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Friday, 29 April 2011

Finding Red Flags in Your Adviser's Record

by Laura Rowley

An exclusive analysis conducted for Yahoo! Finance shows one in 10 financial advisers in the U.S. have been involved in at least one customer dispute. Such disputes typically involve alleged unsuitable recommendations, misrepresentation of a product or transaction, or unauthorized activity, such as making trades in an account without a client's approval. Granted, these transgressions may not constitute fraud, but they can surely cost investors their hard-earned money.

The question is: How do you know your adviser is not among this group?

BrightScope, a firm that rates corporate 401(k) plans, this week launched BrightScope Advisor Pages in an effort to facilitate comparison among registered investment advisers (RIAs) and broker-dealers. The service aims to give consumers free, in-depth profiles of 450,000 financial advisers, with more to be added in the coming months. The site aggregates public information from the Securities and Exchange Commission (SEC) and the private non-profit Financial Industry Regulatory Authority (FINRA). (RIAs are regulated by the SEC or a state securities regulator; broker-dealers must be registered with the SEC and be members of FINRA.)

"The database is searchable from every dimension you want, and truly public in that Google will be indexing it," says Mike Alfred, BrightScope co-founder CEO. "Up until now, if you search an adviser's name on Google you would never find the SEC or FINRA data directly, because the format makes the data impossible to scrape." (Spokespeople for the SEC and FINRA declined comment.)

BrightScope hasn't populated all of the profiles on the site yet, but it will eventually include advisers' qualifications, experience and employment history, type of clients, total assets under management, average account size and area of specialty. BrightScope will also add information about legal disputes, formal complaints, bankruptcies and terminations. The firm will make money by giving advisers the ability to add their own information to their profiles for a fee.

The heightened transparency is likely to make some financial advisers uncomfortable, and provide a higher profile for practitioners with clean records. At the same time, consumers would be wise to use the site as a starting point and double check their findings against the detailed reports available through the SEC's Investment Adviser Public Disclosure (IAPD) site and FINRA's BrokerCheck database.

BrightScope conducted an analysis exclusively for Yahoo! Finance of 328 financial advisory firms with at least 50 advisers. The data revealed that at 14 of those firms, one-quarter or more of advisers were involved with at least one dispute. (The analysis, which is not included on the website, is based on disclosure filings as of Dec. 31, 2010.)

"Some firms have a higher tolerance for long regulatory rap sheets, provided [the advisers] bring lots of assets with them," says Ryan Alfred, BrightScope co-founder and president (Mike and Ryan Alfred are brothers). "Other firms say, 'there's no way we'll work with this person.'"

But some advisers argue that dispute records are more nuanced than a rap sheet. David Alan Boyer, CEO of Capital Guardian Wealth Management in Belmont, N.C., says he likes the idea of more transparency, but investors need to dig into the results. Some 22 percent of his firm's brokers have at least one dispute on record, but the firm itself has never had a claim filed against it.

"You can have a frivolous $10,000 claim against an adviser, but it's not like going to court and proving your innocence and it goes away," Boyer says. "It goes to arbitration, he proves his innocence, and it stays on his record. But if you see a pattern, you have a problem."

Marshall Leeds, CEO of Summit Financial Group of Boca Raton, agrees. At Summit, 38 percent of advisers were involved in at least one dispute, according to the SEC/FINRA data as of Dec. 31, 2010. "It all depends on how long the adviser has been in business, what type of products they do and what the complaints are," he noted. "If a firm has 10 advisers and has been in business 20 years and has 20 complaints, that's one-quarter of a complaint a year. You have to go to BrokerCheck and know the information you are getting is right."

Ryan Alfred conceded that some advisers have more exposure to complaints. "We agree that if you're in business long enough, you will get these issues," he says. "The question is: Are they chronic, and was there fraud involved?"

In addition, some dispute numbers may be skewed by repeat offenders. Wedbush Securities of Los Angeles, for example, has had 274 customer disputes among one-quarter of its 445 advisers who were on staff as of Dec. 31, 2010, according to SEC and FINRA data analyzed by BrightScope. But 51 of those disputes involve Bambi Iris Holzer, an author and popular media pundit. (FINRA's BrokerCheck describes the disputes against Holzer in more detail.)

Steve Goldberg, Holzer's attorney, says the disputes stem from a variable annuity product that she sold as a UBS broker in the mid-1990s. The product was marketed by Golden Select, which was later purchased by ING. "At some point there was ambiguity in the terms and ING interpreted the guarantee differently than Golden Select," he says. "She called clients and told them. The vast majority of disputes were against UBS. FINRA data...identify her as the individual broker, but that doesn't mean she was sued; she was the salesperson."

But there are five pending disputes for more recent product sales by Holzer, according to BrokerCheck. Jeffrey Kaplan, an attorney for several investors involved in the recent disputes, says they relate to two high-commission investments Holzer sold: Provident and Shale Royalties, an oil and gas private placement that turned out to be a Ponzi scheme; and Highland Floating Rate Advantage Fund, a junk bond fund that lost more than half its value. A Wedbush spokesperson says Holzer left the company in late March.

"Brokers are obligated to know what they are selling and to perform the actual due diligence on it," says Kaplan. "In the interest of caution, why would an investor choose a broker like that when there are thousands of brokers who have never had a customer complaint filed against them?"

In fact, some 25 firms in the analysis of 328 had no disputes at all. One example is Atlanta-based Ronald Blue & Co., a 30-year-old, fee-only firm that has 134 advisers and $5 billion under management. The company's SEC filings show that planners generally recommend low-cost index funds or exchange-traded funds. "We just look for quality people and are choosy about who we hire, and that's always been important to us," says spokesperson Malissa Light.

Laura is author of the book "Money & Happiness" and blog of the same name. Read more about her here.

Start With $10,000 and Retire a Millionaire

by Jonathan Burton

The 7% solution: Let money and time work for you, no matter your age.

The millionaire next door could be you.

All it takes is money and time; it always does. But what this really means is you have to save money over time, and that's where so many of us struggle.

Reaching age 65 with $1 million saved requires strong discipline and sustained effort. You need to recognize the importance of starting early and putting money away regularly. But even if you don't have as much time, you still have options other than a last-ditch Hail Mary pass.

It can be done -- even if you start with just $10,000.

"Whether you're 25 or 45 or even 55, you've got to start somewhere," said Nathan Dungan, founder of financial education firm Share Save Spend.

Call it a 7% solution. Assume a 7% inflation-adjusted return from a portfolio of U.S. and international stocks, bonds and cash -- not overly aggressive, but an expected return that requires taking some risk -- and living well within your means.

"In order to save, you have to understand your spending," said Eric Kies, a financial adviser with The Planning Center, an investment manager in Moline, Ill. "Build some awareness of where you are now, where do you want to be, and what are you willing to do to get there."

Of course there will be bumps along the road -- potholes, even, that challenge your resolve. The financial markets love to shake and stir individual investors; don't give up, because it may be hard to get back in

"It's less about where the money is invested and more about your ability to be disciplined," Dungan said. "Ask yourself, What is realistic? What can I achieve? The best savers don't have magical thinking about money. They're honest with themselves."

25 Years Old: Starting Out

Forty years is a long time. So long, in fact, that it's easy to put off saving for the future. There are bills to deal with, college debt to pay, stuff to buy, vacations to take, a career to build.

Savings -- sure, but who has money for that? Indeed, one of every three Americans between the ages of 18 and 33 have no personal savings, according to a recent Harris Poll survey. What's more, 53% of this age group has zero in the way of retirement savings.

They're missing out, big time. If a 25-year old with $10,000 invested $320 a month at a 7% annual compound rate of return until they turned 65, they would wind up with $1 million.

"There's a reason why Albert Einstein called compounding the most powerful force in the universe," said Jonathan Guyton, a principal at investment manager Cornerstone Wealth Advisors in Minneapolis.

Whether or not Einstein really said this, the math speaks for itself. At 7%, your money doubles every 10 years.

If saving a few hundred bucks a month seems daunting, rest assured it only gets worse. One way to make the job easier is to rely on your job -- specifically investing in your company's 401(k) plan and enjoy whatever contribution match your employer offers. Think of it as free money.

Don't have a 401(k)? Open a Roth IRA if you qualify, and automatically deposit money into it from your bank account to get tax-free growth.

35 Years Old: Early Innings

Ten years later, the price of waiting has been high. Not as costly as it will be, but tough enough. Instead of $320 a month, you're looking at saving $775 a month to turn that $10,000 into seven figures at a 7% annualized return.

Don't beat yourself. Just save. Funnel money into your 401(k) so you're not dipping into your own pocket for the full amount. Take the Roth IRA route if you can. By now you may have a young family -- so do it for the kids. Show them you not only can make money, but also know how to handle it.

