Your SlideShare is downloading. ×
Asset Dedication Fiscal Cliff
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Asset Dedication Fiscal Cliff

3,414
views

Published on

Slides from the Asset Dedication webcast

Slides from the Asset Dedication webcast

Published in: Economy & Finance

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
3,414
On Slideshare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
0
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. The Fiscal Cliff Implications for Your ClientsPresented By:Stephen Huxley, PhDBrent Burns
  • 2. © Copyright Asset Dedication 2012For Advisor Use Only Not intended for use with individual clients
  • 3. © Copyright Asset Dedication 2012 Client Talking Points1. Uncertainty2. Taxes will rise3. Spending cuts will negatively impact the economy4. Interest rates will likely stay low5. Financial planning matters
  • 4. Higher Taxes Spending Cuts
  • 5. C+ I +G +(X – M) = GDP Consumption InvestmentGovernment Spending Net Exports
  • 6. C+ I +G +(X – M) = GDP ConsumptionGovernment Spending
  • 7. Income TaxCapital Gains TaxTax on Dividends Estate Tax © Copyright Asset Dedication 2012
  • 8. © Copyright Asset Dedication 2012 Income Tax IncreasesNote: All figures subject tochange, depending on negotiations Tax Brackets (2012 Dollar Amounts) Marginal Rate Unmarried Filers Married Joint Filers But Not But Not Over Over 2012 2013 Over Over $0 $8,700 $0 $17,400 10% 15% 8,700 35,350 17,400 70,700 15% 15% 35,350 85,650 70,700 142,700 25% 28% 85,650 178,650 142,700 217,450 28% 31%178,650 388,350 217,450 388,350 33% 36%388,350 ... 388,350 ... 35% 39.60%
  • 9. © Copyright Asset Dedication 2012 Other Tax increases• Many changes - Capital Gains, Payroll, AMT, dividend, estate, 20/20 cap on 401(k), etc.• More details: – http://www.bankrate.com/finance/taxes/fiscal-cliff-expiring-tax-laws.aspx – http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newslet ters/Articles_2012/CPA/Aug/2013taxincreases.jsp – http://www.journalofaccountancy.com/Issues/2012/Nov/20126172.htm – http://www.forbes.com/sites/kellyphillipserb/2012/11/10/tax-increases- looming-in-2013-who-pays-how-much-and-will-they-stick/ – http://www.ebri.org/pdf/briefspdf/EBRI_IB_11- 2011_No364_RetTaxRfm2.pdf
  • 10. © Copyright Asset Dedication 2012Government Spending
  • 11. © Copyright Asset Dedication 2012 Baseline PlanCut $ 110 billion per year over 10 years ½ Defense ½ otherCuts for 2013: 1. $55 billion from Defense (about 8% of its budget) 2. $55 billion from non-defense (varies)
  • 12. © Copyright Asset Dedication 2012 Projected 2012 Federal BudgetRevenues: $2,443 billion*Expenses: $3,540 billionDeficit: -$1,097 billion*All figures approximate. Source: Congressional Budget Officehttp://www.cbo.gov/sites/default/files/cbofiles/attachments/08-22-2012-Update_to_Outlook.pdf
  • 13. © Copyright Asset Dedication 2012 Federal BudgetFederal Revenues $ Billion As % Federal Revenues $ Billions Income Tax,Income Tax $1,130 46% $1,130 $1,200Payroll (Soc. Sec./Medicare) Tax $844 35% Payroll Tax, $1,000Corporate Tax $240 10% $844Other $229 9% $800Total $2,443 100% $600 Other Corporate Revenues, $400 Tax, $240 $229Federal Spending $ Billion As % $200Soc. Sec. $760 21% $0Medicare/Medicaid $725 20%Defense $652 18%Income Security (Unempl. Comp. Soc. Sec., Federal Spending $ Billions $760Food Stamps, etc.) $359 10% Medicare+, $800 $725Net Interest on Debt $258 7% $700 Defense, $652Federal Pensions $212 6% Income Other, $574 $600 Security, $359Other $574 16% Net Interest $500 Total $3,540 100% on Debt, $258 $400 Federal $300 Pensions, Deficit for FY 2011 -$1,097 $212 $200 $100Accumulated Deficits - National $0Federal Debt: $16,400
  • 14. © Copyright Asset Dedication 2012 Incentive to Keep Rates Low Current debt service = 7% of the budgetSource: Treasury Direct - Average Interest Rates on Marketable Securities as of 11/31/2012 and Daily Debt Held by Public as of 12/5/2012
  • 15. © Copyright Asset Dedication 2012 Incentive to Keep Rates Low 1% Interest rate rise Debt service = 10% of the budgetSource: Treasury Direct - Average Interest Rates on Marketable Securities as of 11/31/2012 and Daily Debt Held by Public as of 12/5/2012
  • 16. © Copyright Asset Dedication 2012 Details – Spending Cuts• More details: – http://bipartisanpolicy.org/projects/budget-control- act?project=39&keys=Budget+Control+Act+series – http://bipartisanpolicy.org/blog/2012/01/three- reasons-why-12-trillion-isn%E2%80%99t-really-12- trillion – http://en.wikipedia.org/wiki/United_States_fiscal_cliff
  • 17. © Copyright Asset Dedication 2012 10 Year US Treasury Bond Yields, 1800-2012 1.93% 1.72%Source: Asset Dedication, U.S. Treasury, and Global Financial Data. Data through 12/16/2012
  • 18. © Copyright Asset Dedication 2012 Total Return Long Government Bonds, 1980-201214.00%12.00%10.00%8.00%6.00%4.00%2.00%0.00% 1950 1960 1970 1980 1990 2000 2010 Source: Morningstar Long-Term US Government Bond Index 2006-2012, Ibbotson And Associates Long-Term US Government Bond Index 1927-2005
