Rate Watch 2018 – April

Welcome to another edition of Rate Watch as we track the interest rate that is vital to the grandfathered pension at Southern California Edison. If you’ve missed any of our previous articles, you can find them here:

Rate Watch 2017 – March
Rate Watch 2017 – February
Rate Watch 2018 – January

Rate Watch 2017 – August

The third rate of 2018 begins to paint a new picture of where rates have the potential to go in the fall of 2018. The latest comes after increased Fed conversations on future rate hikes and an increase in March. Let’s take a look at the most recent numbers:

*These are not current plan rates for Southern California Edison’s pension plan, they are minimum present value third segment rates from the IRS. Official plan rates are derived from the minimum present value segment rates table (https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates) . Plan rate changes are made by Southern California Edison on an annual basis.

*These are not current plan rates for Southern California Edison’s pension plan, they are minimum present value third segment rates from the IRS. Official plan rates are derived from the minimum present value segment rates table (https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates) . Plan rate changes are made by Southern California Edison on an annual basis.

March’s value of 4.43 gives us the first reading higher than the current official plan rate of 4.36, a 0.07% change. With the Fed announcing an increase in rates by 0.25% to a range of 1.50-1.75%, the sixth rate hike since 2015, is said to be one of many by the Fed in 2018. They continue to point to strong economic outlooks and labor conditions as reasons to pencil in future hikes, but we will have to see how the market reacts.

This also brings some new thinking for grandfathered pension holders because this could produce a situation where the following year’s interest rate will be higher than the current value, and increases in interest rates will produce a smaller lump sum payout for grandfathered pension holders. The inverse is true for rate decreases; however, it looks like that could be a less likely scenario should this trend continue.

Remember, if you are planning on retiring as a grandfathered pension holder, then you have a choice on when you want to set your commencement date and pick which rate produces a more favorable outcome.

I think we’ve become a broken record at this point by saying this, but it is still a tad early to make any huge decisions, but the fall will soon be upon us. As always, this is only one metric to look at as you think about retirement, but it is an important one.

Developing a financial plan on how to approach retirement and maximize your benefits is important, so make sure you are working with someone who is familiar with Edison’s benefits and knows how they work.

Worried about your retirement plans? Concerned with how to handle your pension or 401(k)? Maybe you’re just unsure on how the transition to retirement works. We’ve helped countless Southern California Edison employees plan for retirement. Contact us for a free retirement planning session or portfolio analysis.


Joe OcchipintiJoe Occhipinti
Wealth Advisor
Warren Street Wealth Advisors

 

 

 

 

Joe Occhipinti is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information. A professioanl advisor should be consulted before implementing any of the strategies or options presented.

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio.Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

 

Why Having a Financial Professional Matters

Why Having a Financial Professional Matters

A good financial professional provides important guidance and insight through the years.

What kind of role can a financial professional play for an investor? The answer: a very important one. While the value of such a relationship is hard to quantify, the intangible benefits may be significant and long lasting.

A good financial professional can help an investor interpret today’s financial climate, determine objectives, and assess progress toward those goals. Alone, an investor may be challenged to do any of this effectively. Moreover, an uncounseled investor may make self-defeating decisions.

Some investors never turn to a financial professional. They concede that there might be some value in maintaining such a relationship, but they ultimately decide to go it alone. That may be a mistake.

No investor is infallible. Investors can feel that way during a great market year, when every decision seems to work out well. In long bull markets, investors risk becoming overconfident. The big-picture narrative of Wall Street can be forgotten, along with the reality that the market has occasional bad years.

This is when irrational exuberance creeps in. A sudden market shock may lead an investor into other irrational behaviors. Perhaps stocks sink rapidly, and an investor realizes (too late) that a portfolio is overweighted in equities. Or, perhaps an investor panics during a correction, selling low only to buy high after the market rebounds.

Often, investors grow impatient and try to time the market. Poor market timing may explain this divergence: according to investment research firm DALBAR, the S&P 500 returned an average of 8.91% annually across the 20 years ending on December 31, 2015, while the average equity investor’s portfolio returned just 4.67% per year.(1)       

The other risk is that of financial nearsightedness. When an investor flies solo, chasing yield and “making money” too often become the top pursuits. The thinking is short term.

