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The Financial Preserve Blog – The Financial Preserve from Lonier Financial Advisory LLC
Conscientious Financial Planning and Retirement Income Management | 201-741-9528
from Lonier Financial Advisory LLC, Osprey, FL

The Financial Preserve Blog

Everything you wanted to know about a retirement plan but were afraid to ask!

Thanks and a hat-tip to Bob Powell for providing me the opportunity to present this webinar on his excellent site Retirement Daily on The Street.com!

Retirement Daily Learning Center: How to Build a Retirement Income Plan


The SECURE Act Puts Roth Accounts Front And Center In Retirement Plans

  • The SECURE Act’s pushback for the start of RMDs to age 72 opens the Roth conversion wider.
  • High taxes forced by the new ten-year distribution requirement can cut inherited tax-deferred IRA accounts in half.
  • Setting up an accumulation trust as the beneficiary of a Roth account can create a tax-efficient trust that could last for generations.

The SECURE Act passed by Congress last week is the first significant retirement plan legislation since the Pension Protection Act of 2006. The SECURE Act changes a number of important things which have become a routine part of retirement planning going all the way back to ERISA in 1974, which first enacted qualified plans and IRAs. If you are on the cusp of retirement or recently retired, these new regulations, which go into effect in a matter of days, will have an impact on your retirement planning.

There is some good news in the new law. If you still have earned income, you will be able to continue contributing to your IRA after age 70-1/2, the old limit, for as long as you have qualifying income. 529 Plan benefits can be used to pay up to $10,000 of student loans and expenses for certain certificate and apprenticeship programs-retroactive to 1/1/19. You can withdraw $5,000 from a qualified plan without penalty before age 59-1/2 for the qualified birth or adoption of a child and repay it under easier rules than repaying loans from a plan. Part-time workers who work at least 500 hours annually for three years will be eligible for company plans-was 1,000 hours. And, company plans can now offer lifetime income annuity products that can be transferred to a new plan or IRA if the participant changes or leaves an employer without fees or penalties.

Beyond these and other tweaks, three changes could have a significant impact on your retirement plan….

Read the rest here at SeekingAlpha.com

Impact Of The New Tax Law On Financial Planning And Retirement

  • Current strategies for tax optimization by asset location in after-tax, pre-tax, and tax-free (Roth) accounts are unchanged.
  • Because of lower rates, retirement savers will have more after-tax money in 2018, but pre-tax deductible contributions to 401(k)s, 403(b)s, and IRAs will have a smaller effect on taxes due.
  • Those working in retirement as sole-proprietors or LLCs can deduct 20% of their business income in 2018, but their full income will count against the Medicare Part B premium threshold.

The new year brings a package of changes to federal income tax laws that go into effect immediately. Here are the salient changes that impact financial planning and retirement.

Unless you’ve been absorbed in all the runner-up bowl games, you’re likely aware the standard deduction has about doubled to $24,000 for joint filers, but that there are no longer $4,050 exemptions for you, your spouse and your children. There is a new $2,000 per child tax credit with a higher phase-out at $400k AGI, and the age 65/blind/disabled additional deductions still apply.

Click to continue reading here.

Cash – Getting A Bang For Your Buck

  • Paper money is the original risky asset, pays nothing, and is fully exposed to inflation.
  • Wall Street would have you believe that holding cash will destroy your purchasing power over the long-term.
  • Cash held as 3-month T-Bills–cash equivalents–has not only kept up with inflation, it has modestly beaten inflation in 53 out of the last 89 years.

Cash is one of the more neglected considerations in financial planning and investing. Everyone knows having a lot of it is a good thing, even as it burns a hole in your pocket begging to be spent on a large flat screen TV or a biturbo something or another.

A recent Michael Kitces post discussed how holding cash instills a sense of well-being and satisfaction. Or at least a sense that you can pick up the check, come what may. In our retirement risk management model this comes under the Spending and Reserves allocation-having the cash available for the next year or so of expected and unexpected spending, without having to sell something at a less than desirable price to pay the bills, whether that something is heirloom sterling or a favorite stock that dropped 20% recently.

