Newsentory Blog: September 2014

Archive for September 2014

Illinois Court: Don't touch Chicago retirees' pensions

Chicago city workers and retirees can breath a sigh of relief -- their pensions won't be cut.

rahm emanuel chicago mayor speaking The Illinois Supreme Court struck down Chicago Mayor Rahm Emanuel's pension reform plan Thursday.

The Illinois Supreme Court struck down a law Thursday that would cut annual increases to retirees' pension benefits and require workers to contribute a bigger chunk of their salary to the fund. The law was pushed by Chicago Mayor Rahm Emanuel in 2014, in an effort to keep the funds from running out of money.

But the Illinois Constitution protects public employees' pensions from being "diminished." The Supreme Court, upholding a lower court's ruling, found that Emanuel's pension reform violates that provision.

The law had addressed two city pension funds which cover about 60,000 retired and active civil service and labor workers. One fund is set to run out of money in 10 years, and the other in 13. Together, they face a $9 billion shortfall. The two unions don't include police, firefighters, teachers, transit or park workers -- who are covered by different pension funds.

A group of four unions that brought the lawsuit to court applauded Thursday's ruling.

City workers, they said in a statement, such as librarians and truck drivers, school social workers and nurses, had been "faithfully paying their share" while politicians failed to set aside adequate contributions.

The retirees' average pension is $32,000, the group said. And those covered by these funds aren't eligible for Social Security, so they often have to rely on their pension for a large part of their retirement income.

Currently, retirees get 3% annual cost-of-living increases to their pension benefits and workers contribute 8.5% of their salary each year to the fund. But the new law would have lowered the annual increases to half the rate of inflation, and increased worker contributions to 11%.

It would have also increased the city's contribution to the fund, because that is calculated based on the amount contributed by employees each year.

Now that the pension reform plan has been struck down, the city of Chicago needs to figure out a new way to come up with the money for its pension funds. In total, the city's six pension funds only have 50% of the funding they need and face a $26.8 billion liability.

"Though disappointing, this ruling does not change my commitment to ensuring employees and retirees have a secure retirement without placing the full burden on Chicago taxpayers," Emanuel said in a statement.

Why dollar-cost averaging doesn't make sense

Secrets of a dream retirement
After completing a risk tolerance test I've decided I need to reduce my portfolio from 70% to 40% in stocks.

After completing a risk tolerance test I've decided I need to reduce my portfolio from 70% to 40% in stocks. But I'm worried if I do that now that I may be selling at a bad time. So should I just dollar-cost-average my way out of stocks until I get to where I need to be? -- N.C.

First, kudos for taking that risk tolerance test. Too many people wing it when it comes to deciding how to divvy up their savings between stocks and bonds. That's never a good idea, but it can be especially dangerous when investors have more money in stocks than they should when the market tanks. So I recommend other investors follow your lead, which they can do by creating a portfoliothat jibes with your appetite for risk.

But once you've decided what stocks-bonds mix is appropriate for you, dollar-cost averaging isn't a very good method for getting from where you are to where you want be.

I know that may strange, since virtually everyone praises dollar-cost averaging and touts its benefits. But if you really examine the practice, you'll see that it's not a very effective way to deal with market volatilityand manage investing risk.

Typically, the subject of dollar-cost averaging comes up when someone with a sizable sum of cash is considering whether to invest it in stocks all at once or do so gradually, say, over the course of a year. Advocates of dollar-cost averaging claim it's a good risk-reduction tool because tiptoeing in a bit at a time reduces the chance that you'll put all your money into stocks just before the market slumps.

But many analyses, including this one, counter that you stand a better chance of ending up with more money by investing in stocks all once, which makes sense since historically stocks have had more up years than downand they have usually outperformed cash during those up years.

Of course, there are times when stocks go down and dollar-cost averaging comes out ahead. But on balance you're more likely to be giving up investment gains by dollar-cost averaging than protecting your downsize.

But I don't think that this way of looking at dollar-cost averaging gets to the real issue—namely, whether it's an effective technique for managing risk. If you've put some thought into your investing strategy and created a well-balanced portfoliothat includes both stocks and bonds, the question isn't how to get new money into stocks, or how to go from all cash to all stocks, but how best to put new money to work in the diversified portfolio of stocks and bonds you already have. (Or, in your case, this slight variation: how to move from the portfolio you have to the portfolio you want.) Either way, the issue isn't how to earn the highest return; it's how best to manage risk and reward.

So let's take your situation. You don't say how much you have invested, but for the sake of this example, let's assume you have $100,000 in savings, of which 70%, or $70,000, is invested stocks and 30%, or $30,000, is in bonds. You want to end up with a portfolio that is 40%, or $40,000, in stocks and 60%, or $60,000, in bonds. So essentially you need to move $30,000 from stocks into bonds.

You could dollar-cost average your way to your target portfolio mix, say, over 12 months. To do that you would take $2,500 out of your stock holdings each month and move it into bonds. (To keep things simple, I'm leaving investment returnsout of the example.)

