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CNN Money – The S&P/Case-Shiller home price index, a closely watched measure of home values. posted a 9.3% annual increase in its May reading, down from the 10.8% rate in April. The rate of increase was as high as 13.7% in November before slowing every month since.
The good news for homeowners is that the index has now been up every month over the last two years — after posting drops almost every month over the previous five years.
And some experts say the current growth is better for the market, because rapid price increases can keep some buyers on the sidelines.
“Today’s Case-Shiller data is consistent with the slow glide-path down towards a more normal housing market,” said Stan Humphries, chief economist for real estate Web site Zillow. “Almost across the board, lower-priced homes have been appreciating more quickly than the most expensive homes, a welcome reversal from prior years.”
Prices rose in all 20 cities measured by the index, and nine of those markets posted double-digit percentage gains. The fastest growth was a 15.4% year-over-year jump in San Francisco. The most modest gain was in Cleveland, where prices rose 2.4%.
Most of the big gains were in markets in California and Florida, as well as Las Vegas. All of those markets were hit particularly hard by the housing bust that followed the home price bubble in the middle of the last decade.
A recovery in home sales and prices have been a major driver of the rebound of the U.S. economy so far this year, as the jump in prices has increased household wealth. The price increases and low mortgage rates also helped many homeowners refinance their mortgages and lower their home payments.
But even with two years of increases, prices are still 17% below the peak reached at the height of the housing bubble in early 2006.
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Bloomberg – Confidence among U.S. consumers soared in July to the highest level in almost seven years as Americans grew more upbeat about the labor market and the outlook for the economy.
The Conference Board’s index rose to 90.9, the highest since October 2007, from a revised 86.4 in June, according to the New York-based private research group said today. The gauge exceeded the most optimistic forecast in a Bloomberg survey in which the median called for an 85.4 reading.
More employment opportunities, fewer firings and resilient equity markets are buoying spirits against a backdrop of geopolitical tension in Ukraine and the Middle East. Faster wage growth would help to further spur sentiment and provide the wherewithal for bigger gains in consumer spending.
“Employment conditions improved, gas prices are lower, equity markets remain robust, and that’s pretty much it,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York. “The fact that confidence is rising at a fairly steady rate implies that employment growth is going to continue at a fairly healthy rate.”
Estimates of the 75 economists in the Bloomberg survey ranged from 82.8 to 88.5 after a previously reported 85.2 reading in June.
Stocks rose, with the Standard & Poor’s 500 Index advancing 0.1 percent to 1,981.64 at 11 a.m. in New York.
Another report today showed home prices rose in the 12 months ended in May at the slowest pace in more than a year as a lull in the housing market limited appreciation. The S&P/Case-Shiller index of property prices in 20 U.S. cities increased 9.3 percent from May 2013 after a 10.8 percent gain in the year ended in April. Compared with the prior month, home prices fell for the first time in two years.
The Conference Board’s gauge of present conditions rose to 88.3, the strongest reading since March 2008, from 86.3 in June. The barometer of consumer expectations for the next six months increased to 92.7, the highest since February 2011, from 86.4 a month earlier.
The share of Americans who said jobs were currently plentiful advanced to 15.9 percent in July, the highest since May 2008, from 14.6 percent. More consumers than a month earlier said they expected greater employment opportunities and better business conditions in the six months ahead.
“Stronger job growth helped boost consumers’ assessment of current conditions, while brighter short-term outlooks for the economy and jobs, and to a lesser extent personal income, drove the gain in expectations,” Lynn Franco, director of economic indicators at the Conference Board, said in a statement. The figures “suggest the recent strengthening in growth is likely to continue into the second half of this year.”
Payrolls surged 288,000 in June after a 224,000 gain the prior month that was bigger than previously estimated, figures from the Labor Department showed this month. The unemployment rate dropped to an almost six-year low of 6.1 percent.
More employment opportunities will probably keep Federal Reserve policy makers on the path to reduce monetary stimulus as they begin a two-day meeting today.
The share of respondents in the Conference Board’s survey that said they expected their incomes to rise in the next half year rose to 17.3 percent in July from 16.7 percent a month earlier.
The increase in sentiment, however, didn’t translate into buying plans. Fewer respondents in the survey said they expected to purchase cars, homes and appliances in the next six months.
