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Monday, March 30, 2009

Top Five 1-Year CD Rates

These are the top one year CD rates available in the US for banks with FDIC insurance.

Bank Name
DATE
m/dd
RATE
%
APY
%
MIN.
DEPOSIT
Corus Bank
3/27 2.77 2.81 10,000
UmbrellaBank.com
3/27 2.71 2.75 1,000
State Bank of India
3/27 2.70 2.73 5,000
GMAC Bank
3/27 2.62 2.65 500
UFBDirect.com
3/27
2.62
2.65
8,000

Data from bankrate.com. Click bank names and scroll down for contact information.

Every month we review the best CD rates for 6-month, 1, 2, 3, 4 and 5-year terms. (See page 4 of this FREE issue of The Retirement Advisor newsletter in pdf: => January 2009.) Give it time to load as pdfs can be slow.

Wednesday, March 25, 2009

Withdrawal Strategies for Retirement Portfolios

We often get questions from people who are approaching or in retirement who need help managing their portfolios to fund their retirement needs. A sample of these questions include:

• How much of my portfolio should I withdraw every year to fund my retirement needs?

• What is considered a “safe” withdrawal strategy, taking into account the potential for significant equity market declines (such as the 1973-1974, or 2000-2002 bear market) or periods of high inflation?

• I want to withdraw a certain percentage of my portfolio every year. What should be my portfolio’s allocation to equities or other growth assets, such as REITs?

First, subscribers should adopt a “total portfolio approach” when determining an appropriate withdrawal percentage from a retirement portfolio. In other words, not only should one take into account all other current income sources (such as Social Security or annuity payments from a defined benefits retirement plan) and expense needs, but projected income sources and expense needs as well, such as:

• The impact of inflation on the purchasing power of existing annuity income, as unlike Social Security
payments, there is usually no cost-of-living adjustments for regular annuity payments.

• An increased spending on goods and services that are typically “consumed” by retirees. Examples include health care expenses, vacation and holiday expenses, or even financial responsibility for an elderly parent (which is increasingly common since many folks are now living into their 90s).

• A “shock event,” such as a 50% decline in the global equity markets or the destruction of your primary residence due to a natural disaster.

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Tuesday, March 24, 2009

US Treasuries are Uncle Sam's IOU: How they work

Treasuries are Uncle Sam's IOU: A United States Treasury security is really just an IOU from the government. You lend Uncle Sam some money, and he promises to pay you back, plus interest. To be more formal, a Treasury security is government debt issued by the United States Department of the Treasury through the Bureau of the Public Debt.

Treasury securities are the debt financing instruments of the United States Federal government. You know our federal government can spend some money big time And somebody is paying for all of these stimulus packages. Sure, us taxpayers contribute up a lot. But our government is running some big time deficits. Not to mention the “off the book” stuff like social security. So, our government needs to borrow even more money and to do that, it sells Treasuries. (Securities issued by other Federal agencies accounts for the rest of the Federal debt).

Pretty much anyone can purchase Treasuries. You, me, funds, institutions, foreign governments. Foreign governments own a lot of our country’s debt. The top 10 are China, Japan, the United Kingdom, Caribbean banking nations, certain oil exporting nations, Brazil, Russia, Luxembourg, Hong Kong and Switzerland. I know what you are thinking, it is kind of a strange concept, but nobody in Washington seems to be complaining.

There are four types of marketable treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS). There are several types of non-marketable treasury securities including State and Local Government Series (SLGS), Government Account Series debt issued to government-managed trust funds, and savings bonds. All of the marketable Treasury securities are very liquid and are heavily traded on the secondary market. The non-marketable securities (such as savings bonds) are issued to subscribers and cannot be transferred through market sales.

Treasuries are considered the "safest" investment there is. Why? Because the government is the only entity that has a legal printing press to print more money to pay back its debt. Of course, others would argue gold is a safer investment because it has intrinsic value as a precious metal, but that is also topic for another day. Let’s take a quick look at Treasuries.

