Should You be Using Target Date Funds for Retirement?

Target date retirement funds seem to be getting a lot of press these days and as such, investors are pouring billions of dollars into them.

The question is, should they?

What are target date funds? It's a mutual fund seeking to grow assets for a future target date. For example, someone who wants to retire in 12 years might use a 2030 target date fund.

Most investors would agree that assets are "supposed to" be managed in the fund to maximize growth and minimize loss in a manner that is prudent given the years left until the target is reached. A target date fund's risk tolerance is "supposed to" become more conservative through reallocation as it approaches its target date.

Target date funds are essentially asset allocated funds. Depending on the age of the investor and the target date, the mix might be 60/40, 70/30, 50/50, etc. stocks to bonds.

Target date funds are the epitome of K-I-S-S (Keep It Super Simple).

Target date funds are pure genius from a marketing perspective. The sales pitch is...investor, if you give us your money and keep it with us for 15, 20, 35+ years, we will:

  1. Help you achieve your retirement goal
  2. Generate good returns in up years and provide some protection in down years             
  3. Reallocate to lessen your risk of loss as you age.

And if the client uses Vanguard's target date funds, the cost per year will be very small.

But will target date funds fulfill as promised? We don't think so.

Using examples is usually the best way to get the point across in newsletters. Let's look at Vanguard's target date funds ending in 2030, 2025, and 2020. That means the current age of each investor would retire in 12, 7, and 2 years respectively. I chose these examples to show how risky each fund is and why we do NOT find them suitable investments.

We used our OnPointe Investment Risk program to run the numbers to score each mutual fund and calculate the maximum drawdown risk going back to the last crash as well as the compound annual growth rate (CAGR) going back 10 years.

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What is wrong with these numbers?

Keep in mind that the three examples we are using are clients who are 53, 58, and 63 years old, if their target retirement age is 65. To us, this means these clients should NOT be in an investment mix that will risk a big stock market loss.

All three have a risk score on the OnPointe 1-100 scale of more than 50. Click here to find your risk score.

The maximum drawdown is huge for all three (-38%, -42%, -46%).

The compound annual growth rate (CAGR) over time is not suitable for the risk taken.

A classic 60/40 mix of stock/bond yielded a higher CAGR and had lower drawdown risk.

While the S&P 500 had slightly more risk than two of the target date funds, at least it generates a much higher CAGR.

If you just looked at the numbers above would you use a target date fund for your retirement?

We wouldn't. As the numbers indicate, target date funds have not performed well historically and, in our opinion, have far too much risk for the returns generated.

If you would like to discuss your retirement goals and the best way to reach those goals, please feel free to email us at tim@twpfinancial.com or give us a call 424-288-4254.

  "There's always an element of risk. No one has a crystal ball. OK, I have one, but no one knows how it works."   Cartoonstock.com

"There's always an element of risk. No one has a crystal ball. OK, I have one, but no one knows how it works."

Cartoonstock.com

The Rock of Gibraltar It Ain’t

More recently cracks in the European financial system have taken a backseat to firmer growth on the continent. But problems are simmering just below the surface.

Since the beginning of the decade, problems in Europe have occasionally drifted across the Atlantic. If it’s not Greece, it’s Portugal. If not Portugal, it might be Italy or Spain. And if not Italy or Spain, Brexit briefly created turbulence in 2016.


Enter the dysfunctional nature of Italian politics and the two anti-establishment parties that took top honors in an early March election.

A coalition was eventually formed between the two groups, but the president of Italy rejected a finance minister who has expressed doubt about the euro, which unites much of Europe.

Concerns the government might ditch the common currency led to a massive spike in Italy bond yields and a global sell-off in stocks the day after the Memorial Day weekend.

We could see new twists and turns, but for now cooler heads have prevailed.  Yields came off highs as government officials salvaged the coalition and staved off new elections later this year.

This synopsis is simply a thumbnail sketch of events, but you may be asking, “Why the overview of what is only the latest in decades of dysfunctional Italian politics? Why should I care?”

First, it’s a reminder that Europe’s ongoing financial problems haven’t been solved, and what happens in Europe can sometimes trigger uncertainty among U.S. investors…at least temporarily.

Should you be concerned?

Italians aren’t clamoring to get rid of the euro. If it were to happen, it would have enormous consequences for Italy, which would then reverberate throughout Europe.

We’d likely see a run on Italian banks, as citizens moved cash to safer shores. The collapse of Italian banks would roil the European financial system, and its impact would likely be felt around the globe.

Yes, we are interconnected today. But odds of a “Quitaly” or “Italexit”–financial commentators are once again trying to coin a new term–remain low. Yet now it’s on the radar.

