There are many points to argue about what is right and wrong when it comes to Social Security and other age based entitled programs. But one point I think we can all agree on without beating the point to death is that Social Security is in serious trouble as we currently use it.

I am not interested in placing blame or running through all the statistical data why it won’t last. Simply put, we borrow from the future to pay for the present but sooner or later the future shows up. Anyone that borrowed against their homes in the last few years knows all to well how that statement rings true.

But what will Obama, McCain or other politicians going to do about it?  How about get real!

According to the American Academy of Actuaries, raising the retirement age to 70 will cut the projected Social Security deficit in half. The statistics back up this age as a base age to use to start benefits with incremental increases built in. The current system increases the social security age one month at a time to age 67 but that is not enough.

The fact of the matter is that people are living longer. In 1935 the retirement age was 65 and you could expect to collect for 12 years. Now that number is closer to 19 years. That’s the type of inflation we can live with, “age inflation”. But that puts pressure on the social programs geared to help seniors with their expenses including Medicare.

According to the National Bureau of Economics the retirement age that is more realistic is closer to 73-74. That might be pushing it a bit and probably impossible to get through politically. The American Academy of Actuaries concludes that long after all the baby boomers are gone the demographics tell us that social security will only cover 75% of its costs. Women will be affected even more since they live longer than men.

But will this be a blow to current generations regarding their expectations for retirement? The answer is no, at least not for those that have given it any thought. Many baby boomers have simply not saved enough for retirement and a large percentage of them do expect to earn some type of income through work during their retirement years.

Financial advisors are also not optimistic about their client’s chances of retiring at the current young age of 65 and having their money last. Inflation and modest investment returns over the last decade have pushed an even greater number of workers into that work longer, save more demographic that will come to dominate those tapping age based social programs.

Raise the retirement age and acknowledge the simple fact that were living longer and we need to make some adjustments to age based entitlement programs.

To the North American Securities Administrators Association (NASAA), there are plenty of modern-day Willie Suttons eager to go “where the money is.” Today, “the money” is largely held by seniors. Hence, regulators say, seniors are the targets of unscrupulous salespeople armed not with pistols, but with professional designations that exaggerate their competence or their concern for seniors’ well-being.

Now some of these individuals are being sought out not by potential clients, but by federal regulators, including the SEC and FINRA. These regulators are making it clear that advisors who use the word “senior” or various synonyms to transact business unethically are squarely in their sights. These individuals are “among [regulators'] top targets,” says Tracy DeWald, general counsel at Securities America, a broker-dealer based in Omaha, Neb. “People age 60 and over are the biggest source of regulatory complaints.”

Targets

Indeed, seniors are targets for all types of unscrupulous vendors. In the financial world, many of those engaged in unethical practices—or merely failing to make adequate disclosures—hold designations that include the words “senior,” “elderly” or “retirement.” contrary to the unethical practices, the designations indicate that the holders are experts in serving the financial needs of senior citizens.

The burgeoning controversy has prompted some reputable firms to take action to avoid being tarred by the same brush. These firms have been limiting the ways their people may use some “senior” designations when doing business. According to NASAA, some product salespeople using “senior” designations typically invite senior citizens to seminars where a free lunch is served along with a presentation on investments. Either at the seminar or through follow-up contacts, some advisors ultimately sell unsuitable investments to some of the attendees.

In April, NASAA introduced a model rule on the use of senior- specific certifications and professional designations. This rule, which prohibits the misleading use of designations that include words like “senior” and “retiree,” has already been adopted by the state of Washington. At press time, New Hampshire was set to adopt the rule and other states are likely to follow suit. A report issued last year by NASAA, FINRA and the SEC lists the popular Certified Senior Advisor (CSA) designation among those it considers misleading or confusing.

That’s not to say that the mere use of the word “senior” will automatically spur regulatory scrutiny. In its model rule, NASAA leaves room for certain designations to be recognized. “Regulators are drawing a distinction between designations that are earned and those that are bought like prizes in a Cracker Jack box,” DeWald says.

What distinguishes a real designation from a specious one? “An authentic designation requires you to pass a difficult test,” DeWald explains.

In addition, DeWald adds, “there are continuing education requirements and you can be kicked out if you violate the rules. On the other hand, there are some designations that you can get by writing a check and spending a couple of hours online. Some are just made up by the person using it.”

NASAA, FINRA and the SEC are by no means the first to recognize the potential abuses of professional designations, especially when it comes to seniors. Some states, including Massachusetts and Missouri, have filed complaints or cease-and-desist orders against people for giving inappropriate investment advice to the elderly while using the “senior specialist” title. Underlying these charges is the idea that certain designations imply specialized knowledge or training, lending credibility to salespeople.

Forbidden Credentials

Some broker-dealers have effectively banned reps from publishing senior-related credentials. Genworth Financial, for example, prohibits its employees and agents from using the CSA designation (the most common senior designation) on their business cards or in their marketing materials.

“We have a similar policy,” says DeWald of Securities America. “In fact, we have lists of which designations are acceptable in published materials and which aren’t. None of the ’senior’ or ‘elder’ designations are on the accepted list. Some of our reps have these designations, which they can mention to clients in conversation. They can’t put the letters behind their names to promote themselves.”