Continue reading at SA.com…

Game Guide to Income, Savings, Wealth and Taxes


  • One thing income is not is wealth. This is the first confusion we might encounter: High income does not necessarily mean great wealth.
  • Savings is the source of income that protects our lifestyle when other income stops, but savings by itself, even significant savings, is not wealth.
  • Income and wealth are taxed differently, so let’s start with the basic understanding that there are two tax systems, not one.

No doubt income, wealth, and taxes will be in the forefront of the news and conversation in the coming year as a new administration settles into Washington. Money is always at the top of the list since taxes are the foundation of all government activity, but never more so than at the beginning of a new political season when campaign pledges bang up against reality.

I thought it might be helpful to review the basics of income, savings, wealth, and taxes—all very different things—so we might be better prepared to make sense out of much of the nonsense we’ll be hearing in the weeks and months to come.

Income is the Football
There’s an old story that Knute Rockne started each spring training season by holding aloft a ball and announcing, “Gentlemen, this is a football.” His record is proof you should always start at the beginning, not take anything for granted, and keep things as simple as you can thereafter. Works for personal finance, too.

Continue reading here…

Market Gyrations And Retirement Spending Volatility


  • • Depending on where you are in the lifecycle, you likely will be better served managing savings or managing spending than managing the volatility of returns
  • • Over a 30-year retirement, changes in interest rates and inflation can cause wide swings in the cost of retirement – the ever-changing present value of all future expenses
  • • Only after aligning the portfolio so that the Floor covers expected future expenses while hedging interest rate and inflation risk do we look to the market for Upside

The Brexit vote and Friday’s and Monday’s market reaction dominated the news this week, and presented the opportunity to consider why these kinds of market gyrations are relatively unimportant to retirement planning. In fact, market gyrations may be relatively unimportant even to young people a long way from retirement as well.

This may seem way off-base since the commonly accepted view, and the historic message of the financial services industry, is that maximizing returns for growth is the purpose of investing…(click here to continue reading at SeekingAlpha.com)


Along with posting here and on www.RMAP-Planner.com, I write about retirement planning and retirement income on Seeking Alpha.com.


Client Note – The Brexit Leave – Upside in a Falling Market

These client notes are meant to connect you with some of the things I am working on at the moment—don’t hesitate to reply to this note with questions or comment!


I’m in Chattanooga tonight travelling back to Sarasota, but the news is stunning regardless. The UK has voted to leave the European Union which is sending the futures markets reeling, with the S&P showing a 5% loss at Friday’s open as of midnight, the largest potential drop in a long time, probably since the Greek crisis in 2013. The Yen rose strongly against the dollar as the pound fell the most in its history. How the markets will behave Friday and over the next days and weeks, no one knows of course, but we do know markets do not like uncertainty. And all we have now with the Brexit leave vote is a big bunch of uncertainty—since indeed, nothing will actually happen for some time. And how much will actually change is also unclear.

So we can anticipate that the markets will be quite jumpy in the near term. How should we respond to this period of uncertainty?

First, some perspective. Despite the hysteria in the media—which is good for the media business—the UK is still exactly where it was yesterday. It’s hard to move a whole country ‘south’ except in the popular imagination. The US markets are up this month about 0.60% as of Thursday’s close, and a modest 3.5% for the year. More importantly, the US markets are just -2.5% from the all time high of a year ago. So the decline and bumpiness we may see in coming days comes on the heels of a recent recovery of about +14% since the mid-February low when US markets fell to -16.5% below last year’s high.

Europe, and emerging markets are still -20% off two-year highs, and Asia -15%, and all three will likely be driven down by the Brexit vote, but all three are up at least +5% this year over recent lows, so there’s a little headroom.

In other words, the coming declines and bumpiness may well fall within the range we’ve already travelled this year, and not be the kind of event that shakes markets to historic lows. But, as we say, no one knows where this will go. History always becons.

