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Introducing Our New "Retirement Focus" Editions

By Gary D. Halbert
February 20, 2007


1.   My Stand-In, Co-Author Once A Month

2.   Introducing Mike Posey & His Credentials

3.   Retirement Planning – The Final Frontier

4.   Why Retirement Planning Should Be Important to You

5.   Retirement: What To Expect, Feedback & Planning

6.   Investment Implications & Conclusions


This week, I’m going to introduce a new service in my Forecasts & Trends E-Letter.  In this issue, I’m introducing a new feature that will become a regular part of the E-Letter, and I’ll also introduce a new writer to you who will be bringing you this new information.

I have been writing this E-Letter every week since September of 2002.  Writing 7-8 pages of (hopefully) interesting information, week in and week out, 52 weeks a year, is indeed a chore, but I actually enjoy the challenge.  For over 30 years, I have written my regular paper newsletter to my clients on a weekly, bi-weekly or monthly basis, so I’m  used to the writing load.

However, anyone who has ever written a successful regular publication knows that you have to surround yourself with able people who can help you with research, information gathering,  topic selection, editing, etc.  After all, I still have a business to run in addition to my writing.

Almost 10 years ago, I hired Mike Posey to head up business development at my company.  Over the time he has been working for me, he has become an ever-more critical part of my company’s operation.  In the beginning of the E-Letter in 2002, I looked to Mike to help take over some of the administrative aspects of the business so that I would have more time to research and write.

As time went by, however, Mike became more involved in research and even helping me develop topics for the E-Letter.  In fact, I would sometimes ask him to research a particular subject, and then write a summary of what he found, only to find that I could use it almost verbatim in the E-Letter.

One of the areas where I have found Mike to be most helpful is on the subject of retirement plans.  I’ll go into Mike’s credentials in more detail below, but suffice it to say that before coming to work for me, he amassed a wealth of retirement planning experience.

As we see the Baby Boom generation nearing retirement, Mike & I have discussed how pre-and post-retirement planning issues are going to become increasingly important to our readership.  Thus, we decided to have a periodic focus on retirement issues become a regular part of the Forecasts & Trends E-Letter.  And given Mike’s experience in this area, he will be writing some regular articles in this E-Letter going forward.  I think you’ll like Mike’s input.

Mike Posey’s Credentials

As I noted above, Mike has an extensive background in retirement planning.  In 1979, he left a position with Arthur Andersen & Co.’s Management Services Division (now Accenture) in Houston to work for Texas Life Insurance Company in Waco, Texas.  There, he helped develop and run the Tax-Sheltered Markets Dept.  He was responsible for helping agents sell all sorts of tax-sheltered insurance, including products related to employer retirement plans.

In 1987, Mike moved over to Sterling Trust Company, also in Waco, where he served as Executive Vice President in charge of operations and qualified retirement plans administration.  About a year later, Mike became president of Sterling Trust.  Under his leadership, Sterling grew from $50 million in retirement assets to over $950 million.

When I first met Mike, I was surprised to find that not only had he been in charge of Sterling’s overall operation, but he also handled both the marketing and compliance areas of the company.  In many firms, marketing and compliance don’t always see eye-to-eye, so I was very pleased to find an individual who could excel at both.  Since my companies are regulated by the SEC, NASD and other regulatory agencies, I just had to hire a guy who could successfully wear both a marketing and compliance hat.

Sterling Trust deals almost exclusively with self-directed IRA and qualified retirement plans.  Thus, Mike not only had to be familiar with the Texas rules related to trust companies, but also IRS and Dept. of Labor rules related to retirement plans.

When Sterling Trust was sold to a Colorado corporation, Mike moved on and eventually came to Austin where I put him to work for me.  Mike is now our Senior Vice President over all operations and is my #1 man.  So, with that as an introduction, take it away, Mike!

Retirement Planning – The Final Frontier
            By Mike Posey

First, let me say that I am grateful to Gary for the opportunity to author these “Retirement Focus” issues of the Forecasts & Trends E-Letter.  I have worked for Gary for almost 10 years and have enjoyed every minute of it.  Gary has a genuine desire to do what’s best for his clients and readers, a quality not always found in the financial services industry.  As president of Sterling Trust, I saw my fair share of self-proclaimed investment gurus, so I’m very pleased to be working with someone with as much knowledge, wisdom and integrity as Gary has.

On the subject of retirement planning, I call it the “final frontier” because it is the area of planning that will determine the quality of the remainder of your life after you retire.  Even so, I’ll be the first to admit that retirement planning subjects are often very confusing and complex.   