Comparable cautions are in effect at major brokerage firms, says Sean Walters, deputy executive director at the Investment Management Consultants Association (IMCA), which confers the Certified Investment Management Analyst (CIMA) designation. “We work mainly with full-service wirehouses,” he says. “They’re paying a lot of attention to designations, including those aimed at seniors, and deciding which ones should be approved for use.”

Designations are also under scrutiny in the fee-only universe. “At NAPFA, we looked at senior specialist designations,” says Tom Orecchio of Greenbaum and Orecchio, a wealth management firm in Old Tappan, N.J., and chair of NAPFA’s board of directors. “The vast majority were not worth anything, we felt. They don’t require much studying or continuing education. There are too many credentials around; the last thing we need is more clutter,” he says. The one exception, Orecchio notes, is the Chartered Advisor for Senior Living (CASL). “It’s offered by the American College and [courses for it are] taught like courses for the CLU and ChFC.”

9,500 Strong

Of all the senior-oriented designations, the CSA is the only one mentioned specifically by states, including Nebraska, when warning seniors to check the credentials of so-called senior specialists. Several of the individuals identified in state regulatory actions hold a CSA.

The CSA designation is conferred by the Society of Certified Senior Advisors (SCSA), which bills itself as the world’s largest membership organization for professionals seeking to improve their skills in working with seniors. More than 9,500 advisors now hold a CSA designation.

SCSA executives are quick to defend their organization. “We’re aware of regulators’ concerns that certain professional designations may be misperceived by the public,” compliance specialist Bill Kaluza says. “That’s why SCSA requires each CSA to provide a written disclaimer to clients and potential clients.” This statement, while asserting that designees have taken steps to bolster their knowledge of seniors’ financial needs, includes notification that “the CSA designation alone does not imply any expertise in financial, health or social matters.”

Of course, whether all 9,500-plus CSA designees are actually making this disclaimer to every potential client they approach is difficult to determine. Kaluza says SCSA makes an effort to police its designees. “CSAs themselves are often our most reliable reporters about CSAs who do not comply with these rules,” he says.

What’s more, Kaluza claims that when a member of the public contacts the SCSA to inquire about a particular CSA, the organization investigates to see whether the CSA in question actually provided the disclaimer. “To date, we’ve had very little indication that CSAs are not using the statement,” Kaluza says.

By Donald Jay Korn
August 1, 2008

As Barack Obama and John McCain are poised to become the presidential nominees of their respective parties, money managers who ordinarily might already have an idea of where to invest after the November election are, like many U.S. voters, still undecided.

A cliched view is that a Republican president helps sectors such as defense and healthcare and a Democratic president is good for, well, not much. The reality, of course, is more complicated that that — for instance, markets typically perform better during Democratic administrations than when a Republican is in the White House.

“It’s amazing that with the election as close as it is, we have so few policies that we can bank on,” said Mark Bavoso, head of U.S. asset allocation at Morgan Stanley Investment Management.

Part of this is because both candidates are veering away from policies that typically define their parties and moving more to the center. It’s also because, said Bavoso, that in a turbulent year neither man wants to corner themselves with their promises.

“There’s still no concrete [economic] plan from either candidate,” said Mike Church, senior portfolio manager of the Church Cap Value fund (CVLAX). “And that’s concerning.”

“Uncertainty from the election has been one factor that’s weighed on the markets,” said Brian Levitt, corporate economist at OppenheimerFunds Inc. He added that, historically, markets prefer one party in the White House and one in Congress. “Free markets like logjam in government,” he said, because it usually means less regulation.

Church said that there’s one fact that faces the country regardless of who wins: George Bush’s legacy. “Bush came in with a budget surplus and he’s leaving a budget deficit,” he said.

And it’s likely the deficit will only increase under a new administration — the Tax Policy Center estimates that under Obama’s plans tax revenue will reach 18.3% of GDP in the next decade, while McCain’s plans will bring in 17.6% of GDP. But even at current levels, spending will account for 19.7% of GDP. The difference of 1%-2% doesn’t sound like much, but GDP over the next 10 years will amount to $185 trillion.

Bavoso said he believes the results of Congressional elections will be just as important as who wins the presidency. Bob Doll, global chief investment officer of equities at BlackRock Inc., said that the biggest question is whether the Democrats reach the magic 60 number in the Senate. With 60 votes, the Democrats would be able to force legislation through the upper chamber regardless of who is president.

Expect a bigger tax bite under a new administration, though the pace and extent of the rises will depend on who wins. Despite McCain’s tax-cutting promise, money managers predict that a Democratic majority in Congress all-but-guarantees the Bush administration’s tax cuts will expire in 2010. In other words, expect higher capital gains, dividend and income taxes by 2011 at the latest.

Doll says that both candidates will raise taxes, and most likely before the expiration date. As Bavoso pointed out, McCain will still need a package that meets the approval of a heavily Democratic Congress.

The Tax Effect

“We handicap the outcome as investors to take the worst-case scenario,” Bavoso said. The expectation of higher tax rates is already being discounted in the market and will continue to be into 2009, he noted.

Once taxes do rise, look for certain sectors to take a hit. “Higher taxes could create a challenge to disposable incomes,” Bavoso said — another blow to the already struggling consumer discretionary sector. “Fewer high-end retailers will do well,” Doll added.

But while tax rises may hurt some equities, they can be good for the bond sector, especially tax-free municipal bonds.

“When federal tax rates go up, municipal bond yields on an after-tax basis also go up,” said Steven Permut, co-manager of American Century Tax-Free Bond Fund (TWTIX).

