THE AFTERMATH OF SANDY

Gauging the economic and market impact of the storm.

Hurricane Sandy's fury has exacted a considerable and tragic toll. Even with the relief efforts now underway, it will be some time before things return to normal in many communities. How has Sandy impacted Main Street, Wall Street and the broader economy?

Repairing Main Street. How do you begin to total the damage from a storm affecting 20% of the U.S. population?1

EQECAT, a risk-modeling firm, thinks it could run as much as $10-$20 billion, with $5-$10 billion reflecting insured losses. This is an important distinction, as many analysts feel a tally of $10 billion or less in covered losses could have a comparably diminished effect on the insurance industry beyond the fourth quarter. However, respected University of Maryland economist Peter Morici told MarketWatch that total losses could reach $35-45 billion if the superstorm ultimately proves more powerful than Hurricane Irene... exactly how Sandy was being described the morning after. That would fall well short of the economic hit from Hurricane Katrina, from which the damage totaled about $108 billion; 1992's Hurricane Andrew was responsible for roughly $60.5 billion of destruction. Federal government officials say they have about $3.6 billion ready to pay for relief efforts.1,2,7

If there is any good side to this, it is that the collective response to Sandy's destruction may amount to an economic stimulus. MarketWatch notes that as much as $20 billion could be spent over the next 12 to 24 months on new construction, remodeling and renovation, which could further invigorate the construction industry, indirectly aid the job market, and bring about increased consumer spending.1,2

Resuming trading on Wall Street. Will the New York Stock Exchange's goal of reopening Wednesday morning turn out to be realistic? Just in case, NYSE Euronext will test a backup plan Tuesday morning, a plan B that could permit trading in case things aren't up to speed by Halloween. In this scenario, NYSE Arca would become the primary market for New York-listed stocks - we're talking about the NYSE's electronic market that could operate even if its trading floor or headquarters were closed for the day.3

As for Tuesday, all NYSE and NASDAQ exchanges will close across all asset classes. While the CME Group's Nymex floor will be closed today, its products are still available electronically. CME Group opened trading of equity-index futures and options Monday night, but that trading ended early today; however, trading of interest-rate futures and options will resume with normal trading hours. The CBOE and CBOE Futures Exchange are shuttered today; CBOE Holdings will update traders if the closure is forced to stretch into Wednesday.3

With the end of the month coming, there is extra impetus to get the market open - fund managers need to adjust holdings before November starts.

What about earnings and the October jobs report? Many corporations are delaying the release of third-quarter earnings reports. Hertz, Spirit, and Waste Management will now report quarterly results on Wednesday; Pfizer, Pitney-Bowes, Ralph Lauren, Sirius XM, and TripAdvisor will follow suit Thursday; McGraw-Hill and Thomson Reuters will now report Q3 earnings on Friday. Time Warner Cable will announce Q3 results on November 5, and Office Depot is delaying issuing its Q3 results until November 6.4

"Our intention is that Friday will be business as usual," Labor Department public affairs specialist Jennifer Kaplan told CBS News regarding the release of October's employment report. While noting that the severity of the storm might hinder some of the report's final calculations, Labor Department officials are hopeful that the report can be released as scheduled November 2 (at 8:30am EST).5

Fuel prices. U.S. natural gas consumption could be greatly tempered this week, and prices may move significantly. New Jersey, Pennsylvania and Delaware are home to five of the most important gasoline refineries on the east coast, but analysts feel they could rebound decently from any storm-related problems. While RBOB gas futures rose Monday as traders assumed some disruption in supplies, it appeared the bigger blip might be demand, with commuting and trucking patterns potentially thrown out of whack for days.6

As to whether drivers might see a violent spike in gas prices, the Oil Price Information Service's Tom Kloza dismisses the notion: "My hunch is we'll get a wobble higher in the next couple of days, and then resume [heading] lower."6

After the stress of this superstorm, we can only hope that its economic effect will not be as severe as some anticipated.

