Kimmunications

You May Be in Good Financial Shape and Not Know It

Yes, many people are staring retirement in the face and aren't even close to being prepared. Yes, our economy is in a funk right now. And yes, everyone is feeling the pinch of higher prices for gas and food. Don't you think it's time to turn away from all the gloom and doom and think something positive?

I'll start with this: You may very well be on your way to a secure financial future, no matter what you keep reading in the media. 

The press likes to focus on doom and gloom, and it likes to tell us time and time again that millions of Baby Boomers are heading toward retirement without nearly enough saved up. They'll emphasize the findings of the latest EBRI Retirement Confidence Survey, which says that most workers aren't confident they'll have enough to retire on. All this may be true, but by focusing solely on the unprepared, it strikes fear in the minds of everyone, including the millions of Baby Boomers who actually DO have plenty of resources to get them through retirement.

I'll admit; I'm just as guilty as the next guy. For the last several years, I've trotted out tons of statistics to try to scare people into shaping up their retirement portfolios. What I've found, however, is that I've been scaring the wrong people.

The fact that you read my articles tells me that you are trying to be on top of your financial situation. The ones who are truly ill-prepared aren't likely to be seeking advice from someone like me. They're probably blissfully ignorant of their financial situations.

I meet with people all the time to go over their individual circumstances, and I've found that most of them fall into three categories:

1. Those who have enough to retire comfortably on (sometimes a lot more than enough), but don't think they're in good shape. Most of them just need to learn how to structure their portfolios to target a sustainable income stream.
2. Those who could have enough, they just need to adjust their spending or their income, and sometimes both. They typically have enough time to get back on the right track; they just need someone to point them in the right direction.
3. Those who really don't have enough, but they think they do. They spend like they have lots of money to burn, when they really don't. They typically need a dose of tough love! They'll probably have to work longer, cut their expenses to the bare nub and save like crazy – not the advice they want to hear.

If you're worried about whether you're adequately prepared, then let's talk.  Let's have a conversation about your situation and your goals. I won't try to hard-sell you on Snider Advisors or the services we offer; I truly just want to help you and maybe calm your fears. The sooner you find out where you stand, the sooner you can make the necessary adjustments – and the less painful those adjustments will be. Give me a call at 214-245-5236, toll-free at 1-888-6-SNIDER, or shoot me an email. You might be better positioned than you think.

SOURCES:

1. Helman, Ruth, et al. “Americans Much More Worried About Retirement; Health Costs a Big Concern,” Issue Brief, Employee Benefits Research Institute, April 2008. [accessed 29 July 2008]
2. Hurt III, Harry. “Who Wants to Retire Later? (Don't Laugh)” The New York Times, 20 July 2008. [accessed 28 July 2008]

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Kim Snider is the President and Founder of Snider Advisors, an investment adviser registered with the SEC, focused on teaching individual investors a sensible, long-term investment approach focused on maximizing cash flow. For more information on Snider Advisors or the Snider Investment Method, please visit snideradvisors.com. Her book, How to Be the Family CFO: Four Simple Steps To Put Your Financial House in Order, will be in bookstores October 1, 2008.

Snider Advisors makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 888-6SNIDER to request the Snider Investment Method® Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments, including the Snider Investment Method™ are subject to risk, including possible loss of principal.

Am I on target with target date funds?

Lately, I have been getting a lot of questions about target date funds. No wonder. Target date funds are being touted as the answer to our retirement investing conundrum. They are being proposed as the default choice in a 401(k) plan. And they are sprouting up like weeds. So should you put your money in a target date fund?

 

The short answer is ... only as a last resort. But first things first.

 

A target date fund is a mutual fund with an asset allocation tied to your target retirement date. If you think you will retire in 20 years, you would pick a 2030 target date fund, with 2030 being roughly the year you plan to retire.

 

These funds are really funds of funds. The fund manager chooses other funds, from the same fund family, in percentages that make up a reasonable asset allocation given your time until retirement. It is the fund managers job to adjust those percentages for you automatically as your retirement date approaches, becoming progressively more conservative. These funds typically hold a mix of stocks, bonds and cash and will often include an allocation to foreign equities as well.

 

It's no wonder I have been getting so many questions about target date funds lately. In 2000, there were only 23 target date funds in existence, with just about $8 billion in assets. Today, there are over 250 target date funds, with $160 billion in assets, and more being brought to market every day. But should you plunk your retirement savings in a target date fund and forget it?

 

I don't think so and here is why …

 

1. One size doesn't fit all, with any investment.

2. Target date funds are too conservative.

3. There are better ways.

 

Target date funds are being touted as one stop shopping. Just pick a retirement date, pick the fund with your retirement year in the name, and let the fund manager do the rest. But does it really make sense that the CEO of a company should have the same asset allocation as a clerk in his Accounting Department? Not likely!

 

An investor has to put together an asset allocation based on his or her long-term objectives, risk tolerance, time horizon and temperament. You choose the combination of investments that has the highest probability of satisfying each of those criteria over your anticipated time horizon. It is possible that is a single investment but often it is not.

 

My biggest gripe with target date funds is they are too conservative. Let's make some assumptions about your retirement. The first is your retirement will last thirty years. That is the joint life expectancy of a 65 year old, non-smoking couple.

 

Second is that inflation will average 3.5% over that 30 years. Forget for a moment that seniors experience inflation at a greater rate than the nation as a whole, largely because of the cost of healthcare. We'll just use the historical average.

