MONEY retirement planning

Answer These 10 Questions to See If You’re on Track to Retirement

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More Americans are confident about retirement—maybe too confident. Here's how to give your expectations a timely reality check.

The good news: The Employee Benefit Research Institute’s 2015 Retirement Confidence Survey says workers and retirees are more confident about affording retirement. The bad news: The survey also says there’s little sign they’re doing enough to achieve that goal. To see whether you’re taking the necessary steps for a secure retirement, answer the 10 questions below.

1. Have you set a savings target? No, I don’t mean a long-term goal like have a $1 million nest egg by age 65. I mean a short-term target like saving a specific dollar amount or percentage of your salary each year. You’ll be more likely to save if you have such a goal and you’ll have a better sense of whether you’re making progress toward a secure retirement. Saving 15% of salary—the figure cited in a recent Boston College Center for Retirement Research Study—is a good target. If you can’t manage that, start at 10% and increase your savings level by one percentage point a year, or go to the Will You Have Enough To Retire tool to see how you’ll fare with different rates.

2. Are you making the most of tax-advantaged savings plans? At the very least, you should be contributing enough to take full advantage of any matching funds your 401(k) or other workplace plan offers. If you’re maxing out your plan at work and have still more money you can save, you may also be able to save in other tax-advantaged plans, like a traditional IRA or Roth IRA. (Morningstar’s IRA calculator can tell you whether you’re eligible and, if so, how much you can contribute.) Able to sock away even more? Consider tax-efficient options like broad index funds, ETFs and tax-managed funds within taxable accounts.

3. Have you gauged your risk tolerance? You can’t set an effective retirement investing strategy unless you’ve done a gut check—that is, assessed your true risk tolerance. Otherwise, you run the risk of doing what what many investors do—investing too aggressively when the market’s doing well (and selling in a panic when it drops) and too conservatively after stock prices have plummeted (and missing the big gains when the market inevitably rebounds). You can get a good sense of your true appetite for risk within a few minutes by completing this Risk Tolerance Questionnaire-Asset Allocation tool.

4. Do you have the right stocks-bonds mix? Most investors focus their attention on picking specific investments—the top-performing fund or ETF, a high-flying stock, etc. Big mistake. The real driver of long-term investing success is your asset allocation, or how you divvy up your savings between stocks and bonds. Generally, the younger you are and the more risk you’re willing to handle, the more of your savings you want to devote to stocks. The older you are and the less willing you are to see your savings suffer setbacks during market downturns, the more of your savings you want to stash in bonds. The risk tolerance questionnaire mentioned above will suggest a stocks-bonds mix based on your appetite for risk and time horizon (how long you plan to keep your money invested). You can also get an idea of how you should be allocating your portfolio between stocks and bonds by checking out the Vanguard Target Retirement Fund for someone your age.

5. Do you have the right investments? You can easily get the impression you’re some sort of slacker if you’re not loading up your retirement portfolio with all manner of funds, ETFs and other investments that cover every obscure corner of the financial markets. Nonsense. Diversification is important, but you can go too far. You can “di-worse-ify” and end up with an expensive, unwieldy and unworkable smorgasbord of investments. A better strategy: focus on plain-vanilla index funds and ETFs that give you broad exposure to stocks and bonds at a low cost. That approach always makes sense, but it’s especially important to diversify broadly and hold costs down given the projections for lower-than-normal investment returns in the years ahead.

6. Have you assessed where you stand? Once you’ve answered the previous questions, it’s important that you establish a baseline—that is, see whether you’ll be on track toward a secure retirement if you continue along the saving and investing path you’ve set. Fortunately, it’s relatively easy to do this sort of evaluation. Just go to a retirement income calculator that uses Monte Carlo analysis to do its projections, enter such information as your age, salary, savings rate, how much you already have tucked away in retirement accounts, your stocks-bonds mix and the percentage of pre-retirement income you’ll need after you retire retirement (70% to 80% is a good starting estimate) and the calculator will estimate the probability that you’ll be able to retire given how much you’re saving and how you’re investing. If you’re already retired, the calculator will give you the probability that Social Security, your savings and any other resources will be able to generate the retirement income you’ll need. Ideally, you want a probability of 80% or higher. But if it comes in lower, you can make adjustments such as saving more, spending less, retiring later, etc. to improve your chances. And, in fact, you should go through this assessment every year or so just to see if you do need to tweak your planning.