So after moving $2,500 out of stocks in the first month, you would be left with a portfolio with 67.5%, or $67,500, in stocks and 32.5%, or $32,500, in bonds. Your portfolio would be 62.5% ($62,500) stocks and 37.5% ($37,500) bonds by the third month; 55% ($55,000) stocks and 45% ($45,000) bonds by the sixth month and 47.5% ($47,500) stocks and 52.5% ($52,500) bonds by the ninth month. In the 12th month you would hit your 40% ($40,000) stocks-60% ($60,000) bonds target.

So you've arrive at your intended portfolio, but it's taken you a year to get there, a year during which you've gone through a series of stocks-bonds allocations that aren't in sync with your tolerance for risk.

If you really believe that a 40% stocks-60% bonds portfolio offers the right balance of risk vs. reward for you (as your risk tolerance test suggests), why should you spend a year at more aggressive allocations?

The answer is you shouldn't. You're better off going immediately to your 40% stocks-60% bonds portfolio, which is how you've decided your portfolio should be allocated. Granted, if it turns out that the stock market starts soaringas you're reducing your stock position, you'll end up with a lower return by moving quickly than you would have if you made the transition gradually. At the same time, though, you'll end up with a higher return going to bonds immediately rather than gradually if the market sinks.

But such "what ifs" are immaterial. The whole point of creating a stocks-bonds mix that matches your risk tolerance in the first place is because you don't know what the market is going to do. So rather than engage in a guessing game, you arrive at a blend of stocks and bonds that (aside from occasional rebalancing) you can stick with through good markets and bad, and that can deliver solid returns given the level of risk you're willing to take. Dollar-cost averaging undermines that strategy.

By the way, the same principle would apply if you were going from a more conservative to a more aggressive portfolio, say, 40% stocks-60% bonds to 70% stocks-30% bonds. In that case, dollar-cost averaging would also take you through a series of allocations that don't reflect your tolerance for risk, except that they would be more conservative than your target mix.

"But what about a 401(k)?," you may ask. People invest money gradually there. Doesn't that show how dollar-cost-averaging can work to your benefit? The answer is no. Investing money over time in a 401(k) isn't an example of dollar-cost averaging; it's an example of investing money as you get it, which does make sense.

If you wanted to apply dollar-cost averaging to your 401(k), you would have your plan administrator invest each contribution in a money-market account and you would then gradually move a piece of it each month from cash to your investment options. But clearly that would make no sense (and be unwieldy and time consuming to boot). Which is why if you contribute, say, $100 a month to a 401(k) that's split, say, 50-50 between stocks and bonds, you have your plan administrator immediately invest your monthly contribution match your investment mix. (Similarly, if you had the ability to make a full-year's contribution to your 401(k) at the beginning of the year, it would make more sense to invest it all at once in a way that reflects the asset mix you've set for your planrather than put it all in cash and then invest in your various options a little bit at a time.)

Bottom line: Whether you're adding new money to your portfolio or, as you're doing, switching to a new stocks-bonds mix because the old one doesn't suit you, you're better off investing the money or moving to your target portfolio mix as quickly as possible rather than dollar-cost averaging.

If you find it psychologically or emotionally difficult to do that, then make the move gradually but over a short period, say, a few months instead of a year. Because the longer you string it out, the longer you'll be taking more (or less) risk than you've decided you should take.

How many funds do you need for a diversified portfolio?

My retirement portfolio currently consists of two mutual funds.

funds diversified portfolio

My retirement portfolio currently consists of two mutual funds. Is that enough? Or do I need more funds to be properly diversified --E.F.

When it comes to building a diversified portfolio for retirement-- or any other goal -- the issue isn't so much the number of funds. It's the type of funds you own and the breadth of securities they hold.

So, for example, you can have a reasonably well-balanced portfolio that meets your needs with just a couple of funds -- say, a total U.S. stock market index fund and a total U.S. bond market index fund. Or for that matter you could even get by with one: a target-date retirement fund.

On the other hand, you could own a dozen or more individual fundsand still not even come close to being properly diversified if your holdings are mostly concentrated in one area of the market (tech, utilities, whatever) or have been thrown together willy-nillywithout any regard to whether they complement one another and operate as a coherent whole.

So rather than shooting for a specific number of funds, your goal should be to create a portfolio that gives you broad access to the stock market but also includes bonds that can provide some ballastif the market goes down. (You'll also want to keep some money in cashfor emergencies while you're saving for retirement and as a reserve for ready spending cash during retirement so you don't have to dip into your assets during severe market downturns.) The aim is create a mix of stocks and bonds that can generate returns high enough to grow your retirement savings and ensure that your money can support you throughout retirementbut without taking on so much risk that you'll end up selling in a panic during inevitable market setbacks.

So how do you build such a mix?

The first step is gauge your tolerance for risk. Generally, the younger you are and the more comfortable you are seeing the value of your portfolio bounce around in response to market fluctuations, the higher the percentage of your portfolio you should be willing to devote to stocks. So, for example, someone in his 20s or 30s, might have upwards of 70%, 80% or even 90% of his portfolio invested in stocks. Conversely, as you get older, protecting the wealth you've managed to createtypically becomes a larger concern, which argues for scaling back on stocks and tilting your mix toward bonds. So someone just entering retirement might have anywhere from, say, 40% to 60% in stocks.

