Retirement Planning Is Essential to Retire Rich
Retirement planning is a subject full of irony: the younger you are when you start investing for it, the more likely it is that you’ll retire with plenty. But when we’re young, we tend to care the least about retirement. Most people under 40 years old don’t even think much about it. Life has more urgent priorities than thinking about how to slow down.
But after 50 years old, we start waking up at night worrying, “Will I ever be able to stop working one day?” Taking action without the benefit of 20-30 years of time on your side is like swearing off steaks as you’re being wheeled into the operating room for a triple bypass: too little, too late.
Since April 15th was the deadline for making yearly IRA contribution, the finance writers were dolling out plenty of advice and ideas on retirement. Neil Weinberg of Forbes guides us how to figure out one’s asset allocation in his article Asset Allocation -The Key to Building A Big Nest Egg. His advice is very useful and his guidelines are similar to how MarketRiders online portfolio manager software works. Other articles worth reading are found in the Wall Street Journal and the Washington Post, they both feature articles on ways to figure out how much you’ll need to retire.
Saving is the first step. Smart investing is the second. A recent MarketRiders study on how fees can devastate an IRA portfolio has been generating a lot of interest. The study reviews three scenarios showing how a 35 year old can diligently contribute $4000 per year to his IRA, but end up losing $1 – $1.5 million over 40 years, just because of fees.
After you read this week’s articles, please fund your IRA this year. You’ll be glad you did!
“Nobody knows Nothing”
“Nobody knows nothing” is a statement made by screenwriter William Goldman about the movie business. He meant that even after making movies for over 100 years, no one actually knows exactly how to make a successful movie. Sometimes sure things bomb. Sometimes long shots win big.
To draw a parallel, we assembled a few articles that describe how random investment success really is. For example, if you own actively managed mutual funds, you’ll retire with a lot less money than if you’d just bought, held and rebalanced the boring ETFs others and we recommend. This is a non-debatable fact that’s been proven over and over again.
But why do so many want to believe something that just isn’t true? Ivy League MBAs who are smart, motivated and work hard must be able to beat a dumb computer managing an ETF or an index, right? Wrong for two reasons. First, investment pros charge fees that are an impossible handicap to overcome. And second, unlike other professions like a surgeon, litigator, race car driver or a pilot where success can be accounted for by how well one manages risk, most professional investors who beat the market one year, are just plain lucky. They win for short periods of time because of random events, not skill or intelligence. Just luck. We all became acutely aware of this in 2008 when all the gurus somehow didn’t see it coming.
Consider it likely that the great professional investors may really be no better than the 4 finalists in the 8th round of a 1000 monkey coin-flipping contest. Yes, there will always be a winner. But why did the winner win? Did someone know something?
This point is made in an article in The New Yorker: “Blowing Up” by Malcolm Gladwell author of “The Tipping Point” and “Blink.” Gladwell interviewed Nassim Taleb, a professional options trader. Taleb’s book “The Black Swan” describes about how random events in the financial markets are common and unpredictable – essentially dismissing 90% of the value of professional investing.
“Wall Street was dedicated to the principle that skill and insight mattered in investing just as they did in surgery and golf and flying fighter jets…. For Taleb then, the question of why someone was a success in the financial marketplace was vexing. Taleb could do the arithmetic in his head…”
In another article in Fast Company, called “The Myth of Mutual Funds,” Chip and Dan Heath the authors of “Made To Stick,” explore why we don’t always want to believe the truth about investing. “Let’s pull off the Band-Aid quickly. You’ve come to believe that mutual funds are a smart place to put your money. They’re not. That’s the assessment of the smartest minds in finance, supported by a mountain of historical data. So two questions: How can this possibly be true? And why, in gleeful defiance of the data, do more people keep buying mutual funds every year?”
Last, read Moneywatch’s “Hedge Funds – Case Against, part 2” if you’re considering investing in one. Allan Roth writes some compelling pros and cons for doing so. He addresses the question: Are these fund managers lucky or smart? “If I had a dime for every time I’ve heard that hedge funds provide above market returns with lower risk, I’d be a very rich man. Every time I hear this claim, however, I ask for any evidence that supports it. I have had no takers to date, though maybe this column will change that. Unless you happen to have a few billion to invest (and give me a ring if you do), I’d steer clear of hedge funds as they provide too much risk with too little return.”
Tips to Guide Your Investing Strategy
Tips to help guide investors on their investing strategy run the gamut from how-to build a low-cost ETF portfolio, to how-to construct the proper asset allocation with diversification suited to your financial needs, to how rebalancing a portfolio can maximize returns.
A few other noteworthy tips that surfaced recently are highlighted below. I hope they are of interest to you.
