Category: Money Myths

You can HOPE you do not run out of money or…

images (1)… you can KNOW that you will not. Most workers today are retiring without a pension. If you are one of them then you might be worried out running out of money. Turing an investment portfolio into a steady stream of income has gotten harder over the years because of low bond yields, high market volatility, and increased longevity. But it can be done. As a Retirement Income Certified Professional, RICP®- this is the process I use to help people that want more certainty, want to know they will never run out of money.

STEP #1: WE LOOK AT HOW MUCH THEY HAVE SAVED. One source of guaranteed income most of us have is Social Security. If you are married, then you might be able to count on two checks. What other sources of guaranteed income will you have, rental, inheritance, reverse mortgage, etc? Will you be working part-time?

download (1)STEP #2: I CALCULATE WHAT THEY WILL NEED. We do not low ball either. We don’t use general rules of thumb, like you will only need 80% of your working years income. I have not found this to be true, in reality. Not in Southern, CA. We want to detailed, realistic and specific to one’s situation. That is real life.

STEP #3: ARE WE COMING UP SHORT of what is required, whether now or later?

downloadThe difference between the income you need and the income you have is the income that’s missing. In an article titled Psychology of Retirement Satisfaction, it is evidenced that retirees with more certainty about what they have and will have to live on for the rest of their lives are MORE SATISFIED. NOTE: contentment increases with lifelong guarantees but… does not increase based on how much one has at risk in their portfolio. It is less stressful to spend the money earmarked as retirement income than it is to spend down money directly from your portfolio. The only way to use part of your portfolio to replace the secure, lifetime pension you’re missing is by investing in a product designed to give you a steady income. This is where an annuity can be part of a successful income strategy.

STEP #4: WHAT? WHEN? HOW? WHY? WHERE? Once our clients come to understand what having income certainty means, we then set about figuring out what is the best way, best annuity, best company, best time to start income and why. It must be designed specifically for that individual or couple. This involves, INCOME PLANNING which is something different than financial planning. Very few professionals are trained to do this. This looks at year by year, where the income will come from for you to live on for as long as we anticipate you will live. Our clients have found this unbelievably valuable, a retirement game changer and life saver.

STEP #5: THEN WE REVIEW AND ADJUST EACH YEAR. This is as important as putting the right plan in place. Maybe even more so. Life changes, therefore we want and need flexibility. That provides additional peace of mind. In reality, it is peace of mind that most every retiree wants. They want to mentally be able to relax. KNOWING they will have enough money to live on for the rest of their lives provides that in a way that an at risk portfolio subject to marker risk cannot.

If you have questions about the best way to secure your retirement income, we encourage you to give us a call. We will help to educate you, help you to understand the retirement realities in one of our upcoming courses or workshops.

 

YOUR MONEY IS SAFE OVER THE LONG HAUL, NOT! NOT IF YOU NEED TO SPEND SOME OF IT.

dfWhen I am asked whether the market is going up or down tomorrow I always answer the same way, “Yes, I just don’t know which.” With the recent 30th anniversary of Black Monday, the single worst day in Wall Street history, it is a good time to ask, “Are you ready for the next Black Monday, or whatever day of the week that black day is?” The Dow fell 22.6%, the equivalent of a 5,000-point free fall at current levels, in one day. We have short memories. The average investor isn’t worried, are you? Cam you handle a 22% one day drop or a protracted 53% drop like 2007-2009?

There’s reason to be skittish. The current run-up is the second longest and strongest on record. Stocks are expensive by historical standards. And you never know what outside event could trigger a scary market drop. Have you ever heard the old Wall Street adage, bull markets die of fright, not old age.

reMany people have become complacent because this bull market has gone on for so long, but the risk of giving back some or a lot of recent gains is quite high. That’s especially true for 55 and uppers, near or in retirement. So how can you protect yourself? You must avoid the standard advice to “stay the course”. It is time for you to be driving in the slow lane, financially speaking. Caution is the word. Even mild stock-market losses or an extended period of below-average returns can inflict serious damage if they come 5 years before or early in your retirement. If you need to sell investments to cover your living expenses, you’ll lock in those losses. And since you’ll have a smaller balance left in your portfolio, you’ll gain less when stock prices eventually recover. Cautious, steady growth in your investment portfolio is critical to ensuring your money will last your lifetime.

You must make a mental shift and allocate your retirement savings as three buckets. The first bucket should hold enough cash and short-term investments for emergencies. The second bucket, provides minimum living expenses via guarantees (Social Security, pensions, annuities, etc. and the third bucket can be utilized for longer term growth. The middle, guaranteed bucket is the salvation. That provides certainty instead of hope. A side benefit is that studies from Towers Watson and others show that retirees who have sufficient guaranteed income tend to be happier and feel they have a higher standard of living than those who rely on savings alone.

