The Time to Plan Is When It’s Not Needed

I received a call last year from a woman who’d sounded desperate.  “I was just offered an early-retirement package from my company,” she’d said, the words rushed from anxiety, “and I’ve got two weeks to make a decision.  Can you help me?”  I had groaned inwardly, imagining the late nights ahead struggling to collect the necessary data, performing the analysis, and clarifying the results in a way that would enable her both to understand and to take action.  But of course I did what I could to help.

It’s not uncommon for us to put off planning for something until we see the need for it.  That’s human nature.  But it’s also risky.  Have you made a list and stashed away emergency supplies in case of an earthquake?  What about a tornado?  The latter may sound remote but one actually touched down in my backyard in 1998.  The cost and stress of recovering from an unplanned problem is usually much higher than if we had planned for it.  And we typically learn this lesson after it’s too late.  When was the first time you started backing up your computer hard drive: before or after your first disk crash?

A recent survey by Nationwide Financial found that 26 percent of potential investors do not have a financial plan.  Even worse: 38% of those that do not have one have no intention of getting one.  “We live in an era when Americans are more responsible for their own financial security than ever before,” said Michael Spangler, president of Nationwide Funds. “However, for various reasons far too many haven’t taken the time to draft a detailed financial plan to help them achieve their goals over the short, medium and long terms.  An effective plan is much more than opening a savings account or investing in your employer’s 401(k), it’s a map to ensure that you get to your financial destination.”

Without a financial plan, we are left unprepared for life’s big transitions, such as a job loss, marriage, divorce, birth of children, buying a house, inheriting money, death of a loved one, and other countless events that can have such a huge impact on the quality of our lives.  And the emotional upheaval these life transitions cause us makes it extremely difficult to make good financial decisions when we’re in the middle of one.  The time to plan is before the event occurs so that we’ll be much better prepared to effectively manage the transition and its financial impact and not get sidetracked by all the pain and stress.

Probably one of life’s biggest transitions is retirement.  US News reported that in 2009 between 60% and 80% of baby boomers had expected to work past age 65 as a way to overcome the devastation of the Great Recession.  Unfortunately, many failed to consider the employment situation or their health as factors.   As a result, according to a follow-up survey by MetLife, over half of the first wave of baby boomers to hit retirement age had stopped working before they’d planned.  Many still hope for part-time jobs or developing new careers, but have been struggling to find them.

The missing element in their plans was the inclusion of alternative scenarios.  As humans, when we make guesses about the future, we almost inevitably predict more of the same.  Unfortunately that’s not how life works.  When we include different scenarios in our plans, we reduce our vulnerability (both emotionally and financially) to unexpected changes.  And the younger you are, the more likely you are to face a curve ball or two at some point in your future.

To summarize, the time to make a financial plan for your future is now, not when you’re in the middle of dealing with a major life transition such as divorce or job loss.  And a robust plan should include several scenarios to ensure you’re prepared for at least some of the major issues life could throw at you.

Artie Green
Artie Green, CFP, MBA

Artie Green, CFP®, MBA, is a CERTIFIED FINANCIAL PLANNER™ Professional and principal at Cognizant Wealth Advisors.  He can be reached at 650-209-4062 or at

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Why Is Good Annuity Advice So Difficult To Find?

Annuities can be a very valuable part of an investment portfolio.  Unlike stocks & bonds, they provide guaranteed income for as long as you live (at least to the extent supported by your state’s Life & Health Insurance Guarantee Association).  But getting help on what kind of annuity to buy (let alone which one specifically) can be surprisingly difficult.  Here’s why.

The first thing to know is that an annuity is a contract between you and the issuing insurance company.  You give them money up front and they promise you a stream of income over your (and possibly your spouse’s) remaining lifetime.  Obviously you need to read the contract in order to understand the details of how you will be paid back.  That’s where it gets complicated.  For the simplest annuities, single premium immediate annuities (SPIA), the documentation is fairly straightforward.  But for more complex variable annuities such as equity indexed annuities (EIA) or Guaranteed Minimum Withdrawal Benefit (GMWB) annuities, the contract can run to 20 or 30 pages, and the details of how the various calculations and limitations are defined can have a significant impact on your actual withdrawal or income benefits.

