The “Retirement Ready” 401k… exists. Right?

Income Production = Market Value Growth + Retirement Security

Unfortunately, it just isn’t available to you in the standard 401k product menu.

Since the demise of corporate Defined Benefit Plans, most employees have been forced to rely on their own investment acumen to make sense of the product menu choices accompanying an ever growing array of private and public Defined Contribution Plans.

These are savings plans that use hundreds of pooled portfolios of securities and derivatives, many with suggestive and exotic names, to invest and reinvest participant and employer monthly contributions. It is rare that any unbiased advice is available to either Plan Sponsors or Participants, and even professional fiduciaries seem a bit brainwashed when one observes the results of their investment product choices.

Recently, it was proven to me fairly conclusively, that no product specializing in top tier  S & P dividend paying companies in combination with a diversified collection of Closed End Income Funds yielding over 6% (after expenses) will ever gain traction in the “good ‘ole big boys club” described as the 401k space.

Quality, meaningful diversification, and income production, the core curriculum of college investment majors for a century or more is now deemed to be an “Alternative Investment”. This a term once reserved for the most speculative of  speculations… futures, options, indices, shorts, commodities, junk bonds, emerging markets, etc.

The speculative essence of 401k Plan product menu choices, coupled with the utter disinterest in providing meaningful income choices (even toward the end of a TDF “glide path”), just screams for a better way for employers to get, 401k-like, tax deferral and wealth accumulation benefits.

For smaller employers, a 401k “safe harbor”, self-directed, program is an attractive alternative with none of the Wall Street program investment choice drawbacks…. AND no “top heavy” or annual recalculation aggravation. Yes, there must be a “match” for employee contributions, and immediate vesting, but a maximum contribution with total matching is a major plus.

Sure this can be done without the help of a professional manager, but that will just put  you back into the same stuff of the 401k model… no known quality, no income, and a taste of every available speculation the Wall Street imagination can devise.

An ideal self-directed program would provide for professional portfolio management with an ever increasing income “purpose” asset allocation “bucket”, based on the age of each participant. For Example:

Self Directed, individually and professionally managed, portfolios for all employees featuring:

  • flexible asset allocations (ranging from 60% Equity to 0% Equity)
  • annual income growth (in all* investment and interest rate markets)
  • annual Working Capital growth (so long as income, gains, & deposits exceed losses)
  • one-to-one convertibility to a Rollover IRA
  • “ROTH” 401k availability

*Using the 2008-2009 Financial Crisis as a worst case scenario.

Many of you have attended the current series of income investing webinars (the January program video is available through the link provided below). This is the kind of program that you could create inside your 401k Plan if it were to become the “Self Directed” variety described above… isn’t it time that you got the most out of your company’s retirement income program?

Remember, that since every investment program becomes a retirement income program eventually, you need to bring your program to a place where you can say with reasonable assurance:

“A stock market downturn will have no significant impact on my retirement income”

Only private “safe haven” type 401k plans, those that are both self directed and managed with the MCIM methodology appear capable of developing annually increasing spendable retirement income. The others just don’t seem to care.

“Retirement readiness” doesn’t just happen; there’s no button you can push. Those of you who are counting on a forever upward stock market, or the promise of a Target Date Fund need to “get real”, and quickly.

Here’s the content of the Vanguard 2015 TDF as of January 31, 2015:

Vanguard Total Stock Market Index Fund ………………..34.9% (3008 different stocks)
Vanguard Total International Stock Index Fund ……….15.1% (5008 different stocks)
Vanguard Total Bond Market II Index Fund ……………..32.4%
Vanguard Total International Bond Index Fund…………10.0%
Vanguard Short Term Inflation-Protected Index Fund…7.6%

Equity Total = 50% Income Total = 50% TOTAL PROGRAM YIELD = 2.01%

So, if your Million Dollar Retirement Portfolio is in this TDF, will you be able to survive on $1,675 per month?

Have a private look at the workings of a professionally managed retirement income program; a high quality, individual security, 30% Equity portfolio, generating a million dollar prorated, $5,480 per month:

https://www.dropbox.com/s/28ty6z5dkgn5ulu/Retirement%20Income%20Webinar.wmv?dl=0

 

Retirement Income Investing: The Dreaded RMD

All of us are approaching retirement, many of us are already there, and some of us (myself included) are thinking about the ultimate IRS slap-in-the-face… The Required Minimum Distribution. It’s time to make sure that your retirement income program is actually ready.

Every investment program becomes a retirement income program eventually.