Citations.
1 - online.wsj.com/article/SB10001424052970204840504578086290411855054.html [10/29/12]
2 - marketwatch.com/story/big-storms-rarely-dent-economy-for-long-2012-10-29 [10/29/12]
3 - www.businessweek.com/news/2012-10-29/u-dot-s-dot-stock-trading-canceled-as-new-york-girds-for-storm [10/30/12]
4 - www.cnbc.com/id/49596291 [10/29/12]
5 - www.cbsnews.com/8301-505123_162-57542196/will-hurricane-sandy-delay-the-jobs-report/ [10/29/12]
6 - www.cnbc.com/id/49596291 [10/29/12]
7 - http://www.reuters.com/article/2012/10/30/us-storm-sandy-insurance-idUSBRE89T0WT20121030 [10/30/12]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

YOUR ANNUAL FINANCIAL TO DO-LIST 2013

Things you can do before and for 2013.

What financial, business or life priorities do you need to address for 2013? Now is a good time to think about the investing, saving or budgeting methods you could employ toward specific objectives. Some year-end financial moves may prove crucial to the pursuit of those goals as well.

What can you do to lower your 2012 taxes? Before the year fades away, you have plenty of options. Here are a few that may prove convenient:

*Make a charitable gift before New Year's Day. You can claim the deduction on your 2012 return, provided you use Schedule A. The paper trail is important here.

If you give cash, you need to document it. Even small contributions need to be demonstrated by a bank record, payroll deduction record, credit card statement, or written communication from the charity with the date and amount. Incidentally, the IRS does not equate a pledge with a donation. If you pledge $2,000 to a charity in December but only end up gifting $500 before 2012 ends, you can only deduct $500.1

Are you gifting appreciated securities? If you have owned them for more than a year, you will be in line to take a deduction for 100% of their fair market value and avoid capital gains tax that would have resulted from simply selling the stock, fund or bond and then donating those proceeds. (Of course, if your investment is a loser, then it might be better to sell it and donate the money so you can claim a loss on the sale and deduct a charitable contribution equivalent to the proceeds.)1

Does the value of your gift exceed $250? It may, and if you gift that amount or larger to a qualified charitable organization, you will need a receipt or a detailed verification form from the charity. You also have to file Form 8283 when your total deduction for non-cash contributions or property in a year exceeds $500.1

If you aren't sure if an organization is eligible to receive charitable gifts, check it out at www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check.

*Contribute more to your retirement plan. If you haven't turned 70½ and you participate in a traditional (i.e., non-Roth) qualified retirement plan or have a traditional IRA, you can reduce your 2012 taxable income by the amount of your contribution. If you are self-employed and don't have a solo 401(k), a SIMPLE plan or something similar, consider establishing and funding one before the end of the year. Also, keep in mind that your 2012 tax year contribution to an IRA or solo 401(k) may be made as late as April 15, 2013 (or October 15, 2013 if you file Form 4868).2

In 2012, you can contribute up to $17,000 in a 401(k), 403(b) or profit-sharing plan, with a $5,500 catch-up contribution also allowed if you are age 50 or older. You can put up to $11,500 in a SIMPLE IRA in 2012, $14,000 if you are 50 or older.3

*Make a capital purchase. If you buy assets for your business that have a useful life of more than one year - a truck, a computer, furniture, a rototiller, whatever - those purchases are commonly characterized as capital expenses. For 2012, the Section 179 deduction can be as much as $139,000 (although it is ultimately limited to your net taxable business income). First-year bonus depreciation is set at 50% for most purchases of new equipment and software in 2012. The way it looks now, the 2013 deductions may be much less generous.2,4

*Open an HSA. If you work for yourself or have a very small business, you may pay for your own health coverage. By establishing and funding a Health Savings Account in 2012, you could make fully deductible HSA contributions of up to $3,100 (singles) or $6,250 (married couples). Catch-up contributions are allowed if you are 50 or older.2

*Practice tax loss harvesting. You could sell underperforming stocks in your portfolio - enough to rack up at least $3,000 in capital losses. If it ends up that your total capital losses top all of your capital gains in 2012, you can deduct up to $3,000 of capital losses from your 2012 ordinary income. If you have over $3,000 in capital losses, the excess rolls over into 2013.2

Are there other major moves that you should consider? Your to-do list might be long, for much financial change may occur in 2013...