 

Third is that you will begin withdrawing funds from your portfolio at the rate of 4% a year. And fourth, let's assume your marginal tax bracket will be 25%. Now, what is the return required over your 30 years in retirement to pay Uncle Sam, pay you, and still get enough growth in your portfolio to keep up with inflation?

 

The answer is 10%. That is (4 + 3.5) / (1-.25) or your withdrawal rate plus inflation divided by one minus your marginal tax rate. Which means we have a gap. Our current way of thinking about investments is too conservative.

 

If you model the traditional 60%/40% retirement portfolio, the expected rate of return over 30 years is only 8%. A 4% withdrawal rate may give me a high probability I won't run out of money but it almost assures that I won't be able to buy anything with the money I have left. In order to protect against conversion risk, target date funds, because they are based on asset allocation models designed for our parents and grandparents, get too conservative too fast.

 

What worked for previous generations will not work for ours. We are the first generation solely responsible for funding our own retirement. Unfortunately, no one told us that until, for many of us, it was too late. On top of that, we are living longer. Life expectancy has increased by ten years. That is both good news and bad news. That's ten more years to travel, play golf and spend quality time with our family. But it is also ten more years without a paycheck.

 

Like it or not, we have to come to grips with the idea that our investment time horizon isn't our retirement date. Our time horizon extends over our entire lifetime. Moreover, it seems plainly obvious to me our lifestyle in retirement is going to be a function the amount of our portfolio we leave in stocks. Unless you are one of the few with more than enough money, that is the only way our portfolio can keep up with inflation, taxes, and still support a reasonable lifestyle over 30 years.

 

Target date funds don't do that. They are by nature too conservative.

 

My regular readers and radio show listeners know I don't like mutual funds, as a rule. I especially don't like actively managed mutual funds because their high fees guarantee over time you will under-perform the market itself. The only time I would ever use a mutual fund is in an employer-sponsored retirement account, like a 401(k) or 403(b) and that is just because I don't have a choice.

 

Most plans are adding target date funds as an investment option. Should you choose it?

 

Only as a last resort. I believe a well-thought out asset allocation of low-cost index funds, like the one in our 401(k) course, is the much better plan. But if your plan doesn't offer low-cost index funds, or you aren't willing to spend the time and money required to learn how to maximize your 401(k), (which is minimal BTW), then target date funds are far better than just picking the funds with the best historical performance and/or allocating between stocks and bonds based on what you think the market is going to do. That is a sure fire way to waste your retirement funds.

 

Bottom line on target date funds … they aren't the panacea the fund industry would like us to think they are. Do the work. You can do better.

 

Kim Snider Financial Communications makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk, including possible loss of principal. Individual results may vary. Individual performance depends on individual savings, investment time frame and market conditions. Diversification does not ensure a profit or protect against loss in a declining market.

 

 

Your time horizon may be longer than you think

When choosing your investments, there are four things to consider:

 

1. Your investment objectives

2. Your risk tolerance

3. Your time horizon

4. Your temperament

 

Once you've chosen an investment that satisfies these criteria, you shouldn't make major changes to it unless one of those criteria changes. I've written a lot on my blog about several of these criteria, but today I want to focus on No. 3: your time horizon.

 

Many of us were taught that there are two phases to investing: The accumulation phase, when you can take more risk by investing primarily in equities, and the income phase, when you put more of your assets into lower risk investments such as bonds. The thinking is that your primary time horizon for investing is up until the day you retire; then you switch to living off what you've built.

 

This line of thinking is a bunch of bunk. Your time horizon for growth doesn't end when you retire; it continues for the rest of your life. (And income investing and growth investing don't have to be mutually exclusive; income reinvested is growth, but that's a topic for another day.)

 

I got to thinking again about our time horizon last week at one of our Snider Method information sessions. I had just described our investment method as a long-term approach when an audience member asked, "But I'm almost 70, and I'm already retired. Shouldn't I focus more on the short term?"

 

I told him that even 70-year-olds have a long-term investment horizon. The reason is life expectancy. If your goal is to sustain your standard of living for the rest of your life, you need to look at how long you can expect to live.

 

A recent article in USA Today detailed the life expectancy of men, women and couples who planned to retire this year at age 62. Citing data from the American Academy of Actuaries, the article said that the joint life expectancy for a 62-year-old couple is 90.7 years. There’s a 58% chance that one of them will live to age 90, and a 29% chance that one will reach 95.

 

This means that my 70-year-old guest has at about a 20-25 year time horizon for his investments -- maybe even longer. His challenge is to invest so his portfolio can sustain his standard of living for that long, taking into account inflation and the rising costs of health care.

 

Considering that the cost of living increases an average of 3.5% a year, and health care costs are rising at twice that rate, his rate of return needs to be higher than that obtained by the bond-heavy portfolio usually recommended to someone in his age group. The only way to generate that kind of return is to have a significant portion of his portfolio invested in stocks.

 

I'm sure most 70-year-olds would balk at the idea of being heavily invested in stocks. Too much risk, they'd say. But market risk is more of a concern in the short term. For the long-term investor holding a diversified portfolio, stock market risk is much less of a concern.

 

The stock market has historically been a great creator of wealth and protector of purchasing power for the investor holding a portfolio of America's greatest companies over long periods of time. Many investors don't realize that their time horizons are much longer than they think -- even my new 70-year-old friend who's already enjoying retirement.