7. Have you done any “lifestyle planning”? Finances are important, but planning for retirement isn’t just about the bucks. You also want to take time to think seriously about how you’ll actually live in retirement. Among the questions: Will you stay in your current home, downsize or perhaps even relocate to an area with lower living costs? Do you have enough activities—hobbies, volunteering, perhaps a part-time job—to keep you busy and engaged once you no longer have the nine-to-five routine to provide a framework for most days? Do you have plenty of friends, relatives and former co-workers you can turn to for companionship and support. Research shows that people who have a solid social network tend to be happier in retirement (the same, by the way, is true for retirees who have more frequent sex). Obviously, this is an area where your personal preferences are paramount. But seminars for pre-retirees like the Paths To Creative Retirement workshops at the University of North Carolina at Asheville and tools like Ready-2-Retire can help you better focus on lifestyle issues so can ultimately integrate them into your financial planning.

8. Have you checked out your Social Security options? Although many retirees may not think of it that way, the inflation-adjusted lifetime payments Social Security provides are one of their biggest financial assets, if not the biggest. Which is why it’s crucial that a good five to 10 years before you retire, you seriously consider when to claim Social Security and, if you’re married, how best to coordinate benefits with your spouse. Advance planning can make a big difference. For each year you delay taking benefits between age 62 and 70, you can boost your monthly payment by roughly 7% to 8%. And by taking advantage of different claiming strategies, married couples may be able to increase their lifetime benefit by several hundred thousand dollars. You’ll find more tips on how to get the most out of Social Security in Boston University economist and Social Security expert Larry Kotlikoff’s new Social Security Q&A column on RealDealRetirement.com.

9. Do you have a Plan B? Sometimes even the best planning can go awry. Indeed, two-thirds of Americans said their retirement planning has been disrupted by such things as major health bills, spates of unemployment, business setbacks or divorce, according to a a recent TD Ameritrade survey. Which is why it’s crucial that you consider what might go wrong ahead of time, and come up with ways to respond so you can mitigate the damage and recover from setbacks more quickly. Along the same lines, it’s also a good idea to periodically crash-test your retirement plan. Knowing how your nest egg might fare during a severe market downturn and what that mean for your retirement prospects can help prevent you from freaking out during periods of financial stress and better formulate a way to get back on track.

10. Do You Need Help? If you’re comfortable flying solo with your retirement planning, that’s great. But if you think you could do with some assistance—whether on an ongoing basis or with a specific issue—then it makes sense to seek guidance. The key, though, is finding an adviser who’s competent, honest and willing to provide that advice at a reasonable price. The Department of Labor recently released a proposal designed to better protect investors from advisers’ conflicts of interest. We’ll have to see how that works out. In the meantime, though, you can increase your chances of getting good affordable advice by following these four tips and asking these five questions.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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MONEY Financial Planning

The Danger of Mixing Politics and Investments

U.S. Democratic presidential nominee Sen. Barack Obama (D-IL) (L) makes a point to Republican presidential nominee Sen. John McCain (R-AZ) during the presidential debate at Hofstra University in Hempstead, New York October 15, 2008.
Jim Bourg—Reuters U.S. Democratic presidential nominee Sen. Barack Obama (D-IL) (L) makes a point to Republican presidential nominee Sen. John McCain (R-AZ) during the presidential debate at Hofstra University in Hempstead, New York October 15, 2008.

Believing that the country is headed in the wrong direction doesn't always translate into a good investing strategy.

Looking at a chart of the S&P 500’s performance from 2007 until now gives you a totally different perspective on the market decline of 2008-09. What an opportunity that was, right?

In hindsight, it’s easy to recognize that March 2009 was a bottom. I won’t bore you with stats on how much the market has gone up since then, because you already know it’s a lot.

We financial professionals find it easy to recall historical market data, but how often do we recall the politics that might have contributed to the decline in the first place?

