Monthly Archives: September 2012

Facing financial surprises in retirement

The American Funds has an article in their recent “Investor” magazine about retirees who encountered financial setbacks in the last decade.  What they did can be instructive to people who retired some time ago and those who have yet to retire.  From the article:

You’ve spent a lifetime contributing regularly to your 401(k) plan and watching your expenses carefully. You followed the lessons of sound personal finance and maintained a diversified portfolio. Can you still be surprised later by costly retirement expenses you didn’t foresee?  

The answer is yes, say financial advisers. “I was naive when I retired 10 years ago,” admits a 70-year-old from California. “There are a lot of hidden costs in retirement that people don’t recognize. I call them stealth expenses.”

These costly retirement surprises range from higher medical costs and significant taxes on retirement income withdrawals to a decade distinguished by historic market volatility. We spoke with several American Funds investors to learn how they dealt with unexpected retirement expenses.

Extreme market volatility

Ten years ago, Phil Reynolds of Clarklake, Michigan, a former machine tool service representative, could see the writing on the wall: Lower cost foreign competition had taken away much of the U.S. machine tool business, and the American auto industry was facing a difficult period of lower sales. After consulting with his financial adviser of more than 30 years, Phil decided to retire early at age 55.  Phil, who’d been investing in mutual funds since 1980 and had a well diversified portfolio of stock and bond funds, felt he was prepared for future market fluctuations. At the time, the stock market was still reeling from the dot-com debacle, which then was considered the
worst decline in three decades. But that didn’t deter Phil from retiring. He and his wife, Linda, maintained a long-term perspective. Within a few years the market had recovered — and by 2007 it had reached new highs. “The fact that we’d survived the 2001 downturn with our retirement savings intact gave us more confidence,” Phil says.

Little did they know just how badly that confidence would be shaken. In late 2007, the housing bubble resulted in a financial crisis that caused equity markets to plummet 55% (based on the unmanaged Standard & Poor’s 500 Composite Index with dividends reinvested) between the market peak on October 9, 2007, and the market low on March 9, 2009. This time Phil panicked. “I was scared to death,” he recalls. “I told my financial adviser that I wanted to get out entirely because I didn’t  know when the market would hit bottom.”

His adviser encouraged him to stay the course. “I sweated that one out,” Phil admits, “but in the end I followed his advice.” When things got tough, Phil trimmed his annual retirement income withdrawal rate from almost 5% to 3%. He and Linda had already taken the precaution of maintaining a large emergency fund, which enabled them to avoid selling shares of their mutual funds when the market was down.  

By the end of June 2012, the couple’s portfolio had recovered to a point where it was close to what it had been at the October 2007 market peak. They were helped by the fact that their investment portfolio contained a mix of growth-and income funds, balanced funds and bond funds. “Our investment strategy was fairly straightforward,” Phil adds. “We weren’t worried about hitting home runs. All we wanted to do was get on base and maybe hit a double once in a while. That helped us a lot.”

There are lots of people like the Reynolds.  The advice they were given was good, their strategy was sound.  Reducing spending when portfolios decline allows the rebound to rebuild lost ground faster.  Having an emergency fund is a great help in times of volatility not just because it keeps you from selling at the wrong time, but acts a a security blanket, making it psychologically easier to weather financial storms.  Often the best advice a financial adviser can give his clients is to stay the course.


A Woman’s View of Choosing a Financial Advisor

Beverly Flaxington wrote an interesting article about women and financial advisers.  If you are a woman, does this apply to you?

1. Relationships matter. A woman might consider how her decision will affect a family member, child, spouse, significant other or friend even when a man might not. Talking about impact on others can be very helpful to a woman in understanding the different options.

2. A woman’s relationship with the salesperson matters too. Can I trust this person? Are they explaining things well to me? Do they value me as a person? Are they open to my questions, or are they making assumptions about me? I can’t stress enough that relationship dynamics are crucial.

3. Improving my life matters. Women, in most cases, are stretched. Statistics have shown that women are more likely to do certain things than their male counterparts, like buying a birthday gift for a child’s friend’s party, looking into nursing homes or caregivers for aging parents, or canceling plans because a friend is in need. In short, we frequently have to “do it all.” Therefore, for women, having their needs met in a way that makes their life easier is important. Does it save me time and money? Does it make doing what I need to do easier?

4. Women want – and need – to be supported. In some cases, we may care more about what someone thinks of us than our male counterparts.  We often care more about effects on our co-workers or their feelings about something. We often feel a desire to take care of the people around us in a variety of ways.