Bob Williams, a principal research associate in the Tax Policy Center, said the tax increases should be taken in context. While the next administration might raise taxes overall compared with today’s levels, the Bush cuts have brought the tax burden down to generational lows.

Sector Benefits

Changes to the tax code may provide the new president with a way to promote pet projects. Sectors that could benefit, Bavoso predicted, are alternative energy and state and local healthcare. “Any areas that the president wants to feature will benefit from tax advantages to drive opportunities and investment,” Bavoso said.

All the money managers agreed the alternative energy sector will benefit if Obama wins, though Church said the sector should improve regardless of November’s outcome because of the likely introduction of a carbon trading scheme along with the continuing high price of oil. Church and Doll predicted that companies in the nuclear energy area will do well if McCain wins.

“McCain seems pretty convinced that nuclear power is the solution [to energy concerns],” Church said, though he added that this enthusiasm may be tempered by a Democratic Congress. Doll said that he expects traditional oil and gas companies also to do well under McCain.

As for the defense industry, Doll said that it would be wrong to think that a McCain victory would immediately lead to an uptick in that sector. “Given how long it takes to impact the defense budget, I think there’ll be less difference in the early years,” he said, adding that defense-related stocks could get a quick lift, however, from investors who expect better times ahead.

Doll added that infrastructure can be expected to better under Obama, while managed care companies in the healthcare sector should benefit from a McCain presidency. But, said Doll, fiscal conditions will hamper the more ambitious parts of either candidate’s healthcare plans.

“It’s going to be sluggish at the start of anyone’s administration,” said Oppenheimer’s Levitt. He suggested sectors with “long-term, secular growth” — for instance, a booming healthcare industry as the country’s population ages.

With tough times on the way, Bavoso at Morgan Stanley suggested a move into a specialized corner of the beleaguered financials sector — investment management companies. “People will be seeking advice on how best to hold on to their money,” he said, and investment managers should benefit.

-By Sam Mamudi

WASHINGTON — U.S. inflation soared to a 17-year-high annual rate in July, a government report showed, led by gains in food, energy, airline fares and apparel.
With energy and commodity prices on the retreat this month and the U.S. dollar strengthening, the report is unlikely to spook Federal Reserve policymakers into raising rates anytime soon as the economy struggles with rising unemployment and soft consumer spending.
Still, a surprising rise in core inflation that excludes food and energy last month will keep officials on edge about the possibility that food and energy prices will become more firmly entrenched in the economy.
The consumer price index rose 0.8% in July, the Labor Department said Thursday. That came on the heels of June’s 1.1% rise, which was the second largest June 1982.
Excluding food and energy, the CPI advanced 0.3% for a second-straight month.
Wall Street economists had expected only a 0.4% rise in the headline and 0.2% core increase, according to a Dow Jones Newswires survey.
Unrounded, the CPI rose 0.818% last month. The core CPI advanced 0.327% unrounded.
Consumer prices jumped 5.6% on a year-over-year basis, the highest rate since January 1991. The core CPI grew a more modest 2.5% compared to July 2007, though that’s still well above the Fed’s long-term goal of 1.5% to 2%. Over the past three months, core inflation rose at a 3.5% annual rate.
Though Fed officials said in a policy statement last week that inflation remains a “significant” concern, they are likely to look past the July data. The Fed is generally expected to keep official interest rates steady into next year, though the rise in core inflation, if repeated in coming months, could put rate hikes later this year back into play.
Many of the forces boosting prices in recent months — particularly high energy and commodity prices and the weaker U.S. dollar — have reversed since mid-July.
In a Dow Jones Newswires interview Wednesday, Minneapolis Fed President Gary Stern said even though the U.S. is “probably…in for a few more sizable increases” in overall prices measures, “assuming we don’t get a resurgence of energy prices, we will see over time a diminution of headline inflation, for sure.”
“As that occurs, I think we’ll also see some diminution of the core,” said Stern, who is considered one of the most vigilant inflation fighters on the Fed.
Energy prices swelled 4% last month, according to Thursday’s report. Gasoline prices spiked 4.1%, and natural gas prices rose 7.4%. Food and beverage prices rose 0.9%.
Medical care prices, meanwhile, increased a modest 0.1%.
But other core items posted sharp gains, a sign that higher headline inflation may have started seeping through the rest of the economy.
Clothing prices, for instance, rose 1.2% compared to June, a 10-year high. Transportation prices soared 1.7% on the month as airline fares swelled 1.3%, reflecting the rise in fuel prices. New vehicle prices advanced a modest 0.2%, reflecting falling demand.
Housing, which accounts for 40% of the CPI index, was up 0.6%. Rent increased 0.3%. Owners’ equivalent rent advanced 0.1%. However lodging away from home rose 0.7%, while home fuel and utilities posted sharp gains.
Services prices rose 0.5%.
In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, fell 0.8% in July, suggesting incomes aren’t keeping pace with prices.
That, in turn, could further damp consumer spending which appeared weak in July, according to a retail sales report released Wednesday.
-By Brian Blackstone; Dow Jones Newswires;

WASHINGTON — The prospect of higher taxes on long-term capital gains and dividends may spur a selloff of stocks and other assets by the end of this year, according to wealth-management advisors.

Investors and business owners are on high alert because of a proposal by Sen. Barack Obama, D-Ill., the presumed Democratic presidential nominee, to hike capital gains and dividend tax rates for many investors by between five and 13 percentage points.