If nothing else, the drama in Italy is simply a reminder that Europe hasn’t solved its financial problems.

Medicare Special Enrollment Period for those affected by the California Wildfires

If you were affected by the California Wildfires, you are offered a special open enrollment period for your Medicare plan. Please see below and get in touch with Phyllis if you would like to review your drug or supplement plan. Special Open Enrollment (SEP) period is through March 31, 2018.

  • Individuals will be considered “affected” and eligible for this SEP if they reside, or resided at the start of the incident period, in the FEMA declared emergency or major disaster area related to the recent wildfires in California. 
  • These SEPs are also available to those individuals who don’t live in the affected areas but rely on help making health care decisions from friends or family members who live in the affected areas. Plan sponsors may ask for proof of residence to determine if an individual resided in an affected area (e.g., driver’s license, utility bills, etc.) at the start of the incident period, but must accept an attestation if an applicant states that his or her documents were destroyed or are inaccessible.

I Am a Life Insurance Policy

Life Insurance is a True Selfless Act
When it comes to financial planning, Life Insurance is truly done for the benefit of others. Unless you are using it as an investment, you are not going to be there to receive any of the money.  Therefore, life insurance is an act of love for your family. Here is an anonymous poem, most likely from the 1950's, about what life insurance actually is:

I Am a Life Insurance Policy
I am a piece of paper, a drop of ink and a few pennies of premium.
I am a promise to pay. 
I help people see visions, dream dreams, and achieve economic immortality.
I am education for the children.
I am savings.
I am property that increases in value from year to year.
I lend money when you need it most, with no questions asked.
I pay off mortgages, so that the family can remain together in their own homes.
I assure people the daring to live and the moral right to die.
I create money where none existed before.
I am the great emancipator from want.
I guarantee the continuity of business.
I conserve the employer's investment.
I am tangible evidence that a man is a good husband and father, and a woman a good wife and mother.
I am a declaration of financial independence and economic freedom.
I am the difference between an old man or woman and an elderly gentleman or lady.
I provide cash if illness, injury, old age, or death cuts off the breadwinner's income.
I am the only thing that you can buy on the installment plan that your family doesn't have to finish paying for.
I am protected by laws that prevent creditors from assessing the money  
I give to your loved ones.
I bring dignity, peace of mind and security to your family.
I supply investment capital that makes the wheels turn and the motors hum.
I guarantee the financial ability to have happy holidays and the laughter of children - even though father or mother is not there.
I am the guardian angel of the home.
I am life insurance.

The New Tax Law: How Does It Affect You?

First of all, the new tax law does not affect your upcoming taxes for 2017.   It affects the year 2018 and forward, so you will be dealing with the new laws and brackets in April 2019.

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Changes to the Individual Income Tax

  • Lowers most individual income tax rates, including the top marginal rate from 39.6 percent to 37 percent. Retains the current seven-bracket structure, but bracket widths are modified. (Table 1 and Table 2)
  •  
  • Increases the standard deduction to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers in 2018 (compared to $6,500, $9,550, and $13,000 respectively under current law).
  •  
  • Eliminates the personal exemption.
  •  
  • Retains the charitable contribution deduction, and limits the mortgage interest deduction to the first $750,000 in principal value. Limits the state and local tax deduction to a combined $10,000 for income, sales, and property taxes. Taxes paid or accrued in carrying on a trade or business are not limited.
  •  
  • Expands the child tax credit from $1,000 to $2,000, while increasing the phaseout from $110,000 in current law to $400,000 married couples. The first $1,400 would be refundable.
  •  
  • Effectively repeals the individual mandate penalty, by lowering the penalty amount to $0, effective January 1, 2019.
  •  
  • Raises the exemption on the alternative minimum tax from $86,200 to $109,400 for married filers, and increases the phase-out threshold to $1 million.
  •  
  • The majority of individual income tax changes would be temporary, expiring on December 31, 2025. Several, such as the adoption of chained CPI and functional repeal of the individual mandate, would be permanent.
  •  
  • The majority of individual income tax changes would be temporary, expiring on December 31, 2025. Several, such as the adoption of chained CPI and functional repeal of the individual mandate, would be permanent.

 

Changes to Business Tax

  • Lowers the corporate income tax rate permanently to 21 percent, starting in 2018.
  •  
  • Establishes a 20 percent deduction of qualified business income from certain pass-through businesses. Specific service industries, such as health, law, and professional services, are excluded. However, joint filers with income below $315,000 and other filers with income below $157,500 can claim the deduction fully on income from service industries. This provision would expire December 31, 2025.

Other Changes

  • Doubles the estate tax exemption from $5.6 million to $11.2 million, which expires on December 31, 2025. The exemption will increase with inflation.