 

SOURCE: Sandra Block, "Boomers' Eagerness to Retire Could Cost Them," USA Today, Jan. 14, 2008. http://www.usatoday.com/money/perfi/ retirement/2008-01-13-turning-62-cover_N.htm

 

Kim Snider Financial Communications makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments, including the Snider Investment Method™ are subject to risk, including possible loss of principal. Growth refers to growth of portfolio income, not necessarily growth of net asset value. Growth assumes some portion of income is reinvested. Yields do not include unrealized losses or gains.

Why Bonds Won't Cut It

Some of you know I went to the University of Colorado (go Buffs!), also known as CU, also known as "Ski-U". Freshman year, my ski days were in the triple digits, if that gives you any indication - and no, I wasn't on the ski team.

 

Back then, we could buy books of coupons good for discounts on food, lodging and lift passes at ski areas all over the state. At the time, I could ski the top notch areas, like Aspen or Vail, for less than $20 a day.

 

I started thinking about that last week while Jim and I were in Las Vegas. While we were there, I read an article that said one-day lift passes, at many of the big ski areas, are now approaching $100 - a day! This is why I believe inflation, not market losses, is the biggest threat to your wealth.

 

Since I was in college, back in the early 80's, the price of a lift ticket has gone up an average of about 6.5% per year. That is faster than the rate of inflation overall, which averages between 3.5% and 4% per year.

 

Now, imagine I was a college student living on a fixed income of $100 a month. Back in 1985, I was living large on $100 - I could ski anywhere, for an entire weekend, on less than that - gas, food and lodging included. (Granted, I wasn't staying at the Four Seasons, but still!)

 

Today, assuming my income wasn't being adjusted by at least the rate of inflation, I can barely afford a one-day lift pass. My income is unchanged, but my purchasing power is sharply diminished.

 

A friend of mine asked me why would anyone invest in stocks? She had all of her money in bonds paying 5%. There was almost no risk, and the income produced was enough to pay all of her bills … today! She thought, as long as she only took out the 5% each year, she could live indefinitely on that money. What she wasn't accounting for was … you guessed it, inflation.

 

So, let's see how much you really need to stay ahead of the inflation boogey monster. Suppose you spend 4% of the value of your portfolio each year, after tax. Assume a 25% marginal tax bracket and a 3.5% average annual rate of inflation. You would need a gross average annualized return of 10% ((4 + 3.5) / (1-.25)).

 

Over the last ten years, the U.S. bond market total return has been approximately 5.5%. Clearly a bond portfolio falls woefully short. Unless you are Warren Buffett - in other words, a billionaire with a reasonably modest standard of living - you are going to have generate something significantly higher than bond market returns in order to sustain a reasonable standard of living.

 

So, while we would all like to stop worrying about the markets ups and downs and retreat to the so-called "safe havens" offered by lower return investments, our reality requires us to do two things: 1) Move UP the risk-reward continuum toward higher risk - higher return investments sufficient to support a reasonable standard of living; and 2) Avoid the mistakes that cause investor return to be lower than investment return.

 

Not sure how to do that? Then I would invite you to one of our Snider Investment Method™ information sessions. 'Nuff said!

 

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

Can you trade options in an IRA?

I did not hear it myself, but I am told Ric Edelman, a big-time money manager and radio talk show host, said in his 12/2/07 radio show that you cannot use options in an IRA account. This is according to one of my readers / listeners, so if I have this wrong, I apologize in advance. But I thought it was a good topic - regardless - because it is a myth that persists. Along with many myths about options, I might add.

 

A competitor of ours (who teaches covered calls) says in his marketing materials, "What we do is so safe, the IRS allows it in your IRA." I am not a lawyer, the SEC or the FTC, but I believe that is blatantly false and misleading advertising. And it is just as wrong as someone who says you cannot use options in an IRA.

 

The fact of the matter is it isn't up to the IRS whether or not you can trade options in your IRA account. It is a decision made individually by each IRA custodian. It is true, up until about five years ago, most brokerage firms did not allow options in an IRA and if they did, they only allowed covered calls. This is undoubtedly the basis of the myth.

 

Option trading has historically been limited in IRAs for three reasons: 1) lack of understanding of options by the retail investment community; 2) no financial incentive to allow options and 3) insufficient internal processes or controls for handing the option transactions in an IRA.

 

For the longest time, retail brokerage firms shunned options. Brokers never had to learn about options in any detail and mindlessly mouthed the conventional wisdom that options were risky. Tragically, some financial professionals still profess their ignorance to their clients when they repeat this mantra! For more on this, see "Lies Advisors Tell: Options Are Risky" and "Misconceptions About the Risks of Options."

 

Exchange traded options started out in a smoker's lounge of the Chicago Board of Trade in 1973. The first day's volume was 911 contracts! Last month alone (November, 2007), over 300 million option contracts changed hands. On an average day, over 14 million options are traded and on some days, the number exceeds 20 million.

 

Compared to stocks and bonds, options are relatively new, hence their slow acceptance rate. But today, options are one of the fastest growing segments. Brokerage firms, always looking to add new products to drive commissions, have been scurrying to catch up to the demand.

 

Newer firms that did not have legacy computer systems and catered to the more active trader, such as optionsXpress or Interactive Broker, were the first to create the systems allowing you to trade options in an IRA just as you would a taxable account. More recently, firms like E*Trade, Scwab and Fidelity have followed suit. The slowest firms to adapt have been, not surprisingly, the wirehouses - Merrill Lynch, A.G Edwards, and the like.

 

What the reader needs to know is: 1) Options can very definitely be traded in an IRA today, and not just covered calls - if you can't you just need to switch brokerage firms; 2) Options are not inherently risky or safe, any more than credit cards are inherently evil - it is all in how you use them that makes them one or the other; and 3) Options can be a very useful tool for creating income and managing risk in a portfolio, provided - and here is the big caveat - you know what you are doing.