Not too long ago I had the pleasure of meeting a man who had traveled extensively but was considering settling down given his advanced age. He had asked that I take a look at his portfolio because he was considering changing his “investment guy.” He mentioned that he had taken a significant hit in 2009 and that he had not fully recovered, so he wanted me to review his portfolio and advise him on what he should do now in order to have enough during retirement.

Soon after we started talking, it became apparent that he was of the belief that the country had been heading in the wrong direction since 2008. His portfolio appeared to have been built around an assumption that the market would collapse beyond its 2009 low.

Whether or not it was a good investment decision at the time would depend on a number of factors. In hindsight, however, it wasn’t a good strategy after March 2009.

Did his “investment guy” share his political views as well, continuing to believe that the country would come to an end? I don’t know. What is certain is that the client’s portfolio suggested that he was expecting a significant decline.

I recall having a similar conversation soon after 2009 with a couple who made it clear to me that they were not confident that American capitalism would survive. They shared with me their displeasure about the political environment at the time and felt that the country was in decline.

I began telling them they should ignore news reports and turn off their television because in the long run, that information would have no bearing on their investments

They looked at me as if to say I was misinformed, and politely walked out of my office.

As financial professionals, we all have our own political views, because we’re human. Some are in alignment with our clients’ views, and some might be to the left or right. But does that mean we should allow our political views to dictate our financial planning advice?

Over the years I’ve learned that my personal political views have very little to do with the advice I extend to my clients. Regardless of whether or not I agree with clients or potential clients, my goal is to remain neutral and apolitical. I focus on just the facts as best as I can.

Bottom line, my political views are irrelevant when it comes to planning and providing advice that would allow my client to navigate the financial noise.

———-

Frank Paré is a certified financial planner in private practice in Oakland, California. He and his firm, PF Wealth Management Group, specialize in serving professional women in transition. Frank is currently on the board of the Financial Planning Association and was a recipient of the FPA’s 2011 Heart of Financial Planning award.

MONEY Retirement

The Pros and Cons of Hiring a Financial Adviser

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Robert A. Di Ieso, Jr.

Q: Should I use a financial adviser to manage my retirement portfolio or should I save money by going it alone? – Carl Vitko, Cicero, Illinois

A: That depends on how comfortable you are doing it yourself. If you are familiar with the basic concept of asset allocation and you’re comfortable choosing investments, you shouldn’t have any trouble building a low-cost diversified portfolio on your own, says Robert Stammers, director of investor education at the CFA Institute.

But you don’t necessarily have to pay an adviser to get help. Most people have the bulk of their retirement savings in a 401(k). Many 401(k) plans offer low-cost index funds and target date funds; the latter is a diversified stock and bond portfolio that becomes more conservative as you age. Many employer plans also offer free tools to help you assess your investing options and assemble a portfolio appropriate for your age and risk tolerance. According to the Plan Sponsor Council of America’s annual survey of 401k plans, 41.4% of plans offer some kind of investment advice.

Taking advantage of that advice can pay off. In a recent Voya Financial survey of full-time workers, people who saved the most for retirement used online financial advice tools and educational materials provided by their employers at more than double the rate of the lowest-scoring savers.

But the do-it-yourself approach requires time to monitor your portfolio and the discipline to adjust to different market conditions. You also have to keep your emotions in check when markets are volatile, which investors admit they have a hard time doing. In a survey by Natixis Global Asset Management, 65% of investors say they struggle to avoid making emotional decisions about their money during market shocks.

Even more worrisome: 81% of investors say expectations for double digit gains going forward are realistic and 54% believe their portfolios will perform better this year than in 2014, when the Standard & Poor’s 500 Index rose by 13%, according to the Natixis survey.

Coming off three consecutive years of market returns that exceed 10%, that kind of enthusiasm is not surprising. But historically, the stock market has averaged 7% annual gains. Having an objective investment adviser can help ground your expectations in reality. And there’s evidence that some investors do better getting some professional advice.

Median annual returns for 401(k) holders who got professional help through target date funds, managed accounts, or their plan’s online advice were 3.32 percentage points higher than returns for people who invested on their own, even after taking fees into account, according a 2014 study by benefits consultant Aon Hewitt and Financial Engines, which provides investment advice to 401(k) plans.

