Those who still are in the workplace probably have a flexible spending account for medical expenses with their employer. The basic rules on the accounts are that you direct a portion of your salary into the account, and that is not included in your gross income. You can be reimbursed from the account at any time during the year and the beginning of the next year for qualified medical expenses.
Here’s the kicker. Anything in the account that you haven’t spent by Dec. 31 is forfeited. It reverts back to the employer. The IRS recently allowed employers to change their plans so that employees can rollover up to $500 to the next year. Some employers rushed to adopt the change right away. Others didn’t.
That makes things more complicated for employees. Which rule does your employer have? Does it make sense for you to defer expenses if you can, or should you go ahead and try to spend the money anyway? Review this article for some details and advice.
But other employers aren’t rushing in. “Most of our employer clients are not adding the carry over feature until the regulators opine on some of the bugs,” says Amy Gordon, an employee benefits lawyer with McDermott Will & Emery in Chicago. If an employer sponsors a high deductible health plan with a health savings account, for example, the FSA carryover feature might affect employees’ eligibility to make health savings account contributions.
So what’s an employee to do? Make sure you know which rules apply to your employer’s plan. “Benefits are complicated,” says Jody Dietel, chief compliance officer with WageWorks. “We can’t just sit back anymore as employees; we have to pay attention.”
I always advise people to be cautious about any particular piece of economic data. Much as we’d all like to be able to use one data series to guide our financial decisions, no data is revealing enough for that. Some data aren’t even good at portraying what they seem to portray.
Consider the weekly new mortgage report from the Mortgage Bankers Association. It is supposed to be a guide to housing market activity, because people generally have to take out mortgages when they buy homes. But take a look at this commentary. It points out that the MBA index is skewed toward large banks and mortgage lenders. So when smaller lenders tend to dominate the new mortgage market, as now, the index misses a lot of activity and could be misleading.
This shift in market share has possible implications for the MBA purchase index. Back in 2007, the MBA index started to increase – and some observers like Alan Greenspan thought this meant the housing bust was over. I pointed out back then that the index was being distorted by a shift from smaller lenders to larger lenders (the smaller lenders were going out of business). The MBA index includes many lenders, but is skewed towards the larger lenders.
None of this will be news to readers of Retirement Watch, but here’s a good review of mistakes to avoid, especially in the first year of retirement. I like that he starts off with the idea that you should have both a retirement plan and a life plan. Once work stops, you need other activities to bring fulfillment, structure, and other key factors into your life. Otherwise, you’ll have an unhappy retirement no matter how much money you have.
“New York Life asked a group of people how much of retirement saving can you spend without depleting your assets,” Laster says. “The biggest number, 42%, said I have no idea. Income drives spending. If you retire and have accumulated a nice nest egg and there is no more paycheck, What do I do? A lot of people have no idea.”
That big retirement nest egg can seem awfully tempting. “People try to enjoy all the things they have been deferring,” Laster says. “They may travel a lot or splurge on presents. That’s a potential risk, overspending, particularly right after retirement.”
It’s remarkably easy to find the case for selling stocks. It seems it’s always easy to make a bearish case, and perhaps that is why there are so many bearish newsletters. It’s easy to write that bearish marketing copy.
So, here’s a compilation of bullish arguments. It points out, for example, that a year of strong gains usually is followed by another positive year. And stock price-earnings ratios are below average if we use the average from the last couple of decades instead of reaching back to pre-World War II data. There are a few other arguments. Review them when you are presented with the bearish case.
Finally, hedge-fund manager David Tepper, founder of Appaloosa Management, said in a conversation with fellow anchor Stephanie Ruhle about two weeks ago:
“I would be worried if I were a long-short equity manager and not long enough — but I am long, so I’m not worried.”
Tepper is up nearly 50 percent so far this year, double the gains for the S&P 500.
Life insurance isn’t dead. Very wealthy people still find it valuable to pay estate taxes or provide liquidity to an estate with a lot of illiquid assets. That’s why a few select insurance brokers who gain access to the wealthy can make huge money on insurance commissions. A very few make so much money in commissions that they can live the same lifestyles as their clients. Consider this review of a recent Tax Court decision. This insurance broker made so much money that he had his own private jet and apparently hid millions of dollars in commissions from the IRS.
