Greg Heiple of Teeter Totter Principle (BalanceZone) fame emailed me this considered response to living benefit variable annuities. Right now with the world economy in turmoil the one rule must be to double check all retirement options and seek the best advice your can find. Greg provides food for thought and should help you think through the living benefit variable annuity as a retirement option.

No one knows how people are going to behave with these types of  guaranteed lifetime income contracts that are being offered through variable annuity company’s.

These guaranteed contracts are fairly new and they have never been tested. While the insurance companies run tests, make assumptions, and design hypothetical scenarios, to test how these contracts will perform, they are all educated guesses at best. No one can predict the future.

The questions that arise from the various variable annuity contracts that are offering guaranteed lifetime income are as follows:

1.      If the account value substantially falls in value, will investors and advisors stay with the contracts even with the guarantees intact?

2.      How much money will people take from their contracts?
3.      Do advisors and investors truly understand these very complicated guaranteed contracts? If not, what will be the cost of potential law suites?

4.      How do insurance companies know how to accurately charge for these various guarantees that have never been dealt with before?

*       If the ending balance falls too far from the original amount invested, history tells us that most people will be irrational and walk away. Even if the guaranteed income is still being offered, if the contract is sold as an investment, chances are people are going to deal with them as though they are investments.

*       Just how much monthly income will you need during retirement? If you are like most people, you will eventually have an event pop up that forces you to dip into your savings. It only takes one time to violate the terms of these contracts to substantially reduce or even eliminate these guarantees.

*       These contracts are intensely complicated. Given this fact, both advisors, and investors are vulnerable to misinterpretation of how these contracts are sold, purchased and used.

*       Finally, there is the pricing issue. How do the insurance companies price this risk? At the current time, no one has an accurate answer. To exacerbate this problem, every insurance company involved in these types of contracts are using the same abacus (the bell curve) to measure risk, and are making the same assumptions (average life expectancy) for 100% of these guaranteed life time income contracts.

What happens if we get a medical break through that doesn’t just increase average life expectancy? What if we get a break through that dramatically increases absolute life expectancy? What if we could choose to be 300? Admittedly, this is a pink elephant questions, but given the recent 56 trillion dollar Credit Default Swap mess, we should admit that this is a black swan reality. Stuff happens.

I truly do want to believe in these new guaranteed life time income contracts.

The industry is making great improvements and I am hopeful that they will eventually simplify and homogenize the way these contracts are designed, sold, and used. As it stands now, I think we are in the same place that the automotive industry was when they first came out with the fuel-efficient automobiles. Yes, the Pinto, Pacer, and Gremlin were on the cutting edge of their time, but we all remember the problems that came along with those cars.

Take Care,

Greg Heiple
President

Click Here To Learn About My New Book BalanceZone

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I have been taking a few days out to think about what to do now with the blog.

I cannot keep talking about all the doom and gloom. The blog was meant to help inform Baby Boomers of the need to protect their nest eggs and take control of it.

Events moved so fast that most Baby Boomers didn’t get a chance to even get their heads around the problems I was talking about.

The whole wealth management system was based on the false assumption that markets will always go up. When they don’t they will soon recover and continue going up. Their models took no account of the the potential for a major catastrophe that could bring down the stock markets, the mortgage markets, the credit markets and destroy world economies too.

Hind-sight tells us Wall Street had stopped investing in Stocks long ago because there was no serious money to be made there. Pension funds were churning stocks to pay themselves hefty fees and commission at the expense of their investors. The smart Wall Street guys knew this and so set up their own money making system

They set up their own off market trading system dealing in complex derivatives, then packaged them and on-sold them to unsuspecting but trusting private clients, pension funds and local government institutions around the world.

The two thing all these people and organisations had in common was virtually no financial experience even at board level, an eye for an easy buck with an implicit US government guarantee, and a reliance on the advice given them by the Wall Street sales people. Add a ratings agency triple A rating and it was a money making machine for Wall Street.

Unfortunately many Baby Boomers are now stuck with investments that show significant paper losses. Many had all their retirement nest egg invested in “properly diversified and asset allocated” balanced pension funds.