“IT’S NOT WHAT YOU DON’T KNOW THAT KILLS YOU, IT’S WHAT YOU KNOW FOR SURE THAT AIN’T TRUE.”

This is very true when it comes to retirement and guarantees from annuities.

fg.pngMore than half of the adults polled for a 2016 survey done by TIAA, the main goal of their retirement savings is to provide an income during retirement. Yet when asked if they were considering an annuity – less than half of them said yes. Are you going to risk your retirement future in ‘misinformation’, on something you ‘believe’ to be true or something you heard that is not true? Here are some untruths that are ‘believed’ to be so. There are entities that have a vested interest in keeping you ‘confused’. If having money that lasts the rest of your life is important read on.

1: I will never be able to get my money out of an annuity.

There are different types of annuities, for different needs. The type utilized by most baby boomers today, a Fixed Index Annuity allows anywhere from a 10% ‘penalty free’ withdrawal annually, up to a 100% return of the money you put in… at any time.

2: When I die, the insurance company will keep all my money.

This is another example of the old-school annuity, not the new more effective and flexible type. Though you can still buy this type of annuity, after doing their research 55 and uppers typically find that the new version is better. Any many remaining in the account at death goes to the heirs you designate.

3: Annuities are quite expensive!

Yes, if it is a variable annuity, the fees can be quite high. These are often sold as safe too… and they are not. Again, typically not the best choice for retirees that are looking for principal protection.

Fixed indexed annuities have NO FEES unless you choose the guaranteed income route. These income riders that can guarantee you never run out of money for 1%, sometimes even less. It is important to find out what is true and believe that! Be careful to nut be sucked into paying fees for features or benefits that you don’t really need.

df.png4: If there is an emergency, I cannot get to my money in an annuity.

What we are talking about here is liquidity. I partially addressed the issue of liquidity with the first ‘untruth’. Your account value is always available, subject to the terms. Yes, you might have to pay a penalty if your contract has a 10% ‘free withdrawal and you want 20% in one year. That said, depending on how long you have had the annuity and the growth, you may well be able to get all the money you put in and some, even after paying the penalty. Your money is NOT LOCKED UP.

5: Annuities are just too complicated.

Yeah, it certainly sounds that way, doesn’t it? All financial contracts and explanations are complicated. They are drawn up by attorneys, not only to explain how the investment works but also to protect the institution from lawsuit. Ah, have you ever tried to read a prospectus for the mutual funds you own? It always amazes me that people risk losing half of their money with little or no understanding, but when it comes to contractually guaranteeing ‘they don’t ever lose another penny,’ they freak out. One of those things that make ya say, “huh”? Yes, understanding any surrender fees, crediting strategies, penalties, income riders can be a challenge, but that does not mean they do not work the way they are designed. The guarantees are… ah, GUARANTEED. Even with an income rider, it’s not that hard to understand how they work, if you ask the right questions and have a patient financial professional that understands the value of [you] understanding.

To use another analogy, annuities are like cars – you don’t have to know how all the inner gears, on board computers, energy transmission systems, fuel system, etc. work in order to be able to get safely where you want to go. An annuity can help you get safely to the end of your life with sufficient and ‘certain’ income. Do not let what you think you know keep you from the truth.

Will Ten Thousand Monte Carlo Simulations Leave You Short of Money to Live On?

fdOn the surface, Monte Carlo simulations seem to be great illustrative tools for retirees and soon to retirees. A simulation, for example can show how varying spending patterns and varying investment returns are likely to or not to deplete their retirement nest egg.

All too often though it provides ‘false’ security. For starters, it doesn’t consider the sequence of future investment returns has an effect that is at least as important as the ‘average’ of those returns. The result of thousands of iterations Monte Carlo simulators produce can cause clients to believe they’ve considered all the possible financial outcomes they could experience, when in reality the numbers generated may have little relevance to their personal financial situation. Monte Carlo doesn’t measure bear markets well, another potentially BIG PROBLEM. Finally, this type of simulation is not capable of connecting projected investment returns with realistic cash flows.

Relying on Monte Carlo simulations can be dangerous.  The method treats the current market not as a starting point but as merely one of all possible environments. For example, it may predict a 20 percent return because the simulation started at a 7 P/E and then doubled. Problem being it may not be relevant if the current 30 P/E is a 30, you are 70-years-old, and concerned about how your portfolio will be affected over the next 10-to-20 years.