That said, there's no single "ideal" stocks-bonds mix that I or anyone else can recommend. A portfolio that may be perfectly acceptable for one 20-year-old may be far too racy -- or too cautious -- for another. The same goes for retirees.

But you can get a decent handle on how to divvy up your savings between stocks and bonds by completing this risk tolerance-asset allocation questionnaire. After answering 11 questions meant to gauge, among other things, how you might react to stock market downturns and how long you plan to keep your money invested, the tool will recommend a specific mix of stocks and bonds. To give you a sense of whether you would be comfortable with that portfolio, the tool also provides stats showing how that suggested allocation, as well as others, have performed in the past on average and in up and down markets.

Once you've decided how to divvy up your assets, you can focus on which (and how many) funds you should own. My suggestion: Keep it simple and focus on broadly diversified low-cost index funds or ETFs. So, for example, if you've got $100,000 to invest and you're aiming for a mix of 60% stocks and 40% bonds, investing $60,000 in a total U.S. stock index fund and $40,000 in a total U.S. bond index fund would give you a portfolio with exposure to virtually the entire U.S. stock and taxable investment-grade bond markets.

If you went no further, I think you'd be fine. But you can easily diversify even further by adding a total international stock index fund and a total international bond index fund to your holdings. Investing pros can and do disagree about how large a place international funds should play in U.S. investors' portfolios, but I'd say an international stake of, say, 15% to 30% of assets is reasonable.

I'd be wary of doing much beyond that. If you want to get fancy and add a REIT fund or a TIPS (Treasury Inflation Protected Securities) fund for some inflation protection, fine. But resist the urge to invest in every new fund, ETF or other investment product that comes along, as you run the risk of "di-worse-ifying" your portfolio rather than diversifying it. (When you reach retirement age, you might want to consider turning a portion of your nest egg into guaranteed lifetime incomevia an immediate or longevity annuity.)

If the process I've outlined above seems daunting -- or you just want to devote as little time and effort as possible to investing your retirement assets -- there are simpler ways to go. One is to invest in a target-date retirement fund, essentially a fully diversified mix of stocks and bonds that becomes more conservative as you age. (If you go this route, you should invest all, or nearly all, of your money in the target fund. A recent Financial Engines studypoints out that many target-date fund holders invest in additional funds, a practice that can often lead to overlapping holdingsand otherwise undermine the effectiveness of the target fund's asset mix.)

Another option is to turn over the reins of your portfolio to an adviser, although doing so adds an extra layer of expense. You can keep costs down, however, by investing with a " robo-adviser," or relatively new breed of asset management firms that operate online and use algorithms to create and monitor portfolios, often for a fee of 0.5% a year or less, not including the cost of the underlying funds. (Vanguard has a similar servicethat also offers access to a flesh-and-blood adviser.)

But whether you end up putting together a portfolio on your own or with the help of a pro, remember: Your aim is to build a broadly diversified portfolio that can get you the returns you need without exceeding your tolerance for risk. And the fewer funds you can use to achieve that goal, generally the better off you'll be.

My IRA lost 9%. Should I rethink my retirement plan?

I've had an S&P 500 Index Roth IRA open for 2 years that I consistently contribute at least 15% take-home to.

money leaking piggy bank

I've had an S&P 500 Index Roth IRA open for 2 years that I consistently contribute at least 15% take-home to. It is set to reinvest any dividends. Over the 2 years, I've lost over 9%. I'm worried the current market is "robbing" future earnings. Should I reconsider my retirement plan? --Matt Brasher, 27, Atlanta

First off, congratulations for starting early.

Saving for something that isn't likely to happen for nearly four decades can be difficult, but investing for retirementearly in a career puts time on your side and can make it easier to weather market downturns.

But let's face it: It's hard to stomach Wall Street's wild swings.

"It's very easy to get distracted, concerned or agitated over short-term volatility with low or negative returns," said Scott Mazuzan, a certified financial planner with F.L Putnam Investment Management Company.

No one likes to watch their hard-earned money lose value, but an important aspect to investing is taking the emotion out of it to avoid knee-jerk decisions.

"What successful investors learn is to not try and time the market ... it doesn't work," said Steve Martin, a certified financial planner and senior managing advisor at BKD Wealth Advisors.

A 9% hit might hurt now, but it helps to look at the bigger picture: In the last five years, the S&P 500 is up 60% and it's nearly tripled since March 2009.

And there is a silver lining for young investors. "Dips in the market mean you are buying cheaper," Martin pointed out. "For people in the accumulation phase, market downturns aren't always bad. You are buying more at lower costs."

Financial planners tend to recommend young savers keep the majority of their retirement funds in stocks since their time horizon is longer, but diversificationis key.

While the S&P 500 is a good barometer of the stock market, the experts suggested investing beyond the large U.S. companies that make up the index.

International stocks could help round out a stock portfolio, said Martin, who pointed out that more than half of global economic growth comes from other countries.

"That means over half of all opportunity is outside the U.S. Companies like Toyota , Mitsubishi, Nestle -- big companies you use every day that you don't own with the S&P 500."

