Some preretirement foul-ups to avoid

By Barry Glassman, CNBC

The years just before retiring, when you're in your 50s and 60s, are the most critical to having a successful retirement. Typically, these are your peak earning years, when many of your larger expenses—such as buying a home or funding your children's college educations—are finished.

But as you take the final turn before retirement, there can be challenges to having enough money to live on when you stop working. Younger people have time on their side to catch up or recover from poor choices or unfortunate circumstances. In later years, time may not be the only thing you're running out of. You may not have the same opportunities to restart at this age.

Here are some things to avoid when you're in your final preretirement years, because the outcome is all too often financial disaster.

1. Spending too much. Many people in their 50s and early 60s enjoy earning more money than ever before in their careers. With the kids in or finishing college and equity sitting in their homes, there is more disposable income and more time to spend it.

A lot of families end up going one of two routes: either spending freely on many things they perhaps denied themselves before—such as expensive trips, dining out frequently and shopping trips—or remaining focused on building up their nest eggs to make sure they'll have enough when they retire.

It's not hard to guess which ones end up in trouble. People who increase their spending along with their income instead of saving those extra dollars for a retirement that may last 30 years can end up running out of money down the road.

2. Using accumulated assets to fund spending. Even worse than spending most or all of a paycheck to live a high lifestyle is spending down accumulated savings while still working. Many people see this pool of assets sitting there and find it tempting to tap the portfolio for the new car or that trip to Europe. It's easy to justify taking some of your savings for things you may have denied yourself over the years. But living beyond your means, relative to your income—especially when you are in your final years before retirement—rarely ends well.

3. Not having a retirement plan. It never ceases to amaze me that so many people just don't have a retirement plan. You must take the time to consider what your retirement will look like. So many people really don't know if they have enough money set aside for retirement or understand what amount they will need to save while still working. Without a plan, how will you know if you have enough?

Once you begin your retirement, it's just too late. At that point, the only thing left to do is alter your lifestyle and cut expenses.

4. Turning recurring income into a recurring liability. This situation the "lottery winner's folly." Most lottery winners go bankrupt because, rather than saving and investing their winnings, they buy high-priced toys that not only depreciate but come with hefty annual expenses as well. That's the boat or the equine hobbies.

Not only is money being taken out of a portfolio that could grow and provide income but the purchases will decrease in value and come with added costs—so it's a double whammy. Reducing income and adding expense is a disastrous combination for most retirees' portfolios.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Don’t Let New Highs Scare You Away From Stocks

As the S&P 500 breaks out into a new high and the Dow Jones Industrial Average making a run at 17,000, fund investors shouldn’t start second guessing their equity exposure.

Some may worry about the next market turn after the equity markets hit new highs, but investors should remember that markets typically rise to new highs over time, writes John Waggoner for CNBC. If you sold at each high, you could miss out on further gains.

For instance, investors who sold off at the last market all-time high on March 28, 2013 would have missed a 25% rally.

Sam Stovall, managing director of U.S. equity strategy at S&P Capital IQ, points out that new highs are a hallmark of a mature bull market.

Year-to-date, the SPDR Dow Jones Industrial Average ETF is up 3.1%, SPDR S&P 500 rose 6.9% and NASDAQ increased 6.3%. On Friday, the S&P 500 and Dow indices both broke new intra-day highs.

According to S&P Capital IQ data, the average bull market spends about 7% of its life at all-time highs, and so far, the current bull market has spent 5% of its time at all-time highs. Over the long-term, bull markets, like those experienced in the 1980s and 1990s, hovered about 12% and 13% of the time at all-time highs.

Looking at company earnings, Stovall calculates that the S&P 500 has reached their estimate for 2014, but he also estimates that the markets still have another 7.5% to go over the next 12 months.

Nevertheless, there are some good reasons to sell or at least trim an equity position. For instance, investors who have reached their target investment goal can dial back equity positions and shift over to income generating options. Additionally, after the recent rally in stocks, you might be overweight equities. Investors can also rebalance their portfolios to put their overall equity and fixed-income allocations back in line.

Investors who are more risk-adverse by nature can also consider letting their cash levels build up instead of investing into the markets. This way an investor can also save up for a rainy day and buy at the end of the next bear market.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Muni Nation: Green Grass and High Tides

By James Colby, Market Vectors

As we continue to ride the 2014 performance wave in the municipal bond market, a colleague suggested that I address one important cause of 2013′s poor performance: defaults.