If you decide to go the professional route, you have choices. An adviser at a large investment firm typically charges a fee of about 1% of the assets he or she manages for you. A new type of investment service known as a “robo-adviser” uses computer algorithms to build low-cost portfolios and charges as little as 0.5% a year. (To better understand how robo-advisers work, read “Would You Trust Your Retirement to a Machine?“)

You should consider enlisting a financial adviser who can do more than manage your investments. A certified financial planner (CFP) takes a more holistic approach to your retirement readiness. They can help you figure out whether you are on track with your savings and how other investment options, such as Roth and traditional IRAs, fit into your retirement plans. Best to go with a CFP who charges a fee for advice versus one who takes commissions on products he or she sells you. That cost can range from $2,000 to $5,000 a year. You can find fee-only planners through the Financial Planning Association and National Association of Personal Financial Advisors.

If you decide to go it alone, you’ll need to be vigilant about monitoring your plan, and should take advantage of any free advice available to you through your 401(k) provider. But as you get nearer to retirement, consulting at least once with a professional and reputable financial adviser is a wise move, says Stammers.

MONEY financial advice

What I Learned in India About Financial Advice

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Stephen Wilkes—Gallery Stock Mumbai

One thing that crosses international boundaries is how people misunderstand the cost of financial advice.

In the airport shuttle taking us to our hotel in Mumbai, I looked out the window and thought, “We’re not in South Dakota anymore.” At midnight, the streets of India’s largest city seemed as full of people, vendors, and traffic as Times Square at noon.

I had no real comparison, though, for the garbage strewn about, the beggars going from car to car when traffic stopped, the people sleeping on the sidewalks, the ramshackle condition of most buildings, and the roaming packs of stray dogs. The third poorest county in the US — just 60 miles from my home — is no match whatsoever for the real ghettos of Mumbai, where 55% of the city’s 16 million people live.

Given these great dissimilarities in economic status as well as political, religious, and cultural views, I expected to find striking differences between the Indian and U.S. financial adviser communities and their clients. Here I was surprised.

I traveled to Mumbai to meet with a group of Indian financial advisers. The country’s financial regulators are actively encouraging advisers to change from charging only commissions to charging fees. My role was to offer suggestions for making that transition.

After spending several days observing and listening to the struggles of the Indian advisers, I concluded that 95% of the obstacles they face in promulgating client-centered, fiduciary planning are the same as the ones planners face here in the US.

The most frequent complaint I heard was that consumers just won’t pay fees. They would rather pay a high commission they don’t see rather than a low fee they painfully do see. I find the same behavior in US consumers. It seems irrational, but it makes perfect sense when we understand the delusional money script of avoidance that says, “If I don’t see the fee, then I must not pay a fee.”

Just as in the US, Indian advisers struggle to help consumers understand the math behind hidden commissions and visible fees. While most advisers can quickly calculate the amounts, consumers still find it hard to accept the numbers. There is great resistance to writing a check, even when a planning fee is half as much as an unseen fee or commission. In my experience, most consumers have great difficulty emotionally understanding that writing a check for $10,000 for advisory fees on $1 million represents a $15,000 savings on a 2.5% wrap fee they don’t see and for which no check is written.

Another similarity is that those most willing to pay fees for service are the wealthier clients. At first blush one might surmise that of course the wealthy are more open to paying fees because they have more money. That isn’t the case. The fees paid are roughly proportionate. In fact, usually smaller accounts that go fee-only save proportionally more than do larger ones. The difference is that affluent or wealthy clients tend to be business owners or professionals who are familiar with employing fee-for-service consultants, like accountants and attorneys.

The transition to introducing fees is slow, requiring a lot of education on the part of advisers and willingness to listen on the part of consumers. Similar to where the US was in the 1980s, India has only a handful of pioneering fee-only planners. Most advisers wanting to switch from pushing financial products to doing comprehensive financial planning have rolled out a fee-based model first. They hope consumers will eventually embrace the advantages — lower costs and fewer conflicts of interest — inherent in a fee-only compensation model.

In my career, I have watched and participated in financial planning’s growth as a profession in the US. It’s a privilege to be able to see it develop in India as well.

