December 25, 2008

Merry Christmas!

Merry Christmas!

To all of my family, friends, and readers, I wish you a very Merry Christmas!

All the best,
Robby Schultz

December 23, 2008


The past few weeks have been a blur, so I wanted to pass along some of my thoughts on different issues:
  • Madoff Comes Clean - I am all about telling the truth in financial matters, but the revelation the Bernie Madoff had a $50 billion Ponzi scam was too much. In a year when investors are already not trusting the stock market, something like this is just plain absurd. The problem here is that Madoff's firm held the money, invested the money, accounted for the money, and sent the statements. He was the advisor and broker-dealer. The SEC just fell asleep here.
  • Investing - I have recently heard from some neighbors that were questioning whether to ever invest again. I think that the interesting thing here is that most of them have benefited from the growth of the stock market, and now, they want to change that mind set. When I discussed many items with them - 401(k) investing, stock options, company matching of 401(k) contributions, and the lack of return on money markets and CDs - they suddenly decided that we must indeed still invest in the market, but we must "fix" it.
As someone that loves history, I have gone back through everything that I can find, and the issues of 2008, may indeed end up being a positive. If we go back and look at the problems of the late 70's and early 80's, there was a drastic need of change.

Inflation was absolutely out of control. Fed Chairman Paul Volcker set out to get it back under control by raising interest rates to unheard of levels. The "prime rate" for the best borrowers hit 20% - compare that to 3.25% today. This action killed the economy, but it brought inflation under control, and it helped lead to the "bull market" of the late 80's and 90's. What is interesting here is that this was the last time you could have your money in CD's and actually get a decent rate of return (15%+), but with inflation at 18%, you were still losing money.

The main thing I am trying to point out is that the problems of today should be resolved within a short time period. This is not to say the stock market will go straight up, but if the financial system and economy can be "realigned," the country and world economy should start to be back on track. If you remember my last post, all of the programs that came about after the Great Depression - FDIC, Unemployment, Medicare, Social Security, etc. - were in response to that financial turmoil. These are all things that have now benefited the citizens and economy currently.

It has been a tough year in the markets, but with negatives can come positive adjustments. The housing markets and mortgages will be fixed, the financial system restabilized, the automakers (hopefully) revamped, and a system that will benefit both the free markets and government sectors.

If President Elect Obama does come in and spend money on education, it will be a positive both today in terms of jobs and funding, but additionally in the future with better equipped children. Educators are at the forefront of society literally making a difference day in and day out, and there must be a system in place to allow them to continue to succeed.

I wish your families and you a Safe and Happy Holiday season and a prosperous Happy New Year!

December 5, 2008

Taking a Step Back

Over the past few months I have talked with many clients and educators about various financial matters. From questions regarding investing to pensions to annuities to savings accounts, and it is from these discussions that I have learned a great deal that I wish to share.

Being an avid history buff, it is interesting to me that the group of people that seem to be least worried about the market fluctuations are those in their late 70's and older. In talking to them, they stress that this is nothing like the "Depression" that is "talked about on the news."

When I ask them what they think, they let me know that things have come full circle. From humble beginnings where family and friends helped each other with the necessities of life to the growth of materialism... and now back to the little things. I think that is sometimes lost on many of us.

The have pointed to the change in government programs from prior to the Great Depression.

  • There was not a FDIC guarantee at your bank for the your account. When a bank went under, your account was gone. Now we have $250,000 guarantees at FDIC banks.
  • Social Security was non-existent. Now it is an important part of your retirement benefits.
  • Medicare/Medicaid was not even a thought until the 1960's.
  • Unemployment benefits started in 1935.
While some would argue whether these programs are run efficiently, they are still better than nothing. Imagine waking up tomorrow morning, and finding out your checking and savings accounts are gone. A "run on the bank" was a real and ever present danger until the government backed the banks.

No one event or program will move us from our current economic situation back towards a "normal" growth pattern, but if you look at the various moves by the Federal Reserve, U.S. Treasury, Bush administration, Congress, and proposals by the soon to be Obama administration, things are in the works. Just the various rumors about the stimulus proposals by Congress for a package that promotes revamping the infrastructure of the U.S. is promising. If it is implemented with speed, it will mean immediate jobs throughout the country on items that must be done and will take months and years to complete. This is just one of the many ways that we will start the growth cycle again.

I wrote today's blog simply to explain that while the current times may look bleak, our country and economy has weathered and grown through many trials. From these previous trials, we have learned, adapted, and anticipated some of these issues. Changes will be implemented after this latest trial, and if history is any judge, we will be the better for it.

Next time, back to more educator issues.

November 21, 2008

TRS Board of Trustees Vote No to Changes in COLA

On Wednesday, the TRS Board voted unanimously to REJECT a proposal to change the semi annual Cost Of Living Adjustment (COLA) for retired Georgia educators.

The proposal was to allow a Board vote annually on the amount of the COLA for the following year. The 40 year history of the current guideline has a 1.5% increase in January and an additional 1.5% increase in July every year as long as the CPI for the previous year was positive.

Additionally, a letter from the Georgia attorney general's office said that Georgia could potentially be held in breach of contract if the proposal was approved. Assistant Attorney General Christopher McGraw wrote that the state would probably have a tough legal battle if the long-standing policy was changed.


403(b) Plans in 2009

I have written often about the problems associated with 403(b) accounts. I am definitely for having a retirement vehicle, but many times the educator is the one that gets taken advantage of by paying large fees that are usually hidden.

On Wednesday, Robert Powell of MarketWatch wrote an article that I would like to share. This is not to scare anyone into NOT opening account, but depending on the county and the custodians available, PLEASE be careful with your choices.

While I do not agree with all of the information below, I definitely agree that you should know and understand what you are signing up for. I want everyone to prosper rather than just be steamrolled into a 403(b) account that hits the employee with huge fees.

Happy New Year? Not for some
403(b) plans will have fewer investment options, more restrictions in 2009

By Robert Powell, MarketWatch
Last update: 7:07 p.m. EST Nov. 19, 2008

BOSTON (MarketWatch) -- Come Jan. 1, more than 10 million American workers who save for retirement in 403(b) plans may not be so eager to hear the phrase "Happy New Year."

As a result of a government regulation that becomes effective next year, many employers who sponsor 403(b) plans will likely reduce the number of providers and investment choices in their plans, as well as put in place restrictions on loans and hardship withdrawals.

That could be a headache for the workers at many hospitals, schools and nonprofit organizations affected by the new Internal Revenue Service regulation.

To be fair, the new IRS rule, the first of its kind in 40 years, is designed to make 403(b) plans look more like 401(k) plans. Up until now, 403(b) plan participants had in some ways much better deals than those with 401(k) plans: They could invest their money with many different vendors and they could take out loans and withdrawals without having to go through their employer. It was, to some observers, a Wild West atmosphere, with some employees essentially managing their own plans.

But now the Wild West is getting tamed. To be in compliance with the new IRS regulations, 403(b) plan sponsors need to have several documents and agreements in place just like employers who sponsor 401(k) plans. Employers will need a written document that provides a summary of its 403(b) plan and identifies the approved list of vendors, eligibility rules, contribution limits, loan rules and limits, and distribution and withdrawal rules, among other things.

Some financial advisers say employers may not have the expertise in place to create such documents. Still, many existing 403(b) providers, including TIAA-CREF, the nation's largest 403(b) plan provider, are giving employers model plan documents to use.

Employers also need recordkeeping and information-sharing agreements in place with their 403(b) vendors. As part of their new fiduciary responsibilities, employers must keep track of their workers' money inside the 403(b) plan. With the information-sharing agreement, employers will be assured that vendors are sharing information among themselves about participants' hardship withdrawals, loans, and transfers.

But some 403(b) firms are not able or willing to meet the terms of the information-sharing agreements that employers plan to use, said Aaron Skloff, chief executive officer of Skloff Financial Group. And that could result in some 403(b) providers exiting the business or reducing their presence, leaving workers to re-arrange their contributions into different funds and products. "Thousands will lose their choices," Skloff said.

Fewer low-cost options?

To be fair, not all 403(b) plan participants will be scurrying. "The changes will be transparent," said Angie Kyle, a vice president at TIAA-CREF.