"Children can be extremely good motivators to good financial habits," said Eleanor Blayney, consumer advocate for the CFP Board and a wealth adviser in McLean, Va. who specializes in financial planning for women.

Teach the kids sound money habits, and teach yourself at the same time. Said Blayney: "It induces you to be financially smart."

45 Years Old: Halfway Home

At 45, you're likely established in your career, with a decent salary. You may own a home, and the kids are thinking about college.

It's good you're making money, because you'll need to add $1,850 every month to that $10,000 base in order to reach $1 million in 20 years.

"There's a greater sense of urgency; your window for taking advantage of time is starting to close," Dungan said.

Yet one in four Americans between the ages of 46 and 64 have no retirement savings, the Harris Poll found. Another 22% have retirement savings mostly in bonds and savings accounts.

With so little saved at this point, you would do well to reevaluate your expectations for retirement. Are you saving and investing accordingly? You may have to weigh the purchases you make today versus a stable retirement.

"Now's your chance," Blayney said. "Don't blow it."

55 Years Old: Winding Down

At 55, the amount needed to reach $1 million with a $10,000 bankroll is both comical and sad: $5,700 a month for 10 years.

Maybe you've been living paycheck to paycheck, and life has been good. You've got a nice house, a fancy car -- but no savings.

In short, you have a big hat, but no cattle. The millionaire is next door, and he isn't knocking.

This is your moment of truth. You may not become a millionaire, but you can live like someone who is on the way to being one.

Here's how: Cut expenses, save what you can, and work longer.

"If a client is in their mid-50s and hugely behind, we start to focus on lowering expenses by paying off debt, restructuring debt, or lowering housing costs," said Guyton, the Minneapolis financial adviser.

"If that change lowers their expenses by $1,000 a month, that's more beneficial than helping them accumulate an extra $100,000," Guyton said. Indeed, cutting $12,000 a year from expenses equates to what roughly $175,000 in assets would produce at a 7% yield.

And take care of your health, Guyton added. You're going to need it in order to show up at work.
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Thursday, 28 April 2011

If You Missed Silver, Corn Could Be Next

Kicking yourself for missing the boat on silver, but still hungry for something to sink your teeth into? Well, at least one adviser has entered the hallowed halls of Breakout to make the case for corn.

That's right. The Reformed Broker Josh Brown says if the planets align correctly and a few other variables kick in, then the amazing beast that is corn could deliver another 60% upside. Now you're all ears, aren't you?

He says to forget the fact that corn has already doubled in the past year and is currently trading at record highs north of $7.60 per bushel. Instead, he suggests you look at a weather map showing a soggy middle America that's home to a lean inventories and a small, wet and delayed crop.

Then spin the globe around, find China, and jot down the words "net importer" -- and therein lies your formula for Brown's prediction that corn could rally to $12.

To be sure, the futures pits of Chicago are not for everyone, but Brown offers several more genteel ways to play the same agri-craze theme, including the Teucrium Corn Fund (CORN), the Market Vectors Agribusiness ETF (MOO) or if individual stocks are more to your liking, then fertilizer giant Agrium (AGU).

And one more thing. Brown also says to be patient and keep an eye on the oversold dollar, which he feels is poised for a pop from three-year lows. That trend reversal, while temporary he believes, will slam commodities and give fleet-footed and courageous corn stalkers a nice buying opportunity.

What are your thoughts on corn, commodities or the markets in general? Comment below or send an email to

Disclosure: Brown owns shares in AGU.

Wednesday, 27 April 2011

You're Richer Than You May Realize

by Andrea Coombes

Count your 'human capital' as an asset; watch your net worth skyrocket

You may be a lot wealthier than you think. Most people look at their 401(k) or other retirement plan, add in the value of other assets — their home, other investments, savings, etc. — then subtract their debt to get their net worth. After the housing-market bust and the bear-market rout of recent years, that number may look painfully small.

But what's the value of you? That is, how much are your future paychecks worth? That number is your "human capital" — and some experts say it should be a key part of your overall financial planning.

Human capital "is anything that's going to generate a cash flow that isn't your investments," said Moshe Milevsky, a professor of finance at York University in Toronto.

"It's your ability to work, your ability to get a bonus, to get overtime. It's a gold mine and an oil well, but you're producing the gold and the oil," he said. "It's millions of dollars when you're in your 20s."

As you age, your financial assets increase and your human capital — the value of your future earnings — decreases, because you have fewer working years ahead. While your human capital is not cash in hand, it's an asset that should be protected and managed just like other assets in your portfolio, Milevsky and others said.

Still, while the concept of human capital has existed for decades and has generated interest among economists and finance experts, there's no guarantee your local financial planner embraces the idea. "Human capital is not as appreciated as it should be," said Andrew Sieg, head of retirement services at Bank of America Merrill Lynch. At a recent panel discussion on retirement risks facing young people, Sieg and others raised the concept repeatedly.

"Almost no [financial planning] tools factor human capital into retirement planning," Sieg said.

Milevsky, who also is president of Toronto-based wealth-planning company QWeMA Group, offers a free tool for measuring human capital. is a free planning tool that incorporates the idea of a household balance sheet. Goalgami's maker, Advisor Software of Lafayette, Calif., makes financial-planning software for professional advisers that "can deliver a certain amount of precision to the human-capital calculation," said Neal Ringquist, president of Advisor Software.

However, a future job switch or other change may render "that level of precision meaningless," he said. Thus, "we use the household balance sheet to capture the impact of the level of human capital on the household financial circumstances. "It's how those numbers fit into the overall financial picture of the household that is relevant."

Diversify, Protect

Whether or not you gauge your future earnings' value, the human-capital concept implies a more immediate task: Reassess whether your portfolio is diversified. For instance, if you work in the technology industry, then you might want to dial down your investments in tech stocks.

"You work for an auto company? Your financial portfolio shouldn't have auto stocks in it," Milevsky said.

And there are other ways to diversify these days, said Robert Johnson, senior managing director of the CFA Institute, which awards the chartered financial analyst designation. "The growth of exchange-traded funds aimed at specific sectors makes the task of diversifying your human capital easier," he said. "Now you can short these ETFs... it's much easier to isolate that exposure now," he said. "There are ETFs [for] virtually every sector."

Still, some say investors should proceed carefully. "Perhaps a career in financial services might lead you to lower your allocation to financial-services stocks," said Mackey McNeill, president of Mackey Advisors, a financial planning firm in Covington, Ky.

But "rarely would I suggest someone skip an asset class altogether based on their career," she said. A real-estate professional, for example, might reduce his exposure to real-estate investment trusts, or REITs, she said, but might still consider investing in foreign real estate.

Another task: Protect your human capital with life insurance (if you have dependents) and disability insurance.

"If we were as focused on human capital as we should be, [everyone] would have disability insurance," Sieg said.

That's because, given the value of your paycheck, you need to insure against its loss. Just over one-fourth of today's 20-year-olds will become disabled before age 67, according to the Social Security Administration.

Also, your human capital may help you decide whether to go back to school. Investing in your human capital may give you the option to work more years, Milevsky said.

Others agreed. "I have a 76-year-old client who is beginning her fourth career," McNeill said. But assessing the return on educational investment is key before taking on debt. "You have to look at what you will spend on your education and what are the likely [salary] outcomes," she said.

Part of the Plan

While many financial planners may not overtly embrace the concept of human capital, a client's expected future income is included in the planning process.

Michael Eisenberg, a certified public accountant and personal financial specialist in Los Angeles, said he asks clients about their current job and income, and asks them to assess the long-term viability of their job.

"We normally take their cost of expenses now and factor in a 3% inflation factor. That gives you the needs down the road," Eisenberg said.

Financial planning in a nutshell, he said, is "here's what you're going to spend, here's what you need to bring in to spend that, how do we plan to get you there?" he said. "Unfortunately, nobody can say that whatever it is they're doing today they're going to continue doing five years from now."

Advisers don't necessarily use the term "human capital," said Johnson of the CFA Institute. "When you're a CFA charter-holder you are charged with taking an individual's circumstances, their personal circumstances and their financial position into account and part of that is your future earnings stream," he said. "That is a part of doing financial planning, of putting together appropriate portfolios and giving advice for clients."

The CFP Board, which grants the certified financial planner designation, has a similar take.

"The concept of 'human capital' is not directly identified in the current or upcoming exam blueprint," said Dan Drummond, spokesman with the CFP Board. But "the concept is indirectly covered" when assessing factors that affect clients, "particularly regarding earning potential and its economic value to the planning process."

