Russell Bailyn -

Why don’t we teach personal finance in high school? When I was 17 I learned about double shifts in the supply and demand curve in AP Economics before I was formally taught the difference between a stock and a bond. I learned how to mathematically determine how a business should set its price points based on consumption patterns before I knew how to balance a check book. Do you see where I’m going with this? I truly believe that teaching personal finance to children and teenagers could have positive, long-term effects to both the economy and the general population. Perhaps some of the crippling financial errors people make (such as buying homes they can’t afford) can be avoided in the future with some simple education.

Student loans are one of the issues that inspired this post for me. My clients and readers know that I consider student loans to be one of the most dangerous and misunderstood financial tools out there. High school kids often don’t have parents who fully understand the lending terms of these loans either but tell their kids ‘its an investment in your future.’ Gosh the colleges love to hear that! The desire of kids to attend their ‘dream school’ is a dangerous one if it forces you to borrow your way through life Teenagers should learn about the financial aid process in high school. Chapters 12 and 13 of my book go over some of the many avenues which offer free money to college students through grants and scholarship. Many of these opportunities aren’t well enough publicized and could be through school programming.

If my vision of a financial literacy class ever comes to light, responsible usage of credit cards would undoubtedly be in the curriculum. Money spent on credit cards is real and students often don’t understand that or just don’t care. If going away to college is a student’s first opportunity to act responsibly with credit or pay the consequences, credit cards can teach you an unfortunate lesson. I’ve seen it in my practice with young clients who relied on credit cards to maintain their lifestyle during their last few years in school. Graduating into an economy like this is tough enough; doing it while racking up fees and penalties on a credit card is just not necessary. Credit cards should be used with kids starting at 14 or 15 and they should understand the positive affects of building strong credit at a young age.

The issue of financial literacy affects younger children as well. Most of us have been discussing the financial crisis and the recession with our families and co-workers over the past few months. We leave children out of it because we generally consider it to be ‘over their heads’ or inappropriate to discuss money issues with 4th and 5th graders. That may be true in some cases, but I think keeping a child’s understanding of money to a simple allowance really isn’t going far enough. Just like filling out a scorecard at a baseball game can be a hobby for kids, so can tracking stocks and market indexes—even without the usage of real money. The hypothetical scenarios we deal with in business school about how executives come to make important business decisions can apply to children as well. We just need to create analogies which kids can understand, perhaps using playtime, lunch money, and toys as examples.

It seems to me that we’re entering a proactive era, whether it be making the world a greener place for future generations or raising our moral expectations from publicly traded firms. Why not raise the bar with our kids as well? The world has become increasingly financially complex over the past decade, so much so that many adults haven’t a clue about their overall financial picture. The least we can do is raise our standards to the point where kids graduating into this wild world can keep their heads above water!

Russell Bailyn

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Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 01:28 PM | Permalink | Comments ( 7 ) | TrackBacks ( 0 )

I had lunch over the weekend with a fellow money manager specializing in municipal bonds. Because of the growing volume of municipal bond business, I like to gather opinions about where the best opportunities are right now in this space. It’s no secret that the current yield spread between treasuries and municipal bonds is totally out of whack. In case you don’t know the historical norms, here is some background: Because municipal bonds purchased by state residents are often free of state and federal taxes, they typically yield less interest to investors than treasury securities with comparable maturities. Lately, treasuries yields have been abysmal in light of the recession. The ‘flight to safety’ play has treasury prices sky high and yields very low. Similarly, the highest rated municipal bonds (AAA) are paying much less interest than municipals bonds in the A and BBB space. I asked my friend if the depressed prices of these highly graded (but not highest graded) muni bonds are accurately reflecting a serious risk of default, or if this could potentially be an opportunity for investors to get paid while the market recovers. I was told that short-medium term treasury prices are ‘unsustainably high’ and quite possibly nothing more than a hiding spot which may disappear if investor’s appetite for risk continues to climb. We also went through a variety of trading strategies which may be profitable if treasury prices continue falling and municipal bond prices (mid-spectrum) continue to rise.