Adding small or mid-sized companies can also help balance out a portfolio , added Mazuzan.

It's important for investors of every age to know their risk tolerance and be comfortable with their investment strategy. For example, older Millennials or those with a lower risk tolerance could consider adding more bondsto help cushion the blow of any market turmoil. Bonds are considered less volatile than stocks. Just keep in mind that your bond values fall when interest rates rise.

"If you have a more diversified portfolio, when the market has these corrections, you don't have as much loss and you have a higher tendency to stick with it," said Martin.

Hey Millennials: What's your most pressing money question? and you could be featured in an upcoming story on CNNMoney. Please include your name, age, and city.

A universal retirement plan could be coming to California

The Treasury Secretary explains MyRA: A 'starter' retirement account
Saving for retirement could get a lot easier for millions of workers in California.

A set of recommendations is headed to the state's legislature that would create a state-sponsored retirement fund for workers who don't have access to retirement plans through their job.

The Secure Choice Retirement Savings Planwould require businesses with at least five employees to provide access to the state program or another retirement plan.

"Every American who works deserves retirement security and seniors deserve to live their lives with strong dignity," said California State Treasurer John Chiang, who was also the chair of the board that created the plan.

If passed by lawmakers and signed into law, the program could go into effect at the start of 2017.

Around 6.8 million residents would be eligible for plan, which would work like a collective 401(k) plan to which workers would contribute payroll deductions.

Only workers who don't have an employer-sponsored retirement plan would be allowed to enroll, and participation would be automatic -- meaning workers would have to opt out of having money withheld from their paycheck.

The board approved the final recommendations for the plan on Monday, and recommended that the legislation require participants have 5% of their paycheck be invested.

The program would be funded through fees taken out of contributions, and participants would get penalized if they take the money out early.

Chiang's office said that the program will lead to retirees being less reliant on public services.

"Policymakers understand that over the long term, it will reduce the possible costs to governments to having to provide taxpayer-provided services for older Americans living in poverty absent of retirement savings," said Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University.

The bill creating the fund has already been introduced, and California lawmakers will hold a hearing on it by April 22.

You can buy this Nevada town for $8 million

The Republic of Molossia, never heard of it?

The Republic of Molossia, never heard of it? Here's why

There's a desert town in Nevada that could be yours for a cool $8 million.

Cal Nev Ari is a 640-acre town located roughly 60 miles south of Las Vegas. About 350 people live there.

The sale includesthe town's facilities -- a casino, restaurant, motel, convenience store and a mobile home park -- plus an additional 520 acres that remain undeveloped.

"It's a very large tract of contiguous land, which is rare in Nevada since the federal government owns 80% of land in the state," explained listing agent Fred Marik.

There's been interest from buyers with different business plans, including a marijuana resort, residential buildings and a retirement community.

Pilots might also be interested in the town. It was an abandoned World War II airstrip for General George Patton and currently has a residential airpark with a dirt runway. Many of the homes have airplane hangars.

"People can walk out of their living room and fly down the taxiway and take off," said Marik.

The city was founded in 1965 by Nancy Kidwell with her first husband. The 78-year-old founder owns all the businesses in the town and employs around 27 people.

The sale comes with a few stipulations: The airport must remain in business as Kidwell Airport and the town must keep its name for 30 years.

"She is really invested in the town. She built it from scratch with her hands," said Marik.

Kidwell originally put the town up for sale in 2010 for $17 million, but it went off the market after the Great Recession devastated the state's real estate market. It went back on the market for the lower asking price in February.

New Obama rule goes after shady financial advisers

V is for Q1: Volatility shapes the markets
Work hard.

Work hard. Save a lot. Retire in peace. That's the goal.

People get derailed on their way to a happy retirement for many reasons, but the Obama administration says costly -- or outright bad -- financial advice shouldn't be what holds you back.

A new rule unveiled today by the Obama administration requires retirement advisers to always act in the best interest of their client.

"It's pretty obvious if people are expecting financial advice they should be able to count on the fact that it's going to be real advice to help improve your situation," says Bill Harris, the CEO of Personal Capital and former CEO of PayPal.

Many advisers genuinely want to help their clients. But currently, it is legal for an adviser to get paid more money (similar to a kickback) if he or she gets you to invest in fund A instead of fund B.

For example, an adviser might make $200 if he or she has you invest $10,000 in a stock fund but only $130 if he or she has you invest in a bond fund, according to University of Mississippi law professor Mercer Bullard. Advisers recommend the fund that pays them more about half the time, one study found.

"Brokers are salespeople. They sell whatever they and their firm make the most money on," argues Harris. His firm already abides by the rule. It charges clients a flat fee for advice so there's no conflict of interest.

Wall Street is anxious about the rule

All these fees add up. Higher costs and lower returns cost American families $17 billion a year, according to President Obama's Council of Economic Advisers.

The new Obama administration rule -- known as the Fiduciary Standard -- is a big shakeup of the industry. Bullard expects a lot more firms to do away with the kickback-style payments to advisers and just go to a flat-fee model.

Wall Street is anxious about the change. Many financial firms' stocks plummeted in recent weeks as it became clear the White House was moving forward with the rule.