A Monte Carlo simulation might predict 17 loss years out of 77 but is unlikely to put even two loss years in a row, let alone three or four, thus missing the present real world pattern. Nor do random distributions even consider the clients’ and/or advisor’s reactions and decisions to short-term volatilities. Another thing, what value can you put on simulations that look at 77 years when you have 20-30 years left?

To compare reality to the simulations, in one study, an astute advisor created 100 different hypothetical portfolios from 1926 forward, and took varying amounts of income from each. Reality was by far worse! Failure occurred much more frequently than what the Monte Carlo simulations indicated, using the same distributions for income.

Another big issue is that Monte Carlo software makes it easy for the advisor and or person doing the input to raise the odds of success by increasing the amount of common stock in the portfolio. Again, a bad idea when the client really needs to avoid withdrawing portfolio funds in down markets. As I cannot say enough “It is always a mistake to spend money from an account that has gone down in value”. It does not make sense to take more risk because a mathematical error was made in the creation of a model that failed because of the way human nature plays into the whole scenario. The decisions that get made along the way will certainly cause ‘something’ different to happen than what the Monte Carlo model illustrated. These Monte Carlo models do not take human emotions into account. It assumes investors will ride out tough times without backing away from negatively performing investments, something few clients do, something few advisors do.

In fact, Monte Carlo makes it impossible to analyze proposed financial strategies accurately because it treats clients’ assets as separate from their required living expenses. The model assumes, again unrealistically that one never makes an unplanned withdrawal from their portfolios. Really!? Over 30 years, or maybe longer? Not realistic.

Furthermore, Monte Carlo oversimplifies complex financial issues. It does not consider income tax bases in portfolio rebalancing and treats cash flow as a constant, disregarding the devastating effects of large variable expenditures when investment returns go negative.

dffThe truth is that we need to recognize that in planning our future, particularly our financial future, there is a lot of ambiguity, as well as variables including risk and volatility. It is better to be less concerned with the probability of success and more concerned with the consequences of failure. The best way I know to deal with uncertainty is minimize it or even eliminate it. You can do this by creating pension income for yourself using Fixed Index Annuities that contractually guarantee income for the rest of your life. For further reading I recommend Pensionize Your Nest Egg: How to Use Product Allocation to Create a Guaranteed Income for Life by Moshe Milevsky and Alexandra Macqueen.

 

 

 

Your ‘Diversified’ Portfolio of Stocks, Bonds, and Mutual Funds IS NOT SAFE Over the Long Haul.

As a conservative person planning for retirement, here is a lesson you would do well to learn. A lesson from the severe market losses in a year like 2008? First ask yourself, “Will we see another drop like 2008?” Jack Bogle, Founder of Vanguard Funds, the largest index fund company in the world said several years ago, “We are likely to see two drops of as much as 50% in the next ten years”. YIKES! Just one drop anywhere near 50% would devastate most baby boomer’s retirement plan. You may not know it, but all your eggs are in the same basket. The Wall Street basket and all your money is at risk. I call this ‘pixie dust’ diversification’.

gfgI have four brothers. When we were young my Mom would let us each color one dozen Easter eggs for Easter. There were never, ever two eggs alike. They were all diversified. I remember one Easter we put all of our eggs in a basket with some pretend green grass. You know the kind I am talking about. Before we went to church, we put the basket up on the dining table. While we were gone, our dog got up on the table and knocked the basket off and then played with the eggs. He ate some too. Few eggs were salvageable. But wait! All the eggs were diversified. What went wrong? Minor detail, we had a bunch of different eggs all in the same basket. Just like investors in 2008!

If a theory fails its biggest test ever, do you want to use that as your retirement plan? In July of 2009 the editor for Investment Advisor Magazine said, “The wealth management practices of Wall Street firms and big banks are broken.  Again.

To understand this point, it’s important to step back and remember that regardless of which particular investment was the flavor of the month, the common theme heard over and over again in the big investment houses over the past 30 years was that by dividing your assets among many different categories that won’t move in the same direction at the same time, you were going to reduce the overall risk.

This premise seemed to have some validity and was appealing to the average investor – until October 2008, when virtually every category except high quality short and intermediate fixed income investments got caught in the same downward draft.  Put another way, the Wall Street wealth management model failed its biggest test.  Investors who were told that they were diversified suffered losses of double or triple the magnitude of what they were told to expect during a tough year.