I believe the price decline and outflows from municipal bond mutual funds, separate accounts, and ETFs were caused in part by the City of Detroit’s Chapter 9 filing, downgrades of Puerto Rico, and downgrades of various other key issuers. However, according to the May 2014 update to the Moody’s annual study, “U.S. Municipal Bond Default and Recoveries 1970-2013,” I believe the municipal marketplace has been remarkably resilient.

Consider the following, according to Moody’s:

The number of municipal bond issuer defaults has increased since the financial crisis in 2008, but default rates among such issuers generally remain low relative to corporate issuers.

Municipal issuer recovery rates are trending lower than they’ve been in the recent past and are more variable in range than corporate issuer recoveries; yet municipal recoveries are still higher than corporate recoveries.

Financially, governments are generally stabilizing, but Moody’s expects some to remain pressured in the absence of a strong economic rebound.

Moody’s expects municipal bond issuer defaults to generally remain few in number.

Furthermore, according to the study, “Municipal issuer downgrades have outpaced upgrades over any 12-month period for every monthly cohort since 2009.” This suggests to me the struggle our general economy has endured since the financial crisis of 2008. However, on the bright side, Moody’s notes, “Such deterioration in credit quality seems to have stabilized since mid-2012.” The analysis is done in the context of only issues they rate, and therefore, the assertion that there have been only 30 defaults (among rated issuers) since 2008 understates the true amount, which would include those issuers without ratings.

To look deeper, I turn to Municipal Market Advisors’ (MMA’s) default study, which, although only four years old, reveals a declining pattern of downgrades and defaults, and also covers issuers who are not rated by any of the services. MMA states in the February 2014 edition of “Municipal Insights,” “It appears fewer issuers with ongoing impairments are falling into default now; many of the most vulnerable bond-financed projects have already defaulted; current economic challenges are somewhat less severe than in prior years; and/or capital market solutions are now more available.”

MMA’s study indicates that the number of defaulting issuers it has identified has declined from 107 in 2012, to 64 in 2013, and to 19 through the end of May 2014. This is evidence, I believe, of a potentially confidence-building trend for the asset class.

All of the above is but one element of consideration for municipal asset allocators, but, in my opinion, the municipal bond fund flows seem supportive of the recent emergence of interest from investors.

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The D2 Capital Management Tax Free Income Portfolio is currently yielding 4.84% (Trailing 12 month Tax Equivalent Yield at 28% Tax Bracket, as of 18 June 2014).

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

A Wonderful Real Estate Investment Trust Fund

By Tom Lydon, ETF Trends

Relief in the form of this year’s 12% decline in 10-year Treasury has lifted real estate investment trusts (REITs) and the corresponding exchange traded funds.

A predictable beneficiary of that trend has been the Vanguard REIT ETF (VNQ), the largest U.S. REIT exchange traded fund (ETF). Signs of a recovering U.S. economy and falling interest rates have been stoking investor interest in REIT ETFs. Only three ETFs have taken in more new assets this than the marketweight-rated VNQ. The fund is up nearly 15% year-to-date.

Rapidly approaching $24 billion in assets under management, VNQ is not just the largest REIT, but the eleventh-largest U.S. ETF overall. As is the case with many Vanguard ETFs, VNQ has gained denizens of loyal followers due to an expansive lineup and low fees.

Fees are crucial in the evaluation of REIT ETFs because VNQ and its primary competitors usually feature top-10 lineups that mirror each other. VNQ charges just 0.1% per year, making it less expensive than 92% of rival funds, according to Vanguard.

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The Vanguard REIT ETF (VNQ) is a component of the D2 Capital Management Multi-Asset Income Portfolio.  Current yield on the portfolio is 5.17% and year to date the portfolio is up 9.99% (as of 18 June 2014).

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Conflict in Iraq: What Rising Oil Prices Mean for the Economy & Investors

By Russ Koesterich, Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist

For much of 2014, stocks advanced despite disturbing world news headlines. However, that changed last week, as U.S. stocks slipped amid news of the escalating violence in Iraq.

Why the different stock market reaction? The events in Iraq pose a greater risk for markets than earlier 2014 geopolitical turmoil because there is a clear link between the conflict in Iraq and the global economy: energy prices.

Oil prices spiked last week as sectarian violence escalated in Iraq, a country producing more than 3 million barrels of oil per day, at a time when production has already been falling in many other parts of the Middle East, neutralizing the benefit of surging North American oil production. West Texas Intermediate (WTI), the U.S. oil benchmark, traded above $107 per barrel, while Brent Crude, the global benchmark, hit approximately $114 per barrel.

