The CAPE Crusader

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By Jeffrey Cedarholm, CFP®, ChFC®, CLU®

Chief Investment Officer

The purpose of investing is not to simply optimize returns and make you rich.  The purpose is not to die poor.                                                                                                                                       – William Bernstein

“Holy Cow Batman!”  Wait a minute, you have the wrong crusader.  In the world of investing, it’s not Bruce Wayne of Gotham, but Robert Shiller of Yale.  And it’s not Caped, but CAPE (Cyclically Adjusted Price Earnings).  Shiller is a recently named Nobel Laureate, professor of economics, the developer of the Case-Shiller Real Estate  index, the author of the well timed book Irrational Exuberance, and oh yes, the originator of CAPE.

The CAPE valuation method uses per-share earnings normalized over a past 10 year period, which tends to smooth earnings (and then also the price / earnings ratio) over a typical business cycle.  The current valuation is 26 times earnings.  Leuthold/Weeden, a prominent financial research firm, uses a slightly different method calculated over a five year period, and their ratio is currently valued at 21 times earnings.  Both of these P/E valuations are above their respective average value, in both cases above the 80th percentile, at least when the exercise is applied to domestic stocks.

The concern from Shiller, James Montier of GMO and other market pundits is not that the domestic market is just expensive.  It is really that based on past history when the market was this expensive on a CAPE basis, five year future market returns have been flat to negative.  Shiller’s graph, included below, shows that his index has only been more expensive than now in three years, 1929, 2000 and 2007.  Uh oh! Obviously, price / earnings ratios are not the only (or even the best) market valuation tool.  The trailing twelve month P/E ratio is only 18.8, and the forward looking ratio (as if we can predict the future) is even lower.  U.S. corporate earnings have remained persistently strong over the last five years and with a near zero interest rate, some premium in the ratio may be justified.  Our markets have done very well since 2009 compared to other markets around the world, and domestic stocks are now more richly valued.  It does make sense to slowly move away from our high valued stocks into less expensive areas of the world, especially Europe and emerging markets, if one has the stomach for uncertainty.  It may also be prudent to begin to accumulate a little more cash, as we see some of our fund partners doing.  Bottom line:  U.S. stocks have done very well, but are no longer inexpensive compared to most of the world.  Time to be careful out there!

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My many thanks to Robert Shiller, James Montier and William Bernstein for their continued research, and frequent articles and books. I have used and abused their thinking many times over the years. If you want more, be sure to check out Shiller’s website by clicking here.

Jeffrey Cedarholm is the Chief Investment Officer at Longview Financial Advisors, Inc.  He is a CERTIFIED FINANCIAL PLANNER™ practitioner with a passion for investment and wealth management. Jeff can be reached via e-mail at jeff@longviewfa.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Inheriting a Non-Spouse IRA

Andrew Gipner

 

By Andrew Gipner, MS, CFP®
NAPFA Registered Financial Advisor 

 

As discussed in the last blog post, inheriting an Individual Retirement Account (IRA) can bring a great deal of complexity if everything attached is not properly planned. In this month’s blog post, we’ll be discussing Inherited IRA accounts from both a beneficiary and benefactor standpoint and a few strategies to consider. 

As you may already know, IRA accounts are not distributed in accordance with a Last Will and Testament, but rather a beneficiary designation that should be completed in conjunction with the establishment of an account (and reviewed regularly!). By having a beneficiary designation attached to the IRA, it allows the account – in its simplest form – to avoid probate and immediately go to the said person or persons listed on the designation form. Unlike inheriting an IRA from a spouse, the non-spouse beneficiary cannot roll over the proceeds of the account to his or her own IRA. 

The decision the beneficiary makes on how they would like the funds distributed could have a lasting impact on their future. When an account is inherited, in most cases, it is very advantageous for the beneficiary to take the annual required minimum distributions based on his or her age at the time they inherited the account. 

But what about situations where the beneficiary decides to take the lump sum? Let’s say that Freddy is a spendthrift and inherits his mother’s Traditional IRA. Freddy anxiously awaits the proceeds of his mother’s IRA so that he can immediately purchase a new car, condo, and a trip to Hawaii. Since the proceeds of the Traditional IRA were deferred income, Freddy now has to pay income tax on the amount in which he received from the IRA which ultimately pushes him into the highest tax bracket and causes a handful of unexpected consequences due to the tax laws. It goes without saying that the lump sum distribution Freddy received gave him more to deal with than he may have originally anticipated. 