I remember early in my career at Texas Life that one of our Regional Directors jokingly introduced me as someone who could “take the confusing and complex subject of retirement plans, and make them more so.”  Actually, I think he was only half-joking, but the fact of the matter is that even investment and insurance professionals reach their limit on retirement planning rules and regulations.  As a result, many investors do not pay enough attention to retirement planning issues.

At this point, you may be asking why Gary would periodically turn over his E-Letter for a discussion of such a complex topic.  It’s because he realizes how IMPORTANT retirement planning is.  The lion’s share of the completed Confidential Investor Profiles we receive from clients and prospective clients list “Planning for a secure retirement” as the number-one investment goal.  With that being the case, we’d be remiss if we didn’t cover retirement topics in the E-Letter, especially as the oldest Baby Boomers start retiring next year.

Why Retirement Planning Should Be Important to You

I noted above how most clients and prospects who come to Halbert Wealth Management list retirement planning as their number one financial goal.  However, realizing the need to plan for retirement and doing something about it are two very different things.  I can tell you from experience about stories from prospective clients who are close to retirement but have no meaningful savings, as well as others who did save for retirement, only to have their nest eggs ravaged by bad decisions or ignorance of the rules related to retirement plans.

However, the biggest reason you need to realize the importance of retirement planning is that there are a number of third-party entities that are very interested in what you have socked away for your golden years.  Here are a few good reasons for you to keep an eye on retirement issues:

1.  Congressional Tinkering – In its July 2006 report, the Investment Company Institute (ICI) stated that retirement assets totaled $14.5 trillion at the end of 2005.  This figure includes money in employer-sponsored plans as well as personal IRAs.  For the most part, this money is growing tax-deferred, meaning that no income taxes are currently being paid on the investment gains.  Plus, much of the new money contributed to these plans is also not currently taxed.

With this huge pile of money not currently subject to taxation, Congress has realized that even a small tweak in the retirement plan rules can mean significant additional tax revenue.  That’s one of the reasons why there has been legislation changing some aspect of retirement plan rules almost every year since the landmark passage of the Employee Retirement Income Security Act of 1974 (ERISA).  In some cases, the legislation has been a major overhaul of the rules, while in others, it tinkers around the edges. 

Politicians have also found that it’s very easy to make changes to retirement plan rules that can result in additional revenue without a major political backlash.  Here’s a good example:  Back in 1981, The Economic Recovery Tax Act opened up the ability to have a deductible IRA to anyone who had earned income.  Prior to that time, only those not covered by a retirement plan could have an IRA. 

Unfortunately, Congress soon learned that this retirement planning device was far too popular, and that the increased use of the IRA tax deduction was having a negative effect on federal tax revenues.  The solution?  In 1986, the Tax Reform Act essentially reversed the earlier legislation by generally again restricting IRA deductions based on plan coverage and income. 

The moral of this story is that if Congress can’t win the game, it will change the rules.  What you need to take away from this story is that it’s important to keep up with even small changes to the retirement plan rules, as they might affect your options in the future.

2.  Social Security Needs Help – Last week, Gary’s article about Ben Bernanke’s recent Social Security and Medicare warnings highlighted some of the problems soon to be facing these entitlement programs.  What may sound like a contradiction to #1 above, Congress has been very busy liberalizing some of the rules related to retirement plans, especially the ability to roll over distributions into Rollover IRAs.

It's not necessarily a contradiction because Congress can liberalize rules related to the access and portability of retirement benefits and still change obscure rules that can result in greater tax revenue.  In recent years, there have been a number of bills that have simplified the rules related to various plans.  In the early days, one set of rules related to corporate plans while a completely different set of rules related to self-employed individuals.  Most of those differences have now been eliminated, and that's a good thing.

Another good example of recent liberalization is the ability for someone age 50 or over to contribute a larger amount to a 401(k) plan or IRA.  This helps those who have not saved enough for retirement, and now have the ability to sock away more money than the previous contribution limits.  It is important to keep track of any rule changes that make retirement plans more accessible or allow you to contribute more on a tax-favored basis.

3.  Some People Do Stupid Things with Retirement PayoutsAlas, it is important to be familiar with retirement plan rules so that you don't make mistakes along the way.  A while back, I prepared a summary that Gary used in an E-Letter called "The Million Dollar Boat."  In that example, I showed the potential consequences of a hypothetical young person using a seemingly small retirement distribution to buy a boat instead of rolling it over to an IRA.