Financial planners also incorporate the idea of human capital when they help clients prepare for the possibility of disability, and whether someone's skill sets would be transferable to another profession or career, Drummond said.

Andrea Coombes is MarketWatch's personal finance editor, based in San Francisco.
Copyrighted, MarketWatch. All rights reserved. Republication or redistribution of MarketWatch content is expressly prohibited without the prior written consent of MarketWatch. MarketWatch shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.

Tuesday, 26 April 2011

How to Tell if You Are Wealthy

Emily Brandon

Many Americans with a net worth of over several million dollars don't consider themselves wealthy. A recent survey of 457 individuals with liquid assets of $3 million or more found that 40 percent don't perceive themselves to be wealthy. Among those who do feel wealthy, here's what convinced them that they are affluent.

Stop looking at price tags. Just over half (56 percent) of the millionaires surveyed came to consider themselves wealthy when they realized they could buy anything without money concerns, the Phoenix Marketing International survey commissioned by U.S. Trust found. The survey respondents typically have between $3 million and $5 million in investable assets (63 percent), approximately $5 to $10 million (27 percent), or more than $10 million (10 percent).

Hit a certain number. Some people have a specific number in mind that makes a person wealthy. Just over a third (36 percent) of millionaires say they became affluent when they accumulated a certain asset level. They typically defined this amount as having between $1 and $2 million saved (23 percent) or approximately $2 to $4 million (28 percent). A few investors think you need between $5 and $10 million (15 percent) or more than $10 million (4 percent) before you become truly wealthy.

Support a family. Most people say an important way they use their wealth is to provide financial security for themselves and their relatives (90 percent). Some 18 percent of those surveyed say they realized they were affluent when they became able to adequately support a family. But that doesn't always include passing on wealth to heirs. Only about half (49 percent) of those surveyed consider leaving a financial inheritance to the next generation an important financial goal. And just a third (34 percent) of these affluent investors feel confident that their children will be able to properly handle any inheritance left to them.

Pursue a passion. Many millionaires report first feeling wealthy when they became able to pursue an interest or passion (14 percent). These individuals say they plan to use their wealth to travel (64 percent) or have fun (36 percent). Many people also plan to continue working in retirement (46 percent) or volunteer in their community (55 percent).

Comparisons with others. Some people don't feel wealthy until they have more money than their friends, neighbors, and peers. A few of the millionaires surveyed say they first felt wealthy when they compared themselves to someone else they considered wealthy (9 percent) or bought a home in a particular neighborhood (9 percent).

How to Become a Millionaire in 3 Easy Steps

by Paul J. Lim and George Mannes

Remember that old Steve Martin joke about the secret formula for becoming a millionaire?

"First, get a million dollars ..."

Okay, getting the odometer on your investment portfolio to click over into seven digits isn't quite that easy. Only 7% of American households ever manage it, according to research firm Spectrem Group -- though it's certainly not for lack of desire.

While $1 million may not be worth what it was back when Martin was a wild and crazy guy in the late '70s, achieving that iconic number still has profound allure. It means that you're ahead of the game. You're assured a baseline retirement security. You've arrived.

Martin may have oversimplified, but the reality is that getting your portfolio to the $1 million mark is not nearly as difficult as you may think, even if you've managed to put away only a fraction of that amount so far. You just have to understand how to operate the three basic levers of wealth building: how much time you have to work with, how much you save, and how you invest that savings.

The slightest tug on one or two of these levers can dramatically affect your path to $1 million. Use our calculator to pinpoint when you're likely to become a millionaire based on your current situation and investing returns.

Lever 1: How Much Time You Allow

When you think about getting rich, what jumps to mind? Saving more money? Getting that money to work harder for you? Sure, those are critical elements. But they're not nearly as important as time: How long you allow dictates how you pull the other two levers -- which is why you want to estimate your schedule before going on to the next sections.

Sometimes you can't play with the time lever -- your kids will go to college when your kids go to college. But in certain cases, it's possible to control the clock.

Say you're now 45, want to retire at 62 with a million bucks, and have $250,000 saved. You've got 17 years. If you were saving $15,000 a year, adjusting for 3% inflation (meaning you put away $15,000 in year one, $15,450 in year two, and so on), and were able to earn 4% a year in real terms (7% before inflation), you wouldn't get there.

[Calculator: When will you be a millionaire?]

But if you delayed retirement by just two years, you'd hit the mark. As Chris Dardaman, head of Brightworth, a financial planning firm in Atlanta, says: "It's not the end of the world if you can't save as much or invest as well as you want -- as long as you save and invest longer."

In part, how long it'll take to become a millionaire depends on where you are now. If you already have $500,000 saved, it might take only 10 to 15 years, in inflation-adjusted terms, provided you sock away $10,000 to $15,000 a year and your investments outpace inflation modestly.

But even if you're only a tenth of the way there -- like the typical worker who's been investing in a 401(k) for 10 to 20 years, according to the Employee Benefit Research Institute -- you can make it in two decades or less, if you save a good chunk of income or earn a decent return.

Of course, that's the dilemma. While the ability to save more is within your control, the ability to generate a certain return isn't 100% in your hands. And as your time horizon shrinks, so too will your ability to accurately predict how your investments are likely to perform. So let time determine which of the two other levers -- savings or investing- -- you pull harder.

If you want to get to seven figures in 10 years or less: Seriously ramp up savings

With only a few years to invest, there's a significant risk that even a seemingly safe investment strategy could fall short of your expectations, because of the wide range of possible outcomes.

For example, according to computer models run by Ibbotson Associates, a moderate 60% stock/40% bond strategy could result in annualized returns of as much as 16% over the next 10 years, but it could also result in worst-case losses of nearly 1% a year. While that gain would certainly speed things up, a sustained loss -- even a modest one -- could be devastating given your time frame.

So if your self-imposed deadline for achieving $1 million (or any financial goal) is tight, instead of banking on optimistic returns, you're better off trying to boost your savings as much as possible. Then invest in a balanced mix of 50% stocks and 50% bonds that can be expected to beat inflation by a modest two or three percentage points a year.

If you're willing to wait more than 10 years: Invest more aggressively

The longer you have to invest, the greater chance you give the market to smooth out any ups and downs. Back to that 60%/40% portfolio: Over 20 years, the annualized spread could narrow to gains between 2% and 14%. So you could even take on a little more risk -- increasing your equity exposure, say -- for the possibility of better returns.

The single most important thing you need to know about building wealth: You're far better off being a dogged saver who's a mediocre investor than being a below-average saver who can knock the socks off the S&P 500.

Lever 2: How Much You Save

"It's sort of like exercising," says Stuart Ritter, a financial planner with T. Rowe Price. "You can devise the most optimal splits between cardio and weight training. But if you only go to the gym for six minutes, it won't really help you that much."

Let's say you have 20 years to invest and $250,000 already amassed. You can see from the table at right that boosting your annual savings from a modest $5,000 to an aggressive $20,000 could increase your chances of hitting $1 million in today's dollars -- $1.8 million nominally in 2031 -- from 31% to 67%, assuming a 60% stock/40% bond portfolio. If instead you kept your savings rate the same but upped your stock allocation to 80%, your chances of success would be less than fifty-fifty.

Savings may be the safer bet, but it's often the tougher task. Here are four ways to crank up the amount you're banking per year, in ascending order of difficulty.

Easy: Use Other People's Money

You've heard this before, but it bears repeating: The simplest way to boost your savings is to max out your 401(k) match, since that's a hand-out from your employer. Say you make $100,000 and save 3% of pay. If you're eligible to receive 50 cents on the dollar for the first 6% of salary deferred a common match you'd be leaving $1,500 a year on the table.

Tax-advantaged accounts like 401(k)s and IRAs also allow you to build wealth faster, in that case by putting Uncle Sam's money to work for you. On the same salary, by contributing $10,000 annually to a 401(k), you'd immediately reduce your income taxes by $2,800, assuming you are single and in the 28% bracket.

For now you can think of it as saving the equivalent of $10,000 while ponying up only $7,200. But even after paying taxes at withdrawal, you'd still come out ahead in most cases thanks to tax-deferred compounding at a 6% annual return, you would be up by $1,600 a year if you'd been socking away $10,000 for 15 years.

(This is why we assume that you'll use tax-deferred accounts as well as tax-efficient investments such as index funds to avoid the drag of taxes on your returns.)

A Little Harder: Bump Up Savings Systematically

"The easiest way to save is to put as much of your savings on autopilot as you can," says Shlomo Benartzi, chief behavioral economist for Allianz Global Investors.

