Perspective on
Market High Fears

Now that markets have bounced back and the S&P 500 Index has crossed another significant threshold (3,000 points), the financial media is, once again, doing what it does best: subtly distorting facts to perpetuate a well-crafted narrative in order to create doubt and unrest so you will continue to tune in.

As we have discussed on numerous occasions, being a successful long-term investor at this critical stage in your life is not easy.  Understanding markets and history is certainly part of the job.  However, proactively filtering and putting the daily deluge of misinformation into proper perspective is of equal or greater importance to your success because of its impact on your mindset and potential actions.

Here are two very important examples we are hearing over and over right now that you have to be aware of:

1)“The market is at an all-time high: How many times have you seen this in the news, or heard it from friends or colleagues? In nominal terms, i.e. 3,000 points vs. 2,500 points, etc., it is true. However, like any financial number, the nominal figure itself  is of zero significance or value to you unless it’s compared with one or many other numbers for perspective.

As I shared with you in my book, The Relaxing Retirement Formula, in October of 1987, the Dow Jones Industrial average fell 508 points in one day.  Back then, 508 points represented a 22.6% drop, a very significant number!

Today, 508 points represents only a 1.8% drop which is Twelve and a Half Times LESS significant than a 22.6% drop.

However, the financial media continues to report “points” on the news each day.  Why do they do this instead using percentages which would be a far more accurate way to report the true significance of the drop?

You and I both know why intellectually: reporting points has a much larger impact on you emotionally!  And, the more emotion they can stir up, the more likely you are to tune in and remain tuned in for the next dose, thus increasing their ratings and the amount they can charge their advertisers.

Now, let’s go back to the market’s at an all-time highfear messaging and place it in proper perspective by comparing it to another relevant number.  The S&P 500 Index (as I write this) is at 3,085.  The consensus forward 12-month earnings estimate for the S&P 500 is 176 (per Yardeni).  Dividing this earnings estimate by the market price provides us with a 12-month P/E (Price-to-Earnings) estimate of 17.5.

For perspective, at the peak of the dot com bubble back in 2000, the 12-month forward P/E estimate of the S&P 500 Index was 29.0 (i.e. 66% higher than it is today)!

By any rational evaluation, that was an all-time high, and it doesn’t even take into consideration two other crucial variables as a backdrop to current market valuations, i.e. our current historically low inflation and interest rates.

The bottom line is the nominal figure of the market’s price (i.e. 3,000) is irrelevant without placing it into proper perspective.  However, the media will continue to tout the phrase, “the market’s at an all-time high” because it stirs up the fearful emotion they want to instill in you that the shoe is about to fall at any moment…so stay tuned.

2)  “The longest bull market of all time”:  The corollary to my first example is the continued storyline that we’re experiencing the longest uninterrupted bull market run of all time dating back to the financial crisis when the market bottomed out on March 9, 2009 after a 57% peak-to-trough drop.

To continue that narrative, the financial media has strategically chosen not to acknowledge two significant events.

You may recall that in 2011, we experienced a bear market brought on by the Eurozone meltdown, the debt ceiling crisis, and Standard & Poor’s downgrade of U.S. government debt.

(For reference, the pure definition of a “bear” market is a peak-to-trough fall in market prices of 20% on a closing basis, i.e. not intra-day.)

Between April 29th and October 2nd of 2011, market prices fell 19.4% on a closing basis, just shy of the 20% threshold. Although it didn’t close down 20%, if you measure the fall by the level of hysteria and equity fund redemptions, it certainly would have qualified as a bear market.

The same holds true for last year between September 20th and Christmas Eve when the value of the S&P 500 Index fell 19.8% on a closing basis, again just a hair shy of the 20% bear market threshold.

Ask all of those who panicked and sold out over $100 billion of equity mutual funds in just a two week period in December if they thought it was a bear market.

The financial media’s decision not to acknowledge these two large market downturns as “bear” markets allows them to strategically continue calling this the “longest running bull market of all time”, thus perpetuating the emotionally charged underlying fear that the market is long overdue for a large correction and it will do so at any moment.

None of this is in any way a prediction of what markets will do tomorrow, next week, or even next year.  Any honest person will readily admit that they don’t know either.

What’s so important to take away from this is to begin each day consciously aware of all attempts to strategically manipulate your emotions.  Don’t just take everything you read and hear at face value.  Always try to put it into proper perspective.

Protect your confidence by filtering all dispensed information for the truth so that you can make decisions based on fact instead of opinion.

