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Today's Commentary: 12.15.06
The Flop
How the S.E.C. got Played
I grew up watching Bill Laimbeer, the tough blue-collar center from the Detroit Pistons. He was always the opponent, playing opposite some of my favorite teams of that era.
NBA.com describes him and his well-known drop to the hardwood like this: The Laimbeer "flop" became the stuff of legend. A grimacing Laimbeer would often go careening to the floor in reaction to the slightest tap from an opponent.
Pulling just such a move from this four-time all-star centerıs playbook, the Securities and Exchange Commission, the referee of choice for the investment community has blown the whistle on numerous regulations, when, as in the many instances that Mr. Laimbeer fooled the on-court refs, there was no foul.
The foul, the act of impeding the movement of a player in basketball, depends on the quick eyes of the referee. Never have the fans played a roll in the call yet the outcome of some of those decisions remain burned into many a fanıs memory.
Christopher Cox, the chairman of the S.E.C. announced on Wednesday that his regulatory group was calling "foul" on such important regulations such as Sarbanes-Oxley, the right for foreign companies to come to our shores in order to list their offerings and play by our rules, hedge fund minimums and company disclosures. Shareholders suddenly became the opponent crying "flop".
The portion of Sarbanes-Oxley in question, Section 404, made it mandatory for all companies to have their financial statements audited for accuracy. Called a knee-jerk reaction to the historical downfall of companies like Enron and Worldcom, Section 404 was adopted at great cost at least initially. The price of those auditory regulations was the subject of the flop.
Many larger companies have now integrated the law into their regular practice and actually have found the cost has dropped significantly as auditors worked the legislation into the software tools they use.
Small businesses, the very companies that have the most to reveal in their statements to their shareholders, will now be exempt. These companies are the high-risk investments in the mid- and small-cap space. By flopping, they simply added another layer of risk without adding any additional reward to investors who purchase their shares. The money saved from this change of rules will not find its way into the shareholder's pockets.
Criticism of the rules came from the top down. Under the guise of competitiveness and transparency, you can now expect many of these smaller firms to use the S.E.C.'s ruling to increase the perception of shareholder value without the accounting proof to back it up.
Allowing small companies to tailor their accounting to suit their own circumstances opens the door for other businesses to follow. It is a sad day when the S.E.C. allows itself to simply react abstemiously.
The second flop came from overseas companies looking to list and run. Regulations, according the foreign markets biggest advocate, Henry Paulson, our Secretary Treasurer, had stymied the IPO market and gave many foreign companies reason to pause before they entered into our regulated investment havens.
The hallmark of American markets was the regulations in place to protect investors. The hallmark of globalization is the deconstructing of such barriers to allow the free flow of commerce and the power of capitalism to make the rules. If we truly wanted globalization, we should force foreign markets to rise to our regulations. That would clarify the rules of commerce that we so xenophobically lay claim to having created.
Mr. Cox also sought to slap the collective wrists of hedge funds by raising the minimum investment from $1 million to $2.5 million. While this is will have little if any trickle down effect on the average investor, the efforts of the S.E.C. to expose the Wall Street Laimbeers for what they really are will now be a mote point. These cowboy investors now have the range to themselves.
The final flop came to the prospectus. Considering the rise of internet ready information as a good enough reason, the S.E.C. will now allow investors to get their shareholder information via the web. Only if investors request a paper printout will they receive one. Only if investors are well organized will this information have the same value as the hard copy.
Bill Laimbeer would have loved the way the S.E.C. blows the whistle. The opposing team, the shareholders, should not.
Today's Commentary: 12.14.06
Pinpointing the Percentages
A Look at Saving Your Retirement
Are you saving enough for retirement? If you aren't asking yourself that question, plenty of companies are. When it comes to retirement and how much you will need, planners often disagree on how much is enough. Imagine doing this for a time in the distant future when no one is sure how much will actually be enough.
Pre-retirement surveys are sprouting up everywhere. They are asking about your lifestyle and what you plan on doing when you retire. And while the respondents to these questionnaires are mostly the ones who can see retirement as something that is close at hand, everyone should be asking the same thing.
Making it doubly difficult, even when retirement seems near enough to grasp, far too many variables enter into the equation to make the determination of "how much will I need" as easy as answering a few simple questions.
For the sake of this discussion, retirement will mean the point when you draw solely on your retirement savings to help you with day-to-day expenses. Granted, that is the drawn down version of what many feel retirement should be. For the sake of this discussion, we will leave leisurely activities out of the equation.
Despite everyone's best efforts, the younger worker is not likely to prioritize retirement in their current spending/savings plans. Which is too bad. They do, and there is a good deal of evidence to back this claim, forfeit some of the best years for saving. With compounding and a long horizon in which the equity markets can grow, the younger investor will benefit over the one who begins late. But there are houses to buy and kids to raise.
Those late-to-the-game savers tend to try to catch-up by socking away larger amounts in their middle years while taking greater risks with that savings. Although they may subscribe to the current thinking that we will work much longer than any previous generation, once you hit that benchmark age, retirement or at least a significant and permanent retreat from a full weekıs work begin to look increasingly attractive.