A decade ago he and University of Chicago economist Richard Thaler devised a 401(k) plan feature that allows workers to preset future contribution hikes -- that is, it lets them specify in advance how much they want to ratchet up savings. A 2007 study found that those who used this option boosted contribution rates from less than 4% to nearly 14% in about 3½ years' time. Those who didn't barely changed their deferrals.

Today half of large employers offer this type of feature, reports Hewitt Associates. If your company is among them, use the tool to step up contributions.

A $2,000 bump will feel like only $55 more per biweekly paycheck thanks to the tax benefit. And with the money tucked into savings, you'll be forced to adjust your spending. Your plan doesn't offer this option? Partner up with a co-worker, put a date on your calendars, and remind each other to call HR that day.

Harder Still: Live on Last Year's Budget

After the market crashed in 2008, retirees were commonly advised to forgo inflation-adjusting withdrawals on their nest eggs for a few years, to give their accounts time to heal. People who are working can adopt the same strategy with savings rates.

Say you earn $90,000 a year and save $9,000 of it. That means you "spend" $81,000 a year on discretionary items (such as entertainment and travel), non-discretionary items (mortgage, utilities), and taxes. Let's also assume your pay climbs 2% annually for the next five years. Your $90,000 salary will rise to more than $99,000. But if you were to increase your "spending" each year only enough to cover the additional taxes you'd owe, you'd be able to save an increasing amount every year -- for a total of $15,000 by year five.

The challenge here, and the reason this falls under "harder still," is that if inflation rises faster than the long-term historical average of 3% -- as some economists fear -- you'd really have to trim your spending.

This plan may not be feasible in any case if you have a medical condition, what with health care costs expected to continue outpacing income growth for the next several years.

Hardest: Boost Your Income

There's only so much you can save on a given salary. At some point, the limits of austerity (you have to buy new clothes sometime!) and the impact of inflation will make it impossible to squeeze more out of your budget. When that happens, your only option is to increase your income.

Landing a higher-paying job would be one way to up your income. But since that promises to be challenging in today's tight labor market, bringing in income beyond your full-time job may be a more optimal choice.

If you have the capacity to do consulting work in the evenings or on weekends, even a small project could help you boost yearly savings by $10,000 or so. Plus, this would allow you to save more tax-deferred: You could contribute 25% of freelance pay up to $49,000 to a SEP IRA.

You might go further by taking steps toward starting a small business while still employed a path about half of entrepreneurs have taken, says the Kauffman Foundation. Or, with housing prices down in most markets and mortgage rates near historic lows, you could take a calculated risk on real estate, investing in rental properties to boost income.

True, improving your investment results may not speed you to $1 million as quickly as jacking up your savings rate. But it can help.

Lever 3: How You Invest

Say your goal is to have a million in less than 20 years, that you have $250,000 put away and that you are taking great pains to save $30,000 a year. Even at that aggressive pace, you wouldn't hit your deadline if your portfolio simply kept up with inflation. However, if you earned a modest 1% a year after inflation, you'd get to the equivalent of $1 million today in 18 years ($1.7 million in nominal dollars). Every percentage point shaves off a little more time.

Of course, the strategies that promise the greatest potential returns also present the greatest potential for loss so you'll want to avoid serious long shots like buying manganese futures or trading the Thai baht. A few saner strategies, in ascending order of risk:

Safe Bet: Cut Your Costs

The returns you collect from mutual funds will always be hampered by the expenses you pay. Don't think reducing costs makes much of a difference?

At Money's request, Vanguard ran a series of simulations to see how various asset mixes are likely to perform over the next 20 years.

Turns out, a typical 60% stock/40% bond portfolio, charging 1.25% a year, has a great probability of generating at least 5% annually over the next two decades. At that rate -- assuming 3% inflation, current savings of $250,000 and additional contributions of $15,000 a year -- you'd get to a million in 23 years.

But if you were able to boost those returns to 6%, which you could do by reducing portfolio costs to 0.25%, you'd make it in 20 years.

You can easily create a 60/40 portfolio with an overall expense ratio under 0.25%. For example, put 40% in Schwab Total Stock Market Index (SWTSX - News) (expense ratio: 0.09%), 20% in Vanguard Total International Stock (VGTSX - News) (0.26%) and 40% in Vanguard Total Bond Market (VBMFX - News) (0.22%). All three are on the Money 70, our list of recommended mutual funds and ETFs.

Wondering if you couldn't achieve similarly positive results simply by picking better funds? Good luck consistently finding managers that will consistently outperform the market, says Thomas Idzorek, chief investment officer for Ibbotson Associates.

Less Safe Bet: Tilt Toward Small Bargains.

In this strategy, you would keep your overall stock-to-bond split the same. You'd just move some of your equity allocation out of big blue chips and into small-cap value stocks -- shares of small companies that are being overlooked or once-larger companies that have fallen on hard times and are selling at attractive prices.

Between July 1927 and the end of last year, the average small-cap value stock gained more than 14% annually, according to Ibbotson Associates, vs. 9.8% for the S&P 500.

It's not all roses, however: Such stocks tend to be more volatile than your garden-variety blue chip because they've either been battered or lack competitive advantage.

Also, there have been long stretches when they have been out of favor, such as the mid- to late 1990s. Finally, since these shares have returned nearly three times as much as the broad market over the past decade, it's hard to imagine they can keep churning out outsize gains -- at least in the short run.

But in the long term "there's no reason to believe small-cap values won't sustain their advantage," says Paul Merriman, founder of Merriman Capital Management.

So if you have at least two decades to invest, gradually shift small amounts from large-caps into small value through a fund like T. Rowe Price Small Cap Value (PRSVX - News), which is on the Money 70. Do so until the shares are a quarter of your equity allocation, and history says you'll see a real impact. Since the late 1920s, a 60% stock/40% bond portfolio with this small-cap value tilt returned 9.7% a year, while a traditional 60/40 index portfolio returned 8.7%. With that edge, in 25 years you'd turn $200,000 into $970,000 in today's purchasing power vs. $770,000 without the small-cap bent.

Riskier Bet: Step Up Your Stock Stake.

History shows that the simplest thing you can do to boost long-term investment performance is to dial up your equity exposure. Since 1926, the average 50% stock/50% bond portfolio gained 8.2%, according to Vanguard. Raising the stock stake just a bit, to 60%, would have resulted in annualized gains of 8.7%.

There's a trade-off, of course: The more you tilt toward stocks, the higher your chances of losing money in a single year. A 50/50 portfolio has lost value in 17 calendar years since 1926; a 60/40 has fallen 21 times; a 70/30 sank in 22 years; and an 80/20 dipped in 23.

You'll suffer the most if the market dives near the end of your time horizon, since you won't have a chance to recover. For example, if you entered 2008 the last year the market suffered losses -- with $1 million, you'd have had $798,000 at the end of the year with a 60/40 mix.

Were your portfolio instead invested at 50/50, your million would've ended up at $840,000. So even if you think you can handle a greater stock exposure now, be sure to reduce the percentage as you approach your goal date.

Riskiest Bet: Leverage Your Equities

Yale professors Ian Ayres and Barry Nalebuff think there's a problem with how we invest. When you're young and can tolerate being all in equities, you don't have much money. When you're older, you may want to be only 50% in stocks, but in dollar terms that dwarfs how much you had in the market in your youth.

Therefore, the duo have controversially posited that young investors -- those in their twenties and thirties -- should leverage their equity positions, sometimes by as much as 2 to 1. In other words, if you have $20,000 to invest, not only should all of that go into stocks, but you should borrow an additional $20,000 so you have $40,000 in equity exposure.

Ayres and Nalebuff crunched the numbers going back to 1871 and found that over a lifetime this strategy consistently beat the traditional 110-minus rule (where you subtract your age from 110 and put the resulting percentage in stocks). Their method resulted in accounts 14% larger, on average. Even in the worst case, their approach came out ahead by 3%.

These professors aren't talking about taking a flier on a single stock. They recommend investing in the broad market, which you can do using a margin account at your brokerage to buy an index fund or ETF.

Or you can leverage your bets through options contracts that give you the right to buy or sell an index, such as the S&P, in the future. You'd reduce your stock exposure as you age. In fact, the extra risk you take in your twenties and thirties would allow you to be even more conservative -- possibly keeping as little as 20% in equities -- toward the end of your career.

There are, of course, caveats: While the profs say that someone in his forties could still benefit by leveraging -- say, 1.2 to 1 -- older folks or those with a time horizon of less than 20 years should think twice about trying this strategy. Leverage will magnify any losses you suffer in equities.

And that could put you in dire straits if your brokerage issues a margin call, meaning it requires you to sell some of your holdings because your account value is too low. (This is also a risk for young people, but less dire.)

Finally, if you work in a volatile industry where your future income looks shaky, you can't afford this type of risk. But if you've got a stable job and decades to invest? It may just make you a million bucks.