*Pay attention to asset location. Here are two big reasons why tax efficiency should be a priority as 2012 leads into 2013:

Next year, dividend income is slated to be taxed as regular income. So tax on qualified stock dividends could nearly triple for the wealthiest Americans.

Capital gains taxes for high earners are scheduled to jump 33% in 2013. Long-term capital gains are now taxed at 15% for those in the highest four income brackets; that rate is supposed to rise to 20% next year.5

*Can you contribute the maximum to your IRA on January 1? The rationale behind this is that the sooner you make your contribution, the more interest those assets will earn. If you haven't made your 2012 IRA contribution, you still have until April 15, 2013 to do that.6

In 2012 you can contribute up to $5,000 to a Roth or traditional IRA if you are age 49 or younger, and up to $6,000 if you are age 50 and older (though your MAGI may affect how much you can put into a Roth IRA).3

What are the income limits on tax deductions for traditional IRA contributions? If you participate in a workplace retirement plan, the 2012 MAGI phase-out ranges are $58,000-68,000 for singles and heads of households and $92,000-112,000 for couples.3

*Should you go Roth before 2013 gets here?We all know federal taxes are poised to rise next year, but one little detail isn't getting enough publicity: the planned 3.8% Medicare surtax scheduled to hit single/joint filers with AGIs over $200,000/$250,000 will not apply to qualified payouts from Roth accounts.7

MAGI phase-out limits affect Roth IRA contributions. In 2012, phase-outs kick in at $173,000 for joint filers and $110,000 for single filers. Should your MAGI prevent you from contributing to a Roth IRA at all, you still have a chance to contribute to a traditional IRA in 2012 and then roll those assets over into a Roth.7

Consult a tax or financial professional before you make any IRA moves to see how it may affect your overall financial picture. If you have a large traditional IRA, the projected tax resulting from the conversion may make you think twice.

What else should you consider as 2012 turns into 2013? There are some other important things to note...

*Payroll taxes are slated to increase 2% next year.The payroll tax cut of 2011-12 has slim chance of extending into 2013. The maximum payroll tax paid by high earners is slated to be $7049.40 next year, $2,425 above 2012 levels. That isn't just because Social Security taxes for employees are returning to the 6.2% level; it also reflects a 3.3% increase in the upper salary limit subject to the tax to $113,700.8

*Review your withholding status. Aside from the presumed end of the payroll tax holiday, there are other reasons you may want to adjust your withholding status...

•You tend to pay a great deal of income tax each year.
•You tend to get a big federal tax refund each year.
•You recently married or divorced.
•A family member recently passed away.
•You have a new job at a much greater salary.
•You started a business venture or became self-employed.

*If you are retired and older than 70½, remember your RMD. Retirees over age 70½ must take Required Minimum Distributions from traditional IRAs, Roth IRAs and Roth 401(k)s and all employer-sponsored retirement plans by December 31, 2013. The IRS penalty for failing to take an RMD equals 50% of the RMD amount.9

If you have turned or will turn 70½ in 2012, you can postpone your first IRA RMD until April 1, 2013. The downside of that is that you will have to take two IRA RMDs next year, both taxable events - you will have to make your 2012 tax year withdrawal by April 1, 2013 and your 2013 tax year withdrawal by December 31, 2013.9

Plan your RMDs wisely. If you do so, you may end up limiting or avoiding possible taxes on your Social Security income. Some Social Security recipients don't know about the "provisional income" rule - if your modified AGI plus 50% of your Social Security benefits surpasses a certain level, then a portion of your Social Security benefits become taxable. For tax year 2012, Social Security benefits start to be taxed at provisional income levels of $32,000 for joint filers and $25,000 for single filers.10

*Consider the tax impact of any 2012 transactions.Did you sell real property this year - or do you plan to before 2012 ends? Did you start a business? Are you thinking about exercising a stock option? Could any large commissions or bonuses come your way before January? Did you sell an investment held outside of a tax-deferred account? Any of this might significantly affect your 2012 taxes.