 

Retirement Coach Jack Phelps Publishes New Article Revealing a Startling Analogy Between the Leading Causes of Death and Financial Dependence

Jack Phelps, founder of The Relaxing Retirement Coach, shares the revelation he had after a dinner conversation with friends and his ensuing research with the World Health Organization

Wellesley, MA – August 11, 2015Jack Phelps, founder of The Relaxing Retirement Coach, a Retirement Coaching company, recently published an article on his website (https://www.theretirementcoach.com) illustrating the incredible similarities between the perception and reality of poor physical and financial health.

In his article titled “Playing the Odds, Jack Phelps writes, “Our dinner conversation kicked into high gear when our friend said something I’ve heard so many times, ‘All your exercise and attention to healthy eating is great, but there’s no guarantee you won’t still drop dead of a heart attack if it’s in your genes. My father and grandfather both died of a heart attack before they were 62.’”

The Relaxing Retirement Coach, Inc. provides their members with the ‘missing structure’ they need to make a seamless and relaxing transition to their retirement years so they can confidently do everything they want to do without worrying about money.  Their Relaxing Retirement Coaching Program™ provides members with a personalized, one-on-one retirement coaching relationship with constant attention to each and every detail necessary for them to consistently enjoy a relaxing retirement experience.

The entire article can be found at https://www.theretirementcoach.com/articles/play-the-odds-3.php

To learn more about The Relaxing Retirement Coach, Inc., please visit https://www.theretirementcoach.com.

About Jack Phelps

Prior to developing The Relaxing Retirement Coaching Program back in 1994, Jack spent five years as a registered representative with Prudential Financial Services. In 1989, Jack graduated from Holy Cross College in Worcester, Massachusetts with a B.A. in Economics.

 

 

 

Play The Odds

While having dinner with friends in Chatham last week, we had a long conversation about health.

The “spirited” debate essentially boiled down to the leading causes of death and the role that ‘luck’ and genetics play vs. the choices we make.

I’d like to share parts of that conversation with you, and the revelation I arrived at about the remarkable similarities to ‘financial health’.

This will take a few moments, but I promise you this extended discussion and research on health has an extremely important lesson in it for all of us about the financial health you and your family members will experience.

Our dinner conversation kicked into high gear when our friend said something I’ve heard so many times, “All your exercise and attention to healthy eating is great, but there’s no guarantee you won’t still drop dead of a heart attack if it’s in your genes. My father and grandfather both died of a heart attack before they were 62.”

I’m sure you’ve heard some version of this comment before. Ultimately, it’s the same as, “you can do everything right and still get hit by a bus!” Or, “I know a guy who was ‘healthy’ who collapsed and died while running.”

Driving home from dinner, I made a mental note to do some research before seeing them again.

 World Health Organization

My ‘fact finding’ mission brought me to The World Health Organization website. (www.who.int)

Here are some very important facts about the four leading causes of death (The italicizing and bolding is mine for emphasis):

Non-communicable diseases (NCD) were responsible for 68% of all deaths globally in 2012, up from 60% in 2000. The 4 main NCDs are cardiovascular diseases, cancers, diabetes and chronic lung diseases. Communicable, maternal, neonatal and nutrition conditions collectively were responsible for 23% of global deaths, and injuries caused 9% of all deaths.

  1. Cardiovascular Diseases (CVDs)

 CVDs are the number one cause of death globally: more people die annually from CVDs than from any other cause.

An estimated 17.5 million people died from CVDs in 2012, representing 31% of all global deaths.

Most cardiovascular diseases can be prevented by addressing behavioral risk factors such as tobacco use, unhealthy diet and obesity, physical inactivity and harmful use of alcohol using population-wide strategies. 

  1. Cancer

Cancers figure among the leading causes of morbidity and mortality worldwide, with approximately 14 million new cases and 8.2 million cancer related deaths in 2012.

Around one third of cancer deaths are due to the 5 leading behavioral and dietary risks: high body mass index, low fruit and vegetable intake, lack of physical activity, tobacco use, alcohol use.

Tobacco use is the most important risk factor for cancer causing around 20% of global cancer deaths and around 70% of global lung cancer deaths.

  1. Diabetes

In 2012, an estimated 1.5 million deaths were directly caused by diabetes.

Type 2 diabetes comprises 90% of people with diabetes around the world and is largely the result of excess body weight and physical inactivity.

Healthy diet, regular physical activity, maintaining a normal body weight and avoiding tobacco use can prevent or delay the onset of type 2 diabetes.

  1. Chronic Obstructive Pulmonary Disease (COPD)

More than 3 million people died of COPD in 2012, which is equal to 6% of all deaths globally that year.

The primary cause of COPD is tobacco smoke (through tobacco use or second-hand smoke).

What’s the Commonality?

As you read through all of this, do you notice any commonalities?