* Economist and “Sunday Morning” Commentator Ben Stein stopped by “The Early Show” Thursday to discuss advice from his new book, “The Little Book of Bulletproof Investing.” Stein explained how to maximize your income while protecting your savings from financial calamities. Interested to learn more, read the complete story:
* Mr. Madoff spends free time in the prison library on the weekends and often watches movies, including “Lethal Weapon,” according to the former inmate. He said he chatted with the admitted Ponzi schemer on Saturdays in the library and asked for financial advice: “He gave me ideas on my index funds.” Mr. Madoff advised him to diversify, saying he should invest in funds that track the S&P 500 index of stocks “where my money would be on all the stocks instead of putting my eggs into one basket,” the former inmate said. The source might be questionable but the advice is good.
* Lastly, TIPS-short for Treasury Inflation-Protected Securities-offer investors the closest thing Uncle Sam has to a sure bet these days. These bonds have the full backing of the U.S. government and provide investors with returns that will keep pace with future rates of inflation, as measured by the U.S. Consumer Price Index. You can buy them directly from the government, but it’s easier-and a better investment decision in many cases-to buy low-fee ETFs that hold TIPS. Read more.
Do Your Homework To Understand Mutual Funds and Their Fees
The Supreme Court finally examined the problem with mutual funds with regards to their fees. The result – not much protection for the average retirement investor. The Court decided to rule against further legislation and to keep the onus of fee due diligence on investors. You can imagine that the $11 trillion mutual fund industry that collects a whopping $90 billion in annual fees rejoiced. To read more about this, read Reuters’ article Supreme Court hands victory to mutual fund industry.
So when it comes to investing in any type of fund, be it index mutual funds, exchange traded funds (ETFs) or mutual funds, investors need to be their own advocate. Do your homework to understand your true costs as no two funds are exactly alike. ’Americans save trillions of dollars for college education and retirement by investing it with funds managed by industry and giants like the Vanguard Group and Fidelity Investments.’
If you are new to the game, beginners should brush up on Investing 101 basics. There are a lot of choices. Make the smartest choice for YOU. Just remember, time is your friend. Money spent on fees today, compounded over time, is money that could be sitting in your retirement account. Do your homework, you will thank yourself later!
Restore and Rethink Your Retirement Dreams by Reevaluating Your Retirement Portfolios
Below is a great check list for retirement planning that came my way courtesy of TIME magazine worth sharing as we take a second (or third) look at our retirement portfolio and wonder if it is on the right track to meet our retirement dreams.
Retirement Planning
They all have numerous components worth serious consideration.
When it comes to investing, “it isn’t enough to simply tend to your 401(k) and pray for Social Security.” Make sure you challenge your current investment portfolio. Should you really be invested in high cost mutual funds, or can you accomplish similar returns and diversification with comparable risk at a lower cost with index funds or exchange traded funds (ETFs)? Challenge your current asset allocation and make sure it really mirrors your financial needs and desires for retirement as well as your tolerance for risk. Question whether you are getting good value from your investment adviser for the cost you are outlaying. Know that there are tools out there to guide and help you do-it-yourself at a much lower cost.
“Your retirement plan probably looks different than it did a few years ago. Yet things aren’t as awful as you might imagine. We’ve turned the corner on some key financial fronts, and it’s both safe and smart to start thinking about your golden years again.”
How Much Is Needed to Comfortably Retire? Plan Your Retirement Portfolio Strategy Now
This mornings Wall Street Journal Sunday had a compelling yet alarming article ‘Do You Have Enough to Retire? Do the Math‘ that highlights the lack of a retirement portfolio strategy for many of the 80 million baby boomers.
“Just how much are you going to need in order to retire comfortably?” the article challenges each of us to ask ourselves. Surprisingly, “fewer than half workers surveyed, 46%, had tried to calculate how much they would need for a comfortable retirement.” The article then takes you through the steps to help you determine how much is enough. ”Based on assumptions made, you will need to save about 20 times the annual income you need your savings to generate.” WOW! And to be even more secure they recommend 25 times. NOW WHAT?!?
A plan is what!!! First take yourself through the article’s ’simple retirement planning worksheet’ then pick up your phone and schedule an appointment with an investment adviser to jump start investing for retirement. For those comfortable tackling this on your own, consider do-it-yourself investing tools. Make sure to have all your account information in front of you to get a clear picture of your financial landscape. It might also be helpful for you to read up on investment options available today so you are informed of their plus and minuses. Being educated will help you navigate through the conversation as they begin rattling off terms such as ‘diversification….asset allocation….rebalancing”. Make sure you also understand the difference between ETFs, mutual funds and index funds. With the goal to have as much money as possible at retirement, you will want to go the route with the lowest cost yet still provide you with diversification and returns.
Congratulations, you are one step closer to retiring comfortably!