5. Women want to understand what they are buying. It’s not about how “cute” it is, or the pretty colors or the way it shines. It is about what it does, how it does it and whether it will keep doing it once it isn’t under warranty! Women, in most cases, like to be knowledgeable about what they are getting. They want to understand pros and cons. There is nothing more insulting than the “selling to the little woman” approach that says we only care about the color of the car and not the safety features, gas mileage and how fast it can ramp from 0 to 60!

We have found our woman clients to be some of our best and most loyal and we enjoy working with them.

Things a Financial Plan Should Tell You – and Things It Won’t

A financial plan is like a road map.   A map will tell you where you are, where you want to go, and the route to take to get to your destination.  But the map is not the territory and sometimes the roads on the map are potholed or washed out, so alternate routes are required.  And sometimes you can’t get there at all.

So what should a financial plan tell you?

1.  What is my net worth?  A plan that doesn’t tell you where you are is no plan at all.  It’s the starting point where all plans begin.

2. What is my goal?  If you don’t know where you’re going, any road will take you.  Goals are usually described as the income it will take to provide you with the lifestyle you desire.

3. How much money will I need to retire?  Keep in mind that there are a lot of assumptions built into this number such as your other income sources, your estimated spending during retirement, the withdrawal rate that will not deplete your money during your lifetime,  the rate of return you can expect on your money during retirement, and many others.

4. What rate of return will I need to meet my retirement asset goal?  As you put money aside for retirement there are two components that influence how much you will retire with: the amount you put aside and the growth of those assets.   You have more control over the amount you save than the rate of growth you can expect.   That is one reason risk control is vital.  You don’t want investment decisions to negatively affect your savings rate.

5. What is a safe withdrawal rate?  There are academic studies that use historical data that provides some guidance.  But the rate your money grows at the beginning of your retirement has a disproportionate effect on on the amount of money in your retirement account.

6.  What is the probability that I will run out of money during retirement?     Some plans use Monte Carlo simulation to give you a probability of your running out of money, but beware of assumptions built into these simulations that may give you a false sense of security.


It’s Really OK to Say, ‘I Can’t Afford That’


From the Wall Street Journal.

Many people would rather struggle to pay off a large credit-card bill then utter the phrase “I can’t afford it.”

Feelings of shame, embarrassment or a desire to avoid conflict are just some of the reasons folks just won’t say no.

But being honest about what you can and can’t afford can reduce financial stress and boost your financial health.

Below, therapists, financial advisers and parenting experts give tips on how to say the dreaded phrase (without actually saying it): 

Here are a few tips from the article.

1. Set limits, decide later

There’s a lot of peer pressure in our society to spend… When presented with an offer, folks can alleviate some of that pressure by using a phrase such as “Let me think about that and check my budget.”

2. Warn them in advance 

Telling friends in advance can prevent them from feeling rejected later on

3. Teach the kids 

When your teenager is whining that “everyone else has one,” it can seem easier to just buy the toy or latest electronic gadget to keep him or her quiet. Not to mention, despite their own financial challenges, most parents don’t want their children to feel deprived.

As a result, telling a child they can’t afford it is something many parents will do their best to avoid.

Instead, after reassuring the child they’re loved, the parent could say “I choose not to spend my money on that,”

4. Blame your adviser 

If all else fails, blame your adviser.


Top Tips for Selecting a Financial Professional


The SEC has published a bulletin on choosing a financial professional to work with.

Tip 1. Do your homework and ask questions.

Tip 2. Find out whether the products and services available are right for you.

Tip 3. Understand how you’ll pay for services and products, and how your financial professional gets paid as well.

Tip 4. Ask about the financial professional’s experience and credentials.

Tip 5. Ask the financial professional if he or she has had a disciplinary history with a government regulator or had customer complaints.

There is more detail in the bulletin, but any Registered Investment Advisor (RIA) should be able to give you straightforward answers to these questions.


Why Young People Are Saving More

The Wall Street Journal illustrates why young people are beginning to save more despite, or perhaps because of, poor economic conditions.

For years, Sean McGroarty ignored his mother’s urging to save money.

Then his mother, Karen Zader, 54 years old, lost her job as an administrative assistant. The family home, where Mr. McGroarty grew up, went into foreclosure, and Ms. Zader had to raid her retirement savings to pay bills. [snip]

As older Americans lose jobs, lose homes and delay retirement, their children are watching and reacting. Growing numbers of young Americans are boosting savings, cutting spending and planning for retirement. …

But young adults are now saving more and starting earlier than people their age used to, according to several broad measures.

Participation in 401(k) plans is up.  Credit card debt is down.