But Skloff and other advisers foresee big disruptions in the 403(b) world.

"These new regulations do not benefit anyone, at least in the short term," said Scott Dauenhauer, co-author of "The 403(b) Wise Guide" and owner of Meridian Wealth Management. "They hurt employers, employees and vendors."

Dauenhauer said employers don't have the time, expertise or money to implement the new regulations, employees face the possibility of losing low-cost and no-load investment options in their plans, and the vendors are spending "a lot of money trying to interface with district and third-party administration's information-sharing systems."

Given all the turmoil and confusion, employers and associations are pelting the government with requests to delay the effective date. The IRS may announce its plan early next month and many are hopeful they will get relief. But no matter whether the new regulation goes into effect Jan. 1 or some later date, many 403(b) plan participants will ultimately have to make some decisions about their retirement plan.

What should 403(b) plan participants do when the time comes?

1. Pay attention

Participants should read closely the summary plan document, Skloff said. Participants should "pay close attention to the new 'approved vendor' list and look for a low-cost vendor," Dauenhauer said. "In all likelihood there will not be one," he said. "If there is not, sometimes the high-cost vendors have a [low-cost] product that they don't like to talk about, but will offer if asked."

For instance, he suggested that participants in the National Education Association's endorsed 403(b) plans should ask for the Valuebuilder Direct from Security Benefit or the similar low-cost product from AIG, two of the approved vendors.

For her part, Kyle noted that many plan sponsors are attempting to choose low-cost vendors, but that it's important for employee and employer to look at the "whole picture" and compare the breadth of services to the cost.

2. Switch only if necessary

Though many third-party administrators (TPAs) will suggest otherwise, 403(b) plan participants don't have to transfer their existing balances to a new provider. "There is no requirement to do this," said Dauenhauer. "Agents that work for TPAs that are really product sales organizations may attempt this ploy. If, however, a plan participant does decide to move their assets [for the right reasons], it has to be to a newly approved vendor."

3. Be wary of high-pressure sales tactics

Those TPAs that are just "product sales organizations in disguise," Dauenhauer said, may give compliance services for free to employers in exchange for access to the employees to sell their high-cost, high-commissioned products. "These TPA's should be avoided by (school) districts."

4. Make your voice heard

Plan participants should be active in helping the employer make the right decision, but should be careful that they don't end up promoting a union product that is expensive, Dauenhauer said.

5. Do your research

Source: MarketWatch

November 12, 2008

AIG Announcements

In the wake of the announcements by AIG of a restructuring of its loans from the U.S., I did quite a bit of research to actually see if there are any negatives to the changes. From independent analysts and company spokesmen, I could find none.

According to an interview of Mr. Liddy I saw on CNBC on Monday, the restructuring allows AIG the ability to repay the loans over 5 years instead of 2 years, and it gives it much more flexibility in the pursuit of liquidating some assets (including the VALIC arm). There is no material change to the company or its issues, thus the changes are not anything a consumer would necessarily ever see.

Additionally, I did receive an e-mail from AIG on Monday morning with two press releases. I am posting the first regarding the restructuring of the loans. The second press release pertained to the earnings of AIG and is not necessarily relevant.



Designed to Create Durable Capital Structure, Resolve Liquidity Issues From Credit Default Swaps and U.S. Securities Lending, Facilitate Orderly Asset Sales, and Enable Repayment of Loan Plus Interest

NEW YORK, November 10, 2008 - American International Group, Inc. (AIG) today announced agreements with the U.S. Treasury and the Federal Reserve to establish a durable capital structure for AIG, and facilities designed to resolve the liquidity issues AIG has experienced in its credit default swap portfolio and its U.S. securities lending program.

Edward M. Liddy, AIG Chairman and CEO, said these agreements are a dramatic step forward for AIG and all of its stakeholders: "Today's actions send a strong signal to our policyholders, business partners and counterparties that AIG is on the road to recovery. Our comprehensive plan addresses the liquidity issues that threatened AIG, and gives us the financial flexibility to complete our restructuring process successfully for the benefit of all of our constituencies."

Liddy continued, "The $85 billion emergency bridge loan was essential to prevent an AIG bankruptcy, which would have caused incalculable damage to AIG, our economy and the global financial system. Thanks to decisive action by Congress, Treasury and the Federal Reserve, there are now additional tools available to create a durable capital structure that will make possible an orderly disposition of certain of AIG's assets and a successful future for the company. Our goal is to repay taxpayers in full with interest, and emerge as a focused global insurer that will create meaningful value for taxpayers and other stakeholders."

The actions announced today include both ongoing financing facilities and one-time transactions designed to address AIG's liquidity issues. The ongoing financing facilities include:

  • Preferred Equity Investment: The U.S. Treasury will purchase, through TARP, $40 billion of newly issued AIG perpetual preferred shares and warrants to purchase a number of shares of common stock of AIG equal to 2% of the issued and outstanding shares as of the purchase date. All of the proceeds will be used to pay down a portion of the Federal Reserve Bank of New York (FRBNY) credit facility. The perpetual preferred shares will carry a 10% coupon with cumulative dividends.
  • Revised Credit Facility: The existing FRBNY credit facility will be revised to reflect, among other things, the following: (a) the total commitment following the issuance of the perpetual preferred shares will be $60 billion; (b) the interest rate will be reduced to LIBOR plus 3.0% per annum from the current rate of LIBOR plus 8.5% per annum; (c) the fee on undrawn commitments will be reduced to 0.75% from the current fee of 8.5%; and (d) the term of the loan will be extended from two to five years. The extension of the term of the loan will give AIG time to complete its planned asset sales in an orderly manner. Proceeds from these asset sales will be used to repay the credit facility. In connection with the amendment to the FRBNY credit facility, the equity interest that taxpayers will hold in AIG, coupled with the warrants described above, will total 79.9%.
The one-time transactions involve the creation of two financing entities capitalized with loans from AIG and the FRBNY. These entities will purchase assets related to AIG's U.S. securities lending program and Multi-Sector Collateralized Debt Obligations (CDOs) on which AIG has written credit default swap (CDS) contracts. The entities will collect cash flows from the assets and pay interest on the debt. FRBNY and AIG will share in any recoveries in the market prices of the assets.
  • Resolution of U.S. Securities Lending Program: AIG will transfer residential mortgage-backed securities (RMBS) from its securities lending collateral portfolio to a newly-created financing entity that will be capitalized with $1 billion in subordinated funding from AIG, and senior funding from the FRBNY up to $22.5 billion. After both amounts have been repaid in full by the financing entity, the parties will participate in any further returns on RMBS. As a result of this transaction, AIG's remaining exposure to losses from its U.S. securities lending program will be limited to declines in market value prior to closing and its $1 billion of funding.

    This financing entity, together with other AIG funds, will eliminate the need for the U.S. securities lending liquidity facility established by AIG and FRBNY in October, which had $19.9 billion outstanding as of November 5th. Upon repayment to all participants, AIG will terminate its U.S. securities lending program.
  • Reduction of Exposure to Multi-Sector Credit Default Swaps: AIG and FRBNY will create a second financing entity that will purchase up to approximately $70 billion of Multi-Sector CDO exposure on which AIG has written CDS contracts. Approximately 95% of the write-downs AIG Financial Products has taken to date in its CDS portfolio were related to Multi-Sector CDOs.

    In connection with this transaction, CDS contracts on purchased Multi-Sector CDOs will be terminated. AIG will provide up to $5 billion in subordinated funding and FRBNY will provide up to $30 billion in senior funding to the financing entity. As a result of this transaction, AIG's remaining exposure to losses on the Multi-Sector CDOs underlying the terminated CDS's will be limited to declines in market value prior to closing and its up to $5 billion funding to the financing entity. As with the securities lending program, FRBNY and AIG will share in any recoveries in the market prices of assets.

    AIG will continue to have exposure to CDS contracts on Multi-Sector CDOs that are not terminated. As AIG winds down its Financial Products division, it will also have exposure to other types of remaining CDS contracts, which have generated substantially smaller total collateral demands than the CDS contracts on Multi-Sector CDOs.
Taxpayers will benefit from the transactions with AIG as follows: fees, interest and repayment of the FRBNY loan in full, payment of a 10% coupon on the newly issued preferred shares, cash payments from the assets purchased by the two financing entities and potential asset appreciation in the underlying securities held by those entities. Taxpayers will own 77.9% of the equity of AIG and will hold warrants to purchase an additional 2% equity interest, and so will benefit from any future appreciation in AIG shares.