*Would it be worth making a 13th mortgage payment this year?If your house is underwater, there's no sense in doing it - and you could also argue that the dollars might be better off invested or put in your emergency fund. Those factors aside, however, there may be some merit to making a January mortgage payment in December. If you have a fixed-rate loan, a lump sum payment can reduce the principal and the total interest paid on it by that much more.

*Are you marrying in 2013?If so, why not review the beneficiaries of your workplace retirement plan account, your IRA, and other assets? In light of your marriage, you may want to make changes to the relevant beneficiary forms. The same goes for your insurance coverage. If you will have a new last name in 2013, you will need a new Social Security card. Additionally, you and your spouse no doubt have individually particular retirement saving and investment strategies. Will they need to be revised or adjusted with marriage?

*Are you coming home from active duty? If so, go ahead and check the status of your credit, and the state of any tax and legal proceedings that might have been preempted by your orders. Make sure your employee health insurance is still there, and revoke any power of attorney you may have granted to another person.

Talk with a qualified financial or tax professional today. Vow to focus on being healthy and wealthy in the New Year.

Citations.
1 - news.cincinnati.com/article/20120919/BIZ/309190108/Businesswise-Make-most-charitable-contributions [9/19/12]
2 - www.inman.com/buyers-sellers/columnists/stephen-fishman/5-things-you-can-do-now-lower-your-2012-tax-bill [10/11/12]
3 - www.irs.gov/Retirement-Plans/COLA-Increases-for-Dollar-Limitations-on-Benefits-and-Contributions [8/2/12]
4 - www.bkd.com/articles/2012/tax-depreciation-changes-coming-in-2013.htm [3/12]
5 - www.thenewstribune.com/2012/10/02/2317249/consider-selling-investments-soon.html [10/2/12]
6 - www.sacbee.com/2012/09/28/4862291/tax-help-program-needs-volunteers.html [9/28/12]
7 - online.wsj.com/article/SB10001424052702304072004577325551162426954.html [10/11/12]
8 - www.forbes.com/sites/janetnovack/2012/10/16/social-security-benefits-to-rise-1-7-workers-face-up-to-2425-payroll-tax-hike/ [10/16/12]
9 - www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Required-Minimum-Distributions#2 [8/2/12]
10 - www.socialsecurity.gov/planners/taxes.htm [10/18/12]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

WILL THE MARKET LOSE MOMENTUM?

Some analysts question how well stocks can perform this fall.

Are fresh headwinds buffeting Wall Street? Stocks performed surprisingly well in the first three quarters of 2012, but developments in the fourth quarter are giving analysts pause. While no one sees the bulls turning tail and running, there are emerging factors that may challenge their advance in the near term.

This earnings season isn't shaping up so well. The Wall Street Journal believes it will be the poorest we've seen in almost three years, with an overall decrease in profitability for S&P 500 firms. Thomson Reuters has forecast a 2.9% drop in earnings. Alcoa kicked it off by beating estimates, but it cited lessening demand in China for aluminum. Then, Chevron warned the market that its earnings would be "substantially lower" than what was forecast. Even shares of some market leaders have declined in value since September.1,2

The IMF sees some gloom ahead. On October 11, International Monetary Fund director Christine Lagarde stated that the "slowdown of economic growth is affecting not only advanced countries but also emerging countries, particularly in Asia." This comment came on the heels of the IMF downgrading its global growth forecast for 2012 and 2013; it now projects global GDP of 3.3% this year and 3.6% next year.3,4

Political question marks abound. The presidential race has narrowed in the last couple of weeks, and that has added another degree of uncertainty to the future of the Bush-era tax cuts and scheduled health care reforms.

Profit taking might be popular. In only three quarters, stocks have had the equivalent of an excellent year - the S&P 500 ended September up 14.56% YTD. So if the bulls trot rather than run this quarter, institutional and retail investors may be predisposed to lock in some gains.5

These warning lights aside, Wall Street has swept away pessimism before. It may do so again. Although the S&P 500 was down approximately half a percentage point from its final September close in mid-October, indicators apart from corporate earnings might surprise to the upside and push stocks a bit higher.6

Citations.
1 - www.dailyfinance.com/2012/10/11/8-reasons-to-hate-earnings-season/ [10/11/12]
2 - www.philly.com/philly/business/20121011_Markets_down_as_earnings_season_off_to_dreary_start.html [10/11/12]
3 - online.wsj.com/article/SB10000872396390444799904578050172264021136.html [10/11/12]
4 - www.smh.com.au/business/markets/dollar-claws-back-overnight-losses-20121010-27bz2.html [10/10/12]
5 - www.cnbc.com/id/49210305 [9/28/12]
6 - markets.on.nytimes.com/research/markets/overview/overview.asp [10/11/12]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

SHOULD YOU REDUCE RISK EXPOSURE AS YOU GET OLDER?