How to Handle Being Forced Into Retirement

by Joe Mont

Even those who have been diligently preparing for retirement can be in for a rude awakening if it arrives too soon.

Let's say you plan to retire at 70 and have based your saving and investing on that. Then an illness or layoff pushes you to leave the work force up to a decade sooner. Too old to easily get another job and too young to hit your desired numbers for a 20-to-30 year retirement, it can be a rough time indeed.

Don't panic

The first bit of advice from financial advisers is to keep your emotions in check. It is advice intended not just to keep you sane, but to prevent rash, counterproductive moves.

Fear can lead some to rashly react more to immediate obligations than with rationally with future needs. They may, for example, commit what many see as the one of the great sins of retirement planning — liquidating a 401(k) and just eating the added taxes, withdrawal penalty and lost funds from future compounding returns.

"It is the worst decision you can make, and you only make it if you are truly backed into a corner and there is nothing else you can do," says Ron Courser, president of Ron Courser & Associates in Grand Rapids, Mich.

"There are always options out there. At some point in time, you may find out you are going to live to be 90 and if you consume everything today it is going to be unpleasant. It's kind of like eating the seed corn. The more you consume today the less you are going to have tomorrow," Courser says.

It is even more troubling when grabbing at that money comes as market returns ebb.

"You have chopped it off at its legs when it was low because you needed the money," says Tony Zabiegala, vice president of Strategic Wealth Partners in Seven Hills, Ohio.

Assess your employer's benefits

Take stock of whatever severance package an employer may put on the table. If you have leverage to negotiate better terms, use it. In particular, push for the best health insurance compromise you can.

"How long will your old employer give you on their health care plan?" Courser asks. "That's probably the biggest single expense they will face. If someone wants to work, they can always find something to do, even if it's going down to the temporary employment guy for $9.97 an hour. But the health care issue is really important. When you are laid off at 57, even if you do COBRA for a couple of years, eventually you have to find health insurance. And you may already have a few things going on in your life that would make it a little more difficult to get health care coverage."

Courser advises seeking out an adviser who specializes in health insurance to help find a plan that finds your needed sweet spot between coverage and cost.

Draw from your IRA

The IRS allows what is called a 72(t) exception for IRAs. While the government typically requires that funds pulled out before age 59.5 are subject to regular income tax on the withdrawal and a 10% penalty tax, under 72(t) guidelines the penalty can be avoided at any age.

"In essence, it says you can avoid the penalty by taking equal payments over a minimum of five years or until you become 59.5, whichever is longer," Courser says. "You get a 56-year-old guy who gets deep-sixed and that's an approach you have to take a look at. He may not do it, because it depends on his other assets, but if the biggest asset is his IRA it may be necessary to look at that and see if we can draw some income off it. It will still be taxable at normal rates, but at least you won't be penalized."

While draining your 401(k) plan is ill-advised, tapping into your IRA may be a solid strategy.

Revise your allocations

"They have to put together an allocation plan that is going to give them some kind of income," Courser says of forced retirees. "They have nontax-deferred assets they can use, but you need to generate some income. It really becomes critical to develop a plan that will give them the income they need until they can tap into the Social Security system and take some of the pressure off their retirement assets."

Be prepared

Don't wait to be pushed into an early retirement before starting to plan for that scenario.

Zabiegala works with his clients to create various "buckets" of assets to ensure they have a dynamic retirement plan that can handle whatever curve balls are thrown their way.

"Don't just put all of your money into a long-term bucket," he says. Short-term, medium-term and emergency savings and investments can help weather for any storm.

Emergency savings of three to six months are important so that "you are not sweating when the crunch time comes," he says.

For each portfolio, risk levels should be appropriate, with emergency funds safely in cash and longer-term needs relying more on equities for growth until retirement approaches.

Investors need to be realistic about their savings needs, Zabiegala says. When a client says their family history means they will likely die at a younger age, he will persuade them to add a few extra years to their projection to be safe. Don't think you'll live to see 85? Well, assume 90 years just in case.

He also urges caution for those who "dip into their savings like a piggy bank" under the assumption that they can always just go back to work as the well runs dry.

It may sound good on paper, he says, but it assumes that those jobs are out there. You may say you can be happy as a Wal-Mart greeter, but very few can adapt to going from "six figures to $6 an hour." A little bit of frugality now can pay off greatly in the future.

Monday, 18 April 2011

Wealth Is What You Save, Not What You Spend

Jennifer Waters

Want to be a millionaire? Don't overspend and use debt wisely.

We all may not be millionaires but there are plenty of financial and life-planning secrets we can learn from the well-heeled.

Most people know that wealth in the U.S. is in the hands of a small percentage of the total population. And, today, most of those folks with a net worth of $1 million or more have earned it themselves.

They're mostly entrepreneurs who create everything from high-speed networks to garbage haulers. They dig ditches and build houses and grow corn and make jewelry. They deal stamps or coins or artwork and control pests and cut lawns. They also cure people and give them new teeth. Others will defend their neighbors or even feed them.

And they're not big spenders. In fact, most of those with big bucks live well under their means -- think about Warren Buffett still living in that modest Omaha home -- and they put their money instead toward investments that help them stockpile more wealth.

"Wealth is what you accumulate, not what you spend," according to Thomas Stanley and William Danko, the authors of the seminal tome on America's wealthy "The Millionaire Next Door," first published in 1996.

"It is seldom luck or inheritance or advanced degrees or even intelligence that enables people to amass fortunes," the authors wrote. "Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self discipline."

Wealth is defined in many ways, though it's generally determined as the value of everything you own minus debts. But there's a difference between marketable assets -- things you own that could be liquidated rather quickly, like stocks, bonds, real estate -- and possessions like cars, clothing and household items that you use regularly and aren't likely to sell.

Income alone does not make one rich. It helps, of course, to build wealth, but the financially independent look to their salaries as a means to an end, which is that pile of cash.

"The wealthy don't spend their wealth on discretionary purchases," said Pam Danziger, founder of Unity Marketing, a consumer market-research firm specializing in luxury goods and experiences. "They get rich by maximizing the value of their investments."

That doesn't mean they don't pay big bucks for pretty shoes or outfits, but that most choose those items carefully and shop for value and quality. "They truly evaluate the purchase as an investment, not an expense," Danziger said.

What they do though is diversify those investments, which gives them more flexibility to ride out difficult times. "The wealthiest clients have very, very diversified portfolios that go way beyond just stocks and bonds into hedge funds, currencies, commodities and emerging markets," said Leslie Lassiter, managing director of the JPMorgan Private Wealth Management.

"There are many, many mutual funds out there that will allow you to get exposure to those types of asset classes," Lassiter said.

Among the biggest differences between those flush with cash and those wishing they were is in how they pay for things. Millionaires tend to use cash for most of their purchases, including cars, homes and boats.

For the average wage earner, of course, that's not always an option but it still holds this lesson: Don't look to debt to fund your lifestyle.

Most wealthy people use debt for investment purposes and are careful not to over-leverage themselves. "A prudent use of debt is an appropriate thing for anyone," Lassiter said.

They also plan very well and spend a lot of time at it. Many are compulsive savers and investors who often say the journey to riches was far more fun than the reaching the goal.

And they're patient, willing to invest in the long term and wait it out. "They stick with their investments and are more likely to have a financial plan," said Sanjiv Mirchandani, president of National Financial, a subsidiary of Fidelity Investments.

Many take the long-term approach to investing because they're working at being financial independent. When they retire, for example, many will know exactly how much they need to live on, to give away and to leave as a legacy.

"The best ones really understand how much liquidity they need to cover their expenses and make sure they have that much cash on hand," Lassiter said. "That's something the average person should do as well."

At the same time, she said most are very careful about leveraging debt. "The wealthy tend to balance between the two," she said.

Recommendations for accumulating wealth:

Live below your means: People with high incomes who spend all that money are not rich; they're just stupid.

Plan: That means plan for today, tomorrow and 30 years after retirement. Take time doing it too and spend time monitoring it every day. Use budgets and stick to them.

Diversify: As Lassiter said, look for mutual funds that allow you exposure to asset classes that aren't related to each other.

Reduce use of credit and turn to cash: It's easier, of course, for a prosperous person to pay for a house in cash than it might be for most folks, but credit-card debt for luxury purchases or extravagant vacations will never pave a road to riches.

Have access to cash: While the rich keep much of their wealth invested, they can get cash when they need it. "Have some kind of line of credit available, like a HELOC (home-equity line of credit) that you never use," Lassiter said. "It's a safety valve." She suggests a year's worth of cash to cover expenses; Danziger thinks three years worth is a better bet.

