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Financial Planning

Five "Get Ready" Rules for Retirement

There continues to be no lack of pressure on American's to get to work on building a prosperous retirement. 

Study after study, article after article, report after report continues to show what most advisors already know, American's are woefully unprepared for retirement. 

There are a lot of reasons that this is the case, lack of savings and investment, poor estimates of what post retirement spending will actually be like and the paralysis of just not being able to get started on "planning" for your golden years in any meaningful way. 

"Numbers scare me. I'm not alone in this. Scientists who study math anxiety say that the anticipation of crunching numbers can lead to the kind of agitation that, on a brain scan, looks a lot like the perception of physical pain." So said John Schwartz in his March 2015 blog post titled "Retirement Reality is Catching Up With Me" which ran on the 11th of that month in the New York Times. 

And, there are a lot of numbers to be crunched to get it right. If that weren't bad enough, the numbers need to be crunched on pretty much a regular basis, year-over-year.  We have family and life issues that change the pattern of spending and it's timing, we have market issues that impact the value of assets as well as their ability to provide either an income source to supplement us or a pool of funds we can draw on when needed to adjust to changing circumstances. 

Many an investor has been duped by the notion that "making 8%" on their portfolio means that they'll make 8% every year. Little do most pre and post retirees know that "averaging" 8% can be woefully different than earning 8%.  I mean, if the top half of your body is put in a freezer and the bottom half in an oven, we can surely figure out what the temperature of each could be to get you to your ideal 98.6 average temperature. But I'll bet you're going to be pretty uncomfortable no matter how that plays out. Averages and how we actually arrive at them can be at mathematically daunting to say the least. 

Investing for income, another notion that on it's face seems to work, inadvertently becomes an "income straight jacket" as investors allocate assets towards dividend paying stocks and long-term bonds. That's good for generating income, right?  Well, it might be, for at least a period of time. Once the Fed starts raising rates and inflationary pressures kick in we have a problem. Our dividend and interest payments from our investments are more or less locked in so now our "income" isn't keeping pace with inflation and the gap between "what we get" and "what we need" is ever increasing. In addition, both dividend paying stocks and longer term bonds are susceptible to interest rate swings, driving down the value of most investors holdings. Hamstrung, they won't sell because of depressed prices to improve their overall "income" return and they can't live any longer only on what's coming in. 

Is it any wonder that nationally the Pension Rights Center motes that the nation, as a whole, is almost $8 Trillion short in funding retirement. An increase of $2 Trillion from just five years earlier.

So what to do? Here's five things that should hold you in good stead as you move toward and through your retirement time;

  • Your magic number isn't about what you accumulate. It's about what you plan on spending during retirement. Five million dollars in banks, brokerage and retirement accounts isn't enough money if you plan on spending six million 
  • Build a long-term investment strategy and stick with it. As a sage market observer once said, "If they ain't ringing a bell to tell you when to get out of the market, I can assure you that they ain't ringing one to tell you when to get back in."  Market timing is akin to pipe dreams and tooth fairies, it'd be wonderful if it worked, but it doesn't, it won't and it never has
  • Don't forget randomness. The likelihood that a series of investment returns won't deviate from it's expected return is ZERO.  Any plan, no matter how well thought out, no matter who the provider of it is that portends that the way you average 8% is by earning 8% every year has a probability of success equal to ZERO
  • Follow the money. In 2015 everyone's asking, where to put their money when things are most uncertain. If you can't make money on cash (which you can't) and you can't make money on intermediate term bonds (bonds with maturity/duration periods of 3-7 years) then the only result is....it goes back into the market. In 1986 you may have been able to get 9% on government bonds or; ride the market tumult out.  Government bonds at 9% were a good alternative in 1986. The paucity of a 0.15% return on cash isn't an option for you, nor is it for any investment banker, mutual fund manager, endowment or any other living creature who might derive their compensation in whole or in part on making market type returns
  • Get your head out of the sand.  Unless immediate death is your post retirement plan, get comfortable with the fact that as medical technology improves so does your chance of living longer. I know you think that you can pull this one out of the fire at the last minute, but you can't. Taking more investment risk, working longer, downsizing etc. all seem like real options but there's two little problems there, which are [1] sometimes you can't and [2] they all begin from the premise that retirement will then be "based on a lifestyle less bountiful than you had envisioned and less hopeful than you'd planned for."  Those aren't good things. Plan ahead, well ahead for this goal. 