AIG will also continue to participate in the recent government program being utilized by many companies for the sale of commercial paper. The Commercial Paper Funding Facility (CPFF) has allowed AIG to reenter the commercial paper market. AIG is authorized to issue up to $20.9 billion to the CPFF and has currently issued approximately $15.3 billion as of November 5.

Mr. Liddy continued, "All of these steps, which would not have been possible in September, will benefit AIG, its stakeholders and the American taxpayers. This plan contributes to stabilizing the financial system and provides the opportunity for the public to realize gains on its AIG investment in the future. These measures will also put AIG on track to emerge as a nimble competitor with good long-term growth prospects."

"This innovative solution enhances AIG's liquidity position. At the same time, American taxpayers will be fairly compensated for funds lent to AIG, and they will capture the majority of any appreciation in the value of the securities involved in the program in the years ahead."

Liddy added, "Today's announcement would not have been possible without the vision and extraordinary hard work, dedication and cooperation of officials from the U.S. Treasury, the Federal Reserve Bank of New York, the Federal Reserve Board and the state insurance departments. On behalf of AIG, I would like to extend sincere thanks to all of those involved in crafting this mutually beneficial solution."

Source: AIG

October 28, 2008

A Response from My TRS Letter and Research on the Markets

I last posted to this blog on Sunday, October 19, and since that time I have been busy researching various items on the stock market, responding to e-mails from educators, and when possible... actually working.

A Response from My TRS Letter

On Monday, October 27, I received the following e-mail from State Senator Bill Heath, Chairman of the Senate Committee on Retirement:

Thank you for your correspondence concerning the proposal dealing with COLAs before the Board of Trustees of the Teachers Retirement System of Georgia (TRS). Time does not permit me to write an individualized response to each of you. I do understand this is an important issue to you. I hope this will help you understand what is taking place. This matter is not before the General Assembly and therefore I do not have a vote in this matter.

The Board of Trustees consists of ten trustees whose responsibilities include administration of the fund and to manage the fund so as to ensure the continued fiscal soundness for the current retirees as well as for the current and future members. To date the fund has been well managed and I commend the board for their actions. They have an increasingly challenging job as the make up of the members, their expectations and financial universe evolve. I trust the Board to continue to make wise decisions as they fulfill their responsibilities.

The Board consists of the ten trustees. The law requires a majority (six) to be active or retired members of TRS. One trustee is selected by the other nine and shall be a citizen of Georgia who is not a member of TRS but with experience in the investment of moneys. The other three trustees include the State Auditor, the director of the Office of Treasury and Fiscal Services and one trustee appointed by the Governor without restrictions.

At the September 24, 2008 meeting of the Board of Trustees, a proposal was made to consider changing the administrative rule that deals with the method by which the Board grants and funds the semi-annual cost-of-living adjustments (COLAs). The current policy, which was adopted in 1969, states that the Board will grant a 1.5% COLA on July 1st and January 1st provided there is an increase in the Consumer Price Index. The proposed amendment states that the Board will determine at its annual meeting each year the amount of COLA up to a maximum of 1.5% that may be granted for the following July 1st and January 1st.

It is possible that the Board will take up this proposal at its November 19, 2008 meeting if the Trustees feel they have had the necessary time to evaluate the proposal. If you would like to voice your concerns or ideas to the Board of Trustees before this is taken up you may do so by sending an email to

I thank you for you interest in this matter. As Chairman of the Senate Committee on Retirement, I spend a great deal of time and energy working to ensure that the pensions of our employees are safe. It is the intent of the legislature to provide an environment that will allow the experts in finance and pension management to maximize the benefits available to those who have served our citizens so faithfully.

Well, at least I have received one response. Nothing much said, but it is a response.

Research on the Markets

I find it interesting that in the "dire" predicament the stock market is in that few people actually do any research on past markets, trends, and outcomes. This market is quite a bit different than many previous problems we have had before due to the issues of credit and globalization.

I read an article about Anna Schwartz who co-authored, with Milton Friedman, "A Monetary History of the United States" (1963). It's the definitive account of how misguided monetary policy turned the stock-market crash of 1929 into the Great Depression. She is obviously a brilliant woman that has looked throughout history, but many believe that she may be missing the globalization of the market.

She says the issue is confidence and not liquidity (The Great Depression was caused by liquidity). This is true, but she does not feel the U.S. Treasury and Federal Reserve are handling the confidence issue. I think history will eventually show that the Treasury and Federal Reserve are working to resolve every single issue both before and after something becomes an issue.

When liquidity was a problem... they injected it. When money market confidence was an issue... they guaranteed it. When we needed worldwide coordination... they orchestrated it.

I think looking 2, 3, 5, 10 years out, we will look back and be amazed from where we have been. The markets are powerful machines that are like a cruise ship to turn... they do not turn on a dime.

Finally, anyone that started to believe the U.S. was now not the center of the financial universe simply needs to see where everyone looked and returned to for guarantees and leadership. We may not all agree on politics or policies, but it cannot be said that the U.S. Treasury and Federal Reserve have not stepped in to help Americans and foreign companies and nations alike.

The trip ahead will be bumpy, but the end should be good for those along for the ride. Just remember - your TRS pension is guaranteed by law, and your 403(b) account is not used on any single day. It is a retirement fund.

As always, let me know if you have any questions.

October 19, 2008

Is It Time to Buy?

Frequently investors wonder if now is the time to buy. Most investors want to make sure that they buy when the market is going up. Interestingly though, most great investors think about 2, 5, and 10 years down the line.

In Friday's The New York Times, Warren Buffett, arguably one of the greatest investors in the history of the stock market, wrote an Op-Ed piece titled "Buy American. I Am." Below is the article for you to enjoy.

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.


A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

Source: The New York Times

October 15, 2008

What Now? 403(b) and Pension Comments

Last week I received numerous e-mails about 403(b) accounts and pensions. "How safe is my 403(b)?"; "Will it just go away?"; "If I take it all out what happens?"; "Is the TRS pension guaranteed?"

403(b) Safety

A 403(b) is much like any other type of retirement account - 401(k), IRA, Roth, SEP-IRA - when it comes to investing. Within most 403(b) accounts you have a fixed annuity option, a cash/money market option, and then various mutual funds that you can own.

  • Fixed Annuity - This option allows you to put your money in a "fixed annuity" that generates a return somewhat along the lines of a CD. The exception here is that most fixed annuity investments only let you take 10-25% out of the investment at a time. This is usually not a good investment due to the constraints of taking the funds from the account - even when you are trying to get them out in retirement. While this does not lose money, it also generally only keeps up just above the rate of inflation.
  • Cash/Money Market - This option allows you to park uninvested cash in a place that earns a rate of return that is along normal money market rates. It will not have the return that the Fixed Annuity has, but you can withdraw, reinvest, or hold it without fearing that you cannot touch it (unlike a Fixed Annuity). This is a good place to hold cash for future investments or distributions.
  • Mutual Funds - This option is the one where you will buy shares of a "mutual fund" that owns usually 25-100 stocks. A mutual fund can make or lose money. It is an investment that can go up or down based on the underlying investments in the companies of the fund. Depending on the fund, you may invest in bonds, big, small, or even international companies. Some of the funds will correlate more with the Dow, S&P 500, or Nasdaq, etc. The custodian (AIG-VALIC, Fidelity, Lincoln National, etc.) is not to blame or get credit for the performance of the funds. The funds are run by fund managers that use your money to invest in companies.

    • For example - if you own the "Janus High Yield Fund," the fund is run by a manager from the Janus fund company that will use your money to invest in high yield bonds from various companies.
What I would like to stress here is that your 403(b) investments should depend on your age, risk tolerance, and goals. In coordination with your TRS pension, your 403(b) is a powerful tool when used correctly, and it can help you realize some of your dreams after you retire from education. There is a huge difference though between making sure you do not want to lose any money and making wise investments. Know your risk tolerance and expectations.