Middle Class Tax Bracket Chart: https://www.nytimes.com/interactive/2017/11/28/upshot/what-the-tax-bill-would-look-like-for-25000-middle-class-families.html

Financial Planning Open Enrollment Is Here

Dear Client,


Happy New Year 2018! The year is off and running.  Open Enrollment for health insurance is winding down and we want to thank all of the new clients that came on board during this time and our most treasured renewing clients.  We not only appreciate your business but also enjoy our interactions with you.

 Now that open enrollment is coming to a close, we can once again focus on Medicare clients and on helping people get low risk and low volatility money management.  Whether you are a pre-retiree, retiree, or a conservative investor we want you to have a better financial future.

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January is a good time to review your financial assets and plans and go over any long and short-term changes you want to make. If you have never had a financial planning appointment with us before, please consider doing so for your financial health and well-being. The appointment is free, and we offer the following:

  1. 1. A risk assessment test to make sure you can sleep at night with your investments
  2. 2. An evaluation of your current investments so you have a better understanding of the fees you are paying and what is likely to happen to your investments if the market were to take a downturn.
  3. 3. Create a plan so you can reach your financial goals and avoid running out of money in your retirement.  

To make an appointment to get your 2018 financial planning underway: www.twpfinancial.com/schedule

Horter Investment Management gives free education program to high school and college student

As part of Horter Investment's "Give Back to the Community" efforts, they provide a free Investment Education Program (13 hours over 3 days) to high school seniors and college students every December and Summer (4 classes).

Local TV station WXIX Channel 19 asked Drew Horter to be a featured guest on December 21st to talk about how we help young adults with personal finance, investment education (stocks, bonds, ETFs, mutual funds, etc.) and 20-30 career opportunities (legal, compliance, marketing, fiduciary advisors, stockbrokers, traders, etc.). Watch the video here

 

October Newsletter 2017: Open Enrollment Is Almost Here: Secure Your Appointment Now As It's Going To Be A Busy Season

 Thanks to Larry Vogler for the cartoon. 

Thanks to Larry Vogler for the cartoon. 

Dear Clients,

The busy season of Open Enrollment is upon us. Anthem is leaving LA County for individuals who are under 65, so starting November 1, we will be busy helping our Anthem clients switch plans. Please book your appointment with us as early as you can since our schedules tend to book out two weeks in advance.

If you are a Medicare Client, Age 65 or older, your Open Enrollment period begins October 15th. Our best time to see you is in the month of Octoberbefore things get really busy with the nearly 1000 clients we serve. Once again, we urge our Medicare clients to have your appointment with us in October before IFP Enrollment begins November 1st.

Medicare Advantage Updates for 2018:
If you’re on a SCAN Classic I Plan your premium is not going to change. If you’re on a SCAN Classic II Plan your premium is going to $24 and you will still have access to UCLA Medical.

Medicare Drug Plan Updates for 2018: 
If you’re on the Humana Walmart Drug Plan 2018 your premium is going from $17 to $20.40 with very little changes to your plan. If you’re on the SilverScript Choice Plan, your premium is staying at $28.50 with very little changes to your plan.

BOOK APPT HERE. 

IFP Enrollment News and Information:
For Individual and Family Plans for people under age 65, your Open Enrollment period begins November 1st. If you want your plan to begin January 1, you must have a completed application by December 15th. There are no exceptions to this deadline.
This gives you the window of Nov. 1 – Dec. 15th to make an appointment with us.

BOOK APPT HERE. 

Please note that some news sources saying the government has shortened the window for open enrollment DOES NOT apply to California as we have our own enrollment period which runs from November 1 -Jan. 31st, 2018. 

The 2018 prices and offerings remain mysterious as ever and we won’t know the rates until Nov.1. As far as we know, the carriers offering plans for off-exchange are Blue Shield, Oscar, HealthNet and Kaiser. The carriers offering plans on exchange are those listed above plus LA Care and Molina. As soon as we have more information we will let you know.
Here’s to a successful Open Enrollment for your Healthcare in 2018.

BOOK APPT HERE.  

Enjoying The Calm Market? Don't Expect It To Last Forever

It's been 20 months since the last market correction. They usually happen every 11 months. The U.S. stock market has been good to investors this year—not only has it hit a series of records, but dips as small as even 3% have been in incredibly short supply—but anyone wanting to jump into the market should realize the good times may not last. Wells Fargo Investment Institute warned that investors “shouldn’t become too complacent” because the current environment is atypical in its lack of volatility and share-price declines, noting it has been much longer than was usual since the market saw a pronounced dip (a decline of at least 5% from a peak), let alone a correction (a 10% drop).