 

If you have any other questions about investing your retirement funds, or what is true and what isn't, please give us a call at 866-952-0100. We would be happy to set the record straight.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

The Marvelous Miss Mary

I was on the phone the other day with the nicest lady. Her name was Mary. She had called in to my radio program the previous Saturday. I had given her my number and told her to call me so I could give her the name of a good, fee-only financial planner because that was what she really needed.

 

Mary had worked hard her entire life. Her job wasn't glamorous. It didn't pay anywhere near the top of the pay scale, but you can tell she did it with pride. She started putting money in her employer's retirement plan back in the 1980s, when they first came out, and she had been contributing religiously ever since.

 

Her house is paid for and she has saved a hundred thousand dollars or so outside her 401(k). She will also get a small pension and Social Security. She is getting ready to retire at the end of the year. She told me she has always read as much as she could about personal finance. She wanted a financial planner who could help her, not tell her what to do. (You go girl!)

 

We chatted about mutual funds. Some of her friends, she said, were afraid of the stock market because they didn't want to lose money. But she understood, from watching her 401(k) all those years, that sometimes it goes up and sometimes it goes down, but over the time she has had it, it has gone up a lot! You just have to leave it be.

 

Unlike most of her generation, she understood intuitively that she had to focus on not outliving her money rather than the fear of losing it. She knew she had to keep investing in the stock market for her nest egg to keep up with inflation. She is the exception, not the rule in this regard.

 

Mary listens to me on the radio all the time, she says. The idea of that makes my heart skip a beat and brings a smile to the corners of my lips. I love the idea that I might have helped her in my own small way.

 

She brought up the Snider Investment Method™. She never graduated from high school, she told me, and she doesn't know how to use a computer - yet. She is thinking about taking some courses now she is retired.

 

"I just wish I was smart enough to do your Snider Method!"

 

"Miss Mary", I said, "I can tell you one thing for sure. After what you have told me today, what is holding you back is not lack of smarts. When it comes to your money, you have accomplished what only 20% of people ever do - financial success. If you ever set your mind to learning the computer well enough, I am CERTAIN you could do the Snider Method. Look what you have already learned on your own!"

 

As you can probably tell, I thought Miss Mary was just marvelous! I could have talked to her all day. It just goes to show, investing and personal finance is mostly common sense … and they don't teach you that in school or hand it out with your promotions!

 

What Miss Mary teaches us is anybody can be a good investor and a good steward of their money.

Kim Snider Financial Communications makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. All investments are subject to risk, including possible loss of principal. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing.

Loss of principal may be the wrong dragon

A man is lying in his hospital bed, surrounded by friends and family, reflecting on his recent near death experience. "I always thought it'd be the ulcer that killed me. I did everything the doctors told me. I drank the cream, ate the butter, drank the milk. And now I have a heart attack!" This was a scene from a new original series on AMC, called "Mad Men", set on Madison Avenue in 1960.

 

It is also a scene playing itself out in the portfolios of millions of Americans. Like Don Draper's boss in Mad Men, many of us are fighting the wrong dragon - and killing ourselves in the process.

 

At each speaking engagement I do, I ask my audience, "When thinking about your investments, what worries you most?" One of the first answers offered is always losing money. Capital preservation is our ulcer. Inflation is our heart attack.

 

Think about the average Baby Boomer - someone born around 1952. For many of you, that won't be too tough. You are the average Baby Boomer. Assuming your parents were 25 when you were born, your parents would have been born right around 1927. How do you think that shaped the messages you got about money, and in particular about investing? How do those messages affect you today?

 

The dominant financial experience in the lives of most of our parents, and certainly our parents' parents, was the Stock Market Crash and ensuing Great Depression. As a result, Baby Boomers were imprinted with certain ideas about money, almost from birth: Don't put your money at risk, pay off your home, stock market losses are ruinous.

 

It is not just investors who are indoctrinated with this belief system. The ranks of financial advisors, financial journalists and government regulators are populated by this same demographic cohort, with the same belief system, stemming from the same seminal event.

 

As a result, as we accumulate assets, we become focused - obsessed in some cases - on avoiding capital losses. So, as we age, we put more and more of our money into fixed income securities like bonds. If capital preservation is the ulcer, fixed income portfolios paying 5% or 6% are the cream.

 

"How so", you ask? The first thing you have to understand is the fact from which all your investment decisions must emanate, assuming your objective is to someday be able to live off the proceeds of your portfolio, is your life expectancy.

 

The average retirement age for all Americans retiring in the year 2007 is 62. So let's consider the case of the average couple retiring this year. They are both 62 years old and non-smokers. I want you to take a guess as to the age at which the second death will occur. In other words, both are 62 years old today. According to the actuarial mortality tables, how old will the latter to die be, when he or she passes away?

 

Jot the number down or just fix it in your mind. Got it?

 

If you would like to dig for the answer, or verify the answer I am about to give, go to your insurance agent and ask to see the mortality tables for the joint life expectancy of a 62 year old man and a 62 year old woman who don't smoke. They will confirm for you the answer is 92 years old. Their joint life expectancy is 30 years.

 

This is the good news bad news joke. We are living longer, but that longevity is also one of our greatest risks.

