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The Independent Investor: Why Some Corporations Are Leaving America |
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By Bill Schmick On: 10:01PM / Friday August 01, 2014 |
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In recent weeks, politicians and concerned citizens alike have decried the growing number of corporations that have opted to renounce their citizenship and move off-shore. Rather than simply playing the blame game, a better approach might be to examine the underlying cause for this growing exodus.
Taxes, as you might imagine, are the crux of the matter. It is true that U.S. corporations pay the highest tax rate in the world at 35 percent. It is an often-quoted statistic but not entirely accurate. The effective tax rate is more like 25 percent when all the deductions and allowances are accounted for. Nevertheless, that number is still high and many corporations fear it is going to grow larger in the years ahead.
The United States also insists that companies pay that same rate on income that was made overseas by its subsidiaries and repatriated home. In comparison, many countries tax only domestic profits, (those that are made in-country) while ignoring profits made overseas in countries like Ireland where tax rates are much lower.
As a result, some companies have resorted to a legal maneuver in which they merge with a foreign company or declare that its U.S. operations are now owned by its existing foreign subsidiary. By taking advantage of this tax loophole, a company can then shift reported foreign profits outside of American tax jurisdiction. As a result, they are only paying taxes on profits that are made in the United States. The rest of their worldwide income is repatriated to their new legal address in their new foreign domicile with little or no tax burden.
This is an especially appealing option to many technology and drug companies because much of their profits are derived from intellectual propriety like patents. If they transfer those patents overseas (and they do) a major portion of their profits becomes tax free.
To be clear, these companies are still paying taxes here. They are not moving jobs or production overseas. They are free to keep their top executives in the United States and most do! Bottom line these so-called “inversions” are nothing more than a change of address, a new mailbox that now resides in a foreign country.
Despite the furor these inversions have caused, we are not talking about many companies. Only 41 U.S. corporations have reincorporated in lower-tax countries since 1982, including 12 since 2012. Eight more are planning to do so this year. The U.S. Treasury estimates a decline in tax revenues of some $17 billion over a decade. That’s not much. What worries the politicians is that the pace may be quickening despite the Internal Revenue Service’s attempts to discourage the trend.
Senator Dick Durbin is working on a measure called the “No Federal Contracts for Corporate Deserters Act,” which will prevent inversion companies from benefiting from federal contracts. Others have resorted to name calling and deriding these companies as unpatriotic.
There is an argument that what made these corporations great was their ability to benefit from the things our government has provided - patent protection, our legal system, education, training, infrastructure, research and our ability to defend their interests from others in time of strife. And now they are turning their back on us in the name of higher profits?
There was a time when we could have explained away this attitude by reminding Americans that corporations are nothing more than economic animals driven solely by the profit motive. However, the Supreme Court changed all that when they declared corporations “individuals” with the same rights and responsibilities as humans. Should we therefore expect a new level of loyalty and good citizenship from these newly-minted citizens?
Clearly, our tax code is a mess. In order to remain competitive in this global marketplace, this country needs to adjust corporate and individual taxes at some point. However, we all know a tax overhaul is impossible given the present state of congress. As such, we should expect more of these inversions in the future as companies fend for themselves in the absence of action by our government.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
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The Independent Investor: How Much Is Too Much to Spend in Retirement? |
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By Bill Schmick On: 02:53PM / Thursday July 17, 2014 |
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More and more baby boomers retire each year. One of the questions that trouble them the most is whether they have enough savings to last their lifetime. The answer largely depends on how much they plan to spend each year.
The historical guideline that most financial planners use is a 4 percent drawdown of your retirement savings after taking account of social security and other non-portfolio sources of income, such as rentals or part-time work. That number has been shown to provide most retirees with a comfortable living over the course of a 30-year retirement.