In May 2012, just a week before the trial over all those claims was to begin, Brown settled every issue but the jet with the government. According to Holmes’ opinion, Brown agreed that his taxable income for 2001 to 2006 should be adjusted upwards by more than $50 million, and that $10 million of those adjustments would be subject to the (rarely imposed) 75% penalty for civil fraud. The total bill: more than $20 million in back taxes and penalties. Brown’s lawyer, Michael C. Cohen of DeCastro, West, Chodorow, Mendler, Glickfeld & Nass in Los Angeles, said Tuesday that he and his client had just received the decision and had no comment at this point.
Brown gained fame beyond the small world of big dollar insurance deals in 2002, when The New York Times reported that he and New York trusts and estate lawyer Jonathan G. Blattmachr (then with Milbank, Tweed, Hadley & McCloy) had devised a way that the nation’s rich could transfer hundreds of millions of dollars estate and gift tax free by exploiting a loophole in IRS regulations. Three weeks later, the IRS issued a notice disallowing the ploy.
The co-winner of the 2013 Nobel Prize for Economic Science is generating a lot of media these days, largely in support of various business projects such as his role with a new mutual fund with DoubleLine Funds. When you see an interview with him, be sure to read his words carefully. Don’t rely on the headlines or paraphrases from the interviewer. For example, consider this interview with Reuters.
The headline indicates Shiller is concerned about a U.S. stock bubble. But in the body of the interview, and in other interviews, he’s not said that U.S. stocks are in a bubble. In fact, he’s said given today’s valuations investors still should have some money in U.S. stocks. Only in the third paragraph of his article is he quoted as saying, “I’m not sounding the alarm yet.” What he’s really saying is that in stocks you shouldn’t be a buy-and-hold investor. You need a strategy for entering and exiting the market and for lightening your holdings but staying in the market when it is pricey but not at bubble levels. In other words, focus on risk management and be prepared to change your portfolio when the market dictates.
An American who won this year’s Nobel Prize for economics believes sharp rises in equity and property prices could lead to a dangerous financial bubble and may end badly, he told a German magazine.
Robert Shiller, who won the esteemed award with two other Americans for research into market prices and asset bubbles, pinpointed the U.S. stock market and Brazilian property market as areas of concern.
The debate continues between efficient market theorists and those who are less sure about market efficiency, between passive or index investors and active investors. It’s easy to find support for the efficient market/passive investing side. They now dominate the academic and financial media worlds. Here’s an interesting essay by someone who identifies himself as a former efficient market theorist but who now sees holes in the theory. The essay covers a lot of ground, including the importance of not altering your behavior based on the latest study or research.
I’ve learned to not be overly impressed with a single study or even a series of studies, no matter how credentialed the authors. The data can be tortured to confess to anything. You need to apply liberal doses of common sense—more when the claims are outlandish. A new theory has to be backed by many independent sources of data, ideally data the theory’s originators have never seen, and you need to really kick the tires of any assumptions it makes.
The best models or theories are the ones that best predict previously unseen data using the fewest and weakest assumptions possible. It’s the litmus test of whether you’ve struck truth: Can you rely on it to work in the future? If not, it’s useless; it’s a prettified story, nothing more. Risk manager Aaron Brown argues many finance academics would never bet money on their more arcane models—such models are optimized for publication, to show how clever you are, not optimized to say something true about the world. The arguments put forth in high finance can have an otherworldly quality. Consider the closed-end fund “puzzle,” the fact that some investors buy CEFs at big premiums in initial public offerings, despite the sad reality that the premium almost always collapses within a couple of months into a discount. Prominent researchers have published papers with models and supporting data showing why such behavior is rational; common sense says IPOs are foisted on naïve investors. Unless you’ve overdosed on math, it’s clear which is probably right.
Remember a couple of years ago when people weren’t too concerned that there was a financial problem in Cyprus? It was a tiny country with a tiny economy. But the problems grew. Greece became a big problem, and most people said it was too small to worry about. Then, the crisis spread to much of Europe, became international headlines, and slowed global growth.
Today, you should wonder if Ukraine is leading the world down a similar path. Here’s one post that provides some background and perspective on Ukraine. Here’s another that summarizes and links to a story asking whether Ukraine will trigger the next global crisis. They’re worth reading and thinking about.
The 2008 global financial crises hit Ukraine harder than most and the disillusioned Ukrainian public elected Yanukovitch legitimately in 2010. The Orange Revolution came full circle, with the brutal thug we all took to the street against in 2004 now the rightful leader of a country that was once again in dire straits.
