Just finished reading the letter portion of Warren Buffett’s annual report to shareholders. It’s always a good read.

My general impression is that Buffett is increasingly describing the wide-ranging operations of Berkshire in terms and structure that highlight the conglomerate his empire has truly become. The specifics of the many underlying, smaller businesses that Berkshire controls and the investments Berkshire makes in marketable securities, are largely gone from his commentary. This was once the bread and butter for professional investor readers. This is natural and reflects the sprawling nature of the business today. Still, his letter does lose a little bit of its “nerdiness” as a result.

It was noticeable to me that he used only one page – just a short list – to describe Berkshire’s investment activities and he made no detailed mention of bonds (a big part of Berkshires’s portfolio as a large insurer), the state of the economy or the current state of central bank policies that have produced unprecedented effects in financial markets today. His comments about the market and their transactions along the way were very sparse and no real mention was made of his investment lieutenants’ (Combs and Weschler) decision making or returns in 2015. Given the focus that many shareholders place on Buffett’s investment acumen, I found this somewhat odd. Especially so, given that he is 85 years old.

Overall, the businesses that Berkshire controls have certainly produced a very diversified set of income streams. The overall value of the company, from a book value relative to its current market value perspective shows that Berkshire’s common stock is reasonably priced at around 1.2x book value. In fact, this is the valuation level that Buffett has stated will prompt him to use Berkshire’s resources to buy back its own shares. This has not occurred often in his 60 year history.

My opinion on Berkshires’s lower book value multiple is that it better reflects the reality that a management transition will occur sooner rather than later. Given its complex conglomerate structure – again, one highlighted by this year’s letter – Buffett’s successors will have a challenge during a transition.

In the high heat of this election cycle, Social Security reform will likely slide closer to the front burner. If not, it should.

As an investment adviser who disproportionately works with near- or currently- retired people, I see firsthand the important role Social Security plays in their overall financial picture.

For a large proportion of retirees, Social Security represents the majority of their retirement income. For this reason alone, digging into our presidential candidates’ Social Security reform proposals is a high priority.

Bernie Sanders appears to provide the most detailed Social Security reform proposals on record. Naturally, he focuses on increasing the program’s funding to help shore up its long-run financial sustainability.

Sanders primarily proposes raising the cap on wages subject to payroll taxes earmarked for Social Security. Under his plan, today’s maximum threshold of around $120,000 per year in earnings subject to this tax would remain. His new proposal is to restart collecting the payroll tax once a worker’s earnings exceed a new threshold of $250,000.

Importantly, in exchange for these additional contributions, affected taxpayers would receive no additional benefits and the money raised would be used to support the benefits of those with a lower history of earnings.

Hillary Clinton’s proposals center on her opposition to retirement age hikes, privatization plans or payroll tax increases for the middle class. Clinton has expressed openness to Sanders’ idea of raising the cap on earnings subject to Social Security payroll taxes, but provides no specific plans.

Donald Trump’s main idea for Social Security is to produce faster economic growth. However, I am not aware of an analysis of how economic growth affects the long-run financial position of Social Security. Beyond the economic growth argument, Trump has also suggested that wealthy people voluntarily return their benefit checks and that he’d reduce “waste, fraud and abuse.”

Marco Rubio and Ted Cruz both support increasing the retirement age and lowering the inflation rate for benefit payments. Both also support the idea of younger workers developing private accounts within the system.

While Cruz’ plan for privatization appears similar to Bush’s previously failed attempt, Rubio’s private account proposal appears to be designed as a supplementary source of retirement savings, rather than a replacement for Social Security.

Social Security is the ultimate political hot potato, no doubt. Understanding the candidates’ reform proposals – with details that allow for deeper analysis and thoughtful debate – is a basic right of voters. The goal of any reform, as I see it, is to reach a collective view on how we’ll maintain Social Security as a pillar of financial support to the millions of retirees who need it. Benign neglect won’t get the job done.

Jason P. Tank, CFA of Front Street Wealth Management will hold a free educational workshop on “Navigating Social Security’s New Rules” on March 9th at 6:30pm in the McGuire Room at the Traverse Area District Library. Call (231) 714-6459 with questions, visit frontstreet.com/workshop to learn more.

 

Stock markets are down this year between 10% and 15% across the globe. From their recent highs set in 2015, the drop has been an even larger 15% to 30%. Now is a good time to talk battle plans for handling this type of investment volatility.

