Faith In The Markets…

Earlier this month on one of my trips to Denver, I was having a discussion with one of my advisors on faith, ideology, and how views differ in many ways for everyone. I am going to avoid any theological discussions, however, I do believe faith plays a crucial role in our daily lives and many aspects of it would not be possible without faith.

Although unnoticed for the most part, as professional pilots, we exercise our faith in many ways on a daily basis. We place our faith on the maintenance procedures of our respective carriers and we assume that our maintenance departments noticed that hair-line crack on one of the turbine blades and that it was repaired properly.

We place faith in our dispatchers to give us timely information, as well as the controllers to keep us and our passengers properly separated form other aircraft, especially on a departure or approach procedure while flying in IMC. Personally, my faith has certainly been tested many times departing out of PHL, LGA, or EWR, with the TCAS system exercising what seemed to be every possible aural command. Of course, as a crew, we exercised all avoidance procedures, and we had faith the controller was also doing his or her part to resolve any conflicts at the same time. Just another day on the job?…absolutely! Other than trust in your own abilities, if you don’t have faith in the system in which you operate in, why even bother spooling up the jets?

As an investment professional managing millions and millions of dollars on a daily basis, I have to have great faith in our financial system. If I didn’t, there would be no purpose for me to come into work each and every day. I cannot say that, over the last two years, mine has not been tested…many times. The Madoffs and Stanfords of the world stand out.

I do believe however, that these tests of faith are only on a macro level. I am a firm believer in and maybe even an optimist about our financial system. I don’t for even a second however, believe that our system is perfect. In fact, far from it. What our system is very good at however, is weeding out the bad.

I say this because regardless of the handful of such individuals named, our financial system is larger than most can imagine. It encompasses everything and nothing escapes it. From a broad perspective of our system as a whole, especially on a global level, I do have great faith that our financial system will always prevail no matter what is thrown at it. It is too deep and too complex to have a short term event derail it at any given point in time.

If you’ve ever thought about how everything is inter-related with everything else you’ll have been amazed at how deep our financial system really goes.

Unfortunately, most of what we see on a daily basis are short term and shallow events that in the long run don’t really mean much. They just cause a ripple in a large ocean. Sometimes, It just might not feel that way because the media is relentless when It comes to “the story of the day”. Jason Zweig in his book “Your Money And Your Brain” said, “Stocks are like weather, altering almost continuously and without warning. Business is like climate, changing much more gradually and predictably. In the short run it’s the weather that gets our notice and appears to determine the environment, but in the long run it’s the climate that really counts”.

As an investment professional, I concentrate on the climate. I may carry a jacket for warmth in early spring , but ultimately never forget that I won’t need it for long and that soon it will warmer. It just doesn’t seem that way during that one cold day. It is that one cold day in the markets that can help us lose our faith in our financial system. Keeping the proper perspective and keeping the faith is crucial on days like that. This I view as a large part of my job.

So here’s the take away…
Maintain faith and perspective. You’ll be amazed at the resiliency of our financial system and the power of the American entrepreneurial spirit on which it is based.

Alex A. Tapia, AIF ®
President and Retirement Wealth Planner
Aviation Retirement Strategies, LLC. Read more

The Social Security Dilemma…

As many Pilots and Flight Attendants are starting to turn 62 years of age or older, the question about Social Security and whether to take it is becoming increasingly more popular. At the very basic level, the question goes something like this…”Hey Alex—-should I take Social Security early?” The answer is usually—-”Yes!”

Some would argue my logic. That is perfectly OK. However, I am not just an advisor, but a Comprehensive Retirement Wealth Planner as well as a Fiduciary, and as such, I have to follow the numbers. The real answer for your particular situation, however, depends on many different variables of which some are fixed, and some are not. Keep in mind that once we step outside of the cockpit and into our personal lives, each of us is completely different, especially from a financial perspective. It is important to work the numbers with your trusted advisor for your situation.

Now that we have satisfied our regulators with our disclosures, let’s look at a typical scenario.