Most of these funds only had one fire door Baby Boomers could use to get out if things went bad - the redemption door. The whole idea of buy and hold is no exit strategy was needed - ever. There was no plan B, no what if scenario that was designed to gracefully reduce a Baby Boomers exposure to the volatile markets.

I’ve been reading that redemptions from funds are at their highest level in years. That probably includes Baby Boomers who are getting out at whatever the financial cost is just so they can sleep at night.

So much for faith in the financial system and their financial advisers.

Where to from here? Baby Boomers who still have money invested in funds showing a large paper loss should seriously try to hold on if they can. The financial loss is just too much to take right now. If possible try and live off the cash you have before selling depressed assets.

If you are still working then you might consider putting any spare money into the bank until further notice. That will ease the pain of the losses since you will have money to live on.

Where to from here for this blog? I am still deciding what I should do. Harping on all the negative stuff is not the thing to do. If I find a topic which is positive I will post about it.

I am now considering giving myself a refresher on trading/investing in the markets. There will be some good opportunities coming up once the volatility settles down. I want to make sure I have a trading/investing strategy in place to take advantage of any market rally in the next 12 months or so.

However I don’t expect the markets to rally and get back to where they were for some time to come. High leverage investing which drove much of the bull market is no more, at least for a while.

If I were to give any advice at this point it would be to learn all you can about protecting your nest egg for the future. Learn also how stock markets work and how you might be able to take advantage of any market rally in the future with a percentage of your money.

Also try to diversify so all your nest egg is not with one fund manager or financial planner or WRAP account. Give yourself plenty of wriggle room. Don’t trust anyone who claims to be a financial expert. You keep control of your money. Keep enough cash handy for 3-5 years if you can.

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No matter what the wealth managers say about it, cash is a position especially in times of crisis like now. Cash is a position but that does not mean you will be in cash forever. The way they tell it is will not protect you and you could miss out on the next bull market.

So for that reason you should gamble some or all of your nest egg in a market that no one can understand right now. That makes good sense and is really professional - I don’t think.

They conveniently forget that in the 70’s the stock market made virtually no capital gains and inflation was running at double digits. How did stocks protect your nest egg against inflation then?

Unless the whole world goes into financial melt-down, cash in your bank account is what you need to reduce some of the panic we all feel. Baby Boomers are especially vulnerable to a recession/depression at this time.

Giving more of your money to your fund manager right now makes no sense either. It is better in your bank where you can control it, until the world sees its way through this financial crisis.

If you cannot stop payments into your retirement funds you can arrange for those payments to be held in a cash account rather than re-allocated into equity, property, fixed interest and other risky assets. So get on the phone to your financial planner, employer fund manager or whoever and make sure it happens.

Forget the fact that interest rates are low and going down for now. Inflation is likely to fall in the short term as the demand for goods and services declines. What if you lose 5% of your money due to inflation this year - that’s a whole lot better than losing 30-40% in the stock market.

If you have cash, use this time to replace all your old high cost home appliances and your car. If you can negotiate significant discounts this is an inflation fighter right there.

GM’s car sales are down 45%, Toyota reported a 69% drop in profit. Retail sales with massive discounts seem to be everywhere and this is normally the best time for retailers as the Christmas demand comes on.

More Stimulus packages are unlikely to do the job they are intended to do. Many consumers will not spend any government handout, apart from maybe buy some Christmas presents. Much of the money will go to reduce debt by paying off the mortgage or the credit card debt.

It’s time for me to state once again I am not a financial planner and anything I say you should check out with your trusted financial adviser before doing anything. Your personal circumstances should be taken into consideration before doing anything I talk about on this blog

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• Baby Boomer Guilty as Charged of being Highly Risk Averse (2)

The governments response to the current credit crisis and the affect on retirement funds may be to throwing the baby out with the bath water. Retirement nest eggs have lost a lot of money during this market turmoil. Governments are now very concerned.

Argentina is about the take over $30Bn in private retirement funds. In the US the Democrats may be considering doing the same. It’s early days and we don’t have all the facts yet but….

For years wealth managers, sanctioned by government have been stealing retirement money through high fees and hidden charges using “buy and hold” strategies.

Rather than think through the problems and keep what is good, governments are now saying the whole “experiment” into self funded retirement pensions has been a failure.

