David Haas, Consultant

If you’re not already aware of it, you might benefit from knowing about this conversation that has been occurring – actually, for more than a year now:

401k/IRA Screw Job Coming?

Many thanks are due to Karl Denninger for keeping this important topic alive. It’s one that’s not always easy to track due to the sensitivity of the subject. It holds real potential for, shall I say, powerfully “motivating” and agitating the masses who are diligently participating in these plans (mainly because they focus on the perceived income tax benefit and don’t know any better options exist). The outcome of such a powerful agitation might not be pretty.

As if lack of access to money “saved” inside qualified plans (think: forced use of credit cards), frequently oppressive commission and fee structures, market losses, stiff penalties, missed opportunities, lack of any additional benefits and uses for the money, legitimate concerns about higher future taxation, and a boatload of other uncertainty weren’t already enough, this potential development just gives us one more reason to legitimately fear the restrictions and dictates of government-controlled “qualified” plans.

Such fears may ultimately become justified if government feels cornered (due to over-commitment, ongoing fiscal mismanagement, exponentially-increasing public debt, unaffordable entitlement programs, falling tax revenues, depression, etc.) and decides to play its trump card – suddenly changing the rules about whose money a qualified plan really is. Will we live to see this day? Personally, I think the odds overwhelmingly favor the house.

Maybe the real agenda is (has always been?) to have qualified plans morph into “self-funded” Social Security “benefits” – since SS appears to be (my opinion again) actuarially inaccurate, unfunded, and fiscally reeling? This plan would certainly do it. Scrap the old SS program (but of course, not the FICA taxes) and begin anew with the trillions that are conveniently waiting, trapped inside QP’s.

“To each according to his contribution – minus the considerable cost of government redistribution and waste.”

- David

All the rest of the money contributed to SS by the millions of workers in previous generations (ours included)? Long gone. Nothing but a sticky drawer full of IOU’s left in its place. My understanding of it is that it’s a “pay-as-you-go program”. Do the math and I think you’ll agree that this cannot end well for our country. That’s why this conversation is being had now and it’s obvious why any debate must be held “in committee” – far removed from the light of day.

My advice? Save generously for your future but DO IT IN THINGS YOU CAN CONTROL TO THE GREATEST DEGREE POSSIBLE. In this crazy day and age, a little well-reasoned paranoia is actually a sign of enhanced mental health. The crazy are held out as the sane and the sane are held out as the deranged. It’s all gone topsy-turvy.

As I’ve written before, when it comes to money, control is 99% of everything. If I were to have complete control of every aspect of your money, who really owns it? Think about that the next time you look at your 401k statement and prepare to make another contribution. Think long and hard. Is a present tax-deduction really worth a complete and potentially permanent loss of control?

And since many of you will be seeing your accountant soon, ask if – in light of all that’s happening in the world around us – he/she thinks there’s a good chance taxes will go up in the future. Depending upon their answer (and your well-reasoned judgment) you may determine that a tax paid now may be the least costly tax you’ll ever pay again. Food for thought, at a bare minimum.

What would you want to leave behind for your family? If your choices were A) a contentious mess, or B) a well-coordinated estate plan, you would choose option B, right? All too many of us end up with option A. In fact, a recent national survey discovered that only 44% of Americans have a simple Will, much less a well-coordinated estate plan.

This is a story of four best friends from school: Charlie, Keith, Mike, and Stu. Each of them lived very successful lives, but their deaths brought very different outcomes.

Charlie was the first of the friends to pass away. His death was quite a shock to everyone because he died in a car accident at a young age. Unfortunately, Charlie never got around to planning his estate and died without a Will. So, not only did his assets have to go through the court process called “probate,” his assets also passed by “intestacy,” which is a fixed formula set by the state legislature for those dying without an estate plan. Charlie was unmarried but had a long-term partner. Unfortunately, the state’s formula did not take that into consideration. So, all of Charlie’s assets went to his blood relatives and none went to the person who mattered most to him, his long-term partner.

Keith learned from Charlie’s mistake. Shortly after Charlie’s death, he went to an attorney and created an estate plan. However, he stuck the plan in a drawer for the many years since it was created and forgot about it. When Keith passed away, he had not updated his estate plan in almost twenty years. While his plan avoided intestacy, it did not reflect his current relationships and intentions, meaning that his estate was not distributed as he wanted at his death. Keith, who had been married to Linda for more than a decade, would want everything to go to her. However, Linda was shocked to discover that his outdated estate plan left everything, including the house they had shared for years, to his former girlfriend from 18 years ago, Betty.

