December 2006 Newsletter

The Planning Challenge

Our new Silver Oak Financial Blueprint software is out of beta testing and now being used with our clients. The program provides several tools to analyze a portfolio and to run long-term retirement cash flow projections.

There are many key variables that go into answering the question, "How much do I need to retire?" including:

Very small changes in any of these assumptions, when projected out over a 40 or 50 year time period, can produce radically different outcomes. Within each of the variables listed above is a myriad of choices and potential compromises a person or family needs to make, and there is no single recipe that applies to all.

That being said, we can use software to run alternative scenarios, testing them for feasibility or chances of success. Remembering that these projections are not guaranteed or very precise, if done properly the results will still provide valuable information.

In this issue, we want to highlight two features of the new software.

Monte Carlo Analysis
Currently our cash flow projections use a single rate of return for each and every year of our analysis. The problem is that no one ever receives the same investment return year after year. Through Monte Carlo analysis we can simulate more realistic variations of return and run several thousand different simulations producing a range of possible results, each with their own unique outcome. This range gives you some idea of how likely your plan is to succeed overall.

Using the example analysis below, we can see that although the fixed return analysis showed a positive outcome, only 74% of the simulations actually were successful. This is because Monte Carlo Analysis takes into account the volatility of your portfolio and the timing of the returns.

Monte Carlo Graph

Historical Stress Test
Another great educational piece is this chart, which takes the asset allocation of your current portfolio and back tests it using actual historical index returns (green line). We then compare that with an average investment return for your asset allocation (purple line).

Historical Stress Test Graph

Here we see clearly that poor early returns can have a significant impact on your ending portfolio balance. In this case, although the average real return scenario succeeded, the plan failed using historical annual returns.

This might suggest that retirees should carefully evaluate their spending plans, especially if there are poor returns in the early years of retirement. In this example had the client spent less or had a more diversified portfolio the historic outcome may have been much more positive.

The Art of Planning
While we are eager to use this new software tool when working with our clients, we are always cognizant that the more important aspect of our work is the personal counseling we do as part of the financial planning relationship. Because our lives, our spending, our savings, our goals are in a rather constant state of change, financial planning is a process rather than a one-time event. As much as we wish for definitive answers and dependable projections, the best we can hope for is some narrowing of the range of outcomes and an organized framework for making decisions.

We are delighted that we are now working with third generation clients in some cases, and have received some wonderful thanks from others over the years. Here’s one excerpt:

"When I retired from [Company Name], I was not really comfortable with the size of my retirement equity. I took your advice on allocation of funds and worked full time for another year. I retired again September 1, 2003. The portfolio you put together for me in September 2002 grew [xx]% in 2003. ...With moderate growth, I should be able to survive quite comfortably until my early nineties, and I pray to God that I don’t live that long. But anyway, you are the one that secured my future and I appreciate it more than I can verbalize. Thank you very much."

We are proud of our work and grateful to all our clients and colleagues that help us keep improving the way we deliver planning and investment services. And speaking of improvements, have you visited the new website yet?

Investment Boot Camp

Our next workshop on investment fundamentals and emotions will be:

Saturday, February 24, 2007
9:30 am to 11:30 am

Please register online or call Jessi for more information.

New "Charitable IRA"

Charities are excited about a new tax law change that allows taxpayers over the age of 70-1/2 to donate up to $100,000 per year from an IRA to a charity without having the distribution count as taxable income. It is effective for tax years 2006 and 2007, so there is still time before the end of this year to consider such a gift.

The contributions must be paid directly from the IRA to a qualified nonprofit organization in order to avoid paying federal income tax on the withdrawal. The taxpayer does not get to deduct the donation on their tax return. Also, donations to donor-advised funds or private foundations do not qualify for the exclusion.

New Contribution Limits

For your 2007 budget planning purposes, here are the new maximum contribution amounts to various retirement plans. Our thanks to Jed Macy, JD, at The Macy Company, for these figures.

Also, the wage base for FICA withholdings for Social Security has increased to $97,500.

The Wise Investor

We close this newsletter with an excerpt from a column by Nick Murray called “A Comeuppance Trifecta” in the November 2006 Financial Advisor:

"The central point I wish to that everyone’s core portfolio holding should always be mainstream equities. This is exactly the truth which so many so-called investors rejected, consciously or otherwise, during the equity market’s slow and often painful recovery from the once-in-a-generation bear market of 2000-2002.

Said bear market had been the inevitable end of the greatest stock market bubble in the history of the world. The wise investor has persevered — through great cyclical excesses of greed followed by fear, followed by boredom that the market 'hasn’t done anything,' or 'hasn’t made any money in seven years,' or some similarly shoddy rationalization for abandoning mainstream equities in order to go off and do something stupid.

We live in a timing-and-selection culture: a culture not of 'what’s always worked,' but 'what’s working now.' Moreover, in this age of streaming market data everywhere we turn, we’ve become completely other-directed, our focus not on whether or not we’re achieving our financial goals but on whether, heaven forbid, other people are making more money than we are in the new hot sector or asset class."

At Silver Oak, we know how difficult it is to maintain a "buy and hold" attitude when the media and the rest of the world presses for action. But we have also learned just how beneficial such a strategy can be over time.

Happy Holidays!

From all of us to all of you, we wish you happy, healthy and enjoyable holidays. Silver Oak’s charitable contributions this year went to Habitat for Humanity, Oregon Food Bank, Portland Women’s Union Foundation, The Foundation for Medical Excellence, Schoolhouse Supplies, Portland Impact, and several other deserving non-profits. Pay it forward!


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