Tag Archives: economic downturn

Retirement Planning: Fun with Numbers and Words

  By petillo | February 1, 2011 - 6:14 am | 401k, bonds, Boomers, debt, financial planning, personal finance, Profitable Investments, Repercussions: A Retirement Review, Retirement Planning Target 2025, social security, taxes
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Oscar Wilde probably said it best: “What we have to do, what at any rate it is our duty to do, is to revive the old art of Lying.” Nowhere is this resurgence in the falsehood more prevalent than when we tell a surveyor about our finances. When they look extremely bleak, we tell them they look even worse. When they look okay, we tell them they are really good. It is in our natures to tell lies considering we do it when we smile.

Evidently, a group of wealthy Baby Boomers told a survey group from Bank of America/Merrill Lynch that their retirement not only looked promising but was much better than their parent’s retirement was. This is pretty lofty talk from a group that just a couple of years ago was not one bit happy with where their portfolios had gone in the wake of the financial meltdown. Now, $250,000 in investable asets is enough to warrant such retirement superlatives as “freedom” and “relaxation”.

What changed? True the markets recovered over the ensuing couple of years. But I doubt that this had anything to do with it. many of these folks, like all age and wealth groups did, panicked at the sudden rebalancing of their portfolios by market forces. Unaccustomed to an all-inclusive debacle, many moved into much more conservative type investments and in the process, created their own mini-bubble in the bond market.

The rest of us moved into target date funds, a sketchy hybrid of funds designed to rebalance our aggressive natures for us. If you are older, the fund you plopped the remaining balance of your 401(k) is close to your age – so you too may have benefited from the updraft of conservatively invested enthusiasm. I wrote about this relationship with the bond market a couple of days ago suggesting that if their isn’t a bubble in the bond market, it is because it won’t pop when it reaches the end of its run; it’ll hiss itself into normalcy.

It may be that this group has a better restructuring plan in place or they are simply lying to themselves – and the surveyors. Consider this: $250,000 in investable assets was consider the borderline between the rest of us schmucks and the high-net worth individual. I’m sure that this number is not even close to the actual investable assets these people had. It is our carrot.

One thing that stands out with the group surveyed is the change in attitude about what retirement is. They mostly believe working in retirement is a way to stay physically and mentally engaged. And for many, it is. For those with less than $250,000 in investable assets, it often isn’t the case.

But these high-net worth folks worry about the same things you do: the cost of health care, the cost of children still living at home and that there portfolios, no matter how well managed, might not be enough. So they smile when they say they have it better than their parents and do so while lying about how much better.

And these high-net worth folks are not short on advice, even if they didn’t take their own. Get a financial adviser as early as possible, they suggest and of course start early. Good pieces of hindsight advice that they were told as they began their working careers – and didn’t follow.

About this advice to use financial advisers earlier. Then there was a survey conducted in 2006, when things were going great: housing values were appreciating, the markets were humming along, and early retirement was well within reach or it was assumed to be. And the results show a complete turnaround in thinking from then to now.

Back then – keep in mind these were the good times – another survey was published: In it, the following: “According to a new MyWay Investment Advisors (MWIA – an independent financial planning and investment advisory firm) survey, 98% of respondents would change the way they work with their advisor with 43% saying they wanted to change the amount they paid for the financial advice and services. This compares to only 13% of advisors who would look to improve how they currently operate, including pricing for clients.. The survey focused on how individuals would like to be treated by their financial advisor or investment professional and how they would like to pay for those services.

“The survey targeted the individuals with annual incomes greater than $75,000 and $150,000 to $600,000 in invested assets, including 401Ks. A duplicate survey was sent to financial planners, investment managers, insurance sales people and other financial industry professionals to compare responses.” Why has this advice changed? Pricing and the way pricing is structured has evolved. Yet the higher the net worth, no matter what you pay, you pay more than you should.

So which is the truth? Are they happy now or were they happy then? The most telling piece of info coming from that survey: “When it comes to financial advice, however, financial advisors isn’t where most of those surveyed go for information. Only 27% utilize financial advisors while over half (56%) get advice from a friend, publications or on their own.

“Of those that have a financial advisor, only 18% are happy with him or her. a whopping 56% say they are dissatisfied and 23% still have not made a decision.”

