Viewing entries tagged
retirement planning

I won't live that long.

I wish I had a dollar for every time I've heard that.  

People need to appreciate that the insurance industry long ago figured out what to do if you die to soon....hence life insurance.  

Now life insurance has probably been around for a very long time and while insurance companies have put a lot of resources into solving the "what happens if I die tomorrow" problem and untold resources into how to subtly nuance it even more (term, whole life, endowment, variable life, universal life, variable universal life, etc.)  we've made little progress on the front of, "what happens if I live too long" issue. 

In a recent article in The Olympian, Chuck Jaffe a senior columnist for MarketWatch, reviews for the record what is becoming all to painfully clear.   

The time has come to prepare for the fact that living long might be your next big challenge. 

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Have You Heard The One About The "Fiscal Cliff?"

So that there's no shortgage of things to worry about, meaningless as they often are, we'll give you some advanced lead time to prep for the next problem dejour, the "Fiscal Cliff." 

It seems that the fiscal cliff is the collision of a number of policy changes that are set to take place in 2013 that are destined to be the next fiscal impediment. 

There will always be change and challenge. Question is, what will you do to adapt and prosper?

There will always be change and challenge. Question is, what will you do to adapt and prosper?

The attached article presents the facts rather susinctly I feel and it comes with one of the more noteworthy admonitions...ignore it when you hear it. 

This all flows so wonderfully well with an insight from last weeks blog by Larry Swedroe. In discussing the predictive capabilities of our world full of "experts" Mr. Swedroe noted: 

"One of my favorite sayings is that there are three types of investment forecasters: those who don’t know where the market is going; those who know they don’t know; and those who know they don’t know but get paid a lot of money to pretend they do. In other words, they are playing an entirely different game."

Read up on the Fiscal Cliff here, and be ready to ignore it when the media grabs this by the tail and starts running with it. 

Sounder investment decisions help to prevent this kinds of dooms day thinking. 

"Ruse" of Thumb

First off, I think that "Rules of Thumb" should be renamed to "Ruse of Thumb" and with good reason, all we need do is look at the dictionary definition of the word "ruse."

ruse (noun) an action intended to deceive someone; a trick; Eleanor tried to think of a ruse to get Paul out of the house.

And that's pretty much what a "rule of thumb" is in most instances, a deception. In personal finance it is at least. 

Shortcuts are short lived. 

Shortcuts are short lived. 

How do "rules/rues of thumb deceive you you ask? Well, the deception lies in their simplicity and seemingly accurate, global application as "policy." 

Here's some popular examples of "rules/ruse of thumbs:  

"when you retire, subtract your age from the number 100, the answer will tell you how much of your portfolio should be investsed in stocks"

"you need 10x your income in life insurance"

"cash is king"

And there are many more. Part of the deception lies in the fact that the "ruse of thumb" leads you to believe that it's an effective substitute for work. You don't have to analyze anything, do any research, consider personal circumstances (either actual or uknown) you just simply pull the "ruse of thumb" out of your toolkit and whamo! You're done. 

The problem is that largely, "rues of thumb" aren't true. They're widely enough touted and largely enough quoted to make you think that they're true and that they represent mainstream thinking, when in fact they are neither true or mainstream thinking. Since they are deceptively simple they are almost always foisted upon the uninformed by someone who will directly benefit by the application of them. 

And yet, "ruse of thumb" do have mass appeal for sure. Why? Because the majority of the population would rather take the easy answer to it's questions, rather than to ask the tough questions. We're hard wired for "fight" or "flight" so our brains like simple solutions, going back to the day when, in sum and substance, there were only two answers, run like hell or fight to the death

In his article; "Should You Seek Yield For Retirement Income," David Loper of Wealthcare Capital explains in susinct terms why the popular and oft used "ruse of thumb" that when you retire, you should invest alter or arrange your investments in such a way so that it maximizes your post retirement income. 

For sure, many who will read this article will resolve that it just can't be that way. Many investors will contend that they're doing just that, seeking yield and they're doing just fine. They've got friends that are doing it and have done it and they're doing just fine too. Like most "ruse" it seems like a logical tact to take. (For the record, I've got a few friends who still smoke, still eat badly and never get a medical exam. For the record, they're fine too, at least for now.) But in the longer view, it's clearly not the right method.  

Digging in and doing the hard work of planning a financial policy grounded in research, thoughtful conversation and deliberate strategy selection isn't as easy as pulling out your "ruse of thumb." Planning however is infinently less likely to fail and in reality, cheaper for most. And, planning is a cheaper option in absolute terms, both today and tomorrow. 

Preparing For Retirment Appears To Be Not Preparing At All

The 2011 Retirement Confidence Survey seems to show what we've known in the profession for known for some time; while American's confidence in financial security continues to fall, the largely aren't doing anything to improve their chances. This proves again that the uncertainty and decision making leading into life's transitions, paralyzes people even in the fact of a problem that they likely understand very well on many levels.

The number of people saving actively toward a specific retirement goal has leveled off at about the same place as they were during the period from 2001 through 2008. The market decline in 2008-2009 bumped the savers up about 7% but that increase has gone away.

Getting ready means getting ready, not wandering into the unknown hoping we'll figure it out some how along the way. 

Getting ready means getting ready, not wandering into the unknown hoping we'll figure it out some how along the way. 

The report goes on to note the paucity of amounts actually saved, with most workers having less than $25,000. Perhaps more importantly, 30% of workers noted that they had to dip into retirement savings to simply pay for basic lifestyle expenses.

Consider this expert from a recent Financial Magazine blog post:

"Still, the vast majority of American employees are still under financial strain, even when the study looked at the least vulnerable demographic groups-men, those between 55 and 64, and workers who earned between $150,000 and $199,999 per year. According to the study, 83% of them reported having some financial stress; as well as 76% of those in the above age group; and 84% of those earning mid- to high six figure salaries." (Read the entire article here.)

Is Planning The Answer?

Planning is at the least a central part of the answer, if only because it frames the issues in a more understandable and less threatening way. Also, it takes what are largely the scary unknowns and converts them to known items, allowing for us to better understand the problem, it's implications as well as it's potential short and long term solutions.

Only 42% of workers have completed some form of "retirement needs calculation" according to the report. An an advisor I can assure you that most of those calculations are fraught with their own inadequacies, so while 42% may be the number taking that bold step, the percentage getting realistic advice as a result of it, is much, much less.

The difficulty here as we see it is that this becomes a problem easy to ignore, either because ignoring it allows you to live the illusion that if you can't see the problem it doesn't exist, or; because once you know the full scope of the problem, you're left with the fact that the problem's too far gone and you can't do anything to change it in any meaningful way.

And, this last fact is where we believe that there's a value in an adviosry relationship. The reality is that you can do something about it no matter how far along the problem is.

The input and persepctive of a professional can be an invaluable resource in working through the details of planning for any of life's transitions.

Anyone wishing to read the entire Retirement Confidence Survey can do at the EBRI website by selecting this link.

If you would like a complimentary reviwe of your own wealth management plan, connect with us and request a no cost, no obligation appointment for your review.