Mike learned from both Charlie’s and Keith’s mistakes. Not only did he put an estate plan in place, he made sure that he kept it updated with his current dispositive wishes. However, he forgot to think about beneficiary designations. Like many of us, the majority of Mike’s wealth was controlled by beneficiary designations. Mike had been with the same employer since graduation. The beneficiary designation on his retirement plan listed his mother; at that time, he was unmarried and had no children. His designation sent the bulk of his wealth to his mother, who was in a nursing home. Not only did it deprive his wife and children of money they desperately needed, it ended up reimbursing the state Medicaid agency for paying for his mother’s nursing home care.

When Stu died, he had seen the personal and financial tragedies that could occur with improper planning. Stu went to an attorney who focused his practice in estate planning. The attorney prepared a well-coordinated estate plan that considered all of Stu’s assets, including those controlled by beneficiary designation. Stu did his part, too. He made sure to follow up with the attorney periodically and whenever there were significant changes in his life. While Stu’s family was saddened by his passing, their grief was not compounded by poor planning.

The four friends each had the best of intentions, to provide for their loved ones after their passing. However, only Stu had an updated, well-coordinated estate plan and only Stu achieved the goal of caring for his loved ones who were left behind.

This post was contributed by Maritess T. Bott. Ms. Bott is an Estate Planning Attorney based in the Chicagoland area. She is a member of the American Academy of Estate Planning Attorneys and has been engaged in the practice of law for the last 13 years. For more information, call Maritess at (847) 818-9084, email mbott “at” bottestateplanning.com, or check out her website at www.bottestateplanning.com.

When I look at the graph you’re about to see, I can’t help but think back to my last roller-coaster ride. I can literally hear the “clickity-clickity” of the ratchet mechanism slapping beneath the cars, preventing us from slipping backwards as we’re propelled relentlessly forward in a steep and seemingly unstoppable ascent. I remember thinking that even time seemed to hang in the balance as I anticipate the excitement that surely lies ahead.

Through my colorful imagination, I can literally still feel the jarring push of the cold machinery against my back, along with the heavy, lifeless thunks and vibrations jolting up through the thinly-padded steel seat.

Today, I can’t help but feel a bit of the same familiar “butterflies” in the pit of my stomach as I ponder the possibilities on this graph – along with the heavy implications the down-side may hold for all of us. Perhaps you’ll share my sentiments.

This is a graph of the sharp “bear market rally” that occurred in 1929-1930 overlain with the current stock market rally that began in early March, 2009. Of course, all credit goes to www.papereconomy.com for the creation of the graph and making it available on their site. Click the graph for a clear, full-size view.

As alert passengers strapped securely into our vehicle knowing that the arrival of the future is unstoppable, many of us sense that things are about to change in a VERY, VERY DRAMATIC MANOR.

In any battle against gravity – whether physical or financial – we know that up merely precedes down as immutable cycles play themselves out in realtime. We just cannot know EXACTLY WHEN the driving forces will reverse and the new trajectory will begin. Change is life’s only certainty. Certainty of degree or timing is not often a part of that.

As I said above, no one knows precisely when a top will be reached but to be safe, be sure your belts are snugged, your belongings are secured, and PREPARE YOURSELF for whatever lies ahead.

ONLY A FOOL would ever risk more than he can afford to lose. Within your own portfolio, be absolutely sure you know where that limit is.

Many people want to believe (hope?) that we are experiencing a rebound in housing. In my opinion, this thinking is premature by at least 3 to 4 years, perhaps even a decade or more.

Below is a link to a chart from the www.ritholtz.com blog (an excellent blog that should be on your financial reading list) that helps substantiate my thinking.

Click the link to see a large version of the chart which was constructed by a Ritholtz reader, Steve Barry, using long-term Case-Schiller real estate data:

http://www.ritholtz.com/blog/wp-content/uploads/2009/06/case-shiller-updated.png

Remember, all markets tend to “over-correct” and swing well beyond the mean to extremes in both directions. My interpretation of this chart shows the long-term mean in the area of 110.

Given the severity of the current recession/depression, I think we’re most likely to overshoot to the 90 area. Though we’re likely to see some bumps along the way (believe it or not, we’re actually in one right now), that would imply that we still have quite a ways to go on the downside before an ultimate bottom can be reached in housing. Commercial real estate is following a similar, albeit delayed, trajectory.

This persistent, slow-motion collapse can’t help but continue having an overwhelming impact on jobs, credit, governments, the global economy, and, of course, the financial markets.