Also, rolling over your 403(b) to an IRA is fine (if you can), but taking all of your money from the 403(b) as a distribution creates a taxable event that can have huge tax implications. Do not take a distribution without first talking to an accountant or financial advisor. It could cost you 35-45% in taxes!

TRS Pension

There are many things to consider when you start thinking about your TRS pension benefits, but one of them is not if the fund will be there. As of June 2007, the pension fund was worth $53.3 billion, and it paid out about $2.2 billion with about $1.7 billion in contributions. Thus, only about $0.5 billion was taken from the fund in FY 2007.

The fund, as of June 2007, was "balanced" with about 62% in equities and 38% in cash and bonds. TRS has not yet released the June 2008 figures, but even with the declines in the stock market, the fund is viable and continues to be reevaluated every year by auditors and actuaries. In June 2009, the employee and employer rates of contribution will rise slightly due to past stock market performance. This increase is to insure the benefits that have been guaranteed to educators.

One important thing to remember is that the TRS benefit is guaranteed by Georgia law. It is not just a guideline but a law.

One additional item on your pension benefits - TRS is proposing a change to the Cost of Living Adjustment (COLA). It is absolutely imperative for all educators - current and retired - to write a letter to TRS asking them to NOT change the wording as the proposal requests. The wording that would change could and most likely would ultimately change your pension benefit. GAE and PAGE are both against this action, and I cannot imagine an educator that is for the change. My post, TRS Board of Trustees to Vote on Cost of Living Adjustment (COLA) Change, on the proposed change includes a my comments and a copy of the letter that I sent to Jeffrey Ezell, Executive Director of TRS, last week.

I hope your school year is going well, and please e-mail me if you have any questions.

October 12, 2008

Are We Hitting the Bottom?

There have been several questions e-mailed to me over the past couple of weeks, and one that continues to be asked is "Are we hitting the 'bottom'"? There is one thing that I have learned from reading history books, economic books and articles, and listening to people... the bottom is never "the bottom" until a few months later.

In October 2002, the market hit "the bottom", but no one knew it until 3-6 months later. The reason is pretty simple to understand but hard to see.

We have all heard the expression "he can't see the forest for the trees", and this is the perfect time for it. It is relevant here because all of us see only what is in front of us. We cannot tell if the market's last drop will be the last one or if we should head for the door.


If we look to history, it will tell us some about "bear" markets:
  • March 2000 to October 2002 (somewhat long) - Decline of 49%
  • August 1987 to December 1987 - Decline of 34%
  • January 1973 to October 1974 - Decline of 48%
  • November 1968 to May 1970 - Decline of 36%
Our current bear market from October 2007 to present leaves us down about 42% from the high. Thus while we may not be at the ultimate bottom, we are somewhere near it.


The next few months could be choppy in the markets, or there could be the "V" bottom that sometimes happens. The main thing to do is keep your emotions in check and have your allocations at what you feel comfortable with. If you sold some assets (hopefully not all) to cash because you are worried, look to keep it, and slowly put it back in. Going all in may be brilliant or it may not, so the diversification and long term aspect is something to remember when markets start to act crazy in the future.

Let me know if you have any questions.

October 9, 2008

TRS Board of Trustees to Vote on Cost of Living Adjustment (COLA) Change

UPDATE - October 14 - TRS has placed a memo on their website regarding the proposed change. Please read the memo.

On September 24, 2008, the Teachers Retirement System of Georgia (TRS) Board of Trustees held a scheduled meeting with members of various educator advocacy groups (GAE and PAGE) present. During the meeting, the Chief Financial Office in the Governor's Office, Tommy Hills, proposed a change in TRS board policy regarding the semiannual Cost Of Living Adjustment (COLA) for both current and future retirees.

The current policy has been in place since 1969, and it states that TRS “shall give” its members a 1.5% COLA in January and July of every year. The Governor's office wants to change that policy to “may give” a 1.5% COLA in January and July. Under the new plan, the Board of Trustees for TRS would vote each May on changing the COLA and possibly how much the COLA should change. From what Mr. Hills said, this would bring the TRS in line with other Georgia retirement boards.

After a discussion, a vote was taken by the seven members who were present. Three members supported the measure and three opposed it. Acting chairman Russell Hinton broke the tie by voting in favor. The proposed change must be “on the table” for 30 days before any action can be taken. The TRS does not meet in October and the next meeting will be November 19th when they will vote on the proposed change.

Based on this information, I personally wrote a letter to Mr. Jeffrey Ezell (Executive Director of TRS) asking him to have the Board of Trustees not change the current wording of the policy. Please see my letter below - click on it to enlarge it.

I would like to ask each of you to please do the same and write TRS to let them know that you are not in favor of any change to the policy. Hopefully together with GAE and PAGE, we can all make a difference so Georgia does not alter the semiannual COLA.

To e-mail all of the important individuals (Jeffrey Ezell - Executive Director of TRS, Governor Perdue, Lt. Governor Cagle, Speaker Richardson, Tommy Mills - CFO, Senator Heath, and Representative Maxwell) with just one click - please click here.

Direct Links to additional information on the proposed change:
  • From GAE - Georgia Association of Educators - You must be a member.
  • From PAGE - Professional Association of Georgia Educators
Sources: GAE, PAGE

October 8, 2008

Georgia TRS Contribution Rates to Rise in July 2009

In September, the Georgia TRS announced that the employee and employer contribution rates would rise starting July 1, 2009. The new rates will be:
  • Employee - 5.25% from the old rate of 5.00%
  • Employer - 9.74% from the old rate of 9.28%
While this may be news, the actual contribution change will be very, very small.

For example, under the current rates (5.00% and 9.28%), an educator making $50,000 a year would make contributions of $2,500 (annually), and the employer would contribute $4,640.

Under the new rates (5.25% and 9.74%), an educator making $50,000 a year would make contributions of $2,625 (annually) - only $125 more. This would have a net effect on your paycheck of about $7.30 per MONTH. The employer will have contributions of $4,870 - $230 more.

The reason for the change goes back to the performance of the stock market since 2001. TRS has an actuary determine the liabilities versus assets of the plan and calculate the difference that must be made up. The raise in contributions will help bring the plan back in line.

If you wish to know more, please read the letter from the TRS Executive Director Jeffrey L. Ezell by clicking here.

Next on the agenda... writing letters about the proposed TRS Cost of Living Adjustment (COLA) change...

October 7, 2008

403(b) Safety - Helping You Sleep at Night

I have been e-mailed several questions over the last few days, and one of the main points that everyone wants to know is "Is my 403(b) safe?"

While I have written about the safety of the 403(b) from a bankruptcy point of view (specifically AIG VALIC), I have not written anything specific about the actual account and its investments. What I have tried to preach in this blog is simply diversification.

This market is actually somewhat the exception and not the rule. During any "bear" market, there are usually areas in the market that are down, and there are some that are up. Diversification usually allows you to make sure to grab some of all of the areas to help you in an up and down market. The 3rd quarter was different because every area of the market was down... even bonds.

The main thing here is that diversification is your friend because most of you do not watch the market every single day, but as the saying goes, you need to be able to sleep at night. For example, a few years ago, I had a couple of clients call me that had several million dollars invested, but for them, safety was the $100,000 in cash in the money market that I held. This "let them sleep at night."

A 403(b) account is just like any other account that invests in the stock market. You CAN lose money, but the issue is not to make your account 100% safe, but to invest it for the long term. At the same time, if you need to feel better and have some in cash "to sleep at night," then by all means, go ahead. The market and economy do look rough in here, and a 20% cash position or so in the money market seems to be a decent place to hide. I would not use the fixed annuity since it locks up your money. Everyone is different though, so you need to do some research, and understand your options rather than just trying to jump on something hot.

If you go to cash in the entire account and wait for the market to get better, then you may miss a golden opportunity.

I will close this post with several quotes from the "Oracle of Omaha" Warren Buffett. Remember, he just bought stakes in Goldman Sachs and GE. He is not looking for today or tomorrow, but for years from now... He has billions though, so you want some safety (cash in the account) and do not go overboard.

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years."

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

"You only have to do a very few things right in your life so long as you don't do too many things wrong."

Good luck, and keep e-mailing me with questions.