 

Now I want you to consider this. In 1988, I was fresh out of college and I made $18,000 a year. I was single. I had my own one bedroom apartment in a reasonably nice apartment complex. I had a new Ford Probe Turbo, on which I made monthly payments. I paid my insurance and gas. I could afford to eat out, go out at night with friends and take a couple of vacations a year. I could do all that on $18,000 a year. Granted, I didn't save anything, but my lifestyle was pretty comfortable.

 

So imagine one of my grade school teachers who retired, in 1977, with a pension of $20,000 a year. They were probably able to live pretty comfortably too - for awhile. After all, the median income in 1977 was $13,572. In 1977, a gallon of regular gas cost $0.62. You could buy a Porsche 924 for $9395! The median price for a new home was $54,200.

 

But fast forward thirty years to 2007. How well do you think my grade school teacher is doing on that $20,000 a year pension now? Even with a Social Security check and a paid for house, I can promise you, her monthly income doesn't go far enough.

 

So here is where our inherited belief system clashes with our reality. The cost of living rises, in the United States, an average of 3.5% per year. That does not take into account health care, which is rising at least twice that rate. If you hold a portfolio which returns 6% a year, for example, your real rate of return, or the return left after inflation, is only 2.5%. This is not enough to sustain any reasonable standard of living over a period which will likely span 30 years of retirement.

 

The only way to sustain a reasonable standard of living over that long of a time period is to earn a real rate of return significantly higher than that paid by bonds. In short, your long-term standard of living is directly correlated to the percentage of your assets you place in what has traditionally been thought of as the riskier asset classes, like stocks.

 

And therein lies the conundrum. In order to live comfortably, you must do the thing that you fear, which is put your capital at risk - because profit is the reward for risk. Without risk, there is no risk premium. And you must earn the risk premium in order to be able to live when you no longer have a paycheck.

 

That is the bad news. Here is the good news. In spite of what you may think, in spite of what your gut might tell you, and in spite of the belief system passed on to you by your parents, there is, effectively, zero risk in the stock market for the long term investor holding a diversified portfolio. Market risk only exists in the short term.

 

To that end, we have to stop thinking of our investment time horizon as our retirement date. Our investment time horizon is as long as we will live. For almost everyone reading this, we are talking a minimum of twenty years. For most of you, much longer.

 

I am 44. For planning purposes, I assume my investment time horizon, for example, stretches to the age of 102. In other words, my investment time horizon is 58 years. If I plan to hold an equity based portfolio for that long, what risk do I have? Not much.

 

Will I experience temporary declines in my portfolio value? Of course. Markets are cyclical. They go up and down. But at the end of 58 years, how likely is it that my investment will not have grown at a rate that exceeds the total return on bonds? As my grandmother used to say, "Nothing's impossible, just highly improbable."

 

Therefore, your choices are really quite simple. In order that you not run out of money, or at least purchasing power, you must commit a substantial portion of your assets to equities and keep them there for the long term - through the ups and downs - all of the panic buying and selling. The only way to make the required return is to always be in the stock market. Not market timing. Not stock picking. Holding a portfolio of America's greatest companies over long periods of time.

 

For most of you, that is not easy. It will never be easy. It goes against programming imparted to you almost at birth. But you have to do it anyway. To do otherwise is to guarantee a heart attack by treating the ulcer.

 

Kim Snider Financial Communications makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Diversification does not ensure a profit or protect against loss of in a declining market. All investments are subject to risk, including possible loss of principal. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing.

Podcast for 5/29/07: Interview with Jay Zagorsky

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Kim interviews Jay Zagorsky, a researcher at The Ohio State University, about his research finding no correlation between intelligence and building wealth.

MP3 Download: Hi (128k) | Lo (24k)

Length: 10:58

Notes:
2:26  Jay Zagorsky explains where the data for his research came from. The Ohio State Center of Human Resource Research runs a longitudinal survey -- they track people from the time they're teenagers until they die. This group started in 1979.
4:10  Zagorsky says there's a strong relationship between intelligence and income, but not between intelligence and net worth. There was a non-linear relationship between financial difficulty and intelligence.
5:55  People who were least in financial difficulty had an I.Q. of about 115 -- slightly higher than average.
6:26  Zagorsky says this research finds that anyone can rule the financial world; I.Q. has no impact.
6:55  Zagorsky describes the difference between this study and others. This study looked particularly at Baby Boomers, while others haven't.
8:15  Intelligence didn't seem to have an impact in any particular areas of financial distress. In other words, there was no evidence linking higher IQ's to, say, missing credit card payments.
8:42  This research didn't account for various risk factors or people's desire for gratification. I need to have it now vs. I'm willing to defer my satisfaction until the future.
9:33  Zagorsky says he wants to examine the drive to become wealthy and the ability to delay gratification.

Resources:
Ohio State - Center for Human Resource Research

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

Retirement Income Strategies

Your job as Family CFO can be described by three activities: financial planning, asset management and behavior management.

 

When applied to investing, there should be a good deal of planning on the front-end to determine your money's higher purpose, where you fall on the risk-reward continuum, your investor temperament and then what investments best fit given these parameters. (See yesterday's post for more on this.) Once determined, your investments should only change when you experience a life event which changes your objectives or tolerance for risk.

 

In fact, once you get started as an investor, if you are doing it right, the planning and asset management portion of the job should take little time and effort. It is the management of sabotaging behaviors that is so demanding.

 

The one aspect of planning that can get a little sticky occurs on the back-end. After years of building a portfolio, you now need to figure out how much you can withdraw each year to supplement or replace your previous income. This area is less easily understood by investors because it is a fairly novel problem.