First, two thirds of all deaths are related to non-communicable diseases (NCDs), i.e. not an epidemic and not an accident.

Among the four leading NCDs, the startling commonality is that they are not random, and not genetic. They’re primarily brought on by lifestyle choices and the physical effects these choices have on our body:

  • Eating: what do we eat, when do we eat, and how much do we eat?
  • Drinking: how much alcohol do we consume? How much water do we consume?
  • Smoking
  • Exercise: how often, and what type
  • Stress
  • Sleep: how much do you get, and what’s the quality of your sleep?

There’s No Guarantee

Armed with these facts, let’s now go back to my dinner conversation with our friend and her comment: “All your exercise and attention to healthy eating is great, but there’s no guarantee you won’t still drop dead of a heart attack if it’s in your genes. My father and grandfather both died of a heart attack before they were 62.”

I sympathize with the loss of her father and grandfather because I lost my mother to cancer at age 57, but the fact that they both died of a heart attack before age 62 doesn’t necessarily suggest that it was genetic. What are the chances that their lifestyle choices, and the negative long term effects they had on their bodies, were similar?

More important, however, was our friend’s choice of the word “guarantee”. It’s a very, very important word and one that led to my “revelation”.

Everyone yearns for certainty in their lives. In other words, they desire and would much prefer guarantees with everything (health, finances, etc.)

Unfortunately for those who seek it, life is not a straight line. There are no guaranteed results in anything.

Given this, to achieve whatever it is that you want, use your freedom to choose.

Research and play the odds at every turn!

In health, it’s 100% true that you could get hit by a bus and die. It’s also true that genetics plays a role in your longevity.

However, as The World Health Organization statistics suggest, your lifestyle choices (a nicer word than behavior) have a far, far greater impact on your health, vitality, and ultimately, your longevity.

If you have a sincere desire to be healthy and live a long life, why would you not study how to eat better, drink much more water and less alcohol, stop smoking cigarettes, exercise rigorously on a daily basis, etc.

Those like our friend who choose to focus on the role that genetics or accidents play in our long term health, etc. prefer believing it’s out of their control because it absolves them of any responsibility or role in the outcome. After all, “there’s no guarantee”.

What they’re really saying is they prefer not to make the proper choices and just do whatever feels good in the moment without any regard to the long term ramifications.

It’s easier to say it’s out of our control, it’s random, or it’s predetermined.

However, that’s a rejection of the reality that we all have the freedom to make the choice to play the odds at every turn and reap the rewards the statistics demonstrate.

My Revelation:

The Analogy to Financial Health

 At this point, you’re probably wondering what this has to do with financial health!

In short….everything!

When you step outside of our Relaxing Retirement membership community, and you read or listen to the majority of individuals (and, by extension, the financial media) talk about those who have achieved financial success, what do you hear?

  • Right Place, Right Time, Luck: Those who have done well had the luck of good timing, choosing to work for many years for company X vs. Y, the business they created benefitted from outside events, etc. and they earned a large income,
  • Trust fund kid, i.e. they inherited it (despite Forbes annual statistics of the remotely small minority to have sustained wealth coming from inheritance),
  • Magic Investment: they somehow obtained information, probably unethically or unfairly, that lead to a great investing outcome,
  • Education: they went to X school

Do you see the commonality in all of this?

It all adds up to the belief that financial independence is all random, luck, and good fortune, and you have very little influence over the financial outcomes in your life.

As potentially mean spirited as this may sound, just as it is with the health examples I gave, it’s easy and convenient to believe that financial independence is all random, luck, and good fortune.

Believing that absolves them of the responsibility of focusing on the long term, and making the necessary choices you have made which have generated your financial independence!

It’s easier to just block all of that out and focus on what brings instant, short term pleasure today, i.e. a new car I can’t afford, a 60 inch flat screen television, eating out five nights a week and running up the balance on my credits cards, or investing in a new “can’t miss hitting a home run” venture I heard about with money borrowed from my home equity line of credit.

Stark Contrast

The reality that I have witnessed amongst our members over the last 26 years is that almost none of you inherited anything. The majority did not earn extraordinarily large incomes during your working years. And, very, very few of you went to Harvard or Yale!

The reason you’re in the top 6% club has nothing to do with any of the traditional dogma most folks conveniently buy into.

You made decisions long ago that you stuck with over your lifetime to spend much less than you made, i.e. live within your means, and save and intelligently invest the difference.

You took 100% responsibility for the outcome you’ve experienced. You didn’t look for a mystical guarantee, or a magic pill (investment). You never panicked. And, you stuck with your plan.

In short, you played the odds.

And, this is what it all boils down to. There are no guarantees and no magic pills, so you may alert anyone and everyone you know to call off the search.