“Historically speaking, on average, the domestic equity market corrects every 11 months—the last correction was in November 2015,” wrote Chris Haverland, a global asset allocation strategist at Wells Fargo Investment Institute. “Meanwhile, on average, the U.S. equity market dips three to four times per year. The last dip was in June 2016.”

In addition to the nearly nonexistent downside, market volatility has also been hard to come by. Thus far this year, the S&P 500 SPX, +0.05% has only closed with a 1% move in either direction in eight sessions. That’s on track to be the fewest such moves since 1995, when there were 13, according to data from LPL Financial. A larger move, such as a 4% swing in a day, hasn’t occurred in nearly six years. Read More Here.


To Your Health and Financial Wellness,

TWP FINANCIAL

Your Anthem Coverage Is Ending December 31, 2017

Dear Anthem Client,

As you probably have heard from our newsletters and directly from Anthem, your Anthem plan is ending 12/31/2017. Anthem is unfortunately no longer insuring individuals (under 65) except for a few counties in Northern California.

We would like to set up a time with you between November 1 and December 15, 2017 so that we can get you a new plan for January 1, 2018. The best way to set up a time to talk is for you to go to http://twpfinancial.com/schedule.   

You can then see our available times and set an appointment to talk with either Tim Peterson or Phyllis Hyde. If you do not like that option, you can email shasta@twpfinancial.com or call her at 424-288-4254 and she can set up the appointment for you.

Please book a time after November 1st only. 

www.twpfinancial.com/schedule

Thanks, and we look forward to talking to you during this open enrollment period!!
 
TWP Financial

September Newsletter 2017: Medicare Open Enrollment, Important Blue Shield Update, Covered CA Will Spend $110M on Marketing, Equifax Breach, Horter Podcast on Finance 

 

Medicare Open Enrollment is October 15th - December 7th
Medicare Open Enrollment for 65+ is fast approaching. Sign up now to make an appointment starting October 1st to square away your Medicare planning for the New Year. Click here to make an appointment or visit our website at twpfinancial.com/schedule. Please remember that during this period you can change your drug or Medicare Advantage Plan for 2018. 

Important Blue Shield Update
Blue Shield has announced today that they are discontinuing the Off-Exchange Silver Seven 3750 PPO, effective January 1, 2018.  All members who are enrolled in this plan will be moved to the Silver 1850 PPO.  We are happy to discuss this option with you, starting November 1st, to see if this is the best plan for you and your family.

Equifax Data Breach: What To Do
"Thieves were able to siphon far more personal information — the keys that unlock consumers’ medical histories, bank accounts, and employee accounts.." - New York Times

This is a serious breach of your privacy and security affecting your identity and credit. According to the New York Times, thieves stole information including Social Security Numbers, driver's license numbers, birth dates, addresses, credit card numbers, and other personal information that can be used to access consumers' medical histories and bank accounts. “On a scale of 1 to 10 in terms of risk to consumers, this is a 10,” said Avivah Litan, a fraud analyst at Gartner, to the Times.

What do you do now? 
1. Explore freezing your credit so thieves can't sign up for credit in your name. Find out more about what freezing your credit means here. To freeze your credit call:
Equifax — 1-800-349-9960
Experian — 1‑888‑397‑3742
TransUnion — 1-888-909-8872
Note that they will charge you a small fee for this. 
2. Sign up for fraud alerts with Experian, TransUnion, Equifax, and other institutions so you are made aware of any activity in your name immediately.
3. Check your bank, credit cards and credit regularly for signs of anything amiss. Awareness is key.

Please look over the FTC's Consumer information on the Equifax breach here

Covered California Will Spend $110 Million For Open Enrollment
Covered California will spend $110 million on Open Enrollment. We are reporting this because there is a lot of news about the Federal government cutting the budget back to $10 million but that will not be the case in California. This marketing is important because it is estimated that 2 million more people will be insured because of it.

Open enrollment begins November 1, 2017 for people on individual plans under sixty-five years old. Please go to www.twpfinancial.com/schedule to set up your appointment. 

Drew Horter of Horter Investment Gives Wall Street Interview
To our growing list of clients who do financial planning and investing with us, you're already aware of Drew Horter. To those who don't know, Drew is the head of Horter Investment Management LLC, who we affiliate with and utilize their platform that is designed to be low risk, low volatility.  We chose Drew and his company because of his passion and his goals to help minimize client risk while striving to be opportunistic in good times and defensive in bad times. Click on the link below to listen to a podcast Drew did with The Wall Street Journal. It's a 7-minute interview on how sports can teach children about finances. LINK. 

To Your Health and Well-Being, 

TWP Financial