Some of the headwinds consumers have faced in recent months are starting to dissipate. A gallon of unleaded gasoline at the pump fell to $3.52 yesterday, the lowest since mid-March, after a high in April of $3.70, according to data from AAA, the largest U.S. motoring group.
Food costs showed signs of stabilizing in June after surging in prior months as a drought in the West and a deadly hog virus pushed up prices for beef, pork and some vegetables and fruits. Food prices rose 0.1 percent in June after a 1.1 percent surge a month earlier, according to Labor Department figures. They were up 2.4 percent from June 2013.
Progress in the labor market is keeping O’Reilly Automotive Inc. upbeat even as the second-largest U.S. auto parts retailer says challenges remain for some of its customers.
“We were encouraged by modest gains in miles driven, as unemployment very gradually improves,” Gregory Henslee, the Springfield, Missouri-based company’s chief executive officer, said on a July 24 earnings call. Even so, “our average consumer has been under pressure for a long time as a result of the slow recovery and we would not anticipate this pressure to significantly abate in the near term.”
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Fortress Investment Group LLC (FIG) has taken its clash with life insurer Phoenix Cos. (PHX)from the courthouse to the statehouses as the firm seeks to salvage a bet on policies with a face value of more than $1 billion.
The private-equity and hedge-fund manager, which purchased policies on the secondary market, has proposed rules to make it harder to cancel insurance and to mandate the return of premiums if coverage is voided. While efforts stalled in states such as Florida and Connecticut, an attorney for Fortress cited progress in Delaware where a proposal advanced from a house committee, only todie as the legislative session ended three weeks ago.
“It takes time to pass bills,” Jeremy Kudon, a lawyer for the New York-based company, said in a phone interview. “We have every intention of coming back.”
Victories could boost liquidity in the life-settlements market, which Fortress said has been chilledby concerns that Phoenix, and possibly other companies, will deny payments. The firm told lawmakers it is seeking to protect and expand a market that can aid seniors by allowing them to get more cash than their policies’ surrender value. The investors take over premium payments and count on eventually collecting the death benefit.
“Fortress sees a way to make money,” said Joseph M. Belth, a professor emeritus of insurance at Indiana University in Bloomington. “They want to enhance the value of their inventory of policies.”
Fortress spent about $330 million four years ago for a life-settlements portfolio with a face value of about $6.2 billion, a regulatory filing shows. The largest of its 2010 Life Settlements funds had a $19 million deficit as of March 31, according to a report to the Securities and Exchange Commission.
That reflects $64.9 million in assets after a $383.2 million investment, and $299.3 million in distributions. A smaller fund had a deficit of about $1.7 million.
“We’re being asked to bail out an out-of-state hedge fund,” Minnesota State Representative Greg Davids, a Republican, said at a hearing last year. “We get very nervous about passing laws that are going to affect current litigation.”
Lima LS Plc, a Fortress investing vehicle, said in a January document that it struck an agreement to exit about 80 percent of its life-settlement policies. The buyer was Apollo Global Management LLC (APO), and Fortress was left after the sale with policies tied to Phoenix, said people familiar with the deal who asked not to be identified because the transaction was private. Fortress said in court papers that it is harder to find a buyer for Phoenix policies and faulted the insurer’s underwriting.
“To get its hands on more and more premiums, Phoenix turned a blind eye to obvious application inaccuracies,” Lima said in a suit in U.S. District Court in Connecticut in 2012. “But now, to avoid paying out on such policies, Phoenix has seized on such errors, feigning false surprise about them.”
Lima cited a $10 million Phoenix policy that covered Faye Keith Jolly, a Florida man. Hartford, Connecticut-based Phoenix had sued Jolly in 2008 for fraud, saying he falsely claimed to have more than $1 billion in assets, mostly in uncut emeralds recovered from a sunken ship.
Phoenix won a judge’s permission to rescind the policy. A trust tied to Jolly said in a court filing that the policy was valid. Phoenix, which was founded in 1851 to cover people who abstain from alcohol and later insured Abraham Lincoln, said that it pays benefits on legitimate policies.
The Lima suit is a case of “buyer’s remorse through which a hedge fund seeks to lock in massive returns on a high-risk investment through judicial action,” Phoenix said in a court document.