The stock of LPL Financial , the nation's largest independent broker-dealer, has tanked over 40% this year. Charles Schwab and E*Trade are both down about 20%. Firms have until January 2018 to comply fully.

There are concerns that financial firms won't make as much money once the rule is fully in effect, but a recent Morgan Stanley report says the impact is likely to be "substantially less" than what the beaten-down stocks imply.

Will the rule make advice more expensive?

A key concern is that the Fiduciary Rule could make advice more costly because of more legal paperwork and compliance expenses.

"If you need more assistance than [basic options], you're gonna get mad when you can't get the support you want," arguesJill Hoffman of the Financial Services Roundtable, an advocacy group for the industry.

Some Republicans have gone as far as to call the rule "harmful" in its current form.

"This rule would raise costs and limit options for people seeking advice on their retirement planning. This rule could hurt millions of middle-class savers," saidRepublican House Speaker Paul Ryan in March.

Advocates of the new rule push back. They point out that the explosion of lower-cost index funds and new online and app investing advice tools should keep costs down and ensure that middle class families get what they need.

"This rule is a huge win for the middle class," said Labor Secretary Tom Perez. "These rules will save affected middle-class families tens of thousands of dollars for their retirement."

Put the client first

The rule has been debated since 2010. The White House says over 3,000 comment letters have come in from advisers, investors and financial management firms.

The White House claims it has listened and made the final rule less onerous, but it won't back down from helping the middle class.

"It's a very simple principle: You want to give financial advice, you've got to put your client's interest first," saidPresident Obama.

How can you find an honest financial adviser?

My husband and I would like to retire in the next few years.

financial advisor

My husband and I would like to retire in the next few years. We have substantial savings, but we're still not sure whether we'll have enough to live on. Where can we find an adviser who can sit down with us, advise us but not give us a sales pitch and try to sell us a lot of things we don't need? --Kathleen, Texas

You've probably heard that after years of talking about it, the Department of Labor last week finally proposed rules requiring all financial advisers to act as a fiduciary-- essentially, avoid conflicts of interest and act in your best interest-- when giving people retirement advice. Previously, only registered investment advisers have had to meet a fiduciary standard.

I would like to be able to tell you that this solves your problem of finding an honest (and competent) financial adviserwho will put your financial well-being ahead of his. But I can't. For one thing, the new rules won't start to go into effect until April 2017. And even when they do, they'll cover only assets in retirement accounts like 401(k)s and IRAs. Savings held in regular taxable brokerage, mutual fund or savings accounts won't be covered by the new rules.

Most importantly, though, I don't believe any rule or regulation can guarantee integrity, competence or, for that matter, assure that you'll get your money's worthwhen paying a financial pro for assistance. For example, as a registered investment adviser, Ponzi scheme king Bernie Madoff owed a fiduciary duty to his clients. That didn't prevent him from stealing their dough.

I hope that this new rule will stem the peddling of inappropriate and egregiously expensive investments, rein in conflicts of interest and perhaps even save consumers money. But I think it would be Pollyana-ish to assume that will be the case, or to believe you should be any less vigilant when choosing a financial adviser because of this rule.

Fiduciary rule or no, and whether you work with an adviser or not it's ultimately on you to safeguard your retirement nest egg.

So how do I recommend you proceed?

Start by thinking hard about exactly what sort of help you want, as that can narrow down the type of adviser you need and also prevent you from getting sidetracked by a sales pitch for products or services you don't want.

It sounds like you already know that you're primarily interested in having someone help you determine whether you're on track toward a secure retirement, and how much longer you might have to work before you can call it a career.

That's fine, but you might want to come up with a list of specific questions or issues you can go over in an initial consultation or interview with an adviser so that there's no mistake about the kind of advice and guidance you seek.

So in your case, some questions might be: If my husband and I retire in the next few years, will we have enough saved to be able to maintain our current lifestylethroughout a retirement that might last 30 or more years? If not, how many more years will we have to work to achieve that goal? Will we be able to weather a market setback-- or a large unexpected expense without jeopardizing our financial security? When should each of us claim Social Security Benefits?

In dealing with these questions, other issues might very well come up, such as whether your savings are invested appropriatelyto generate the retirement income you'll need. But by outlining ahead of time the areas you're most concerned about, you'll have a better chance at evaluating whether different advisers are responding to your needs or pushing their own agenda.

There are plenty of advisers out there who can talk a good game about retirement planning and creating a retirement income plan. But if you really want to know whether or not you're on track to call it a career, you don't want a glib talker or sales type. You want an adviser who's capable of doing the nitty-gritty analysis and number-crunchingnecessary to make such an assessment. For the most part, that probably means dealing with a financial planner who holds a Certified Financial Planner(CFP) or Chartered Financial Consultant(ChFc) designation, both of which require an adviser to meet rigorous professional standards.

That said, you shouldn't make a decision based on credentials alone (or let yourself be awed by a long string of impressive-sounding designations). I'd ask to see the sort of analysis the adviser has done for clients in similar situations to get a better idea of how comprehensive his plans are and what sort of recommendations they involve.