October 5, 2008

VALIC to be Sold - AIG Press Release

On Friday, AIG Retirement seems to have released a press release from its President and CEO Bruce R. Abrams explaining that VALIC would be one of the properties sold by parent company AIG. This news does seem to fit in with the previous press release e-mailed to me directly by AIG and posted on the website on Friday.

This does not mean that anything will change with VALIC or the investment options you have in your 403(b) accounts, but it is worth noting that a change does seem in the cards. As I have previously stated, the change should most likely be nothing more than a "branding" change with AIG Retirement's name changing to that of the purchasing company. This is similar to a bank being purchased by another bank, and it is no reason to be alarmed.

You can find the press release that was e-mailed to me by a visitor to the website by clicking here.

As information becomes available, I will post more information about changes.

October 3, 2008

Out of the Blue - AIG Press Release?

Whenever I write anything on this blog, I do try to research it as thoroughly as possible. I do searches, watch interviews, etc. I have never had a company or someone just e-mail me something... until this morning from AIG.

The following is the press release sent to blogs like this one from AIG.

We apologize for sending this to you as a mass e-mail distribution, but we thought you would want to receive this as soon as it came out, since you and your readers have been following this story closely.


Ongoing Business Expected To Have Significant Earnings Power

NEW YORK, October 3, 2008 - American International Group, Inc. (AIG) today indicated its intent to refocus the company on its core property and casualty insurance businesses, generate sufficient liquidity to repay the outstanding balance of its loan from the Federal Reserve Bank of New York and address its capital structure. AIG had drawn $61 billion on the Fed credit facility as of September 30, 2008.

AIG plans to retain its U.S. property and casualty and foreign general insurance businesses, and to retain a continuing ownership interest in its foreign life insurance operations. AIG's worldwide property and casualty businesses generated $40 billion in revenues in 2007. The company is exploring divestiture opportunities for its remaining high-quality businesses and assets.

AIG is also actively at work on a number of alternatives for its Financial Products business
(includes VALIC) and its securities lending program.

AIG Chairman and Chief Executive Officer Edward M. Liddy, said, "We are refocusing on our traditional strengths in property and casualty underwriting. We have a number of remarkable businesses with leading market positions and significant competitive advantages that could not be recreated today."

"To realize our objective we will sell a number of extraordinary businesses that are already proving to be highly attractive to buyers," Liddy said. "We have already been contacted by numerous strong, stable parties, and we expect the buyers will recognize the value of these properties, be a good strategic fit and offer the greatest potential for growth, profitability, and continuing opportunities for employees. Our goal is to emerge from this process as a smaller but more nimble company that is solidly profitable and has good long-term growth prospects."

AIG's global coordinators for the divesture program are The Blackstone Group and J.P. Morgan.

We hope this information is useful.

All the best,

AIG Blog Relations

What Does This Mean for AIG-VALIC Retirement Accounts?

Well, at the moment nothing. It does seem to point to the fact that AIG may be selling its VALIC unit, but to who we do not know. I would agree with the statement that AIG does in fact have several very profitable lines of business. In fact, it was only due to the mortgage related securities that AIG was even effected at all.

AIG is working with two of the most respected names in industry to work out its issues with JP Morgan and The Blackstone Group. I would imagine that there have been and will continue to be numerous discussions about what business units may be divested (sold).

I will continue to look for information on AIG and especially VALIC, and as I receive it, I will post it and comment as necessary.

Today's big story... get the financial bill passed in the House.

October 2, 2008

How to Look at Your Entire Portfolio - Pension, 403(b), Real Estate, etc.

Whenever a new client comes to my office, I always ask them to bring any relevant account statements, tax returns, etc. We discuss each one and make a list of assets and debits. From there, we can start to really get a picture of the financial portfolio of the client.

I think that sometimes it is hard for many people, including educators, to understand that their pension has a current value beyond just the monthly payout in retirement. This is something that I am frequently asked about by educators, so I hope this post helps explain it.

Let me give you an example. Let's say that you are set to retire after 30 years, and the last two years you made $65,000 each year. In Georgia, your pension payout would be $3,250 ($39,000 annual) a month with a 1.5% cost of living adjustment every 6 months. Since this is essentially an annuity, let's estimate that you will live for 40 years. Factoring in 480 payments, the $3,250 to start,the 1.5% increase every six months, and the TRS return of 4.5%, you would need to purchase an annuity for $1,159,396 today. Yes, that is more than $1 million.

Now that we have the value of the annuity, let's look at the other assets - a little 403(b) of $175,000 plus a paid for house of $250,000. Without knowing it, you have a net worth of $1,584,396. See the chart below (click it to enlarge).
Now that we have valued your pension and totaled your assets, you can start to see why your 403(b) being invested is a smart move. The pension portion is considered "fixed income," thus it is very stable and predictable. The real estate portion (your house) does not generate income, but it is also a substantial asset that has a significant value.

Your 403(b) - which you should rollover to an IRA - is actually your least valuable asset, and it is one which it should be used to complement your pension. By leaving it invested in equities and slowly drawing it down, you allow the 403(b) to weather any moves in the market and to continue to gain in value for our future use.

You can read in many books about moving your assets to fixed income as you approach retirement, but this is generally meant for 401(k) participants. Since the vast majority of your assets (your pension) is already considered fixed income, you are looking at only 11% of your assets being invested in equities. This is well within a range of acceptability.

Keep investing, keep asking questions, and keep wanting to learn more about your financial future.

October 1, 2008

Is My 403(b) Safe? - Part 2

Since my previous "Is My 403(b) Safe?" post, there have been hundreds and hundreds of visits to the website and numerous e-mails asking questions - I hope I have helped. This is obviously an important topic, so I decided to add a second section to the blog.

It was not even two weeks ago that I wrote the previous blog discussing 403(b) accounts held at AIG VALIC. In that time, the financial world has continued to change, and on Monday, the Dow had its largest one day point drop in history with 777 points. What I want you to remember now is that this account is for your retirement and the rest of your life, not today.

There are several dozen vendors that have 403(b) accounts, and I have not heard of one going out of business. As for the case of AIG-VALIC, the company could change soon. I am not sure it will, but the VALIC accounts may be a one of those assets that is purchased by another company as AIG is sliced up and sold off. This does not mean that you are losing your account!! It just means that someone else will be the company you do business with. This is just like your bank being bought by another bank - i.e. Wachovia purchased by Citigroup. Your money and accounts do not disappear, but the name will change.

If you have left teaching or the county you started the 403(b) in, by all means please rollover that 403(b) to an IRA. In an IRA, the asset choices are better, the fees lower (annuities charge about 1.35% per year with NO additional services), and the services you can receive for your account make it all worthwhile. If you have not, look at the various options you have.

Going Forward

This is not the time to stop contributing to the account, but it is a good time to look at your investments (tomorrow I will discuss how to value your TRS and 403(b) together). Remember your pension from TRS is guaranteed and should be considered a fixed income security when looking at your overall portfolio. If you are young with 10+ years to retirement, the diversification, time, and your continued contributions will be enough to help you weather any momentary blip. If you are less than 10 years from retirement, then this is something you should really talk to someone about - your goals, feelings, level of risk, etc. I would not transfer money into the fixed annuity side - this just locks it up for the next 4+ years - this is not a good investment. The money market is better than that since you can move it back to the equity investments at any time.

The main thing here is that your account is safe as to the possibility of losing all of your assets based on a company going under. You are invested in mutual funds that are regulated by the SEC that own dozens of companies within each. This does not mean that you cannot lose money, but just as the market goes up sometimes it will go down. The long term benefits though have been tremendous.

A quick glance back at history shows that as we have reached the current "modern era" of investing, the recessions and bear markets have become shorter with bull markets that have become longer. No one knows when the bottom will be, but if you sell out now, you are locking in losses with no potential for gain. The only people that lost money on October 19, 1987 were the people that sold out. The market rebounded over the next 6 months, and the economy and markets had a tremendous bull market rising 650% over the next 21 years.

I cannot say that we will have the same return, but if you look at your pension as the foundation of your retirement and the 403(b) as the "extra" money, you can benefit from being invested. Just stay diversified (have I preached it enough?), get advice (from a professional - not your neighbor), be smart about your money (rollover old 403(b) and 401(k) accounts to an IRA), and you will be much better for it.

If you have any questions or just want to chat, always feel free to e-mail me.