If you do not have the inclination to figure it all out yourself, where do you turn for advice?  All insurance products are sold via commission.  You may or may not get a good detailed explanation about a specific annuity from the salesperson, but you certainly will not get a comparison of that annuity with other similar annuities from other companies that might have better benefits or lower premiums.  You are also unlikely to get help comparing the annuity income with alternative investments that might be more appropriate for your situation, simply because the salesperson doesn’t sell them.

Consumer support organizations and publications such as Consumer Reports logically would be another good source.  But again, because there is no standard for annuities like there is for auto and home insurance, a review of one annuity wouldn’t tell you much about any others.  As a result you won’t find more than general information and advice about annuities from these kinds of sources.

That leaves financial planners and independent advisors.  Because they are held to a higher standard than insurance agents (they are required to have a fiduciary responsibility to their clients, meaning they must put their clients’ interests ahead of their own), they must consider alternatives and recommend what they believe is the best choice specifically for you.  Many advisors don’t like annuities because of their complexity and lack of standardization.  Each one is different, and even similar sounding annuities from the same insurance company can have different terms & conditions.  And, just as with auto and home insurance policies, the premiums for annuities with similar benefits can vary widely from company to company.  The only way a financial planner can do a cost-benefit analysis of a complex annuity is to read the contract in detail, which involves a lot of time and effort.  And then he or she needs to compare it to other annuities as well as to other investments.  Imagine how many hours that all takes.

Are there alternative investments that are safe but better than annuities? Again, it depends on the specific annuity, as well as your goals in considering one.  I evaluated one client’s EIA by comparing it to an equivalent amount invested mostly in ultra-safe zero-coupon 10-year US treasury bonds (called strips) plus a small amount in an S&P 500 index fund.  I compared the returns over the 10 year period from 1990 through 1999, which was one of the best performing decades for the S&P 500 in recorded history (432% cumulative), and over the 10 year period from 2000 through 2009, one of the worst decades (-9% cumulative).  I found that in the best decade, the investment beat the annuity by 107% to 48% (cumulative). In the worst decade, the annuity returned 36%, while the investment, without any guarantees, returned 29%, not much worse.  The client, who was very risk-averse, appreciated the fact that an investment mostly in US government bonds (which, by the way, are safer than any annuity investment) can mitigate much of the risk even without minimum guarantees.  His insurance agent did not explain any of this.

Again, annuities can be useful tools for retirement.  But the decision to include one in a retirement portfolio depends on a number of factors specific to each family’s situation. If you are considering annuities on your own, especially complex ones such as EIAs or GMWBs, there’s a lot of due diligence you really need to perform to make sure you’re getting what you think you’re getting.  And until the various state regulatory agencies impose standards on annuity contracts, you should plan to devote many hours learning about them before making a decision to buy one.

The bottom line: Caveat emptor!

Artie Green

Artie Green, CFP, MBA


Artie Green, CFP, MBA

Artie Green, CFP®, MBA, is a CERTIFIED FINANCIAL PLANNER™ Professional and principal at Cognizant Wealth Advisors.

He can be reached at 650-209-4062 or at

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Buying a Mutual Fund? Which Class is Right for You?

If you’re like many investors, you like the diversification and perhaps the active management that many mutual funds offer. And there are lots of resources available for you to identify, compare, and choose funds in which to invest. Let’s say you’ve decided to put some of your money into the Pimco Total Return Bond fund.  Fair enough.  But did you know there are five different classes of the very same fund?  There’s PTTAX, PTTBX, PTTCX, PTTDX, and PTTRX?  Why are there so many choices and which is the right choice for you?

