Financial advisors, planners, and sales representatives do not have track records, in particular records that are audited by independent third parties. In the absence of records, less ethical advisors use deceptive sales tactics to create them. For example, they show you the results of a hot mutual fund and tell you they started recommending the fund before the performance occurred. This is a deceptive sales tactic.
From Wall Street’s point of view, the ideal assets are the ones it can retain the longest and the ones that produce the largest amounts of new fees and commissions.
Investors may spend 30 years accumulating assets for their retirement years. Then they may spend 30 years in retirement. If a Wall Street advisor created a relationship with this type of investor on day one he could generate fees and commissions for the next 60 years.
In year one, the investor opens an account with an initial contribution of money – let’s say $5,000. And, the investor contributes that amount for the next 30 years. Simple math, with no compounding, says the investor will have $150,000 at the end of the 30-year period. Continue reading →
Here’s how the Labor Department describes the problem. Assume you have 35 years until retirement and your current 401k account balance is $25,000. If your investment performance averages 7% over the next 35 years and your expenses average 0.5% your 401k account balance will grow to $227,000 in 2047. However, if your expenses averaged 1.5% with no additional contributions to your account your account balance would only grow to $163,000. The 1% difference in expenses reduced your account balance at retirement by 28%. And, that is with a paltry starting balance of just $25,000. Bigger 401k account balances are impacted the same way, the numbers are just bigger.
Every dollar of expense is one less dollar you have available for reinvestment and your future use. Therefore it is critical that you obtain the data you need to create an extremely accurate spreadsheet that documents every penny of expense that is deducted from your accounts or billed direct to you. Your measuring stick is the percentage of your assets that are paid every year in the form of expenses to as many as five service providers. Continue reading →
You know what the words investment performance mean, but do you know there are several types of investment performance that have varying levels of impact on your financial health?
Investment performance is the fastest way to achieve optimum financial health. For example, you earn $100,000 per year and you have a 10% savings rate ($10,000). Plus, you have accumulated $500,000 of retirement assets and your investment performance is 10% ($50,000). In this example, your investment performance had five times more impact than savings. Financial health occurs when your savings plus investment performance produces the assets you need to live the way you want to for the rest of your life with no compromises. Continue reading →
Your parents worked for companies that provided Defined Benefit Pension Plans. These plans were funded by the companies, invested by professionals, and provided retirement income for life. The only small catch – the company had to stay in business because its net worth was the ultimate guarantor of a lifetime of benefits for retirees.
What about performance? The company was responsible for contributing new monies to the plan and managing plan assets during your parent’s working years and during their retirement years. Investment performance impacted the company, not your parents. Your parents’ only responsibility was cashing the monthly pension checks that started arriving 30 days after they retired. Continue reading →
The year 2008 was a turning point in the lives of many, mostly for one reason: there was a dramatic crisis of confidence in our credit market combined with a process called ”deleveraging” which meant companies were no longer borrowing to invest. Since 2008, a worldwide economic slowdown has had a negative effect globally. This has created a challenge for our government and especially for Federal Reserve Chairman Bernanke, whose job it is to find ways to stimulate the economy and get it back on track.
We are now living in a low interest rate environment, primarily a result of the Federal Reserve Board’s (commonly called “the Fed”) decision to keep interest rates low in order to stimulate business and, of course, the general economy. So is this a good thing or a bad thing for seniors? As in most things in life, it depends on your point of view. Continue reading →
How to buy stocks is usually focused on how to buy high quality stocks that will provide superior performance over the next few years. For example, if you purchased Apple at 100 you would have a 700% gain. If you did not buy Apple you are not alone. It is very difficult to predict the future price movement of individual stocks. This is why most investors have a number of stocks. However, diversification is a defensive, not an offensive strategy. The primary role of diversification is to minimize the risk of large losses.
An index fund is a managed portfolio of securities that is designed to replicate the performance of a segment of the stock market. For example, the S&P 500 index duplicates the performance of 500 large capitalization U.S. stocks. The EAFE (Europe, Australasia, Far East) index is supposed to represent the collective performance of the stock market in 22 foreign countries. Continue reading →
The greatest thing about defined-benefit plans was that workers didn’t have to do anything other than show up for work to get the desired result: a guaranteed income for life. It was a good system in that most workers didn’t want responsibility or control, just a secure retirement.
The defined-benefit plan is gone, and it’s not coming back. It’s been replaced by the 401(k), an accidental solution to the retirement problem. As a replacement, it’s been a dismal failure. The worker is still just looking for a secure retirement with little to no input required. Unfortunately, very few workers are on track to get that these days. Continue reading →
A high percentage of investors have been conditioned to believe investment performance is determined by their willingness to invest a significant percentage of their retirement assets in the stock market. Consequently, they are exposed to substantial risks when they are in their latter years of accumulating assets for retirement or in their early retirement years with 20 or 30-year investment horizons.
According to an Investor Watchdog (www.InvestorWatchdog.com) survey 64.2% of investors are becoming very concerned about their ability to recover from stock market crashes. Their immediate concern is a crash between now and their retirement dates or within a few years after they retire. They have figured out how the math of falling and rising markets works against them. Bill and Ann Smith, our hypothetical investors, illustrate the problem.
Financial advisors know people want superior investment performance for reasonable risk and expense. Advisors use a variety of sales tactics for making this claim and the less ethical the advisor the bigger the claim. For example, an advisor may claim his performance ranks in the top 1% of all advisors in the country. The claim is verbal and no documentation is provided so this is a safe sales tactic for the advisor. If investors are gullible enough, they may just select this advisor based on a false claim of high performance for low risk and expense. Remember, 11,000 people turned their assets over to Bernie Madoff. Continue reading →
The employer’s obligation for the pension plan doesn’t end when they write the check. It begins.
Without any thought or planning the 401(k) has become America’s pension plan. The days of guaranteed retirement income for life are long gone, and along with them the financial security that the traditional pensions plan provided.
The 401(k) solution is deeply flawed. The widespread failure of 401(k) plans to provide adequate retirement income security for American workers has caught the attention of the courts, regulators, the administration, Congress, academics and participants. Continue reading →