To my mind the failure has been in allowing these wealth managers to set up an investment system for their convenience that says you need to “buy and hold” for the long term and then take high fees for managing your nest egg.

What that means is you give them your money to hold for the long term. Once they have it they then buy and sell stocks like crazy bidding up the price as more and more money is given to them. Each time they trade they charge you a fee and if they make a profit they have a complex thing called a “unit price” which seems to take about three days to work out. They then give you this unit price as your paper profit.

The governments have failed dismally to reform and regulate the wealth managers.

Now the stock market has crashed some governments are saying the whole retirement pension experiment is a failure and they need to protect your nest egg from further harm.

What has failed is the “buy and hold” strategy. The strategy was based on what is called a “highly normative world” as Scott Burns put in in a previous post. It did not take into account a once in a hundred years financial collapse as Greenspan stated before congress. Naleb calls it a “black swan” - the unpredictable event.

Wealth Mangers really believed that the market would always go up and every 5-7 years if there was a market downturn, it would recover your money. They sold  you and the government on this too.

They didn’t understand it is not the fact that the market drops that is the issue. It is by how far it drops that is the problem. Right now the market is down 35-40% and many Baby Boomer nest eggs will not recover from their losses unless the markets come back very quickly or they go back to work for the next few years to replenish it.

The other important factor is there is no rule that says the market will always come back in 5-7 years. If we are in a long-term bear market it might take 10 or more years to come back. Baby Boomers cannot wait that long.

What really hurts is you can do everything right according to wealth management best practice. You can contribute each month to your retirement account for 40 years using their “buy and hold” philosophy. Governments encouraged you through tax advantage accounts to do this. Then just as you are about to retire the market can crash taking 50% of your retirement nest egg with it.

The wealth managers response is, “Don’t panic, just stick to the plan and in 5-7 years you will get your money back”. Unfortunately this time it may not happen, so governments are losing confidence in self-funded retirement plans and getting scared about the massive problem of Baby Boomers all needing government pensions.

What I find really irritating is that financial commentators are now saying self-funded retirees failed to understand how to invest their retirement funds and should not be trusted with them. They are calling for governments to take over the retirement funds.

What the hell were you paying those high fees for? When did you ever feel you had control of your retirement nest egg? Your money was paid to some wealth manager somewhere who all but guaranteed to manage it for you and implied you should not concern yourself with it until retirement.

I sell, install and support computer networks. I make sure my client’s system and data are protected by using firewalls, anti virus, anti spam, tape backups, battery backup systems, redundant hardware and remote monitoring. I even tell them off if they miss inserting a tape for a nightly backup. It’s that important.

Wealth Managers should have been doing similar things with your money. They should have helped you to reduce your exposure to equities as soon as they saw the subprime debacle. They had access to their own research departments, brokers and financial experts who should have been working to protect you. They did not do their job.

As you approached retirement they should have been helping you put some of your money into low risk term deposits or bonds to develop income ladders that roll-over that money in higher interest accounts so you can live off that money and risk other money in the markets for the longer term.

Annuities might have been a help to some Baby Boomers and these should have been put in place too if required.

They should have been chasing you to contribute more to your retirement fund if they believed you needed to save more.

It was their duty to protect you and to advise you. That was what they were paid high fees and commissions for and they failed.

Now the financial commentators are blaming you for not understanding investing. These are the same guys who kept pushing the “buy and hold” strategy and said you are investing for the long term and not to worry. They now say you were too dumb to be trusted with your own retirement investments. Government should take your money and look after it, because you can’t.

It is conveniently forgotten that most wealth managers made it so hard for you to find out what was happening to your retirement nest egg you gave up, didn’t try, or trusted their marketing hype not to worry. Governments failed to make wealth management transparent, accountable and and easy for you to get involved in.

That does not absolve you of your responsibility to take control of your nest egg. Regardless it was your responsibility to either understand what was happening to your nest egg or find someone who did and who would help you manage it properly.

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Here is the second post covering the email interview I did with Scott Burns. He answers 13 more questions on a range of topics that include Assetbuilder.

The views expressed about John Huggard are those of Scott Burns. I included his response to my question.

Once again his responses raised more questions in my mind but I think it important to post the text as it was received and let you decide what you think.

