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Jim Mahaney

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    • I enjoy Adam's articles, but I respectfully disagree with Adam's position on Buffered ETFs, as they may serve a valuable purpose for certain investors, particularly those approaching or in retirement. ·       Risk management becomes paramount when preserving accumulated wealth for retirement distributions. Buffered ETFs provide sophisticated options-based protection strategies without requiring investors to understand or implement complex options trading themselves. ·       The cost structure has become increasingly competitive. For instance, BlackRock's iShares Large Cap Max Buffer Sep ETF charges just 50 basis points, making it an economically viable protection strategy. ·       While financial advisors often justify their 1% to 1.5% fees by citing their role in preventing emotional selling during market downturns, paying 50 basis points for a structured product that mathematically eliminates downside risk represents a more cost-effective and reliable approach to risk management IMO. Rather than paying premium fees for behavioral coaching during bear markets, investors can secure guaranteed protection through Buffered ETFs at a fraction of the cost. ·       Implementation can be straightforward by investing at each fund's inception. BlackRock's quarterly Buffered ETF launches allow for systematic entry points, such as the first trading day of each quarter. ·       The psychological aspect cannot be overlooked. Many investors in their sixties have experienced predominantly bullish markets since 2009, leading to substantial portfolio growth. This generation has developed an understandable preference for maintaining exposure to potential market upside. ·       However, current market valuations warrant caution. The Shiller Cyclically Adjusted Price Earnings Ratio (CAPE) stands at 36.32, more than double its historical average of 16.80 and approaching the December 1999 peak of 44.19. ·       Historical precedent raises concerns: The S&P 500 declined approximately 45% during the dot-com crash, even accounting for dividends. Future market corrections could potentially be more severe with longer recovery periods. ·       The psychological impact of significant portfolio losses on recent retirees cannot be understated. This is particularly relevant for those who derive personal satisfaction from managing their family's investments and would face both financial and emotional consequences from major market declines. ·       BlackRock's September 2024 ETF offers meaningful protection: complete downside buffer (minus the 50 bps fee) while still providing a 7.41% net upside potential. To me, this represents a compelling risk-adjusted proposition. ·       While investors may miss some upside during strong bull markets, the psychological benefit of seeing positive returns in moderately rising markets while maintaining protection against significant drawdowns is valuable. ·       Given the numerous uncertainties facing today's markets - potential AI bubbles, federal deficit concerns, the possibility of bond vigilante resurgence, and climate change impacts - the "known" cost of downside protection through Buffered ETFs appears reasonable. For those who have already achieved their retirement savings goals, protecting those gains through partial allocation to Buffered ETFs may represent prudent risk management in our 401(k) world. 

      Post: Don’t Place That Call

      Link to comment from November 3, 2024

    • Readers may find it of interest that I created the idea of an Income Bridge using 401(k) or IRA savings to generate a higher Social Security benefit. Back in the early 2000s, I was asked by my employer at the time to help come up with a product to help workers retire from 401(k) plans with more security as defined benefit plans faded away. At the time, the financial community's conventional wisdom was to always defer taking IRA distributions until later in retirement and to typically take SS as soon as one retired. However, I thought that this was not the best strategy for the average retiree.......Notably, my retired father lost a lot of my mother's IRA wealth in the early 2000s bear market and it was eating him alive. SS not only has inflation protection that couldn't be duplicated in the private sector but had a survivor benefit few talked about (Jonathan did). At the time, no one talked about how spouses should strategize together to create the optimal SS claiming strategy. In addition, changes set forth in 1994 for SS were about to really kick in. Chiefly, Delayed Retirement Credits were to bump up to 8% per year whereas before they were in the 5% range. I also did a deep dive into the SS rules and discovered that due to a change made under President Clinton to eliminate the Earnings Test after FRA, an individual could file for benefits (at or after FRA) triggering the eligibility of a spouse to file for a spousal benefit and the worker could immediately suspend his benefit. I named it "File and Suspend". A young actuarial trainee came to work under me and he was able to design an Excel modeling tool to prove the concepts. He added greatly to the ideas...We put together an annuity product that could be designed to create a customized cashflow to bridge from retirement until delayed SS kicked in. It allowed for the spouse's worker and/or spousal benefit to be integrated into the strategy. We wrote a paper and it was published by the Pension Research Council at Wharton. Jonathan wrote about the launch in 2006 when he was at the WSJ. Needless to say, the product failed and I probably made it too complicated as I brought in the significant tax savings that many households would find if they took the income bridge approach. That said, the research paper made the rounds and John Sloven at Stanford and Alicia Munnell at Boston College's Center for Retirement Research, William Reichenstein at Baylor (and others) took the concept and wrote about it and advanced the research further. "File and Suspend" was killed under the Obama Administration as it was deemed a loophole. That said, the concept did help more retirees consider the tremendous value of delaying SS to provide for a surviving spouse. I recently retired from that employer and am working in a start-up to provide employers with a 401(k) rollover platform that will allow individuals to see the value of "bridging" to delayed SS if they choose along with using low-cost index funds to invest and generate income as needed. We also hope to provide a commission-free immediate annuity or QLAC for the few who wish to generate more guaranteed lifetime income. Right now, that product doesn't exist in the insurance industry but I feel strongly that it is needed...I don't feel employers (plan sponsors) are willing to change their 401(k) plans to have the "income bridge" in their plans, but perhaps they will allow it outside their plans as a low-cost IRA rollover option which is part of a grander retirement income plan. After all these years, I still believe SS should be the core foundation of many retirees' retirement income plans, especially with our low interest rate environment, the ongoing potential for future inflation, and the increased longevity of affluent retirees.