September 30, 2008

What Happened in Congress and What Should They do? - Plus Explaining the "Bailout"

It is a sad day we live in when our elected representatives to Congress cannot vote "appropriately" to help our country. As educators, I would hope that this could be a good lesson for your students.

When you are in a leadership position, you sometimes need to put the organization in front of yourself. The problem that I see with Congress (or at least the House of Representatives) is the constant need to put their reelection efforts in front of the country's interest. Not advocating anyone here, but isn't one of McCain's slogans "Country First"? Shouldn't the entire House of Representatives think about this?

I watched most of the debate this morning on C-Span prior to the vote on the financial bill, and I could not have been more embarrassed. Most of the Democrats came to the podium for their two minutes of face time to complain about the Bush administration, and the Republicans followed suit by complaining about the bill the Democrats had brought forward. Luckily, there were a few from both sides of the aisle that actually asked everyone to vote for the bill. They explained that it was not perfect, but the bill was much better than doing nothing.

Unfortunately, our Speaker of the House, Nancy Pelosi, decided this was a great time to rant against the Bush administration and the Republicans...not the right time if you ask me. The Republicans are not without blame though, as 2/3 of them voted no. Final Tally - 205 to 228. Is this really the time to take a stand on principles?

I do understand wanting to defend your constituents and make sure that you are doing the right thing, but did the 777 point fall on the Dow maybe wake you up?

My Plan

My quick and easy plan is this...

  1. Get all the Representatives and Senators in one room - no media, no cameras, no recordings
  2. Explain it all - get to the basics - forget the extras - hammer out the details
  3. Write the bill - it could not be more than 10-15 pages
  4. Take it to the floor of the House, forget the debate, call a vote
  6. Take it immediately to the Senate
  7. No debate, call a vote
  9. Send it to the President and have it signed immediately

Man, look at that... From a bill to an act in just a few short steps. One to two days to get the whole thing done. I can just imagine the "I'm Just a Bill" song playing in the background.

If every single Representative and Senator votes "yea" for the bill, how are they really going to be chastised at home at reelection? "I put the good of the country first. There were 534 other members that also voted yes from all states and both parties. It may not be popular, but it was the right thing for the good of the country."

How is this so easy that they cannot understand it?

How the Bill Works

The absolute basic principle of the plan is simple. Here is a quick example using eBay -

I have $100 to spend. I go on-line to eBay searching for a baseball card. There are ten of the cards I want, and I buy the lowest priced one for $100 (the guy I pay can now go buy more cards). I get the card, and I contact 5 card dealers.

Option 1 - The highest price I get is $85. I just decide to hold it. Five years later, the guy is going in the Hall of Fame, and I sell it for $130. Now I made $30...

Option 2 - The highest price I get is $85. I need the cash, so I sell it. I lost $15, but I did get the $85.

This whole thing about how we are just adding $700 billion to the debt is ridiculous. Do you think we are going to buy $700 billion in mortgages that are backed by real property and not recover anything? The housing market will recover, the percentage of loans that default will remain low, and assets will appreciate.

I do not like the thought of "big government", but if it is for the good of the nation and economy, I can support it. I simply hold on to the historic principles of our founding fathers and believe that putting country before self is necessary.

Our elected officials promised us leadership and accountability in Congress - where is it?

September 27, 2008

Alternative Energy - Part 4 of 4 - A Look At Four Different Options

With the rise in the price of conventional fuels (namely oil and natural gas) earlier this year, there was a shift to look at different energy alternatives. Many people have pointed to the need for green energy, while others have talked about the U.S. dependency on foreign countries for oil. Whatever the reasons may be, alternative energy sources are going to become a growing part of our lives.

Today's post will be the fourth in a series of four posts discussing different alternative energy sources - nuclear, solar, wind, and ethanol. While none of these sources to be discussed are new, the importance of each over the next 10+ years should grow.

We have already discussed nuclear power, solar energy, and wind power, so this week will be ethanol.


This is the one alternative fuel that has drawn the most interest during this series. I have received more e-mails and calls about discussing ethanol than anything else, so I have tried to address many of the questions and concerns that were asked.

First, ethanol is probably the alternative fuel that touches the most Americans since it is a common additive in gasoline. The blended fuel (gasoline and ethanol) has similar combustion characteristics to pure gasoline, so as a fuel it is really nothing more than something to reduce the use of oil.


Since the 1850's, ethanol has been used as a fuel. In the beginning, it was used primarily for lamps, but that changed when taxes on it increased (Civil War liquor tax). Suddenly, kerosene and methanol were substituted.

In 1896, Henry Ford built his first automobile, the quadricycle, to run on pure ethanol. In 1906, the liquor tax was repealed, and Ford declared ethanol the fuel of the future. Ford designed his Model T to run on a mixture of gasoline and ethanol.

From there it seemed that ethanol would continue to be used, but the need for harvest foods due to World War I, the Great Depression, and World War II led to a decline in ethanol. Finally its use decreased even more with the realization that cheap oil made gasoline less expensive than ethanol.

It was not until the 1970's that ethanol started to be revitalized again after oil prices shot up but then faded away again. Over the last few years, as the green movement started to grow, ethanol once again became more important. With the rise in oil this year, it started drawing even more interest.


There are several ways to make ethanol from crops. One process uses yeast to ferment the sugars and starch in crops like corn, barley, wheat, rice, sorghum, sunflower, potatoes, sugar cane and sugar beets.

Since ethanol is created by fermenting sugar, sugar crops are the easiest ingredients to convert into ethanol. Brazil, the world's largest producer of ethanol, makes most of its ethanol from sugar cane. Many cars in Brazil are engineered to operate entirely on ethanol made from sugar cane.

Comparisons to Gasoline

Unlike gasoline, ethanol is biodegradable. It quickly breaks down into harmless substances if spilled. When small amounts of ethanol are added to gasoline, usually less than 10 percent, there are many advantages. Ethanol reduces the emissions of carbon monoxide and other toxic pollution. It keeps engines running smoothly without the need for lead or other chemical additives. Because ethanol is made from crops that absorb carbon dioxide and give off oxygen, it helps reduce the total volume of greenhouse gas emissions.

Ethanol does not get even close to being as efficient as gasoline. A study focused on the new flex fuel 2007 Chevy Tahoe SUV. The Tahoe can either run on gasoline or e85 ethanol, which is a blend of 85% ethanol and 15% gasoline. The report found that the Tahoe averaged 14 mpg on gasoline and only 10 mpg on ethanol - 29% less. This decrease in mpg is expected because ethanol contains less energy than gasoline. This means that using e85 fuel will cause drivers to refuel more often than gasoline.

Beyond just the mpg issue, there is the fact that you must find a gas station that will sell e85 (only 1,500 nationwide). Plus each time you fill up, you pay the same gas taxes. There is also a wide range of prices for e85. In some states, there is more than a 30% difference between e85 and gasoline, but in other states, the difference is only 2%.


Overall, the basics of ethanol sound like a viable alternative, but unless it becomes easier to produce, more readily available, the auto manufacturers accept it, and ultimately cheaper, it will not be a long term solution.

The production issues are being researched. There is currently a study analyzing "cellulosic ethanol" that can be produced from trees, grasses, and crop waste. The grass (switchgrass) is the most interesting item. Since it seeds itself, is perennial, and can grow on marginal land, it looks to be a very, very cost efficient alternative to corn, wheat, etc. If the process can become efficient, this could drive down ethanol prices and drive up production.

The distribution and auto manufacturing issues will be the last to fall. Gas stations must see a demand, and without a number of flex fuel vehicles, there will not be much demand. There are vehicles (approximately 2 million) that are flex fuel vehicles on the road, but how many of their drivers take advantage? How many owners live in states where the difference in price does not make it economically beneficial to use ethanol?

In a search around my house (Norcross), I found 8 gas stations within 20 miles that sold e85 gas. The price difference between e85 and regular gasoline was only about 13%. This is a nice, environmental option, but it is not economically feasible for most people especially when prices are so high.

In the end, if the issues raised can be solved, it could definitely be a good solution. Will they be solved and when?