Some advisors are telling clients to consider taking gains soon, because tax rates could change next year, particularly if Democrats win the White House and hold on to their congressional majorities.

“For the foreseeable future, you’re not going to get a better chance to move out of appreciated positions, from a tax perspective,” said Hank Alden, an advisor at Everest International Group.

Investment advisors caution that taxes alone should not be the overriding factor in investment decisions and decisions to buy or sell should be made as part of an overall strategy related to one’s portfolio.

But for many investors who have stocks or other holdings that they would otherwise sell in the next several years, the window for doing so at preferential tax rates may be closing.

Obama wants to bump the long-term capital gains and dividend rates up from their current level of 15% to at least 20%, and possibly as high as 28%.

The higher rates would apply only to individuals with income in excess of $200,000 or more, or couples earning more than $250,000.

Jason Furman, economic director for the Obama campaign, said that even for those making more than that amount, “we believe a rate much closer to 20% would be feasible.” That is based on campaign projections that assume that other Obama proposals would also be enacted.

Obama’s opponent, GOP nominee-designate Sen. John McCain, R-Ariz., favors keeping the capital gains and dividend rates at 15% for all investors, regardless of income level.

Screening for “Insiders” Business owners in particular may accelerate plans to sell their firms because of a looming capital gains increase, wealth advisors said.

“A number of family businesses have asked us the question, if we sold later than 2008, how much would my business have to appreciate just to break even,” or to realize as much profit as they would if they sold in 2008, said Jeff Paravano, a partner at the law firm of Baker Hostetler.

“When they see the spreadsheet, and the additional tax, a number of them have decided to sell this year,” Paravano said.

Some investors are even trying to turn a looming tax increase to their advantage by betting that business owners will sell before the tax hike. Investment advisor Robert Willens said some investors are “screening” for companies where founders or their descendants own a large share of the company stock.

Since those “insiders” are likely to have a low basis, they will be more motivated to avoid the tax hit by selling the business before the higher rate kicks in, he said.

“If investors believe a company will be sold at a premium, they may buy in the hope of reaping gains,” said Willens.

Dividend Rate Hike

Companies that pay dividends and their shareholders also are feeling pressure to act ahead of any tax hike.

Some companies may accelerate their fourth-quarter dividend payment from December 2008 from January 2009, according to Paravano.

In anticipation of a higher tax rate on dividends, investors who hold income-producing stock may want to shift to stock that doesn’t pay dividends and roll that into a tax-preferred savings vehicle such as an individual retirement account. That way the entire investment could appreciate without being taxed until the IRA is cashed out.

But they will be limited by annual contribution limits to IRAs, set at $5,000 for 2008, with an additional $1,000 for individuals over 50.

Uncertainty about how quickly Congress might move to raise taxes, and when higher rates will actually take effect, adds to the urgency. While recent GOP-led Congresses have typically made tax changes prospective from the date a bill is signed into law, that has not always been the practice, according to wealth advisors and economists.

Under current law, the 15% rate on capital gains and dividends is in effect until the end of 2010. But many observers expect Congress to act next year to fix the estate tax. Facing budgetary pressures, lawmakers may move at the same time to hike capital gains, dividend and other tax rates that were cut during President George W. Bush’s first term.

Economic Impacts

Rep. Richard Neal, D-Mass., said lawmakers will weigh carefully the effect of tax increases on an economy already burdened by high energy prices and credit woes. “We don’t want to do anything that would slow a recovery. But the deficit is a very stubborn fact,” Neal said in an interview.

Economists disagree over the broad economic impacts of an increase in the capital gains and dividend rates. Stephen Entin, president and executive director of the Institute for Research on the Economics of Taxation, has argued that a hike in the capital gains rate to 25% could damp the gross domestic product by as much as 6% over the long term.

But Furman of the Obama campaign said there is evidence that measured increases in tax rates that help reduce the deficit, as Obama is proposing, will not have a sustained negative effect on the economy.

Furman also said other Obama proposals will encourage savings and investment, such as an enhanced saver’s credit for lower-income earners.

“What investors should look at is what’s going to happen to overall economic policy. This is a change in economic strategy to emphasize fiscal responsibility in a way that we haven’t seen,” said Furman.

By Martin Vaughan
Of DOW JONES NEWSWIRES

Don’t scoff. Oprah Winfrey just left $30 million to her dogs. Like many people who didn’t have children she considers her pets her “babies” and heirs. And pet trusts are not just for the likes of Leona Helmsley, who left $12 million to her beloved white Maltese named Trouble. (The dog’s security, grooming and chef-prepared meals—served on a silver tray—cost $300,000 a year alone.) On the contrary, estate planning for pets is part of the lucrative and growing pet-care industry, and can be a valuable addition to the range of services offered to an increasing number of totally sane clients.

Consider the statistics: Two-thirds of American households have a pet, while only one-third has a child. According to the American Pet Products Manufacturers Association, pet industry expenditures have doubled since 1998, to $43 billion a year. The Mercanti Group, a financial advisory firm, expects this to remain the fastest-growing retail sector after electronics. And that growth will be driven by high-wage earners.

