written by Kelly Campbell, CFP, ChFC, CMFC
This is not a politically correct argument. It is not a ‘let me tell you what you want to hear’ article. What it is, is a factual, no holds barred, reality check for you based on your plans to retire. Whether that date is right around the corner or a decade from now, it is time to get your act together and make your retirement plan work.
Sure the market of 2008 may have put your investments into a tail spin, but if you are honest with yourself, this is not the first time this has happened. Remember the down markets in 1994, 2000, and now again in 2008. Well, it is finally time to stop letting your lack of preparation control your life and instead put yourself in the driver’s seat. So let’s begin with the 3 main reasons people fail in their retirement planning.
First, Boomers fail to plan. They do not put their assets and goals into a financial planning program to see where they are and to show them what they have yet to do. Assembling all of your assets, contributions, assumptions of rates of return, taxes and inflation and ultimately your goals quite honestly is not fun. As a matter of fact, it is downright hard work. And it cannot be done in one 30 minute sitting.
So why is this so difficult? Well, there is really no mandatory requirement to plan. There is no standard date on the calendar when you must develop your retirement goals and strategies. Also, people do not really think of the future in terms of 10, 20 or even 30 years down the road. They usually think last year, this year and next year. It is a difficult process to make those plans as if they know where they want to be. So instead, they procrastinate and put it off for another day. Sometimes people will go to a financial website, put their info into a calculator but not do anything with the outcome; a total waste of time! And even less often, will investors spend money for someone to do the plan……..although it may be the best money ever spent.
Second, Boomers are not very organized. Information about their assets is not convenient for them to be able to assemble on one sheet of paper.
Even if they put together the plan, they would not really keep track of their assets or rates of return. They may do it for a few months or even for a year but usually not for any longer. As a matter of fact, most people cannot keep up with their planning for more than a month. Doesn’t that sound ludicrous?
I have spoken to more people that cannot name where their accounts are, how much is each and how they are positioned either separately or all together as a whole. Isn’t this an extremely important bit of information? People have lost appreciated stock options because they did not exercise the stock before the option expired, a full ten years. That is why banks allow CDs to automatically roll over, because they know their customers will forget about it and let it roll over to the lower rate. Does that mean that Americans are predictably lazy? Unfortunately, yes!
But let’s say you know where your assets are. Do you really know how they are positioned? In other words, if you have an IRA at XYZ Financial, do you know how the portfolio allocation looks? And if you do know, how are you monitoring it.
Well, that brings about the third point; Boomers do not have an investment management plan. They are simply reactive to the daily, weekly or monthly swings of the market. They do not have a proper asset allocation. They spend a negligible amount of time choosing their managers. They buy high and sell low and/or often enough do not even have a sell discipline which would tell them exactly when they should sell an investment that has gained or lost too much. Further, many lose so much to taxes, that they are only keeping about half of what they make when they do make money. Or some may even have enough ‘Capital Loss Carry Forward’ to carry them into the next generation. I have met people that said they have not rebalanced in over 10 years.
So what does all of this mean and why is it so important? I will tell you why. As human beings, we are given a relatively short amount of time on this earth. In that time, while we do work at our jobs a large percentage of our waking hours, that is not the reason we are here. We are not here to fatten our boss’s paycheck or the IRS’s coffers. What we are here to do is to work for a living to be able to support our wonderful lives. But more importantly to do the things we enjoy doing the most. That might be skiing, swimming, teaching, reading, playing music, dancing, laughing, helping friends or even helping those less fortunate. Whatever it is, any of these will be more fun and exciting if we have planned properly. And yes, that will take some work and it may be difficult and we may need some help. But it will be the best thing you could do for your future.
Well, now is the time. This is the year of change. So where do you start?
There are several things you should commit to doing NOW!
First, it is time to put the plan on paper. Most people cannot really put together a financial plan properly on their own. So don’t be afraid to get help. Yes, it will cost you a few dollars, but I assure you it will be money well spent. That financial plan will look at everything you are doing from your cash flow to your networth. It will let you know how much and what types of life insurance you should have. If you have younger children it can include a college funding plan. Also, the plan will review where you are in your retirement planning and if you are not on track, what you must do to catch up. You can even review certain planning goals like taking a trip around the world or buying a vacation home. This plan will let you know exactly what you need to do to achieve your goals. The time you spend on assembling the plan will pay huge dividends in your future.
But this still seems like a daunting task. So let me tell you what to do. Start out by searching for a Certified Financial Planner (CFP). The CFP to the financial planning industry is like the CPA to the tax preparation/accounting world or the J.D. to the legal profession. It will give you the best person that will be most appropriately credentialed and experienced to provide the plan you need.
Also, make sure the CFP you hire is fee based. That means that he or she is licensed to be able to charge by the hour or by the plan. If they are, then they are a Registered Investment Advisor. That means that they have achieved further licensing to charge the fee in the first place and they must act in a fiduciary manor while constructing your plan. This is an entirely new level of responsibility. When someone charges you a fee in the financial services industry, they are held under a higher standard than if they are simply receiving a commission for a trade they made for you. This is the level of professionalism you must require in the development of the plan that will determine your financial future. Again, it is a MUST!
When constructing the plan, make sure you provide as much quantitative as well as qualitative information as you can so that the CFP knows you as a person and understands your goals. This is the key to planning to enable you to ‘live the life you deserve.’
I know you aren’t planning to fail, but you will if you fail to plan!
