate to call so we can give you more details.
Other than the normal shenanigans of tax season, the financial world has been relatively quiet this last month. Our accounts on average registered a small gain to add to the favorable year-to-date returns, and after the dramatic start we had to this year we welcome the opportunity to catch our breath. The areas helping to steady investments are: stabilizing oil prices, persistently low interest rates, glimmers of hope in a China recovery, and no financial crisis to dwell on.
All seems well as most energy companies return to normal valuations and our growing dividend strategy appears to be outperforming the stock market. However, higher stock prices are not always good news. The stocks within the portfolios are on average fully (or 100%) valued, meaning, there are not many great deals (stocks selling at a discount) out there for us to pick up.
With that in mind, we’re looking to rebalance and sell overvalued and overallocated companies while we wait for the current earnings season, interest rates, or the next crisis to knock down stock prices so we can invest cash at more favorable levels. In the meantime, the dividends and interest, the main objective of most our portfolios, continue to roll in helping current and future retirees cover distributions they use to live on.
This quiet month was also great timing for me (Tim) to fulfill my two-week commitment to the Coast Guard for my Active Duty Training at Station Yaquina Bay in Newport, OR. During my two weeks we had a ceremony to honor the accomplishments of the crew. I was one of those privileged to be honored
by the Commanding Officer (CO) for becoming a Coxswain (boat driver) a month earlier. It was a proud moment for me and represented 3.5 years of work.
Being there for two weeks straight always gives me a better appreciation for the dedication of the active duty men and women. They are VERY good at what they do and I’m thankful for the time and effort they put in training a part-timer like myself.
As always, please call us with any questions you have. We’re making our way through our list of calls and if we haven’t reached out to you yet, you should be hearing from us shortly.
Thank you for taking the time to read,
-Bruce Porter & Tim Porter, CFP®
In mid February we wrote about the “storm” we were in as we watched the stock market plummet 10% in short order. We mentioned having the courage to endure markets like this because it’s not easy to watch emotional swings affect our savings so dramatically. Usually it takes a fair amount of time to bounce back from situations like these, however, this storm passed relatively quickly and Josh Peters, CFA from Morningstar has made recommendations that held up well.
In the first 32 days of the year (Feb. 11) the S&P was down 10% while the growing-dividend equities in Peters portfolio were down less than half that. In the subsequent 42 days of the year, the stock market has climbed back 10% and Peters’ equities have risen close to the same amount (9% according to his newsletter). This leaves anyone invested in these stocks up nicely since the beginning of the year while the S&P struggles to stay positive. (Returns will vary depending on risk and individual portfolios.)
Even though we’re thankful for the great year-to-date performance of the conservative growing-dividend philosophy, we still remain concerned about the next storm and in an effort to prepare, we’re currently rebalancing all of our accounts. This is generating trades, which will show up as notices in our client’s mailbox. These are not major changes, but are more like tweaks to ensure portfolios are within guidelines after some investments have underperformed and some have outperformed since the beginning of the year.
A few of the stocks that have outperformed are Fastenal FAST, an industrial construction supplier, and Genuine Parts GPC, an automotive parts supplier. These stocks have taken off since late January, returning 33% and 23% respectively, not including dividends. These stocks are not huge dividend payers, with yields of 2.63% and 2.41%, but we’re happy to have low yields in addition to nice growth. Once again, we credit Peters for having the foresight to recommend these stocks for us and look forward to his next recommendation.
As we work through these rebalances we’ll be calling our clients to give updates on their specific situation. We look forward to catching up on what’s going on in their lives and discussing the good news that we survived the storm!
Happy tax season,
Tim Porter, CFP®
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While we’re big fans of Xerox and the phenomenal Phaser 8560DN, a wax-based 
ink printer we’ve used for years in our office, this may be the least of their accomplishments. The contributions this 110 year old company has made to technology is quite impressive, including the computer mouse and ethernet. Now with the activist shareholder Carl Icahn in the mix the split of the company appears inevitable. Icahn will control three seats on the board of the services company, and we’re left to help our retiring Xerox clients answer the question, “Will the split affect my pension?”
Continue reading “Will the split affect Xerox’s pension?”