Best that you start actually thinking this one through. I know that finding out that there's a problem isn't a comfortable reality for anyone, but finding out early leaves time to adjust, plan, and rethink things a bit. Finding out too late, leads to chaos, bad decisions, and the severe likelihood that all you'll do at that point is compound your problem. 

Confront the issue, understand the pitfalls and gaps, develop or buy the expertise to deal with them and remember, retirement is suppose to be at least as good a time as your working years were, if not better. 

But that isn't going to happen by chance. You have to make it so. 



Three Reasons To Stop Benchmarking Your Investments

Arbitrary, unrelated and irrelevant.....there they are three reasons. Now let's take a closer look at the rest of the story. 

Benchmarking

Comparing your investment portfolio performance to something has been around a long time. 

Many people use an index as a benchmark, comparing their portfolio to let's say the S&P 500 Index or the Dow Jones Industrial Average.  Those are ok choices, but they're more or less meaningless in the real world. You might as well be comparing your portfolio to the performance of your colleague in accounting. 

  • Arbitrary- any benchmark you pick is of your own choosing, there's no real way to tell which benchmark is better for you than any other. What about the EAFE Index, or the Russell 2000 Value or Russell 1000 Growth Index, why not them? (Other than the fact that those are a bit harder to get data on, but that doesn't mean that they might not be better does it? Gold is harder to find than wood and that's worth more right?)
  • Unrelated- depending on your holdings, the benchmark you pick might be totally unrelated, especially if you don't have any real idea of what it is that you own, beyond a Morningstar or Lipper style designator. What about style attribution, doesn't that matter? If you own a derivative laden large company growth fund, guess what, it's not a large company growth fund is it, if the fund's leveraged to the moon, it's more like a micro-cap fund than a large company growth fund, albeit that the fund company would prefer you continue to think about them as "large company growth" especially when they out-perform their peers by 8%! (Oh, did I mention that that 8% out-performance comes at 200% of the risk?)
  • Irrelevant- ahhhh, saving the best for last. The benchmark that matters most to you is the one that is "all" about you. How much do you need to earn on average so that the net present value of your [a] future income streams such as your pension, social security, annuity payments, etc., plus the net present value of your investment assets and cash, exceeds by some meaningful amount to you, the net present value of all your future spending?  That's the number that matters most, because that's the number that gets you to the finish line.  

If your goal is your future then your benchmark should be your benchmark. Not mine, not The Wall Street Journal's and certainly not Harry's in accounting.

benchmark

If, in the future, you're forced to stop going on vacations, or trading down out of your house or not being able to throw the kids a couple thousand a year for the extras that they need but can't afford, it won't matter much that you outperformed the S&P 500 will it?

No, it won't because it wasn't your performance that let you down, it'll be the fact that you didn't invest enough....something that comparing your portfolio to a benchmark other than your own can't possibly tell you can it?

If they're your goals, and it's your life, make that your benchmark. 

 

How Does Your Door Fit?

Is by "design" or by "default?"

As I was reading Simon Sinek's recent offering, "Start With Why," a story he told early on in the book resonated with me, not only from the standpoint of entrepreneur/business owner but also from the perspective of wealth manager/advisor. 

It seems that a ways back,  some U.S. car manufacturers had visited a Japanese auto manufacturer and were watching the various tasks that were performed along the Japanese assembly line.  While much of the work was the same as "back home,"  the one thing the U.S.  delegation noticed that was missing,  was that in the U.S. there was a last person at the very end of the line who was tasked with whacking each car door with a rubber mallet to get the door to sit properly and line up with the overall body contour. 

When questioned about why step didn't exist in Japan,  the American's Japanese counterpart noted that "we design the doors to fit from the beginning, that's the difference." 

Many people treat their efforts at achieving financial success and as a result the life that they truly desire, in the same way as the American auto assembly line; they treat each and every financial transaction, be it, picking a money market account or deciding on an investment allocation for their 401k plan, about like a U.S. car door; whack it till it ultimately fits, even if it doesn't.

