OCTOBER 2006 INTRODUCTION While fall colors are past their peak in Vermont, hillsides in lower New York are still quite green. The stock market is doing better than we expected and our client returns are better than a blended index. But our work and our thinking go on - and we hope you will find that this Newsletter also stimulates your thinking. The first article is on retirement and is written for a wide audience, including those who are still working and those who "retired: sometime previously. Beyond that we discuss the way in which Schwab is giving clients added benefit, recent tax law changes, issues around inheritance for both the givers and the receivers, a PBS program you should watch for, our annual offering of our ADV, and funny, but thoughtful quotations. We also mention that we have received an award from Bloomberg's Wealth Management Magazine, and we conclude with Office Matters. So let's get started. LIFE AFTER WORK: It's About More Than Money Maybe it's that I turned 65 this summer, or that an increasing number of friends have retired. Maybe it's that this summer our office did an in-depth re-examination of two specific retirement plans we did several years ago. Maybe it's because my wife, Mary, is thinking and writing about issues related to retirement. Whatever it is, I have wanted to write an article for the Newsletter on this subject. A number of people leave their work life by simply retiring at normal times. But for others, Mary included, retirement is not the right word to use, or at minimum, "retirement" for many does not mean what it used to mean. In addition, certain people today stop working at the full time job they held, often for many years, and choose to work in another way, usually for fewer hours and often for less or no payment. You begin to see the dilemma presented in writing an article on retirement, when even defining the term is a challenge. Whatever the circumstances, however, walking away from the world of work raises all sorts of questions. So this article begins with a few of the questions that confront people who stop working at a full time job they have had for some time: 1) Where do you want to live? You may have chosen your present location because of employment. But, if that no longer ties you to a place, do you wish to move closer to children? To a community that will provide opportunities or fulfillment? To a place where you can pursue another vocation or avocation? Or, will you stay where you are? 2) How do you want to define yourself? You probably do not want to settle in to simply being "an old person." Do you wish to adopt a new vision for this chapter of your life? 3) How do you want to structure your day, week, year? Often jobs determine such ordinary things as what time you get up in the morning. What schedule do you prefer, and what other factors should you take into account as you consider options of scheduling in retirement? Volunteering? Leisure activities? Family commitments? 4) Do you have thoughts about your legacy in non-financial terms? If work seemed to dictate how you occupied many hours of your week and year, you now will have choices as to how to spend your time in a way that could make a difference to others and lend another sort of fulfillment to your days. 5) Do you have wishes for a vocation or avocation that you have not pursued up to this point in your life? One person I know joined a steel pan band; another took up photography; and another became "clerk of the works" for a hospital that was under construction where he lived. Perhaps #3 on the above list is of nearly universal concern as people retire. For you personally, how do your options look as you consider, begin to plan, or actually live out your retirement? Leisure time? For many years it was leisure time vs. structured or work time. But if most time now is unstructured, what is on your "to-do" list? Volunteer time? What projects do you feel passionately about and how might you make a difference? Travel? What places are on your list? What is the intrigue behind the specific places you want to visit and how can you arrange travel time to meet particular goals or fulfill wishes? Time with family and friends? Though there may be more time available to spend with these folks, what will you do? Do you want to be a greater part of your grandchildren's lives? What do you need to do to maximize those opportunities? Time with your spouse or another intimate friend? If you were away at work 50 - 60 hours a week, it can be quite a shock when that work ends. One wife made a new interpretation of her wedding vows: for better or worse, but not for lunch. Intimates need to work out their new schedules together. Of course, the issues around money are always a major concern. Do you have enough money to live out your retirement years? If the answer is no, then attention must be paid to working part time for pay and/or being very careful with spending. Both options can provide new opportunities. If a move is contemplated, what are the cost/reward trade offs for the area in which to live, the type of dwelling (condo, house, etc.) and size of dwelling? When there is sufficient money, how much money do you want to give away? And to what organization or person? Charity? Children? A friend in need? How do you evaluate needs so as to have the most impact? What changes do you want to make in spending patterns during non-working years? What specific ways will you spend? What will you not spend money on? Ending the period of full time work opens a new chapter in life. Once, "retirement" was a concept with few variations on the theme. In addition, men particularly, when they made it to a retirement age, often did not live a lot of years after they stopped working. That has changed dramatically, and the options for our post-work years have multiplied, especially with so many people retiring at younger ages. Now people can live in retirement for almost as many years as they worked. Yet, however many years we allocate to this time of our lives - this potentially less structured, more free, post-work period, questions abound and opportunities beckon. Do you have a plan in place that you're happy with? Should you be developing one? An inspiring article appeared in The Valley News, a Vermont/New Hampshire newspaper, just as this Newsletter was going to press. It was reported that CNN taped an interview with Robert Chambers, a local 62 year old, who missed the