While Freddy’s case is an extreme, there are ways in which his situation could have been avoided. By making the beneficiary of the account a trust for the benefit of Freddy, stipulations could have been set in place that would have ultimately allowed the capital in the Inherited IRA to grow and disallow him from taking all of the money at once and spending it. If the Inherited IRA is in a trust, income would still need to be distributed in accordance with his age through required minimum distributions, but the stipulations of how much he could withdraw and for what reason would be written within the trust document. More times than not, making a trust a beneficiary is a good strategy to consider for spendthrifts like Freddy or if the beneficiary of the account is a minor child. All that being said, it is highly (highly!) recommended that you discuss the stipulations of adding a trust as a beneficiary for an IRA account with your financial planner and estate planning attorney to ensure that the language within the estate documents and beneficiary designation is indeed correct. Failure to have the correct language could put the beneficiary in a situation where the account must be withdrawn in 5 years, which in-turn, could add a great deal of unwanted consequences that were never intended by the benefactor. 

Recent Reasons Why a Trust Should Be Considered as a Contingent Beneficiary 

While it has been a topic of discussion for the past couple of years, the Supreme Court recently ruled on June 12 that Inherited IRA accounts do not have the same bankruptcy and creditor protection of up to $1 million granted to Traditional and Roth IRA accounts because they are no longer –for all intents and purposes – retirement accounts (Clark v. Raemaker). This means that if a beneficiary does indeed find themselves in the midst of bankruptcy, the amount they hold in their Beneficiary IRA could be taken away by way of creditors and litigators. More than ever, even if the beneficiary is not a spendthrift or minor child, a trust should be considered. Again, before taking any action of changing the beneficiaries on your account, we recommend that you discuss everything with your financial planner and estate planning attorney. 

Andrew Gipner is a part of the planning team at Longview Financial Advisors in Huntsville, Alabama.  He is a graduate from the University of Alabama with a Masters in Financial Planning. Andrew is a  CERTIFIED FINANCIAL PLANNER(TM) Professional as well as the the Membership Director of NAPFA Genesis,  a sub-group of the National Association of Personal Financial Advisors (NAPFA) dedicated to the professional growth and development of financial planners age 33 and younger. Visit “Our Team” to learn more about him and other team members at Longview. Andrew can be reached via e-mail at andrew@longviewfa.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Inheriting Your Spouse’s IRA

Andrew Gipner

By Andrew Gipner, MS, CFP®
NAPFA Registered Financial Advisor 

Inheriting an IRA account can be a complicated process that if not properly planned for and handled in the correct way can result in a great deal of unwanted stress and even a larger than expected  tax liability. In this two-part blog series, we will explore the top strategies to consider when inheriting an IRA as a spouse (in this post) and strategies and considerations as a non-spouse benefactor and beneficiary (in the next post).

Inheriting an IRA from Your Spouse

While there are a few options that can be made, let’s focus our attention on the two most common options – rolling the deceased spouse’s IRA into the surviving spouse’s IRA or keeping the IRA in the account with no transfer initiated.

First, rolling the deceased spouse’s Traditional IRA into the surviving spouse’s IRA (thus, making it one account) is typically recommended to surviving spouses who are younger than the deceased. Using a very general example, let’s say that John is age 72 when he passes away and his wife, Jane, is 65. Because John was past the age of 70 ½, he was required by the IRS to take his required minimum distributions (RMD) from his Traditional IRA (which was based on his average life expectancy). With it being 5 ½ years before Jane is obligated to take her required minimum distributions, after John’s RMD is taken, she can roll over the net proceeds of John’s IRA into her IRA. The deferred money will grow without having to take required minimum distributions and pay tax until she reaches the age of 70 ½. It also goes without saying that this strategy could potentially put Jane in a better situation for some good financial and tax planning given the chance there will be a lower tax liability.

Now let’s say that John is 75 and Jane is 71. Since required minimum distributions are based on average life expectancy it would still make sense for Jane to rollover John’s IRA into her IRA given the fact that she has a longer life expectancy and smaller required minimum distribution divisor based on her age.

On the other side of that, let’s say that John is 65 and Jane is 72 when he passes away. Jane can keep John’s Traditional IRA open and defer the required minimum distributions until he would have reached age 70 ½. This again is a way to lower a tax liability – especially if one spouse’s IRA is significantly more than the other.

Another situation where it may be best to keep the IRA accounts as two separate accounts is when the surviving spouse needs income and is younger than the age of 59 ½.  Using John and Jane as examples again, let’s say that Jane is 55 and is in need of income for whatever reason. If she took John’s IRA and rolled it into her IRA, and then took a distribution to supplement her lifestyle, she would have to pay tax on the amount in which she withdrew plus a 10% excise tax on an early withdrawal because she has not reached age 59 ½. If she was to keep the two IRA accounts separate and withdrew from John’s account, she would still have to pay tax on the amount from which she withdrew, but there would not be a tax penalty for an early withdrawal if it came from John’s account.