Fortress said in its suit that it has owned policies tied to Phoenix with a face value, or death benefit, of about $1.4 billion. Part of Fortress’s statehouse push is to require that insurers respond to inquiries from prospective life-settlement investors about the validity of policies they want to buy.
“If you don’t have these sorts of rules, your investors are at risk,” said Kudon. “This market will need certainty to expand and flourish.”
Fortress faces skepticism from lawmakers like Minnesota’s Davids and Florida’s insurance watchdog about why state officials should get involved. Also, the regulator has said that changes sought by Fortress may contribute to fraud by encouraging people to take out policies with the sole intent of reselling them.
“The courts are addressing these issues,” the Florida Office of Insurance Regulation said in a December report to the Legislature. “The treatment of life insurance solely as a commodity from inception is at odds with the purpose of life insurance and may have negative ramifications.”
Fortress told the Florida watchdog that it manages assets for clients including university endowments, public pension funds and unions. The firm also said that the California Public Employees’ Retirement System invests in the market. Joe DeAnda, a spokesman for Calpers, declined to comment.
Banks have also been involved in the market, both by arranging sales or investing in the contracts. The Institutional Longevity Markets Association, a trade group that represents lenders such asWells Fargo & Co. (WFC) and Credit Suisse Group AG along with Fortress, has also pushed for rules benefiting investors.
“We want to ensure that there’s clarity and that there’s transparency and that there’s surety in what you do,” Jack Kelly, managing director of ILMA, said in a phone interview. Investors’ returns fall when insured people live longer than expected and when companies deny benefits or change policy terms.
Fortress has been working to get life-settlement rules passed for about two and a half years, focusing on states where it has the most at stake, according to Kudon. Bills in Minnesota,Connecticut and South Dakota died or were tabled, according to the American Council of Life Insurers.
The advance of the bill in Delaware caught the attention of the ACLI, which put out a statement on June 30, as the legislative session approached its close, to say there was a danger of more financial fraud if the proposal became law.
“After failing to get what they want in the courthouse for a couple years, they moved to the statehouse,” said David McDowell, a lawyer who represents Phoenix in the suit and testified for the ACLI in Minnesota.
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cnbc.com - In a dramatic split decision, two federal appeals panels disagreed Tuesday on the legality of Obamacare subsidies that gave billions of dollars to help 4.7 million people buy insurance on HealthCare.gov.
A panel of the appeals court that covers Washington, D.C., ruled 2-1 that the subsidies were and are illegal if issued through that federal exchange, as opposed to one set up by a state.
But about two hours later, a Fourth U.S. Circuit Court of Appeals panelruled 3-0 in another case that the subsidies are legal for people who buy plans on HealthCare.gov, which the federal government operates in 36 states.
The circuit split could mean the cases will soon land before the U.S. Supreme Court. For now, the subsidies remain in effect. Full Story here
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Bloomberg - Wholesale prices in the U.S. rose more than forecast in June, reflecting a jump in energy costs that is now abating.
The 0.4 percent increase in the producer price index followed a 0.2 percent drop in May, the Labor Department reported today. The median estimate in a Bloomberg survey of 69 economists called for an advance of 0.2 percent. Fuel costs climbed 2.1 percent, the biggest gain since February 2013.
Crude oil prices have dropped this month as concerns about supply disruptions ease, bolstering Federal Reserve Chair Janet Yellen’s view that recent increases were temporary. Smaller price increases indicate Fed policy makers can keep interest rateslow well into 2015. Full Story
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CNNMONEY - Taking a 401(k) loan can seem attractive for a few reasons: You don’t have to qualify. You can get the funds quite quickly. Plus the interest rate is typically around 4% to 5%, far below the typical credit card interest rate.
Most 401(k) plans allow you to borrow 50% of your balance up to $50,000, which you then must pay back (plus interest) through automatic payroll deductions. Typically, the loan must be repaid within five years.
Nearly half of all retirement savers who had taken a 401(k) loan said they had borrowed the cash to pay down debt, according to a recent survey from retirement provider TIAA-CREF.
But there are a lot of things that can go wrong.