We looked through several historical graphs of treasuries prices and yields, municipal bonds with AAA ratings and with BBB ratings and lower. If you chart out various muni grades from 1998-2008, they chart out similarly, with prices bouncing around within a 10% range of each other. However, starting in late 2008, the BBB grade muni bond prices fall off a cliff, creating a yield spread of over 500 basis points.* Why? The most common answer is a fear of a massive default wave over the next few years similar to that of the Great Depression. What has the actual default rate been so far in the BBB space? Under 1%, or historically average as if the recession barely exists. The explanation for why BBB bonds could jump in price dramatically is as follows: municipalities rarely default on their bonds. When they do, it’s a dead last resort which badly tarnishes the municipality’s future ability to raise cash. Most municipalities, I’m told, would rather fire employees, freeze wages, cut services, basically use every other tool in the box before they turn their back on bondholders. Over the past two weeks many of these BBB bonds have rallied about 15% off their lows.** This has correlated with a jump in the stock market and an overall greater appetite for risk by investors. Many people believe the opportunity offered in the BBB muni bond space is unusually high right now, and the total return could rival that of the S&P 500 during recovery.

That’s not to say ultra-high grade (AAA) municipal bonds aren’t also an interesting space to be in. Prices are down somewhat from the high points (although not much because after treasuries and cash this is considered one of the safer places to hide) and plenty of people still feel the recession has legs. If that is the case, now would be ‘early’ in terms of jumping back into the lower-grade space where the default rate is still uncertain. I may be willing to get my feet wet with BBB bonds but not everybody will do the same.

Along the same lines, shorting the current price of long-term treasury bonds seems to be a popular trade. Barons ran a cover story on this a few months back when treasury prices were even higher and the 10-year T-bond was under 3%. The 10-year is still down in the 3.2% range with some expecting it to rise back to a more ‘normal’ 5% within 24 months. If that were to happen, you’d likely see muni bond prices come up, pushing yields down closer to historical averages.

Question or comments? E-mail me.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

* TheStreet.com: “Take Another Look at High-Yield Munis:” Interview with John Miller of Nuveen: 02/26/2009

** Source: Bloomberg Media: Jan 1st – May 11th 2009

Two of the major independent credit rating services are Moody’s and Standard & Poor’s. They research the financial health of each bond issuer (including issuers of municipal bonds) and assign ratings to the bonds being offered. A bond’s rating helps you assess that bond’s credit quality compared to other bonds. Moody’s and Standard & Poor’s append their ratings with an indicator to show a bond’s ranking within a category. Moody’s uses a numerical indicator. For example, A1 is better than A2 (but still not as good as Aa). Standard & Poor’s use a plus or minus indicator. For example, A+ is better than A, and A is better than A-. Investors typically group bond ratings into two major categories: Investment grade refers to bonds rated Baa/BBB or better. High Yield (also called speculative risk) refers to bonds rated below Baa/BBB. You need to have a high risk tolerance to invest in these bonds.

The S&P 500 Index is an unmanaged index that is generally considered representative of the U.S. Stock market. The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Past performance is never a guarantee of future results. Investments offering the potential for higher rates of return also involve a higher degree of risk. Actual results will vary.

Posted by Russell Bailyn at 02:11 PM | Permalink | Comments ( 1 ) | TrackBacks ( 0 )

Retirement plans are a mystery to many. It’s no surprise that many small business owners can have a difficult time funding a retirement plan that perfectly fits their needs and does not have them asking, “Is this as good as it gets?” One of the services my firm provides is identifying and implementing customized retirement plan designs for business owners who need something a bit more sophisticated than a one-size-fits-all retirement plan. We tailor to your financial situation after a thorough discovery process. Here’s an example of what a customized retirement plan can accomplish:

Meet Steve. Steve is a 50 year-old owner of a small software development outfit. He has been having a difficult time finding a retirement plan for himself and his two associates, both of whom were earning $105,000 in salary and bonuses annually. Steve was limiting his W-2 wages to $100,000, taking the balance as distributions from his subchapter S corporation. Recently, he had finalized a prolonged divorce that had taken a significant portion of his income over the last few years, dramatically reducing his personal asset base, and, consequently, compromised his retirement readiness.