Spread cash around: When the wealthy pulled money out of the equities markets two and three years ago, they opened a bevy of bank accounts, all guaranteed up to $250,000 of deposits by the Federal Deposit Insurance Corp.

Bring your children into the mix, and remember the importance of estate planning: The affluent can go to great lengths to teach their children about money and how to manage it -- something every family should do. Though talking about money with children consistently ranks as one of the most dreaded conversations, it's important that your heirs know where all the bank accounts and safe-deposit boxes are -- even that their names are on them, too -- who the attorney is, where the will and trusts are filed.

Sunday, 17 April 2011

The Rising Price of Retirement

by Chris Farrell

Mention the word "retirement," and most people shudder. The term seems synonymous these days with the phrase, "you can't afford it." More than half of workers in the 2011 Retirement Confidence Survey by the Employee Benefits Research Institute say the total value of their household's savings and investments, excluding the value of their home and any defined benefit plans, is less than $25,000. Housing wealth has vaporized for many households. More than 27 percent of all residential properties with a mortgage — 13.4 million homeowners — had negative-equity or near-negative-equity mortgages at the end of 2010, according to CoreLogic, an information and analytics firm.

Times remain tough even though the stock market is up 97 percent from its March 2009 low and the economy is gathering steam. The government's broadest measure of unemployment, and underemployment, is at 15.7 percent, and household budgets are being squeezed by rising food and oil prices — not to mention miniscule yields on savings. It all reinforces the fact that one must confront huge areas of uncertainty when planning for the last stage of life. The answer to the question "how much will you need?" depends on a series of imponderables, from the timing of your death to your health in old age.

Nevertheless, the pervasive gloom about retirement is overdone. Fact is, people are quite creative at coming up with solutions. Case in point: An aging generation isn't really retiring, at least not in the traditional sense of the word. (Think golf.) They may say goodbye to their employer and colleagues for the last time, but they're continuing to work, usually part-time. (Think consulting.) Call it the partial retirement or the job-tirement. It allows savings to compound longer. Delaying taking Social Security benefits locks in a more generous payout. "People aren't slowing down in their 60s and 70s," says Ross Levin, a certified financial planner (CFP) and president of Accredited Investors in Edina, Minn. Adds Joel Larsen, a CFP with Navion Financial Advisors in Davis, Calif.: "If you really like what you're doing, why retire?"

When Income Replaces Savings

Just ask Don Lambert, age 67. The engineering manager retired from Fisher Controls (now Emerson Process Management, a division of Emerson) in 2002. He spent 32 years with the company, half of it abroad, mostly working on projects in the Middle East and Africa. He lives in Ames, Iowa, and when he retired he set up a consulting firm with Fisher as a client. He spent two years on contract with Fisher in Saudi Arabia, where the only thing he had to pay for out of pocket was his "newspaper and haircuts." He still works about two days a week and spends the rest of his time doing community volunteer work with the Rotary International, Meals on Wheels, and the Iowa Council for International Understanding. Lambert has a defined benefit pension plan, Social Security, savings, and no debt. He takes out roughly 3 percent of his savings a year. "I don't need to draw on a lot of my savings yet," he says.

The twin benefit from a higher Social Security benefit and returns that have compounded longer is striking. The Social Security payout rises 8 percent a year for every year of delay after age 62 and before age 70. Laurence Kotlikoff, finance professor at Boston University and head of ESPlanner, an online financial planning website, ran a simulation. Among the key assumptions: A couple is 60 years old, each earns $100,000, and they have a total retirement portfolio worth $2 million. If they elect to take Social Security at age 62 in 2013, they draw on enough of their savings for a total income averaging around $140,000 for the next 38 years. That means they can maintain their standard of living at 70 percent of preretirement income.

Yet if the same couple shifts to part-time work in 2013, making $30,000 each for four years, draws on their 401(k)s, and waits until age 70 to file for Social Security, their discretionary spending jumps by 14 percent, to nearly $160,000 over the next four decades. "To get the same living-standard-hike, the couple would need to find $455,000 lying on the street," says Kotlikoff.

Undermining Old Rules of Thumb

But (you knew the "but" was coming, didn't you?) working longer complicates everyday money management by upending a few critical and common assumptions. A traditional benchmark is that in order for households to maintain their standard of living in retirement, they need approximately 70 percent of preretirement income. The lower figure comes from the assumption that a retiree will drop into a lower tax bracket, have more time to shop for deals, and won't incur many expenses associated with work. For instance, economists Mark Aguir of the Federal Reserve Bank of Boston and Erik Hurst of the University of Chicago delved into household data on food gathered by the U.S. Agriculture Dept. from the late '80s and early-to-mid '90s. They found spending on food fell 17 percent among retired households while the time spent making meals rose by 53 percent. There was no real difference between eating out at table-service restaurants for those aged 60 to 62 (pre-peak retirement) and those 66 to 68 (post-peak retirement), except that the retired household spent 31 percent less on fast food and diners.

The old rule is obsolete for the partially retired. The retiree's tax bracket may not drop. The dry cleaning bill will probably stay the same. They're busy and just as likely to grab a burger before a meeting or stop for a takeout meal on the way home as they did before retirement. "I don't think the 70 percent rule applies," says Moshe Milesky, finance professor at York University in Canada and a wealth management and retirement expert. "It may be higher than that."

The other big change is that an aging, income-earning household needs to save from every paycheck, just like their younger co-workers. After all, the cost of goods and services used by the elderly is going up. True, over the past 12 months the consumer price index is up a mere 2.1 percent. Yet that average masks some critical differences. Fuel oil is up 27.1 percent and medical services 3 percent over the same period — a big blow to the budgets of the elderly — while the price of personal computers is down by 7.4 percent, which may be a boon to younger folks. Mutual fund giant Fidelity estimates a 65-year-old couple retiring in 2011 will need $230,000 to pay for medical expenses throughout retirement (and that does not include nursing-home care). "Every single one of our friends has had some serious financial surprise during retirement that was completely unseen," says Henry "Bud" Hebeler, the former president of Boeing Aerospace. His own "retirement" turned into a career offering retirement and financial-planning advice at his website,

Hebeler has devised his own formula for how much to save in retirement while working. He recommends taking your monthly take-home pay, after all deductions and taxes; multiply it by the number of years you will still work, and divide that figure by the number of years it's possible you have to live. For example, say a 65-year-old plans on working another 10 years, expects to live to 95, and makes $2,100 a month after deductions for Social Security, Medicare, union dues, and the like. The monthly amount she can spend from that paycheck would be $700 (2,100 x 10/30 = $700). The remaining $1,400 should go right into savings. Clearly, this isn't our parent's retirement.

Tuesday, 12 April 2011

16 Ways to Make Yourself Unfireable

We all know people who have recently lost their jobs. Maybe you're lucky enough to still have a paycheck, but for how long? Fortunately there are several simple things you can do to make yourself unfireable.

Be the First to Arrive and the Last to Leave

Showing up to work first and leaving last shows your boss that you are dedicated to your job. Make sure to leave your office door open so your boss can see you putting in the long hours.

Cut the Company's Costs

Take a look at where your company is spending its money. Then see if there are ways to reduce those costs. Your boss won't fire someone who is improving the company's bottom line.

Make the Company More Money

Even better, figure out ways to increase revenue. Find a new client or develop new products and services for your company to sell. (See also: How to Make an Extra Income.)

Just Say No to Drama

Be sure to avoid drama whenever possible. If someone starts gossiping to you, simply excuse yourself by saying "I'm so sorry, I really have to finish this project. Maybe we can catch up later after work?" This way you can avoid the drama without being too rude to the gossiper.

Be Aware

Even though you should avoid drama, try to stay informed about what other people are saying about you. If you know what is being said about you, you can figure out how to improve your relationships with coworkers or know if you need to step it up. By being aware of how you are perceived, you can always be on top of your game.

Learn New Skills

Take advantage of any training, certification, or back-to-school programs offered by your employer. The more skills you develop the more valuable you become to your employer. If your company doesn't offer any programs, buy some new books and start training yourself.

Give Progress Reports

Make sure your boss knows how hard you are working and what you are working on by giving him or her progress reports on a weekly basis. If your boss has evidence that you are pulling your weight, he or she will be less likely to fire you.

Make Everybody Love You

Be friendly with everyone. Never say anything negative, mean, or condescending. No matter how much you hate your job, always show up with a smile on your face. (See also: How to Thrive in a Job You Hate).

Show You Are a Leader

If you are on a new project and no one seems to be taking charge, step up and be a leader. They can't fire you if you're the point person of an important ongoing project.