To arrive at the answer for the Social Security dilemma, you first must understand the inner workings of the system and establish a constant from which to work from. For our purpose, we will assume that the Social Security system will be around for quite a while, especially for those that are nearing or are at the qualifying age of 62. It is no secret that our Social Security system has seen better days, especially for us younger contributors. Whether or not it will be around to benefit those of us in our 40’s or early 50’s is probably better left for another discussion. We will also assume that in our example, our recipient is 62 years of age. We will look at the break even point, based on taking benefits early vs. late, the effects of working while taking Social Security, and the significance of this benefit from a Retirement Asset Management standpoint.

The first part of the equation should be mathematical. This is the most basic starting point. Let’s assume that our sample pilot does not work beyond the age of 62. Let’s also assume that the average Social Security monthly payment for a retired airline pilot is approximately $1,800.00 at 62 and $2200.00 at age 66. (This is the full retirement age for those born between 1943 and 1954). The difference between these two amounts is $400.00 per month. This may sound tempting, but you have to follow the math. We will also assume that payments are not taxed.
If our pilot’s monthly benefits are taken at the age of 62 at $1800.00 per month, he would receive a benefit of $21,600.00 per year. This means, that by taking the lower benefit at age 62, our pilot will have received $86,400.00 prior to turning age 66. Had he waited to 66 years of age, he would have been able to take advantage of the additional $400.00 per month.

To make up for the $86,400.00 not received during the previous 4 years prior to turning age 66, our pilot will have to receive the additional $400.00 per month for 216 months, or 18 years to make up for payments not received. Put in another way, if our pilot passes away at the statistical age of 82, he would have received $475,200, had he taken the benefit at 62 (the lower amount), as opposed $422,400 (the full amount at age 66). A difference of $52,600. This makes a pretty compelling case for taking your benefits early. So when is it prudent to wait to take your Social Security benefits late? Almost never!

One main reason is the fact that something may happen to you while you are waiting for that larger payment. If some-thing does happen, you will not have received anything at all.
There may be one exception, however, and that is if you decide to work past 62 years of age. The reason for this is that your benefits will be taxed at quite a high rate. In 2010, once you earn more than $14,160.00, you will be taxed $1.00 for every $2.00 (50%) on Social Security benefits. For a major Legacy-Carrier pilot, the $14,160.00 earnings limit is usually reached within the first two months of the year. This means that most of your benefit will be taxed at the 50% rate. This “penalty” is phased out in the year you turn 66 (Full Retirement Age) and is no longer applicable on the month you turn “full retirement age”. Some have argued that it is worthwhile taking it anyway since you at least receive something. I cannot disagree with that philosophy, but we would always to look at the pilot’s individual situation.

In my opinion, the most compelling reason to take Social Security benefits as early as possible really has nothing to do with break even points, or the fact that you may be able to “Pay Back” benefits received early, just to receive the higher amount at “full retirement age”. For those unfamiliar with the “pay back” concept, I would be happy to discuss this one individually with anyone, but from a retirement asset and management perspective, it carries no financial logic. The most compelling reason to take Social Security as early as possible is the fact that, in retirement, it is all about cash-flow and asset longevity.

From an assets management standpoint, there is no greater friend than time to invest. It is a historical fact that money does grow if given enough time. That being the case, I would say that if someone is trying to give you money and you hold out on taking it for the chance of getting a slightly bigger payout later, then I believe that you are hurting yourself in various ways, not to mention the fact that, should you pass away prior to getting that larger payment, you’ll never see any of it. Even if you do live longer, it will take you 18 years (as in our example) to break even. The risk of something happening in that period is far greater. Bottom line is, Social Security helps your cash-flow. The better the cash-flow, the lesser the money you need to take out of your own nest egg, and more than likely pay taxes on it if it is coming from an IRA.

I could quite comfortably argue that the first five years of retirement are the most crucial for the longevity of your assets. It’s not too often in our lives that we can take advantage of pension benefits and for those with lump sums, even the ability to invest a big portion, if not all, in the markets in some way. With the proper protections in place for your assets, you will have the ability to expose your assets to potential growth, which will, in turn, stretch out the longevity of those assets, not to mention, maybe leaving some behind as your legacy. So, when the question comes up about whether or not to take your Social Security payments early or not, follow the math and make the calculation for yourself with your actual numbers. More than likely, it will work out so that, at least mathematically, you will be ahead if you take them as soon as they are available.