Sources: Consumer Reports, GM, Oklahoma Cooperative Extension Service, Oklahoma Department of Agriculture, Food and Forestry, Oklahoma State Department of Education,

September 25, 2008

How Main Street Will Profit - Another Take on the "Bailout"

Since we are all somewhat stuck hearing about the big "bailout", I thought it was relevant to post this blog because it affects all of us - Main Street to Wall Street.

On Wednesday in my normal blog, The Rollins Financial Blog, my firm wanted our post to accurately describe the "bailout" that has been proposed by Treasury Secretary Paulson and backed by Fed Chairman Bernanke. We are obviously not the only ones trying to explain the "bailout" to everyone.

Also on Wednesday, William (Bill) H. Gross the chief investment officer and founder of the investment management firm PIMCO went to the airwaves and print media to explain his view. In case you have not heard of him before, Gross manages the $133 billion Pimco Total Return Fund and helps oversee the more than $812 billion in assets at Pimco. Below is his opinion piece from Wednesday's Washington Post:

How Main Street Will Profit

By William H. Gross
Wednesday, September 24, 2008; A23

Capitalism is a delicate balance between production and finance. Today, our seemingly guaranteed living standard is threatened, much like it has been in previous recessions or, some would say, the Depression. Finance has run amok because of oversecuritization, poor regulation and the excessively exuberant spirits of investors; the delicate balance has once again been disrupted; production, and with it jobs and our national standard of living, is declining.

If this were a textbook recession, policy prescriptions would recommend two aspirin and bed rest -- a healthy dose of interest rate cuts and a fiscal package that mildly expanded the deficit. That, of course, has been the attempted remedy over the past 12 months. But recent events have made it apparent that this downturn differs from recessions past. Today's housing bubble, unlike that of the stock market's before it, was financed with excessive and poorly regulated mortgage debt, and as housing prices began to tumble from the peak, the delinquencies and foreclosures have led to a downward spiral of debt liquidation that in turn led to even lower prices and more foreclosures.

And so, instead of mild medication and rest, it became apparent that quadruple bypass surgery is necessary. The extreme measures are extended government guarantees and the formation of an RTC-like holding company housed within the Treasury. Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent. Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that.

In effect, the Treasury will have the fate of the American taxpayer in its hands. The Resolution Trust Corp., created in the late 1980s to deal with the savings and loan crisis, dealt with previously purchased real estate, which was flushed into government hands with a "best efforts" future liquidation. Today, the purchase of junk mortgages, securitized credit card receivables and even student loans will be bought at prices significantly below "par" or cost, and prospectively at levels allowing for capital gains. This is a Wall Street-friendly package only to the extent that it frees up funds for future loans and economic growth. Politicians afraid of parallels to legislation that enabled the Iraq war are raising concerns about a rush to judgment, but the need for speed is clear. In this case, there really are weapons of mass destruction -- financial derivatives -- that threaten to destroy our system from within. Move quickly, Washington, with appropriate safeguards.

The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic. Democratic Party earmarks mandating forbearance on home mortgage foreclosures will be critical as well. If this program is successful, however, it is obvious that the free market and Wild West capitalism of recent decades will be forever changed. Future economic textbooks are likely to teach that while capitalism is the most dynamic and productive system ever conceived, it is most efficient over the long term when there is another delicate balance -- between private incentive and government oversight.

September 24, 2008

What Should I Do If I Leave Education?

I had a visitor to the site ask me about leaving education. Specifically, they asked me about their 403(b) and their pension.

As an advisor, I look at each one separately when it comes to what to do after you leave education. During your time in education though, I would view them together with the pension as a fixed income investment and the 403(b) as an equity investment.


As I stated in my last post, many times the annuity based 403(b) vehicles sold by AIG-VALIC, Jefferson National, Lincoln National, etc. have additional "hidden" fees called mortality fees which are typically about 1% of the account per year. This fee is charged in addition to mutual fund fees, the quarterly statement fee, plus anything else they tack on. They would like for you to leave the assets where they are so they can continue to receive these fees for as long as you hold the account. The interesting thing is the fees do not give you any additional benefits.

The short answer is roll the 403(b) over into an IRA.

A quick example - My firm would also charge you 1% to manage those assets, but the difference is, we would continually review the holdings, make changes as the market and economy dictate, and discuss the various options with you. That's not all though - we would also help you with any other financial issues you have. Refinancing, purchasing a house, pension options, student loans, estate planning, etc., etc. All for the same 1% fee. No hidden fees, no hidden service charges, no compensation paid to us by anyone but our clients.

The annuity firms would charge you their fees (described above), and if you wanted to make an appointment, you could go sit down and talk to a representative about your account. They would make some recommendations, then you would most likely not hear from them again.

We have a service business for our clients, and they have a holding business for your assets.


If you are truly sure you will never go back to education, then the issue is are you vested? In Georgia, if you were an educator for 10 years or more, then please do not let anyone talk you into rolling over your pension! It may not seem like much, but you will receive 20% of your salary forever once you reach age 60 if you taught just 10 years - 30% for 15 years - 40% for 20 years - 50% for 25 years - 60% for 30+ years.

A guaranteed income stream is a good deal, and the additional item is if you do roll it over, you only receive the funds that you contributed - not your funds plus the state funds they contributed for you.

If you are not vested (less than 10 years), then please rollover the balance into an IRA. Only do this though if you are sure you are not going back to education. If you go back, you will need to repurchase those "lost years" later to receive the pension for it.

Just last week I met with a potential client that asked me what to do. They could either take a pension as a lump sum ($100,000), or they could have a salary for life of $8,500. Since I am bound to look at the best interest of the client, I literally had to convince them that the annual pension was the best idea. They finally agreed, but it was only after I found out they wanted to take the lump sum to pay a few small debts off first. Pay a few small debts, lose a lifetime pension... not a good idea.

If you have a specific question(s), always feel free to e-mail me. I am happy to help you, and it may just save you from making a huge mistake.

September 19, 2008

403(b) Investing - Choice of Firms and Investments

There was a huge response to the blog from yesterday regarding AIG VALIC and the safety of your account. From everything I have continued to read, the accounts do in fact seem to be safe with no issues. I would personally recommend not using VALIC due to fees, investment choices, etc.

In regards to the ability to choose a firm to use for your 403(b), most counties have more than one firm to choose from. In Gwinnett, you actually have the ability to choose between four firms - AIG VALIC, Lincoln National, Jefferson National, and Fidelity. It is probably obvious which one I would recommend - Fidelity.

Fees, investment choices, ability to roll it over later without fees, customer service, ease of use, etc. Fidelity pretty much is on the ball here.


I have received several questions over the last few days about investments and continuing to make contributions when the market is rough. First, on the investments, you should always try to make sure that you are well diversified. This does not mean choosing every fund, but looking at all of the funds, and selecting the best funds from a variety of categories - large cap, mid cap, small cap, international, etc. The amount you allocate to each also matters.

Personally, since you have a secure pension, I believe in allocating little to nothing in bonds in a 403(b). This is more aggressive, but considering, the bulk of your assets are already in fixed income (your pension), you are not making anywhere near the "bets" that business people make with their 401(k)'s. Everyone is different though, and the closer you get to retirement, the more you might want to see about having more bonds. The key is to be diversified and really understand what it is you are invested in.


I know that when the market gets rough it is tough to think that you may be losing money on day one when you contribute, but the main point here is that no one can predict the bottom of the market. When the market is low, you are buying more shares of the funds you own with every paycheck. As the market turns and trends higher, your next paycheck will actually buy less shares. This is called "dollar cost averaging".

By investing this way, study after study has shown this to be the most effective and efficient way to maximize your return. Since you are contributing every month, sometimes you will buy when it is high and sometimes you will buy when it is low. Just continue making the contributions, and you will win over the long term. Just remember to diversify...

Let me know if you have any questions - just e-mail me.

September 18, 2008

Is My Retirement Safe? Is My 403(b) Safe?

Update 2 - March 3, 2009 - To read the latest happenings on AIG/VALIC please click here.

Update 1 - To read Part 2 of this post, discussing the recent market activities since this original post, please click here.

September 18, 2008

As a husband to an educator and friend to many educators, I have been asked continually over the past few days about the safety of their retirement. Below I will break apart each part of an educator's retirement so there is little confusion. First, your TRS pension, and then the 403(b) account - VALIC specifically.