While a short-term spike in oil prices due to declining production in northern Iraq is not a major threat, a prolonged price rise would put additional pressure on the global economy, including on U.S. consumers, who are still operating in a mode of caution.

As of early this week, the violence in Iraq showed no sign of abating and it appeared that the crisis in the Middle East isn’t likely to be resolved quickly.

Perhaps even more importantly, in addition to the short-term impact on oil production, the insurgency in Iraq and civil war in Syria have the potential to dramatically alter national boundaries in in the Middle East.

In other words, there may be longer-term implications and potentially significant changes to international borders. Under this scenario, energy prices may remain elevated for a prolonged period of time, which could add additional pressure to several major economies, including the United States, China and India.

As for what this means for investors, higher oil prices, coupled with still reasonable valuations in the energy sector, support a continued overweight to energy stocks. At the same time, higher oil and gas prices represent yet another headwind for a U.S. consumer already struggling with slow wage growth and high personal debt. In a world of modest growth and a strapped consumer, I believe a cautious view toward consumer stocks is warranted.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Inherited IRAs Not Protected In Bankruptcy

By Deborah Jacobs, Forbes

When is an IRA not a “retirement” account?

The U.S. Supreme Court answered that riddle recently and resolved a key question that has lingered for nearly a decade: Are funds in an inherited IRA protected in bankruptcy? The answer was a unanimous, “No.”

In an opinion with far-reaching implications, the Court found that Heidi Heffron-Clark, who inherited an IRA from her mother in 2001 and filed for bankruptcy nine years later, could not shield the account from her creditors.

The Court’s analysis turned on key legal distinctions between inherited IRAs and those that you set up and fund yourself, either through annual contributions or by rolling over assets from a company plan.

Several features make inherited IRAs unique and suggest that they are not retirement assets, the Court noted. Unlike IRA owners, inheritors can’t put additional funds into the account, and they can take out money at any time without penalty. In fact, generally, non-spousal IRA heirs must either withdraw the entire account balance within five years of the original owner’s death, or take out a minimum amount each year, starting by Dec. 31 of the year after the IRA owner died.

This whole system is different from the one that applies to IRA owners, which is designed to ensure that they will have money available during retirement, and therefore justifies protection of those assets during bankruptcy, the Court noted.

Money in IRA accounts (or employer sponsored retirement plans, such as 401(k)s and 403(b)s) will not normally be covered by a will. Instead, an IRA inheritance is given out according to beneficiary designation forms that you fill out when you open the accounts or later amend.

Most notably the decision has important ramifications for spouses. A spouse who inherits–let’s assume it’s the wife–has an option not available to other inheritors. She can roll the assets into her own IRA and postpone distributions from a traditional IRA until she turns 70½. The catch is, like other IRA owners she may have to pay a 10% early-withdrawal penalty if she takes money before age 59½ from her own IRA, as explained here.

Unless she does the rollover, however, the account is considered an inherited IRA. She would not have to take any money out until her late spouse would have turned 70½. But under today’s decision those assets would not seem to be protected in bankruptcy. So spouses now have one more reason, in addition to income tax benefits, to do a rollover.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Munis: A Less-Taxing Alternative

By Richard Moroney, Editor Dow Theory Forecasts

When comparing muni bonds to taxable bonds, we typically adjust the stated yield based on the highest individual income-tax rate (39.6%) to compute a tax-equivalent yield comparable to the stated pretax yields of taxable bonds.

Even without their tax advantages, munis look better than usual relative to other bonds. As of May 29, The Bond Buyer's 20-Bond Index of municipals yielded 4.26% (equating to a tax-equivalent yield of 7.05%), down from 4.73% at the start of the year, but roughly in line with the five-year average of 4.25%.

The current yield lags the 20-year average of 4.91%, no surprise given the Fed's anchoring of the yield curve at the short end.

At the moment, municipal bonds look somewhat expensive relative to their 20-year average yield. However, Treasury and corporate yields have fallen more sharply from long-run averages, making munis appear cheap in comparison.

Our take: We prefer stocks to bonds for the year ahead. But if bonds make sense for you, municipals look like a wise choice—assuming you keep your bonds in a taxable account and can take full advantage of munis' tax protection.

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The D2 Capital Management Tax Free Income Portfolio is currently yielding 4.84% (Trailing 12 month Tax Equivalent Yield at 28% Tax Bracket, as of 11 June 2014).

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.