This means one thing. We can no longer look to those we consider net-worth wealthy for guidance in how to become net-worth wealthy ourselves. Retirement has become a reality and an illusion. It is something we want and fear, something we strive for and are repelled by, something that is both possible and impossible. Yes it is a conundrum.

But it is your puzzle to figure out. And the simplest way to do that is figure out if you are willing to live on less than you have now. You don’t need a financial adviser to tell you that you probably haven’t invested enough. You know that you are probably wrangling more debt that you would like. You know that your contribution to your 401(k) is les than it should be. And you know that your goals concerning retirement are lofty than they are on paper.

Your balance sheet needs to be revisited and often. You need to double your 401(k) contribution now, no matter what age you are. There are numerous, almost painless ways of doing this including channeling the tax relief on your Social Security payroll tax (2% for the next two years) or simply increasing your contribution by 1% for every month of the upcoming year. You have the pieces to solve this puzzle. It all depends on how much you want to lie. The rich can. So can you.

The Great Recession Turns Three Years Old

  By petillo | December 15, 2010 - 6:15 am | 401k, economics, financial planning, personal finance, Repercussions: A Retirement Review, Retirement Planning Target 2025
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It’s hard to believe that this economic mess, this credit crisis, the loss of household wealth that so many of us counted on (almost daily), this long-spiral into an unemployment morass, the devastation experienced in our retirement plans and 401(k) portfolios is now three years old. And with anything that has been around as long as this Great Recession, we have become accustomed, even familiar with it.

In a couple of weeks we will put 2010 to bed. And rather than simply look back at where we have been – or to look forward to where we are going (that essay is coming sometime next week), I thought I would look at where we are right now. Three years into this Great Recession, and we feel better. Or not.

Frugality has its limits. It is a self-serving sort of practice that doesn’t warrant the envy of your neighbors, family or friends. Sure they wonder how you can do it. But few if any wish they could replace who they are with what you may have become. While becoming frugal does have its benefits, it doesn’t offer hope and across the American landscape, it is this virtue that carries us throughout our lives.

We know all too well what wealth is like. Even if we have never really had any, we understand that the pursuit of what is often termed a “better life” is attained only when we achieve some modicum of wealth. It might be a simple as the equity in our homes. It might be as mundane as living debt free (mortgages excepted). It might be as comforting as being able to fully fund your 401(k). Whatever it is, wealth means never having to worry – too much.

Take away this cushion – diminish the worth of your home, lose your job and begin tapping your savings to get by, or watch your 401(k) portfolio crumble before your eyes – and suddenly the comfort zone of even modest wealth pushes frugality on you. And we seem to be tired of it.

Trouble is, not much has changed. You may have survived the job losses that seemed to impact those around you. With unemployment (including the disparaged worker and those who have long since passed the 99-week mark) at plus 15%, proof that the job market hasn’t recovered should be disconcerting. But it’s not. You are working and even though your pay has stagnated over the last three years, your benefits have been cut, and the level of production you are laboring under has increased, you don’t feel so bad.

Perhaps it is because your 401(k) is doing better. If you were to look at the overall stock market, still down significantly from where is was in October 2007 (the S&P 500 is off 21% from its record high and the DJIA is 19% lower) you might take comfort that at least your 401(k) is returning. But if you are like most people, this is not the case.

Your knee-jerk reaction away from risk has stymied your recovery. It is understandable but far from what would be considered smart. Many people I have talked to, from near-retirees to distant ones, moved to conservative investments (which in many cases did not eliminate the risks as they may have thought they would) or to set-it-and-forget-it type of investments like target date funds.

Had they simply left everything untouched, two things would have happened: one, the losses in the markets would not have been as bad (selling mutual funds has a tumbling effect on the market, a manager sells a stock to pay an exiting shareholder, then repeats this process again and again) and two, they would have been much closer to full recovery than they are now, even with the losses in equities.

Oddly, you feel better about your job. Your 401(k) match was cut in many instances, revamped or eliminated altogether. And you reacted in kind as if the move made by your employer signaled some hidden knowledge of where your retirement was headed. They cut how much they matched and you did likewise. Or if they didn’t cut their contribution, they took from some other benefit you may have had. They broke even and you lost ground. And you feel good about it.