Alex A. Tapia, AIF ®
President and Retirement Wealth Planner
Aviation Retirement Strategies, LLC. Read more

The Modern Baru…

Professional Pilots have an amazing way of setting aside their emotions while flying an aircraft, especially below 10,000 feet. During the critical phases of flight, they can completely follow procedure using pure logic and systematization. Let’s face it, we don’t really have a choice—for our passenger’s sake and our own.

Flying is a science and therefore predictable. Our knowledge of the condition of the aircraft, airspace system, and weather are the primary variables dictating a positive outcome for each flight. We arm ourselves with great knowledge about these variables as well as hone our flying skills, before flying the line, to tackle any anomalies involving these variables to ensure a safe landing at the end of each flight.

So why can we not apply similar types of techniques to our retirement plans, much in the same way we plan for each flight? If we could just figure out the science behind the markets, we should be able to predict the outcome of our portfolios, right? After all, if you watch CNBC or any other financial news channel, you’ll see “experts” all day long telling us what the markets have done, what they are currently doing, and more importantly, what they will do in the future. So why all the uncertainty? It‘s because the financial markets are not exactly scientific and therefore not quite as predictable. In fact, far from it.

Financial markets are based on emotion, are random, and have no specific pattern associated with them in any way shape or fashion. As a species, we don’t do well with randomness. So much so, in fact, that we have a natural tendency to find patterns and sequences in everything we encounter so that we can predict an its outcome. Even if we are told that something is completely random, we will still try to figure out a pattern and try to predict the end result. We do this because It is simply our way of trying to explain something that we don’t understand. According to psychology professor George Wolford of Dartmouth College, it is part of our biological and physiological make up. We can’t help it. In fact, without it, we probably would not have survived as a species. It is actually what sets us apart and helps us thrive over other animals. However, when it comes to the randomness of the markets, it is a trait that hurts us more often than it helps us.

Thirty-seven hundred years ago, in ancient Mesopotamia, the first clay model of a sheep’s liver was baked, and it was to be used as a training tool for specialized Babylonian priests, known as Barus. These priests believed that by studying the guts of freshly slaughtered sheep, they were able to make predictions about the future. This clay model was designed as a catalog of the varying colors, blemishes, and size or shape that the liver of a real sheep might display. The Baru and his followers believed that each of these variables could help predict what was about to happen. The clay model (training device) was subdivided into sixty-three distinct areas, each marked in cuneiform writing and other symbols, describing its predictive powers. As described by Jason Zweig, what makes this artifact so outstanding is that it is as contemporary as the coverage of today’s financial news. “More than thirty-seven hundred years later, the liver reading Babylonian Barus are still with us, except today they are called market strategists, financial analysts, and investment experts.” Instead of a sheep’s liver, these modern Barus use powerful computer software and other technologies to justify their forecasts, much like a weatherman. However, unlike a financial “expert”, a weatherman has actual science to back up a forecast, making him right more often than he is wrong.

In the unscientific financial world, predictions have two fundamental flaws: First, they assume that whatever has been happening is the only thing that could have happened, and second, it relies on the short-term past to forecast the long-term future. A recipe for disaster, given that financial markets behave randomly. If you have two coin tossers and they toss a coin five times each and one has an outcome of tails five times in a row and the other has an outcome of tails only three out of the five times, chances are that most people would bet that the first tosser’s next outcome would be tails. After all, tails five times in a row seems quite impressive. The reality is that, statistically, the chance for an outcome of heads remains the same as it does for tails.

If we were to always keep this in the back of our minds, we might have second thoughts about being impressed with a financial “expert” simply because he or she was right about the latest couple of moves in the market. For the same individual being right about the next move in the market has an equal chance of being wrong. If you look at the history of most “experts”, they have been wrong more often than they have been right. Interestingly enough, the Wall Street Journal once stated, “If pilots’ vision were as bad as economists’, Amtrak would be profitable.”