Inquire too about follow-up. How will you know his advice is working? How will you measure progress? While you're at it, get a few references from current clients who have worked with the adviser on the types of issues you and your husband are facing.

You'll also want to vet the adviser to see whether he's had run-ins with financial regulators and/or left a trail of disgruntled customers. A recent study titled " The Market For Financial Adviser Misconduct" shows not only that such problems occur frequently enough to merit concern, but that some advisers are serial offenders, moving from firm to firm.

You can find plenty of helpful resources on how to examine an adviser's background, including links to regulators' websites, by going to the Check Out A Broker or Advisersection of the SEC's site.

Of course, you'll also want to know how much the adviser's advice is going to cost you. Advisers can be compensated in a variety of ways. Some charge a fee for their advice (typically a percentage of assets under management), others get a sales commissions for the products they sell and some receive a combination of fees and commissions. A minority of advisers are willing to work for an hourly fee. Generally, I think the fee-for-advice arrangement has less potential for abuse and conflicts of interest (and I expect will become more prevalent as the DOL's fiduciary rule kicks in).

You can find planners willing to work for a fee, commissions or a combination of the two at the Financial Planning Associationsite. The National Association of Personal Financial Advisorscan direct you to fee-only planners, and the Garrett Planning Networkhas a roster of planners you can hire on an hourly basis.

Whatever compensation method you go with, I recommend getting a detailed estimate of all charges in writing. By comparing costs from one adviser to another, you can make a more informed decision about which adviser offers the best value. And having such information may even help you negotiate for a better deal.

Finally, you need to broach the subject of conflicts of interestwith any adviser you're considering. The primary goal of the new fiduciary rule is to require advisers to put their clients' interests first. And I fully expect that many advisers will use the new rule as a way to market themselves: "I'm a fiduciary. I'm the good guy. You don't have to worry about getting ripped off. The law requires that I put your interests ahead of mine."

At the risk of sounding cynical, I don't believe any adviser can totally put a client's interests first. For example, a fiduciary adviser who eschews sales commissions in favor of charging an annual percentage-of-assets fee to manage your investment portfolio might rightly note that he's eliminated an inherent conflict of interest associated with commissions -- namely, that the adviser might steer you to high-commission productsthat are better for his bottom line than yours.

But the fee-for-advice model also has inherent conflicts. The adviser has an incentive to charge that same percentage fee year after year, increasing the adviser's income as your portfolio's value rises even if the services provided remain largely the same. Or the adviser might be reluctant to recommend products, such as bank CDs or an immediate annuity, or engage in strategies, such as paying off mortgage debt, that reduce the value of assets under his management and thus lower his annual fee.

So before hiring an adviser, ask him to detail the potential conflicts in your relationship and have him explain how he'll manage them to your benefit. And never assume that just because an adviser is a fiduciary that you're getting the best deal. Fiduciary advisers' fees can vary widely, so it's still up to you to shop around to ensure you're not paying more than necessary for the advice you seek.

Clearly, you'll have to allow some time to think about these issues, identify potential advisers and then do your due diligence on them. But given that the retirement stash it took you an entire career to accumulate is at stake, this is definitely a process you don't want to rush.

How to create a secure retirement plan

When I retire, I want to create my own pension, but I have reservations about annuities.

secure retirement tips

When I retire, I want to create my own pension, but I have reservations about annuities. So I'm thinking of investing some of my savings in a bond fund, leaving the principal untouched and just living off the income. I'll keep the rest of my nest egg in mutual funds and dip into it as needed. Do you think this is a good plan? --Mike A., New York

I totally understand why you're wary of annuities. Many of them are expensive and mind-numbingly complex. So I get your reluctance to include an annuity in your retirement income plan.

But while the strategy you suggest -- putting a portion of your savings into a bond fund and living off the income and other distributions -- might work, it also has some drawbacks. And, perhaps more importantly in your case, it doesn't come close to replicating a pension, at least in the way most people think of one.

Why? Well, the main reason is that is that a pension typically gives you a fixed monthly payment (although in some cases it may rise with inflation) that you can depend on the rest of your life regardless of how the financial markets are performing. Research shows that such reliable income can make for a happier retirement.

With your plan, however, your income can fluctuate, depending on what interest rates do. The value of your investment in the bond fund can also go up or down, rising if interest rates fall and dropping if interest rates rise.

You say you won't sell any shares in the fund, so theoretically at least that shouldn't affect you. I say theoretically because if you decide to abandon your hands-off policy at some point and sell shares because you need extra money, then the current market value of your fund may become an issue, especially if it has declined.

You should also know that you'll likely have to settle for a pretty low level of income from the assets you invest in the bond fund. With investment-grade bond funds currently yielding in the neighborhood of 2% to 4% depending on their maturity, an investment of, say, $150,000 might generate income of roughly $250 to $500 a month these days, although the exact amount will fluctuate (and might include other distributions, such as realized capital gains if interest rates fall and the fund sells bonds at a profit). You can always generate more income from the bond fund by increasing the amount you invest in it, but that would mean diverting money from the rest of your nest egg.