Well-heeled animal lovers increasingly spend on doggie day care and posh pet hotels. What’s more, all that doctors can do for humans these days, vets can do for pets. Does your dachshund need disc surgery? At Red Bank Veterinary Hospital in Tinton Falls, N.J., that costs $10,000, plus $90 a session for physical therapy. Should little Weiner need a kidney transplant, you’re talking $20,000, plus $2,000 a month in anti-rejection drugs. No wonder, The Mercanti Group reports, households with incomes over $100,000 accounted for 35% of all spending on veterinary care in 2006, up from 27% in 2003. “You can’t expect a caregiver to pay for all that,” says Annie Brody, who runs Camp Unleashed, where dogs and their owners romp in Becket, Mass. “You have to set aside the resources.”

The Pet and the Plan

Of course, not many people will leave more to their animals than to their human heirs. But even a modest pet trust can significantly benefit both client and advisor. To Dave Ness, president of Raymond James Trust, planning for a pet helps strengthen an existing fiduciary relationship. “These are frequently elderly people, and their animal is their confidante, the one who is there for them in the dark of the night,” he says. “They want that animal properly cared for, and rightly so. If you can help them solve that problem, you have helped them in an extremely important way.” To Gina Barry, a lawyer with Bacon Wilson in Springfield, Mass., such planning can start a relationship. “People don’t like to think about dying, but they will begin by thinking of their animal,” she says. “That is the start to getting their whole plan done.”

Most people still do it the old-fashioned way, says Ness. They leave all their worldly possessions, including the cat, to their grown children. (Yes, Kitty is considered property, with all the legal standing of a dust mop.) But what if they have no children? Or the children work long hours? Or, as Ness says, it’s, “Great Dane, small apartment—bad fit.” Then clients need to select a responsible caregiver, make the level of care they expect clear and specific, and fund it with a trust.

There are two main types of pet trusts. The simplest, a “statutory pet trust,” is authorized in almost 40 states. This is a basic document, naming a trustee and making an animal the beneficiary; it requires nothing more than a provision in a client’s will stating, “I leave $15,000 in trust for the care of my dog, Fifi.” The second, a “traditional pet trust,” is effective in all states. In this, the client also names a trustee to manage his funds, but appoints a caretaker as the beneficiary, with the money earmarked for the pet’s expenses. A traditional trust provides much greater control. The pet owner can direct what kind of care the pet will receive, what to do if the beneficiary dies, even where the pet will be buried.

A trust can be created while the client is still alive (an “inter vivos” or “living” trust) or when the client dies (a “testamentary” trust which is included in a will). The living trust has the advantage of providing for a pet if an owner becomes incapacitated, and can take effect immediately, if he dies, before the will passes probate. Those with a testamentary trust would have to make sure their power-of-attorney and healthcare proxy provide for their animal should they become disabled.

An advisor can help clients calculate how much money pets will need. Consider, say the experts, the animal’s life expectancy: A beagle, 15 years; a cat, 18 years; a tarantula 30 years; and a macaw 80 years. In addition to providing for inflation, calculate the cost of potentially expensive medical care, the cost of professional boarding when the caretaker is away, and whether the caretaker will be paid for his services.

Animal Assets

The money may be invested in a bond mutual fund, for instance, with income for expenses and the principal for emergencies. Or the trustee can be made the beneficiary of a pet owner’s life insurance policy; the policy may be taken out simply to fund the pet trust, or a portion of an existing policy may be made payable to the trust. Similarly, an annuity or retirement plan can be used to fund both inter vivos and testamentary trusts by making the trustee the recipient of some of the assets.

Problems, however, can arise. Ness cautions his clients not to leave a lump sum to a caregiver for a pet’s well-being. “Accidents happen all the time,” he says darkly. “You may have created an incentive for the caregiver to plot the early demise of Fluffy.” Better, he says, to make sure any money for the caregiver is separate from the money for the animal, and earmark the funds that remain after the animal dies to charity.

Animal lover Barry, who runs a horse sanctuary, advises that the pet be clearly identified, preferably with a microchip. She tells of the black cat that literally had close to nine lives: The caretaker replaced the cat several times to keep her payments coming.

Advisors should also warn clients not to leave too much to their pets. “A 12-year-old Pekingese can only eat so much,” says Ness. If a client leaves more than her animal reasonably needs, “the other heirs can use that to say that grandma was goofy,” and contest the trust. After all, says Ness, some “some people care the way they do for their animals because they feel abandoned by their families.”

Generally, an advisor can broach the issue of a pet trust merely by asking, “What are you going to do with your cats?” and referring the client to a competent lawyer. In Ness’s experience, $100,000 invested at a 4% annual return “should be more than enough.” In some cases, however, the bank becomes the trustee, and in rare cases, that can cause complications.

Joseph Macri, vice president and market manager for M&T Bank in Harrisburg, Pa., had such a case. A widow left $600,000 for the lifetime care of her beneficiaries—three dogs—named a dear friend as caretaker, and directed the remainder of the money (once the animals died) to charity. The bank, which had served as trustee during her lifetime, continued in that role. Macri determined the salary of the caretaker and made periodic, unannounced visits to check on the animals’ care.

In a twist, however, the pet owner had also left her house to the animals, making it “the most expensive doghouse in the world.” Macri had to see that the lawn was mowed, the snow shoveled, the bills paid, including cable “so the dogs could feel someone was talking to them.” Fortunately, Macri’s staff, and the bank’s tax and real-estate departments, shouldered the load. And he never found the caretaker negligent, abusive or extravagant.