Knowledge is key to making any decision and in the financial world this is no exception. Most of us know that the markets are unpredictable. The knowledge that we tend to latch on to market predictions, which are essentially baseless, is a part of our biology and therefore seems to make sense. Understanding how our investing brain works along with its constant need for trying to bring order to randomness, it might bring to light the importance of having a well prepared, functional, and flexible retirement plan that allows for change

Alex A. Tapia, AIF ®
President and Retirement Wealth Planner
Aviation Retirement Strategies, LLC. Read more

Pensions 101…

It has always amazed me that major airline pilots have such great paying jobs along with so many perks and there is so little information about how all of these perks actually work. I can’t count how many times I have stood in front of a big group of pilots or flight attendants and have had their undivided attention when explaining how pensions, B-plans, and even 401ks are structured. It’s not that they don’t want to know, its just that there is very little information out there about how these benefits are designed. Even less, how to maximize each individual benefit in itself and as a collective whole.

Most airline professional love their jobs. All airline professionals would love to retire from their jobs with as many assets as possible. The key to maximizing that possibility is to have a good understanding about what benefits are offered and how to make them work together in concert towards your retirement goals.

One of the most misunderstood benefits that most major carriers offer their employees is an A-plan or most often referred to as a “Pension Plan” or “Defined Benefit Plan”. It is “Defined”, because the benefit has been pre-determined based on a certain formula.

As a very basic concept, pension plans are nothing but a promise to take care of an employee, in retirement, in return for many years of loyal service. Once retired, It is usually paid in the form of a monthly payment for the remainder of the employees life. Options are usually given to allow the spouse of the employee to take part in the benefit for the rest of his or her life, at the cost of a lesser monthly payment, but stretched out over two lives.

We will follow Capt. Maverick on a typical pre-retirement journey as he figures out what his A-Plan benefits are going to be so he can plan for his retirement. Capt. Maverick has worked for Hi Airline for 30 years and is 60 years of age. Capt. Maverick’s need for speed is long gone and he wants to retire. He calls the Benefits Department and they tell him his Pension Benefit is a monthly lifetime payment of $4000.00 per month if he takes that payment on his lifetime only. Pretty simple so far.

Lets assume that one day Capt. Maverick is on a long flight to Paris on the 787, and to pass time while waiting for his dinner, he gets out his calculator and tries to figure out how much the company will pay him over his lifetime. He looked the day before at actuarial tables from the IRS and found that the average longevity for a 65 year old male is 85 years of age. This means he is guaranteed to receive 20 years worth of $4000.00 monthly payments. With a quick authoritative whisk of the fingers, he calculates that those payments will equal $1,056,000 over 22 years. Not bad if he lives that long. Even better if he lives longer. Capt. Maverick’s mood brightens and with the prospect of dinner to arrive soon, the promise of a memorable trip has strengthened.

To continue, we will assume that Capt. Maverick actually lives until 85. The company’s obligation is to find a way to make his $4000.00 monthly payments no matter how long he lives. Half way across the Atlantic, Capt. Maverick just now realizes that the dollar figure for his Lump Sum Option was considerably less than the $1,056,000. In fact, it was only $636,039. How could that be?

The answer lies in the fact that, even though the company is obligated to pay him $4000.00 per month, they are not required to come up with the full $1,056,000 up front.

The reason for this is that the IRS allows companies with pension plans to “invest’ money to guarantee the required monthly payment. The investment vehicle is a combination of interest rates, applicable to all pensions, commonly referred to as the Composite Corporate Bond Rate (CCBR). For simplicity purposes, lets assume that this rate equals 5%.

In order to provide Capt. Maverick with his $1,056,000 over the next 20 years, the company only has to come up with $636,039, if it can invest it at 5% interest. If the current interest rate being used was higher, then the company would have to come up with even less. The reverse is also true. If the interest rate being used was lower, then the company would have to come up with a larger amount of money for Capt. Maverick.

In summary, defined benefit pension plans are designed to provide you with a lifetime annuity. They use mortality (life expectancy) tables to predict the expected cost of your benefit.