His regime has proved to be every bit as bad as expected. There has been astonishing corruption, symbolized by the president’s mysterious acquisition of a massive estate and his son Oleksandr, a dentist who has suddenly become one of Ukraine’s most successful businessmen. Lawlessness has also raised new heights, with the jailing of Timoshenko and the truly heinous case of Oksana Makar shocking even the thoroughly jaded Ukrainian populace.
So this was the preamble for the current protests that rejection of the European trade pact kicked off. After years of disappointment, this last insult was simply too much. Yanukovich’s decision to turn Ukraine back toward Putin’s Russia has sent thousands out in the streets again.
The U.S. stocks indexes are about 150% or more above their lows of 2009. That recovery is increasing the number of people worrying that stocks are too highly valued or even in a bubble with two 50% or greater declines occurring since 2000, people are more on the lookout for big declines than they were 15 years ago. The strongest argument of bearish investors is the high valuation of the CAPE or Shiller P/E ratio. This ratio uses a 10-year average of corporate earnings, adjusted for inflation, to measure an index’s valuation. Using a 10-year average takes out fluctuations due to market cycles and corporate special earnings items. The CAPE is somewhat close to its all-time high levels, well above its long-term average, and just below levels reached near the last two big market declines.
But have things changed enough that call into question the usefulness of the measure today. Jeremy Siegel of the Wharton School wrote an article for The Financial Times that was preview of a presentation he gave a few months later. The article raises several questions about the measure. He says the rules for reporting corporate earnings changed in the 1990s, and the change was significant enough to affect long-term comparisons. Other changes in earnings include the low interest rates corporations pay today, the large percentage of corporate debt that it long-term now, and the higher percentage of foreign sales (which tend to have higher margins). Because of these factors, Siegel believes the stock indexes are not as highly valued as the CAPE ratio indicates.
The bullish case for equities relies not only on the expectations of higher earnings but also on the possibility that P/E ratios will expand significantly. It is a historical fact that low inflation and low interest rates translates into higher P/E ratios.
Since 1954, whenever long-term interest rates have been below 8 per cent, the P/E ratio of the S&P 500 Index has averaged 19. Real interest rates (and hence yields on inflation-linked Treasury bonds) are strongly tied to GDP growth and if the “new normal” growth pessimists are right, real interest rates are unlikely to rise above 2 per cent. Even if inflation runs somewhat above the Fed’s 2 per cent target, nominal rates on Treasury bonds will rise to at most the 5 per cent level, below the zone where P/E ratios contract.
Long-term real returns on stocks are strongly linked to their “earnings yield”, which is the reciprocal of the P/E ratio. It is not a coincidence that the historical average P/E ratio for stocks of 15 yields an earnings yield of 6.7 per cent, extremely close to the 6.6 per cent historical real return for stocks.
Few people outside of the Washington, D.C. area, and only a few there, heard of CGI Federal, the government contracting firm that apparently had primary responsibility for the healthcare.gov web site. Here’s a long article giving some of the company’s history, practices, and controversies. It appears to be run more like a law firm than a technology company. I think we’ll be hearing more about this company and its projects in the future.
“Everyone is kind of self-employed,” says Gordon Divitt, who was a senior executive consultant at CGI in 2007 and, before that, chief information officer at Interac, a Canadian ATM company for which CGI ran technological plumbing. “You’ve got to manage yourself, which is very unusual at a company this size.” Godin, he says, espoused “a philosophical approach, rather than a traditional hierarchical approach.”
Many big corporations have “mission statements,” essentially feel-good boilerplate outlining their raison d’être. CGI has a “Constitution,” with “chapters” laying out “Fundamental Texts.” The unusual manifesto-style document, available on CGI’s website and referenced in securities filings, extols what the company has long called “The CGI Dream: to create an environment in which we enjoy working together and, as owners, contribute to building a company we can be proud of.” “Serge believes CGI is truly unique,” says a person close to Godin.
Despite its atypical management philosophy, CGI Federal sought to cultivate a more mainstream image, in line with that of competitors like Accenture, Cap Gemini and IBM’s government-contracting division. CGI Federal staffed up on former government managers and executives from the Environmental Protection Agency and other agencies. In 2008, it created the CGI Institute for Collaborative Government – a think tank with policy specialists at George Mason University, Johns Hopkins University and Virginia Tech.