First off, you need to get to a place where you can say:

“a stock market downturn will have no significant impact on my retirement income”

This applies to everyone; income development is always important, and Tax Free Income (outside the IRA or 401k) is The Very Best. Only private “safe haven” 401k plans are capable of focusing on income development.

Retirement readiness requires active consideration of your asset allocation, your overall diversification, and most importantly, the quality of your holdings. Those of you who are relying on 401k assets to fund your retirement income requirements need to look inside the program.

If you are within five years of retirement, repositioning at the top of a stock market cycle (now) is essential; if you are in retirement, get your portfolio out of any employer plans and into your IRA… you just can’t protect yourself  (and especially, your income) in Mutual Funds or ETFs.

If you are approaching 70, the RMD is “in your face”… here’s how to handle it:

• Position the portfolio to produce slightly more income than you must take from the program.

• Take the income monthly and DO NOT pay the taxes in advance. Lump sum withdrawals require uninvested cash reserves and/or untimely sell transactions.

• Move the RMD disbursements into an individual or joint account and reinvest at least 30% in Tax Free Income CEFs.

• If you hold equities (in addition to the RMD income producers you need), set your profit taking targets lower than usual… and maintain the Cost Based Asset Allocation.

I’m relatively sure that some of you are currently dealing with the RMD incorrectly… with “lump sum + the taxes” distributions.

Some of you have been to my ongoing series of “live SRS portfolio review, Income Investing Webinars”.

Follow this link to the recording of the January 22nd private presentation and don’t hesitate to post it where ever you like… wouldn’t it be cool to have this presentation show up on YouTube.

https://www.dropbox.com/s/28ty6z5dkgn5ulu/Retirement%20Income%20Webinar.wmv?dl=0

The Microsoft Retirement Income Program

Reading Between the Lines

Once we recognize that all investment portfolios eventually become retirement income portfolios, we can begin to focus on the regular recurring income that they produce… retired or not, the market value of your private portfolio (or of your 401k plan) has no purchasing power.

Yet all 401k programs are performance evaluated on market value growth as opposed to income production.

In late 1999, Microsoft Corporation (MSFT) common stock was at an all time high of $58.38 (split adjusted), and there were thousands of MSFT multi-millionaires out there confident that their retirement was secure…. with a guaranteed monthly income of ?

Please send me an email with the amount of income produced by a million dollars worth of Microsoft in 1999… or your favorite ETF or TDF today.

Several years later, one of those millionaires, and a golf buddy of mine, disclosed that he had just sold the 7 series BMW he had purchased with the proceeds of his MSFT stock… the one “asset” he still had from his dot.com fortune. Pushing 65, he just couldn’t bear the memory any longer.

If only he had sold the entire portfolio… or converted enough to tax free Closed End Funds to assure a lifetime income.

Yet no 401k programs today will hold income Closed End Funds (yielding 7% or so right now). Why? Because, according to the Department of Labor, 2% after low expenses is better than 7% after higher expenses.

By September 2000, MSFT stock had fallen by almost 50%; nearly 15 years later, with the market near its highest numberl ever, MSFT (at $47.60) remains 18% below its 1999 level… it didn’t pay a dividend until 2003, and its dividend yield today is only 2.6%, after many increases.

Back then, most Mutual Fund portfolios contained MSFT and hundreds of similar NASDAQ securities…  and this was OK with all varieties of regulators and plan fiduciaries because the markets, after all, were trending upward.

MCIM portfolios contained no NASDAQ equities, no Mutual Funds at all, and a growing income component of at least 30%… hmmm.

It took more than 15 years for NASDAQ to regain its 1999 level… how many of the heroes survived?

Today, most Mutual Fund investment portfolios and ETF gaming devices contain 1999 Microsoft look alikes, and most pay very little income…

MCIM portfolios? Well, no… no Mutual Funds, and no ETFs, just IGVSI (NYSE dividend paying) equities, and an income CEF component of at least 40%.

Can you get an MCIM Income Purpose portfolio in your IRA… absolutely;  in your 401k…  it’s a long sad story.

What’s in your wallet?

Retirement Income Webinar Sign-Up

S&P 500 Index: Morning After 401k Musings

March 2000 witnessed the S&P 500 Index breach the 1,500 barrier for the very first time… seven and a half years later, it was in just about the same position.

Inter-day October 15th, after an incredible bounce from its 56% drop through March 6th 2009, the S&P was just 20% above where it had been 14.5 years earlier… a gain of roughly 1.4% per year.

Just how low will it go this time? and are you prepared… this time?

The long term chart (Google “s & p 500 chart”, look mid page and click “max”) shows the volatility over the past fifteen years. Just for kicks, see if you can find the “crash” of 1987  (October 19th).