final cut for receiving the $100,000 award (he received a $15,000 consolation prize) for co-founding a nonprofit agency to help the working poor obtain car loans. In June, the think tank Civic Ventures named Chambers one of the finalists for its Purpose Prize - an award for people older than 60 who set up innovative social programs. CNN has a "Life After Work" series which will run a feature on the Bonnie CLAC (which stands for Car Loans And Counseling) program that has arranged 807 loans in the last 5 years. Bonnie CLAC accepts donations of older cars, reconditions them, and arranges bank financing for people who could not normally qualify for a loan. It is quite remarkable that, with financial counseling, less than 2% of the borrowers default on their car loans. Chambers began the program in White River Junction, VT, an area where public transportation is limited, but the population is spread over several towns, with the result that poor people often have trouble getting to work. Bonnie CLAC was formed to address that problem. When asked about retirement, Chambers said he can't imagine retirement yet - especially after gathering with the other 14 Purpose Prize nominees last summer. "I met a lot of people with interesting projects," he said. "It was the youngest old group I've ever been around." Let me conclude with a list of resources that might help the reader explore this area more fully. Of course there are many books out there and these aren't necessarily the ones with definitive answers. But, ideally they will open up the conversation - and that is an essential first step. Transitions, by William Bridges What Color Is Your Retirement? By Richard Nelson Bolles Goal Free Living - How to have the Life you Want, by Stephen M. Shapiro Local course offerings for older adults. One example was offered recently at the Institute for Lifelong Education at Dartmouth: "Living Your Best Life in Your Wisdom Years?" The précis states, "Emphasis will be on discussing ideas for living extraordinary lives in the next stage." SCHWAB INSTITUTIONAL The relationship between Otto & Associates (O&A) and Charles Schwab has recently changed in important ways. We have always wanted Schwab to serve our clients as well as possible and charge as little as possible. Even though Schwab has continually improved their service over the years, changes have not occurred as quickly as we have wanted. Here is a bit of background. Many people are unaware that there are really two major Charles Schwab companies. One is their retail business for people who open accounts at Schwab on their own, often on the web. O&A is under the other Schwab umbrella, called Schwab Institutional. Clients of Schwab Institutional open accounts under the auspices of financial planners and money mangers. While Schwab Retail and Schwab Institutional have a lot in common, clients of the latter have some additional benefits: a greater range of mutual funds, lower (usually non-existent) minimum balances on accounts, and lower fees for certain transactions. There was a long period when we negotiated hard for lower fees, revisiting the question with Schwab every year or so, and losing more of those discussions than we won. We are pleased to report that recently Schwab Institutional has made some important changes for our clients. The most important of these has to do with fees. For example, after two years of negotiations, Schwab agreed in 2005 to reduce the charges our clients pay when buying and selling stocks, including closed end funds, to 2¢ per share and a minimum of $20. Not too long after our negotiations, Schwab lowered the per share fees for all Institutional clients to 2¢. Recently, those fees were dropped even more (to 1.3¢), for our clients who agreed to receive all confirmations and monthly statements via email. For large portfolios the cost is more complicated but is never more than 1¢ per share. In the last few months Schwab Institutional has announced reductions in other areas. A number of "nuisance" fees have been eliminated, such as the $9.95 fee for replenishing Schwab checks, the $15.00 "stop payment" charge, the $1 ATM fee, and the monthly $6.95 bill pay fee. In summary, our current relationship with Schwab Institutional has grown into one of collaboration where together Schwab Institutional and O&A are looking to see how we can serve clients better and with the lowest fees possible. YET ANOTHER TAX LAW CHANGE A large segment of a recent new tax law (signed by the President in August, 2006) concerns pensions. Because of such frequent changes in the law, we are reminded again of the importance of using planning strategies that provide maximum flexibility. Although we regret boring you with the tax law updates, here are a few of the more interesting changes: IRA owners who are over 70-1/2 can make charitable contributions directly from their IRAs and won't have to pay taxes on those distributions. This is only allowed in 2006 and 2007, and is beneficial to a few taxpayers. Beginning next year, non-spouse beneficiaries of qualified retirement accounts such as 401(k)s, will be allowed to roll over their inherited IRA to their own account, allowing them to stretch out distributions longer and therefore delay taxes. Previously, non-spouse beneficiaries were required to make taxable withdrawals based on the age of the deceased IRA owner. This change will make a very large difference, for instance, if a person leaves an IRA to a grandchild. Starting in 2007, all charitable gifts of cash need to be documented, so, if your item is not documented with a canceled check or credit card statement, you will need to ask for a receipt! And starting this year, all non-cash gifts (e.g. used clothing) need to be in "good used condition or better" in order to claim a charitable deduction. Some provisions that were set to expire after 2010 have been made permanent, including increased annual retirement account contribution limits, and tax-free withdrawals from College Savings Plan 529 Accounts. If you have 529 accounts, don't forget to make your 2006 contributions before year's end! As always, contact us if we can help you with any of these items. INHERITANCE Much has been written about inheriting money and how that matter should be handled by the generation that is giving the money as well as by the generation receiving the inheritance. This article will briefly address both matters. We have quoted in a previous Newsletter