More General Questions on AssetBuilder and other topics

1. The book makes a good case for consumption smoothing. I like the idea very much. Is there a plan to integrate  Asset Builder and E$Planner into some sort of total financial retirement management system?

We’re going to focus on low-cost asset management. My personal hope is that there will be an “unbundling” of asset management and financial planning. This will allow asset management costs to decline and it will allow financial planning to be done on a professional services basis. Scott Baradell can send you a link to a magazine interview that discusses this in some detail.

2. It seems AssetBuilder is targeting individuals, I assume using IRA’s and the like.. More and more there is a push for Employer 401K plans where there are some real advantages from Employer contributions. Is this a market Asset Builder is going after?

Not at the moment. Our goal is to attract and serve self-directed investors who understand the benefits of indexing and risk efficiency. We believe there is a gigantic market of people who are under-served by conventional delivery systems because they only have assets of, say $100,000 to $500,000. What has surprised us is that many of our clients have portfolios in excess of $1 million. We believe the abuses and expenses in the current system will continue to create new clients for us— people who want to take the index path and reduce costs.

3. With respect, there are some critics on the forums about AssetBuilder and misleading performance claims. In particular one forum member cites the performance charts include the costs of the funds but not the transaction fees charged by Schwab nor the Advisor Fees. Is this the case and if so how do the charts look when these are included?

This is being changed. Future representations will be adjusted for estimates of costs. Since some accounts are larger than others and would have lower transaction fees as a percent of assets, the result will be that many clients will experience better results than we post.

4. There are also complaints about using made-up performance results for funds that did not exist at the beginning of the period used. What is your response to this?

The funds may not have existed but the indexes did. So it is reasonable to include them in model portfolio results.

5. What about the complaint that AssetBuilder does not use a fixed fee structure which goes against what I understand has been your previously stated position of using fixed fee services?

We have never advocated fixed fee services. We have always focused on expenses as a percentage of assets managed.

6. What is “mean variance optimization exactly? How does it benefit a Baby Boomer?

A good start here is to read about modern portfolio theory in Wikipedia: http://en.wikipedia.org/wiki/Modern_portfolio_theory .  If mean variance optimization can be done, any retiree has the prospect of larger withdrawals, with safety.

7. What is the Redemption Rate through this Credit Crunch period from AssetBuilder?

We’ve never made that calculation.

8. In  an interview with RR you quoted 4 big myths about money and investing. I agree they are all myths and need challenging. I have a question on the third one. The third one is that risk diminishes the longer your invest term. You said it is a myth and that it doesn’t and failing to take risk into account can work to dramatically reduce your standard of living late in retirement. If we enter a long term bear market how will AssetBuilder protect a Baby Boomers nest egg?

This is the position Zvi Bodie at Boston University takes. What you can see using ESPlanner is that variance risk puts a downward slant on portfolios in distribution. More important, the odds that a retiree will have to reduce his standard of living due to a market decline increase as he ages. Check the related graphics in “Spend ‘til the End”.

9. Also in that interview you make the distinction that AssetBuilder is all about investment management. You go on to say, “We offer a portfolio review, enabling potential clients to compare the cost, diversification and trailing performance of their current investments with an AssetBuilder portfolio of similar risk. That helps potential clients to tune in better to the importance of risk and its implications. From that foundation, they can select one of our risk-measured model portfolios. My question is, what is the on-going investment management process to ensure my nest egg will last 20-30 years?

There is no guarantee. Future events could totally overwhelm portfolios because portfolios are built based on demonstrated returns and volatility for asset classes. Basically, it assumes a highly normative world. Global diversification reduces some of the risk, but it does not eliminate it.

10. On one of the forums there is the following, “Moshe Milevsky has shown that the sequence of portfolio gains and losses has critical effect on portfolio survival. If the typical portfolio incurs a loss every 3 years or so (which is really the norm) it takes a smaller loss than you think for your expected retirement income to go up in smoke. Asset diversification has a smaller benefit than is commonly expected, since the volatility of stocks is quite large and dominates compounded return if you hold the 60-70% commonly recommended by financial advisors to offset long-term inflation. I think it is critical to consider social security, inflation-indexed annuities, and “hedging” investment strategies discussed by Milevsky and Zvi Bodie. SB has given some attention to Social Security and annuities in his writings and books. However, I’d like to see more discussion of “hedging” as opposed to “diversification” strategies for managing one’s retirement investment portfolio.” Is hedging something you might consider doing in AssetBuilder in the future?