While this example is the exception and not the rule, it is important to keep in mind that any benefit you get when you change jobs represents a present value of the retirement benefits you accrued while working there.  The only way you can realize their full value, however, is to keep the money in a tax-favored account such as a Rollover IRA until retirement.  Using it to pay off bills or buy a car or boat is rarely, if ever, the best use for the money.

Just as ill-advised is the situation where people are eligible for a 401(k) plan but choose not to participate, or they do participate but do not invest their account prudently.  This problem has become so pronounced that the recent Pension Protection Act of 2006 contained provisions allowing employers to now automatically enroll employees into their 401(k) plans, and even offer default investment alternatives under certain conditions.

4.  They’re Out to Get You - It's no secret that the Baby Boomers will soon be retiring en masse, which has already resulted in opening the floodgates of advertising offering help with the large number of retirement plan distributions sure to come.  The investment industry has pulled out all of the stops in anticipation of the rollover bonanza that will unfold over the next 20 or so years.

I’m sure you’ve seen the ads featuring lava lamps and scenes from the 60’s, I guess in an effort to make you think you can trust their judgment because they are of the same generation.  Then there's another ad that tries to counter this logic, saying you shouldn’t dwell in the past, but rather concentrate on reaching your retirement dreams for the future.  One company even shows scenes of flying gliders and buying a vineyard after retirement as examples of such dreams.

I guess these ads are lost on me.  I don't know of many people I ran around with in the 1960s that I'd trust to help me invest, and neither non-powered flight nor a new business venture are very high on my retirement "to-do" list.  What I have found over the years is that most of the new retirees I have talked to are primarily concerned about having a comfortable retirement and not outliving their money. 

Many Boomers will soon be put in charge of a retirement account with more money than they have ever seen before, and will be responsible for its prudent management.  Your decisions regarding that money should be based on sound financial principals and not whose ad has the best flashback footage from the 60s.

While I'm on a roll, I also take issue with some of the "advice" available for free from brokerage firms, mutual fund companies, etc.  Since retirement planning can be so complex, some firms have apparently decided that the best thing to do is provide the simplest answer as the best alternative for everyone.  That defeats the purpose of having different rules for different situations.  One well-known company even brags about how they've made retirement "simple."  No, they haven't.  Take my word for it.

When I used to do a lot of speaking to professionals and employee groups about retirement plans, I would tell them that the most common answer to a retirement question is, “It depends.”  That’s because retirement plans have a lot of working parts, and Congress is constantly fiddling around with them.  So, if in writing these articles I tend to over-answer a question, it’s just the nature of the beast.  But in doing so, I hope to give you a better feel for the variety of options open to you.

Before descending from my soapbox, I'll also warn you that the scam artists also know that Baby Boomers will be receiving large retirement rollovers.  Thus, I expect to see more and more fraudulent programs promising high levels of guaranteed income and scams that offer huge growth potential while also preserving principal.  You need to always remember Gary's advice: “If it sounds too good to be true, it usually is.”

5.  Fewer People are Covered by Traditional Pension PlansBack when ERISA was passed in 1974, most workers were covered by their employers' "defined benefit" pension plans.  A defined benefit plan is simply one that pays a monthly benefit to you for as long as you live.  Since the benefit is defined by formula, the employer or insurance company takes the risk of workers living beyond the average life span.

Today, however, defined benefit plans are being phased out by many large employers, and are usually not even considered by smaller employers.  Instead, we have profit sharing and 401(k) plans that are known as "defined contribution" plans, which define what goes into your retirement account, but make no guarantees as to sufficiency of any income these funds may produce for the remainder of your life. 

This shift to defined contribution plans puts the onus of planning so that you don't outlive your money on you and not your employer.  This is an important shift because improper or insufficient planning can result in your golden years not having very much gold.  Since you are now the captain of your retirement fate, it's important that you become familiar with the ship that's going to take you there.

6.  What you don’t know can hurt you Another major theme I have always tried to stress during my retirement educational sessions has been that ignorance of retirement planning rules can hurt you.  Just for example, until the Social Security Administration started mailing out estimated benefit reports, many people didn't realize that if they were born after 1964, their retirement age is 67, not 65.  Thus, if your retirement planning depended upon a full Social Security benefit starting at 65, you might be in a world of hurt for a couple of years.

With changes being made so rapidly in retirement rules, it's very likely that some have been enacted without your knowledge, yet might have a significant effect on your retirement planning.  My goal is to provide important retirement planning information to Gary's readers so that none of you ever has to say at retirement, "I wish someone had told me that."

Here’s What To Expect

In each issue featuring the Retirement Focus, I will discuss an area of retirement planning that is likely to be important to a wide range of readers.  While there will be times when some topics will apply only to a smaller portion of the readership, I will try my best to cover topics that apply to the largest possible audience.