  • 19. © Copyright Asset Dedication 2012 The Yield Curve• The decline in interest rates affects all maturities, though not to the same degree• Short term maturities usually have lower rates than longer maturities• Changes over time - the “living yield curve:” http://www.smartmoney.com/investing/bonds/the-living- yield-curve-7923/
  • 20. © Copyright Asset Dedication 2012 Treasury Yield Curve 2012, 2011Source: www.treasury.gov 12/16/2012
  • 21. © Copyright Asset Dedication 2012 Treasury Yield Curve 2012, 2008Source: www.treasury.gov 12/16/2012
  • 22. © Copyright Asset Dedication 2012 Treasury Yield Curve 2012, 2003Source: www.treasury.gov 12/16/2012
  • 23. © Copyright Asset Dedication 2012 Japan 10-Year Govt. Bond Yield 1994-20125.00%4.00%3.00%2.00%1.00%0.00% Source: Reuters as of 12/19/2012
  • 24. "We expect to keep the short-term interest rate at exceptionally low levels to at least mid-2015... so long as price stability ispreserved, we will take care not to raise rates prematurely.“ -Federal Reserve Chairman Ben Bernanke 10/3/2012
  • 25. © Copyright Asset Dedication 2012 Advantages of Individual Bonds1. Predictable2. Known worst case3. Safe – Treasuries, agencies, CD’s – Corporate and muni bonds have predictable probabilities
  • 26. © Copyright Asset Dedication 2012Default Rates, 1970-2011
  • 27. Other Income Producing Investments © Copyright Asset Dedication 2012
  • 28. Dividend payments from companies in the S&P 500 dropped by… 23.9% January 2008 to January 2009Source: Standard and Poors; S&P 500 Market Attributes Snapshot; January 2009
  • 29. According to Cohen and Steer’s, publicly traded REITs cut their dividends by 26% in 2009Source: Cohen and Steer’s; A Case for REITs as a Hedge Against Inflation; June,2011
  • 30. The risk to principal from currency fluctuations can reduce or eliminate any yield advantage for international bonds € 1,000 ≈ $1,205 € 1,000 ≈ $1,316 € 1,000 ≈ $1,470 -22%Source: Yahoo Finance 12/19/2012
  • 31. Junk Bond Defaults Tend to Spike When the Economy Struggles
  • 32. © Copyright Asset Dedication 2012Waiting for Rates to Rise
  • 33. © Copyright Asset Dedication 2012 Waiting in Cash for Rates to RiseConsider the cost of buying an 8-year incomestream starting at $100,000 plus 3% inflation.• Sum of all cash flows = $889,234• Can buy income stream now or wait two years to see if it will be cheaper due to rising rates – Current cost of 2013-2020 stream: $841,219 – Current cost of 2015-2022 stream: $807,539 – Future cost of 2015-2022 stream: $841,219 (assuming no change in yield curve)
  • 34. © Copyright Asset Dedication 2012Why Buying Now is Cheaper
  • 35. © Copyright Asset Dedication 2012 Probability of Rise in RatesRates will have to rise fast enough and far enoughto make the future cost of the 2015-2022 streamless than its current cost ($807,539)• The probability of this happening is below 10% based on the history of rate changes (1927-2012)• Given Bernanke’s statements, the probability is probably closer to 0%.
  • 36. © Copyright Asset Dedication 2012How Fast Interest Rates Change
  • 37. © Copyright Asset Dedication 2012 Cost of Waiting EvidenceIn our white paper of November, 2010, white paper“Cost of Waiting for Interest Rates to Rise,” cost ofa 2013-2020 portfolio would have been $770,896.1. Our recommendation then: Don’t wait!2. Estimated cost if rates did not rise - $820,0883. Cost now is $841,219 – $41,000 higher!4. Our recommendation now: Don’t wait!
  • 38. © Copyright Asset Dedication 2012 Questions?Email info@assetdedication.com for more information on Asset Dedication white papers
  • 39. © Copyright Asset Dedication 2012DisclosuresAbout Asset DedicationAsset Dedication LLC is an SEC-registered investment advisor located in Mill Valley, California. Asset DedicationLLC and its investment adviser representatives are in compliance with the current registration and/or notice filingrequirements imposed upon SEC-registered advisors by those states in which we maintain clients. AssetDedication LLC may only transact business in those states in which it is notice filed, or qualifies for an exemptionor exclusion from notification requirements.Past PerformancePast performance is not indicative of future results. Therefore, no current or prospective client should assumethat future performance of any specific investment or investment strategy (including the investments and/orinvestment strategies recommended or undertaken by Asset Dedication LLC) made reference to directly orindirectly by Asset Dedication LLC in its website, or indirectly via a link to an unaffiliated third party website, will beprofitable or equal the corresponding indicated performance level(s).RiskDifferent types of investments and/or investment strategies involve varying levels of risk, and there can be noassurance that any specific investment or investment strategy will be either suitable or profitable for a clients orprospective clients portfolio and may result in a loss of principal.

×