It can be hard to imagine having all the savings we need to roll into retirement and not sacrifice our lifestyle. While AFC offers advising on retirement plans, we also think it's important to stay abreast of the latest news about retirement law, fiduciaries, and to really understand what it takes to retire comfortably. We encourage you to take a look at some of our posts, and if you have any questions we hope you contact us!
I’ve spent a lot of time talking about 401(k)s in the last few months. We’ve covered the challenges, upcoming changes, historical development, and potential criminal liability. Still, I know it can be a lot to take in. Here are a few quick facts and stats to help you keep things straight. 401(K) Retirement Expectations The average 401(k) plan balance of current retirees is $144,000. This means they receive an average of $400 – $500 a month. Hidden Fees The Department of Labor (DOL) estimates 401(k) plan participants incur up to 17 hidden fees for things like marketing, legal, accounting, investments, and insurance. Fiduciaries or not? Business owners who are plan sponsors are fiduciaries. CPCP The Department of Labor’s Employee Benefits Security Administration (EBSA) formed the Contributory Plans Criminal Project (CPCP) in 2010. The CPCP is designed to, “combat criminal abuse of contributory benefit plans,” says the DOL. As of March 31, 2011, the CPCP obtained 41 indictments with 15 guilty pleas and restored $1,147,304 in assets. New Agents In 2009, the DOL was authorized to hire 1,000 enforcement agents tasked with identifying noncompliant 401(k) plans and plan sponsors. The DOL says 77 percent of all 401(k) plans are out of compliance. For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.Read More
It used to be saving 4% of your income over the 40 working years to retirement (22 to 62) would be enough to get you to 80% of your annual salary. Now financial advisors and financial firms are recommending 10%! The reason? Using current financial planning software, modern portfolio theory and asset allocation mathematically reduce returns. Our goal at Adams Financial Concepts LLC is to get you to your goals using our own approach which we feel will give you superior returns. One of my son’s high school teachers during parent orientation to the school asked this question: If you wanted to buy a $40 item and were offered a choice in how you paid, which option would you choose. The store offered a discount. You could take a 10% discount on the item and pay sales tax of the discounted amount or you could pay full price plus sales tax and take the 10% discount on that amount. Which would you choose? The answer is that both ways resulted in you paying the same amount. Work out the math and you can verify that for yourself. The reason is that multiplication is commutative: (axb=c) is the same as (bxa=c). That is the reason that 10% is the new 4%. Why do I say that? Most people are familiar with the pyramid of financial assets or pyramid of investing: The idea is that investors should have a decreasing percentage of assets as you move up the pyramid. The “Safe Money” is in the bottom part of the pyramid. Whether it is called asset allocation or the pyramid of risk, it works in a similar fashion. The money invested in the bottom of the pyramid has a low return. Whereas stocks (equities) have over the period from 1926-2013 had achieved better than 10% annually, the so called safe money yields were about 2% annualized for that same period of time. With asset allocation returns are very likely reduced over that 40 year period of time between beginning a career and retirement. If returns are 4% instead of 10%, then instead of saving 4% investors need to adjust savings upward to 10%. 10 becomes the new 4! At Adams Financial Concepts LLC we are committed to a goal and so state in our ADV filed with regulators that we strive to do better than the benchmark for our client accounts over the longer-term (5 to 10 years). We believe this means greater security to withstand those corrections and bear markets. We do not achieve that on a quarterly basis and we will have years when we underperform, but over the longer-term we are guardedly optimistic about our goal for clients. We do report our actual performance and you can check it out here. For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.Read More
Last week I posed a question – why is 10% the new 4%? Why do you need to put 10% of your income away in whatever account is preparing you for retirement, when just a few years ago, 4% was considered a safe nest egg? Let’s look at the math (my favorite subject, and I assume yours); math is communitive. Let’s elaborate with an example: if you get a 10% discount on a $10 item, do you want it before or after tax? A 10% discount on $10 is $9. With 10% tax, your item would be $9.90. A 10% tax on $10 brings it up to $11. Then you get your 10% discount of $1.10 and you’re back to $9.90. Math is communitive – it doesn’t matter when you take your discount. In this way, the market itself hasn’t changed, but the equation we use when creating portfolios has. The catalyst for this change was October 19, 1987. In one day, the DOW Jones Average dropped from 2,246 to 1,728. Fearing a literal market collapse, people froze their assets and were unwilling to make trades. As we discussed last week, revenue for brokers and financial advisors came largely from commissions on trades during this time, and when trades ceased, so did revenue. Seeking a new way to create revenue, some bigger brokerage houses released CDs and annuities, but most successful was the introduction of financial planning, introduced by Merrill Lynch. It was (and still is) sold as preparation for saving for college, retirement, and the like – and it was marketed as a good incentive to bring all of your accounts to one advisor or broker, so that they could create a complete financial plan. It also meant that, eventually, those assets would begin to move and create revenue again for the advisor and firm that did the financial plan. Financial plans incorporated the idea of asset allocation. The concept was, if one asset group goes down, another will inevitably go up, and your potential losses would be balanced. That balancing would reduce the risks in market downturns like October 19, 1987—at least according to the theory of uncorrelated assets. Advisors reassured their clients. As we saw in the 08/09 Recession, that turned out not to be true, but the idea of safety appealed at the time. Financial planning was aided by the increased access to computers, which made it easier to plan into the future and ensure that the portfolio was allocated to the client’s comfort level. The idea of “low-risk,” “moderate,” and “high-risk” money caught on with asset allocation; the greater the risk, the greater the potential returns, but there was still so much fear from ‘87 that more and more people were (and still are) opting for low-risk money. This takes us back to our initial question: why is it that now we have to put 10% of our paycheck into a 401(k) or savings instead of the 4% that