Bob Carlson

No, the system hasn’t run out of money yet. In an effort to modernize and save money, the government soon will pay Social Security and other benefits to new recipients electronically only.According to The Washington Post:

New recipients of Social Security and other federal benefits will receive their payments electronically, without exception, starting in May, the Treasury Department announced Tuesday.

The Obama administration is pushing to make most government benefits payments paperless by 2013, including most federal pay stubs.

If you’re already receiving benefits by paper check, you won’t have to switch until March 1, 2013.

For years research showed that men and women are different when finances are concerned. For examples, women are more risk averse, ask more questions before making a decision, and prefer working with a professional. The latest research is specific to retirement finances and is not encouraging for most women. Three important findings about women and retirement are that women fail to plan for retirement and they tend not to understand that they are likely to live longer than men and so need more money to fund their retirements. Women also appear to be less financially literate than men. Olivia Mitchell of the Boettner Center for Pensions and Retirement Research at the Wharton School of the University of Pennsylvania, among other roles, said in an interview:

Q: When you say financially literate, what exactly do you mean?

A: [In our studies, we] asked simple questions about [whether respondents] understand percent and compound interest. Perhaps not surprisingly, people are woefully underinformed about compound interest. They don’t even get percents very well, as it turns out. The main thing is that women tend to be much less financially literate, much less likely to understand [the concepts of] compound interest, inflation, and risk diversification, and less likely to plan. . . .

We also just completed a 2010 phone survey on what people know about Social Security; we had 2,000 people [ages] 25-65, and only one quarter gave themselves a grade of C, while 40% graded themselves D or F regarding preparedness for retirement. Only 22% could answer six or seven questions about Social Security correctly, and half couldn’t answer at least four questions correctly.

Mitchell also discusses how perceptions about retirement have changed and what women need to focus on in their retirement planning.

Quite a few books were published about the financial crisis. It’s tough to read them all, but you can get a sample of them at Fortune’s web site. The magazine published excerpts from what it believes are the best five business books of 2010. Two of the five books were about the financial crisis: All the Devils Are Here and The Big Short. Other books on the list are The Facebook Effect, War at The Wall Street Journal, and The Master Switch (about the telephone company).

Russia is rich in commodities and natural resources. In a world where growth in the emerging markets is pushing the prices of commodities higher, it may seem to make sense to invest in Russian stocks. Periodically the case for investing in Russia has been made since the fall of communism.

As strong as that argument may seem, it’s overridden by by the extent to which corruption and cronyism dominate the country, and also the absence of the rule of law. Here’s a fine example of all three.

You can see the sprawling, Italian-style palace on the Black Sea in satellite photos. There’s a fitness spa, a hideaway “tea house,” a concert amphitheater and a pad for three helicopters. It’s still under construction, but already the cost is said to total more than $1 billion.

And most amazing of all, according to a Russian whistleblower named Sergey Kolesnikov, it was predominantly paid for with money donated by Russian businessmen for the use of Prime Minister Vladimir Putin. The funds have come “mainly through a combination of corruption, bribery and theft,” charges Kolesnikov, a businessman who until November 2009 worked for one of the companies he alleges was investing money for Putin.

The whole article is worth a read, especially if you’re considering putting some of your money in Russia.

We’ve maintained for some time that retirement has changed and will change again. One consultant reviewed how retirement in America has changed over the decades and concluded we are entering Retirement 5.0. Keith Weber of Weber Consulting says two themes will dominate retirement planning in coming years. One is that, in the wake of the financial crisis, people will be concerned about outliving their assets. They’ll want strategies that convince them their money will last for the extended retirement period many anticipate. The other them will be a continuation of what Weber calls Retirement 4.0. People will want some sense of fulfillment and accomplishment.

We’ve addressed this theme many times in the past. The money you accumulate for your post-career years is not the end. The money is being accumulated so that you can live the retirement you desire. Only about half of retirement planning is financial. The rest of it is deciding how you want to live in retirement, what you want to do, what you want to accomplish. After ensuring your finances will allow that, you need a plan to meet your nonfinancial goals and have a fulfilling post-career period.

Some people refer to this as life planning or similar names. It should be part of your retirement planning, regardless of your financial situation.

The Chinese stock market indexes have been sliding. Chinese authorities are taking steps to slow the economy and keep inflation in check, such as raising interest rates and increasing the capital requirements of banks. Asian stock markets, especially China’s, rewarded investors who were brave enough to keep capital in them the last five and 10 years. The region’s economies have been growing much faster than the developed world’s economies, and China’s stimulus measures did much to pull the rest of the world out of the tailspin of late 2008.

But the rewards of investing in Asian could be coming to an end, at least for a while. That’s the forecast from Louis-Vincent Gave of investment firm GaveKel. I’ve been following Gave’s work for years. He’s a sharp analyst who produces well-reasoned reports from a value perspective. His key points now are that stock valuations are too high in Asia and there is excessive liquidity (meaning too much money has been flowing into the Asian stock markets). The economies will continue growing at high rates, but stock investors won’t do as well for five to 10 years.