There are, however, successful formulas built on highly probable odds in both health and finance that are in plain view for all of us to see.

I’ve often said that if I fail, it’s certainly not going to be because I wasn’t prepared or I wasn’t willing to accept 100% responsibility for whatever outcome I realized.

In health, and in finance, we should all welcome our wonderful freedom to exercise control and choose our actions. And, happily do whatever is necessary to play the odds at every turn.

Retirement Coach Jack Phelps Publishes New Article answering the question of why we would want to ‘invest internationally’

Jack Phelps, founder of The Relaxing Retirement Coach, shows why demographic changes should play a major part in your investment decisions

Wellesley, MA – July 3, 2015Jack Phelps, founder of The Relaxing Retirement Coach, a Retirement Coaching company, recently published an article on his website (https://www.theretirementcoach.com) clarifying international investing misconceptions, and how to evaluate a company in today’s world.

In his article titled “Part II – International Investing”, Jack Phelps writes, “Whether it’s an American based company like Apple increasing sales in China or India, or a Swiss based pharmaceutical company selling insulin in the United States and abroad, who they’re selling to and the potential that brings is the critical factor.”

The Relaxing Retirement Coach, Inc. provides their members with the ‘missing structure’ they need to make a seamless and relaxing transition to their retirement years so they can confidently do everything they want to do without worrying about money.  Their Relaxing Retirement Coaching Program™ provides members with a personalized, one-on-one retirement coaching relationship with constant attention to each and every detail necessary for them to consistently enjoy a relaxing retirement experience.

The entire article can be found at https://www.theretirementcoach.com/articles/part-ii-international-investing-3.php

To learn more about The Relaxing Retirement Coach, Inc., please visit https://www.theretirementcoach.com.

About Jack Phelps

Prior to developing The Relaxing Retirement Coaching Program back in 1994, Jack spent five years as a registered representative with Prudential Financial Services. In 1989, Jack graduated from Holy Cross College in Worcester, Massachusetts with a B.A. in Economics.

 

 

 

Part II: International Investing

In my last article, we examined the misconception that international investing equals investing in the “economy” of the country or region in which the company is headquartered.

In short, there were two important distinctions:

  1. When we all invest, we’re investing in companies, not countries or the “economy” of a country,
  2. Where a company’s headquarters is located has become much less relevant when evaluating their potential success. A more accurate method of evaluating a company’s opportunities is through a “revenue lens”, i.e.  where their revenue comes from.

However, this stopped short of answering the question of why we would want to ‘invest internationally’.

The answer to that question lies in demographics. The United States, and the model in which it was built with free enterprise and the protection of personal property rights, has spawned the greatest advancement of living conditions and individual wealth in human history.

Unfortunately, many other nations took a longer period of time to institute and protect the personal freedoms which led to this explosion of improvements.

Slowly but surely, however, this is all changing. The living conditions and wealth of billions of individuals all over the world are rising rapidly, especially in developing market nations.

By the end of the decade, it is estimated that 440 million individuals will move into the middle class in Brazil, Russia, and China alone! (For reference, the United States has approximately 330 million total citizens.)

As you might imagine, this move up the wealth ladder has led to a rapid change in consumption patterns, and an increased need and desire for upscale goods and services including luxury apparel, health care, automobiles, and travel.

Health Care

In health care, for example, Novo Nordisk has a 50% share of the global insulin market. Just think about controlling half the world’s supply of insulin! Currently, 40% of their revenue comes from sales in the United States.

Now, let’s look into the future for Novo Nordisk. With the rapid movement into the middle class in so many developing nations that I noted above, the ‘westernization’ of diets has led to increased levels of diabetes. Increased diabetes leads to increased demand for insulin.

Just imagine what their marketplace will look like in 20 years.

Consumer Products

On the heels of the announcement that Apple’s cash reserves alone would make it the 17th largest company, many have questioned CEO Tim Cook’s plan to continue their stellar growth.

Cook talked about two major markets in which he thinks Apple has potential to sell many more iPhones.

The first is China. Apple is already doing well there, but Cook believes there’s an opportunity to do even more.

The next major market for Apple to attack, Cook said, is India. “We’ve started making investments in India, we’re growing rapidly in India, but we’re on a very small base there. But in some number of years, you could envision India being really significant, too, and should be.”

Air Travel

Another example is air travel. As the lifestyles of these upwardly mobile millions of people begin to increase, so will their desire to travel for pleasure, and for business in order to actively participate in global trade.

Companies who create the infrastructure necessary will also benefit, including roads, railroads, electricity, and telecommunications. All of these are crucial to the movement of goods and services to this growing group of individuals.