However, I advise my clients to use the 4 percent rule of thumb as a starting place and adjust along the way. Times change and so do markets, so no single number will be appropriate for every situation. Take inflation, for example. Every year inflation climbs higher. Over the last five years, inflation has been fairly well contained but that doesn't mean it will always be so.
I suggest that above and beyond the yearly 4 percent savings drawdown, enough money should be withdrawn to account for the inflation rate. This year, for example, inflation should come in slightly above 2 percent. In which case, a retiree should plan on withdrawing 6 percent of his funds next year to accommodate for these higher costs.
For the last 30 years or so, conventional financial wisdom has dictated that retirement portfolios should be predominantly invested in bonds. Advisers argued that this was the safe, conservative approach for those who can no longer afford to play the volatility of the stock market. As a result, some planners are now arguing that the 4 percent guideline should be lowered given the historical low rates of returns in the fixed income markets. They are extrapolating that since rates are low now they will therefore continue to be low in the years ahead. I think that is nonsense.
First off, as I have written before, bonds are no longer a "safe and conservative" investment. I believe that bond prices in the future will fall considerably as interest rates rise. Why keep the lion's share of your retirement savings in a losing investment that will continue to decline over the next several years?
The state of the bond and stock markets will also impact that 4 percent rule. I suggest that you adjust your spending based on how the markets perform. If the stock market is declining, the economy stalling and/or interest rates are rising; you might want to pare back your spending and your withdrawals. If the opposite occurs, you may consider withdrawing more money, but within reason.
I have one client, a single woman age 82, with health issues, who has about $1.5 million invested fairly conservatively with us. Each year we have managed to generate enough returns to satisfy her 6percent withdrawal rate and make substantially more above that for her. The problem is that every year we do, she immediately withdraws those additional profits, leaving nothing for those "rainy day" years when the markets are down. I have my hands full convincing her to leave some of those profits alone. The point is that you must remain flexible while still planning for the future.
But not everyone need abide by the 4 percent rule. Actuaries will tell you that if you follow the 4 percent rule you have a 90 percent confidence level that your retirement savings should last your lifetime. But 90 percent is a high rate of probability, maybe too high for your liking. You may opt to spend more and reduce your probabilities to a more reasonable 75 percent that your money outlives you.
That lower confidence level might actually be more appropriate for your planning purposes. By now, you may realize that if you have not discussed this with an investor adviser it is never too late to start.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
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The Independent Investor: The Fed Turns Off the Spigot |
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By Bill Schmick On: 06:15PM / Thursday July 10, 2014 |
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The Federal Reserve Bank announced an end to their latest quantitative stimulus program on Wednesday. The markets worldwide sold off on Thursday. Was it just a coincidence?
It was not as if their announcement was unexpected. The Fed has been winding down its $85 billion a month purchases of bonds and mortgage-backed securities since the beginning of the year. Each month they have pared back $10 billion/month incremental purchases.
June's policy meeting confirmed that the last purchases would end in October.
Some investors were relieved, while others were concerned. Many believe that the longer the Fed's program continues the less impact it will have. Others disagree. That is nothing new, since, from the outset, the entire Quantitative Easing (QE) program has been mired in controversy.
The initial round of QE in 2008 was intended to prevent the economy from plunging into a second Great Depression. The Fed succeeded in that desperate bid and followed the first QE with successive bouts of stimulus in 2010, 2011 and 2012.
Unfortunately, its goal — to jump-start the economy and return it to a healthy growth rate — has had, at best, mixed results. While unemployment has fallen from almost 10 percent to 6.1 percent in June, the economy has remained mired in a slow-growth recovery. At the same time, this unprecedented meddling in the economy has resulted in a number of distortions, some good and some not so good.
Keeping interest rates low was supposed to convince American investors to sell their low-yielding, safe-haven U.S. Treasury bonds and buy riskier assets such as stocks and corporate bonds. The hope was that would in turn spur an increase in lending, consumer spending and investment. Very little of that actually happened. Investors and banks alike either remained in cash or their Treasury bonds.