Treasury Bills

Treasury bills, or T-bills, are sold in terms ranging from a few days to 52 weeks. Bills are typically sold at a discount from the par amount (also called face value). For instance, you might pay $990 for a $1,000 bill. When the bill matures, you would be paid $1,000. The difference between the purchase price and face value is interest. You can buy a bill in TreasuryDirect or Legacy Treasury Direct, or through a bank, broker, or dealer. Bills are sold in increments of $100 and the minimum purchase is $100. All bills except 52-week bills and cash management bills are auctioned every week. The 52-week bill is auctioned every four weeks. Bills are issued in electronic form. You can hold a bill until it matures or sell it before it matures. For Treasury Bills, Notes and Bonds, an investor can buy up to $5 million by non-competitive bidding or up to 35% of the initial offering amount by competitive bidding. To learn more, or to open an account with Treasury Direct, go to this url:
Treasury Notes

Treasury notes, or T-notes, are issued in terms of 2, 3, 5, 7, and 10 years, and pay interest every six months until they mature. The price and interest rate of a Note are determined at auction.

Treasury Bonds

Treasury bonds are issued in terms of 30 years and pay interest every six months until they mature. When a Treasury bond matures, you are paid its face value. The yield on a bond is determined at auction. Bonds exist in either of two formats: as paper certificates (these are older bonds) or as electronic entries in accounts. Today, the Treasury issues bonds in electronic form, not paper but paper bonds can be converted to electronic form.

Savings EE Bonds

Series EE Bonds are reliable, low-risk government-backed savings products that you can use for retirement income, as well as gifts such as for children and grandchildren and financing education. Series EE Bonds purchased on or after May 1, 2005, earn a fixed rate of return, letting you know what the bonds are worth at all times You can purchase EE Bonds electronically over the Internet at www.TreasuryDirect.gov or you can purchase paper EE bonds at banks and other financial institutions. If you redeem EE Bonds in the first 5 years, you’ll forfeit the 3 most recent months’ interest, but if you redeem them after 5 years, you won’t be penalized.

Treasury Inflation-Protected Securities

TIPS, or Treasury Inflation-Protected Securities, are securities whose principal is tied to the Consumer Price Index. With inflation, the principal increases. With deflation, it decreases. Interest is paid every six months, based on a fixed rate applied to the adjusted principal. At maturity, TIPS pay the original or adjusted principal, whichever is greater. TIPS are sold in terms of 5, 10, and 20 years.

I Bonds

The Treasury’s inflation-indexed I bonds are designed to offer all Americans a way to save that protects the purchasing power of their investment by assuring them a real rate of return above inflation. I bonds have features that make them attractive to many investors. They are sold in electronic form in amounts of $25 and above, or in paper form at face value in denominations of $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000, and earn interest for as long as 30 years. I bond earnings are added every month and interest is compounded semiannually. They are state and local income tax exempt, and the federal income tax on I bond earnings can be deferred until the bonds are cashed or they stop earning interest after 30 years. Investors cashing I bonds before five years are subject to a 3-month earnings penalty. Savers and investors can now open an on-line account to purchase I bonds in electronic form, as well as EE savings bonds and Treasury marketable securities, through the website www.TreasuryDirect.gov. Account holders can purchase, manage, and redeem such I bonds over the Internet 24 hours a day, seven days a week.

* * *

Ok, so that’s the basic on Treasuries. Now, as noted earlier, China owns a bunch of our Treasuries, to the tune of about $1 trillion. China surpassed Japan last year as the largest foreign holder of Treasury bonds. In fact, they have over half of their foreign currency invested in our debt so you can imagine that they want to make sure their investments will pay off.

This weekend, China’s Premier Wen Jiabo acknowledged that China was worried about having all of this money in U.S. Treasury Bonds. Specifically, Premier Jiabo said, "Of course we are concerned about the safety of our assets. To be honest, I'm a bit worried. I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."

China is worried that the dollar is going to depreciate because of the excess spending on the part of Uncle Sam. But China is kind of in a bind as well. After all, where are they going to put all that money? The Financial Times is reporting that a director-general at the China Banking Regulatory Commission had this to say on the topic:

“Except for US Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option. We hate you guys. Once you start issuing $1 trillion - $2 trillion...we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

Hmm, you have to at least appreciate his frankness, if not his sentiment. More on that at the following url:
The comments by China’s premier are important for several reasons. We know the United States has embarked on a spending spree the likes of which our country has never seen. The Federal Reserve, the Treasury, the White House and most of Congress have adopted the view that we must spend now to avoid a deepening recession. The hope is that the economy will start back up, tax revenues will start coming in again, employment will rise, and THEN, we will be in a better position to start paying down our debt. It’s a plan, that’s for sure. Whether it is a realistic one, I don’t presume to be any smarter than the top dogs at the Fed or at the Whitehouse, nor do I have a crystal ball.