A study suggests the "conventional wisdom" may be flawed.

If you move away from equities with age, are you making a mistake? For some time, financial professionals have encouraged investors to lessen their exposure to the stock market as they get older. After all, a 60-year-old has less time to recover from a market downturn than someone decades away from collecting Social Security checks.

Is that conventional thinking flawed? It might be. It isn't simply a matter of looking at the future; you may also want to look at the past.

What's the price of playing not to lose? It could be significant - at least in terms of opportunity cost. At this moment, how many people really want to shift money into fixed-rate investments?

Obviously, bonds, CDs and money market accounts will always hold some appeal as they tout protection of principal. Aside from that sense of safety, how does a 1% or 2% return sound? As we enter Q4 2012, the highest-paying 5-year CDs yield less than 2%.1

Who would want to be locked into these yields for five whole years when the Federal Reserve is going in for open-ended easing? With QE3, the Fed just opened a door to inflation - and it may have to leave it open for some time.

On October 1, Chicago Fed President Charles Evans told CNBC that the central bank will keep buying mortgages until unemployment falls below 7%. That might take a while: while the jobless rate fell to 7.8% in September, it was 8% or higher for the previous 42 months.2,3

With the Fed and the European Central Bank flooding the global economy with cheap money, the tame inflation of the past few years may give way to something greater. Fixed-rate investments are great tools for diversifying a portfolio, but retirees and pre-retirees with significant assets in investments yielding 1-2% will start wincing if inflation gets back to 4-5%.

As interest rates are so low now, some conservative investors are thinking about adding riskier bonds to their portfolios. The central problem with that is that corporate bonds don't act like Treasuries. Lower-quality bonds can have stock-like risks, and those risks become more evident when the stock market is slumping. Stocks are also more tax-efficient - bond interest is typically taxed as ordinary income whereas stock returns are taxed as capital gains.4

Is the "glide path" strategy overrated? You may or may not have heard of this term; it refers to a gradual adjustment in asset allocation across an investor's time horizon. With time, the asset allocation mix within the portfolio includes more fixed-income assets and fewer equities, becoming more conservative. (This is the whole idea behind target date funds.)

A recent article in Investment News questions the glide path approach. Research Affiliates chairman (and former global equity strategist) Rob Arnott looked at a whopping 140 years of bond and stock market returns (1871-2011) and ran model scenarios using three different asset allocation approaches across 41 years of hypothetical retirement saving and investing. The findings?

**"Prudent Polly" saves $1,000 annually and practices "classic glide path investing", gradually devoting more and more of her portfolio assets to bonds after age 40. This way, she winds up with an average portfolio of $124,460 at age 63 (with a $37,670 standard deviation across assorted 40-year windows).

** "Balanced Burt" also saves $1,000 annually, but he invests it in an unchanging 50/50 mix of equities and bonds across 41 years. He ends up with an average portfolio of $137,870 at age 63. In terms of deviation, his worst-case scenario, 10th percentile outcome and median outcome are all better than Polly's.

**"Contrary Connie" saves $1,000 annually while practicing the inverse of the classic glide path strategy - her portfolio tilts more and more toward stocks after age 40. She ends up with an average portfolio of $152,060 at age 63 and her worst-case, median and best-case scenarios all give her more retirement funds than Polly's.5

A recent CBS MoneyWatch article noted the risk-adjusted returns (i.e., annualized Sharpe ratios) of the equity premium (0.43), investment grade credit premium (0.07) and high-yield credit premium (0.21) from August 1998-June 2012. Stocks look good next to all that. (For that matter, who have predicted that the 10-year Treasury would someday have a negative real yield?)4

As many people haven't saved enough for retirement to begin with, they more or less have to stay in stocks or other forms of equity investment. Instead of shifting their focus from wealth accumulation to wealth preservation, they need to focus on both. Accepting more risk may be necessary as they seek suitable returns.