It was the stock market and rampant speculation that has been the main beneficiary of the Fed's efforts. Some argue that the gains in the stock market have only benefited a tiny portion of the population (the One Percent) and there has been precious little "Trickle Down" impact on the economy.
Although the unemployment rate has declined, economists argue that the numbers are deceiving. Many After years of attempting to find a job, many people have simply dropped out of the rolls thereby reducing the unemployment rate. The data also indicate that a growing number of these gains are low-paying, part-time jobs, something the Labor Department's numbers fail to account for within these trends.
Then there are the risks. Potential inflation heads that list. Contrary to those who have been predicting hyperinflation, the numbers do not bear that out. For the last two years inflation has been running below the Fed's target rate of 2 percent.
However, that could change. If, at some point, banks begin to lend those trillions of dollars, instead of speculate with it, if corporations begin to invest in plant and equipment rather than buy back their stock or someone else's, then the story could change.
The multiplier effect of money begins to come into play. That is when the dollar I lend to you is used to buy a widget or two, in turn, the widget seller turns around and uses that same dollar to pay my neighbor to make more widgets and so on and so on. In that way one dollar becomes many more. That's what causes inflation. We haven’t gotten to that point yet. And the Fed says they will raise rates when and if that happens.
Some say all the Fed has done is cause a gigantic bubble in financial assets. The Fed says no, markets, in their opinion, are simply fairly valued. No one, including the Fed, really knows for sure. In many ways this entire QE program has been a grand experiment and the final outcome has yet to be written.
So back to the stock market, if you trace the behavior of markets through these various QE programs, one thing stands out. In every instance, once investors understood that the QE program was ending, the stock market declined. One wonders if this will happen again this time.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
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The Independent Investor: Should You Pay Off Mortgage Before Retiring? |
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By Bill Schmick On: 03:21PM / Thursday June 26, 2014 |
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Many retirees, concerned with no longer having a steady paycheck, have asked me for advice on whether to pay off their mortgage early. There is no definitive answer but here are some variables to consider when making a decision.
Your monthly mortgage payment in retirement may represent a significant portion of your monthly income. If you only have social security as an income stream, then chances are that a mortgage payment will significantly reduce the amount you will need to meet your monthly expenses. If so, then pay off the mortgage. However, be careful you don't significantly reduce the amount of money you have available for emergencies, general expenses and discretionary spending. You don't want to end up house-rich but cash-poor.
By paying off your mortgage now, you reduce interest rate risk, especially in a rising rate environment. Naturally, there are several factors at play here. How long and how much debt remains on your mortgage will be a crucial factor. If you have an adjustable rate mortgage and rates double over the next five years then it makes sense to pay off the loan or at least convert to a fixed-rate mortgage.
On the other hand, if you took advantage of the low interest rate environment over the last few years and re-financed, you might now have a thirty-year fixed rate mortgage with an interest rate of 3-5 percent. In that case, it may make sense to keep the mortgage. Why?
If, as many predict, interest rates do rise substantially in the years to come, your borrowing cost on that fixed mortgage will look like a very good deal.
Retirees must also understand the opportunity costs of paying a large lump sum out of your retirement savings to be free of that mortgage. While being debt-free may feel good, could there be other investments that might provide a better return?
Let's go back to the retiree who refinanced and now has a 30-year fixed at 5 percent. If interest rates do rise from here sometime down the road, that retiree has the opportunity of taking advantage of those higher rates. Theoretically, he could invest that lump sum money into a safe U.S. Treasury bond yielding 6 or 7 percent, maybe more.
While he waits for rates to rise, there is always the stock market. Stocks have averaged a 7 percent return historically for well over the past 100 years. He could invest the money in a group of dividend stocks, which would not only generate him income but also price appreciation. In long-term bull markets like today's, the average return on equities has been much, much more.