At the risk of stating the obvious, the weight of the evidence continues to confirm that we’re experiencing a long-wave, once-in-a-generation deflation (massive systemic credit shrinkage). These are NOT to be confused with “normal” business cycles. Think hurricane versus rainshower.

In general, despite frantic efforts to appear otherwise, governments have proven repeatedly to be impotent in the face of deflation – which is why they fear it like the black plague and attempt to inflate like madmen to forestall it. It never works.

As an immutable and powerful force of nature, deflation must work itself out on its own terms to correct the institutionalized excesses, malinvestment, and malfeasance that have been compounding exponentially throughout the previous decades. Just as it’s futile to attempt to turn the ocean tide, you can’t turn back the long-wave cycle.

View debt deflation as a natural, curative cleansing process and invest accordingly.

Above all, stay safe.

Note to readers: Participants in 401(k) plans face numerous challenges to building a safe, dependable, fully-integrated, and efficient retirement program for themselves. The unfortunate fact is that many – if not most – plan participants use the 401(k) as their primary (or sole) vehicle for savings and investment. In my opinion, they do this at their own peril as they unwittingly increase the odds of a less-than-optimal outcome at retirement – for a variety of reasons, some you’re about to read.

This article mentions 401(k) plans but the points made and questions raised may pertain equally to IRA’s, Roth plans, SIMPLE plans, SEP plans, 403(b) plans, 457 plans, and other similar retirement plans created and controlled by government regulations. Always consult your own documents and advisors to be certain of what you have and do not have.

—————

All by themselves, the recent broad-based market melt-downs have underscored the fact that YOU DO NOT REALLY OWN YOUR 401(k) PLAN BALANCE until you’ve liquidated it and, even then, you own just a part of it.

“Your” plan is continuously held hostage by a wide variety of potentially restrictive institutional and governmental forces that EACH HOLD A HIGHER LEGAL CLAIM ON YOUR MONEY THAN YOU DO. As long as you participate in their plan, THEY hold the controls and write the rules and YOU are “subject” to play by them.

And, even if you should choose to quit their game, you will be required to pay a 10% penalty to the “keepers” (that is, unless you are over age 59 and 1/2 or you learn how to use the sophisticated loophole that enables you to quit without penalty). The threat of this 10% penalty seems to be a powerful enough incentive to keep most people in the game over the long-haul.

While this unfortunate lack of control will never change, it’s nearly inevitable that – in addition to capricious market forces - the rules, restrictions, penalties, and income tax rates that impact retirement plans will continue to change – just as they have so frequently in the past.

FACT: The unpredictability of change is one of the most serious risks you “volunteer” to take on as a participant in any government/institutionally-sponsored retirement plan.

A valid question to ask about a 401(k) might be; “Whose money is it?” As the old saying reminds us, possession is 9/10th’s of the law and, in the case of a 401(k), the money is held by a trustee and/or other type of plan administrator, not you.

Other serious questions a participant needs to investigate for him/herself BEFORE investing too heavily in such a plan might be:

– Are the REAL RISKS AND UNCERTAINTIES inherent in these types of retirement plans worth the widely-touted but uncertain “benefit” of tax-savings?

…which is, surprisingly, open for discussion as verified here:

Dems Target Private Retirement Accounts

– What else could I do with this same money and would any other options offer similar or even more benefits with fewer potential risks, costs, and loss of control?

As you can see, there’s much to consider. And, obviously, though it’s seldom disclosed, there’s much uncertainty and “extra baggage” accompanying participation in any of these government plans. Ultimately, when you consider that your retirement plan may be a larger lifetime investment than your home – for many, the very largest asset they’ll ever acquire – these questions are worthy of VERY SERIOUS deliberation.

And finally, here’s a link to an interesting article from the Wall Street Journal that illustrates yet another “surprise!” layer of complexity and potential illiquidity that can blindside you with regard to “your” holdings. Just when we thought we’d seen it all! Be sure to take a minute or two to read this:

401(k)’s Hit By Withdrawal Freezes

In an era rife with “full disclosure” mandates, why don’t retirement plans come with a long list of government warnings and precautions? As in all aspects of life; buyer beware. It pays to be an educated consumer.

Footnote: There are other private, non-governmental options you may wish to consider. Though they’re not perfect, you can invariably retain a much greater measure of control over future variables as well as preserving ready-access to your money. This is an area we consult in so please feel free to call or write if you have questions in this regard.

Gary Fielder, a Denver attorney, has put together one of the best educational videos I have ever seen detailing the monetary history and the ongoing struggle for control of our nation.