My personal belief, however, is that the economy will recover as the spending works its way through the system, and the Fed’s efforts take hold. However, I think we will face another crises shortly thereafter. There are unfunded promises made for Social Security, Medicare and federal retirement programs that account for a significant portion of taxpayer liabilities. And neither the Republicans nor the Democrats have really been willing to curb government spending when in power so to expect either party to change too much seems to be unrealistic.

Not to digress too far, but the yields on Treasury Bills, Notes and Bonds right now are extremely low. At some point, if foreign governments like China decide to curb back their investments in our government’s debt, then the interest we pay on our debt will have to be higher to attract new investors. Either that, or the government could allow or force a debasement of the dollar so that the debt could be purchased at what is really a discount since foreign investments into Treasuries must be made with dollars.

The other side to this equation is inflation. Right now, inflation is basically zero (as reported by the government) and the bigger worry from the Fed is deflation. But down the road, I am of the opinion we will get inflation of some sorts, and if you are locked in on a long-term Treasury bond and yields are rising, you are not going to be happy. If it is a date-certain bond that you hold to maturity, you will get your money back. But the purchasing power of your money is going to be eroded by inflation. If you are in a bond fund with long-term maturities and yields start rising, the net asset value should decline and that is also not an ideal situation if you own the fund.

Right now, Treasuries are reflecting a world that is paying a premium to avoid risk. But that will change as the pendulum swings again.


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Sunday, March 08, 2009

Bob Brinker on Approaching Retirement

Bob Brinker on Approaching Retirement vs. The Retirement Advisor

Bob Brinker has been able to reach a wide audience over the years by virtue of the syndication of ABC’s Radio Show, Moneytalk which he hosts on the weekend. Mr. Brinker has often discussed asset allocation, but in recent years we believe his market timing choices, and other recommendations have included poor recommendations. For example, he told a person approaching their retirement years that he wouldn't have a problem having more than 50% equities given his bullish outlook at the time. His Model Portfolio which was designed for someone in retirement, had well over 50% in stocks at one point. This came at a time when Bob Brinker was extremely bullish on stocks, and was recommending to lump sum purchase into equities when the S&P 500 was around 1450. His subsequent “buy” signals were lower and lower, but the market continued to go lower. At The Retirement Advisor, our most aggressive portfolio for someone approaching or in retirement has maximum exposure of no more than 50% in stocks. Our other two model portfolios have even less exposure to the stock market and have weathered this bear market quite favorably.

Brinker also had recommended the Vanguard High Yield Corporate Bond fund for one of his Model Portfolios that invested solely in the fixed income arena. At The Retirement Advisor, we completely disagree with this investment choice. We believe fixed-income holdings should be conservative investments that investors do not have to lose sleep over. That fund lost over 20% in one year -- which we regard as totally unacceptable losses for someone approaching or in retirement who invests in bonds.

The Retirement Advisor Model Portfolios were constructed with the goal of safety and one other important goal in mind: Simplicity. Studies have shown that the most effective way to save and invest for retirement is to construct and maintain a diversified portfolio of low-cost index funds matched to one’s retirement needs and risk tolerances. There is no need (and in fact, this may be detrimental to your financial health) to invest in the hottest technology fund, or buy actively managed mutual funds where annual expenses could be over five times as high as low-cost index funds.

We invite you to learn about our newsletter which is very reasonably priced and hopefully will help you achieve your goals as you head into your retirement years. You can download a free sample, and learn how to subscribe to The Retirement Advisor by going to this URL:

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Tuesday, March 03, 2009

What Does TALF Mean?

Today the US Treasury and Federal Reserve announced the launch of the "Term Asset-Backed Securities Loan Facility" or "TALF" for short. The purpose of TALF is to help "Main Street" get access to credit so consumers and small businesses can once again buy goods and services on credit. This is expected to significantly stimulate the economy.

From the joint press release:

In carrying out the Financial Stability Plan, the Department of the Treasury and the Federal Reserve Board are announcing the launch of the Term Asset-Backed Securities Loan Facility (TALF), a component of the Consumer and Business Lending Initiative (CBLI). The TALF has the potential to generate up to $1 trillion of lending for businesses and households.