A good financial professional helps a committed investor and retirement saver stay on track. He or she helps the investor set a course for the long term, based on a defined investment policy and target asset allocations with an eye on major financial goals. The client’s best interest is paramount.

As the investor-professional relationship unfolds, the investor begins to notice the intangible ways the professional provides value. Insight and knowledge inform investment selection and portfolio construction. The professional explains the subtleties of investment classes and how potential risk often relates to potential reward. Perhaps most importantly, the professional helps the client get past the “noise” and “buzz” of the financial markets to see what is really important to his or her financial life.

This is the value a financial professional brings to the table. You cannot quantify it in dollar terms, but you can certainly appreciate it over time.

 

 


Blake StreetBlake Street, CFA, CFP®
Chief Investment Officer
Founding Partner
Warren Street Wealth Advisors

Blake Street is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio.Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

Citations.
1 – zacksim.com/heres-investors-underperform-market/ [5/22/17]

Rate Watch 2018 – March

Welcome to another edition of Rate Watch as we track the interest rate that is vital to the grandfathered pension at Southern California Edison. If you’ve missed any of our previous articles, you can find them here:

Rate Watch 2017 – February
Rate Watch 2018 – January

Rate Watch 2017 – August
Rate Watch 2017 – July

The second rate of 2018 is an interesting one as it comes a couple days before the Fed’s announcement to raise interest rates 0.25% on March 21st, 2018,  but let’s take a look at the most recent numbers:

March 2018

*These are not current plan rates for Southern California Edison’s pension plan, they are minimum present value third segment rates from the IRS. Official plan rates are derived from the minimum present value segment rates table (https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates) . Plan rate changes are made by Southern California Edison on an annual basis.

February’s reading takes us closer to the current grandfathered rate for 2018, 4.36. This would bring very little change to your lump sum grandfathered pension value as of right now, but it could be an indicator of where rates could end up in the fall. Again, we can’t emphasize enough, it is still early in the year and rates could go anywhere as the months continue.

One of the most interesting factors for following months will be if the Fed increasing interest rates will have any impact on minimum present value segment rates, which are the rates used to determine the official grandfathered rate in the fall.

Remember, your grandfathered pension is just one of many factors that you should examine when thinking about retirement. There are many moving parts that extend further than interest rates and lump sum payout values.

Unsure if you are on the right track for retirement? Concerned about your 401(k) or other retirement investments? Contact us for a free retirement goals session or portfolio analysis.


Joe OcchipintiJoe Occhipinti
Wealth Advisor
Warren Street Wealth Advisors

 

 

 

 

Joe Occhipinti is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information. A professioanl advisor should be consulted before implementing any of the strategies or options presented.

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio.Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

 

Rate Watch 2018 -February

Welcome to another edition of Rate Watch as we track the interest rate that is vital to the grandfathered pension at Southern California Edison. If you’ve missed any of our previous articles, you can find them here:

Rate Watch 2018 – January
Rate Watch 2017 – August
Rate Watch 2017 – July
Rate Watch 2017 – June

As our first rate for 2018, we feel that this could be a good indicator on the range of possibilities we might see as we approach the end of 2018. The official rate for the grandfathered pension plan in 2018 is 4.36, derived from the August 2017’s third segment minimum present value rate, but it is important to determine what you options could look like as we approach the official announcement. Let’s take a look at the most recent posted rates:

February 2018 Chart

*These are not current plan rates for Southern California Edison’s pension plan, they are minimum present value third segment rates from the IRS. Official plan rates are derived from the minimum present value segment rates table (https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates) . Plan rate changes are made by Southern California Edison on an annual basis.

There has been a small uptick from December 2017’s 4.11, but insignificant in the short-term. However, as we say each month, when rates decrease the value of your lump sum payout goes up and vice-versa. The most recent rate is still below the official 2018 rate, but again, it is very early in the year and there is plenty of time for rates to move from now until the fall.

What is more important to note is the continued conversation of rising interest rates in the U.S., and how the Fed continues to look to raise rates in the long-term. The Fed and how the market reacts to these interest rate changes will be one of, if not the biggest, influence on rates this year.

As the fall approaches, it will be vital for SCE employees to examine the new official rate in comparison to the 2018 number of 4.36. Additionally, as employees plan for retirement, their pension should not be the only metric that they look at. Assets, debts, and income needs should all be analyzed prior to making a decision on retirement. Again, this metric is important to track for those prepared to make the plunge into retirement, but you should not base your decision off of rate changes or you pension alone.


