Moneytalk with Bob Brinker Show Report

Items Covered

• New Bull Market Highs
• Affect of High Inflation on Stock Market
• Brinker's Stock Market Outlook
• Sequestration
• New Taxes to Avoid Sequestration

Moneytalk with Bob Brinker Commentary for February 24, 2013 Radio Show

New Bull Market Highs

Bob Brinker did not talk about the stock market hitting a new bull market high this weekend.  Bob went right into a discussion of the sequestration and ways to raise taxes such as taxing the $16,000 paid by employers for the average families health care.    I find that rather odd as some of us are very happy our portfolios are at record all-time highs!  

I wrote an article for Seeking Alpha about the new highs on Friday.  You can read it at:

• SPY Near Record Highs As ECRI's WLI Continues Lower For A Second Week

Here is a chart showing SPY, the exchange traded fund for the S&P 500, making a new record high last week after including dividends paid.

Affect of High Inflation on Stock Market

A caller asked Brinker what affect high "runaway" inflation would have on the stock market.  Brinker said this would be the worst case thing for stocks which is why you want a system that prevents this.  He then talked about how the Federal Reserve has a dual mandate from congress for stable inflation and maximum employment.

Read more about this at the Chicago Fed's web site The Federal Reserve's Dual Mandate

"The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."

Make sure you read: Terry Savage: Fed Destroys Retirement Plans

Brinker's Stock Market Outlook

Kirk Here: Bob Brinker has been "Fully invested" in the stock market since March 2003.  His "balanced" model portfolio three is currently about two thirds in equities and one third in fixed income.  The other two model portfolios are 100% in equities.  My opinion, he takes excessive risk with these portfolios because if the market crashes, like it did in 2008 with him very bullish, he can screen calls and advertise his fixed income advisor newsletter.  For more, read:

• Bob Brinker's Asset Allocation History

Moneytalk with Bob Brinker Commentary for February 17, 2013 Radio Show

The following commentary is from my "Retirement Advisor" writing partner,  David Korn. 

STOCK MARKET

Brinker Comment:  The stock market indexes are all at or close to their 2013 year-to-date highs and for the most part the highest levels in several years. Those indexes have been strong year-to-date.  Having said that, there is a lot of bullish sentiment.   A lot of the indicators are showing a lot of bullishness.  Usually, at some point, that kind of over-zealous participation is very frequently cause for profit taking.  So if you see some profit taking coming into the market, you should not be surprised given the high level of sentiment in a number of indicators.

EC: It is relatively rare for Bob to make these kinds of clear cautionary remarks.  His comments about sentiment mirror the focus of the e-mail I sent to subscribers one week ago tonight.  He and I are on the same page on this issue.

SEQUESTTRATION


Brinker Comment:  The big story this weekend is the sequestration that takes place on March 1, 2013.  That is when the automatic spending cuts take place.  This is basically an $85 billion mandatory spending cut program agreed to in the summer of 2011.  The President this weekend is announcing that he has an idea to reduce the deficit by $1.5 trillion over 10-years, which is a significant amount of money even though our deficit is high.  He wants to speak with the House to get this done.  On one side, people say they don’t want to cut spending by $85 billion because that will hurt the economy, whereas others say that’s a drop in the bucket and if you can’t handle this kind of cut, what can you handle?

If you can get the annual deficit down to 3% or less of GDP (total goods and services) you can probably grow your way out of the problem.  Our country was at a point where our annual deficits were 10% of GDP but now we are down to 6% which is a major step forward but is still way to high.  We have $16.5 trillion in debt and the only reason we are getting a pass on it right now is because interest rates are near zero, but we have to pay the interest on that.

EC:  Read “Obama chief of staff warns of sequester” at the following url: http://tinyurl.com/beyqxep

New Taxes to Avoid Sequestration

Brinker Comment:  The President is talking about tax increases with the wealthy the target.  They got hit with the 2013 increases, the affordable care act and now the “balanced approach” discussed by the President with five areas at risk for tax increases which can include reductions in tax deductions.  Bob said we are not going to be talking about marginal rate increases because that battle was fought in December.  But reductions in deductions are on the table.  Bob discussed the various potential areas for increasing tax revenue.

Mortgage Interest Deduction. One of the things that is inherent in changing the mortgage interest deduction is taking the money out of the pocket of high earners and the way you can do that is eliminating part of the mortgage interest deduction some high earners tend to have large mortgages (if they have one). Right now, there is a cap on mortgage interest for mortgages over $1 million.  They could reduce that cap as it is currently a high level which is a gift to high earners.  If they reduced that they would raise tax revenue.  Another mortgage-related deduction on the table is the second home deduction which is very valuable for high earners who have a vacation home.  And finally, there could be a “means test” used to determine whether you make too much in earnings to allow you to take the full mortgage deduction.

Deduction for State and Local Taxes.  Right now you can deduct your real estate taxes, your sales taxes, etc. for those who itemize.  The last year we have numbers for this is 2010 and taxpayers deducted $260 billion in state and local taxes.  If you took 20% of that, you would increase revenue by $52 billion a year.  Once again, this would be skewed to high earners.  The camel’s nose on this one is already under the tent because they have already eliminated the state and local tax deductibility for victims of the alternative minimum tax.  So keep an eye on this one.

Charitable Deductions.  The President has already proposed a cap on the deductions to charity.  They could easily set an income threshold like they do for medical expense deductions.

Employee-Sponsored Health Care Benefits:  There are 150 million beneficiaries of this.  If you work for a company that pays for all of your health care, you get that benefit without being required to pay taxes on that benefit.  If your neighbor pays his own premium, he doesn’t get a tax break on it.  The average premium per family is $16,000.  If they made that taxable, that would be a tremendous amount of money.  The joint committee on taxation estimates this is $150 billion annual revenue!

