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Mom was right…………. September 24, 2015

Posted by forwardfinancialplanning1 in Financial Planning, High Yield Bond Funds, International Equity Funds, Investing-General, Large Cap Growth.
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There was no shortage of parental wisdom in the household of my youth.  And, while neither of my parents had an abundance of formal education, growing up in the Great Depression had taught them many important life lessons.  My mom would frequently remind us to set aside and save some money “for a rainy day.”  It’s a shame that so many Americans failed to learn these important financial axioms.

I’m basing this lament on some recent data released from a survey by bankrate.com.  They found that 30 million Americans had tapped retirement savings in the last 12 months to pay for an unexpected expense. Baby boomers were the most likely age grouping to have done so as some 26% of those aged 50-64 answered that their finances had deteriorated and 17% had used a 401k or similar retirement savings account to pay for an emergency expense.

Some years I spent in the in-bound call center of a major 401k plan administrator also reinforced this message.  Three fourths of the calls we took were to assist a plan participant who was originating a 401k plan loan to themselves.  Likewise, many calls were for “hardship withdrawals” which do even greater damage to a participant’s retirement preparation.  Many callers would comment that they “had to do it because of an unforeseen emergency” such as a car repair, a leaky roof or what have you.  I can remember several poor souls who paid a $100 loan origination fee (levied by their employer) to borrow $1,000 from their balance.

PEOPLE!!!!  —–Cars are going to have problems, roofs are going to leak and kids are going to break their  eye glasses.  These shouldn’t be surprises in life but rather they are certainties……………..the only surprise should be the form in which the emergency will take.   Emergency funds should be in place for emergencies!!!


August 31, 2015

Posted by forwardfinancialplanning1 in Retirement Savings.
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There’s a biblical question, “Am I my brother’s keeper?”   And  while the spiritual learning intended from this question is aimed at pointing out the need to help our fellow man, I’m not sure that we’re supposed to help those that won’t help themselves.  Some discouraging statistics from Nielson Global Consumer Insights: (1) One out of four families making more than $150k per year lives “paycheck-to-paycheck”.  (2) The corresponding ratio is 1 out of 3 for annual incomes between $50K and $100k.  (3) The ratio is 1 out of 2 for incomes below $50k.

And we don’t stack up well versus the rest of the world as 22% of American households have no spare cash.  This percentage is 21% in the Middle East, 20% in Europe, 15% in Latin America and 8% in Asia Pacific.  There’s a truism that “nobody will care more about your money than you will.”  But, it appears that many Americans think somebody else is going to handle the job for them……………..

There’s no such thing as a “silver bullet” for retirement August 11, 2015

Posted by forwardfinancialplanning1 in Annuities, Retirement Savings.
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This country has a looming retirement crisis which will become more evident as more baby boomers (and eventually Gen X and Gen Y’ers) retire.  People are living much longer than previous generations yet many have nowhere near enough accumulated wealth to carry them through a potentially lengthy retirement.

Our so-called “leaders” in Washington talk about this issue frequently and like most politicians, they love to propose “painless” solutions to the problem.  Many, including our current President have suggested that more widespread availability of annuities would solve the problem.  And not surprisingly, purveyors of these products have chimed in as well.  A recent quote from Cathy Weatherford, President of the Insured Retirement Institute (the annuity provider’s trade group) claimed that a current Department of Labor proposal to amend the definition of “fiduciary” (as it relates to financial advisors) would, “limit access to annuity products at a time when we should be encouraging and promoting lifetime income strategies as a source of retirement income that cannot be outlived.”

Well, it is very obvious that “having a source of lifetime income that can’t be outlived” is a wonderful thing.  However, the proponents of these clean and simple solutions never tell you the whole story.  Purchasing an annuity that will cover the spending requirements of the average American household will require a great deal of money—far more than has been accumulated by the vast majority of American workers.  The average 401k balance is well under $50,000 and even the segment aged 50-60 averages less than $200,000.  A quick check at http://www.immediateannuities.com illustrates that $200,000 utilized by a 65 year old female to purchase an immediate annuity generates the princely sum of $1088 each month.  And, of course, using the entire $200,000 for the annuity purchase would leave the average 401k (aged 50-60) holder with nothing else in reserve and many years to live.

So, take a jaundiced view of these proposed “silver bullet” solutions to the impending national retirement challenge.  We would all be better served if we heard the truth.  Fidelity Investments Senior VP, Doug Fisher told it like it really is when he said, “Annuities are meaningless if savings are ‘practically zero””.

“Is that all it needs……………?” July 28, 2015

Posted by forwardfinancialplanning1 in Social Security.
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We continuously read articles predicting the imminent demise of Social Security and lamenting Congress’ lack of action in addressing its shortfalls.  Read an article on the Fox Business website which (if accurate) puts the problem into a much clearer perspective.  Note also, that the following relates only to the Old Age and Survivors’ portion of the Social Security system, and not its Disability component.