Step two to getting your financial house in order directly follows your financial plan. It is to get financially organized. While there are many financial tools you can use, not many provide adequate summarization of all of your assets. And unless it is easy for you to see everything in one place, it will not be easy to stay organized and on track.
There are some programs that will aggregate all of your assets in one place for you to see them. And I do not mean that they will all be with the same company. What I mean is that this program will retrieve your account balances from all of your investments including bank balances, brokerage accounts, mutual funds, IRAs and 401(K)s. Some of these programs will even keep track of your frequent flyer miles. But the key to this type of software is that it retrieves all of your information on a read only basis each and every day. So your account balances are always up to date, leading to your complete organization. You really have to let technology be your friend.
To take this type of software to another level, wouldn’t it be nice if the aggregation program was part of your financial planning program so that you could always see where you are in relation to retirement for example. Now that is organization!
Now there are other programs you can use to view your assets and liabilities but not many give you the complete organized financial picture of ALL of your assets and liabilities and updates every single day. So my question to you is if you want to be organized, why wouldn’t you want to be completely organized?
Ok, so we have one more item left. We need to have an investment plan. And this is a major feat, especially when you think about all of the stock brokers and money managers who couldn’t save their clients from the devastating market drop of 2008. This is no easy task.
First and foremost, I want you to forget everything you have heard about asset allocation (AA) and putting all of your eggs in one basket. While the major premise of AA is correct, it is a very antiquated theory. Here is why: Traditional asset allocation typically assumed that you invested your money into several different asset classes. That is correct. These asset classes included things like Stocks; large cap, mid cap, small cap, growth and value. Next were bonds; government, corporate and high yield with both shorter and longer terms. And all of the above being domestic investments, invested across the US. Finally asset allocation suggested that we invest some of our portfolio outside the United States, usually a large cap international fund.
So what is the problem? Well for most people, 80-95% of their assets were invested in the US with only 5-20% invested internationally in large cap stocks, only. What about all of the other international classifications?
In a day and age when you can buy a Starbucks coffee or a McDonalds cheeseburger in almost any city across the globe, everyone must realize that the world has globalized. So my question is why peoples’ portfolios haven’t? Why do they not think of all of the other opportunities outside the US? The reason is that it is hard to change old habits and not many people have the knowledge to make those investments.
But while this sounds difficult, it is easier than you may think. There are funds that allow you to diversify into almost any investment across the globe. As a matter of fact, you can find Exchange Traded Funds (ETFs) for almost any and every investment available and the number of ETFs available is increasing monthly. Remember, ETFs are more efficient in the way they trade and in their taxation which again puts you ahead of the curve with tax efficiency.
So what are some of the opportunities abroad? Start by looking for small and mid cap stocks outside the US. But also look at currencies, commodities, global real estate and even global bonds. They can provide great opportunities for growth especially when the US market is in such turmoil.
But do not stop there. While we have just introduced a slew of new opportunities, how do we manage that risk when investing in so many markets? This brings up the concept of how people invest. Most people invest in something they believe will go up in value, which makes perfect sense…..most of the time. In other words, you buy a stock or mutual fund and the market goes up, your investment goes up and you are happy. This seems like investing 101. Well it is. But what about when the market goes down? Which by the way seems to happen every five to seven years. Do you just simply sit on the sidelines and watch your investment tank? The answer is yes and no.
Some people do and they lose a lot of money and when the market rebounds, their investments go up again but starting from a lower point. Conversely, others decide to be more proactive. They look for the right time as the market is tanking to sell everything and go to cash. And they do, but usually when the market is either at the bottom or very close to it. But then they are sitting on the sidelines and still have to make another decision…..when do they get back in? Big problem here, most wait for the market to go up significantly until they are convinced the market is surely going up and then they jump in full force. But this time the market is again close to its high. So in this latter case, the investor sold low and bought high….the exact opposite of the rules you should follow. But doesn’t this seem like a case for “damned if you do and damned if you don’t?” Well that is how Americans invest!
So how do you break this Great American Philosophy? Well if you are going to do it yourself, then you need to do some research and invest in every asset class you can find both in and out of the US. And then you need to keep an eye on all of them. Each year, you will also need to rebalance which is simply taking all of the investments as they are now and redistributing them back to the percentages of your original investments. Remember that means when investment A outperformed investment B, then it is time to sell part of A and buy part of B. Also, keep in mind that when you do this, you are selling (A) high and buying (B) low.
Now, if you are going to hire someone to help you, again make sure they are fee based and then have them explain their investment management plan. If you think that they are just going to buy you some commission based funds or stocks, save your money and move on to the next planner. When you find the person who you think is the right person, then ask them for references and actually call each one of them and ask enough questions until you are comfortable.
I know everything we just talked about will take a lot of up front work. But let me assure you that it will surely be worth the effort. When you have that plan, a well organized way to achieve it and managed in a way that makes you feel comfortable regardless of what is happening in the stock market, only then will you truly Live the Life You Deserve! Enjoy!
Below are some points you should review to begin to get your financial house in order.
No Financial Plan on Paper
* Don’t know what rate of return you need
* You are easily distracted from the plan
* No discipline
* No Long Term goals
* You are a do it yourselfer
* You procrastinate
* Don’t want to get help
* Don’t know where all your assets are
* Don’t know how your assets are positioned
* Very hard to monitor
* Don’t want to get help
No Investment Management Plan
* Asset Allocation is wrong
* Choosing the wrong managers
* Investments are not tax efficient
* No Sell strategies
* No Rebalancing strategy
* Don’t want to get help
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