 

Increases in longevity and the shifting burden of retirement savings has made the calculation of your maximum sustainable withdrawal rate very important. Mis-calculate and you could end up running out of money before you run out of breath. On the other hand, an overly conservative calculation will limit your standard of living unnecessarily, just at the time you are supposed to be enjoying the benefits accrued after years of hard work.

 

Here is a list of some of the various strategies being used:

 

• Bill Bengen, who has done the most research in this area, pegs the distribution at 4.4% of the first year's retirement portfolio, with the dollar amount increased by inflation each year. This assumes you will live for another 30 years, don't need to leave an inheritance, and your portfolio will do about as well as the market. This formula will give you a very high probability the money will last for the full 30 years.

 

Other strategies include:

 

• Base distributions on the IRS' IRA tables for single or joint life expectancy as appropriate.
• Calculate the weighted average balance over the last five years and take a fixed percentage of that number, like 4%, each year.
• Put one, two or three years of living expenses into a money market account. Use dividends and other distributions from the portfolio to replenish the cash account. If the markets are up the preceding year, you sell equities to raise the money to replenish the cash account. If the markets are down, you keep drawing from the cash account. This avoids selling in a down market.
• Put one year's income in a money market fund and two year's worth in a short-term bond fund. Each year, the bond fund replenishes the cash account and in the year's when the overall portfolio rises more than 4%, the bond fund is replenished as well.

 

Another question I am often asked is which accounts to draw from first. As a general rule of thumb, you want to draw down taxable accounts first. But here are some variations for you to consider:

 

• Take distributions from a regular IRA to the level where you fill up the 15% tax bracket. The rest would come from taxable accounts. This will reduce required minimum distributions after you reach age 70 1/2, saving you some taxes.
• In the first couple years of retirement, while you are pulling from taxable accounts, your taxable income is almost totally within your control because you have already paid taxes on that money. This is a great opportunity to move regular IRA's into Roth IRAs and pay very little taxes on the portion moving over.

 

For those readers who use the Snider Investment Method™, we have two possible formulas for calculating withdrawal rates:

• 4% - 10% of your stake, depending on account type and size, with a six month reset. (See the alumni web site for more details.)
• 80% of your average income. (Consult your Chronim advisor if you have any questions.)

 

Learn more about how to be a great Family CFO in my upcoming class, "The Family CFO's Guide to Investing." I am offering this class in June only - Tuesday, June 5th in Frisco, Wednesday, June 6th in Fort Worth and Thursday, June 7th in Dallas. The best part is, like this article, it is absolutely free with no strings attached. Check the dates and get registered at kimsnider.com.

 

And as always, feel free to leave your thoughts and comments below. Specifically, I'd love to hear from you what distribution strategies you are using and whether you came up with them or a financial advisor?

 

SOURCE:

 

1. Bob Veres. "Taking On Retirement"; Financial Planning; May 2007; pp 45- 46.

http://www.financial-planning.com/pubs/fp/20070501021.html

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

BusinessWeek Stories

The folks at BusinessWeek are looking for people who fit two story ideas. Details and contact information is below. Please contact the writers directly if you think you are a fit.

 

I have two requests for reporting help—one from me, and one from my colleague Anne Tergesen. Feel free to forward this anyone you know who may fit our needs.

 

First: I’m working on a story about early retirement, and I’m looking to interview people who are obsessed with retiring early. Obsessed may be someone, say, who has given up premium toilet paper to save money. Or someone, say, who found all of her kids college scholarships, and used money earmarked for college to buy a retirement home. These are made-up examples, of course, but you get the drift.

 

I prefer to be contacted by email with a short explanation of your (or your friend’s) early retirement obsession! I will do my best to respond to everyone who is in touch in a timely fashion, but this list contains more than 1,400 contacts, so I apologize in advance if it takes me a few weeks to sort through the avalanche of leads and replies you (hopefully) send my way.

 

My email is: lauren_young@businessweek.com

 

Second: My colleague Anne Tergesen is writing an article about some of the interesting or unusual ways in which people have decided to divide up personal property.

 

Please note: This is NOT financial assets such as stocks, bonds or real estate, but the objects of sentimental value heirs fight over just as often—for example, grandma’s antiques or grandpa’s ancestral Civil War sword.

 

Anne says: “I’m looking for people who are willing to share their methods and stories of dividing items everyone wants in a way that preserves the peace. The decision about how to divide the items may have occurred before the owner’s death or after and it could have been initiated by either the owners or heirs—I’m not picky! If you’re willing to share your story with me, please let me know. I prefer to be contacted by email – and a short explanation of your situation would be helpful. Thank you!”

 

Please contact her directly: anne_tergesen@businessweek.com

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

Are You Navigating or Just Drifting?

I've been reading a management book titled "Mastering the Rockefeller Habits" by Verne Harnish. The central premise is how to create alignment in an organization. Alignment can best be understood as everyone and everything working together toward a defined objective.

 

I am attracted to the Rockefeller Habits because Harnish has created a step-by-step system for managing a small but rapidly growing business, much like the Snider Investment Method™ is a complete system for managing your investments. Like the Snider Method, there are steps to be followed, one after the other and always in the same sequence. Also like the Snider Method, there are worksheets to keep up with all the data and metrics to track performance.

 

As I was reading, I quickly realized that my company is suffering from a lack of alignment. We have 20 people all doing stuff every day - stuff that "feels" important, or at the very least urgent. But a lot of it has nothing to do with meeting our most important goals. We are all rowing very hard but all to a different cadence. We are moving, but not in a straight line and not with the efficiency we could be.

