NAPFA’s Top 5 “New Perspectives”

If you ever wished you could be a fly on the wall at a financial planners’ conference, here’s your big chance!  Alternatively, if that sounds about as appealing to you as watching paint dry, this “Reader’s Digest version” might be just what you’re looking for.   So here they are: my key takeaways from the recent “New Perspectives” Conference for the Northeast/Mid-Atlantic chapter of the National Association of Personal Financial Advisors (NAPFA).

1.  The shape of the recession –  Speakers who addressed this tended to doubt we’ll see the classic V-shaped recession, the best-case scenario whereby things “snap back” to normal quickly.  Nor were there a lot of votes for a more prolonged U- or W-shaped (a.k.a. “double dip”) recession, or for the dreaded, most severe L-shaped recession (a la Japan, which has never really returned to pre-1990 growth levels.)  Instead, as one speaker put it, “Have you ever seen a square-root sign?”  The math majors in the audience – and perhaps those with excellent memories of their grade school years – will recognize that this symbol suggests a fairly quick initial bounce followed by a period of flatness.  With the price – and accuracy – of crystal balls what it is, I guess we’ll just have to wait and see, with the smart money on keeping expectations modest and being pleasantly surprised if we outperform.

2.  Taxes – Short term: There was a lot of discussion about the tax breaks enacted as part of the economic stimulus/relief effort, many of which I wrote about in September.  Alas, the pace of change is so rapid that #1 on my list is already out-of-date.  But that’s good news for first-time homebuyers who couldn’t make the original deadline for the tax credit, and for other non-first-timers now eligible for a credit per the new extended law.

3.  Taxes – Longer term: With the Bush tax cuts scheduled to expire at the end of 2010 and government deficits at record highs, many at the conference are anticipating tax law changes big enough to cause a significant shift in income tax planning strategy.  To paraphrase a favorite Seinfeld episode, when every instinct you ever had becomes wrong, “do the opposite” may well become the new catch phrase.  “Accelerate income, delay expenses”?  That’s almost unheard of!  But there’s a chance it may become the strategy du jour in the not-too-distant future.  Of course, fear of jeopardizing the still nascent recovery is running high with policymakers, so we’ll have to see exactly what comes to pass.  Suffice it to say that this is an area financial planners will be closely monitoring.  So don’t be surprised if, someday soon, you hear me recommending the income tax planning equivalent of George Costanza’s “Up is down. Black is white. Good is bad.  Day is night.”

4.  And more taxes – Estate Taxes: Uncertainty still reigns.  Defying the expectations of most experts, a scant 6 weeks from when the estate tax is scheduled to phase out altogether in 2010 before reverting back to pre-2001 law in 2011, no legislation has been enacted to prevent that from happening.  Again, because of the state of the nation’s finances, many are still expecting Congress to act before year-end to derail the plans of those whose tongue-in-cheek estate planning strategy was “I’ll just die in 2010”. Yes, this is another “wait and see” item.

5.  Retirement – Safe Withdrawal Rates in a post-crisis world: More and more research is being done to answer the question “Just how much money can I spend in retirement without having to worry about running out?”  While you might think this is something that we’d have down pat by now, it’s only in the last 10 – 15 years, since the demise of defined benefit plans combined with a rise in longevity, that it’s come to the fore.  Not only that, but it turns out it’s a fairly complicated issue with a lot of moving parts, including but not limited to inflation, rates of return, cost-of-living adjustments, variations in spending over time, and – most notable of late – portfolio volatility (read: market crash of ‘08.)

Interestingly, the new studies are reinforcing, and deepening our understanding of, some of the original results which, to dramatically oversimplify it down to a rule of thumb, suggest that portfolios with a 50%+ allocation of stocks can sustain a withdrawal rate of 4 – 4.5%, annually adjusted for inflation, over most retirement periods.  More recent research suggests that increased diversification within asset classes (e.g. not just US large company stocks in the stock portion) and a willingness to pull back on expenses during bad markets might allow for a greater initial safe withdrawal rate.   And, fresh from the conference, the timing of bad markets can have a big impact on the end result, i.e. portfolio losses in early years matter a lot more.

Some of this data is so new that many of us are still trying to distill it down into what it means for real life retirement planning, a topic for which the devil really is in the details, but the industry owes a big debt of gratitude to those who are leading the charge.  To learn more about their work and its implications for your retirement, check out this site.

So that’s it – the talk of the conference.  Needless to say, the discussion went well beyond these subjects.  I should also confess that my need for continuing ed credits in the area of income tax planning might have skewed my experience a bit.  Still, I’ve no doubt these will be the hot topics for the foreseeable future, and I hope you’ll agree it was beneficial to take some time out from our regularly scheduled planning efforts to revisit the big picture and make sure we’re still on target for when “what’s in store” becomes “what is”.

About the author

Sherrill St. Germain, CFP®

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