I will attempt to give you the best information available to me, but you also must realize that I am not an attorney or CPA, so I cannot give legal or tax advice.  You should consider me to be a source of basic information that you then discuss in further detail with your trusted advisors.

The articles I present will also, where applicable, try to provide you with a range of options available to you rather than a limited number of choices based on what's easiest for an investment sponsor to handle.  I'll try my best to present these topics in an interesting and easy-to-understand format, so if I fail to do so, please let me know.

From time to time, I’ll also throw in tidbits of information that can be used to make your retirement planning more successful.  These will be short discussions of techniques used by retirement planning specialists to enhance the value of your retirement nest egg.  In the way of an example, here’s the very first one:

Retirement Planning Tidbit:  Could you use an extra $97,000 at retirement?

Sound interesting?  Well that would be the approximate difference in the accumulation value of the maximum IRA contribution of $4,000 per year for 42 years, with the only difference being that one is contributed at the beginning of the year, and the other is contributed at the end of the year.

Let's assume a 25-year-old decides to start funding an IRA and contribute the 2007 maximum of $4,000 until retirement at age 67.  However, like many other investors, our 25-year-old makes the first contribution at the end of each year, so there are no investment gains during this initial year.  Under that scenario, by the time this person reaches age 67, the funds will have accumulated for 41 years. 

If we assume the contributions earn an average annualized return of 8% (which is for illustration purposes only and is not guaranteed), by the time this person is age 67 the accumulated value will be $1,216,974.  Not bad – an IRA millionaire!

However, if this 25-year-old is smart and begins making contributions at the start of each year, the same 8% average annualized return will work for 42 years instead of just 41, leading to a hypothetical accumulated value of $1,314,332.  That’s a difference of $97,358 on the same $168,000 of accumulated contributions.

The same concept can work for 401(k) plans, depending upon how your employer’s plan is set up.  Some plans allow you to “front-load” your contributions by requesting a high salary reduction percentage until you reach the maximum annual contribution limit of $15,000 for 2007 ($20,000 if you are over age 50).  If you are in a financial position to have a greater amount drawn out of your check early in the year, you might want to check out this option.

Of course, the question will arise about making monthly contributions through the year rather than a single contribution at the first of the year.  While monthly contributions are better than waiting until the end of the year, they are still not as good as contributing the whole amount up-front.  A monthly contribution of $333.34 ($4,000 divided by 12) starting at the beginning of the accumulation period will grow to $1,269,114 based on the same illustration assumptions as we used above.  That's still $45,218 short of making the entire contribution at the beginning of the year.

The moral of this story is that the earlier you can make your contributions, the longer you have for the miracle of compound interest to work for you.

Reader Feedback and Questions

From time to time, I’ll also try to include some reader questions.  This will not necessarily be part of every Retirement Focus issue, but if I get a good question or comment that I think will benefit the entire readership, I’ll make sure everyone has the benefit of seeing it.

Incidentally, that’s a back-door way of saying that your comments and questions are always welcome anytime, just as with Gary’s writings.  However, Gary gets a ton of e-mail in regard to the E-Letter, so if you have a question or comment for me, just make sure to reference "Retirement Focus" in your subject line.

Investment Implications

When a particular topic leads to implications for how you should invest your retirement nest egg, then Gary will close out the Retirement Focus E-Letter with suggestions for how you might want to proceed from an investment perspective. 

While not every retirement subject will lend itself to an investment discussion, it is important that you keep the subject of investments on the forefront of your mind, simply because the investment industry is already thinking about ways to get you to send them your rollover.

By Gary Halbert

We hope you enjoyed this first issue of our Retirement Focus.  While Mike concentrated mostly on what you can expect from these issues in the future, I think he also drove home how important it is for you to be knowledgeable about the rules, techniques and other issues that relate to what is likely your most important investment goal.

I am very pleased that Mike is going to be authoring future issues of the Forecasts & Trends E-Letter.  He will join Spencer Wright, an avowed political junkie like myself, who has already written a number of articles with political themes.  However, I have to be honest and admit that it's hard for me to give up the opportunity to write to you personally, even though the Retirement Focus will likely only be a once-per-month feature.  As I noted above, I truly enjoy communicating with my clients and readers, and have for over 30 years.

In closing, I am also interested in your thoughts regarding our new Retirement Focus feature.  Both Mike and I need to know if you feel this information is beneficial to you as you address your investment goals.  Your open and honest feedback will help me produce a more informative E-Letter, which has always been my goal.

Very best regards,

Gary D. Halbert



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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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