 

I also realized that I am much more successful at achieving goals in my personal life than in my business life. Maybe it's because there are fewer people to get onboard. In my personal life, it's just Jim and me. The dogs don't put up much resistance - or provide much input for that matter!

 

Our dream is to build a polo farm in Aiken, SC. Everything we have done for the last few years has been about making that a reality.

 

First, we had a vision that we were absolutely 100% committed to. Next, we had to ensure we had enough money put away to support us for the rest of our lives - not lavishly, but at least comfortably. In other words, take care of retirement savings first, then the dream.

 

Then we had to figure out what it would take to make the dream a reality. The first thing we realized is we needed to build the company into one that was not so dependent on Jim and I on a daily basis. In others words, we had to build a business. We are working on that.

 

It also meant quantifying the dollars involved. How much would it take to build our dream? Yikes! Polo farms don't come cheaply, at least not the one I see in my dreams. So we did that too.

 

Then we started working towards those goals. Everything else has taken a back seat because that is what we decided was most important. When we wanted to take a vacation, we measured it against the dream. "For the cost of a trip to Sun Valley, we could buy an acre of land." or "Is that worth a polo pony?" Sometimes we would say yes. Most of the time we decide it isn't worth it.

 

Our actions are generally in alignment with our goals. As a result, we have bought the land and hope to start moving dirt some time next year.

 

I have always believed that our lives, especially our financial lives, are just micro businesses, to which business principles apply. That is why I always stress the concept of the Family CFO. I believe it is a useful metaphor.

 

I realize now that my personal life is better aligned with my personal goals than my business is with its business goals. We aren't as focused, in the business, as I would like us to be. That is my fault as the CEO and I have determined to fix that.

 

But what can you learn from my experience? Well, here is my question - are YOUR actions aligned with YOUR goals or are you allowing YOURSELF to drift day-to-day without getting any closer to your dreams? And if you are drifting, what do you need to do to take hold of the helm and start creating an intentional course? If you'd like to share, your thoughts and comments are welcome below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Do You Deserve Financial Success?

I saw an article in MarketWatch the other day that made me sad. Apparently, 50% of Americans believe a secure retirement is an impossible dream. It makes me sad because self-defeating beliefs like this become self-fulfilling prophecies. There is absolutely no reason this has to be true.

 

Financial success requires three things: save prodigiously, invest wisely, and act like an entrepreneur. These things are simple. They are doable. But they are obviously not easy or we would all be millionaires.

 

In The Millionaire Next Door, Drs. Thomas Stanley and William Danko tackle the question of quantifying how wealthy you should be. They use a formula I have find quite useful. Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.

 

If your net worth is more than twice this number, you are a PAW - a prodigious accumulator of wealth. If it is less than 50% of this number, you are a UAW - an under-accumulator of wealth. In between and you are average - an AAW.

 

At the age of 28, I was wealthy, by any measure. I didn't inherit it. But it was a stroke of luck. The company I worked for went public and my stock options were suddenly worth a lot of money.

 

By age 30, I was dead broke. I didn't have a penny to my name and I was in debt up to my eyeballs. All my cool toys were re-possessed. I sold my beautiful Uptown condo at a terrible loss just to stay out of foreclosure. My credit was wrecked and I had no job.

 

Today I am 43 - I'll turn 44 in May. I am again wealthy - by any measure. This time it wasn't a stroke of luck. It was damn hard work. And let me tell you something. It is far more gratifying than the first time.

 

There are many lessons to be learned in how and why I lost all that money the first go around. I'll save that for another day. I prefer to focus on how I got from the there to here - and to ask you a question? What can you learn from my experience?

 

One of the most useful exercises for me has been finding people who had what I wanted, figuring out what they were doing that got them the result I was after and then doing the same thing. That is why I found the Millionaire Next Door to be so helpful. It gave me a shortcut. I didn't have to talk with all these people, the author's already had.

 

Financial success starts with a simple principle. If you earn $100 and spend $110 you will always be poor - it doesn't matter how much money you earn. If you earn $100 and spend $90, you will always have money - it doesn't matter how little you earn. If you want to be financially successful, you must spend less than you earn.

 

Once you have put away enough to cover emergencies start investing your savings. The key to investing wisely is knowledge. I believe a financial education is one of the best investments you can possibly make.

 

Investing is simply a trade-off between risk and reward. You cannot have one without the other. That law is as fundamental as gravity - it cannot be suspended. The investor who manages that trade-off well will do well. If you don't, you won't. Too much risk or too little can be equally detrimental to achieving financial success. Your job is to always maintain a happy medium.

 

Risk is connected with financial success in many ways. For example, two-thirds of high net worth (HNW) individuals are entrepreneurs even though the self-employed only make up 20% of the workers in America. That makes sense given that profit is the reward for risk. The entrepreneur takes the risk to start and sustain a business and therefore makes more, when successful, than the person who works for someone else and has less risk. But he or she also stands to lose more if the business fails, which it often does.

 

So it is not surprising that HNW individuals are predominantly entrepreneurs. I am an entrepreneur. Not because I set out to make a lot of money but because I have a passion that burns deep inside my core - to make a profound difference in the financial lives of others by teaching them what I had to learn the hard way.

 

But the good news is that you don't have to be an entrepreneur to be financially successful - you just have to act like one. Most successful entrepreneurs I know have three traits you need to be financially successful: 1) commitment and determination; 2) creativity, self-reliance and ability to adapt; and 3) believing in yourself.