Could any stock market image be more beautiful? Could any be more in-your-face damning… tactically?

What if your 401k investment strategy had required selling before the profits started to erode?

What if your 401k strategy made you hold equity-destined cash until Investment Grade Value Stocks fell at least 20% before selective, patient, cautious buying began?

What if your 401k investment strategy called for at least 40% of your investment portfolio to always be invested in income purpose securities?… securities rising in price so far today, in the midst of a major sell off.

Such an approach has been available since the 1980’s for a lot of happy investors who have never had to change their retirement dates; and the same program has been available to 401k investors since March 0f this year…  but you have not been allowed to know about it!

You can’t use it because your 401k plan rules don’t allow you to invest in 40 year old “makes-a -lotta-sense” strategies, just because they have a new label and/or not enough millions under management… who’s protecting whom?

This is precisely how the big operators keep new and innovative solutions on the sidelines. Tough luck investors… you’ll just have to bite the bullet and watch your “by-design” speculative portfolios crumble  for the third time in fifteen years.

Pity, but one-size-fits-all rules are every bit as bad for your financial health as one-size-fits-all products. How are those TDFs doing… and with all that experience and mega millions under management.

 

Retirement Preparation 101

Prompted by a recent article in “Financial Planning” entitled “For Retirement Portfolios, a Smarter Glidepath”… several points in the referenced “conventional wisdom” have fingernails on chalkboard quality.

The use of “stocks” in retirement to help with portfolio growth and to keep up with inflation is the first. The main thrust of a retirement program is (should be, anyway) the generation of income… closed end income funds do this better (and historically safer) than anything else.

If there is enough income (defined as more than the retiree needs for regular monthly expenses), the transition to retirement can be easy without ever being overly concerned with market value.

If a retiree spends a max 70% of the dividend and interest (“base”) income, it’s easy to grow both the portfolio market value (which you can’t spend) and the income (which you can)… thus keeping up with inflation, something we haven’t been allowed to see a glimpse of for years.

Only when there is enough income should equities even be considered in a retirement portfolio. Stocks have nothing whatsoever to do with inflation … a measure of buying power. More income dollars = more buying power. More market value tends only to encourage excessive spending.

Another myth is “today’s low interest rate environment”… totally not true in the land of income CEFs and even some income ETFs… tax free CEFs are paying (they have been for years) over 6% on average, with taxable funds paying much more.

A retirement “glide path” that increases equity exposure “to improve total return outcomes” is another dose of illogic that stems from the idea that the market price of income securities is even more important than the income the securities produce.

It just ain’t so… ever. Take the example of the financial crisis. Investors who held income CEFs (particularly the tax exempt variety) never saw a change in spending money, while the reinvestment of the “at least 30% of the income” rule mentioned above allowed them to add to their holdings… growing yield, growing income, and reducing cost basis per share.

The problem is that the search for the holy (market value) grail makes pre-retirement investors forget the purpose of their retirement portfolios (i.e., it’s the income, not the market value).

The problem this market value, total return, focus brings to the 401k space is the millions of pre-retires, appendages crossed, genuflecting frequently, praying that their market value will be stable. Somehow their standard of living will be maintained with realized income in 2% to 3% range… so let’s add more stocks, the article suggests, because they will go up in price better than income securities.

My hope is that the vast majority of Financial professionals will reject this lunacy… no matter how you slice it, higher, even stable, market value may float your boat, but it won’t produce the income needed to run it.

A wise man once defined true wealth, not as the ability to accept financial risk, but as the ability not to need to. Wise men in the 401k 3(38) fiduciary space can be found at Expand Financial and QBox Fiduciary Solutions.

Total Return: Smoke and Mirrors?

Just what is this “total return” hoop that investment managers are required to jump through? Why is it mostly just smoke and mirrors? Here’s the formula:

  • Total Income + (or -) Change in Market Value – Expenses = Total Return — the ultimate test for any investment portfolio.

Applied to income purpose portfolios, it is really close to nonsense, and confusing to most investors.

Remember John Q. Retiree? He was the guy with his chest all puffed up one year, bragging about the 12% “Total Return” on his bond portfolio. Secretly, he wondered about having only 3% in actual spending money.

A year or so later, he’s scratching his head wondering how he’s going to make ends meet with a total return that’s approaching zero. Do you think he realizes that his spending money may be higher?

What’s wrong with this thinking? How will the media compare mutual fund managers without it?

Wall Street doesn’t much care. They set the rules and define the performance rulers, and they say that income and equity investment performance can be measured with the same tools. They can’t, because their investment purposes are different.