Joe OcchipintiJoe Occhipinti
Wealth Advisor
Warren Street Wealth Advisors

 

 

 

 

Joe Occhipinti is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information. A professioanl advisor should be consulted before implementing any of the strategies or options presented.

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio.Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

 

Rate Watch 2018 – January

If you followed along with us last year, you may remember our Rate Watch 2017 articles where we tracked the interest rate used for the Southern California Edison grandfathered pension.

Rate Watch 2017 – August
Rate Watch 2017 – July
Rate Watch 2017 – June
Rate Watch 2017 – May

Since our last Rate Watch post in September 2017, we wanted to write a quick recap article of the last few months of interest rate changes as we look towards the official announcement in the fall.

Edison uses the minimum present value third segment rate for the grandfathered pension plan. The August rate is the one that is specifically used for the plan’s lump sum value calculation, and the official announcement is made by SCE to its employees in late September or early October.

Rate Watch January 2018 Chart

The rule of thumb with the pension is: when interest rates decrease, the value of your lump sum payout increases and vice versa.

Since August, we have seen the rate fall from 4.36 down to 4.11. While it is still very early in the year, and this number does not directly impact lump sum values for the pension, we find it important to keep track of where the number is at and where it could be heading towards the fall.

If you think that retirement is on the horizon and want to make sure you maximize your pension benefit, then schedule a free consultation to learn what we do for SCE employees and how we have helped 100’s of them retire with confidence.

*These are not current plan rates for Southern California Edison’s pension plan, they are minimum present value third segment rates from the IRS. Official plan rates are derived from the minimum present value segment rates table (https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates) . Plan rate changes are made by Southern California Edison on an annual basis.


Joe OcchipintiJoe Occhipinti
Wealth Advisor
Warren Street Wealth Advisors

 

 

 

 

Joe Occhipinti is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information posted here represents his opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio.Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

 

The ABCs of Behavioral Bias – Conclusion

We’ll wrap our series, the ABCs of Behavioral Biases, by repeating our initial premise: Your own behavioral biases are often the greatest threat to your financial well-being.

We hope we’ve demonstrated the many ways this single statement can play out, and how often our survival-mode brains trick us into making financial calls that foil our own best interests.

Evidence-Based Behavioral Finance

But don’t take our word for it. Just as we turn to robust academic evidence to guide our disciplined investment strategy, so too do we turn to the work of behavioral finance scholars, to understand and employ effective defenses against your most aggressive behavioral biases.

If there weren’t so much damage done, behavioral finance might be of merely academic interest. But given how often – and in how many ways – your fight-or-flight instincts collide with your rational investment plans, it’s worth being aware of the tell-tale signs, so you can detect when a behavioral bias may be running roughshod over your higher reasoning. To help with that, here’s a summary of the biases we’ve covered throughout this series:  