Municipal Income Tax:  Right now, municipalities are benefiting from near zero rates.  They could cap the amount of income you can earn tax free.

Bob said the overriding theme in all of the ways the government wants to bring in revenue is to go after the high earner.

EC: Republican Senator John Barrasso said today that the country should be prepared for sequester because it is going to happen on March 1st.  Read more here: http://tinyurl.com/a2pv6kt

Check out these portfolios at record highs:

Kirk Comment:  Read: Best Retirement Portfolio For You

Terry Savage: Fed Destroys Retirement Plans

I got this great summary in an email from Terry Savage that I want to pass on to my readers.

Savage Truth:  The Fed is Destroying Retirement Plans!

The Federal Reserve is trying to save the economy – but it is killing retirees’ financial plans.  This prolonged period of low interest rates has been devastating to those who planned to live on their interest income.  And for those approaching retirement, it means you may need much more money to afford retirement.

Chicago-based Morningstar, the largest provider of 401(k) managed accounts with more than 800,000 participants, has just announced it is changing its retirement modeling program because of the Fed’s actions.   And whether you’re just in the “saving for retirement” stage or the “withdrawal planning” stage – or in the midst of actually trying to live on your savings – you might want to reconsider your plans, too!

Taking Money Out

How much can you withdraw from your retirement accounts every year and not run out of money before you run out of time?  That’s the overwhelming question facing every retiree – and those planning to retire. 

The whole question is made far more difficult by the low interest rate environment of the past few years.  While the Fed pushes rates down to try to get the economy going, those who planned to live on their interest earnings are devastated.

Real interest rates are actually negative when you take into account the impact of inflation.  And inflation for seniors -- which is heavily weighted toward medical care, and property taxes, and food and energy bills – is even greater than the inflation numbers measured by the traditional Consumer Price Index (CPI).  It’s fair to say that for seniors, savings invested conservatively in 10-year Treasuries is producing a real loss of buying power each year.

And that is the real issue here:  How much can you withdraw every month, or year, to keep your standard of living? And if low rates force you to withdraw more, how much sooner will you run out of money?

The Traditional Rule

Financial planners have sophisticated computer models to tell you how to diversify your investments – and how much you can withdraw on a regular basis.  The process is called Monte Carlo modeling.  It takes into account historical returns of investments, such as stocks and bonds.  
Monte Carlo goes beyond using an average return for investments.  That would be dangerous, because averages mask great extremes.  Instead this computerized modeling takes into account the small, but existing possibility of extreme movements in markets.  That’s the kind of action we’ve seen in the past decade in the stock market.

The simple rule derived from this kind of modeling has always said that with a well-balanced investment portfolio that contains both stocks and bonds:  You can withdraw 4 percent a year from your principal and have a 90 percent probability that you won’t outlive your money.
Since Monte Carlo modeling takes into account the potential of wide swings in the stock market, retirees and their planners have felt confident in using this rule to plan their retirement investments and withdrawals – even during recent wild swings in the stock market.  Those kinds of stock movements have happened before.  And as we’ve seen, the market ultimately returns to its norms.

You could live with volatility in stocks as part of your portfolio – because you were getting a steady return from your conservative bonds.  But what happens when bond yields go to extremes – as they have today – extreme lows?  What happens when bonds are not yielding anywhere near their historic models, and the low yields persist over a period of years?
The impact could be devastating on a retiree’s withdrawal strategy – causing him or her to run out of money far more quickly than expected. 

That’s the scientific explanation of the anxiety that seniors are facing today.

Changing the Model

Now the experts are considering changing their models to adjust for this unprecedented and prolonged Fed intervention in the bond market.   Morningstar says that a 4 percent withdrawal rate from a balanced portfolio, once considered a secure way to plan, could now lead to a 50/50 possibility of running out of money too soon.

Instead David Blanchett, head of retirement research for Morningstar’s Investment Management division,  suggests that a retiree who wants a high degree of certainty over not outlasting his or her money should reduce the withdrawal rate from 4 percent a year to only 2.8 percent annually.   And to get the same amount of money to withdraw each year, that means you would need 43 percent more savings before retirement!

Blanchett is not alone in his findings.  Well known financial planner Joe Tomlinson has just published a sophisticated research paper in Advisor Perspectives, Inc., suggesting that  the immediate impact of current low bond yields will crush most retirement withdrawal plans.  He notes that most planning software includes an average historical real (after-inflation) return of 2.4 percent for intermediate term government bonds.  But the current real return, as measured by yields on Treasury Inflation Protected Securities (TIPS) is a negative - 0.73 percent.  The impact of wrong assumptions exponentially impacts the likelihood of the plan’s success.  [http://advisorperspectives.com/newsletters13/Predicting_Asset_Class_Returns-Recommendations_for_Financial_Planners.php]

What to Do Now

No matter what your stage of retirement planning – or retirement living, this is the time to re-think your numbers.  If the Fed keeps rates low even for another few years, you have to think about working longer, saving more, earning some extra money in retirement, or living on less.
What you should NOT do is take on more risk!  Trying to get higher yields on the bond portion of your investments by purchasing riskier bonds, or locking your money up for longer time periods, could be even more devastating when the Fed loses control – and all the money the Fed has already created produces inflation, which will bring higher rates.

Yes, these are tough times.  And according to the financial models, times will get even tougher for retirees living on fixed incomes.  It’s time for AARP to take the Fed to task for its low-rate policies.  And that’s The Savage Truth.

-

The New Savage Number: How Much Money Do You Really Need to Retire