The "piecemeal"  approach is seldom ever going to be efficient and like the U.S. auto builders who had to pay a union worker to swing the mallet and purchase lots of rubber mallets for them to swing, generally, in the long run to be sure, it's going to be more much more expensive. 

Because we fail to choose a path to take, cobbling together financial assets and financial decisions seems the norm.  Without a well thought out plan, we have little context to balance our decisions against. Absent a well defined standard, almost everything is going to fit more-or-less, even if we have to hit it with a mallet to make it so. But the reality remains that it didn't really fit at all did it?

To be sure, it's one more thing checked off the list. But that doesn't make it either effective or right, does it?

The fact is, that on its surface, you'd have a hard time telling the folks with a well thought out plan and path from the ones without one. But, over time, as calamity and change have their influence, it wouldn't be hard to tell at all.  If you never had a plan, it'd be awful hard to stick to it. 

Set a course for your financial future and stick to it. Decide what you'll need to live the life you truly believe that you're entitled to based on a lifetime of work, then figure out how to get there.  There are steps, pragmatic and calculable ones, that put you on the right course. 

Find them. 



Rules For A Sound Retirement Reality

EBRI (Employee Benefit Research Institute) just released it's 2015 study of the longest running national survey of retirement confidence on Tuesday. And, there's good news....well, sort of. 

The 25th annual Retirement Confidence Survey said that 37% of workers are "very confident" about the ability to live a retirement on their own terms that's double the amount from 2013 and another 36% were "somewhat confident." Terrific. 

Reality is however that little has changed in the way of underlying data to conclude that those dramatic rises in confidence are based on anything other than "hoping it to be true." 

The data shows that 57% of workers have an aggregate value of less than $25,000 in savings and investment. That's frighteningly low.

So, how do we get to the dramatic rise in optimism? Well, frankly, it's a mere extrapolation of of data and you can pretty much pick the data you'd like to delude yourself into believing. If the price of homes in your neighborhood has shot up recently, simple, just assume that that meteoric rise continues. Even though it won't. 

Stock market up 32%? Let's assume that'll continue, even though it can't. 

Unfortunately, there's no substitute for answers. 

We can fool ourselves all we want, but in the final analysis, the joke's going to be on us. 

I asked a potential Client the other day; "If I have $5,000,000, do I have enough money to retire on?"  The answer was an enthusiastic, "absolutely!"

I followed it with the following: "If I have $5,000,000 and plan on spending $6,000,000 do I have enough to retire on?" The answer was, as you'd expect, of course not. 

So it isn't about what you have. It never has been. The commercials about your "magic number" were at least partially accurate...there IS A NUMBER and IT ISN'T MAGIC. 

In the parlance of wealth management, the question is, this.......

"Does the net present value of all your projected future spending and taxes result in a number that is greater than or less than, the projected future value of your assets and income, adjusted for inflation and predicated on the fact in whole or in part that the returns on your assets will be random?"

Complicated question. One which I can assure you with almost precision like certainty, only a handful of people "know" the answer to. 

Of this we can be sure; 

  • having "things" like a 401k and an IRA are nice, they're retirement assets but they don't assure you of anything
  • having more than the $25,000 than the typical EBRI survey respondent is also nice, but that doesn't assure you of anything other than your retirement will likely be better than theirs and yet fall way short of your ideal
  • having a lot more than the typical EBRI respondent assures you of nothing, other than you'll have a retirement better than them and the guy or gal next to them and the one, after that and the one after that. 

But if you're all still falling short, who's the winner. 

Quick recommendation here....get the math done. Not some math, not sorta math, your math. 

It's your retirement, you own the outcome.

"Survey says..........."




Generation "Why?"

Hangovers are tough.

All too often we forget that different people, raised at different times and in different ways see things entirely differently than others might.  I wonder what Generation "Y" thinks about our recent financial history and how their understanding of the facts that brought about the worst financial crisis of our time will impact their actions as they move forward in life?

What would your view of the banking sector be if you were at the precipice of your financial life in 2007-2009?  I wonder how much faith and comfort you'd have as you viewed your future financial landscape and considered the role that the banking and brokerage industry would play in your goal planning? My bet is that you'd be skeptical at best and skepticism typically leads to avoidance. 