That’s why for the portfolios I manage, we operate with a different mindset. It starts with looking at each individual’s household balance sheet and finding the Upside on the balance sheet—the amount of liquid investable savings that exceeds the amount needed to cover all future expenses over the rest of the household life cycle. This Upside amount we can invest and expose to market risk for long-term growth without jeopardizing the savings needed to support the ongoing household lifestyle since there will not be pressure to sell when the market declines—expenses are covered by Floor and Reserves allocations, not Upside. So losses do not need to be realized.

Instead, since we know the portfolio’s Upside allocation from the household balance sheet, I can use value averaging to buy more Upside when the markets decline at a lower cost, which significantly improves growth over time. I do this both for new and existing portfolios. (Value averaging is a form of rebalancing using target percentages rather than a target dollar amount which is common in dollar averaging).

For new portfolios where we are still building out the allocations, I may increase the Upside allocation as regions within the global market fall below their allocation target to fill that regional target allocation. This works even for partial targets as the portfolio is built up over time before it is fully allocated.

For existing portfolios I rebalance when Upside regional allocations fall more than 20% outside of their regional target percentage. This rebalancing allow us to add to those regions in the global market portfolio that are now selling at a lower cost—buying low—while we sell at higher prices those regions that exceed their targets by 20% when that occurs. Buy low, sell high!

Which feels exactly wrong if you’ve ever tried to do this yourself! No one wants to buy more when markets are falling—fear is a powerful motivator that is difficult to overcome unless you’ve done the math in advance and have the plan in place to act when the time comes. And no one wants to sell stocks that have gained so much they are over-allocated. “Let the winners run!” Wall Street says, and then they fall, and the selling/rebalancing opportunity is lost…

So a bumpy period is a busy period for me as a portfolio manager, but it is a satisfying busy-ness because it invariably adds value to the portfolios in the long run.

As these current events proceed, please let me know your concerns and questions. Meanwhile, think of periods like this as opportunities for long-term growth. And feel confortable that your needs for the short-term and beyond are well covered by a safely managed Floor that is not being tossed around by the news of the day.

Catching a Falling Knife Without Bleeding – Value Averaging Down

Today was another down day, a reversal in the stock market. For those who use the market to support long-term financial goals, this is a good time. It is a good time, if your plan is based on your balance sheet, to consider adding to your Upside holdings by buying or rebalancing. If you’re beginning to wonder if you should be selling off and getting out, you may find that a strange comment. Let me explain why this is a good time.

I start any financial plan with a close look at the household balance sheet. I look at the current value of savings (financial capital) plus the present value (“PV”) of future employment earnings (human capital) and Social Security, pension, and other income (social capital). I compare that with the present value of estimated future expenses.

The amount of savings needed to cover the PV of future expenses is the Floor. Anything left over is Upside. You can afford to expose Upside to market risk for future growth because losses to Upside will not jeopardize your lifestyle—your lifestyle is covered by the Floor.

Upside is a simple name for the risk capacity—the ability to withstand losses—on your balance sheet. It’s a mathematical measure, not an emotional one. When you understand your balance sheet and know your Upside, you take the emotions out of investing.

Instead of always worrying about the market, you build a safe, risk-free Floor so that your lifestyle is covered and you can sleep at night. And instead of thinking about running for the exits when the market tanks, you think about adding to Upside to bring it back into balance with the rest of your plan.

The Upside of Upside
Today the broad US market closed about 14% off its all-time high last June, and is down almost 9% for the year. The upside of Upside increases when risky assets—stocks—are cheaper, as they are now.

So it’s a good time to be buying or rebalancing if you have a long-term plan that includes covering your lifestyle goals with risk-free Floor and only investing Upside in risky assets. You’re being smart by investing within your means, the same way you protect your lifestyle by spending within your means.

The investment guys talk about trying to catch a falling knife, meaning that buying a market that is down can be dangerous, since it could go down further. Yes, it can. It can also go up and then you haven’t bought in, either, and what was cheaper is now pricier. In fact, no one knows what the market will do. Not your “money guy,” not Goldman Sachs or Merrill-Lynch, not the Fed, not Donald Trump, not your insurance agent or your brother-in-law. No one. The market goes up, and it goes down. Timers lose more often than they win.