The short answer is that each different fund class has a different fee structure designed for a particular market segment.  Each share class includes some combination of three types of expenses.  First, there are the annual expenses (called expense ratios) which every mutual fund charges.  For some funds these charges are less than 0.10% of your investment, while for others they can eat up as much as 3 – 4% of your assets each year.  Funds utilizing more active management and/or those focusing on geographies or sectors – small companies in emerging markets, for example, where there is less available information – will typically have higher expenses, reflecting the additional research required.  The return to the investor from the fund is equal to the fund’s return less the annual expenses.

In addition to the expenses above, there may be an up-front load, or sales charge, that some mutual fund classes include.  There may also be a back-end load, or redemption charge.  And, just to add to the complexity, the size of these loads can also vary from one share class to another.  While the impact of these different combinations of expenses on your returns will vary based on the length of time you hold the fund, knowing the basic differences between these share classes can help you make better choices even without knowing the future.  Let’s compare some of the more common share classes and which are better or worse for investors:

‘A’ shares (also known as investor shares) typically carry high front-end loads, no back-end loads, and relatively low annual expenses. For example, Pimco Total Return Bond fund ‘A’ shares (PTTAX) carry a 3.75% load and an expense ratio of 0.85%. That means that if you invest $10,000, you’ll pay $375 in sales charges right off the bat, leaving $9,625 to be invested in the fund. And each year the investment company will take out an additional 0.90%. Unless you plan to keep the investment for a very long time, the large up-front fee will significantly reduce your returns (relative to the fund’s returns). Class ‘A’ shares are typically recommended by commission-based brokers since the up-front fee represents their fee for selling you that mutual fund. If you’re buying shares on your own, you should avoid ‘A’ shares.

‘B’ shares typically have no front-end loads, higher expense ratios than ‘A’ shares, and back-end redemption fees, which sometimes decline the longer you hold the shares before selling them. ‘B’ shares aren’t usually very economical either, especially for long-term investors, because of their high expense ratios, as well as their back-end sales charges.  For example, the Pimco Total Return Bond fund ‘B’ shares (PTTBX) have a 1.60% expense ratio, nearly twice that of the ‘A’ class shares.

‘C’ shares are commonly known as “level-load” shares. They generally have no loads on either the front or back end, or if they do have a redemption fee, it’s usually much smaller and/or scales down much faster than the back-end loads of ‘B’ shares. But like ‘B’ shares, ‘C’ shares usually have high year-to-year expenses as compared to ‘A’ shares, again making them a bad bet for long-term investors. The ‘C’ shares of the Pimco bond fund above (PTTCX), for example, have the same high expense ratio as the ‘B’ shares. Some funds utilize ‘N’ shares, which are slightly cheaper versions of ‘C’ shares, but which still carry higher expense ratios than ‘A’ shares.

‘D’ shares are typically sold through mutual fund supermarkets such as Schwab or Fidelity. There are no loads (either front-end or back-end) and the expenses are usually more reasonable. The expense ratio for the Pimco Total Return fund’s ‘D’ shares (PTTDX), for example, is only 0.75%. But there might be a transaction fee you have to pay to the broker, which varies depending on the level of assets you are maintaining with them. Regardless, these are usually the best class of shares to purchase if you are a retail investor.

‘R’, ‘S’, and ‘Z’ shares round out the list, and are generally not available to retail investors. ‘R’ refers to shares that are explicitly created for retirement plans. The fees that these funds charge range widely. Some are ultra-low-cost, while others bundle in the record keeping and other administrative costs associated with running the plan. ‘S’ and ‘Z’ are usually share classes that have closed to new investors; if you want to buy into one of these funds for the first time, you’ll have to go through a broker and initially opt for the A, B, or C share class.