      Post: Building a Bridge

      Link to comment from February 19, 2022

    • If you're drawing down the IRA prior to delayed SS claiming, there are fewer dollars required to be withdrawn after age 72 and thus you can receive the benefit of not triggering the taxation of SS benefits.

      Post: Making Your Claim

      Link to comment from February 18, 2022

    • Yes, you pay taxes on the IRA earlier, but you avoid having the IRA grow larger which you will owe taxes on and - for many - the IRA dollars withdrawn force the taxation of Social Security benefits. Yes, it's possible the IRA taxes are higher for withdrawals made prior to delayed SS claiming when you look at those IRA withdrawals alone, but one should look at the overall lifetime income taxes. Page 10 on this link if you want to do a deeper dive. Innovative Strategies To Help Maximize Social Security Benefits | Prudential Financial

      Post: Making Your Claim

      Link to comment from February 18, 2022

    • Actually, spousal benefits are "up to" one-half of the other spouse's FRA amount. The spouse actually has her/his own worker benefit if she/he worked for the minimum amount of time and then a spousal benefit on top of it for a TOTAL OF up to one-half of the higher earning spouse's benefit. Example: John has $2000 monthly benefit at his FRA. Suzie, his wife, has a $600 worker benefit. In this case, her spousal benefit is $400 if she starts at her FRA. This can be an important distinction since these benefits can sometimes start at different times for Suzie. She might claim the $600 worker benefit at a reduced amount at age 62 and then claim a spousal benefit at her FRA when John files and triggers Suzie's eligibility for the spousal benefit. Two parts for Suzie - her own worker benefit (which was reduced for claiming early) and a spousal benefit (which was not reduced).

      Post: Making Your Claim

      Link to comment from February 18, 2022

    • Great article....I've done a lot of research and writing about Social Security over the last 20 years and will share a couple of thoughts.....While a breakeven point is important to consider, SS is really insurance against outliving one's income...and insurance against rising inflation as well..Most breakeven discussions I have had with individuals fail to consider the value of COLAs...Speaking of which, the 5.9% increase (and other increases) applies when one is delaying SS and this will have a big impact down the road due to the magic of compounding interest...When you consider a surviving spouse may inherit that benefit, the value increases immensely. I also believe many of the spouses who manage the family finances fail to consider the value of the survivor benefit in that the widow/widower doesn't have to "manage the money"...Just get a check each month and have it increase annually via COLAs. My guess would be that few spouses of readers here also read the articles... In a low interest rate environment, the value of SS increases. In terms of taxes, very few individuals truly understand the tax savings that can occur by delaying SS...This is because Social Security goes into the Combined Income formula at a 50% rate...So, if you "trade" IRA income for SS income after age 70, you get a double benefit of no IRA taxes and potentially lower SS taxes. Bill Reichenstein has built off my earlier work in recent years and has some papers on this....Also, in terms of taxes, most states don't tax SS. So, one can save, say 5%, 6% or more if they choose higher amounts of SS income by delaying (and getting higher COLAs) because they save on the state income tax..

      Post: Making Your Claim

      Link to comment from February 16, 2022

    • While this is an important article because tax diversification can lower taxes and IRMAA charges in retirement, I'd strongly disagree with the author’s comment “In hindsight, we should have increased our taxable savings at the expense of our tax-deferred bucket.Unless paying almost zero federal and state taxes in the early work years, it’s going to be generally more advantageous in the long run to invest pre-tax in a 401(k) plan versus saving outside in a taxable account. You not only get much more into a retirement account up front due to the tax deduction, you have decades to benefit from the magic of compounded earnings on those contributions. That said, putting into a Roth account can indeed work better when someone is starting out in the workforce, but you’re not going to do better in a taxable account. Think of it this way…If you are in the same 25% tax bracket when you are contributing to your pre-tax 401(k) as when you take it out, a Roth 401(k) account will end up in the exact same place as a pre-tax account holding all else held constant. Further, would you rather pay taxes on earnings in a taxable account or receive tax-free earnings and withdrawals from a Roth? Of course, the Roth is better…. In a taxable account, you are also paying taxes on dividends and interest along the way and thus lose the additional tax deferral on that investment growth as well, not to mention potentially being in a higher tax bracket due to earnings, With a 401(k), the contribution is taken out of your paycheck and automatic…Tough to replicate this “behavioral benefit” with a taxable account. Early career readers should prioritize contributions to their 401(k) plan. 

      Post: Wrong Bucket

      Link to comment from February 7, 2022

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