 

People sometimes ask me how I went from broke, to not, in thirteen years. I tell them I decided to. That is the truth. Without commitment and determination, you probably won't get there, because financial success requires making hard choices - usually involving giving up what you want now for the opportunity to have something better down the road. That is hard.

 

It is also hard not to get caught up in what everyone else is doing or to not keep doing the same thing over and over and expecting a different result. When the traditional Wall Street offering didn't meet my objectives, I created my own. If what you're doing isn't working, change what you're doing. Otherwise, you shouldn't be surprised when you keep getting what you've always gotten.

 

50% of Americans don't believe they can create a secure retirement. Sadly, they are right. Because if you don't believe you will, then you most assuredly won't.

 

Why do so many people doubt their ability to achieve financial success? Is it because they are afraid to try? Is it because too many people have told them they can't do it? Is it because we are a gluttonous, consumer goods oriented society where no one knows the value of delayed gratification any more? Maybe.

 

I saw an old beater car driving down Stemmons Freeway yesterday with a big screen plasma TV tied in the trunk. The driver was pretty obviously on the lowest rungs of the economic ladder. Yet there he was with his big screen, which by the looks of it, was worth more than the car!

 

But maybe, just maybe, it is because we do not believe we are deserving of financial success. One thing I know for sure, anything I believe I am unworthy of - love, money, respect, friendship - will elude me until I can say with certainty, "I deserve this!". Do you deserve financial success?

 

	TAKEAWAYS:   1. To be financially successful you must: save prodigiously, invest wisely, and act like an entrepreneur.   2. If you don't believe you are capable of financial success, figure out why.

 

So now you know what I think. How about you? What do you think? Feel free to leave your thoughts and comments below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

The Need For Financial Education

I write a lot about the need for financial education - not surprising given I am in the financial education business!

 

The Employee Benefits and Research Institute (EBRI) published an issue brief this month which looks at how new retirees are doing financially in retirement. The study finds that many Americans age 65 - 75 appear to be starting of rather well. 53% have experienced no decline in household income and 71% had no decline in total wealth. That is good news.

 

The bad news is those who are losing money are losing it fast.

 

There was a roughly 50 percent median decline in total wealth from 1992–2004 among those who experienced a decline, and the median average annual decline in total wealth surpassed 5 percent for this group — putting them at significant risk of running out of money in retirement. Those seeing a decline in financial wealth are posting a median decrease at approximately twice the level that research suggests is advisable. Although the HRS dataset does not allow detailed analysis, this is probably due to excessive spending rather than investment loss.

 

I am going to make a bit of a leap here and suggest the most likely reason these retirees are spending down their nest egg so quickly is not extravagant spending but because they didn't have enough to support a retirement income in the first place.

 

The study also finds a clear correlation between those with regular income from pensions and financially successful retirements. Of course, an increasingly smaller percentage of Americans will have the benefit of pension income in the future as employers shift from traditional pension plans to 401(k) type plans.

 

The report concludes that many individuals need to learn much more about managing assets in retirement. The data suggests that how individuals manage their individual account assets—especially IRAs—will be a critical factor.

 

Current data indicate that many Americans appear to be on the right track for financing their retirement, have successfully managed their assets to date, and could likely have a reasonably comfortable retirement. However, other Americans appear to be in for a trying time in retirement—not just because of insufficient savings, but also because of their apparent lack of money management skills to properly utilize whatever retirement assets they do have.

 

The Snider Investment Method workshop is for people who have accumulated at least $25,000 in retirement savings, either in their IRA or taxable accounts. The goal of the Snider Investment Method is to grow the amount of income your portfolio can generate while you are young and then give you the means of harvesting it when you retire.

 

But what about all those people who have the majority of their retirement savings locked up in 401(k), 401(b) or SIMPLE plans? It isn't as much as is held in IRA's but still - it is a lot. For many people, their 401(k) will be the foundation of their retirement savings. It is critically important that you make the right decisions in your 401(k) from the get-go to maximize it's benefit later on.

 

That is why we created our newest course, How To Turn Your 401(k) Into A Million Dollar Nest Egg.

 

Our new course is a system, like the Snider Investment Method, for picking from among the different funds available in your 401(k), 403(b) or SIMPLE plan, deciding how much to allocate to each, what to do in a brokerage window, and how to rebalance. It also gives you guidelines for how much to contribute, the real skinny on company stock, loans and hardship withdrawals, what to do when you leave your employer and how to make your money last once you stop working.

 

If you read my blog or have heard me speak, you know I don't like mutual funds. I think it is a travesty that we are limited, unless you are one of the lucky few with a brokerage window, to mutual funds when the 401(k) and similar type plans are the cornerstone of our retirement system. Furthermore, I think it is particularly problematic that the people responsible for putting these plans together, namely HR folks, probably don't know beans about investing. As a result, the choices we get are bunch of horribly over-priced, under-performing actively managed funds.

 

That being said, it is no use tilting at windmills. Until the system changes, you have to do the best with the choices you are given. In spite of all the problems with 401(k) plans, I still believe that every person with an employer sponsor plan should contribute as much as they possibly can. The tax benefit outweighs the negatives and the company match, if you have one, makes it a no-brainer.

 

The question I have been asked most often over the years is what to do with retirement money that can't be invested using the Snider Method? So this course is our answer to that question. My plan is 1) to teach people how to maximize the many choices they must make in their employer sponsored plan for as long as they have it 2) give them enough information to know if their choices are really awful and encourage them to go pitch a fit to management and 3) give them a better alternative in the Snider Investment Method as soon as they are able to roll their 401(k) fund out into an IRA when they leave their employer.