Gary’s late 2008 video is crucial to gaining a full understanding of why we’re in the financial straits we’re in today and it is certain to hold spellbound both the neophyte and the veteran with regard to the intriguing subject matter at-hand.

Gary is a masterful presenter, for sure, and he action-packs a college-level education on this fascinating topic into about 83 minutes.

MOST INTERESTING!!! DO NOT MISS THIS VIDEO!!!

Watch here or watch in large format at the link below.

The Gig Is Up: Money, The Federal Reserve and You.

Spend the time. See the future. Educate yourself with the wisdom of a master.

Marc Faber Video

Here’s a link to an excellent interview of Dr. Ravi Batra by Matt Renner of www.truthout.org. Dr. Batra has been a keen observer of the American economic evolution during the decades that lead to our current situation.

He has written a number of interesting books over the years but this interview is a terrific summary of why we’re where we are today. As you’ll see here, Americans have been first drained, then “wrung-dry” by government policy.

Dr. Ravi Batra: New Thinking on the Economy

The financial talking-heads and, therefore, the general public tend to believe that “sub-prime mortgages” are almost entirely to blame for the global financial crisis. To me, this is ridiculous on its face and is more of a cruel joke – bordering on class-sanctioned bigotry – than anything even remotely related to fact.

Depending upon how “sub-prime” is defined, there were a total of $1.5 trillion to $3 trillion in sub-prime mortgages in existence at the height of the bubble in 2007. Assuming that ALL mortgages are backed by real-estate, these mortgages ALL still have some tangible value to them – even after the “collateral” price re-adjustments of the ongoing housing melt-down are factored in. Furthermore, though you wouldn’t know it from the media, not all sub-prime mortgages are in default.

The last figures I saw were that roughly 20% were in default – though I’m not sure how accurate that figure is. If those mortgages were total write-offs (zero value in the underlying real estate), the total “hit” to the global economy would be a maximum of 20% of $3 trillion, which is $600 billion.

Obviously, IF THAT HAD BEEN THE TRUE PROBLEM, we could simply have written a check – albeit a rather large one – for this amount from the annual budget and solved the problem. Yet the problem has quickly revealed itself as a multi-headed hydra – something many orders of magnitude larger than simply sub-prime mortgages.

So, in order that we may be properly educated about the TRUE CAUSES of the global financial debacle, let’s look to the excellent work of Robert Weissman to do the job for us. Based upon what he’s written – and my own observations over many years – I think he’s covered all the bases in a concise manner.

12 Deregulatory Steps To Financial Meltdown

And one more thing, while you’re reading, don’t fall victim to the “anti-free markets” rhetoric that’s gaining so much traction around the world. What Weissman describes here is THE ORCHESTRATED HIJACKING OF PUBLIC REGULATORY SYSTEMS TO PREVENT THE NATURAL CORRECTIVE MECHANISMS OF FREE-MARKETS FROM INTERFERING WITH FRAUDULENT PRIVATE EXPLOITATION, CONVERSION, AND THEFT.

Don’t ever forget that – as natural forces of nature – markets work just fine, exactly as they are doing now. The market is “aggressively correcting” the collective misdeeds and “un-natural” excesses of the recent past, forcibly leveling the playing field that has been so radically perverted and slanted in favor of the greed-heads of the world. A sturdy rubber band will only stretch so far before it snaps back.

The market will “react” in equal or slightly greater degree than it was “destabilized” by the forces organized against it. Perhaps, with luck, the legal system will follow the lead of the markets and catch up.

To maintain a civil society, perpetrators of crimes must be punished when caught – and not simply by markets.

Regular readers of my blog have seen me mention Karl Denninger and his work in previous posts and here is another of his articles that is definitely a MUST READ. Karl has an insightful mind and, in my opinion, is better-informed than most media-proclaimed “experts” in many areas of finance.

For those of you who may be prone to relying on some combination of “faith, hope, and positive thinking” to resolve the myriad problems that have been created on our behalf, here’s a strong dose of reality for you to mull over.

I wrote about CDS’s a few days ago and what Karl has subsequently written may make you want to take action and begin educating (many) others about the potential scope and scale of this problem.

CDS’s are acting like a strong acid eating holes in and potentially consuming the foundation of our entire economy. The only thing likely to stop this now is the wholesale nullification of these contracts on a GLOBAL BASIS. This is definitely not the first time I’ve said this. Karl seems to agree.

Karl’s article is short, go read it now.

The Market Ticker: More GE (Important)