We don’t try to time the market. We aren’t trying to beat the market. We don’t have to. We’re using the market to support our long-term goals for growth. To get the best use of the market, we buy the whole market and then buy more if it when it’s cheaper. We get market returns, which typically are better than 2/3 of the results of those who are trying to beat the market.

In fact, we get something better than market returns. We get a rising return on our Upside investment by value averaging down. Let’s say you have a global allocation to five low-cost index ETFs in your Upside portfolio. Your average share price (cost or basis) of the largest fund—the US total market—is $100/share.

The price per share drops to $90. Your allocation is 10% down, so you rebalance by purchasing 10% more at $90 with cash from your Reserves, if your balance sheet affords it (we haven’t talked about Reserves; we’ll save that for another discussion).

Your average share cost is now $99 [the Excel math for that is =(90%100)+(10%90)]. You’ve lowered your cost by 1%, which will increase your return accordingly if and when the market recovers.

A week later the market falls another 10% from $90, to $81. The price is now 19% lower than your original basis. So you buy another 10% at $81, lowering your cost to $97.50.

Value Averaging Adds to Market Returns
This is called value averaging—investing to target percentages rather than by dollar amounts (“dollar averaging”). In this example, when the fund rises back to your old average cost of $100 a share, you’ll have gained 2.5%. If it falls even further first, and you value average down even more, then your gain will be even higher when it recovers. Value averaging down increases market returns by lowering your basis. Dividends increase the total return further.

That’s how you catch a falling knife without bleeding. And that’s why this is a good time for those who have a strong balance sheet and a long-term plan to manage Upside, Floor, Longevity, and Reserves.

–Michael Lonier, RMA

I am teaching another section of the Retirement Management Analyst course starting this week to financial planners and advisors through the Salem State University (MA) distance learning program. Learn more at the Retirement Income Industry Association site.

Looking at Floor Five Years Out

Most folks think investing is about picking stocks and dodging in and out of the market before the roof falls in. Maybe with play money. In real life, investing is about figuring out your life goals, how to pay for them, and then designing an investment approach that will get you to a successful outcome, the funding of your life goals.

In most plans, the key life goals are covered by Floor, Longevity, and Reserves. Floor covers annual expenses, Longevity provides insurance that you will still have income if you live longer than your portfolio (ie, run out of money!), and Reserves is for current spending and the unexpected. These three allocations are critical to managing the risks that can derail a retirement when you can no longer earn your way out of trouble.

What about the market?
The surplus after the critical goals are covered is your Upside. Upside is the amount you can afford to risk in the market for long-term growth without jeopardizing your lifestyle. It’s the risk capacity on your balance sheet when lifestyle (Floor), Longevity, and liquidity (Reserves) are covered, referencing Wade Pfau’s apt “four Ls.” Upside is legacy.

Most of us can afford a lot less risk than we think. A legacy might be a goal but it’s not essential to your lifestyle.

As we near and enter retirement, focus shifts from chasing the market—the preoccupation of the young and employed who can earn their way out of a downturn—to Floor. Building Floor. Covering a hopefully long future without a paycheck. You can live without Upside, but life without Floor is not a pretty sight. Risk is the enemy of Floor, so you won’t find risky assets in well-built Floor.

Laddering Floor
An effective way to build a Floor is to ladder out the first five to ten years of needed annual income using CDs, Treasury STRIPS, or TIPS (Treasury Inflation Protected Security) bonds matched to provide the income needed for the year they mature. The high cost of bonds during ZIRP (zero interest-rate policy) has created a rough patch for Floor builders the last few years, but prices have dropped a bit recently.

Here are some options today for a rung maturing in about five years on a Floor ladder:

  1. TIPS maturing 4/15/20, priced a bit below par at 99.20, with a real-yield-to-maturity of about .297%. That’s .297% above inflation over the next five years, whatever inflation turns out to be. TIPS protect against inflation risk.
  2. Treasury STRIPS (zero coupon bond) maturing 8/15/20, priced at 92.096, pays no interest but matures at 100, with a yield-to-maturity of 1.657%
  3. CapOne brokered original issue CD, maturing 8/19/20, no call, selling at 100, paying 2.4% to maturity.