What went wrong? The fixed income substitutes pushed by the major investment houses – “low volatility” hedge funds, preferred stocks, asset backed securities or other structured products, closed-end bond funds, income/mortgage REITs, and master limited partnerships – weren’t fixed income substitutes at all.  None of them is a substitute for the most important characteristic that investors should be looking for from the fixed income portion of their portfolios:  safety of principal. Safety of Principal can only be had from putting some of your precious eggs in a different basket. A basket where you can make money when the market goes up, and NEVER LOSE when the market goes down. You must Risk Less to Spend More.

For answers to your question or information on how this applies to you, feel free to get in touch with me at tpenland@greenlineca.com.

 

Father of the 401(k) has regrets. Rightfully so!

fgdgTed Benna, knew the 401(k) was going to be big, but he states that he never imagined that it would become the primary way people would be accumulating money for retirement. That was never the intention. All was looking good with two bull-market runs in the 1980s and 1990s pushing 401(k) accounts higher. Then two recessions in the 2000s erased those gains and prompted very serious second thoughts from some early 401(k) champions, like Ted Beena.

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It is often stated that the 401(k) came about by ‘accident.’ But considering how big Wall Street won when a gazillion baby boomers put trillions of dollars into a poker game they knew nothing about, considering how big the government won by making themselves a partner in the growth of our retirement savings for 30 or more years, I must say, “I don’t believe it!” Think about it, when we had pensions the government did not get a cut of our pension fund growth! But now they do. Yes, approximately 30% of your retirement savings IS NOT YOURS. It is Uncle Sam’s. Their share is called income tax. Yes, our old pension income was also taxable, BUT… they did not share in the growth of that money for all the years we worked.

Ted Beena, in many ways the ‘father’ of the 401(k). He as well as many early backers of the 401(k) say, “The 401(k) was not designed to be a primary retirement tool” and further acknowledges, “we used forecasts that were overly optimistic in order to sell the plan in its early days.” Others say, “the proliferation of 401(k) plans has exposed workers to big drops in the stock market and high fees from Wall Street money managers.” Beena says, the 401(k) helped open the door even wider, for Wall Street to make even more money than they were already making. In other words, the biggest effect the 401(k) has had is ‘sweetening the pot’ for the real players.

sdsdMany financial experts, those that are not working for Wall Street agree, “it was not a good idea and it is not working well.” The Economic Policy Institute recently declared 401(k)s “a poor substitute” for the defined benefit pension plans workers used to count on, which provided income to live on throughout their retirement years. The fact is, 401(k)s are far less safe than old school pensions because they rise and fall with financial markets. The risk of having enough money to live on is now borne by the retiree. A modern stress most baby boomers would have preferred to avoid. Many Americans are more worried about running out of money more than they are of death.

The retirement revolution began in 1978, when Congress decided to alter the tax code with the Revenue Act. Companies pretty quickly jumped on the band wagon because it was cheaper and it put the brunt of the responsibility on the worker. It was sold pretty hard and employees were attracted to the new strategy for retirement, promoted as a better way. It was touted as a savings vehicle that, they were told, could put them in a better position to retire. Savings, by definition does not include ‘loss’. In reality, the 401(k) was a risk vehicle sold as a savings plan for retirement. Even the employer match you paid for. You worked for it. The 401(k) is still being ‘sold’ as the best way to ‘save’ for retirement. Understanding the difference between saving and risk is HUGE. It is a make or break for many retirees.

“The great lie is that the 401(k) was capable of replacing the old system of pensions,” former American Society of Pension Actuaries head Gerald Facciani tells The Journal. “It was oversold.” The harrowing truth is that most retirees have little clue about how to convert their nest egg into income in any efficient and cost effective way. Even scarier than that, neither do many of the financial professionals they are relying on to help.

As a retiree, how do I avoid scams and fraud?

lkDo not panic, but be aware. You could lose some or all your hard-earned and saved money to scammers. Retired Americans are targeted by scammers more than any other group. One of the reasons is, they are more likely to have assets and, they can be more trusting. There is also the issue of brain cognition, the older we get. You MUST be on guard, always. Fraud can be and often is committed by people the victims know, like friends, neighbors, members of social and religious institutions, and even people they’ve done business with before. In addition to these 7 typical ways retirees are scammed, it is maybe even more important to know that many unfortunate retirees have had their retirement accounts wiped out via wire fraud, email scams and sundry other fraudulent actions.

fghIt seems there are more and more ways scammers come up with to scam us too. NEVER, ever give anyone account ‘type’ information without first verifying who they are via another method. A phone call for example, utilizing a phone number you get on your own, not one given by the potential scammer. These devious people are getting better and better at covering the ways they are found out. Anyone’s email could be hacked, hijacked or mimicked. It is called email phishing. There are two types, ‘spear phishing’ and whale phishing’. Oh… and you are the bait! You may think you are communicating with me, or your financial institution, including retirement account managers, mortgage lenders etc. Even the government’s computers have been hacked, as you well know. Be careful of email and USPS mail requests from IRS and other government agencies asking for information. Verify, verify and verify. Scary, I know. If you suspect you may be, or have been targeted for fraud, immediately contact authorities.