If you want to use a ruler that applies equally well to both classes of security, just change one piece of the formula and give the new math a name that focuses on the actual purpose of income investing — the spending money.

We found this old way of looking at things within “The Working Capital Model”; the new and improved formulae are:

  • For Fixed Income Securities: Total Cash Income + Net Realized Capital Gains – Expenses = Total Spending Money!
  • For Equity Securities: Total Cash Income + Net Realized Capital Gains – Expenses = Total Spending Money!

Yes, they are the same, and divided by the amount invested, they produce a Total Realized Return number. The difference is what the investor elects to do with the spending money.

So if John Q had taken profits in year one, he could have spent more, or added to his income production. You just can’t spend (or reinvest) “Total Return”.

We’ve taken those troublesome paper profits and losses out of the equation entirely. “Unrealized” is “un-relevant” in a properly diversified portfolio comprised only of investment grade, income producing securities.

Most of you know of Bill Gross, the Fixed Income equivalent of Warren Buffett. He manages a humungous bond mutual fund, but how does he invest his own money?

According to a NYT Money and Business article by Jonathan Fuerbringer (January 11, 2004), he’s “out” of his  own Total Return fund and “in” Closed End Muni Funds paying 7.0% tax free. (Must have read “The Brainwashing of the American Investor”.)

Fuerbringer doesn’t mention the taxable variety of CEF, then yielding roughly 9%, but they certainly demand a presence in the income security bucket of tax-qualified portfolios like 401ks. Sorry, can’t do that now. The omniscient DOL says the net/net income isn’t nearly as important as the Expense Ratio….

Similarly, Mr. Gross advises against the use of the non investment grade securities (junk bonds, etc.) that many fund managers  sneak into their portfolios.

But true to form, Mr. Gross is as “Total Return” Brainwashed as the rest of the Wall Street institutional community, as he gives lip service validity to speculations in commodity futures, foreign currencies, derivatives, and TIPS.

Inflation impacts buying  power, and the only way to beat it is with higher safe income. If TIPS rise to 5%, REITS will yield 12%, and preferred stocks 9%, etc. No interest rate sensitive security is an Island!

As long as financial intellectuals remain mesmerized with total return numbers, investors will be the losers.

  • Total Return goes down when yields on individual securities go up, and vice versa. This is a good thing.
  • Total Return analysis is used to engineer market timing decisions between fixed income and equity investments, based on statements such as: “The total return on equities is likely to be greater than that on income securities during this period of rising interest rates.”

Investors have to commit to the premise that the primary purpose of income securities is income production… this requires a focus on spending money.

If these three sentences don’t make complete sense to you, you need to learn more about income purpose investing:

  • Higher interest rates are the income investor’s best friend. They produce higher levels of spending money.
  • Lower interest rates are the income investor’s best friend. They provide the opportunity to add realized capital gains to total spending money and to total working capital.
  • Changes in the market value of investment grade income securities are totally and completely irrelevant, 99% of the time.

The Retirement Income Gap

A BlackRock and EBRI analysis (from Think Advisor, July 9th) suggests that older retirees are further from being retirement ready than their younger counterparts… go figure.

Ironically, since most benefit plan investors (really speculators) at all ages are market value focused instead of income focused, this observation will likely be the same ten years from now.

… and this is so easy to fix, if plan participants are forced to start thinking “income” from the get-go. Retirement readiness is a planning issue that “target date funds” and most other 401k product shopping menus are just not equipped to deal with.

Plan advisors, fiduciaries, and plan sponsors need to make sure they have “serious income production options” in the benefit plans they are advising.

What if you could liquidate your “all time high market value with nearly zero programmed income” benefit plan balances and trade them in for a 5% or so compound income machine that is convertible, security for security, at retirement? You can. And, at retirement, you’ll actually be able to increase the income production significantly with a few simple tweaks….

Here’s where the 401k industry and DOL focus on expense ratios make no sense at all. Income Closed End Funds pay in excess of 6%, and have for years. Nearly all of them (the hundreds that I’m familiar with) continued their payments without a hiccup throughout the financial crisis and continue to do so now…

The 6% is AFTER EXPENSES. The best from Vanguard Target Funds is maybe 1.5%; Stable Value Funds are in the 2% area, again, maybe….

Isn’t it our fiduciary responsibility to focus on the income purpose of benefit programs? Isn’t it our responsibility to educate plan sponsors and participants enough so that they understand that it is the income that pays the bills… not the market value, and not the three year total return.

Isn’t our responsibility to school the DOL…. that performance of a retirement income program should be measured in terms of income production… and that market value and expense ratios are not the predominate considerations? Well maybe not that one.