The best shares to own are the ‘I’ or ‘Y’ institutional shares – no loads and the lowest expenses in the mutual fund world. Our Pimco bond fund’s ‘I’ shares (PTTRX) carry an expense ratio of only 0.46%, for example. But ‘I’ shares require a minimum investment that is typically out of the range of most investors. For the Pimco fund it’s a cool $1 million! There are, however, two ways you can get access to such fund classes without being Bill Gates. One way is to utilize a financial planner who is also an investment advisor. Many advisors can get you institutional fund shares based on their aggregate investment (across all clients) in the fund or the fund family. Many advisors also have access to load-waived ‘A’ shares of many funds, which have the same low expense ratios as ‘A’ shares but eliminate the front-end loads. Load-waived ‘A’ shares are not always as good as ‘I’ shares, but certainly better than most of the others. Another way to invest in institutional shares might be through a retirement plan if you work for a large company. Unfortunately, many such plans utilize custom funds whose expenses can be opaque and, in some cases, even more expensive than retail shares.

If you think these cost differences are minor, think again!  Over time they can have a big effect on your returns.  Suppose the Pimco Total Return Fund returned an average of 8% per year over the last five years, not including these fees.   If you had purchased $10,000 worth of PTTRX, after the five years you’d have ended up with $14,383.  PTTAX, on the other hand, would have returned you only $13,594.  That’s almost a 6% difference.  And we’re talking about the very same fund!

To summarize, ‘I’ shares are the best, followed by load-waived ‘A’, ‘D’, and ‘N’ shares.  Remember: there are many strategies you can follow for picking a good mutual fund. You can consider cost, or management strategy & expertise, or historical performance, or any number of other attributes. But once you’ve made your selection, paying attention (when the investment company offers multiple classes) to which share class to purchase is a simple way to further improve your portfolio returns.

Artie Green
Artie Green, CFP, MBA

Artie Green, CFP®, MBA, is a CERTIFIED FINANCIAL PLANNER™ Professional and principal at Cognizant Wealth Advisors.  He can be reached at 650-209-4062 or at

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Should you take a lump-sum payout from your company pension?

Among the many decisions new retirees face is the decision whether or not to take your company pension as an annuity or as a lump-sum payout.  In many cases the decision will be made for you — some company pension plans (also known as defined benefit plans) do not support lump-sum payouts.  But if you do have this choice, it’s important to spend a little time thinking through your decision.

An annuity is a guaranteed payment from the plan for the remainder of your life.   All plans also offer a joint and survivor option: that is, the plan will continue to pay at least 50% to your spouse should you predecease him or her.  The key advantage of the annuity choice is a guaranteed payment throughout your and your spouse’s lifetimes.  Guaranteed payments always make retirement planning easier.

However, a guaranteed payment does not necessarily guarantee sufficient funds to support you through your retirement.  Over time the purchasing power of your pension is eroded by inflation.  Even if inflation were to remain only 3% per year (its 80-year average), after less than 25 years every dollar paid to you would be worth only 50 cents.  And with people living longer, it’s not at all unreasonable to assume a retirement lasting for that many years or more.  If you have put together a retirement plan, you should easily be able to tell whether or not the pension income together with all your other expected income will be sufficient.

Guarantees are also only as good as the pension plan itself.  If your company were to go bankrupt without sufficient funds in the plan, the plan would be taken over by the Pension Benefit Guarantee Corporation (PBGC), created by the federal government in 1974 to provide for such contingencies.  But the PBGC will only cover pensions up to $54K per year, regardless of the pension originally guaranteed by the company.  That’s the equivalent of only $27K per year after 25 years if the inflation rate were to remain a constant 3% over that time.  And the PBGC itself is not in great shape.  It is currently running a deficit of over $33 billion.

Does that mean you should take the payout as a lump-sum instead?  On the positive side, the returns investors have gotten from a diversified basket of assets have historically exceeded the returns from a fixed pension by a pretty wide margin.  So if you were to take the money as a lump sum and invest it wisely, you should expect to earn more than taking it as a monthly or yearly payment.  Of course, you could also take the annuity instead and invest each monthly payout, assuming you didn’t need the money immediately.  That might turn out to generate just as much income as the lump-sum investment, although quantifying the difference would be pretty difficult.  But the biggest disadvantage of putting the money into an investment portfolio vs. taking it as an annuity is the risk that your investments do not produce the returns you expect.  A couple of bad years could have a significant impact on your retirement goals.