Hedging tends to be very expensive, so we don’t have much enthusiasm for it. We prefer diversification and risk reduction through portfolio construction.

11. I read an article by Michael P DeGeorge in The Dallas Morning News where he responds to your article entitled, “7 Sins of Variable Annuities” I believe that Baby Boomers with a small nest egg should not risk a high percentage of it in Equity Funds (Indexed or Managed). The new Living Benefit Variable Annuities seem to be offering much better value than older variable annuities according to John Huggard and  can ensure much of the nest egg can be passed on to our heirs. Have you reviewed these new products and do you believe a combination of risk based assets like Indexed Funds and Annuities can provide a Baby Boomer with a less volatile and guaranteed retirement income in retirement?

It has been demonstrated that John Huggard has problems with both logic and arithmetic. He is a source used by salespeople, not by anyone with a serious interest in evaluating products. Here’s a link to a column about Huggard:

http://assetbuilder.com/blogs/scott_burns/archive/2002/07/23/Dis_2D00_Informing-the-Public.aspx

If you examine the living benefits offers in terms of the time value of money you will find that the typical investor is exchanging $1 and getting about 62 cents back. A column on this was scheduled but has been delayed by the current market upheaval. It should be in print by the end of October. Meanwhile, here’s a link to one that I wrote last year:

http://assetbuilder.com/blogs/scott_burns/archive/2007/11/02/magic-in-finance-part-2-an-alternative-to-living-benefits.aspx

12. In June 2008 you responded to a question in an article entitled, “Fixed-income ladder can provide security in retirement”. In it you might recall you advised the person to consider a 5 year income ladder using fixed investments. Is this still something you advocate if a Baby Boomer is investing with you in AssetBuilder too?

Some of our clients put a portion of their money into a ladder and then increase the risk level of their AssetBuilder portfolio. The basic idea is to defer, as long as possible, making withdrawals from the portfolio that is likely to have some volatility. The longer the investment period, the greater the odds that you’ll get close to the expected return.

13. I’m just curious but how did you get from biology and poetry to financial commentator? What was the journey?

Actually, I went from aspirant astronaut to biology, to writing and all that happened in the four years I was at MIT. By the time I was in my late 20s I had figured out that having an ability with numbers and an ability with words in the same body was a really good thing and that it would allow me to do what I really wanted to do which was write and communicate. I’m attaching a file “American Generations” that provides a lot more detail. It was nominated for a Pulitzer prize in 2005.

End of Questions

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• 7 Questions for Scott Burns on AssetBuilder (0)

I was invited to interview Scott Burns of Couch Potato Investment Portfolio fame about a month ago. I held off posting the interview because of the credit crisis.

I will post it in two parts. Part 1 focuses on  7 questions I asked him about AssetBuilder and the book, “Spend ’til The End” he co-authored with Laurence J. Kotlikoff.

For the purposes of this Interview I assumed I was a 60 year old Baby Boomer in retirement, living in the USA, own my own home, have no debts and have $500,000 nest egg ready to invest. My wife does not work.

I filled out the 4 Question Survey as follows:

1. $500,000
2. 1 year or less because I am in retirement
3. $1,667 per month (I’m using the 4% rule as I have no information on my consumption smoothing yet)
4. Conservative. I want Capital Preservation at least in the early years. I do not want to lose money in retirement in the early years, because it will be too hard to replace it if I have no other source of income.
5. Results are:
   • Expected Return $1,850,647.00 with Expected Standard Deviation of 5.36%
   • I understand these results include Fund Fees but not AB’s Advisory Service Fees
   • According to the chart I can increase my withdrawal amount to $4,000 a month in which case I will still have $310,163 left after 20 years.
   • The chart is very smooth so I assume it is using average returns. Is this correct?
   • How “real” are the expected returns given the increasing market volatility of late?

The chart is the result of using the figures above. Unfortunately the two questions above did not get responses. I believe they were just missed when Scott went through the emailed list of questions.