The younger generation may well be doing a better job getting ready for retirement, often nearly 40 years down the road, than their parents.  And it’s a good thing.  While their parents may have had a company pensions when they retired, most young people do not.  Many younger workers don’t believe that Social Security will be there for them when they retire.  Other government “entitlement” programs are projected to be  insolvent in the long term

Many young savers cited the fear that government retirement programs will be gone or curtailed by the time they qualify.

“Friends of mine in our 20s, we joke that there isn’t going to be any Social Security when we get old enough to collect,” said Mr. McGroarty, the DJ. “But it isn’t really a joke. What are we going to do after we retire?”

As they see their parents struggle financially, the younger generation is taking the lesson to heart that financial independence can be achieved, but it requires putting money aside in 401(k)s, IRAs and Roth IRAs and investing it wisely.  That’s where getting professional advice from an RIA is valuable.

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Why do so many people who make a lot of money go broke?

Don McNay has an interesting column about sports stars who make millions and blow it.

Sports Illustrated did a fascinating study in 2009 titled “How (and Why) Athletes Go Broke.” The statistics are stunning. By the time they have been retired for two years, 78 percent of former NFL football players have gone bankrupt or under financial stress because of joblessness or divorce. Within five years of retirement, an estimated 60 percent of former NBA basketball players are broke.

These are people who made millions. What happened?

I see a lot of them blow money on large entourages and wild spending, the same way many lottery winners do. But I see a lot more get burned by getting involved in businesses far away from their area of expertise.

Like lottery winners, athletes are not very good at managing money.  First, they live a lifestyle that is unsustainable after they retire.  Second, they fall prey to unscrupulous people who promise them financial returns that are simply impossible.  And if you don’t’ know much about managing money who are you going to listen to: the huckster who promises to double your money overnight or the planner who recommends conservative investments with modest returns?

It’s not that hard to be financially secure. You spend less than you make, you save the rest and don’t do anything stupid. You assume you are going to live to an extremely old age and make sure you have money that lasts as long as you do.

It’s not hard, but it’s tedious. And it’s not the least bit glamorous.

I knew of a woman who was always trying to meet a guy driving a new Mercedes.

She should have been looking for someone who drives a 10-year-old Toyota. The Toyota driver is more likely to have real wealth in the long run.

Good advice.

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Receiving your Social Security earnings statement

The Social Security Administration has recently stopped mailing annual earnings statements.  Only workers near retirement age are mailed the statements.

However, the rest of us can now obtain them online at

You set up an account.   The information you receive, looks exactly like what you received in the mail previously.


Retirement Math

Retirement planning is as much art as science.  There are all kinds of “rules-of-thumb” that  are used to create “retirement math.”  Should you save 11 times, or 20 times your income to retire?

The focus on pre-retirement income can be misleading.  Instead, estimate what your retirement expenses will be and how much of that will be paid for by guaranteed income like pension payments and social security.  The gap between expenses and guaranteed income can be filled by either reducing expenses or generating income from investments.

If the gap is to be filled by portfolio income, there are a lot a estimates that have to be made.  A good RIA can help you make some educated assumptions.


Where do you plan to retire?

I began looking at a list of “worst states to retire in” at and it struck me then how badly people are misled by books, magazines and internet sites.  They chose the following criteria:

  • High life expectancy
  • Low crime rate
  • Where people are prosperous

Do these make sense as a way of choosing your retirement location?

First, average life expectancy is a statistic that is much more affected by the death rate of young people than old people.  Second, by the time you are ready to retire your lifestyle and heredity has the biggest impact on how long you will live and the average age of the people around has no impact at all.

The crime rate is another flawed statistic.  Detroit and Chicago are some of the most crime ridden cities in the country, but you can find areas in and around these cities that are virtually crime free.   To assign a crime rate to an area the size of a state, and make a retirement decision based on that is nonsense.

The prosperity of people in a state is another spurious reason for moving to an area for retirees.  In fact, there are good reasons for avoiding “prosperous” areas.  They are often associated with astronomical real estate prices, high taxes and high cost of living.  Want to live in Sausalito, Beverly Hills or even the better parts of Manhattan?  Bring big buck and prepare to spend them.

How do people really choose where they want to live in retirement?  The number one reason for choosing a retirement home is proximity to family, usually the children.  The other issues are climate (the reason so many Northerners move to Florida), the cost of living (including taxes) and access to medical care.  An interesting trend is retiring in low-cost parts of Mexico or Central America.

Choosing a retirement community is a big decision and we have seen a number of examples of retirees who changed their minds after moving.  Keep your options open, especially if you are moving to areas that are new to you.  Take time to settle in and decide if this is where you want to spend the rest of your life.

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