the comment by John D. Rockefeller to the effect that giving money away is more difficult than making it. While Rockefeller was presumably talking mainly about giving money to charities, it is also true for giving money to family. Today, parents who are alive and well might choose to give money to children. But, when to give, how much to give, how much to tell family about the sum total of their wealth, and when to begin those discussions, are just a few of the questions that require thoughtful consideration. For those inheriting money, two problems are common. First, whether the givers are alive or not, recipients may treat the inheritance as a windfall that can be luxuriated in. Such people need rather to contemplate the possible uses of their inheritance, including saving for education or retirement. A second pitfall might be called "preserving legacy." This involves treating an inheritance as a precious legacy that shouldn't be touched. The result is that the beneficiaries get little or no advantage from their inheritance because they feel obligated to "preserve" it. An additional problem may be that the beneficiaries see the various stocks and bonds as part of the legacy that they should not change. But all assets need to be managed and there is often enormous risk in letting a portfolio have a large concentration in just one or two stocks, or, almost as bad, one or two sectors of the investment world. Many of these problems can be addressed, if not completely solved, when there is open communication between the generations. While people often find it difficult to have that kind of frank, intergenerational discussion, not having the discussion can lead to unfortunate consequences. The situation can be exacerbated when parents die without imparting their wisdom and guidance. In such case the next generation is at a severe disadvantage when assets unexpectedly drop into their lap. Please give our office a call if you want to work toward facilitating a family conversation. SUPER STARS For the seventh year in a row, O&A has been honored by Bloomberg's Wealth Management Magazine as one of the top money management firms in the country. Bloomberg has called us a "Top Dog" and a "Champion," but this year we are included in the group of "Super Stars." We even moved up higher on the list. Stop by the office or give us a call if you would like to see the complete article with the Bloomberg list. FINANCIAL PLANNING ON PBS One of our colleagues in the fee only part of financial planning is scheduled to tape a one hour program that will be used by Detroit Public Television during their pledge drive in December. It could be a breakthrough in educating the consumer about fee only planning and fiduciary responsibility. Although trained as a lawyer, Bert Whitehead has worked as a Fee Only planner in Michigan since 1972. A revision of his book, Why Smart People Do Stupid Things with Their Money: Overcoming Financial Dysfunction, will be out ahead of the December airing of the program, which will follow the general format of the book. One of the important points Bert is planning to make on the program is about the importance of individuals' taking financial responsibility and not just trusting that anyone who is friendly and likeable has their best interest in mind. The program will be made available to other PBS stations over the next three years. We do not know which, if any, other PBS stations will pick it up. Watch for it in your area after December. ADV OFFER Each year Otto & Associates, Inc. is required to remind our clients that our ADV Parts I & II and our brochure are available. These forms, required by the Securities and Exchange Commission, state who we are and how we operate. Please call the office or send us an e-mail if you would like a copy, or you can visit our web site (www.ottoandassociates.com) to view all of these documents. NOTABLE QUOTES A colleague recently asked other planners for quotations that they think of as noteworthy. Here are some of them: "In spite of the cost of living, it's still popular." --unknown "If you are property diversified, you always have something to complain about." --unknown "Diversification is the conscious choice not to make a killing, in exchange for the blessing of never being killed." --Nick Murray "When going through hell, keep going." --Winston Churchill "There are two times in a man's life when he should not speculate on stocks: when he can't afford it, and when he can." --Mark Twain "For most of human history, people didn't age; they died." --Ken Dychtwald "I have suffered many things in my life, most of which never happened." --Mark Twain "I used to have a nest egg, but I blew it gambling; I bet I wouldn't live this long." --Drew Carey "It is tough to make predictions, especially about the future." --Yogi Berra OFFICE MATTERS Continuing education requirements keep Deborah and David involved in a number of pursuits. Deborah has attended seminars held in New York City and Westchester County and is a regular attendee of the Financial Planning Association meetings held monthly in Westchester. On Oct. 13, Deborah and Judy together attended an all day conference sponsored by the Baron family of mutual funds, held annually at Lincoln Center. Surprise entertainment was provided by Billy Crystal. David attended one of the first of those conferences more than 10 years ago when it was held in a hotel conference room where there could not have been more than 200 in attendance. With over 2,000 people in attendance this year, the Baron Conference has obviously become very popular. On October 17-18, David will be going to a seminar held three times each year, often in Chicago. The Gateway Group has a membership of only 20 other planners from across the country. Woody Brock, a nationally known economist, meets with the group. David will also attend the Northeast Regional Conference of NAPFA (National Association of Personal Financial Advisors) in Bethesda, MD, on Oct 26 - 29. Among the featured speakers at that meeting will be Judy Woodruff, a broadcast journalist who has covered politics and news for more than three decades at CNN, NBC, and PBS. In August, David not only celebrated his 65th birthday, he also renewed the lease on the office space in Katonah for 10 years. He may be of retirement age but clearly is hoping to continue to work for a number of years. He has requested that both Deborah and Judy also sign long term contracts!