There is only one product I know of that has the proper income focus — and with a reasonable expense ratio. For more information, contact a qualified 3(38) fiduciary at either QBOX Fiduciary Solutions or Expand Financial.

The Investment Gods Created Volatility… and it was good

Have you noticed how paranoid people are getting about market “volatility”.

OMG, cries the DOL, we’re going to fine employers if their 401k plan participants don’t grow their balances as fast as the average plan around the country… thus making the Federal Government a participant in roughly half the 401k plans in every audit time frame.

Employers use investment plans (401ks) as an employee retention benefit… but by what stretch of the imagination are employers responsible for the financial ignorance/naiveté/ laziness/poor judgment of their employees?

Isn’t this just another overreach by regulators who seem focused on making it as hard as possible for private businesses to remain viable? Why not require unbiased investment education instead and create some productive jobs for a change… most adults are willing to accept responsibility for their own mistakes.

Since the dawn of investment time, market value change has been the lifeblood of investing and speculating… a distinction that “Modern Portfolio Theory” (itself a long-con of great imagination) has hypothetically correlated out of existence.

Without market volatility , there would be no chance of profit and no risk of loss. The absurd “Major Prediction Theater” proposes that past correlations and relationships will be repeated in the future, and that risk can be minimized by gaming with the numbers….

The investor need only select the right mix of speculations. But even if the mumbo jumbo is solid, theoretically, market value volatility remains the reality, and some funds, products, methodologies, and hypotheses outperform others… it’s the performance parameters that require adjusting, not the employer’s fiduciary responsibility.

So instead of relying on Wall Street’s most self-serving hypothesis ever, why not embrace the investment god’s gift of market volatility… as many of us have done effectively since investment puberty?

Regulators only appear to be stupid… they know that neither employers nor employees have the inclination to become proficient investors. They know that businesses fear the pox of a compliance audit… making compliance job designations the fastest growing, non-productive, industry in the economy.

And here’s the kind of decision-making the regulatory Gestapo produce:

“Mr. Jones, we’re fining you a gazillion dollars because your retired participants’ 401ks grew only 2% over the last 3 years and the markets were up 15%; clearly you failed in your fiduciary responsibility”.

“But these people are retired, your lordship.”

Their portfolios are producing over 6% in spending money, less insane federal income taxes (light bulb moment: think how a no tax on retirement income rule would benefit everyone), while the best of the best Target Date Funds pay around 2% before taxes .”

“Not my problem sucker, since when did income become the objective of a retirement program”.

The Very Best 401k Plans

I just read an article that listed six features of “great” 401k plans: high company contributions, instant eligibility, immediate vesting, low fees, auto enrollment, high employee contribution rates.

I agree, but something is missing. What about the investments… a black hole of understanding, in spite of all the information available on the internet. Neither participants nor plan sponsors are fluent in what’s inside the program.

Performance numbers don’t produce understanding or develop reasonable expectations. The focus is on market value “performance” … and expense ratios, regardless of their impact on participants.

Just google a few bond or target fund names see how difficult it is to determine the “yield”, i.e., the income you receive in retirement.

The Vanguard Target Retirement Income Fund, for example, yields less than 2% and has a 30% stock market exposure… the same company’s 2015 “target retirement program” is 52% invested in the stock market, now at about the highest prices in the history of mankind?

The income generated by this extremely popular program (the spending money of retirement) is a disgraceful 2% or so. Hey, these numbers are from their website… and proudly?

But it’s not totally their fault…. more income could increase expense ratios or impact “market value” performance numbers… and the DOL is coming.

401k regulatory “wizards” don’t help very much… nowhere in their search and destroy missions is any mention of income received by people when they choose to retire. Instead, they focus on market value performance and costs of the mix of products available.

Barely anyone speaks of “convertibility” of the program into a real live retirement income machine… certainly not the government. In the mind of the Federal Government (an oxymoron?) it seems, a taxable 2% in employee’s pockets (after low expenses) is somehow better than 6% taxable with a higher expense ratio… it’s da law!

The market value of fixed income purpose securities are expected to “perform” in the same manner as common stocks … and they look at me like I’m smoking something funny!

Although 401k plans are not pension plans (even the modern variety of inadequate income development programs), they are looked at as such by nearly everyone…. especially politicians. In my experience with 401k plans in general, only one type of “investment” product has a focus on the income objective that should actually be the main “target” of any retirement program.

If 401ks are perceived by participants (and much more importantly) by the regulators as retirement programs, one would think that advisers would make a concerted effort to find more suitable income producers to put inside them..