Steve’s firm was funding a prototype profit sharing plan established a few years back through a household name brokerage firm. Because of the limited contribution formulas available in the prototype plan, he was contributing the same percentage of salary (20%) for himself and his two associates. To receive an annual allocation of $20,000, Steve was forced to provide $42,000 for his employees. He was frustrated that he was giving up more in employee costs than he was saving in taxes and was considering terminating the plan.

Steve's W-2 wages = $100,000 and plan funding = $20,000
Employee 1's W-2 wages = $105,000 and plan funding = $21,000
Employee 2's W-2 wages = $105,000 and plan funding = $21,000

The obvious question was, “Is there a more efficient solution?” One of the plan design experts at our firm was able to point out one step that the client could execute on immediately—reallocating a portion of the S corporation distributions to increase the client’s W-2 wages to the maximum plan compensation of $245,000. Since the client was near the 2009 Social Security wage limit ($106,800) the payroll taxes on the additional wages were largely limited to the combined 2.9% Medicare taxes. By paying an additional $4,200 in payroll taxes, Steve would be able to increase his deduction to the prototype plan to $49,000, thereby realizing net tax savings of about $7,000. While this was a definite improvement, it still left him with a $42,000 plan funding cost for the employees.

Steve's W-2 wages = $245,000 and plan funding = $49,000
Employee 1's W-2 wages = $105,000 and plan funding = $21,000
Employee 2's W-2 wages = $105,000 and plan funding = $21,000

An individually-designed solution would offer a better outcome. And a Cross-Tested 401(k) Profit Sharing Plan was proposed. Since Steve turned 50 in 2009, adding a 401(k) feature allowed him to make a $5,500 catch up contribution in addition to the normal 401(k)/Profit Sharing limit of $49,000 (for a total of $54,500). The allocation to the two younger associates was limited to 5% of their compensation. This reduced their cost
from $42,000 to $10,500.

Steve's W-2 wages = $245,000 and plan funding = $54,500
Employee 1's W-2 wages = $105,000 and plan funding = $5,250
Employee 2's W-2 wages = $105,000 and plan funding = $5,250

Case design specialists inquired whether Steve might be interested in further enhancing his retirement savings by adding a Defined Benefit Plan. Utilizing a defined benefit plan would create a much larger deductible contribution, although it would reduce slightly the allocation to the Cross-Tested 401(k) Profit Sharing Plan. The defined benefit plan allowed Steve to fund $135,000 for his benefits in the defined benefit plan, with a cost of only $4,409 for the two employees. Between the two plans, Steve would be able to fund over $170,000 towards his retirement, with a total cost of less than $15,000 for his associates.

Steve's W-2 wages = $245,000 and plan funding = $171,400
Employee 1's W-2 wages = $105,000 and plan funding = $7,785
Employee 2's W-2 wages = $105,000 and plan funding = $7,124

What does it mean to the client short-term and long-term? With implementation of the plan, the client:

• Reduced his employee funding costs from $42,000 to $15,000
• Improved efficiency of the existing plan by 300%
• Increased his tax-favored savings 800%—from $20,000 to $171,400
• Reduced his taxes (net of employee costs and payroll taxes) by $59,400

In the long term, Steve will most likely be able to restore his asset base and successfully prepare for retirement. The proposed qualified plan strategy will allow him to have access to $175,000 (net after tax) for a period of 25 years, from age 65 to 90, assuming 10 years of contributions and 6.5% growth.

In the coming year, the IRS is requiring that all defined contribution plans be fully restated onto a new document that complies with the changes in pension law contained in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). You may recall that the most recent requirement of this kind was associated with GUST, when every plan sponsor was required to bring their retirement plans in compliance with the series of laws passed from 1994 to 1997. While the changes brought about by EGTRRA have already been adopted by most plans through good faith amendments, the IRS is now requiring a full restatement of all defined contribution plans so the plan document itself contains the required EGTRRA language.

Because the entire document must be restated to include the new provisions required by EGTRRA, this is an ideal time to consider whether you might benefit from including some optional provisions that could help you reach your business and retirement objectives more efficiently.

Please feel free to call or e-mail me to discuss how we may be able to make your plan more efficient, flexible, and responsive to your business and personal needs.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 04:54 PM | Permalink | Comments ( 0 ) | TrackBacks ( 0 )