“The 401(k) always appears to be a pretty good place to borrow from…” said Margaret Starner, senior vice president of financial planning at Raymond James & Associates. “But it’s a slippery slope.”
Not only are you raiding your current savings balance, but you will also miss out on the compound returns those funds would have gained over time.
Plus, like any other kind of borrowing, a 401(k) loan isn’t tax free. You’ll pay the loan back with after-tax dollars and then pay taxes again when you withdraw the savings in retirement.
And if you lose your job or switch to a new one, the timeframe to pay back the loan shrinks to as little as 60 days. If you’re unable to repay it by that deadline, you could be hit with another tax bill and a 10% early withdrawal penalty if you’re younger than 59 1/2.
If you’re still thinking of taking a loan to tackle debt, here are some things to consider.
What kind of debt is it? The only kind of debt you should even consider raiding your nest egg to pay down is extremely costly debt, such as high-interest credit card bills or a payday loan, said Bruce Cacho-Negrete, a certified financial planner who specializes in helping clients manage their debt.
That means that you wouldn’t want to use retirement savings to pay down loans with lower interest rates and longer time spans, such as student loans or mortgage debt.
Do you have other options? A 401(k) loan should be a “loan of last resort,” according to Cacho-Negrete. First consider your alternatives.
For example, if you have a good credit score, you might be able to pay down higher-interest credit card debt with a personal loan from a bank or credit union, said Sophia Bera, a Minneapolis-based certified financial planner.
Or if you think you’ll be able to tackle the debt in the next year, consider taking advantage of a 0% balance transfer offer to transfer the debt to a different credit card and pay it off without any additional interest payments.
Do you have a plan? Your retirement savings is not a piggy bank. So if you do take a loan, you’ll need a strategy to make sure you don’t make it a habit, said Dan Keady, director of financial planning for TIAA-CREF.
If it was overspending that forced you to raid your savings, for example, commit to a budget to make sure you don’t just run up the card all over again.
If possible, you should also try to continue contributing to your 401(k) plan up to at least your employer match, on top of paying back the loan. See the full story here
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New York Times - Nearly every major asset market on earth is currently expensive by historical standards. You can read more about this phenomenon — the Everything Boom, or possibly the Everything Bubble — But what happens now? What does this simple fact, that globally prices are high and expected returns are low, mean for the future?
The answers fit into three broad categories: the good, the bad and the ugly. Here is what each possible outcome looks like.
The most hopeful outcome for the global economy — and global asset prices — is that the low price of capital will help unleash productive new investments that create higher growth in the future — and that the economy will in effect grow into the current market valuations.
Companies could use their ability to borrow money cheaply or issue new stock on favorable terms to finance new inventions, new factories, new workers. Governments could use their ability to borrow cheaply to invest in infrastructure and education, increasing the longer-term productive capacity of the global economy. High prices for real estate in some of the most economically productive cities on earth could lead developers to put up more buildings there.
If this future materializes, interest rates would presumably rise, meaning people who bought bonds at their current ultra-low interest rates could lose money. But that would probably happen gradually, and in the context of strong returns to stocks and other risky assets. After all, in this more prosperous future, corporate earnings would rise along with the economy.
In effect, this result would be one in which central banks’ efforts to stimulate growth through cheap money policies (finally) have their desired effect, and once strong global growth arrives, everything else takes care of itself.
People tend to assume that the current world of very low interest rates must be a short-term aberration. It’s not necessarily so. Just ask the Japanese; 10-year government borrowing rates have been below 2 percent almost continuously for the last 15 years (they edged above that level one day in May 2006).
There are different names and explanations for it — a liquidity trap, a secular stagnation — and one of the great macroeconomic debates of our age is why this might be happening and what policy makers could or should do about it. But whatever you want to call it and whatever you believe its origins to be, the effects on the economy and markets are clear. It means continued low to nonexistent growth, low interest rates and low inflation. And the Japanese experience shows that it can persist for quite a long time.
In other words, it could be that the era of low interest rates and low returns on investments doesn’t end with an economic boom or with a collapse. It doesn’t necessarily have to end at all. It may be that the world needs to buckle in for the kind of slow-growth, low-interest-rate world of the last few years for a long time to come.
The two outcomes above appear the most likely. But we are in uncharted territory in many ways, and it is possible that the world may not work the way standard Keynesian economic models suggest it will.