The Trustees report noted that the program has an actuarial deficit of 2.68% of taxable payroll.  Due to this shortfall, the fund is paying out more in benefits than it is taking in from current workers.  It obtains these needed dollars from paying out some of the interest it is earning on its many years of accumulated surplus.  By law, this surplus has been invested in US Treasury debt which of course, pays (albeit, low) interest to the Trust Fund.  The Trustees are forecasting that by 2034, the on-going shortfall will consume all of the interest in addition to the principal of the Treasury bonds.  At that point, the program will only be able to pay about 75% of its promised benefits since it will merely be redirecting current in-flows back out in the form of benefit payments. (If that sounds to you like a Ponzi scheme, you are correct).

But what does this “2.68% of payroll actuarial deficit” really mean??  According to the article, it suggests that if an additional 2.68% was coming into the fund, it would not be drained for at least 75 more years.  Since both the employee and the employer are currently assessed 6.2% of payroll for Social Security, an increase of 1.34% on the tab for each party would fix the problem.

I’d be willing to bet that if you told the typical US citizen that they could remedy Social Security’s problems by coughing up an additional 1.34% of their pay, they’d be looking for a place to “sign on.”  Employers may object because of the collective aggregate increase in their payroll costs, but they would most likely adjust their overall cost structure to preserve this pillar of US retirement security.

Now, if we can only give the Trustees the right to invest elsewhere than in low yielding US Treasury debt, we may really fix this mess!!!

“Retire???–I’m still paying student loans………” July 27, 2015

Posted by forwardfinancialplanning1 in Education Planning.
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Some sobering statistics from the New York Federal Reserve–student loan balances of borrowers aged 50 and older made up 17% of the nearly $1.2 trillion of outstanding student loan debt in this country. This $204 billion in outstanding debt came both from co-signed loans for younger student borrowers and those who took loans for themselves later in life.  The fastest growth has been from borrowers aged 60 and older as these balances have increased nine-fold since 2004.

Outstanding loan balances can have ramifications for many years down the road.  Between 2002 and 2013, the number of borrowers whose Social Security payments were offset to pay outstanding student loans increased five-fold from 31,000 to 155,000.  Among those 65 and older, this figure increased from 6,000 to about 36,000 over this same period.  At some point, people have to ask themselves, “Was this loan really worth it?” and “Did it increase my earning power enough to justify taking on this debt so late in life”.  The schools which benefitted probably don’t want it to be known, but increasingly, the answer is looking like “no”.

Why won’t people ask for help?? June 23, 2015

Posted by forwardfinancialplanning1 in Financial Planning.
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As a financial planner, it never ceases to amaze me when I consider the number of people who are approaching retirement without having ever done any analysis.  Many Americans are simply floating along day-to-day and have never taken the time to consider two fundamental questions regarding their preparedness for retirement.  (1)  Do I have enough financial resources to retire? and (2)  What will I do with my time in retirement?

A recent study puts this into perspective for the academic niche that TIAA CREF serves.  The TIAA CREF Faculty Career and Retirement Survey grouped respondents (all were age 50 or older) into three categories: (1) “Traditional retirees”—those planning to retire at normal retirement age (comprising 35% of respondents).  (2) “Reluctantly reluctants”–those who want to retire at normal ages, but expect to be working longer (16% of respondents) and (3) “Reluctant by choice”–those who simply expect to work past normal retirement ages (49%)

One of TIAA-CREF’s most perplexing findings is that of the “Reluctantly reluctants”, 50-67% had never done any analysis.to determine if they were financially capable of retiring.  Likewise, of the “Reluctant by choice” group, 60-90% had never engaged in any serious consideration regarding how they would use their time in retirement.

We need to  also keep in mind that these survey respondents are some of the most highly educated people in the country!  Yet, so many don’t t attempt to answer those two fundamental questions or seek help in finding the answers.  One can’t help but be reminded of the famous Yogi Berra quote,  “If you don’t know where you are going, you might wind up somewhere else………..”

US Chamber of Commerce swallows the Kool-Aid June 15, 2015

Posted by forwardfinancialplanning1 in Uncategorized.
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The broker dealer world has been staging a media campaign to circumvent the proposed Department of Labor rule which would expand ERISA fiduciary status to financial professionals who provide advice to IRA’s.  In an attempt to preserve their commission flows and revenue sharing arrangements with retirement plan administrators, broker dealers have employed a “fear tactic” suggesting that if required to be fiduciaries (and therefore place their clients’ interests ahead of their own) broker dealer employees will stop servicing small employer plans and individuals all together.

The US Chamber of Commerce has taken the bait!!   They recently published a report entitled  “Locked Out of Retirement” which concurs with the broker dealer argument.  So in essence, the Chamber of Commerce is embracing a business model which essentially says, “in order to serve this market, we have to fleece the employees with biased advice and a very opaque cost structure.”