Pension - Teachers Retirement System of Georgia (TRS)

The cornerstone of any educator's retirement is their pension from TRS. There is a clear basic formula as to what your benefit will be, and it does not change unless by law. The current formula is 2% for each year of service (30 is max) of the average of your highest two consecutive years' salaries. Thus, if I make $55,000 my 29th year and $60,000 my 30th year, I should receive a benefit pretty close to the following:

$55,000 + $60,000 = $115,000 / 2 = $57,500 average of 2 highest consecutive years

30 years X 2% per year = 60% benefit

60% X $57,500 = $34,500 per year

Additionally, you do receive a Cost Of Living Adjustment (COLA) of 1.5% every 6 months.

As the TRS website says:
TRS administers the fund from which teachers in the state’s public schools, many employees of the University System of Georgia, and certain other designated employees in educational-related work environments receive retirement benefits. TRS offers a defined benefit plan, guaranteeing a monthly benefit – based on a member’s final average salary and service – which is payable for the life of the member, and when applicable, transferable to a member’s spouse or beneficiary(ies).

A defined benefit retirement plan (401A) relieves its members of the burden of making investment decisions and assuming the risk associated with those decisions. TRS assumes this risk for its members. Therefore, the retirement benefit offered by TRS is secure. Unlike an IRA or 401K account, a TRS retirement benefit is not impacted by stock market performance. The State of Georgia guarantees TRS members will receive retirement income for life. Also, depending on the plan of retirement chosen, a TRS retirement benefit can be passed to a beneficiary at a member’s death, and the beneficiary continues to receive this income until his or her death.

TRS manages the retirement accounts of approximately 272,000 non-retired (active) members, and pays a monthly benefit to approximately 75,000 retired members and survivors. TRS retiree payroll is in excess of 2.2 billion dollars per year.

TRS benefits are administered and paid in accordance with laws enacted by the Georgia Legislature.

403(b) Accounts

Since the most pressing issue is the safety of the assets in 403(b) accounts, I will discuss them today. Tomorrow, I will discuss the investing, but today it is important to understand how safe your account is.

The parent company of VALIC is AIG, and they have been in the news with the threat of bankruptcy. Tuesday night, AIG was given a loan by the Federal Reserve for $85 billion, but if you have a VALIC 403(b), your assets are NOT going to be effected by AIG per the information they have provided..

According to a press release from AIG Retirement,

  • VALIC underwrites, issues and guarantees our annuity products. VALIC is financial strong with $3.4 billion in adjusted capital and surplus as of 6/30/08. Adjusted capital and surplus means that VALIC is able to meet its obligations (such as the fixed account options and fixed annuity contracts). VALIC's capital and surplus is completely separate from our ultimate parent, AIG.
  • FIXED ANNUITY: VALIC client assets in the guaranteed fixed investment options are protected by Texas state insurance regulations. The fixed options provide fixed rate earnings and a guarantee of principal. This guarantee is backed by the claims-paying ability of VALIC, which supports only the obligations of VALIC, not any obligations of AIG.
  • VARIABLE ASSETS: Client assets in the mutual funds or variable annuity account options are invested in mutual funds regulated by the SEC. A mutual fund's assets are owned by its shareholders and managed by a professional portfolio manager; thus, such funds are not affected by business actions involving AIG or AIG Retirement.

    • Further, since VALIC is domiciled in the State of Texas, Texas state law requires insurance company separate accounts to be held apart from the rest of the company assets. Therefore, the variable annuity separate account assets in these mutual funds are held for the exclusive benefit of the clients and their beneficiaries. This insulation provides safety for each client, and ensures that the account is not subject to claims from any person or entity other than a contract owner, plan participant or beneficiary.
    • The mutual fund and variable account options change in value each business day. Retirement investments are long-term investments, and fluctuating values means that when redeemed, the investments can be worth more or less than its original cost. This also means that client investment returns depend on the performance of the individual investments the client selected and not on the performance of AIG, or any of the AIG Retirement companies.

I hope this helps you feel a bit better about your retirement, and tomorrow I will discuss the investing side of the 403(b) accounts.

Sources: Teachers Retirement System of Georgia, AIG Retirement/VALIC

September 17, 2008

Alternative Energy - Part 3 of 4 - A Look At Four Different Options

With the rise in the price of conventional fuels (namely oil and natural gas) earlier this year, there was a shift to look at different energy alternatives. Many people have pointed to the need for green energy, while others have talked about the U.S. dependency on foreign countries for oil. Whatever the reasons may be, alternative energy sources are going to become a growing part of our lives.

Today's post will be the third in a series of four posts discussing four different alternative energy sources - nuclear, solar, wind, and ethanol. While none of these sources to be discussed are new, the importance of each over the next 10+ years should grow.

We have already discussed nuclear and solar energy, so this week will be wind power.

Wind Power

Since the 1870's, the U.S. has been using wind power in some capacity. During that period, there were two companies producing windmills. They were used mostly in rural areas that allowed a farmer or rancher to pump groundwater to the surface for use. The windmill has been credited with helping to open the plains and west up for farmers and ranchers. In fact, one of those companies, Aermotor, is still making the exact same windmills today. However, on their website they have a disclaimer - "No. Water and electricity don't mix," so sorry no energy production.

Fast forward to today, and we have just started to realize exactly how abundant wind is as a resource. In the U.S., wind power accounts for 48 billion kWh of electricity a year which will serve approximately 4.5 million households. While that sounds very good, that is only about 1% of the current electricity demand in the U.S.

If we look around the globe, we begin to see how far behind we are in the utilization of wind power. In Denmark, over 22% of the nation's electricity comes from wind power. Germany and Spain come in second with both countries harnessing about 16% of their electricity from the wind. With only 1%, the U.S. has far to go to catch up.

Unless you have been sleeping the past two months, you have probably seen T. Boone Pickens in one of his many commercials talking about the "Pickens Plan". As a man that has literally amassed a huge fortune being an oil man, it is interesting seeing him switch to other forms of energy. His first comment on a current commercial is "Drill, Drill, Drill...(for oil)," and then he goes on to discuss wind and natural gas. His point, much like Joe's, is that we need to increase domestic oil production while moving toward alternatives. Of the alternatives, his favorite idea is wind.

His "Pickens Plan" proposes building wind facilities in the corridor that stretches from the Texas panhandle to North Dakota which is estimated to be able to produce at least 20% of the nation's electricity. Pickens has already started this move toward wind with Pickens' Mesa Power building the largest wind farm in the world in the Texas panhandle.

The huge windmills are actually now "wind turbines" and stand up to 410 feet tall with blades that stretch 148 feet in length. They are usually white, and if you have ever been near one, you hear the low "swoosh" of the blades as they turn.

The costs to move to wind power are not cheap. About 70% of the cost to harness wind power is the turbine. Over 75% of the market for turbines is effectively controlled by four companies (Vestas Wind Systems of Denmark, Gamesa of Spain, GE, and Siemens Power Generation of Denmark). Three of the four are from Europe which makes sense considering the capacity to which they currently use it.

The way utilities in Denmark, Spain, and Germany pay for the wind turbines is through government subsidy programs and wind power that is sold at above-market prices on the grid. The hope is the U.S. will be similar. If Congress will continue the wind generation subsidies, then the utilities will definitely see the advantages of moving toward the abundant resource.

Interestingly, due to the current utilization in European countries, the U.S. should be able to learn from those countries and make any transition easier. Also, since many countries do not have the space or wind that the U.S. has, the U.S. looks poised to be the next growth venue for wind power (30% per year over the past 6 years). There should be a pick up in manufacturing plants and electricity plants for wind power. This could spark renewed interest in rural America with rural cities suddenly growing.

It is not all positive for wind energy though. The sites must be suitable with a minimum and maximum amount of wind plus there are the environmental concerns (birds mainly), neighbors to worry about, and construction and transmission cost to get to the grid.

Also, wind does not exactly follow a supply/demand model. When the wind blows, the turbine turns. When it does not blow, the turbine doesn't move. Pretty easy to understand, but the wind does not pay attention to the energy demand as to whether or not it blows. Thus, someone will need to come up with ways to "store" the energy when the wind blows and the excess power is not needed.

I know T. Boone Pickens will be working on these issues...

Sources: The Pickens Plan, Janus