By electing the lump sum option, you remove the ability of the plan to invest the assets in an annuity. It is assumed that the Pilot could invest the lump sum and earn the interest rate in effect, when the lump sum was paid. Theoretically, this will produce the same annuity benefit the plan was willing to pay, based on the applicable interest rate.

Capt. Maverick has a very important decision to make regarding his retirement and it is certainly one that should not be take lightly. The choices are seemingly endless and I always highly recommend hiring a professional to at least be presented with all of the investment options, should anyone decide to take a lump sum.

Pension plans are great benefits and usually the greater part of someone’s nest egg. Aside from all of the technical theory behind such benefits, it is crucial to always keep in mind that your situation is unique and should be treated that way. A properly designed financial plan is always the answer and it has to include all of your other assets so that you can get an inclusive collective picture of your individual situation.

If you are interested in learning more, in detail, as to how your benefits are structured and to enhance the possibility of getting the most out of what is offered to you, please feel free to call us.

Alex A. Tapia, AIF ®
President and Retirement Wealth Planner
Aviation Retirement Strategies, LLC. Read more

Setting Goals…

What if you were to get in an airplane with your spouse, you start up the engine, and he or she asks, “where are we going?” You look to your right and say, “I don’t know! We’re just going to fly aimlessly, in random directions, and hopefully find what we’re looking for and then enjoy it when we get there.”
If there was a passenger in the back seat, what do you think this person would think of your plan?

Unfortunately, this is how most of us plan our financial lives. If you’ve ever felt that you were not making any progress or are confused about money, this could be a good reason why. We fly random headings, maybe even different altitudes, to destinations that are yet to be defined.

I have a framed photograph in my office of an old man sitting in a chair, staring at the camera lens with a confident, yet uncertain look, almost as if he is not quite sure of what to make of his situation. He thinks he’s ok, but he’s not one hundred percent sure. At the bottom of the photograph is a caption that reads, “There are no do-overs in retirement…” It makes a very powerful statement about the need for planning your financial life, especially when it comes to retirement.

Retirement is an event that seems so far away to many of us that we do not see the need to tackle this challenge in the immediate future. We feel this way until it’s right around the corner and then it might be too late. Although we all know we should start today, saving for retirement can always start tomorrow or next paycheck, or even after we upgrade to the left seat or larger equipment.

I believe that the reason why planning for retirement is always put off until later, is because most of us view this as a daunting challenge. Often, it may feel like you need a degree in finance just to even begin. If you listen to the media, I can understand why most of us could feel that way. It seems like the choices are just end-less and we don’t want to make the wrong ones. Sounds reasonable, but knowing that we will eventually have to deal with this issue, why not get started now? Because we always have some-thing else that is more pressing right now that can put retirement on the back burner.

If you truly want to attain a comfortable retirement for yourself, you need to make retirement a priority, no matter what age you are. Also keep in mind that the “man” that you work for has no vested interest in looking out for you once you leave his employment.

The key to a successful retirement is to set a goal. I don’t just mean set any goal or try to be unrealistic but set a real goal that exactly defines what YOUR retirement ideally would look like. Take a few minutes one day and truly visualize where you want to be. For-get about the opinion that someone might have about your vision or somehow think that it may not be the right one. Remember that this is your retirement and there is no right or wrong answer.

Also, your vision must be vivid, and you should be able to see, hear, and smell every detail. The more vivid this vision is the better. The key is to completely define your vision or goal. After seeing your vision, explore it and try to find ways to break it down into smaller segments or goals that are easier to obtain. Together they should make up your larger goal. Once you have your sub goals defined, place them on a timeline and focus on the first one first, not the second or third. Think of these as a road map that defines the shortest route to where you want to go, and it will keep you from going off course. This will keep you focused and you’ll feel better about smaller attainments along with a sense of progress.

At my firm, we help our clients with this process to give an incentive to get started. Your primary focus should be to have your goal defined and we can help you break it down into manageable steps. It is part of our process, as it should be for any true Wealth Planning firm.