Well, this “research” paper contains the answer to its own stated problem—the advisor who provides advice in these circumstances must charge “a level fee” for his/her advice.  Perhaps that’s too simple for the authors of the paper to comprehend, or perhaps the Chamber embraces opaqueness in pricing.  The advisors who are serving this market today are obviously reaping enough income for it to be worthwhile.  Under this new proposal, they will simply have to show this income directly via the level fee that they charge to provide it, instead of hiding it via incomprehensible (to most employees) 12b-1 fees and revenue sharing arrangements with other plan providers.

Government ineptitude strikes again May 29, 2015

Posted by forwardfinancialplanning1 in Retirement Spending.
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All of us rely on government statistics to some degree as we make decisions in life.  Of course, central to that decision making process is the belief that the data spewing out of Washington is accurate.  At the risk of being labeled as “cynical”, I’ve always wondered how accurate these number really are.

A recent analysis by the non-profit Employee Benefit Research Institute (EBRI) highlights the validity of my concerns.  We often read about doomsday predictions based on aging baby boomers’ collective lack of retirement preparedness.  Many of these forecasts lament that while a large portion of today’s elderly population has exhausted their retirement resources (and thus, rely solely on Social Security), it’s going to be even worse for the baby boomers.  Yet, somehow, we Americans seem to muddle through and we don’t hear stories of widespread deprivation of the elderly.  I expect that the baby boomers will do likewise.

The EBRI estimates that the US Census Bureau’s “Current Population Survey” (CPS)  has been underestimating the income of Americans aged 65 and older by $133 billion.  Phrased another way, the CPS was under-reporting IRA and 401k income by more than 250%!!  The Annual Social and Economic Supplement to the CPS is a widely cited source of income data for those 65 and older.  The survey questions misclassified income because they had not been adjusted to reflect the change in the nature of private sector retirement plans from primarily defined benefit plans to defined contribution plans.

So, here’s a heads-up to the government workers who still overwhelmingly have generous defined benefit retirement plans (which are bankrupting many states, and eventually the federal government).  Wake up!!  The people who pay your salaries and your pension benefits don’t have the same sweet deal that you do.

To some, even free money is not sufficiently attractive………… May 15, 2015

Posted by forwardfinancialplanning1 in 401k plans.
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One of my friend’s favorite sayings is, “You can’t fix stupid.”  And while we can’t dismiss the behavior described below as merely ‘stupid”, it sure has to be on the list.

Much has been written about America’s collective failure to save enough for retirement.  Financial Engines has done an analysis of the 401k plans it works with and they have found that “free money” is not even a strong enough incentive.  Financial Engines found that 25% of 401k plan participants do not contribute enough to capture all of the employer’s matching funds.  In total, this represents $24 billion of forsaken contribution matching dollars or an average of $1,336  per employee annually.

I once heard matching dollars described as “the easiest money you’ll ever make.”  Apparently for many, it’s not easy enough!!!!

What, me worry….?? April 22, 2015

Posted by forwardfinancialplanning1 in Retirement Savings.
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Those words were memorialized by Mad Magazine in my youth, but it’s a very good synopsis of the approach many Americans are taking to preparing for their retirement. The non-profit Employee Benefits Research Institute (EBRI) conducts an annual survey of Americans’ retirement confidence.  The 25th annual Retirement Confidence Survey found that 37% of workers are “very confident” of their ability to achieve a comfortable retirement and 36% are “somewhat confident”.  The 37% reading for “very confident” represented a doubling of the percentage reporting similar confidence in 2013.  Certainly, the financial markets’ performance during this time period made a positive contribution to this increase

But are these increases warranted?  Not so, according to Jack Vanderhei, Research Director for the EBRI who stated, “There’s probably a lot of false optimism, there.”  And when you look at the hard data supporting Jack’s belief, it’s pretty easy to agree with him.

For instance, 57% of workers report that the total value of their household savings and investments (not counting home equity and any defined benefit pension entitlement) was less than $25,000.  Of that group, 28% have saved less than $1,000.  Older workers fare somewhat better with 23% aged 45 and older reporting accumulated retirement assets of $250,000 or more.  Yet, for those holding $250-300k as available for retirement, the traditional 4% withdrawal rule of thumb suggests that they will be generating less than $1,000 per month on a sustainable basis.

When one also considers increasing medical costs, the financial predicament of Medicare and long term care costs (the majority of which are not covered by Medicare), it’s hard to be as optimistic as the “confident” respondents.  Vanderhei did not suggest any explanations, but my professional opinion is that most people never take the time to forecast “their number” needed for a successful retirement.  In our planning business, most people tell me that they simply “guessed” at a figure, or never bothered to try to make such an estimate.  And as the famed philosopher, Yogi Berra once said, “If you don’t know where you’re going, you might wind up somewhere else.”