Of course, each individual's situation is different. Paying off the last $100,000 of a mortgage out of a retirement nest egg of $1 million is much different from someone who only has saved $300,000. As always, the mortgage interest rate you are paying is critical to the equation. There are also alternatives. If there is no prepayment penalty, you can always pay down the principal faster or simply double your overall monthly payment.
But numbers aren't everything. For some people debt is, and always will be, a dirty word.
The peace of mind they receive from being debt-free may trump whatever opportunity they may have elsewhere. My only advice is to weigh all your options carefully before making that decision.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
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The Independent Investor: Retirement should be a part-time job |
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By Bill Schmick On: 11:14AM / Friday June 20, 2014 |
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Only 40 percent of those who retire find that their quality of life improved. That’s because the majority of Americans, especially men, fail to understand that retirement can have a sudden and stressful impact on their lives and especially their marriage. Don’t let this happen to you.
Remember that throughout history, most people worked until they died or were physically or mentally unable to hold down a job. It is only recently that people had the luxury of choosing to retire. For many, it comes down to the dollar and cents ability to have saved enough money to live on through their remaining years. But just because you have the money doesn’t mean that you should.
In my experience, anecdotal evidence indicates that those of my clients who are happiest in retirement are actually those who hold down part-time jobs, created new jobs or have developed interests and hobbies that keep them busy and out of the house for the good part of every day.
On several occasions when my clients have expressed an interest in retiring over the next year or two, I have urged them to spend that time trying out new roles and identities. In many cases, I have urged my clients to think outside the box and pursue interests that seemed outside their grasp up until now. One client loved to swim and already taught classes part-time. Another had organized a mountain-biking club and in his spare time taught newcomers the sport. One loved to bake, another to ball-room dance. Some considered opening a business, others started or joined charities or social groups.
For those management types who loved a good business plan, I recommended building a business plan for retirement. I urged them to develop and share this plan with their spouse, which brings us to the topic of marriage and retirement.
Retirement is the fastest way to discover the holes in your marriage. Think about it. For years an unhappy marriage could exist by avoiding each other by simply going to work. Retirement will change that. Now, you are together with your spouse 24/7, which will mean adjustments, big adjustments if that marriage is going to survive. Issues that you should have resolved years ago will demand immediate solutions. No wonder the divorce rate among retirees is increasing.
How do you begin, or if you are in a pretty good relationship, how do you adjust to retirement? Well, first you have to sit down and talk about it (preferably before and not after). First on the agenda is establishing a retirement lifestyle that you can both enjoy and one that meets the needs of both partners. That may mean sharing the household chores, something most men have avoided their entire lives. There may be personal habits that have to go and it most certainly will require teaching old dogs new tricks. Private time for both is also going to be important. The point is that becoming a couch potato, keeping your feelings to yourself and continuing old behaviors are not the answers.
For most couples, retirement will be a process. At first most couples experience a short-term honeymoon period where everything works. You can sleep later, go out to eat more often, watch television together and visit the kids in California. However, after a few weeks or months, reality hits. Senior citizenry no longer has the cache you thought it had and you come to realize how “bossy” that person who shares your life really is.
To survive retirement together your first rule of thumb is that communication is essential. For many men that is an earth change in behavior. Men have to get out of the house and find part-time work, paid or non-profit, social or otherwise. I call it work because men are usually not comfortable in new social settings. They rely instead on their wives to do that for them. No more.
Remember too that being retired does not mean you have to spend every waking moment with your spouse. No matter how likable you think you are, you’re not. You both need the confidence and sell-esteem to take care of yourself and have time alone.
The best way to look at retirement is as simply as a job change. You may work fewer hours at something new or different. You may get paid less or nothing at all. Like any new job, there will be a learning curve, failures and successes along the way and lots and lots of changes. If that bothers you, don’t retire. But if you do retire, embrace the change and treat it with the respect and planning it demands and serves.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
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