What about timing?  Pension plans base their expected payouts on the annuity model.  If you want to take your payout as a lump-sum instead, the plan calculates the current value of the lump-sum based on the stream of payments it expected to pay you over your lifetime.  When interest rates are low, the calculated present lump-sum value of your pension will be much higher than when interest rates are high.  That’s because the plan itself invests in bonds and other income producing investments and would need more money in a low interest rate environment to be able to fund the same future stream of payments as compared to a high interest rate environment.  Therefore, if you did decide to take a lump-sum payout, the best time to do it since 1970 would be right now!

So what’s the right answer: take your pension as an annuity or as a lump-sum?  Well, having some combination of guaranteed income and investment income is generally prudent.  But, then again, even if you took your pension as a lump-sum, you could always take some of the proceeds and annuitize them by simply purchasing an annuity from an insurance company, creating a guaranteed stream of payments just like pension income.  In the end, the choice will depend on your specific financial situation, and a conversation with your financial planner on this topic would probably turn out to be the best decision you could make.

Artie Green

Artie Green, CFP, MBA

Artie Green, CFP®, MBA, is a CERTIFIED FINANCIAL PLANNER™ Professional and principal at Cognizant Wealth Advisors.  He can be reached at 650-209-4062 or at

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A Different Way to Save for Retirement

Many financial planners (including me) believe that one of the best ways to save for retirement is to regularly set aside a certain amount of money every week or month, turning saving into a habit.  Retirement plans such as 401(k)s have been structured to encourage this behavior.  However, when you have to make lifestyle changes in order to save, it becomes somewhat like dieting.  It’s hard to keep it up when you feel like you’re restricting yourself from doing something you like.  A recent CNN/Money Magazine article describes a different way of saving called burst saving.  One of the benefits of this approach, according to research firm Hearts & Wallets, is that people who practice it are far more likely to sock away enough money for a comfortable retirement than those who don’t.

The concept is quite simple.  Whenever your income ramps up, such as from a pay raise or from a bonus, put at least 50% of the increase into a retirement account or bank or brokerage account targeted for retirement.  Whenever your expenses drop — for example after your children graduate from college or after you pay off a mortgage — take at least half the amount you would have spent and put it into the same accounts as above.  This approach allows you to save more without feeling like you’re forcing yourself to cut back or to give up something.  And if you can do this for several years, rather than just once, so much the better.

Hearts & Wallets says that burst savers are more likely than other types of savers to hit their savings goals no matter what age they start their savings regimen.  That makes this approach particularly useful for those 40 and 50-year olds who have not been giving much thought to saving for retirement until now.

There are some other things that you can do to increase your savings without it becoming a burden.  One is to set a target for savings.  Studies show that people who calculate how much money they need for retirement end up saving much more than those who don’t.

A variation of the above strategy is to create an auto-escalation plan for your 401(k) or your budget.  For example, you can raise your 401(k) contributions by one percentage point each year for five years, or increase your monthly savings in your budget by 1% each month.  People who do that are much more likely to save enough for retirement than those who don’t.

Keep in mind, also, that those credit cards in your pocket may be the single biggest drag on your ability to save.  Taking on debt for home ownership is one thing, since most of us (with the possible exception of the latest Google and Facebook millionaires) do not have a sufficient level of equity to be able to buy a home fully in cash.  But taking on debt for most other purchases means you are living beyond your means, and that is practically as risky as borrowing money to invest.

We’re all living longer than our predecessors, and government support for our retirement is getting smaller.  Anything you can do to save more now will be well worth it to your future self.

Artie Green, CFP, MBA

Cognizant Wealth Advisors
2600 El Camino Real
Suite 304
Palo Alto, CA  94306
Tel: 650-209-4062

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