was touted for our parents? Think of it mathematically and it will start to make sense. Let’s say that our hypothetical friend has a flat income of $100,000 and is saving 4% of their paycheck each month. On their investment, they receive a 9% return. After 40 years, they’ll find themselves with $2.83 million. At a 4% withdrawal rate, they would take $113,000 a year; at that rate, their money would never run out, even with only a reduced rate of return on the $2.83 million. As we have moved both to 401(k)s and to financial planning with multiple asset classes, that equation has changed, and most of it comes back to the fear that froze the country after October 19, 1987. People have more fear of loss than they do enthusiasm for gain, and opt for low-risk, low-reward investing. With “safe” money – invested in CDs, bonds, etc. – our friend earns 2% or maybe 3%. If our friend was investing in a handful of low-risk options, they’re getting, on average, 4% returns on their money. Look at how it changes their scenario: If they are only investing at a 4% rate, in order to make up the difference between the scenarios, they have to put away 10% of each paycheck – because math is communitive. The only way to make it to that lovely $2.83 million at that lower return is to invest more money in the first place. And on the other side of the equation, they have to draw down less than 4%, because they would be drawing all of their earnings. Asset allocation seems a logical approach to reducing risk, and it probably does over the short-term, but nothing in the market is free. By reducing the supposed risk through asset allocation, investors are giving up returns. Over the longer-term that supposed reduction in risk also reduces the total nest egg to the point that investors have to save 10% instead of 4%. 10% is the new 4%. At AFC we do not believe it does not have to be.Read More
Do you read the newspaper or listen to CDs? When was the last time your heard the dialup tone? Do you know what a dialup tone is? In just the last 20 years, we have experienced exponential change in everything from how we decide what to have for dinner to how we learn the news. The goal of this blog, and of my radio show, About Money, is to put you ahead of the curve so that you can make investing and financial decisions that not only keep up with changes, but outpace them. I want to spend a couple weeks talking about the changes we’ve seen in the financial industry. The Department of Labor’s Fiduciary Rule has been in the news every day (as of this writing in early 2017), and whatever the outcome, the light it has shined will change an already capricious industry. In this blog, we’ll be looking at how investing has changed in the last century, and where it’s projected to go, in two parts. We’ll begin with how the structure of the investment industry – and in particular the 401(k) spheres – has changed. Since the 1960s, the way payment was calculated for financial services (at the time, facilitated by stock brokers) was through a fixed transaction commission. Every time a trade was made, you paid a fixed commission, which had been regulated for 183 years. On May 1st, 1975, the Securities Acts Amendments of 1975 created the option for negotiable commissions. At the time it was a victory for deregulation, but most stock houses chose not to change their income structure – with the notable exception of Charles Schwab, with whom you may be familiar. He introduced the idea of discounted trades, and by 1999, one-third of all investors had at least one “discount” account. Discount accounts proved to be a bigger game-changer than anyone at the time expected. When I licensed in 1986, 95% of revenue in the industry was generated in big brokerage houses, and they had found success with commissions. In the ‘80s, the average household income was around $43,000; brokers were expected to produce at least $100,000 in revenues. Those who couldn’t were eliminated. They did not leave the industry, but began their own industry shift by opening small firms. They sold a different product, so to speak. The old Registered Representative (broker-dealer) fell under the Investments and Exchanges Act of 1933, which specified only that an investment be suitable for a client. These new firms chose to license under the Investment Company Act of 1940 – they became Registered Investment Advisors, which required a fiduciary standard. They had to (have to still) make every decision in the best interest of the client. It created a split between the two groups; the former can sway the client toward the investment that offers the higher commission to the broker, so long as it is “suitable.” The latter must make every decision in the best interest of the client (a topic about which I’ve spoken before). The Department of Labor Fiduciary Rule wants to expand the fiduciary requirement to all advisors who work in the retirement planning spheres. The trend – leaving brokerage houses to join or start smaller firms – continues to this day. Almost 50% of the revenues created by the financial advising industry are created by the registered investment advisor. From there, they began, too, to move away from commission-based accounts to fee-based accounts, and this payment structure has since made its way back to the brokerage houses. Fee-based accounts have, for better or for worse, created a culture of relationships; “sell the relationship, not the results.” Make people like you, so they don’t care what the performance is. Dalbar did a study which found that the average stock mutual fund investor, over the last 30 years, has achieved a return of 3.96%. What that means that if you began with $100,000.00 30 years ago, you would have tripled your money. The S&P 500, to compare, was up 11.1% over that same amount of time. Your $100,000.00 would become $2.1 million. With returns consistently so poor, pressure has been put on fees, bringing them down across the industry. In the 1980s, the average fee was around 3% for the first $100,000.00. Today, it’s down to 1% or even lower. Failure to perform has injured the advisor and the investor. So, what new innovation will continue to change the equation? Robo Advisors. Computers can now not only provide financial planning with significantly lower fees than any registered financial advisor I’ve ever met. Today, 46% of investors are aware of the Robo Advisor, and are at least considering opening an account. Why? They can do everything most financial advisors do, except “hold hands” during a down turn,” and the fees are so much lower. So, ironically, advisors “selling the relationship” may give way to the Robo Advisors, leaving those few of us who really do believe that superior performance is real value. Baseball teams do not pay a .217 hitter the same as they pay a .320 hitter. It is not what is paid that is most important, but how much the client earns in their account. I’ll continue this conversation next week with more on how your individually managed accounts and 401(k) plans equations have changed. In the meantime, I pose a question: Why is 10% the new 4%?Read More