Show You Are a Team Player

You have to be able to work well with your coworkers. Listen to their suggestions. Adapt to each person's idiosyncrasies. Treat each coworker with respect and courtesy. If you can't be a member of a team, chances are you won't survive the next layoff.

Get Personal

Make sure your boss knows about your family by keeping pictures of them on your desk or bringing them to company parties when appropriate. Also, show an interest in your boss's family in return. Employers are less likely to fire someone they have a personal relationship with. Just be wary of over sharing. Keep personal conversations light and upbeat.

Don't Take Unfair Advantage of Sick Days

Only take a sick or personal day when you absolutely need to do so. Be honest with yourself--are you really sick or just sick of going into work? Whenever you're feeling lazy, just remember the countless unemployed people who would love to have your job.

Take on Responsibilities that No One Else Wants to Do

Chances are there are responsibilities at your company that no one wants to do because, well, they are tedious and boring. Bite the bullet and offer to take on the task that no one wants to do. Your boss (and coworkers) will love you for it.

[6 Questions to Ask Yourself Before Accepting a Job]

Positivity Goes a Long Way

By remaining positive during tough times, you can help create a more optimistic work environment. Positive people are always the last ones to get fired.

Don't Abuse Internet Privileges

It is very easy for companies to track what you do on your computer while in the office, especially online activities. Stay off of Facebook, don't check your personal emails, don't surf the web, and don't use your company email address to send personal emails.

Be the Social Chair

Who would want to fire the life of the party? Probably no one, so make yourself the social chair at your company. Come up with fun events that your coworkers actually want to participate in. You will boost company morale by making sure everyone is having a good time and make your boss think twice about handing you a pink slip.

Ashley Jacobs is the college correspondent for personal finance blog Wise Bread. Follow her latest tweets on @CollegeCents.

Monday, 11 April 2011

Bucket Strategies for Retirement Will Stick Around

by Robert Powell

Many advisers, despite the advent of new technology, new products and new thinking, use some fairly old-fashion strategies to create a retirement-income portfolio.

They tend to use the same or slightly modified portfolio they did when devising a saving-for-retirement portfolio, and simply draw down 4% per year. Or they use what's called a bucket approach, the principles of which are based somewhat on the asset-liability matching techniques used by pension plans.

Much has been written about the 4% withdrawal strategy (and its shortcomings), less about the bucket strategy. In my case, the bucket strategy has become the topic du jour for a few reasons.

In 2009, UBS became one of a growing number of large brokerage firms to unveil a bucket strategy. In its version, the first risk bucket contains funds required to fulfill the liquidity needs for an individual over some predefined time horizon.

The second or core bucket contains the bulk of an individual's assets and should reflect the investor's risk preference and be positioned for the maximum return vs. risk.

And the third bucket, the leverage bucket, contains a mix of riskier assets that should be used as a risk overlay and offers the investor the opportunity to dial up or dial down their risk tolerance.

Read about the UBS risk report.

More recently, an adviser built a retirement-income portfolio for a relative using the strategy espoused by Paul Grangaard, CPA, author of "The Grangaard Strategy." That's a strategy in which an investor uses a mix of growth- and income-focused investments and products for many "holding" periods of retirement, and the growth investments/products in the current holding period become the income-focused investment/product in the following holding period.

And another reason had to with an online course about retirement that I just finished teaching at Boston University in which I learned how ingrained the bucket strategy is among advisers. One student said they first began using the bucket approach 20 years ago.

Advisers do indeed use the bucket approach religiously, though each with a slightly different variation. One student, for instance, noted in discussion group how he used what he called a "two-bucket" strategy. Money needed to fund the next two to five years of living expenses is placed in one bucket, in safe, liquid investments not subject to market volatility, such as money market funds and the like. And the remainder is placed in total return portfolio.

Another student, who uses a three-bucket approach, said the following: "I use the bucket, or what some call the time-segmentation approach, religiously. Clients understand it and they open up more when I draw it out. It is an easy concept to grasp and I think it lends credibility."

She also said that prudent diversification to her means spreading risk over many products, using the short-term bucket with bank products; medium-term bucket with a mix of bank and brokerage products; and then the long-term bucket with variable annuities, annuities, bonds, insurance and the like.

Another student used a four-bucket approach. "At our firm we use a time segmentation approach using buckets. Years one to five are for principal preservation; years six to 10 for conservative investments; years 11 to 20 for moderate investments; and years 21 to 30 for growth. This is approach is simple, and has been pretty well received thus far, although it is a constant work in progress."

In some cases, students differentiated buckets not by number but by strategy. One student noted that the main consideration is, what strategy are you employing? Is it a static point-to-point or a waterfall approach? The waterfall is smoother and addresses some of the risks associated with bucketing such as interest rate risk.

All this doesn't mean that advisers don't have concerns about the limitations of bucket strategies. For instance, one student said the weakness with the bucket approach is that it is a continuation of an accumulation or the saving-for-retirement portfolio. And yet another mentioned that creating too many buckets is not without its costs. "I have reviewed many multiple bucket strategies (time-segmented and goal-segmented) and I believe that the ongoing friction of taxes and transaction costs overwhelm the viability of the strategies," that student said.

And another student suggested that bucket strategies don't address the risk of living too long, of outliving your assets. "You still have an issue with tail risk, that is living too long," that student said. "So we would have a conversation about income and legacy and balancing your desires for legacy and the tail risk. If you live to long you are going to spend your legacy. The thought is you have already outlived your primary heirs."

So what to make of all this? Partly this: If you plan on hiring an adviser to build your retirement-income portfolio, you'll likely get some version of the bucket or time-segmentation approach instead of a new-world retirement-income plan, inclusive of, say, income annuities, deferred annuities, longevity insurance, absolute returns funds, and the like.

And the reasons they'll give make sense and are, quite frankly, backed up by research done by GDC Research and Practical Perspectives.

According to that research, there's the cost and expense of some of these new retirement-income solutions and products. There's the issue of whether the benefits of these new products and solutions are superior to that of existing solutions.

There's the issue of track record. Few product and providers have a sufficient history to ensure performance in various market environments. And then there's the issue of complexity. Is the solution overly complex or is it easily understood and transparent?

One student said that although they found the new retirement-income strategy intriguing, without further research they would remain skeptical of the cost and the difficulty of implementing the new-world strategies given the uniqueness and complexity of clients' goals.

In other words, bucket strategies are here to stay for awhile.
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Saturday, 9 April 2011

IRS: 12 most common tax scams

Blake Ellis

With less than two weeks to go before Tax Day, scammers are hard at work coming up with ways to score every last penny. That means stealing identities, filing fake tax forms, hiding income offshore and exaggerating charitable donations.

On Thursday, the IRS released its "dirty dozen" tax scams, detailing the most common ways taxpayers try to cheat the system.

"Don't fall prey to these tax scams," IRS Commissioner Doug Shulman said in a statement on Thursday. "They may look tempting, but these fraudulent deals end up hurting people who participate in them."

The people who do choose to participate in them risk facing hefty fines and imprisonment, the IRS said.

Here are the 12:

Hiding your money offshore: If you have an offshore bank account, brokerage account, credit card or even an offshore insurance plan, the IRS urges you to come forward voluntarily in order to limit the possibility of criminal prosecution.

As part of its ongoing crackdown on hidden offshore accounts, the agency announced an initiative earlier this year that gives taxpayers a reduction in penalties -- and no jail time -- if they fess up to any undisclosed overseas accounts by the end of August.

Identity theft and phishing: The IRS warns that criminals can use your personal information to file a fraudulent tax return and collect the refund that you should be receiving.

Scammers can get this info from e-mails, phone calls, faxes or social media. If you receive a message from someone claiming to be from the IRS, don't open any attachments or click on links included in the e-mail. Instead, forward the message to the IRS at

If you believe someone stole your personal information for tax purposes, call the IRS Identity Protection Specialized Unit at 1-800-908-4490.

Shady tax preparation: It's easy for an accountant or tax preparer to take advantage of you, especially if you're unfamiliar with the tax code or paperwork involved with filing a return.

There are many preparers out there who will skim a portion of a client's refunds, charge more than they should for services and lure taxpayers to their offices by promising unattainable refunds.

It's up to the taxpayer to be careful when selecting a preparer, but the IRS is also cracking down. Next year, all paid preparers will be required to register with the IRS to receive an identification number so customers can verify if they are legitimate.

Preparers will also be required to take competency tests and participate in continuing professional education, unless they are attorneys, certified public accountants or enrolled agents.

Filing false or misleading forms: Scam artists are trying to get fatter refunds than they deserve, fabricating information on their returns and claiming made-up withholding credits, the IRS said.