Macri’s preferred solution is much simpler: “Just give a friend a bequest and ask him to care for your animal.”

Estate Planning
By Joanmarie Kalter
Joanmarie Kalter is a writer who lives in Montclair, N.J. with her cockapoo, Harry.

NEW YORK — A top Federal Reserve official expressed concern Tuesday about inflation in the U.S. and warned the central bank may have to raise rates soon to keep price pressures under control.

“To prevent recent inflation from continuing to plague the economy and to avoid a rise in inflation expectations, I believe the current very accommodative stance of monetary policy will need to be reversed,” Federal Reserve Bank of Philadelphia President Charles Plosser said. “Depending on how economic conditions evolve, I anticipate that this reversal will likely need to begin sooner rather than later,” he said.

“To keep inflation expectations anchored means that monetary policymakers will have to back up their words with action,” the official added.

Plosser is currently a voting member of the interest rate setting Federal Open Market Committee, and his comments came from a speech prepared for delivery before the Philadelphia Business Journal Book of Lists Power Breakfast, in Philadelphia.

His comments arrive at a time where central bankers are struggling to contain inflation amid economic growth that has remained stubbornly weak, as financial markets have stumbled from one bout of trouble to the next. Most observers reckon the Fed is being boxed in by this mix of conditions, and as a result, it will maintain its current overnight target rate of 2% for the remainder of the year.

Plosser’s comments about the economy expressed a considerable amount of concern about inflation, although he showed less worry about the state of growth.

“We must be attentive to both growth and inflation in a consistent and systematic way, and as we are all aware, inflation has been rising,” Plosser said.

But he added “inflation is already too high and inconsistent with our goal of — and responsibility to ensure — price stability. Rates hikes “will likely need to begin before either the labor market or the financial markets have completely turned around,” Plosser said.

The official’s outlook on growth has undergone modest changes. “My own outlook for the rest of this year is for continued sluggish growth and weakness in labor markets,” with the U.S. gross domestic product likely rising by 1.7%.

“This is a somewhat better picture than just a few months ago,” Plosser said. But he added, “I still expect sluggish economic growth in the second half of this year and a further increase in the unemployment rate.”

Plosser said he expects the central bank’s preferred inflation gauge, the personal consumption expenditures index, to remain at a rise of 4% this year, reflective of energy price increases. He reckons the core PCE price index — it’s stripped of food and energy costs — will rise by 2.5%. That’s above the Fed’s perceived comfort range.

Plosser added “as energy and other commodity prices level off, I expect both measures of inflation to be lower — in the 2 to 2 1/4% range by the end of next year,” at least as long as Fed acts to make that happen.

Despite Plosser’s inflationary concerns, he argued the U.S. is not seeing a replay of the conditions seen in the 1970s, when the U.S. suffered from stagflation, a mix of low growth and persistent price pressures.

“I want to emphasize that what we have been seeing in the economy this past year, and in my own outlook going forward, is very different from the 1970s, because I see the Fed as committed to keeping inflation expectations well-anchored,” Plosser said.

The official also said the central bank’s preference for looking at prices stripped of food and energy factors may need to change. “Since energy price increases have been so persistent in recent years, I do believe more attention should now be paid to measures of headline inflation in setting monetary policy,” Plosser said.

By Michael S. Derby
Of DOW JONES NEWSWIRES

WASHINGTON, DC- U.S. Senators Bob Casey (D-PA), a member of the Senate Special Committee on Aging, and Herb Kohl (D-WI), Chairman of the Senate Special Committee on Aging, today introduced a bill to help protect seniors from investment fraud.  The Senior Investor Protections Enhancement Act would increase penalties for those who commit securities violations against people who are at least 62 years old.

“Everyday, older Americans are targeted for investment scams and they see their life savings go down the drain” said Senator Casey “Pennsylvania has the second highest number of residents over the age of 65 and we must take care of them.  This legislation will help better protect our older citizens from being targeted from fraud.”

“Many seniors are discovering that their life savings may not be enough to last them throughout their retirement.  As they turn to investments to bridge the gap, seniors need to know that they can trust the people who handle their money,” said Senator Kohl.  “This bill will ramp up the punishment for those who advantage of older Americans’ well-earned retirement savings.”

Americans over the age of 65 control an estimated $15 trillion in assets, a large portion of which are investable.  Seniors have difficult and complicated decisions to make on how to stretch their savings throughout their retirement.  Their assets remain at risk from traditional fraud and Ponzi schemes.  Recently, seniors are increasingly offered many new but complicated investment tools such as reverse mortgages and various annuity products.  While these products can be very valuable to Americans generally and seniors specifically, they can also be abused by unscrupulous actors.    

Additionally, many older Americans are targeted by con artists who seek to exploit them through manipulation and fraud.  Seniors already account for more than half of all investor complaints received by state securities regulators.   The U.S. Securities and Exchange Commission (SEC) has reported that they are working to improve their ability to prevent fraud and abuse where possible and prosecute it where necessary.   

Under the Senior Investor Protections Enhancement Act, penalties for existing securities violations could include an additional $50,000 civil fine for each violation that is primarily directed toward, specifically targets, or is committed against a senior.  Under the legislation, seniors are defined as persons age 62 or older, the age at which most retirement savings become available for use and investment.  