———-

Rick Kahler, ChFC, is president of Kahler Financial Group, a fee-only financial planning firm. His work and research regarding the integration of financial planning and psychology has been featured or cited in scores of broadcast media, periodicals and books. He is a co-author of four books on financial planning and therapy. He is a faculty member at Golden Gate University and the former president of the Financial Therapy Association.

MONEY Financial Planning

Online Financial Planning Is More Popular Than You Think

piggy bank connected to computer mouse
Jan Stromme—Getty Images

Who needs to meet a financial adviser face-to-face? Not millennials and Gen Xers, who are often happier Skyping.

Hi, my name is Katie, and I’m a virtual financial planner.

If this sounds like a support group meeting, sometimes I feel like it should be. When I tell other financial planners that I work with clients across the country, they say, “But clients always value the face-to-face meetings that my firms provides.” So I ask them, “What is the average age of those clients?” The answer is usually in the 60s.

I started my own financial planning firm last year because I wanted to focus on clients under 50, in a way that lets me deliver advice without selling financial products. That doesn’t sound too complicated, does it? One of the ways I do this is by offering my services to people not in my immediate location. We either have a phone call while using screen-sharing software like JoinMe, or we use Skype or Google Hangouts to conduct meetings.

Since I’ve been in the industry for 10 years and always previously met with clients in person, I was a little apprehensive about the idea of not meeting clients face-to-face.

You know what? They don’t care. At all.

The clients I work with are well-educated, busy Gen X and Gen Y professionals. They use technology on a daily basis for work and personal reasons. The married couples I work with are usually both working in high-intensity jobs while juggling the demands of a family. Taking time out of their day to drive to a financial planner’s office, have an hour-long meeting, and drive back to their own workspace would easily eat up two to three hours of valuable time.

When we have a call or virtual meeting, we have a set agenda, the appointment is on their work calendar, and we are able to accomplish everything in 30 to 45 minutes. When we do this, my clients don’t need to spend a bunch of time away from the office, get a babysitter, or drive around town.

Another advantage to my clients (and me!) is that I am able to keep my financial planning prices down. Because I don’t keep an office in an expensive part of town, my overhead costs are lower. I can pass that savings along to my clients. I also have a lot of flexibility to conduct business even when I’m out of town for a conference.

What does a planner need in order to work with clients virtually?

  • A phone, and preferably a phone number that isn’t tied to a particular office space.
  • Comfort with screen-sharing tools.
  • Enough organizational skills to have the topic decided on beforehand — and enough flexibility to be able to answer other questions as they arise.
  • Financial planning software that clients can access online, or a secure client vault for sharing documents back and forth.

That’s it!

Clients that fit best in a virtual relationship are those that are comfortable with technology, somewhat self-sufficient, and aware of why this setup benefits them.

I’ve found that members of Gen X and Gen Y actually like working with a financial planner virtually because they are already comfortable with technology, they’re used to communicating this way, and they like the time-saving convenience. As an added benefit, those clients get to choose an adviser because the adviser specializes in their specific situation, not because the adviser happens to live near them.

———-

Katie Brewer, CFP, is the president of Your Richest Life, where she works virtually with Gen X and Gen Y professionals, helping them create and stick to a financial roadmap to live their richest life. Katie is a fee-only planner, a founding member of the XY Planning Network, and a member of the Financial Planning Association. She is also proud to be a Fightin’ Texas Aggie.

MONEY Financial Planning

Why I Want Clients to Get Emotional About Retirement

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Chutima Chaochaiya—Shutterstock

Digging deep into clients' emotions helps one planner uncover what they're really thinking.

I like to delve into clients’ emotions and feelings. People may tell me one thing initially, but upon further questioning may see that their first response wasn’t emotionally true.

One example of that came up in a recent meeting with a couple who were getting ready to retire. Of course, they had worries about what they should do.

They wondered if they should move all their money into conservative investments. They floated the idea of moving everything into an annuity — an option they believed carried no risk.

When I asked them about longevity in their blood lines, I learned they each had at least one parent in their mid-90s. I then explained to them how we are in a low-rate environment and talked about the danger that their annuities would be capped at very low rates of return that likely would not keep pace with inflation or taxes.

That’s where my emotional questioning began. Let me summarize our conversation:

Question: The chance of your living another 30 to 40 years is extremely possible. How do you feel about that?

