I was unable to listen because I have been very sick for a few days and my daughter decided it was time for some TLC and some home made soup today.
However, we are very fortunate to have two guest-writers, Frankj and Jeffchristie, who have summarized the broadcast:
Frankj summarized the first hour
Bob Brinker hosted MoneyTalk today, August 24, 2014 and led off the show with a review of what it takes to reach the Land of Critical Mass: Patience, Discipline and Knowledge. These three elements are what the show is all about.
Bob mentioned the earthquake that struck near Napa, CA at about 3:20 am this morning.
In breaking financial news, Bob mentioned the purchase of an Australian based drug company, Intermune (ITMN) by Swiss-based Roche Holdings. Roche is paying $74 per share for ITMN which is a 63% premium over what ITMN was trading at on August 12. The small (450 employees) company developed a drug for treating lung disease. The deal should close by the end of the year.
Rich from Novato was first in the batting order of callers. He asked Bob about Warren Buffett’s investment strategy for when he shuffles off this mortal coil. Buffett has left instructions to invest 10% in short term government bonds and 90% in a low-cost, no-load S&P 500 Index fund. Rich wanted to know Bob’s thoughts.
Bob disagreed with the choice of equity fund, recommending instead a total stock market fund. This would pick up the mid cap and small cap components of the US market which the S&P 500 fund does not. Bob also disagreed with the allocation of 90% equities, calling it too aggressive but consistent with how Mr. Buffett thinks.
Bob mentioned that he has always said, going all the way back to the start of the show in 1986, if he had to choose just one equity fund, it would be a low-cost, total stock market fund.
Paul from Missouri led off his call by saying he is a long term subscriber “TO BOTH OF YOUR NEWSLETTERS,” and he is mostly in cash now but wants to move into the income portfolio, Portfolio 3. Bob did not advise him that his son actually edits the fixed income newsletter. He did advise him to plunk half his money into the fixed income part of the portfolio and to dollar cost average the other half into the equity side of the portfolio. Bob mentioned that the fixed income side is protected against loss of net asset values because of its short duration.Next up was Mark from Illinois, a military retiree who is employed, has a 401K with a 65% equity/35% bond allocation, and plans to work another 8 years. He wanted to know how aggressive he should be with his allocation. Bob said his allocation was just fine for someone in his situation.
Howie from Dartmouth batted in the clean-up position with a question on the Osterweiss Strategic Income fund, one of the funds in Bob’s income fund stable. Howie said the fund has a duration of 1.94 but a yield to maturity of 4.03… what’s up with that? Bob explained that duration is the measure of the percentage a fund’s net asset value will move if interest rates move up or down by 1 percent. The bond portion of the income portfolio currently has a 1.1 duration, Bob said.
Mike from New York wanted to know if the charitable deduction for IRA’s was going to be renewed by Congress for 2014. This provision allows someone to donate money from their IRA directly to a charity and avoid counting the distribution as income, while also taking a deduction for a charitable contribution. This is attractive for people who are in the land of the Required Minimum Distribution, but may not need that income for living expenses.
Bob said he did not know if the provision was going to be renewed and it is unlikely we will find out until after the fall election. Bob went on to prognosticate that the Republicans will maintain control of the House, they may take the Senate but they won’t have 60 votes there. Thanks to gerrymandering there is not much turnover in the House. Politics is, he said, “all about the money.”
Dave from Oklahoma City has $650K in a Roth-IRA and he wants to know if he can use any of it before he hits age 59 ½. Dave mentioned that his father is his financial adviser. (Why not ask him?) Anyway, Bob advised that there are certain circumstances where you can withdraw money from a Roth-IRA if you have held the account less than 5 years and before you are 59 ½. He gave some examples but anyone really interested in knowing this information is advised to go to the IRS website and look up the rules, or talk to a CPA or qualified tax preparer.
Teresa from Kansas has been retired for 1.5 years, she’s sitting on a retirement fund of $1.8 million, and is looking at taking her required minimum distribution in 6.5 years. Should she be tinkering with her 40% equity, 60% bond allocation in anticipation of this future RMD? Bob’s answer was no.
Betty from Waterloo missed her turn at bat.
Tom from Moses Lake, WA is 46 and looking at retirement at 59 ½. His 401K is 100% in stock funds and he projects it will be worth between $1.5 and 2.0 million when he retires. He said he won’t need the money right away when he retires, so should he reallocate? Bob’s advice was to re-allocate a little at a time, 3% per year, in order to get to a 50% - 50% allocation by the time you retire. (Does this get to a 50% allocation by age 59 ½? It does not by my Jethro Ciphers. By age 62, it does get to 50%. Was Bob listening closely?)
Jeffchristie summarized the second hour of the broadcast:
Bob started the second hour by encouraging moneytalk listeners to max out their contributions to IRA's and 401k's.
George in Petaluma owned two homes in the bay area. Property A has been his principle residence for 6 years. He paid $670,000 for the house and feels it is now worth $1.2 million. Property B is a rental property that he bought for $185K and he thinks he can sell it for $850K. Bob noted that if he sold property A he could get a $500k federal tax exclusion on the sale and this looked like the way to go.
Linda from Kansas wanted to know what her I bonds were paying. Bob told her there was a base rate and an inflation component. She should look at the yield in the print out she had from the government web site.
Harvey in Carolina retired 2 1/2 years ago. His company did not offer a sump sum a that time. Now they are. He is receiving $55k a year and his wife would get half of that if he dies. The option is a lump sum of $696K. Since he didn't need to add that money to his estate Bob suggested he should continue with the monthly payments.
Carl from Chicago ask about the PE for the S & P 500. Bob told him that he is using the 2015 operating earnings and gets a forward PE of 15.3.
Ryan in Utica New York has 9 years to retirement. He has most of his investments in the market and Bob suggested he get to 65/35. He should plan on a 4% withdrawal rate when he retires. This would net him around 20 to 24K a year based on the numbers he provided.
Mark in Portland said he was in a total bond fund. Bob noted that the duration was 5.7 and that was too risky for him. A 1% rise in interest rate would cause a 5.7% drop in the value of the fund.
Honey here: I can't thank both of these gentlemen enough for coming to my rescue today.