If inflation averages more than 1.36% over the next five years, the TIPS beats the STRIPS. If it averages more than 2.1% over the next five years, the TIPS beats the CD. The TIPS provides a modest real yield above inflation no matter how high (or low) inflation is during the period, so in effect, it’s inflation insurance that pays for itself.

The one risk TIPS fail to cover is deflation—TIPS will loose the corresponding value of the inflation adjustment already accrued during periods of deflation, but will pay no less than par. Since this TIPS is selling slightly below par, with a small accrued adjustment, there’s little risk to capital from deflation with this TIPS bond. In short, the 4/15/20 TIPS today is a pretty good option for the 5 year rung of a Floor ladder, with interest rates and inflation likely on the rise.

Protecting Retirement Lifestyle
As you can see, the logic of creating a secure retirement Floor to protect your lifestyle is very different than coping with the up/down total return price action of risky assets in the market. A five to ten year Floor ladder built from CDs and TIPS provides a rock solid foundation Floor for a retirement lifestyle.

The more solid the Floor, Longevity, and Reserves allocations in your plan are, the more “safely” you can invest Upside in the market for long-term growth, without risking your critical goals. This approach manages the real risks to your lifestyle without adding market risk on top of the risks you can’t otherwise avoid.

Which would you choose to provide absolutely positively provide the income you need in five years—a TIPS, STRIPS, or a CD?

–Michael Lonier

What Are You Paying Your Advisor For?

You know that the fees you pay to invest your savings matter, and that these costs, even tiny percentages, can significantly reduce your gains over a lifetime of saving and investing. You are probably also aware of the rise of “robo-advisors,” web-based automated do-it-yourself investment management sites like Wealthfront and Betterment that provide sophisticated, algorithmic portfolio management at a much low cost than most financial advisors.

Financial advisors have traditionally provided investment management services for 1% of assets annually, usually on a sliding scale of some sort. That’s $10,000 a year to manage a $1,000,000 portfolio, plus whatever underlying expenses the funds charge, which may average 1.25% for the “high performing” funds the advisor recommends. Heaven forbid the advisor puts you in A shares with a 5% front-end sales charge right off the top. Sales charges are more common if your advisor is a big bank or institution—some apparently still believe they can do this with impunity.

Independent advisors will likely use no-load funds as part of the value they offer as an alternative to the big guys, though the 1% management fee and 1.25% fund expenses remain. Traditionally, some superficial financial planning is provided “at no cost” to provide a basis for allocating the portfolio between stocks and bonds.

Digital Disruption Points to Free Asset Management
Robo-advisors, on the other hand, charge .15%-.25% for management plus underlying low-cost index fund expenses that run about .10%-.15%. That’s a fraction of the traditional cost for portfolio management and fund expenses—$1,500 to $2,500 a year for a million dollar portfolio instead of $10,000 for management, and a similar reduction for fund expenses.

The digital disruption now impacting financial services is driving the cost of portfolio management rapidly towards…free. It’s becoming free because asset allocation is no longer a “secret” that can be credibly defended as a uniquely valuable service proprietary to an advisory firm. Consider this table of relative costs:

Management Fee Fund Expenses Total Cost
Advisor managed 60/40 stock/bond portfolio




Robo-advisor algorithmic 60/40 portfolio




Vanguard 60/40 LifeStrategy targeted risk fund*




*A managed global portfolio of four Vanguard low-cost stock and bond index funds

The traditional advisor has to beat the indexes by about 2% to cover these cost differences. We know from over a decade of S&P SPIVA (S&P Indices vs Active) Scorecard studies that about 60%-80% of all portfolio managers do not even equal their benchmarks each year, yet alone beat them by 2%. And fewer and fewer can equal the indices year after year. And we don’t know who they will be until the year is over. It is, as Charlie Ellis has called it, a loser’s game.

The message of the robo-advisory onslaught isn’t that robo-advisors are a great deal. The message is that it’s increasingly difficult to justify paying anything more than the low annual expenses—and no management fee—of an indexed targeted-date or targeted-risk fund as the core for a life-long investment portfolio. Even robos charge too much!