The TALF is designed to catalyze the securitization markets by providing financing to investors to support their purchases of certain AAA-rated asset-backed securities (ABS). These markets have historically been a critical component of lending in our financial system, but they have been virtually shuttered since the worsening of the financial crisis in October. By reopening these markets, the TALF will assist lenders in meeting the borrowing needs of consumers and small businesses, helping to stimulate the broader economy.

Under today's announcement, the Federal Reserve Bank of New York will lend up to $200 billion to eligible owners of certain AAA-rated ABS backed by newly and recently originated auto loans, credit card loans, student loans, and SBA-guaranteed small business loans. Issuers and investors in the private sector are expected to begin arranging and marketing new securitizations of recently generated loans, and subscriptions for funding in March will be accepted on March 17, 2009. On March 25, 2009, those new securitizations will be funded by the program, creating new lending capacity for additional future loans.

The program will hold monthly fundings through December 2009 or longer if the Federal Reserve Board chooses to extend the facility.

Today the Board also released revised terms and conditions for the facility and a revised set of frequently asked questions. The revisions include a reduction in the interest rates and collateral haircuts for loans secured by asset-backed securities guaranteed by the Small Business Administration or backed by government-guaranteed student loans. The modifications are warranted by the minimal credit risk on these assets owing to the government guarantees, and, by making the terms of the TALF loans more attractive, they should encourage greater flows of credit to small businesses and students.

Additional details of the TALF and the CBLI can be found at http://www.financialstability.gov/. Further information on the Federal Reserve's credit and liquidity programs is available at http://www.federalreserve.gov/monetarypolicy/bst.htm. The Treasury Department also released a new white paper outlining efforts to unlock credit markets. On February 10, 2009, the Board and Treasury announced an expansion of TALF to include new asset categories that could generate up to $1 trillion in new lending. Teams from the Treasury Department and Federal Reserve are analyzing the appropriate terms and conditions for accepting commercial mortgage-backed securities (CMBS) and are evaluating a number of other types of AAA-rated newly issued ABS for possible acceptance under the expanded program. The expanded program will remain focused on securities that will have the greatest macroeconomic impact and can most efficiently be added to the TALF at a low and manageable risk to the government.

The Federal Reserve and Treasury currently anticipate that ABS backed by rental, commercial, and government vehicle fleet leases, and ABS backed by small ticket equipment, heavy equipment, and agricultural equipment loans and leases will be eligible for the April funding of the TALF. Other types of securities under consideration include private-label residential mortgage-backed securities, collateralized loan and debt obligations, and other ABS not included in the initial rollout such as ABS backed by non-auto floorplan loans and ABS backed by mortgage-servicer advances. As is the case for the current categories of newly originated loans, the TALF will combine public financing with private capital to encourage the private securitization of loans in the asset classes eligible in the expanded program.

Increased TALF lending and other actions to stabilize the financial system have the potential to greatly expand the Federal Reserve's balance sheet. In order for the Federal Reserve to conduct monetary policy over time in a way consistent with maximum sustainable employment and price stability, it must be able to manage its balance sheet, and in particular, to control the amount of reserves that the Federal Reserve provides to the banking system. The amount of reserves is the key determinant of the interest rate that the Federal Reserve uses to pursue its monetary policy objectives. Treasury and the Federal Reserve will seek legislation to give the Federal Reserve the additional tools it will need to enable it to manage the level of reserves while providing the funding necessary for the TALF and for other key credit-easing programs.

Key Dates for the TALF
Schedule for First Funding with Initial Eligible Assets

Date Announcement/Event
March 3, 2009 Launch of the TALF. Publication of the details for the first funding
March 3-17, 2009 Marketing first funding to investors
March 17, 2009 Subscriptions for first funding for TALF recorded
March 25, 2009 First funds from the TALF disbursed

Schedule for Second Funding

Date Announcement/Event
March 24, 2009 Announcement of details of second funding
March 24-April 7, 2009 Marketing second funding to investors
April 7, 2009 Subscriptions for second funding for TALF recorded
April 14, 2009 Second funds from the TALF disbursed

Related Press Release

Federal Reserve Bank of New York announces March 17 TALF Operation


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The Retirement Advisor Model Portfolios all began with $200,000 on 1/1/2007