The Bias Its Symptoms The Damage Done
Anchoring Going down with the proverbial ship by fixing on rules of thumb or references that don’t serve your best interests. “I paid $11/share for this stock and now it’s only worth $9. I won’t sell it until I’ve broken even.”
Blind Spot The mirror might lie after all. We can assess others’ behavioral biases, but we often remain blind to our own. “We are often confident even when we are wrong, and an objective observer is more likely to detect our errors than we are.” (Daniel Kahneman)
Confirmation This “I thought so” bias causes you to seek news that supports your beliefs and ignore conflicting evidence. After forming initial reactions, we’ll ignore new facts and find false affirmations to justify our chosen course … even if it would be in our best financial interest to consider a change.
Familiarity Familiarity breeds complacency. We forget that “familiar” doesn’t always means “safer” or “better.”    By overconcentrating in familiar assets (domestic vs. foreign, or a company stock) you decrease global diversification and increase your exposure to unnecessary market risks.
Fear Financial fear is that “Get me out, NOW” panic we feel whenever the markets turn brutal.   “We’d never buy a shirt for full price then be O.K. returning it in exchange for the sale price. ‘Scary’ markets convince people this unequal exchange makes sense.” (Carl Richards)
Framing Six of one or half a dozen of another? Different ways of considering the same information can lead to illogically different conclusions. Narrow framing can trick you into chasing or fleeing individual holdings, instead of managing everything you hold within the greater framework of your total portfolio.
Greed Excitement is an investor’s enemy (to paraphrase Warren Buffett.) You can get burned in high-flying markets if you forget what really counts: managing risks, controlling costs, and sticking to plan.
Herd Mentality “If everyone jumped off a bridge …” Your mother was right. Even if “everyone is doing it,” that doesn’t mean you should. Herd mentality intensifies our greedy or fearful financial reactions to the random events that generated the excitement to begin with.
Hindsight “I knew it all along” (even if you didn’t). When your hindsight isn’t 20/20, your brain may subtly shift it until it is. If you trust your “gut” instead of a disciplined investment strategy, you may be hitching your financial future to a skewed view of the past.
Loss Aversion No pain is even better than a gain. We humans are hardwired to abhor losing even more than we crave winning. Loss aversion causes investors to try to dodge bear markets, despite overwhelming evidence that market timing is more likely to increase costs and decrease expected returns.
Mental Accounting Not all money is created equal. Mental accounting assigns different values to different dollars – such as inherited assets vs. lottery wins. Reluctant to sell an inherited holding? Want to blow a windfall as “fun money”? Mental accounting can play against you if you let it overrule your best financial interests.
Outcome Luck or skill? Even when an outcome is just random luck, your biased brain still may attribute it to special skills.   If you misattribute good or bad investment outcomes to a foresight you couldn’t possibly have had, it imperils your ability to remain an objective investor for the long haul.
Overconfidence A “Lake Wobegon effect,” overconfidence creates a statistical impossibility: Everyone thinks they’re above average. Overconfidence puffs up your belief that you’ve got the rare luck or skill required to consistently “beat” the market, instead of patiently participating in its long-term returns.
Pattern Recognition Looks can deceive. Our survival instincts strongly bias us toward finding predictive patterns, even in a random series. By being predisposed to mistake random market runs as reliable patterns, investors are often left chasing expensive mirages.
Recency Out of sight, out of mind. We tend to let recent events most heavily influence us, even for our long-range planning. If you chase or flee the market’s most recent returns, you’ll end up piling into high-priced hot holdings and selling low during the downturns.
Sunk Cost Fallacy Throwing good money after bad. It’s harder to lose something if you’ve already invested time, energy or money into it. Sunk cost fallacy can stop you from selling a holding at a loss, even when it is otherwise the right thing to do for your total portfolio.
Tracking Error Regret Shoulda, coulda, woulda. Tracking error regret happens when you compare yourself to external standards and wish you were more like them. It can be deeply damaging to your investment returns if you compare your own performance against apples-to-oranges measures, and then trade in reaction to the mismatched numbers.

 

Next Steps: Think Slow

Even once you’re familiar with the behavioral biases that stand between you and clear-heading thinking, you’ll probably still be routinely tempted to react to the fear, greed, doubt, recklessness and similar hot emotions they generate.

Nobel laureate Daniel Kahneman helps us understand why in his book, “Thinking, Fast and Slow,” where he describes how we engage in System 1 (fast) and System 2 (slow) thinking: “In the picture that emerges from recent research, the intuitive System 1 is more influential than your experience tells you, and it is the secret author of many of the choices and judgments you make.”

In other words, we can’t help ourselves. When we think fast, our instincts tend to run the show; for better or worse, they’re the first thoughts that come to mind.

This is one reason an objective advisor can be such a critical ally, helping you move past your System 1 thinking into more deliberate decision-making for your long-term goals. (On the flip side, financial providers who are themselves fixated on picking hot stocks or timing the market on your behalf are more likely to exacerbate than alleviate your most dangerous biases.)

Investors of “Ordinary Intelligence”

Berkshire Hathaway Chairman and CEO Warren Buffett is a businessman, not a behavioral economist. But he does have a way with words. We’ll wrap with a bit of his timeless wisdom:

“Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

If you can remember this cool-headed thinking the next time you’re tempted to act on your investment instincts, Mr. Buffett’s got nothing on you (except perhaps a few billion dollars). But if you could use somes help managing the behavioral biases that are likely lurking in your blind spot, give us a call. In combatting that which you cannot see, two views are better than one.

 

Warren Street Wealth Advisors, LLC is a Registered Investment Advisor. The information posted here represents his opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.