(Note to the reader: I originally posted this piece in mid-March of 2020. Now I'm reviewing it at the end of April 2020. Hit the nail on the head, didn't I?)
I’m sure you’ve heard the term before: asset bubble. Sounds ominous, because a bubble is generally something that’s going to pop. On the other hand, I think of bubbles with champagne. So there are two images, both conjuring up a party that has to end at some time.
What does the term refer to in terms of market valuations? It means simply that at some point assets will be trading at a price that’s too high, and that the price will come down – maybe gradually, or maybe by a pop. Why is there so much in the financial literature today about asset bubbles? Because there appears to be a big asset bubble in the making.
Before I go on, let me define two terms:
Student loans are often top of mind for many people in the early stages of a professional career. You’ve made an investment in yourself by getting a great education, and now you’ve got to make enough money to build a life, but also to repay those loans. The main piece of advice we give most of our clients with student loans is not about numbers. It’s about overcoming the feeling that this debt is very heavy burden. So if you’re in that camp, we have some thought to share:
Taking out these loans was ultimately your choice, so own it. You DID in fact have other options – you could have gone to a cheaper school, or stretched your education out as you worked your way through. Whatever the case, ultimately it is your signature on the loan form. Take responsibility.
We’ve all seen the financial headlines:
“Sell everything and buy gold!”
“Time to take profits off the table!”
“The market is poised for a big upswing – get in now!”
“Make 16% guaranteed with tax lien certificates!”
“Buy my real estate flipping system and control your own rental empire!”
…I’m getting an Excedrin headache.
If you’re like many people, reading the financial headlines every day can make you crazy. Yet you continue to watch in order to stay informed. You want to be in the know about financial markets so you follow CNBC, Money Magazine, The Wall Street Journal, The New York Times, and others. Some outlets are better than others. There is so much economic uncertainty in the air, so you invest time and energy reading, or listening, to these “experts” to get a sense of what you need to do with your money....
FRS participants have a choice among two retirement plan options:
The investment option, which is a defined contribution plan (DC)
The pension option, which is a defined benefit plan (DB)
In previous posts, I covered both the FRS Pension Option and the DROP (Deferred Retirement Option Program). In this post, I’m presenting the FRS Investment Option.
The salient feature of any DC plan is the amount of contributions that can go into an individual’s account. On the other hand, with a defined benefit plan (also known as a pension plan) there is a pension formula. The inputs are usually based on years of service and average or final compensation. The formula calculates a pension amount that is guaranteed over the pensioner’s lifetime or lifetimes of the pensioner plus spouse. Here, though, I’m focusing in on the FRS investment option, which is the FRS defined contribution plan.
ERISA statues define...
As many of you know, I am a CFP® instructor with Zahn Associates and have been for many years. As I write I'm reviewing the material for General Principals of Financial Planning, which I’ll be teaching again soon. Part of that course is college funding.
In the context of the material, this section teaches the time value of money calculations. For example, if the client has a newborn who absolutely will be attending Harvard at age 18, how much new annual saving is necessary assuming 5% inflation and 8% earnings? Siri tells me that the full freight now is $78,200.
Ready for the answer? Sitting down? $18,743.42/year. Something most new parents can do, right?
I personally feel that if I have brought a child into the world, I have a responsibility to that child to give him or her the best start possible, and that includes a solid education. Yet college funding numbers look stratospheric. In this example, one year of college may...
The Deferred Retirement Option Program (DROP) is available to Florida Retirement System (FRS) pension plan participants. As a DROP participant, you earn your salary while your monthly pension is paid into the FRS Trust Fund. You earn interest at the rate of 1.3% on those DROP funds. This money adds up quickly. If your pension payment is $5000/month, your ultimate DROP payment will approximate $310,000!
This is a rich retirement – there’s nothing remotely like it that we’ve see in private industry.
Before you participate in DROP, you earn one month of retirement service credit for each month you work. When you enter DROP, you are considered to be retired and your pension is frozen at that level. You will still benefit from the cost of living increases, however.
To participate in DROP, you must be vested and eligible for normal retirement (based on your years of service or age). You must be an active...
The fundamental reason to buy life insurance is that someone else is depending upon you for a living. Plain and simple. It is risk transfer: in exchange for premium dollars, the insurance company will make a payout at your demise.
The life insurance industry is one that responds to market demands. In Part I of this series I’m going to give you a little history. What kind of policy should you buy – term? whole life? In Part II I'll discuss the other jobs life insurance can do for you, and talk a little about underwriting. In Part III I'll examine some common reasons for procrastination.
Original insurance contracts were for one year only – term policies, in other words, which renewed each year. As the insured ages, year-by-year the premiums would rise, reasonably enough, as one’s mortality age comes closer. So fundamentally we...
If you dropped dead tomorrow your family would be in a world of hurt. You know this. Yet you haven't purchased life insurance. Why not? Before you get into it, check out Part I and Part II of this 3-part series.
Why Haven't You Purchased Your Life Insurance?
You think you have enough insurance coverage through work. Do you know how much is there? Typically anywhere from $50K to $250K. Is that anywhere near sufficient?
It isn't the product that bothers you but the process. You put the life insurance agent/broker in the same category as a stereotypical used car salesman. He’s got greasy hair, you’re his newest best friend in the world, and he wants to know, What do I need to do to get you into a policy today? You think he’s out solely to earn a commission. You have nothing against anyone making a living, but you just don’t...
Having great investment portfolio returns may not get you to your retirement goals. You could have (in theory) spectacular returns every year for 20 years and still not realize the retirement you want. Do we like strong investment performance? Sure. Should stellar performance be your goal? Not necessarily. Goals-based investing should be the approach. The investor starts from the endpoint and works backward toward today.
In doing retirement planning, first begin with the lifestyle you want to enjoy. Then figure out how much it’ll cost you. Then evaluate your current investments to see if they’ll do the job. Your portfolio return in this approach becomes the means, not the end. In other words, start with your goals, figure out how much it’s going to cost you, and determine how you should invest to accomplish those goals.
This approach is very different from performance-based...
Employer-sponsored retirement plans can be split into two groups:
As the name suggests, the salient feature of any defined contribution plan is the input – how money goes into the plan. Money goes in from employer contributions and matching, employee deferrals, and forfeitures from those not vested.
On the other hand, the DC plan is defined not by the inputs, but rather than by the output. The Florida Retirement System pension option is a defined benefit plan. I explain this a little more fully in my video.
With any defined benefit plan, all the investment risk is with the employer and not the participant. When I say the risk is with the employer, I mean the State of Florida. FRS invests the retirement plan assets in such a way that it is able to pay out what has been promised. The employer is guaranteeing the...