What Should You Pay an Advisor For?
The era of paying high fees for investment management is ending. Girding for the robo-battle that is underway, traditional investment managers are recasting their services as “wealth management,” and beginning to move beyond a focus centered on investments.

The question you need to ask of your advisor is has he or she moved far enough? Is wealth management as they practice it just another guise for expensive investment management with a few bolt-on sidebars, or has your advisor fully embraced conscientious financial planning as a valuable service in its own right? Conscientious is a deliberate word choice here instead of the more common comprehensive, since it implies a right-minded or even fiduciary responsibility to the client that comprehensive does not.

What is the value of conscientious financial planning? A recent post by Wade Pfau, a professor at American University, looks at Vanguard and Morningstar studies of this question. Pfau sets the stage by observing that “It’s important to remember and easy to forget that the end goal of comprehensive financial planning goes beyond choosing investments.”

The Vanguard paper focuses on the advisor’s value for improving investment results through asset allocation, asset location, lower costs, rebalancing, and coaching. Vanguard says that more expert investment management, while still challenged to make up the management fee that low-cost indexing avoids, offers about a 3% better annual return than naively doing it yourself with typical mutual funds. Pfau points out this 3% additional return just fills the hole the inexperienced digs for himself. The pro still faces the perennial problem making up the 2% cost drag discussed above, just to match market returns. Focused as it is on the professional’s impact on investment management, the Vanguard paper represents the trailing-edge defense for old school investment management, or at least is a justification for Vanguard’s new low cost planning service.

Morningstar is more in the vanguard of this issue with its fuller consideration of the value of “intelligent” financial planning and its impact on retirement income rather than investment returns.

Pfau summarizes the five key strategies from the Morningstar study and adds a sixth for optimizing Social Security benefits:

  1. Asset allocation based on the full household balance sheet including lifetime human capital (income from work)
  2. Dynamic funding of annual expenses in retirement, not a fixed rule for withdrawals
  3. An allocation to Longevity risk management to provide lifetime income from low-cost annuities
  4. Tax efficiency from managing asset location and withdrawals that minimize tax consequences
  5. Matching goals (expenses) with reliable assets rather than chasing performance
  6. Enhanced social capital on the household balance sheet by optimizing Social Security benefits

The value of the first five from the study is an increase of almost 23% more retirement income annually. With Social Security optimization, the six strategies provide over 30% more annual income each year in retirement!

That’s FIFTEEN TIMES the 2% additional annual returns that traditional investment managers struggle to eke out each year to justify their high management fees.

Pay for a High Value Conscientious Financial Plan not for Traditional Asset Management
The five items in the Morningstar study plus Social Security optimization are clearly worth more to you than specious promises of higher returns made by traditional asset managers. If you can’t do these six things yourself either because you are too busy in your career or because you lack the specialized knowledge necessary for some of the tasks involved, find a conscientious financial planner who can and pay him or her a reasonable fee to provide these valuable professional services. 30% more income in retirement is well worth the expense of conscientious planning.

A conscientious financial plan should be based on your household balance sheet, not investment theories for higher returns. Your balance sheet will show the amounts that your plan should allocate to the different techniques for managing major household risks:

  1. A Floor allocation to manage lifestyle risk by matching safe assets to expenses (Morningstar #5)
  2. A Longevity allocation to manage the risk of outliving your money with lifetime income from deferred income annuities and optimized Social Security benefits (Morningstar #3&6)
  3. A Reserves allocation to cash to manage near-term expenses and risks of chance including long-term care (Morningstar #2)
  4. An Upside allocation that can be safely exposed to market risk for long-term growth without jeopardizing the Floor (Morningstar #1)

The implementation of the plan should look across all your accounts, tax-deferred, tax-free, and taxable (Morningstar #4) for tax efficient asset location and conversion to income. And finally the plan should also include an estate plan that meets your legacy goals (a bonus 7th plan strategy!).

What do you think, is conscientious financial planning worth more than investment management? Is the era of paying advisors high fees for investment management coming to an end?

–Michael Lonier