You can call this arrangement whatever you like, but referring to it as a pension is a stretch. That said, if you're okay with the fact that your "pension" income isn't stable and that you'll have to devote considerable assets to a bond fund to generate decent income, then you may want to proceed with your plan.

But if you really want to turn a portion of your nest egg into something that approximates a pension -- a specific amount of money you can count on month in and month out for the rest of your life -- then I suggest you suspend your wariness about annuities long enough to at least consider a type of annuity that's easier to understand, less prone to the abuses that are too often associated with annuitiesand is very efficient at turning savings into assured lifetime income -- namely, an immediate annuity.

The premise behind an immediate annuity is relatively simple. You turn over a lump sum of cash to an insurer (although you may actually buy the annuity through an adviser or an investment firm rather than directly from the insurer) and in return you get a monthly payment that's guaranteed for life. The size of the payment you get depends, for the most part, on your age, gender, the level of interest rates and the amount of money you invest. ( This annuity calculatorcan give you an estimate of how much you might receive for a given amount invested in an immediate annuity today.)

The way that an immediate annuity might work in your situation is also pretty straightforward. You devote a portion of your nest egg to an immediate annuity and invest the rest in a diversified mix of stock and bond mutual fund that jibes with your tolerance for risk. The annuity generates steady income much like a pension. The stock and bond funds can provide long-term growth to help maintain your purchasing power over the course of a long retirement and also act as a source of liquidity for any additional spending money you need. (As a practical matter, you'll also want to have a cash reserve for emergencies and such.) This columngoes into more detail about how this annuity-plus-traditional portfolio approach works.

One significant drawback to relying on an immediate annuity for retirement income is that you can no longer get to your money once you've invested in the immediate annuity. So you can't tap it for emergencies or leave it to your heirs. And if you die shortly after buying the annuity, you'll have shelled out a lot of dough for a small number of payments. Generally, an annuity makes the most sense if you (or your spouse, if you're married) expect to live to life expectancy or beyond.

But there are advantages too. You can count on the annuity payment to be stable whether interest rates are rising or falling. An annuity also generates higher monthly payments than you can get from a bond fund (largely because, unlike with a bond fund, you give up access to your original investment in the annuity). Today, for example, a 65-year-old man who invests $150,000 in an immediate annuity might collect about $820 a month for life.

Or, since the annuity provides higher payments, you could choose to invest less money in the annuity than in the bond fund and receive the same size monthly payments. This would allow you to keep more of your nest egg in a mix of stocks and bondsthat can grow over time.

Before you embark on either strategy, I suggest you do a retirement budgetto get a better handle on just how much retirement income you may need. If it turns out that Social Security (which is also effectively a pension) will provide enough income to cover all or most of your essential living expenses, then you may not need more pension-like income from an annuity. In which case you can rely on your portfolio of stock and bond funds for any income needs beyond what Social Security provides.

In fact, even if Social Security doesn't cover your essential expenses, you may not need an annuity if your nest egg is so large relative to whatever expenses it must cover that your chances of running through your savings in your lifetime are minuscule. (To see whether that's the case, you can go to this retirement income calculator.)

But if there is a gap between the income you'll receive from Social Security and your basic living expenses and you would like to cover all or most of that gap with income that's assured, then you may want to do so with an investment that can actually provide pension-like income -- i.e., an annuity.

One final note: There's no need to rush this decision. Indeed, spending a couple of years in retirement can give you a better sense of how much income you'll require and how much, if any, pension-type income you need beyond what you get from Social Security. And if you eventually decide an annuity is a good choice, you'll also want to set aside plenty of time to get answers to these key questionsbefore you buy, so that you end up with an annuity that's right for you.

There's a big sale on Puerto Rican homes

Looking for a real estate steal?

puerto rico for sale collage For sale signs and abandoned buildings are common in Puerto Rico these days.

Looking for a real estate steal? Try Puerto Rico.

While most of the U.S. freezes in February, Puerto Rico is 80 degrees. The island is home to one of the world's best beaches, according to TripAdvisor.

And it's a buyer's market right now. You can get a 3-bedroom home near the beach for under $100,000.

Hedge fund billionaire John Paulson has been scooping up real estatethere. He predicts it will be the "next Miami."

So what's the catch? For sale signs are everywhere in Puerto Rico. People are fleeing the island because it's been in a prolonged economic crisis. The situation is reminiscent of what Detroit was like when it filed for bankruptcy in 2013.

"So many houses are empty here," says Joaquin Garcia de la Noceda, a locksmith in San Juan, the island's capital.

Joaquin listed his 96-year-old mother's home in San Juan for $100,000. Hardly anyone looks at it even though it's in San Juan and has three bedrooms and two bathrooms.

The home is one of many bargains in Puerto Rico. It was appraised at $215,000 not long ago, and his mom paid $177,000 for it in 2009.

Few want to buy with the island in crisis mode. More than 1 in 10 people can't find jobs and the government is deep in debt. Since Puerto Ricans are U.S. citizens, many are simply packing up and moving to Florida, Texas and other states.

The island has lost over 10% of its population -- roughly 440,000 people -- in the past decade. The exodus appears to be accelerating since the island defaultedfor the first time ever in August.