In cases where the surviving spouse had a Roth IRA, more times than not the recommendation would be to take the Roth IRA and roll it into the surviving spouse’s Roth IRA due to the fact that the Roth has after-tax monies that are able to be distributed tax free.

In closing, the death of a spouse can be a life altering event and the added financial stress of not properly establishing the right direction of the IRA accounts can add even more stress. If you find yourself in this situation, we recommend that you first discuss everything with your financial planner or tax advisor to ensure you are indeed taking the right strategy tailored to your needs.

Andrew Gipner is a part of the planning team at Longview Financial Advisors in Huntsville, Alabama.  He is a graduate from the University of Alabama with a Masters in Financial Planning. Andrew is a  CERTIFIED FINANCIAL PLANNER(TM) Professional as well as the the Membership Director of NAPFA Genesis,  a sub-group of the National Association of Personal Financial Advisors (NAPFA) dedicated to the professional growth and development of financial planners age 33 and younger. Visit “Our Team” to learn more about him and other team members at Longview. Andrew can be reached via e-mail at andrew@longviewfa.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Form ADV and Privacy Policy

Each year, Longview reviews and updates its privacy policy and SEC disclosure form (Form ADV) to ensure we are continuing to meet the appropriate regulatory policies and procedures. The privacy policy information has not changed from the previous year and the only material change to our Form ADV is the addition of two new employees, Jeff Jones and Joseph Bedingfield, and the removal of Mitch Marsden, who has moved back to Utah to be close to family. 

Both forms can be accessed online or you may request a paper copy from us at any time.  We have included a physical copy of our privacy policy in this mailing.

Risks to Consider Before and During Retirement

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By Jeffrey Cedarholm, CFP®, ChFC®, CLU®
Chief Investment Officer

Within the last month, we have had two meetings with new clients each of which are planning for retirement. Like many of our clients, neither of the two knew when retirement would begin. At our first meeting, as we discussed risks – specifically investment risks – one of the clients asked “So, how much risk do we need to take in retirement?” While we always complete their planning before providing a specific answer, the general response given to our new clients who ask the question is that you should only take as much risk needed to accomplish your short- and long-term goals. Usually their response guides us into a discussion about what those goals are which will serve as the framework of a customized ongoing plan.

The zinger really came in the second meeting when our client asked “So, what are the risks you see for us in retirement?”  This time I didn’t answer in order to gather my thoughts.  After some time to think, I have concluded that there are many, but four seem to be more prominent than others. They are:

Longevity Risk – Most people imagine their life in retirement at least as good as in their working years, including being economically as well off.  With Social Security and pension income, we know that clients can maintain a fixed source of income, but their lifestyle could suffer greatly if the steady capital inflow from their investments is eroded over time. In our initial planning process, we project lifespans out between 20 – 30 years and much will happen during that time!  The risk is that with ever better nutrition and medical care, retirement lifespans could last well beyond those projections and beyond that investment income.

Healthcare Costs – As a parallel to longevity risk, healthcare costs will continue to rise as we breeze through retirement.  Even if we don’t consider the high rate of healthcare inflation, it is estimated that most retirees will spend between $250,000 and $300,000 on health related expenses, including the cost of long-term care (or the insurance to offset that care).

Investment Risk – Many of the gurus in our profession are preaching of a future with lower returns than have been the average since 1982.  Even though we have had a bull market over the last five years, it has certainly been a reluctant bull.  And after last year’s gains, it appears the market has stolen returns from future years.  With stocks a little on the high side and bonds being very expensive, it is hard to see what will drive returns to their long term averages of 8 -9% over the next 20 years.  Add to that the conundrum of the massive number of baby boomers retiring and the outlook becomes pretty murky, at least based on our historical perspective.

Finally, as I said in the beginning, there are many financial risks for retirees to ponderHowever, the sneaky one, the one few consider is the risk of not enjoying retirement to its fullest because you are worried about all the other risks. A good spending plan, appropriate investing, and ongoing monitoring will go a long way towards mitigating all of these risks.

Jeffrey Cedarholm is the Chief Investment Officer at Longview Financial Advisors, Inc.  He is a CERTIFIED FINANCIAL PLANNER™ practitioner with a passion for investment and wealth management. Jeff can be reached via e-mail at jeff@longviewfa.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.