Gave said emerging market investment success depends on selecting the right countries, and the only Asian country with the potential for a strong equity bull market over the next six to 12 months is South Korea. He also believes Asian companies will have difficulty transferring the high growth rates of their countries into comparable profit growth. He favors Asian bonds and U.S. equities.

The government quietly issued regulations just before Christmas providing that Medicare starting Jan. 1, 2011 will pay doctors for time spent advising patients in developing Advance Medical Directives and in end-of-life medical care issues. The 2010 health care reform law provided that Medicare beneficiaries will be covered for an annual physical. Previously only one welcome-to-Medicare physical was fully covered. The new regulations provide that advance medical planning and end-of-life advising will be covered as part of that annual physical. We’ve long advised that a complete estate plan include medical care documents such as a medical power of attorney, an advanced directive, and a living will or similar documents. The new regulation doesn’t pay for an attorney’s fees to help prepare the document. Instead it pays the doctor for time spent discussing the issues such as the care a patient might want under certain circumstances.

A value investing legend passed away last Friday at age 107. Roy Neuberger was a founder of the investment firm Neuberger Berman and was a leading practitioner of using value investing to select stocks. He lived through the three major Wall Street crashes: 1929, 1987, and 2008. Neuberger also made a name in the art world by collecting the works of living artists in bulk while they were unknown or relatively unknown, amassing a significant and much-regarded collection.

More important for the rest of us was Neuberger’s longevity and work ethic. Though he sold his firm years ago, he reported to the office every day until he was 99. Neuberger worked though he had no real need to. His father built and sold a successful business, leaving Roy with a healthy annual income. But Neuberger decided he wanted to collect art and needed a higher income to do that, so he entered the investment business. It’s one of many aspects of a very interesting life.

I’m partial, but I think those hurt most by the financial crisis are those in or near retirement. Many lost a lot of capital just as they were trying to decide when to retire or how much they could spend in retirement. Those who weren’t invested in risky assets are earning miniscule yields on their safe investments. The result, of course, is more people working longer than they expected to a few years ago.

In  a new paper, two economists at the Chicago Fed — Eric French and David Benson — estimate that the labor-participation rate among people 51 to 65 years old is 2.9% higher as a result of their financial losses alone. That’s about an added 1.6 million people staying in jobs or looking for work.

Meanwhile, if people can’t rebuild their retirement nest eggs, they’ll have to cut back on spending in old age more than they already do. That’s a problem for companies hoping to sell them everything from health care to cars. And if more of an aging population winds up relying on the state for support, that doesn’t bode well for the government’s efforts to get its long-term finances back in order.

Before the financial crisis, surveys reported that a higher percentage of the Boomers planned to work past ages 65 and 70 than stayed in the labor force previously. The percentage seems to have increased since the financial crisis in 2008. But there’s one point to keep in mind if working longer is part of your financial plan. A high percentage of those already retired report that they retired unplanned and sooner than they wanted to. Some had to retire because of health reasons. Others were laid off and couldn’t find new employment. Planning to work longer is fine, but you also need some flexibility and a back up plan.

Investment manager and best-selling author Ken Fisher has a new book, Debunkery. His goal in the book is to refute common investment beliefs that he believes are wrong. His approach seems to be similar to ours in Retirement Watch. Fisher tries to look behind the beliefs and rules-of-thumb to the underlying data. Often, as we’ve found, the data don’t support the belief, or over time people forget the qualifications and assumptions that originally were part of the belief.

I haven’t read the book, but here’s an interesting review. The review’s main point is that Fisher does a good job of demolishing a lot of myths but makes poor arguments when addressing other myths. This reviewer hints that Fisher’s presentation is influenced by his business of managing stock portfolios for investors in separate accounts. Here’s a sample:

Let’s turn to chapter 26, “Low P/Es Mean Low Risk.”  In it, Fisher states, “Using P/Es to forecast risk and return over any reasonable time period is about as useful as using an Ouija board.”  Fisher is talking about P/E ratios based on 12-month trailing earnings, and in this narrow sense he is correct.  When calculated in that manner, P/E ratios provide little useful information.

Fisher does not mention, however, the predictive power of normalized P/E ratios, popularized by Yale professor Robert Shiller, which use earnings averaged over the last 10 years.  Those P/E ratios have been shown, by Shiller and others, to be reliably predictive of returns over long (e.g., 10-year) time horizons.  That finding has been used, for example, by Michael Kitces to show that sustainable withdrawal rates can be increased by increasing equity allocations when markets are undervalued.

Fisher compounds that oversight when, in chapter 20, he writes, “There is absolutely no way – none – to predict stock market direction 7 or 10 years out unless you can somehow predict future stock supply shifts.”

The notion that stock prices are driven by the supply and demand of securities is one that Fisher advances several times in the book, notably in chapter 10.  By contrast, I looked for a discussion of the role that a company’s free cash flow generation plays in determining its stock price and could not find one.