Avoiding Phishing Scams
To guard against phishing scams, consider the following:

  • Greenline Associates and other reputable organizations will never use email to request that you reply with your password, full Social Security number, or confidential personal information. Be suspicious of any email message that asks you to enter or verify personal information, through a website or by replying to the message itself. Never reply to or click the links in such a message. If you think the message may be legitimate, go directly to the company’s website (i.e., type the real URL into your browser) or contact the company to see if you really do need to take the action described in the email message.
  • The safest practice is to read your email as plain text.
    Phishing messages often contain clickable images that look legitimate; by reading messages in plain text, you can see the URLs that any images point to. Additionally, when you allow your mail client to read HTML or other non-text-only formatting, attackers can take advantage of your mail client’s ability to execute code, which leaves your computer vulnerable to viruses, worms, and Trojans.
  • If you choose to read your email in HTML format:
    •  Hover your mouse over the links in each email message to display the actual URL. Check whether the hover-text link matches what’s in the text, and whether the link looks like a site with which you would normally do business.
    On an iOS device, tap and hold your finger over a link to display the URL. Unfortunately, Android does not currently support this.
    •  Before you click a link, check to see if the message sender used a digital signature when sending the message. A digital signature helps ensure that the message actually came from the sender.
    When you recognize a phishing message, first report it, and then delete the email message from your Inbox, and then empty it from the deleted items folder to avoid accidentally accessing the websites it points to.

Is the stock market a Ponzi scheme?

A Ponzi, or pyramid scheme is a scam in which people are persuaded to invest through promises of unrealistic high returns, with the early investors being paid their returns out of money put in by later investors. Investors that get out early during bull markets usually profit handsomely, while the herd of investors that enter the market late lose badly. If you’re investing in a qualified retirement plan, your contributions are automatically allocated to certain mutual funds. People in these funds are usually the ones losing the most money in market corrections and crashes, while professional investors not in the same funds can move into more unrestricted and flexibly, out of the market with their profits intact.

Also, worth considering; with required minimum distributions from your retirement plans at age 70 and a half, you are forced to sell your mutual funds and withdraw money, even if you don’t want to. You will need new money flowing into the market when you have to sell your mutual funds. If there aren’t many, or worse yet, any new buyers and only sellers, the market sinks or even collapses like it potentially could with 78 million baby boomers taking required minimum distributions over the next 18 years.

There are other reasons that also contribute to the ‘ponzi’ nature of the stock market. One is the ‘artificial injections’ into the stock market at the expense of future retirees who will be left holding the bag on depreciating assets once the Fed stops the artificial injections, and asset prices go down.

401(k)… Hoax or not? You better find out before it is too late.

MM pic 1The 401(k) will turn out to be the greatest systemic financial hoax ever perpetrated on an unsuspecting public. On paper, it ‘looks’ good but the reality is quite different. Is Your 401(k) A Total Scam?

Where did the pension of our parent’s generation go? What did the 401(k) help? Well, let’s see. Firstly, it allows the federal and state governments to own a part of your retirement nest egg and the growth, a huge part! About 30% for most people. You have a 401(k) worth $500,000, only about $350,000 of it is yours. Secondly, 401(k)s convinced, otherwise very bright people, to put all their retirement eggs into the Wall Street poker game that they know nothing about. Again, huge amount. Baby boomers have anted up about $16 Trillion and they have no idea how to play the ‘game’. Ahhh, who does that benefit? Well ask yourself, who would it benefit if you sat down at a table with a group of professional poker players, and you do not know how to play. Just sayin’.

The American public has been deceived: MM pic 2401(k)s were established to satisfy the interests of government and corporations, not the interests of working Americans. The 401(k) represents an implicit promise to middle-class Americans that they can live off the income that they receive from taking risk in the stock market. It is a promise that is impossible to fulfill.

“It appeared as a device that made it easy for the average worker to participate in the biggest boom in history. It seemed the 401(k) would be a perpetual wealth machine for each and every member of the great American middle class.” Unfortunately, it has not only put your nest egg at risk, it has put your family’s financial security at risk. I hope it is not too late for you to do something about it.