Here are the other 7 I asked;

1. The Performance Table above is representative of a compilation of the selected funds to achieve a probabilistic return for a measured level of risk. How is it done and how does it compare to “real” returns for those funds compiled together?

The expected return and standard deviation are just that, “expected”— they are the result the you would expect over a long period of time. Results will vary significantly over shorter time periods. You can get an idea of how much variation by considering the standard deviation. If the expected return is 10 percent and the standard deviation is also 10 percent, that means your return will range between 20 percent and 0 percent in two of every three years. In the third year the performance will be outside that range.

2. How does AssetBuilder cater for Retirees as it is a 20 year expected return and not a 20-30 Year income distribution chart? Will my nest egg survive?

Portfolios in distribution face a significant danger of exhaustion and that danger increases as the time period increases. If you select a portfolio with a relatively low standard deviation, you reduce the danger. Select a portfolio with a relatively high standard deviation and you increase the danger. If your withdrawal rate exceeds the current income production of the portfolio, securities will have to be sold. In down markets this amounts to reverse dollar-cost averaging. Statisticians call this effect a “variance sink.” Biologists call it “the extinction problem,” referencing what happens to a population when a significant loss overcomes its reproductive capability.

The lower your withdrawal rate, the greater the odds of long term portfolio survival. The best you can do is play the odds. Remember, in a scenario that estimates a 90 percent survival rate, 10 percent of portfolios will be exhausted prior to death but the other 90 percent will have a broad distribution of final values.

3. This is just a single instance chart of expected future returns. Or is there a Monte Carlo Simulation behind it? How are these expected returns calculated for each asset class into the future?

We start from historical returns and standard deviations, then make adjustments to reflect recent experience. We also back-test to see how much an significant change in expected return for an asset class would effect overall portfolio performance.

4. Why not use real returns and show how the portfolio would have performed over the last 10 years? (I understand some funds are less than 10 years old so should only be used from their start dates)

Return figures for the model portfolios are posted monthly on our website. We don’t go back 10 years because many of the funds don’t have that much history.

5. How would I take a pension from my AssetBuilder invested funds in good and bad years?

There are a variety of approaches to doing that, all of which work by different “rules” for modifying your withdrawals. You can find columns about some of these approaches on the website. You can also read the original papers in sources like the Journal of Financial Planning. Backtesting with different portfolios indicates that withdrawal rates can be as high as 6 percent if some restrictive rules are followed.

6. You mention in the book that diversifying your portfolio is generally a bad idea but Asset Builder does that doesn’t it? Can you explain why the book says one thing and the AssetBuilder says another? Or have I misunderstood something?

I think you have forgotten the context. In the book we discussed diversification in the context of incorporating your human capital into your planning. At AssetBuilder we design portfolios with a range of expected returns and risks, hoping to provide the highest possible return for any given level of risk. That’s what we mean when we talk about being “risk efficient.”

7. I have seen the charts on the web site and I note that none of them made a loss during the 2000-2033 stock market slump. I know these are back-tested results  and some funds have been adjusted back to 2000, but how much confidence is there that this is what would have happened to a real portfolio?

You can be very confident that those are the results that a real portfolio would have had during that specific period of time. That should not be interpreted, however, as a guarantee against losses in any future period. To us, the issue is providing the highest return at the least risk— maximizing the odds that loss periods will be limited.

8. You’ve written a report with Brook Hamilton called “Reinventing Retirement Income in America”. In it you proposed a new 401(k) plan called  the American Freedom 401(k) and then go on to list many of the attributes that should be in that plan. It seems a good idea. How far along has this progressed and is it something you will be adding to AssetBuilder to expand it’s reach into the employee 401(k) business? It seems to me from my readings that this area is still lacking the attention it deserves – getting employees to maximize their employee 401(k)’s or even to contribute in the first place.

Many of the recommendations in that study are becoming standard in company plans, particularly automatic enrollment. In addition, new legislation will force providing more information on costs and the mutual fund companies are clearly reducing expense ratios, at least for companies with large asset accumulations.

I’ve not added any comments to the answers given by Scott. Some of his answers have generated several more questions in my mind. But for now I do appreciate the time and effort Scott took to respond to them.

Part II will follow in a few days.