Citations.
1 - www.forbes.com/sites/marcprosser/2012/09/18/cd-yields-currently-beat-bond-yields-for-short-term-investments/print/ [9/18/12]
2 - www.cnbc.com/id/49238242 [10/1/12]
3 - www.ncsl.org/issues-research/labor/national-employment-monthly-update.aspx [10/05/12]
4 - www.cbsnews.com/8301-505123_162-57524713/better-returns-more-stocks-or-riskier-bonds/ [10/4/12]
5 - www.investmentnews.com/article/20121002/BLOG09/121009987 [10/2/12]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

THE VALUE OF ESTIMATES

In this age of ever-expanding technology, the data-gathering process for a financial plan has gradually become less complicated and intrusive. Computers can now pull the latest values of your 401(k) plan and bank account balances into various evaluative software programs, and update them automatically. We can model future returns on a variety of different portfolio combinations with a few mouse clicks, and future government income benefits are sent regularly from the Social Security Administration.

But a great deal of hard work still falls on the shoulders of financial planning clients. People still have to figure out how much they expect to spend in retirement, and how much income they expect to need to pay their living expenses. You have to make decisions about your future lifestyle, and estimate the costs of each component part, often by taking a closer look at your current expenses than you ever have before.

And this, of course, is complicated by questions like whether you plan to work during the traditional retirement years, what hobbies you plan to pursue, whether you'll keep your current home or downsize, and how long you'll live. You look at the list of questions and realize that anything you write is an estimate or an attempt to quantify something that you cannot possibly know with precision. You can be forgiven for wondering: what's the point of all this effort? Why should I have to go through with this? Can't we just create a workable plan using current account information and what we know today?

The answer, alas, is no -- and the reason is interesting, and not always well-understood. The truth is that being able to live a successful financial life, and meeting your goals, is far more dependent on a person's behavior than his or her financial planner's. Even if the financial planner were to get an extraordinary rate of return on your investments over a long period of time (and this is usually not possible), how much you save and invest from your monthly budget will still be a more important factor in how wealthy you will become. And the amount of your future expenses will be more important still in whether you'll be able to fund your future lifestyle.

In addition, and related to this, it is important to know whether the amount you're saving and investing today is likely to be enough to meet your future expectations. If not, it's better to make a course correction now, before it's too late.

In addition to that, it's always better to have an understanding of your future expectations, so you can start making concrete plans for that part of your life when work becomes optional. For some people who enter their retirement years and look back, this advance planning and preparation turned out to be the most valuable part of a financial planning relationship.

More recently, some advisors are distinguishing between the types of future lifestyle expenses that they are assuming in their models. For instance, suppose your retirement plan calls for staying in your current home, dining out three times a week, buying a new luxury automobile every five years and taking a trip abroad once a year. If the market collapses the way it did in 2008, you might suddenly have a frighteningly high probability of running out of money in retirement.

But a new evaluation might look at a retirement where you downsize the home, or cut back to eating out once a week, or buy a less expensive automobile, or take a trip every other year. A truly pared-down retirement expense model might look only at the costs of food, rent, gas, utilities and other expenses necessary for living comfortably. You might have virtually 100% chance of affording your pared-down retirement, a high probability of affording the reduced future lifestyle, and still have a reasonable shot at affording everything you hope for.

This broader evaluation allows you to look at the alternatives. If you decide to work an additional two years at your current job, you will raise the odds of affording your optimal retirement. Saving and investment more each month raises the odds still further.

None of this analysis is possible, however, until the unpleasant homework assignment has been completed, until you've provided your projected spending information after taking a hard look at your current spending habits. In the computer industry, they have a phrase: "garbage in, garbage out," which means that if the data that is used in an analysis isn't accurate or precise, the analysis will give you meaningless outputs. This is also true in financial planning, where no professional wants to give out a garbage plan, and no client wants to receive one.

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

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