MORE STRATEGY CHANGES

A Forecast Tells You A Lot About The Forecaster But Nothing About The Future…
Warren Buffet.

With All Due Respect To Mister Buffet…It is impossible to plan your financial future without making some assumptions about what you anticipate will happen in the future. These assumptions constitute a forecast. As the future unfolds it is advisable to think about those assumptions in order to determine if those you made when you put your financial plan in place are still valid. If not, does your present strategy still fit in the current environment/ In my case, the strategies I developed 30-years ago when I first got serious about the planning process, have changed numerous times. Some of the changes were in response to changes in the environment while others were because of changes in my investment philosophy. In one of my August posts, I listed assumptions about changes that might chang to compensate for the over-use of leverage by the government, business, and consumers. These changes have caused me to challenge one strategy that I have held of several years. Perhaps you might want to consider a similar change.

Earlier Withdrawal From Qualified Plans Might Be Advisable. One commonly accepted principal is that retirees should first withdraw funds from non-qualified plans in order to allow tax-deferred funds to accumulate in qualified plans. For those of you who may not know, qualified plans are contributions made with funds which were not taxed. An example is a 401-k or IRA account. While the assumption that it is best to withdraw non-qualified funds first may still be appropriate for some retirees, others might want to begin withdrawals earlier. The reason for this is the potential for much higher taxes later. The huge federal deficit along with deficiencies in the social security system are almost certain to cause tax increases in the future. Just as social security became taxable for higher income beneficiaries in 1984, other increases will probably be necessary in the future. In fact, a recent change in Medicare part B premiums has been enacted for retirees earning more than $160K per year. This increase can constitute a major reduction in net social security income those affected taxpayers. Another reason that this year might be a good year for withdrawal, is that many of us had lower overall incomes in 2009 compared to what we hope to have in the future. Finally, an early withdrawal can benefit your heirs who might find themselves subject to estate taxes as well as income taxes on inherited benefits.

When Will The Anticipated Correction Occur. The market is approaching 10,000, a level that most of us were not expecting until next year. Most analysts are anticipating a correction because they believe the market has moved too far too fast. In addition, statistical analyses indicate that returns are much lower during the last four months of the year. My strategy is to raise some cash by selling stocks that appear fully valued and those in which we have deductible losses in the current year. I am not recommending carrying this strategy to the extreme and selling everything but a slight increase in cash allocation appears prudent at this time. As usual, I favor retaining or making new investments in companies that pay higher dividends or offer attractive option opportunities.

Coming Back To Colorado. Betty and I will probably come back to Colorado in early October. I regret that I didn’t get to visit with everyone on my recent trip and look forward to meeting with others later.