While investment battle plans are best established prior to declines, it’s never too late and today’s lessons will no doubt help you tomorrow.

Your first line of defense is to do an investment risk assessment.

A proper risk assessment is a function of your age, income, assets, debts and your lifestyle desires. Together, these factors define your financial capacity for taking risk. It’s the brains, but not the heart of the matter.

A clinical exercise in financial accounting just isn’t sufficient to capture the power of your emotions. While investment advisers tend to denigrate investors’ emotional decisions, let me provide you with a more-nuanced view.

Like it or not, your emotional tolerance for risk will always be a part of you. Discounting who you are is generally a futile fight. Given this reality, your focus should be on properly aligning your portfolio’s high-level structure with your tolerance for taking risk. If you don’t know your portfolio’s asset allocation, review it now.

Your next line of defense is to actually know what you’re invested in.

If you own mutual funds, like most people, you should work to understand the investments sitting inside those funds. Remember, a mutual fund is just a box with wrapping paper on it. What’s inside is what matters most. If you don’t know the type of funds you own, find out.

Your third line of defense is to be diversified.

Diversification is often cited by investment advisers. Sure, it’s good, classic advice; don’t put all your eggs in one basket. But, calling it good after simply noting a long list of holdings on your account statements may open you up to some hidden risks.

Ask yourself if your portfolio is hanging on a common thread. For example, in your search for income in a yield-starved world, do you own too many real estate funds, lower-quality bonds or even safe-looking bond funds that rely on leverage?

Upon deeper analysis, you may have exposed your portfolio unknowingly and are actually undiversified. After all, diversification is not about how many investments you own. Rather, it’s about the commonalities and differences between them. If you are unaware of the factors that affect your portfolio, I’d suggest you start doing your homework

Jason P. Tank, CFA of Front Street Wealth Management will hold a free educational workshop on “Battle Plan for Investment Volatility” on Feb 24th at 3:30 pm in the Blue Room at the Traverse Area Chamber of Commerce. Call (231) 714-6407 with questions, visit frontstreet.com/workshop to learn more.

One question has rung through loud and clear following my two recent columns on the big rule changes with Social Security and the development of a safe spending rate in retirement.

Soon-to-be and current retirees want help developing a holistic plan for the “living off my savings” phase of their retirement journey.

Specifically, their burning question can be broken down into three smaller questions. First, from which accounts should we withdraw our money and in what order? Second, how exactly will my Social Security benefits affect our tax bill? Third, what steps could we take now to help minimize our tax bill in retirement?

Our financial system is a ridiculously complex maze for retirees to navigate. At the center of the complexity sits our tax code.

Regarding the question of which accounts should be drawn from first and in what order, most retirees have two forms of savings. They have savings that have already been taxed and savings that have yet to be taxed.

To begin, it’s important to understand that the mere act of drawing from your already-taxed savings does not trigger a tax bill. Only your dividends, interest and realized gains result in tax payments. In contrast, the act of drawing from your tax-deferred savings creates immediate taxable income.

Given this, choosing the best source of retirement income clearly depends on your own tax picture. For this reason, sound advice about the best source of retirement income wholly depends on your personal financial setup. This requires some basic tax modeling of your present and future tax picture.

Next, you may not realize that Social Security benefits are often taxed. The proportion of this benefit that is taxed can range from none to a maximum of 85% of the benefit. The tax owed depends entirely on your other income, some of which is voluntarily created by drawing from your tax-deferred accounts, such as your IRAs.

With this understanding, the decision of which pot of savings to draw from – your already-taxed savings or your tax-deferred savings – can impact the amount of tax owed on your Social Security.

Finally, there are planning techniques that might allow you to minimize your future tax bills in retirement. Among these techniques are strategic, partial Roth IRA conversions and the possible utilization of the 0% capital gains tax rate on your federal tax return.

Intelligent planning for the “living off my savings” phase is increasingly on the minds of current and soon-to-be retirees alike. The educational steps you take now will no doubt pay dividends later. Best of all, those dividends are completely tax-free!

Jason P. Tank, CFA of Front Street Wealth Management will hold a free educational workshop on “Retirement Income: From Where & When?” on Feb 10th at 6:30pm in the McGuire Room at the Traverse Area District Library. Call (231) 714-6407 with questions, visit frontstreet.com/workshop to learn more.