"People are literally leaving their homes empty with the keys in the house," says retiree Maria Milagros Rodriquez. They let the bank deal with it.

Puerto Rico's foreclosure crisis

Maria owns a gated home in San Juan with 5 bedrooms, a pool and a big garage. Homes on her block sold for over $1 million only a few years ago. Now people are lucky to get $400,000.

If Puerto Rico were a state, it would currently rank second in the U.S. for homes in foreclosure, according to RealtyTrac. It only lags behind New Jersey.

The plight is evident on Maria's block. The home next to hers is empty and she knows of two other vacant properties a few houses down. There are no "for sale" signs yet because most of the homes are in the process of being repossessed by their banks.

Puerto Rico has more foreclosures now than the national average at the peak of the housing crisis in 2010, says Daren Blomquist, vice president at RealtyTrac.

And it's only likely to get worse. More and more homes are entering the foreclosure process. It's another blow as the the island tries to deal with its recession and $70 billion in debt.

Bargain buyers are starting to come

The "beachfront bargains" are starting to attract buyers.

Paulson isn't the only one looking for deals. Wealthy investor Nicholas Prouty bought an apartment building out of bankruptcy in 2012. People warned him it would take a decade to sell the condos. He's already sold all 312 apartments.

Who's buying them? He told CNNMoney the typical purchaser is a single Puerto Rican woman in her early 30s with a graduate degree.

They pay $160,000 for a one-bedroom and $230,000 for a 3-bedroom. The apartment building -- known as Ciudadela -- is located in the heart of San Juan and has its own security force and private trash collection.

The project has been so successful that Prouty is working on two more buildings.

"The prices are excellent on real estate here," says Prouty, who has even re-located his own family from Greenwich, Connecticut to Puerto Rico.

Trump Mortgage...in 2 minutes

This Trump business failed in less than 2 years
In 2006, there were already warning signs that the housing market was in trouble.

But that didn't deter Donald Trump from getting into the mortgage business.

Trump Mortgage, LLC launched in spring 2006.

But the company didn't last long.

Now, Trump, who frequently touts his business acumen on the campaign trail, is catching some flak for the failed venture.

1. The timing was poor

Though the bursting of the housing bubble wasn't completely apparent yet, home priceswere starting to fall in early 2006.

In 2007, the bottom fell out when home owners started defaulting on shoddy loans and real estate prices came crashing down. Foreclosures spiked, mortgage lenders and banks crumbled and lending dried up. Not an easy environment for a new mortgage business to break into.

The company described itself as the "strongest and safest residential and commercial mortgage company in the industry," on an archived version of its website.

2. Trump wasn't too concerned

Despite the warning signs, Trump was still upbeat about the real estate market.

During an April 2006 interview on CNBC, Trump said he thought it was "a great time to start a mortgage company," according to a transcript of the interview.

"I've been hearing about this bubble for so many years from you and everybody else in your world, but I haven't seen it. I will let you know when I see it."

He also said during the interview that the company was "swamped" with customers seeking out financing and that "the real estate market is going to be very strong for a long time to come."

Sadly, it wasn't.

An archived webpage of TrumpMortgage.com from Wayback Machine.

3. It wasn't actually lending money

Trump Mortgage launched as a mortgage broker, which means it helped facilitate loans between borrowers and lenders, but didn't actually lend any money to homebuyers.

But that could've been the next step. The Wall Street Journal reportedthat Trump was considering starting a mortgage bank.

Job postings on an archived TrumpMortgage.com page showed the company was looking to hire a mortgage originator and a loan processor. Both positions required knowledge of different loan types, including subprime and government-backed loans.

4. The CEO's qualifications raised some eyebrows

E.J. Ridings was tapped to run Trump Mortgage, but his business credentials raised some red flags.

A 2006 report by Money Magazineclaimed Ridings made "false or misleading claims" about his professional background. The article called into question his claims of being a top Wall Street executive and his experience in the mortgage world.

5. The plan was to educate consumers

The company claimed to be all about transparency and aimed to educate borrowers to help them understand their loan options.

The company's mission said that "trust" is an important part of the process.

"The Trump Mortgage Team is dedicated to making sure that every loan, every client, receives nothing less than the full Trump experience -- integrity, honesty, safety, guidance and exceptional personal service," the website read.

6. It didn't last long

Trump Mortgage closed in 2007, less than two years after it opened.

News reports cited that the company failed to hit financial targets, and Trump placed some of the blame on his executives.

Trump distanced himself from the company, reportedly saying he didn'twant to get overly involved in the mortgage business.

7. Trump's campaign downplays his role

In April 2006, Trump took the stage at the company's press launch at Trump Towers. He said the company was going to be very successful, according to the New York Times.

Today, Trump's presidential campaign calls the failed business a "tiny deal."

"[That] was a tiny deal that Mr. Trump looked at, but never ultimately moved forward with because Mr. Trump decided he didn't want to be in this business foreseeing the market crash," Trump campaign spokeswoman Hope Hicks told CNNMoney via email.

When asked for further clarification, Hicks repeated that the company was "just a look."

"Mr. Trump has over 500 companies. This was just a look, but he decided he didn't like the market."