The bill would increase penalties for those who commit securities violations against seniors - violations could include selling them products that are unsuitable for their age, failing to disclose fees, lock-ups of cash or large penalty charges, switching investments sold with the one marketed or other material aspects of the investment.  The bill would not interfere with legitimate investment advisors who recommend products and investments appropriate for their customers.

Last September, the Aging Committee held a hearing to examine some of the questionable practices used by so-called senior financial investment specialists in order to gain access to the retirement savings of older Americans.  An investigation conducted by the Committee revealed that many seniors targeted by such unscrupulous salesmen have lost their life savings because they were steered toward investment instruments that were unsuitable for them, given their retirement needs and life expectancy.

For more information on retirement income and investing for income visit www.livelongliverich.com and don’t forget to sign up for the free newsletter!

NEW YORK — Your dividend check is probably in the mail.

While the number of companies slashing or eliminating dividends has increased due to crises in the housing, mortgage and credit markets, a great many others continue these quarterly payouts, and some are even raising them.

Dividend-paying stocks remain a safe and attractive holding for investors seeking relief from the seemingly interminable onslaught of negative economic news. For elderly investors on a fixed income, dividends provide an essential stream of steady income — regardless of the vicissitudes of equity markets.

“A company with a long and consistent history of raising annual dividends is the best defense against a weak economy,” said William Schultz, chief investment officer at McQueen, Ball & Associates Inc., in Bethlehem, Pa. “A solid, dividend-paying policy reflects a financially healthy company that is able to grow its earnings in any and all market environments.”

Howard Kornblue, who once ran a mutual fund for Pilgrim America that focused solely on dividend-paying stocks, also believes such securities will serve beleaguered investors very well in today’s jittery environment.

“We sought out companies that not only raised their dividends annually, but also had strong balance sheets, no significant long-term debt and were engaged in businesses with solid outlooks,” he said.

Scott Schluederberg, a portfolio manager at Hardesty Capital Management, thinks the current environment for dividends is “fantastic,” as long as one holds a reasonably diversified portfolio of dividend-paying stocks.

Look around and you will see a wide array of companies boosting their dividends. Stocks as disparate as Rohm & Haas Co. (ROH), State Street Corp. (STT), Coca-Cola Co. (KO) and Target Corp. (TGT) have all recently hiked these payouts.

Dividend increases come from a broad array of industries, even in these troubled times.

Schultz especially likes two sectors with a plethora of dividend-paying firms: pharmaceuticals and consumer staples.

“There are a substantial number of blue-chip companies in these areas — including Procter & Gamble (PG), Johnson & Johnson (JNJ) and 3M (MMM) — which have rewarded their shareholders with uninterrupted annual dividend increases for almost five decades,” he said. “It all has to do with their ability to generate consistently growing earnings.”

In one of his investment strategies, Schluederberg keeps a basket of stocks called “Trophy Dividend Growers,” comprising blue-chips which pay out a very comfortable portion of their earnings (30% to 50%) as dividends.

“This gives them a good cushion — they can still pay dividends even in the event of an earnings shortfall,” he said. “We also consider earnings expectations. If the payout ratio starts going above, say, 70% of earnings, then we become concerned and consider exiting the position. We want to make sure the dividend is safe.”

In this strategy portfolio, the collective dividend yield is a very robust 5.2% (versus 2.2% for the overall market). Typically, the yield of this strategy is between 3.5% and 4.25%. “Dividends don’t fluctuate the way stock price does,” Schluederberg noted.

His “trophy dividend” growers include Anheuser-Busch Cos. (BUD). “We bought that stock in the upper $40s when it yielded close to 3%,” he said. “Its value was fully realized when InBev acquired it for $70.”

The best dividend-paying industries, Kornblue asserts, are companies engaged in utilities, essential consumer products, health care, pharmaceuticals, energy, food and beverages. “The managements of these companies are eager to maintain their dividends because they know many of their shareholders invest in them primarily for the dividend yield,” he noted.

But some companies can no longer afford the luxury of handing out dividends.

S&P recently reported that 97 publicly-traded companies (of the 7,000 it tracks) cut their dividend in the second quarter, versus just 18 in the year-ago period. This was the largest figure since the second quarter of 1990, when 108 companies reduced their dividend payouts. Moreover, companies posting dividend increases amounted to 455, a 16% drop from the year-ago period.

Kornblue, now senior portfolio manager at Alpha Fiduciary Generational Wealth Management in Scottsdale, Ariz., thinks dividends will become scarcer as the economy continues to falter. As such, to play it safe, he suggests that dividend-seekers completely avoid stocks in a few distressed industries, particularly financial services, auto makers and home building.

Although the phenomenon of high-profile financial services companies — notably Citigroup Inc. (C), Wachovia Corp. (WB) and Washington Mutual Inc. (WM) — reducing or eliminating dividends has grabbed headlines, the scenario in the overall sector isn’t all that dire.

In fact, according to S&P, for the first half of the year, 7.9% of financial issues shaved their dividends (versus 2.9% for non-financials.) More telling, 20.9% of financial stocks actually hiked their dividends. Still, the losses incurred by the unfortunate shareholders of those financial firms that slashed payouts have been enormous — on the order of $13 billion, S&P estimates.

As for financial services stocks that continue to pay dividends, investors should be extremely cautious. Schultz cites US Bancorp (USB), which has faithfully raised its dividend 36 consecutive years, an impressive stretch. “Given the turmoil in the banking industry, we are waiting to see what they do in the fourth quarter,” Schultz noted.