In those models, for example, inflation can become a problem only when the economy is overheating. But what if the unconventional tools that central banks have used over the last half a decade have different results, causing, for example, a spike in prices even as the economy remains depressed? Then you could see bonds fall in value, but unlike in the “good” scenario above, not be accompanied by a rising economic tide.
Or, perhaps the large deficits that the United States and other countries have run during the crisis years will one day cause a crisis of confidence in advanced nations’ debt. Interest rates could spike (and bonds could fall sharply in value, and probably other investments, too) not because the economy is recovering, but because of that loss of market confidence.
Or maybe some external force will result in an economic downturn, which world economic policy makers would have few tools to fight after exhausting most of them over the last few years. If that happened, what would in normal times cause a mild downturn might instead bring about something more dangerous, like a new depression and market collapse.
Which of these is most likely? For the last few years, many official projections — forecasts from government agencies and bank economic research shops, for example — have tended toward the “good” outcome, predicting a full-throated expansion as being just around the corner. Many commentators, particularly on cable financial television, have predicted an “ugly” one, full of out-of-control inflation, debt crises and collapse.
But the pattern of the last few years shows that the “bad” scenario has been closest to the reality. That doesn’t mean the rest of the bad script will continue in the years ahead, but it should prompt those predicting the first or third outcome to wrestle with why they have been wrong so far.
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CNBC - How do you tell a client she can’t retire yet? How do you tell another he can’t sustain his current lifestyle? Delivering bad news comes with the territory for financial advisors.
“A large amount of our time is spent counseling and supporting clients. We often become their support team for daily life decisions,” said Richard Colarossi, certified financial planner and accredited investment fiduciary with Colarossi & Williams.
It’s essential to deliver the bad news with hope and actions that can be taken to fix the problem, he added, recalling a recent situation. Colarossi was beginning the retirement income distribution process for a client with $5.5 million in assets, of which only $2 million were investible.
“She was living a very high lifestyle, withdrawing 10 percent per year, and I had to say to her, ‘It won’t work,’” he said. “She was stunned, and asked, ‘What do you mean?’”
The first thing Colarossi did was reassure his client that she’d been very successful and had accumulated a wonderful portfolio but did not have the income she needed.
“She hadn’t been looking at the withdrawal percentage, just the dollar amount,” he said. “People do simple arithmetic, [and] she didn’t understand that the equilibrium rate—what her investible assets needed to earn—was 14 percent.”
Colarossi explained, “She was taken aback, questioning if I was right. But I quantified everything, and eventually she said, ‘I think you have a point.’”
His immediate prescription? In the short term, live within your means, scale back, and try to sell assets such as real estate in order to get more income-producing assets.
“It’s very important to look at the big picture—usually it’s not all bad. You can’t be dramatic. In reality, people usually know what they did,” said Helen Simon, certified financial planner, retirement management analyst and CEO of Personal Business Management Services.
Simon described some common scenarios in her practice where she’s had to deliver bad news:
- Spouse vs. spouse: “Often, one spouse doesn’t know what the other is doing. It’s usually the husband handling the investments, but he doesn’t want to admit what he’s doing or if he made a big mistake. So it’s my job to bring it to the forefront.”
- Keeping up with the Joneses: “The husband wants to give his wife everything she wants—but can’t afford it. He doesn’t want to admit that he doesn’t make as much as people think.”
- Waiting too long to save: “There are a lot of people in their 50s who decide, all of a sudden, [that they] need a financial advisor. But 15 years is not a long time—especially if you’re not saving an astronomical amount of money.”
- Severe market corrections: “You’ve got to show the client the big picture of the portfolio over time. Clients will be receptive if you prepare them the right way. You have to be somewhat [parental]: Explain to them that if they are diversified, they’ll have gains that make up for those losses.”
Since the kids will be moving out, maybe our clients will see their way clear to spend some of their retirement on themselves or make it grow more. Mentioning headlines like these in seminars give prospective clients reasons to invest with us. We’ll try to keep you well informed on news as it happens. seminarsforless.com
CNN Money – They really do want to move out, according to a study by Harvard’s Joint Center for Housing Studies, and by 2025 could form 24 million new households.