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• Scott Burns Answers 13 More Questions on AssetBuilder (0)

Congratulations to Barack Obama for winning the US presidency. Two years and $600M later he is now President-Elect. This may be a dangerous time for Baby Boomers as a Democratic Congress may convince President Obama to redistribute your 401(k) for your own good!

As one article put it, “Two questions however hover like a spectre over the celebrations. The first is whether the new president will choose to rein back the economically and socially left-wing agenda of the large Democratic majority in congress.”

Socially left-wing agenda could include the abolition of tax breaks for the $3 trillion 401(k) system realizing some $80 billion in revenue to the government.

This is justified by Democrats on the basis that private retirement funds have lost $2 trillion in this credit crisis and that the government can do a better job of protecting your wealth.

It seems to me this has shades of the Argentinean dash-for-cash as it plans to nationalize it’s own private pension scheme to take control of $30 Billion in private pensions.

As a Baby Boomer in retirement the plan may be no good to you since it will require you to contribute 5% of your income into a government guaranteed retirement account. If you are already retired that’s not going to work for you.

It appears your existing 401(k) will be left as it is but will be taxed. Without further details this may be an unintended consequence.

The Democrats in the US House have discussed 401(k)’s and IRA’s and converting them into accounts managed by the Social Security Administration.

Right now this is only a proposal put before a Democratic Committee by Professor Ghilarducci. You can read her briefing paper “Guaranteed Retirement Accounts” to learn more about her proposal.

Take the time to read it because you may find your personal circumstances may benefit from her proposal. As I always say don’t discount anything without looking into it thoroughly and from your own personal situation.

You should contact your congressman at your earliest opportunity to have your say on what may be a major change in the US retirement income system.

President-Elect Obama has stated on several occasions his belief in the concept of wealth redistribution. So it may not be hard for Congress to take over your nest egg for your own good!

“Should Sen. Barack Obama win the presidency, congressional Democrats might have stronger support for their “spreading the wealth” agenda. On Oct. 27, the American Thinker posted a video of an interview with Obama on public radio station WBEZ-FM from 2001.
In the interview, Obama said, “The Supreme Court never ventured into the issues of redistribution of wealth, and of more basic issues such as political and economic justice in society.” The Constitution says only what “the states can’t do to you. Says what the Federal government can’t do to you,” and Obama added that the Warren Court wasn’t that radical.”

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There are several things happening right now that might give us a significant rally in the stock market. It may be short-lived but it may give Baby Boomers an opportunity to reduce their exposure to the stock market and put some money into cash.

No one knows if this rally will continue or how far it will go. Baby Boomers who have large paper losses in their retirement nest eggs should consider taking advantage of any rally by selling into it.

According to Arthur Merrill who has done extensive studies on market phenomenon there are several observed events that can occur in the markets at this time. These include;

• The Four Year Presidential Cycle
• The Market Year

As you can see since 1886 there has been a general trend up towards the end of the Election Year. We might be already experiencing this despite the economic crisis still not being resolved.

Combine this with the fact that November, December and January historically are the best 90 days in the stock market.

Then add the extraordinary steps being taking by almost all governments around the world that include;

• World-Wide Government Bailouts of larger banks
• World-wide lowering of Interest Rates
• Many Governments planning more consumer stimulus packages before Christmas
• A commitment to do whatever it takes to resolve the credit crisis

Include the fact that the fund managers are accumulating a large amount of cash. At some point they have to invest it or violate their investment mandates.

If there is a chance of a serious rally before a recession expected in the new year, then this is it.

So far the Dow has rallied from just over 8,000 to 9,300. There is a possibility it could continue to rally to 10,500-11,500. With Merrill’s observations and governments around the world manipulating the markets it may well be a good bet.

If Baby Boomers have all their nest egg tied up in a pension plan or superannuation plan there may be an opportunity to reduce exposure to equities and take some cash out.

It may mean selling some equity investments at a loss but only selling what you need to get cash to live on may be a good idea. Remember Baby Boomers in retirement don’t have time on their side to replenish their nest eggs from a salary or wages.

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Right now there is not too much Baby Boomers can do about their investments. If you are still fully invested in managed funds then the advice must be to sit tight on the equity fund investments unless there is a significant rally to sell into.