Kornblue also thinks things will get worse for the financial sector, citing the deepening credit crisis, slowing economy and the ever-unfolding mortgage meltdown. Many financial stocks still paying a dividend carry unsustainably high yields, he warns, strongly suggesting dividend cuts are inevitable.

“There’s a lot of uncertainty here, especially among mid-sized banks,” he said. “More shoes may drop as we learn more about the full extent of their exposure to toxic mortgages.”

But not all financials are bad, Schluederberg insists, especially those companies that have diversified operations, have avoided risky acquisitions, or have too much exposure to mortgages. For example, he likes JP Morgan Chase & Co. (JPM), which just posted better-than-expected second-quarter results.

“They are well-positioned to survive the current crisis,” he said. “In fact, they served as the backstop for the Federal Reserve’s Bear Stearns rescue. JPMorgan shares have sold off recently, but I think they can sustain their dividend.”

While some investors crave a high dividend yield, this can sometimes be a misleading concept. A steep dividend yield may simply mean that the stock price has fallen too far, but the company is still dutifully paying its dividend. This often equates to an unsustainable situation, because the company may have weakening internal fundamentals and likely will have to cut or abolish the dividend.

“A high dividend yield does not necessarily mean that the company is healthy and fast-growing, although it depends on each individual case,” Schultz said.

“As investors, we are more interested at the rate of growth of the dividend, not the absolute dividend figure itself.”

Indeed, some industries like utilities and big pharma tend to have high dividend yields, but they are hardly “high-growth” industries.

To avoid high-dividend yield traps, Schluederberg looks at future earnings estimates. “If a company is paying a $1 annual dividend and their earnings are forecast to be $1.05, then that dividend is in jeopardy,” he explained.

For more information on investing for income visit www.livelongliverich.com and don’t forget to sign up for the free newsletter!

By Palash R. Ghosh
A Dow Jones Newswires Column

Interest rates have dropped and it has caused many investors to search for higher income producing investments and is leading many into more complex fixed income products. Not all that appears to be safe is, and those that have read about the credit issues plaguing Wall Street know all to well the negative ramifications misunderstood investments can have on one’s financial present and future.

But we can improve our situations, not by taking on more risk but perhaps understanding the risk in what we own and are contemplating investing in. I would like to go over two simple but yet important concepts in bond investing that many, even savvy stock buyers do not fully understand and therefore under appreciate their importance. It is a bond’s yield to call and yield to maturity. 

Lets start with a simple CD. (Certificate of Deposit) CD’s are time deposits and you agree to invest your money for a certain period of time at a certain interest rate and at the end of that period, at maturity, you receive your money back plus interest earned.

Bonds of all types are available and work in a similar way. You place your money with a government entity or company and receive interest for that period of time and at the end you receive your principal back. There are many types of risks associated with bond investing from credit risk to interest rate risk just to name two but I want to focus on just two parts of the decision on whether a bond is right for you, first Yield to Maturity.

Yield-To-Maturity

When you purchase a bond, the price you pay may be more or less than the maturity value. The values of bonds will fluctuate and on the date of purchase, it could be trading above the maturity or par value, which is called a premium bond, or below it which is called a discount bond. The premium or discount you pay effects the overall return on the investment.

If you paid $950 for a $1000 bond, you paid a discount and the appreciation from $950 to the maturity value of $1000 plus the interest earned needs to be taken into account when evaluating the overall return on the bond. You not only earned the interest, but made $50.

The same holds true for a premium bond. If you paid $1050 for a $1000 bond, you paid a premium. The difference between what you paid over the maturity value would need to be subtracted to find out your overall return. In this case you earned interest but lost $50 on the investment.

When evaluating a bond you may want to invest in, you do not need to figure all this out. Your advisor or company you deal with will be able to tell you the yield to maturity. If a discount bond had a yield to maturity of 6%, and a premium bond had a yield to maturity of 6.1%, all other factors remaining equal, then the premium bond would be a better buy. The total return was better even though I paid more for it.

So it’s not just the interest rate the bond pays, it is also the price you are able to purchase it at that makes a difference.

Yield to Call

The yield to call is determined in the same way as the yield to maturity except the call date is used instead of the maturity date. Most bonds today have call provision which means the issuing organization has the right to redeem, call away (give your money back) earlier than the stated maturity date. They will most likely do this if they can turn around and borrow at a lower rate than they are paying you. Just like you might refinance your home mortgage at a lower rate.

The effects of a discount or premium paid are magnified since the gain or loss, in this case of $50.00 is compressed over a shorter period. Making $50.00 over a shorter period of time is a good thing, losing the $50.00 premium over a shorter period of time is a bad thing and hurts your overall total return.

The interest rate you receive may increase the chances of a call. If a bond has a high interest rate and the current rates are much less, the bond has a greater risk of being called away and therefore a premium bond holds more risks under this environment.

Fortunately, the yield to call just like the yield to maturity is readily available to you from your advisor. When investing in bonds, the price you pay can have a dramatic effect on your return. The higher the yield to maturity on a premium bond does not equate to a better investment if the chances of a call are higher.

Knowledge is king in bond land, don’t be lead by the nose, know what you are buying and understand the risks first, reaching for a higher yield and ignoring the risks could result is a major loss of principal. On Wall Street, there is no free lunch.

For more information on bond investing, please log onto www.livelongliverich.com and don’t forget to sign up for the free newsletter.