"The IRS continues to see instances in which people file false or fraudulent tax returns to try to obtain improper tax refunds," said the agency. "The IRS takes refund fraud seriously, has programs to aggressively combat it and stops the vast majority of incorrect refunds."

Arguing with the tax man: Have a bone to pick with the IRS? Be careful.

Taxpayers are being convinced by scam artists to argue with the IRS in order to get back some of the taxes they owe to the agency.

"Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe," the IRS said. "While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or IRS guidance."

The agency has a list of legal positions that have been "thrown out of court" and cannot be used against the IRS, so pick your fights carefully this tax season.

Inflating your withholding credit: You could be fined $5,000 this year if you exaggerate your withholding when reporting nontaxable Social Security benefits, which would result in your falsely reporting zero income to the IRS.

Exaggerating your charitable donations: It can be tempting to overvalue items you give away when reporting them on your return -- especially for non-cash donations such as furniture or artwork -- but the IRS is keeping an eye out for suspiciously high-valued donations this year.

The agency is also looking out for taxpayers who abuse charitable deductions by donating money or items to tax-exempt organizations temporarily, just to shield the money for taxation.

Fishy retirement plans: The IRS is on the hunt for taxpayers who abuse their retirement plan arrangements, including individual retirement accounts (IRAs). Many of these taxpayers are finding ways to exceed the contribution limit of IRAs or aren't reporting early distributions.

While illegal, this abuse is often encouraged by advisers, so taxpayers should be wary of such advice, the IRS said.

Disguising your company: It's time to fess up to that business you own. The IRS is currently working with state authorities to identify corporations and other entities that disguise the ownership of a business.

These entities are often disguised through using a third party to request an employer identification number, and the businesses or financial services can be used for the underreporting of income, fictitious deductions, money laundering, financial crimes and even terrorist financing.

Giving yourself a pay cut: In an attempt to lower the amount of taxes owed, some taxpayers file phony wage-related information returns instead of the required returns. This is typically done by filing Form 4852 (a substitute W-2 form) or a "corrected" Form 1099 to fraudulently lower a person's taxable income to zero.

"Taxpayers should resist any temptation to participate in any of the variations of this scheme," said the IRS, adding that false filings could result in a $5,000 fine.

Abusing trusts: An increasing number of people are transferring money into trusts to reduce their taxable income, deductions for personal expenses and estate taxes.

"Such trusts rarely deliver the tax benefits promised and are used primarily as a means to avoid income tax liability and hide assets from creditors, including the IRS," the agency said.

Claiming gas costs: Gas is pricey these days, but that doesn't make you eligible for the fuel tax credit. In fact, trying to claim this credit when you don't deserve it could cost you a $5,000 fine from the IRS.

While taxpayers such as farmers who use fuel off highways as a means of carrying on their trade or business may qualify for the fuel tax credit, you can only claim the credit if your use of fuel and income level meet specific IRS requirements.

7 Investments That Show the BRIC is Back

by Jeff Reeves

Commentary: Foreign investments to consider now

ROCKVILLE, Md. (MarketWatch) — To hear some investors tell it, the boom days of China are a thing of the past. The 2002 to 2007 surge was great — but as the saying goes, what has China done for you lately?

The benchmark indexes have left many investors flat. The SPDR S&P China ETF (NYSE: GXC - News) has underperformed the major indexes slightly over the last 12 months, up about 10% compared with 13% for the S&P 500 (NYSE: ^GSPC - News). More recently, in the last six months the China SPDR is up a mere 5% vs. 15% for the S&P 500 since October. Then there are the iShares FTSE/Xinhua China 25 Index ETF (NYSE: FXI - News) and the Claymore/AlphaShares China Small Cap ETF (NYSE: HAO - News). Both are up less than 6% in the last 12 months, about half the performance of the broader market.

Similar arguments can be made against other emerging markets – the landmark iShares MSCI Brazil Index ETF (NYSE: EWZ - News), with nearly $13 billion in assets, is up a mere 4% in the last year. And the diversified iShares MSCI BRIC Index Fund (NYSE: BKF - News) is up only 7% over the last 12 months.

When you look at numbers like this — alongside headlines of China real estate bubbles and India food inflation and the rest — the BRIC seems a bad bet. Right?

Wrong. The only thing proven by the underperformance of these funds is that Wall Street is a far more complicated place these days than simply picking a country and putting your portfolio on cruise control. In the boom times, investors could simply throw a dart at China and watch the cash roll in. But now, it takes a more to pick a winner.

I have never been to any of the BRIC nations and don't pretend to be an emerging markets insider. All investments require homework, and foreign investments require even more. But based on big-picture trends and specific facts for each stock, here are some picks you may want to consider in the BRIC right now:

Brazil: Banco Bradesco

It's no surprise why the iShares Brazil ETF has underperformed — over 35% of its holdings are vested in some form of Petrobras (NYSE: PBR - News) or Vale (NYSE: VALE - News) stock. Both the oil giant and metals giant have underperformed the market lately, dragging down this fund. However, another one of this ETF's major holdings, Banco Bradesco (NYSE: BBD - News), has fared quite well. The commercial bank is up over 20% in the last year on strong growth in lending and a growing middle class frequenting the bank more. Toss in a 2.6% dividend — not bad considering the state of financial sector dividends in the states — and you've got a decent BRIC buy.

Brazil: AmBev

Brazilian beverage giant AmBev (NYSE: ABV - News) is an interesting growth opportunity right now. Amid a 5-for-1 split just after Christmas, the company topped earnings expectations for the first time in several quarters thanks to 13% sales growth overall — 10% growth in its home country of Brazil. It was part of a fourth-quarter report that boasted nearly 50% earnings growth year-over-year on the quarter and nearly 40% for fiscal 2010 over 2009. As an emerging middle class develops more expensive tastes for beer, soda and other beverages, AmBev could be a great long-term play in Brazil. The stock is down slightly in 2011, but adjusted for the slip ABV shares are up about 65% in the last 12 months.

Russia: Gazprom

A very savvy colleague of mine, Ivan Martchev, said to me the other day "as Russia goes, so does Gazprom (NYSE: OGZPY - News)." The energy giant is the largest Russian company by market cap, and is benefitting doubly from the focus on crude oil and the focus on Russia by institutional investors. The stock is cruising at a new 52-week high — and with a stunning 17% of worldwide natural gas production and a nearly 10% contribution of total Russian GDP, you can understand why this stock has seen a jump of over 50% in the last six months. Though a pink sheet stock and thus not subject to some of the stricter standards of a major exchange, give Gazprom a look.

Russia: Russia Capped Index ETF

Though it may seem like a contradiction for me to bang up broad-based funds and then pitch a Russia ETF, note that the iShares MSCI Russia Capped Index Fund (NYSE: ERUS - News) is essentially a heaping of Gazprom with some other Russian stocks on the side. With 25% of assets behind OGZPY stock and another 11% behind Lukoil(NYSE: LUKOY - News), you're essentially making a slightly less aggressive play on the Russian energy scene. But fair warning — ERUS launched in November and trades only about 50,000 units a day.

India: Sterlite

Sterlite Industries (NYSE: SLT - News) is one of India's largest mining companies, with interests and operations in aluminum, copper, zinc and lead. While the stock has admittedly underperformed the market recently, the company is on track to grow earnings by over 35% this fiscal year — and its January earnings report showed profits up 60% on higher base metal prices.

Inflation seems like a foregone conclusion in commodities like energy, food and metals. Though things have been rocky in the near term — India investments had a heck of a January and have yet to recover — this uptrend coupled with projections of 50% sales growth in the next fiscal year add up to a decent long-term buy in India.

China: CNOOC Ltd.

Like Gazprom, China National Offshore Oil Company (NYSE: CEO - News) is a massive oil company in one of the largest energy producing regions of the world and enjoys favored status with the government. It's hard to bet against a play like that. With crude oil prices steadily on the rise to boot, CEO seems a great China play. It has been so far — shares are up over 10% since Jan. 1, and are up over 50% in the last 12 months. CEO is just a shade off a new 52-week high, but that could be one of many marked by this oil giant in the next several months.

China: Baidu

I know, everyone always rolls their eyes at folks who call Baidu Inc. (NASDAQ: BIDU - News) "China's Google." But now that Google Inc. (NASDAQ: GOOG - News) has all but given up on China, there's really no other way to put it. The Internet giant is growing at a breakneck pace. Revenue almost doubled from 2009 to 2010, and growth could top 70% this fiscal year. Is it any wonder shares have doubled in the last 12 months? China's heavy hand with the Web all but ensures that western players like Google will have trouble getting into the market — or at least trouble stomaching the rules. In a vacuum, Baidu is sure to thrive.

As of this writing, Reeves did not own a position in any of the stocks or funds named here.

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