There have been attempts at defining how much is enough as planners and brokerage houses roll out new tools. The most popular post-work guidelines suggest you will need anywhere from 70% of your pre-retirement income to 85% and then to my suggestion of calculating the need for 100% or more of what you are making now for later. All of us could be right and as many could be wrong.
The 70 percenters all believe that retirement will present fewer liabilities as we age. This group should be entering retirement with no mortgage, a home in relatively good repair, no debt or at least a manageable amount, affordable health insurance benefits, and limited travel ambitions. This plan also assumes that property taxes and insurance will remain stable based on pre-retirement levels. This group, in order to succeed, needs inflation to remain tame.
But taxes, insurance and inflation are not likely to be more affordable once your working income ceases. Health insurance, the conversation of choice among seniors I found out during a visit to a hospital-bound elderly relative, could also become a hot topic that has no monetary target. In other words, you cannot determine today what that coverage will cost in ten years. And this dire news does not account for possible changes to your coverage.
The 70 percenters would be wise to take advantage of every option available including their IRA. A recent piece of legislation allows retirees to rollover their IRA in the newer enhanced
HSA, a consumer driven health savings account. This permits savings that was growing tax deferred to be free of taxes once it is put in the plan. Be aware of the stipulation that comes with such a rollover. That money, once it is moved, can only be withdrawn for medical reasons.
But if that group was counting on that savings for income, what will they do now? You will find that the 70 percenters often make assumptions that are not based in reality.
Often, too often in fact, the 70 percenters will count their house as an asset. In the back of their minds, they look at the equity built up in the property as a sort of safety net. The two things they fail to understand with that thinking is that equity is equity until it is tapped; then it becomes debt.
In many instances, the 70 percenters fail to recognize the cost of that debt in terms of interest rates and pay back periods. But more importantly, will the lending institution lend you the money on your diminished income? Probably not. And although you may trot out all of your accumulated savings as proof you can pay back the loan, why borrow only to accrue unnecessary interest.
The 70 percenters will often cite a pension as part of their plan. This added boost to their financial picture is only as good as the pension. If you have questions about your pension, the lion's share of which are under funded in this country, you have the right to ask if it is insured and if you ask in writing, they must respond with your planıs funding condition.
The Pension Benefit Guaranty Corporation acts an insurer guaranteeing that pensioners will get something should the underlying plan fail. The shock for most people, who have accumulated the majority of their pension dollars in the later years of their career, comes when they realize that the PBGC has an income cap of $47,652 for retirees aged sixty-five in plans that terminated in 2006.
Fidelity is suggesting that an 85% pre-tax retirement income is the best goal. The company feels that health insurance is the greatest risk to any retirement plan. That factor alone could impact savings more than many of us anticipate. Worried that a retireeıs inability to pay for good health care coverage could have a devastating effect on a retirement income perceived to be adequate.
After a recent appearance on a local television show, I was stopped and asked the same question most fifty year olds seem to be asking these days: "should I buy long-term care insurance?".
The daunting truth is probably yes. And the reality is probably no. If you consider the fact that you have a one in three chance of ending up in a nursing home, even briefly, as good odds, you probably shouldn't get it. But you should save for the possibility. Factor in an additional $100,000 above and beyond what you have set aside for retirement income. As mentioned earlier with the 70 percenters, rolling this into a health savings plan at retirement is a good idea.
While the premiums for long term care insurance might seem considerably lower in your fifties than in your late sixties, you should also consider your resources. Is your home elder-friendly? Now would be a good time to rethink those stairs and discuss the possibility of not being able to use them.
Will you have family to help you recover from some of old age's maladies? In many instances, a family member will step in and help. But you should consider this fact: one in twenty seniors aged sixty-five or older ends up in a nursing home for more than five years.
People who believe that 85 percent of their income will be adequate can only really make that claim if they currently live on exactly that amount. These folks max-out 401(k) plans, hold investments outside of retirement accounts and realize that where you live is shelter foremost with downsizing or reverse mortgaging as the last resort rather than part of the plan.
Determining what the industry calls a income replacement ratio can be difficult. Worksheets and calculations can be made at a wide variety of sites across the Internet. But how well they jive with your outlook is unknown.
The best thing to do would be to start the discussion now. Don't look at rainy Monday mornings as a good reason for retirement. But by all means, discuss how you envision your post-work years. Can you afford it on your current take home pay? Remove your mortgage (but not your cost for taxes, insurance and upkeep) and ask yourself could you afford it now?
Factor in your health (and to a limited degree, the health of your parents) and try and determine those costs, which could rise almost 100% over the next ten to fifteen years.
Now determine your hopes, desires and aspirations. Is there enough money left over to do those special things right now? If not, after taking all of those other expenses into account, then you are not saving enough.
And lastly, take the government out of the equation. While many count on something from Social Security, suppose it wasn't there. Could you face old age without Medicare or Medicaid?
Do your best to save as much as possible now. Ignore the percentage targets set by planners. No calculator can determine everything you will need or not.
Do not plan on working later in life. There are only a select few who can or will try to do this because they want to. A far greater number of us would just as soon cease and desist. If you think it is possible and something you might consider, start the job search today. The doors for late life job seekers are not as wide open as they were when you were twenty.
Beginning to save as if you will need every dime of your current take home pay, possibly more and doing it now will make the future just a little less complicated.
The Blue Money Report
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