Takeaway and Strategy

The marketplace for all companies today has expanded rapidly, and will continue to expand based on these demographic shifts and future trade agreements.

The key point to grasp is that the location of the headquarters of a company is less and less important in evaluating their future.

Whether it’s an American based company like Apple increasing sales in China or India, or a Swiss based pharmaceutical company selling insulin in the United States and abroad, who they’re selling to and the potential that brings is the critical factor.

When you’re building your diversified Retirement Bucket™ of investments, it would be very shortsighted to limit your holdings to companies headquartered in the United States alone.

By doing so, you’re missing out on the opportunity to own companies headquartered outside the United States who not only sell to individuals in these rapidly expanding developing market countries, but also right here in the United States.

That would be the equivalent to fighting the heavyweight champ with one arm tied behind your back!

In your never ending battle to have your Retirement Bucket™ keep pace with your rising lifestyle costs, you want to stockpile and own as many good companies as you can who are positioned to take advantage of these growth patterns all over the world.

 

Retirement Coach Jack Phelps Publishes New Article Clarifying Common Misconceptions Surrounding International Investing

Jack Phelps, founder of The Relaxing Retirement Coach, provides a very simple method to understand international investing

Wellesley, MA – June 4, 2015 – Jack Phelps, founder of The Relaxing Retirement Coach, a Retirement Coaching company, recently published an article on his website (https://www.theretirementcoach.com) exposing common misconceptions about international investing and how you can understand the critical topic more easily.

In his article titled “International Investing”, Jack Phelps writes, “There is a lot of confusion over the issue of international (or global) investing so I’d like to clarify a few misconceptions so you can be a more educated investor in your retirement years.”
The Relaxing Retirement Coach, Inc. provides their members with the ‘missing structure’ they need to make a seamless and relaxing transition to their retirement years so they can confidently do everything they want to do without worrying about money. Their Relaxing Retirement Coaching Program™ provides members with a personalized, one-on-one retirement coaching relationship with constant attention to each and every detail necessary for them to consistently enjoy a relaxing retirement experience.

The entire article can be found at https://www.theretirementcoach.com/articles/international-or-global-investing-3.php

To learn more about The Relaxing Retirement Coach, Inc., please visit https://www.theretirementcoach.com.

About Jack Phelps

Prior to developing The Relaxing Retirement Coaching Program™ back in 1994, Jack spent five years as a registered representative with Prudential Financial Services. In 1989, Jack graduated from Holy Cross College in Worcester, Massachusetts with a B.A. in Economics.

International (or Global) Investing

When you hear the phrase “investing overseas”, what is the first thought that comes into your mind?

If you’re like many Americans, you might respond by saying:

“Isn’t investing overseas risky?”, or

“Why would anyone want to invest overseas?  Isn’t Europe’s ‘economy’ struggling?”

There is a lot of confusion over the issue of international (or global) investing so I’d like to clarify a few misconceptions so you can be the most educated investor.

Let’s begin by taking a big step back for a moment and clarifying why we all invest in the first place.  We all choose to invest in order to accomplish multiple goals, but in the big picture, they all fall under two main goals:

  1. Build our Retirement Bucket™ large enough to achieve complete financial independence so we don’t have to depend on the income from work in order to support our desired lifestyles.
  2. Maintain our purchasing power into the future in a world which has witnessed staggering levels of price increases throughout history.

In order to accomplish these goals, we all must own assets (investing) which have the potential to grow fast enough to keep pace with our rising lifestyle costs.

The $64,000 question is then always, “what should we invest in”?

A better way of stating that is “what companies should we own” since owning is what investing is all about?

One way of distinguishing one company from another is where the company is headquartered, i.e. in the United States vs. anywhere else around the world.

International investing simply means owning pieces of a company (or companies) who has their headquarters located outside the United States.

That’s it.

An example of this would be owing companies like Toyota (automobile manufacturer headquartered in Japan), Novartis (pharmaceuticals company headquartered in Switzerland), or Burberry (luxury apparel headquartered in the United Kingdom).

Companies vs. Countries

One big misconception is that international investing equals investing in the economy of a certain country.

If that was true, owning shares of Toyota would mean investing in Japan.

Owning shares of Novartis would mean investing in Switzerland, or Switzerland’s economy.

Clearly, this is off base given that each company is a truly global doing business all over the world.

Toyota derives a very large percentage of their revenue from buyers located outside of Japan, predominantly in North America.  I’m one of them!

In contrast, McDonalds, which is based in the United States, has locations in more than 100 countries around the world.

When we all invest, we’re investing in companies, not countries.

Headquarter Location vs. Revenue Location

Before the liberalization of trade policies throughout the world, companies did the overwhelming majority of their business in their home region.