Some 11 million recent grads were living with a parent in 2012, according to Pew. The homeownership rate for those under age 35 was 36% in the first three months of 2014, down from a high of 43% in 2005, according to the Census. Three main factors have been holding them back, said the Harvard study: A weak job market for recent graduates. Student loans. And tight lending standards. But as the economy turns around, the obstacles have begun to fall. “When the job market recovers and their income recovers, they are going make their mark on this housing market,” said Christopher Herbert, research director at the Harvard division, in a panel discussion following the release of the Harvard report.
Buying by Millenials should give a boost to the overall housing market. “If somebody wants to move up from a starter house to a larger house, they need someone to sell the starter house to,” said Mike Calhoun, the president of the Center for Responsible Lending, at the panel. The report pointed out that some factors could restrain household formation. Despite economic news improving, Millennials face only slow economic gains. Unemployment is falling, but wage growth has been persistently stagnant. Plus, Millennials must still confront increasing student debt burdens and tight lending standards.
Instead of a mass exodus from their parents’ homes, the authors said Millenials’ might just trickle out, mirroring what Herbert called the economy’s “steady, slow recovery.”
The report also pointed out that borrowers of color, who are expected to see demographic growth that could help drive household formation and building, face mortgage denials at far higher rates than white counterparts, which might well imperil a housing surge.
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Marketwatch.com – Since the dark days of 2008, employers have taken some steps to fix the 401(k), the backbone of the nation’s private retirement-savings system. But Nobel laureateRobert C. Merton says that in the rush to upgrade these plans, plan sponsors and administrators have overlooked one big problem: They are managing these plans with the wrong goal in mind.
“The seeds of an investment crisis have been sown,” the MIT professor of finance writes in an article in the July-August issue of Harvard Business Review, which was published Tuesday. “The only way to avoid a catastrophe is for plan participants, professionals, and regulators to shift the mind-set and metrics from asset value to income,” writes Merton, who won the Nobel Prize in Economics in 1997.
In recent years, employers have tried to improve 401(k)s by introducing features such as automatic enrollment and products including target-date funds. But in his article and in a recent interview with Encore, Merton said these moves weren’t likely to be sufficient. To fix the 401(k), he argues, employers and the financial services companies that manage these plans must get past the ongoing obsession with two things: Account balances and annual returns. These metrics, Merton says, are far less important than one other: The amount of sustainable income an employee can expect to receive in retirement.
By disclosing annual income, instead of (or in addition to) an account balance, Merton says, employers will help employees quickly and easily calculate how much of their annual salary they can expect to replace in retirement, together with Social Security. As a result, employees will be better able to take action to ensure they are on track to retire as planned.
But that’s only half the battle. In order to accurately calculate how much retirement income a participant’s 401(k) balance will purchase, the plan sponsor must assume the money will be invested in an inflation-adjusted deferred annuity or long-termU.S. Treasury bonds. These investments, Merton writes, ensure “spendable income” that’s “secure for the life” of the bond or annuity and are “the very assets that are the safest from a retirement income perspective.”
That’s not to say that 401(k) money shouldn’t be invested in stocks. In fact, Merton says, 401(k) investment managers should invest participants’ savings in a mixture of “risky assets,” including equities, and “risk-free assets,” such as long-term U.S. Treasuries and deferred annuities. Moreover, the investment manager should shift the investment mix over time to optimize the likelihood of success.
Employers, he says, should begin by asking employees not about their tolerance for investment risk, but about their expectations for income needs in retirement.
If the investments are managed well, the employee – upon retirement—should have enough money to buy a deferred, inflation-indexed annuity that (together with Social Security) will replace his or her salary in retirement. Retirees who don’t want to buy an annuity don’t have to. But once they achieve their retirement income goal, he says, they’d be foolish to leave their money at risk in the stock market.
“Think of risk as a tool,” he writes. “When you don’t need it, get rid of as much of it as you can because it’s costly. When we take a risk, it’s generally for a good reason. You wouldn’t normally put yourself in harm’s way for no reason.”
Merton has also been working with mutual fund manager Dimensional Fund Advisors to turn his ideas about 401(k) reform into a commercially viable strategy. For more on those efforts see this recent Forbes article by Matt Schifrin.