If you managed to pull some or all of your money out then cash is a position but not for ever like the buy and hold merchants would have you believe.

Put 3-5 years worth of cash into “safe” investments like bonds and term deposits so you can pay yourself in retirement. This is what the fund managers should have been doing slowly for you so as not to affect the markets adversely and protect your nest egg.

If you do not know what is going on in the markets then you need to stand aside until things become clearer. Most gurus and pundits tell you this. Guess what, it is market timing by any other name.

Just one look at the S&P 500 index will tell you the market is in a downtrend. You don’t need to be a Wall Street investment expert to see that.

No one knows how long this market will last so what do you do now?

You educate yourself ready for the next Bull Market. It may not happen right away, but it will happen. Be ready.

You learn to read charts and understand the stages in the markets. Charting and technical analysis can help you get out of markets far quicker than a brokers recommendation to sell which is as rare as hens teeth.

The very people who are making the stock recommendations still work for companies paid by the markets. Chartists believe all events are factored into the market price on any given day.

You cannot trust CEO’s CFO’s Boards, Brokers, Congress, Presidents, Prime Ministers or anyone on Wall Street to tell you the truth. There are only two things you can rely on - PRICE and VOLUME. You will know both at the end of each trading day.

Understanding price and volume from a big picture investment viewpoint is relatively easy. Day trading is much harder if not impossible for most people. Your friendly financial adviser would disagree but until you take a look for yourself don’t believe them. Have confidence in your own ability and judgement. Trusting theirs has got us all into this mess.

When I started trading/investing in 1995 I found one book that gave me the overview I needed to start using charts and technical analysis to trade/invest successfully.

That book is by Stan Weinstein and is called, “Secrets for Profiting in Bull and Bear Markets“. I got three things from that book;

• Stage Analysis - There is a time to enter or exit any market
• Use of Stop Losses - Its okay to be wrong so when you are cut your losses fast.
• Definitions of terms to use to analyse the markets.

You can find a good overview of Stan’s Stage Analysis at Share Hunter. I am not recommending Share Hunter but it does appear to implement Stan’s strategies.

Where do you think we are now in Stan’s Stage Analysis? It’s not that hard is it? So don’ let the financial advisers fool you into saying things are too difficult.

I don’t believe you should all go out and learn how to time the market as an investor (as opposed to a trader), unless you want to. What I am saying is learn to read charts and see trends. Know at what stage the markets are at. Understand how to use stops to protect your nest egg.

When your financial adviser tells you to keep investing and you can see the S&P is in Stage 3 or 4 give him a copy of Stan’s book to read and tell him to reduce your exposure to the equity markets.

Stage Analysis is not infallible. If you are wrong about stage 3 and you exit the markets, you still have all your money AND your profits. If you leave it until well into stage 4 you will repeat what has just happened to most Baby Boomers.

As a Baby Boomer you should not take unnecessary risks. You need to learn how to avoid large losses. Use this time of uncertainty wisely to educate yourself and don’t be a Wall Street victim again.

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Wharton University of Pennsylvania have put together a fantastic presentation dedicated to explaining the sub prime crisis and what needs to be done to fix it.

There are 7 videos you can watch that explain the various stages and compare it to Japan.

There is an Interactive Special Report on the Sub Prime Crisis, The domino effect from the housing bubble and a glossary of all the terms to do with sub prime.

It is something all Baby Boomers should study as it will make you more financially aware. Plus you will understand why you must take control of your nest egg and not leave it up to your financial planner or adviser to protect it for you.

If you have lost money in this crisis plan to ensure it doesn’t happen again or at least find ways to minimize any losses.

Wealth Managers have used the last 25 years of long term returns to justify a buy and hold philosophy for your nest egg. They told you that you should expect some volatility every 5-7 years but that the market would recover.

The problem is whilst they told you to expect the market to fall every 5-7 years they didn’t tell you how far it might fall. It’s not the fall that is important. It is how far it falls.

This is especially so if you are in retirement and using your nest egg to draw a pension. The market can fall so far that if you continue to take a pension from your nest egg, it will not recover.

This is not mentioned in the small print. They just tell you that past performance is no indication of future performance.

Wharton University explain how lawmakers, lenders, borrowers and Wall Street all helped bring on the crisis.

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