Today, this is no longer true.  Large multinational companies now earn the majority of their revenue outside of their original geographic boundaries.

For this reason, where a company’s headquarters is located has become much less relevant when evaluating their potential success, and thus the trajectory of their stock price.

A more accurate method of evaluating a company’s opportunities is through a “revenue lens”.

Companies now report where their revenue comes from so we can get a much more accurate picture of where their business is generated.

This critical piece of information tells you so much more about a company’s prospects than where it is headquartered.

When you hear the term “international investing”, always keep these points in mind.

Stay tuned as we now delve into why we want to invest in companies located outside the United States.  This is a very important issue.

Retirement Coach Jack Phelps Publishes New Article Revealing Warren Buffett’s Unique Thoughts on Risk and Volatility

Wellesley, MA –April 22, 2015Jack Phelps, founder of The Relaxing Retirement Coach, a Retirement Coaching company, recently published an article on his website (https://www.theretirementcoach.com) sharing Warren Buffett’s critical thoughts on volatility and risk for retirees.

In his article titled “Warren Buffett’s Annual Report”, Jack Phelps writes, “While I strongly disagree with Warren on many national policy issues, his investment philosophy and process are sensational and worthy of careful attention by all of us.”

The Relaxing Retirement Coach, Inc. provides their members with the ‘missing structure’ they need to make a seamless and relaxing transition to their retirement years so they can confidently do everything they want to do without worrying about money.  Their Relaxing Retirement Coaching Program™ provides members with a personalized, one-on-one retirement coaching relationship with constant attention to each and every detail necessary for them to consistently enjoy a relaxing retirement experience.

The entire article can be found at https://www.theretirementcoach.com/articles/warren-buffett%E2%80%99s-annual-report-3.php

To learn more about The Relaxing Retirement Coach, Inc., please visit https://www.theretirementcoach.com.

About Jack Phelps

Prior to developing The Relaxing Retirement Coaching Program back in 1994, Jack spent five years as a registered representative with Prudential Financial Services. In 1989, Jack graduated from Holy Cross College in Worcester, Massachusetts with a B.A. in Economics.

Will Your Kids Lose 45% of Your IRA??

Having to deal with the emotional and psychological effects of losing a spouse or parent is always difficult.

Having to also deal with their financial affairs and the tax implications is enough to put you over the edge.  The consequences of making a wrong decision are enormous.

Landmines are everywhere, especially when your family inherits your IRA and/or 401(k).

If they’re not informed, almost half of your IRA could get lost to taxes in one fell swoop!

Doesn’t  sound too inviting!

Let’s walk through an example of how your children and grandchildren can make an “informed” decision when they inherit the IRA that you’ve taken your entire lifetime to build.

Ron and Rose

Ron and Rose been married for 40 years, and have 3 children who are all out of college and in the workforce.

After Ron retired, he rolled over his 401(k) and pension plan to an IRA where he named his wife Rose as his primary beneficiary and his 3 children as secondary (or contingent) beneficiaries in equal shares.

Two years into retirement, Ron suffers a heart attack and passes away.  (Sorry for the blunt shock value of the story, but it’s necessary to make the point)

When Ron passes away, as Ron’s spouse and beneficiary, Rose may transfer the money that was in Ron’s IRA into her IRA without paying any taxes.  (Key point: ONLY spouses can do this.)

Now, let’s fast forward ahead 3 more years.  Rose gets sick, and after a long battle, she passes away.

At this point, Rose’s children have some decisions to make as the beneficiaries of their deceased mother’s IRA.

In far too many situations, here’s what happens:

They call the institution where the IRA was held (bank, investment firm, insurance company, etc.) to inform them that their mother has passed away and to find out what their options are.

Depending on who receives that phone call, here’s the answer that they’re likely to hear:

“We’re very sorry to hear about your loss.  We’re going to send you out an IRA distribution request form.  Please each sign the form and return it to us along with a certified death certificate and we’ll get the checks out to you within 7 to 10 business days.”

Sounds simple enough, right?

Wrong!

What just happened?

Income Taxes Now Due on the ENTIRE IRA

The children just paid income taxes on the entire balance of the money in the IRA!

Depending on their own personal tax brackets, it’s likely that they gave up 40-50% of their share in federal and state income taxes in one fell swoop!

Let’s suppose that each of their shares in their mother’s IRA was $500,000.  That means that as much as $225,000 would instantly go to pay federal and state income taxes!

Imagine that.  You work your entire life.  You diligently save your money.  You select sound investments.  You do everything right and with one phone call to an uninformed company representative, 40-50% of your hard-earned savings is gone in one shot!