Skepticism in finance is almost never a good thing. There's already enough "built in" propensities to avoid matters of personal finance, adding to the pile of impediments is not a good thing. 

And how do we propose to alleviate the problem before it snowballs into other ones? I'm not sure that we've thought that one threw have we?

What if an entire generation has lost it's faith in "investing" and "banking" seeing them both as self absorbed sectors, bent on greed, unfairness and lack of transparency?

What will that portend for the housing market?

What will that portend for retirement for a generation afraid to trust anyone with just about anything having to do with their life's savings?

What will that portend for social programs, already straining to provide for people?

Many outcomes are unintended. The lack of intention however has no direct corollary to the disruption it causes.

What we better start getting right in our thinking is this: Our actions send a wave of information forward and that wave, like the ripples on a pond reach all points. Understanding that the impact of and implications of that ripple last long after we've last seen it traverse the surface is something that we seem to keep missing. 

To this day, I meet with both existing and prospective Client's of a certain age who also don't trust "investing" or "ETF's" or "advisors" or much of anything else, absent dirt, a purposely built home and cash. 

Their starting point; the Great Depression. 

Bottom line is that "it" lasts longer than we think, takes more of a toll than we realize and consumes the thoughts of a generation. 

The failure of the Financial Crisis and the havoc it caused might need to be measured for the rest of most of our lives. 

 

 

 

 

Where Ease of Use and Disaster Meet

We've written before about "rules of thumb" and their imminently fallible future.  It appears that one of the most widely used "rules of thumb" may take a dive.

I'm thinking "maybe" not because there's a mathematicians chance that this often used "rule of thumb" actually works, but I say "maybe" because it'll be interesting to see if the public ever finds out. 

Target Date Funds....

Oh these are a help right. Here's the premise; 

a. Lay people can't do very well picking their own investment allocations (this is something that we know to be true and is widely supported by research)

b. You can purchase or invest in a fund that will take care of all that for you, AND;

c. It will automatically adjust the percentage of stocks vs. bonds that you own as you get older so that you're experiencing the lowest risk (i.e., owning the least amount of stocks) as you get older and experiencing the highest amount of risk (i.e, owning the most amount of stocks) as you're at your youngest. 

auto pilot

Think of it, on "auto pilot", all you've ever asked for. When you're young and your earnings are highest and you can afford the most risk....an aggressive portfolio and then, without even so much as a question or concern, an automated tilt to the conservative side of the table just as incomes drop, reliance on portfolio income increases and age sets in.

Problem is...it doesn't work, and frankly, research indicates it never did. 

It was just a ruse from the mutual fund industry that you bought and paid for likely with a fair amount of your retirement nest egg, but hey, who needs more money, you or Wall Street?

Intuitively, consider the matter: 

a. you start out with the smallest amount of money invested in the most profitable asset class, stocks.....

b. overtime, you accumulate more money as you move toward a lower yielding option, a blend of stocks and bonds, then....

c. you wind up with the most amount of money at the exact time that you're in the poorest yielding asset class of the bunch....bonds

Hmmmm....target dating doesn't sound quite that interesting when you explain it that way does it?

Well, once again, Wall Street's and the actively managed mutual fund industry would conveniently like to not let the "math" cloud the issue. 

Here's a typical Wall Street spin you can try.........

If you're ever in an elevator that cuts loose from it's cables and starts plummeting to the ground, all you need do is to jump in the air just prior to impact to save your soul. Seems to make sense right?  For 95% of the "trip" you're not even actually falling are you? I mean you're standing on the floor of a "fixed" object so a good hardy "jump" at just the right moment only puts your feet about three feet off the floor which means that if you only went up three feet, you'd only come down three feet right?

Sounds plausible. It's not.  But again it sounds plausible....if you ignore the math. (P.S. if you've ever watched Myth Busters you know how the elevator story plays out.)

Bottom line is that gimmicks can get a big tailwind, especially when they're sold as something that's so obviously awesome. 

But let's not forget, "bad" ideas always need to be sold

So if you're a "target" date investor, check and make sure that the target's not on your nest egg.