So our jobs aren’t what they used to be. Our portfolios are far from where they should be. Why do we feel better? Because frugal is no fun. Smart but not as self-entertaining as spending some of the hard-earned money we have.

According to some surveys, we are spending cash instead of charging this holiday season. Bravo! Inventories are up and stores are pleased with this loosening of the purse strings. But we won’t get the satisfaction we are looking for in the simple act of spending. At some point, it will haunt us in 2011 – not the way our out-sized credit bills once did in a post-holiday hangover. But in the missed opportunity.

While the stock market has been steadily climbing all year, many of you have missed it. It is hard to find a good reason why it has been propelled to this level because so many investors are simply not in it. And when they do decide that risk is something they not only need, but must embrace, it will go higher still. If you were to give yourself any sort of gift this year, risk would be the best.

This is not to suggest that you bet it all on the markets in the same way you once did. But without it, frugal will be a retirement reality.

Are We There Yet?: Recession, Retirement and the New American

  By petillo | August 6, 2010 - 7:40 am | Boomers, economics, financial planning, personal finance, Repercussions: A Retirement Review, Retirement Planning Target 2025
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Will we be asking the same question sixty months after the beginning of this recession as was asked at the thirty month mark?  The Pew Research Center’s Social & Demographic Trends project might, as they did recently (click here for the report, downloaded as a pdf.) The question is, will it harbor the same hopes and fears as the current report, one where despite the cut in pay, the unemployment experienced by many, the switch to part-time and cut in hours available to work indicate that six in ten surveyed thought that things will be or are getting better? Perhaps.

The reports, as thorough as they may be, are backward looking.  It makes one wonder if we are looking at the same point in time (the old philosophical question of being unable to step in the same river twice) and be able to use that point in time to predict the future. I’m thinking the answer is yes and no.

Yes, because the people they are surveying cut across a wide demographic and tells us that the lower your income, the less likely you are to spend more than you absolutely have to.  This group, as well all know to well, drives the consumer numbers.

And no, because the folks closest to retirement age may have benefited in the bull market from 1982 to 2000 and although they have seen diminished balances in their retirement nest egg (about 24%), they still know what it will take to retire. This knowledge is perhaps the worst enemy for this group even as it has become the new focus for advisers.  The 54+ group are more likely to say, according to the report that they are in worse financial shape.  But how much worse?

The report does suggest that this group will delay retirement but doesn’t say why.  It doesn’t suggest that they couldn’t lower their expectations (there are more that now think of themselves in a lower economic class) and still retire.  The assumption is based on how they feel about their home values (although important in wealth calculations, it is still the most illiquid of measures but it is a debt that does put pressure on total assets) and the pressure the economy has put on their children (9% of the respondents moved home and 49% reported loaning money to possibly avoid the possibility that their kids move home).

Lower confidence numbers don’t derail the sentiment that America is still the land of opportunity and things will get better.  Yet the folks who suggest they will have to work longer are actually at the root of the problem with unemployment.  New jobs can be created through attrition and if workers stay on and do so foregoing pay raises, toughing out lower worked hours and because they believe they have no other choice, the length of this recession will extend itself out longer than predicted.

Financial advisers, who now fancy themselves as financial managers wonder whether this group is interested in the products they sell that might help?  If, as the report indicates, they are looking at cheaper brands to buy, then as long as it costs them less to invest, they will.  But I don’t think we can assume they will believe that lower cost (i.e lesser risk) financial products will deliver the same bang for the buck.  They have to know that they are getting something worthwhile for less than they paid for it previously.  If household wealth is down 24%, then perhaps that would be a baseline for product pricing cuts.

But they may be showing less trust in lower prices that rapidly increase with each new layer of protection.

I distinctly remember the relief experienced in the mutual fund industry when the 2001 downturn was no longer accounted for in their five year track records.  If that is any indication of when consumers can be convinced that things are better, then we only have four more years to wait.  (Which ironically, is about how long those surveyed believe housing prices will recover.)

So many advisers are wondering where the break line between intent and action occurs. Or worse, how to create action where there is no intent.