Depressing!

What Should They Have Done?

Each of the kids actually had another option with their share of their mother’s IRA.  One option was to just cash it all out.  But, as I mentioned, that has enormous tax consequences.

The second option, which is all too often omitted from the discussion, is to “re-title” their portion to an Inherited IRA, leaving their deceased mother as the deceased owner of the IRA and them as the beneficiary.

By doing this, they are only required to withdraw and pay taxes on a small amount of the money from the IRA each year, leaving the rest to grow tax deferred for the rest of their lives if they wish!

The amount of money saved in the short term and the long term is staggering.

Now, in order to qualify for this “Inherited IRA” tax deferral plan, there are certain IRS requirements that they have to fulfill in order to make it work.

Stay tuned to discover the steps required by the IRS that your children and grandchildren have to follow perfectly in order to qualify.

Retirement Coach Jack Phelps Publishes New Blog Clarifying How to Calculate Your Capital Gains Tax Burden When Selling Your Home

Jack Phelps, founder of The Relaxing Retirement Coach, walks you through a case study so you don’t overpay your tax bill.

Wellesley, MA –August 26, 2013Jack Phelps, founder of The Relaxing Retirement Coach, a Retirement Coaching company, recently published a blog on his website (https://www.theretirementcoach.com) demonstrating the step-by-step process you’ll need to use when selling your home so you don’t overpay your taxes.

Jack Phelps writes, “This is a question that’s in the forefront of many of our Relaxing Retirement members’ minds whom I speak with every day.  One of their stumbling blocks is in not knowing what the tax implications will be if and when they sell their home vs. keeping it and passing it on to their children.”

The Relaxing Retirement Coach, Inc. provides their members with the ‘missing structure’ they need to make a seamless and relaxing transition to their retirement years so they can confidently do everything they want to do without worrying about money.  Their Relaxing Retirement Coaching Program™ provides members with a personalized, one-on-one retirement coaching relationship with constant attention to each and every detail necessary for them to consistently enjoy a relaxing retirement experience.

The entire blog can be found here.

To learn more about The Relaxing Retirement Coach, Inc., please visit https://www.theretirementcoach.com

About Jack Phelps

Prior to developing The Relaxing Retirement Coaching Program back in 1994, Jack spent five years as a registered representative with Prudential Financial Services. In 1989, Jack graduated from Holy Cross College in Worcester, Massachusetts with a B.A. in Economics.

The Financial Media Salivates

Here’s Wall Street’s Market Watch on Monday, June 24th at 10:18 a.m.:

Headline: “U.S. Stocks Slide on China-Led Global Selloff”

Monday’s selloff comes after last week’s bruising selloff on Wall Street…European stocks tumbled and Shanghai stocks melted down….”

After quite a run so far this year with very few down days, equity prices cooled off toward the end of last week and now into this week.

Not good or bad news for all of us, but GREAT news for the financial media who’s been starving for a hiccup to start the chorus of alarm bells to garner your wavering attention.

After all, it’s no fun being in the financial media business when market price volatility is only on the up side. In order for them to put their best copywriters to work, they need some down side too!

Notice the terminology in the headline and first paragraph:

▪   “Selloff”

▪   “Tumbled”

▪   “Melted down!”

Doesn’t the term “selloff” just scare the heck out of you?

Have you ever thought about the term “selloff”? What exactly does that mean?

It sounds like everyone who’s ‘in the know’ is selling, thus you’re missing the boat by not doing so too.

The reality is there’s a fixed number of shares circulating out there. For every share of a given company that is sold, there is another person on the other end of that transaction who’s “buying”.

We have to always remember that!

Couldn’t they just as easily say, “….Global Buyoff” because for every person “selling” their shares, there’s an equal number of shares being “bought” by someone else.

In other words, for every person who chooses to sell (for whatever reason they have for doing so), there’s another person on the other end celebrating their good fortune because someone’s willing to sell them shares in the company they want to own at the price they’re willing to pay for them!

I know this sounds so simplistic, but it’s so important to protect your confidence and not allow brilliant terminology used by top financial media copywriters to influence your carefully prepared long term plans.

Reality Again

The reality of what’s happening to prices of companies (stocks) right now is “this is normal”!

As a rational, long term owner of shares of the great companies of the world, prices temporarily cooling off does not, and cannot qualify as news.

Nor does it qualify as an event worthy of discontinuing your ownership, i.e. selling!

Why?

Because market prices retreating 5-10% is nothing new. Just as market prices rising 15+% earlier this year didn’t alter your plans.

If you’ve never heard this statistic before, here’s a terrific one to plant in your memory during cooling off periods like this: the average peak to trough “intra-year” drop in the price of the S&P 500 Market Index is 14%.