Answer: That we won’t have enough money.

Q: How does that make you feel?

A: Afraid and very uncertain.

Q: When you started work and got married, what were the rules?

A: Save money in a retirement account, have children, and make sure they get good education.

Q: What are the rules in retirement?

A: We don’t know of any other than just making your money last.

Q: If all of us are living longer, and you know that certain health care costs and taxes are going up, why would you not want to grow your money? Why would you want to buy this financial product that is not designed to keep pace?

A: That’s just what we were told. And that’s what we thought you did as an adviser.

Q: Well now that you are here, how do you feel about this happening?

A: We are very uncertain and really don’t know what to do!

Q: Has anyone worked with you to put together a plan that is balanced with investments and also has an income component that is adjustable for you?

A: No

Q: If you could become more educated on a balanced plan and how that may help you navigate the next 30 years, how would that make you feel?

A: It would make us feel like we have a chance to succeed.

When clients say that they do not want to lose any money, my response is, “Okay, but how do you feel about not making any money?” They don’t like that idea either.

In today’s marketplace, “no risk” equals minimal return and loss of purchasing power.

It is very important to educate clients on current economic conditions and teach them that calculated risk is worth taking. The average retiree who has a net worth of, say, $500,000 to $1 million either falls prey to annuity salesman or is so shell-shocked from 2009 that he or she only trusts CDs.

There is a real need to educate clients on how rates work and why the market have been the place to be for the past six years. Retirees also need greater clarification on annuities in order to understand their income and growth restrictions.

Asking questions to gauge risk is key to financial success. More importantly, it is key to building a sound relationship between adviser and client.

I always ask my clients, “In the next one to two years, what do I need to make happen to assure you that you have made a good choice in working with me?” These answers vary, but generally speaking, clients want to know that they are staying on the right path and are not falling behind. Keeping in touch with clients and knowing how they feel emotionally is paramount to them feeling good about their adviser.

———-

Matt Jehn, CFP, is managing partner of Royal Oak Financial Group, which offers small businesses and individuals in Columbus and Lancaster, Ohio a complete financial solution through professional accounting, tax and wealth management services. Jehn, who earned a degree in family financial planning from The Ohio State University, enjoys helping his clients grow their businesses by educating them on the meaning behind the numbers.

MONEY Ask the Expert

Why You Need to Send Your Spouse a Love Letter—About Money

Investing illustration
Robert A. Di Ieso, Jr.

Q: I have accounts with various institutions and have been doing my own investing for more than 30 years. I recently married again but my wife does not get involved with my investments. What instructions should I give her about how to handle these accounts if I die first? — Anonymous

A: The sooner you can bring her into the fold, the better, says Byron Ellis, managing director for United Capital Financial Advisers in The Woodlands, Texas. And not just for the sake of your nest egg, but for the sake of your marriage.

First, consider consolidating your accounts. “A lot of people think having money at different firms is a great way to diversify, and that’s just not true,” says Ellis. Simplifying has advantages for you today, and will make things easier for your heirs down the road.

Next, use this concern about these accounts as a jumping off point for a bigger discussion about money. “People think differently about money, and that can lead to other issues,” adds Ellis.

If you haven’t already, make a date with your wife to talk about everything from how you’d like to handle day-to-day finances to your overall philosophy about spending and saving. Does she have assets of her own? How confident is she about managing money? What motivated you to save as you did?

Once you understand where each of you is coming from, you can talk about how you want to handle things going forward. For example, do you want to continue managing your money separately? What are your near-term and longer-term goals?

Regardless of what comes out of the conversation, you should by all means leave your wife some instructions – for your investments and the rest of your estate. In addition to making sure your will is up to date – that is key – write your wife what Ellis calls a love letter, and ask her to do the same.

This letter should outline your instructions and include all the information you think she should have if you pass away: a list of accounts and account numbers; user names and passwords; your insurance policies; important contacts and phone numbers; an inventory of other assets or items you’ve hidden. Obviously, you’ll need to put this letter in a safe place, such as a safety deposit box, and let your wife know where you keep it.

Finally, make a point of updating the letter once a year; some information will change, and so too may your wishes.

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