Although the purpose for this article is not to specifically define how to implement this process, it is in-tended to help alleviate some of the challenges that are associated with it. I have found over the years that most have avoided the goal setting process simply because they do not know where to begin and there is also a certain sense of fear of failure. “Pain avoidance is human nature, which is a shame since the pain of repeated failure is incredibly insignificant when measured against the pleasure of ultimate victory” as stated by author Stacey Johnson.

No matter what age you are or what stage you are in your career, financial goal setting is crucial to the successful outcome of your retirement. Whether you do it yourself or you enlist the advice of a Wealth Planner, it is a process that should simply not be avoided. Keep in mind that retirement is different for everyone and we all have different situations. The best thing that you can do for yourself and your family is to set goals today, endure a little bit of pain, and enjoy your life tomorrow along with an exhilarating sense of achievement and personal success.

Alex A. Tapia, AIF ®
President and Retirement Wealth Planner
Aviation Retirement Strategies, LLC. Read more

Inflation…Is It An Issue?

By definition, inflation is an upward movement in the average level of prices that we pay for everyday goods. Deflation, is the exact opposite.

Let’s assume that there are only two commodities in this world: black, rubber-soled pilot shoes made by Reebok and paper money printed by our trusty government. If, one year, Reebok made less shoes than the previous year, then in comparison, there should be more pilot dollars chasing the fewer shoes proportionally. In this scenario, you would expect the price of these shoes to go up. Conversely, if Reebok were to make too many shoes one year, there would be less dollars chasing larger amounts of shoes proportionally. In this scenario, you would expect the price of the shoes to go down. In reality, we all know, as Pilots, that there can never be enough of these types of awesome and classy shoes made, but you get the point. It is a ratio between the supply of money relative to the demands of everyday goods.

So why is this a recurring topic of conversation these days? Pretty simple. Our government has been printing quite a few dollars lately. You would expect that eventually prices should be going up and this expectation is probably correct. It is up to the Central Bank and current Federal Reserve Chair to make sure that the rate of inflation rise remains in check for the U.S. Whether or not they are doing this properly or not is to be debated, but we have to assume that they are doing the best they can with what they have to work with.

If we assume that inflation will be a problem in the near future, then the real question is: How does this affect all of us, especially as Pilots going into retirement?

From a general standpoint, it affects Pilots quite a bit. If we are on a fixed income, our buying power will be significantly reduced. You will have to cut back on some things and adjust your lifestyle accordingly. If you depend on more than just fixed income, like revenue generated by investments, you will need a very specific strategy to hedge against inflation. If not, you will be forced to invest in such a way so that your investment portfolio will generate more returns. Of course, to achieve higher returns, you need to take more risk. In retirement, this may not be a good idea. At my firm, we always assume that the average inflation rate is 3.76%, for planning purposes. The reality is that, in the short term, this rate can be much higher, or lower. Any investment portfolio should have the flexibility to adapt to either scenario.

Specifically, Inflation affects different people in different ways. The reason is that there are different types of inflation. For example, the real estate market could be inflated at any given point in time. This doesn’t mean that our awesome rubber soled pilot shoes might be inflated necessarily at the same time. In this case, if you are not buying an new house anytime soon, this will not affect you a great deal. When the prices of general merchandise is inflated, as opposed to real estate, then buying a flashy new pair of Pilot shoes would have an effect on your budget.

Either way you look at it, you need to be prepared and flexible enough to adapt to ever changing scenarios. For those with lump sum options, there may not be a greater time to retire than when interest rates are as low as they are today. However, the downside is that we will have to be prepared for rising inflation at the same time. Placing all of your money into an investment portfolio and hoping for the best is simply not an option. Your assets need to be diversified into different types of portfolios so that you’ll have the flexibility to adapt. A portfolio with just stocks and bonds works great in a perfect world. Problem is, the world is never perfect.

If not prepared, inflation can certainly be an issue for many. If taken into consideration, with proper planning and advice, most of these issues can be avoided. Look at your entire picture and try to anticipate your future needs as detailed as you can. Buy the “big” things while working and simply use common sense when making everyday purchases. If you need help, we’re always there to help you plan.

Alex A. Tapia, AIF ®
President and Retirement Wealth Planner
Aviation Retirement Strategies, LLC.