Let me repeat and clarify that for a moment because it’s a very, very important fact:

In any given year, the average percentage drop that we’ve experienced at some point during that year is 14%. In other words, if you take a look at the high and low points of each year, you’ll see an average price drop of 14%.

What we can take away from that is that it’s completely “normal” for the stock market to have cooling off periods during any given year.

It shouldn’t necessarily give you the “warm and fuzzies” and lead you to celebrate, but it also doesn’t qualify as a phenomenon worthy of panic.

Unfortunately, this is not how the overwhelming majority of retirees think and behave. They spend their lives in constant reaction to everything which leads them to make the same costly mistakes over and over again.

Feel proud of the fact that you’re not one of them.

Euphoria!!

Good Morning Relaxing Retirement Member,

After reading and digesting the devastating results revealed in the DALBAR report, I want to do everything in my power to help you avoid being part of that horrific statistic.

To quickly refresh your memory, and to ingrain these numbers and their effects in your mind, here’s what DALBAR’s study on the results for the 20 year period ending in December, 2010 revealed:

  • The Average annual return of the S&P 500 Stock Market Index from 1991 thru 2010 was 9.14% (including dividends reinvested)
  • However, the average annual return of the “average” equity mutual fund investor (not investment, but an investor, i.e. a person) over the same 20 year period was 3.83%
  • The Average annual return of the Barclays Aggregate Bond Index from 1991 thru 2010 was 6.89%
  • However, the average annual return of the “average” bond mutual fund investor (not investment, but an investor, i.e. a person) over the same 20 year period was 1.01% (a difference of 85.3% per year).

What these numbers tell us is that, while the S&P 500 Market Index delivered a strong average annual return over those 20 years of 9.14%, the average stock mutual fund investor (a person, not an investment) only achieved 3.83%!

That means that the average equity investor’s return was 58.1% less than the broad market index each and every year!

The Effect

There are many, many reasons why social security statistics continue to demonstrate that only 6% of Americans are financially independent at retirement age, and can continue their same standard of living throughout their retirement years.

This DALBAR report illustrates a huge one!

The wonderful news out of all of this, however, is that it’s completely within your control to close this performance gap.

This ugly performance gap is not the result of bad investments or bad markets.

They are the direct result of poor investor strategy and behavior (action or inaction), all of which you have the ability to control!

Enjoying the relaxing retirement that you’ve worked so hard for and deserve requires not only action on your part, but resisting the allure of the wrong actions taken by the overwhelming majority of retirees.

In this Retirement Coach Strategy of the Week, I’d like to walk you through one of the reasons why this awful performance gap exists so that you can avoid being a victim.

And, after the record breaking month we’ve just witnessed, this is especially appropriate right now!

Performance Gap Reason #2: Riskless Euphoria

What exactly do I mean by Euphoria, and how does it apply to investing?

Well, it’s the financial equivalent of “rapture of the deep” which is a phenomenon that overtakes scuba divers when they dive down really deep.

Divers get completely blissed out and they lose any adult sense of danger.

The same thing occurs with investment Euphoria.

When you’re in The Euphoria Zone, there’s a complete loss of the idea that principle loss is even a possibility.

The best way to identify this in anyone, including yourself, is when their identification of loss, or their definition of risk, is being outperformed by somebody else!

They completely lose sight of their objectives and their plans and, instead, are attracted to the bright, shiny object of someone hitting a temporary investment home run.

When all you’re worried about is somebody making more money than you are, you’re in The Euphoria Zone.

What they lose sight of completely is the fact that in order to achieve higher and higher rates of return, they must take on greater and greater amount of principle risk.

1997 to 1999: The “New” Economy

The classic example of this was from 1997 through 1999 when people bought internet stocks at price multiples of 75 to 1!

Even those who were earning good rates of return doing what they were already doing.  But, that didn’t matter because others were earning more so they jumped into the pond without a second thought about the potential ramifications.

2005: Real Estate

Another example of this was real estate in 2005.  There was no price that was too high to pay for a pre-developed condo in Boca Raton, or Naples Florida because they just knew it would double in price in 3 years!

In hindsight, we now know what the result of this is.  Condos in those towns are now selling for 25 to 40 cents on the dollar.  I have a friend who bought a condo in Naples for $429,000 that he can’t sell today for $160,000!

What essentially occurs in The Euphoria Zone is the complete loss of any sense of risk at all.  None.

And, that’s one of the biggest mistakes that leads to irrational investing and the horrific results revealed in the Dalbar Report.

Stay out of the trap!

Committed To Your Relaxing Retirement,

Jack Phelps

The Retirement Coach

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Thank you!