Retirement Portfolios Underfunded, Study Reveals — Time to Start Saving
A recent study released by ratelines.com reveals that most Americans retirement portfolios are underfunded, resulting in many being unprepared for retirement. ”Of the 1,153 workers surveyed, 43% have less than $10,000 set aside in their savings accounts for retirement. Approximately 27% of the workforce have less than $1,000 saved. Both percentages have increased since 2009 reports.” Though the number of workers surveyed was not large, I believe it echos the current status of retirement portfolios.
The study concludes that “The decline in retirement preparations could be directly related to companies no longer offering 401(k) matching, layoffs and the housing crisis. Lack of retirement planning forces many to work until they are much older.”
To that I say you need to start investing in the market by establishing your own individual retirement account (IRA). Look to start investing in low cost investment vehicles such as exchange traded funds (ETFs). Not only will you be able to save on fees, that in turn stay in your own portfolio and compound over time, but also they allow you to be in the market with less risk than individual stocks. ETFs are a basket of stocks or bonds that track an index, not individual equities, and thus are inherently less risky. I also suggest utilizing tools offered by marketriders.com to get guidance on how to build a portfolio with an asset allocation that suits your financial needs and offers you diversification.
I realize 2009 was a tough year, but know that any amount you can add to your retirement portfolio today will have greater benefits to you in the future.
From Warren Buffett: Advice Helpful for an IRA Rollover
Warren Buffett is our generation’s Benjamin Franklin, a humble billionaire full of great advice, quips and invaluable insights. While he never gives direct investment advice, one can gleen some helpful hints about investing in one’s IRA Rollover account.
To paraphrase Warren, most investors should “do as I say, not as I do.” The world’s greatest investor warns us against trying to imitate his stock picking abilities. His unwavering advice for years has been to buy index funds because: a) very few people have it in their DNA to be a great investor, and b) those who charge you for their investment expertise can rarely outperform the market due to their onerous fees.
To bring home his advice we’ve pulled together a rare 8 minute Buffett video, evidence a $1 million bet he made, and a fable that he wrote.
A Fable. Read excerpts from Berkshire Hathaway’s 2005 and 2006 annual reports where Buffett describes what happens to the imaginary Gotrocks family when they begin taking help from Wall Street.
“…imagine for a moment that all American corporations are, and always will be, owned by a single family. We’ll call them the Gotrocks… In the Gotrocks household everyone grows wealthier at the same pace, and all is harmonious. But let’s now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others…. The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend, and in a wide variety of ways, they urge it on.”
The $1m Wager. Buffett bet Protégé partners, a fund of hedge funds, $1,000,000 that over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses. Buffett’s bet is a bet on high fees. His view: regardless of how good the money managers are, the hedge fund fee structure is so high, that it will, over 10 years, wipe away any gains achieved from beating the market.
The Lecture. Warren Buffett spoke to a group of students at the University of Florida and answered questions for ninety minutes about his investment philosophy. Fast forward to the 1:15 minute mark on this great video where he says:
“If you are not a professional investor, if your goal is not to manage money in such a way that you get a significantly better return than world, then I believe in extreme diversification. I believe that 98 or 99 percent – maybe more than 99 percent – of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs. All they’re going to do is own a part of America. They’ve made a decision that owning a part of America is worthwhile. I don’t quarrel with that at all – that is the way they should approach it.”
Just because you can pick up a golf club doesn’t mean you should bet all your savings on your getting on the PGA tour. And just because you (or someone in a suit at an investment management firm) can place a trade at an online broker, doesn’t mean you figure out a better strategy than using index funds in an asset allocation strategy for your retirement investing.
Do as I say, not as I do. Thank you Warren.
Resurrecting a Retirement Portfolio — Good Advice and A Warm Glass of Milk
Has your retirement portfolio – or lack there of- got you up at night? If so, consider reading an excellent round-up article by Jan Rosen of the New York Times ‘Now Is A Perfect Time to Reconstruct A Nest Egg‘ that provides an excellent primer on IRA investing. Even though many investors have been hit hard over the recent past, it is now critical, especially as tax day approaches, to revisit ways to build a well structured IRA.
“The turbulent economy of the last two years has left accounts across the nation like beaches after a coastal storm — severely eroded. Clients in their mid- to late 60s are asking, ‘Can I still afford to retire?’ The answer depends on a person or couple’s assets, lifestyle and retirement goals. While retirement may still be feasible for the affluent, those less well-off or younger people whose modest portfolios have been battered need time to rebuild.”
So as you decide on your IRA investment strategy, consider an investment portfolio that provides diversification with an asset allocation fit to your financial goals and risk tolerance. To protect your nest egg from further erosion, also be certain to entertain low cost investment vehicles such as exchange traded funds (ETFs) and index funds. This coupled with a warm glass of milk should help you sleep more soundly at night!
Watch Out For Unnecessary Fees In Your IRA
Despite the fact that money is not everything, we all want to reach retirement healthy and financially stable, highlighting the importance of maximizing one’s IRA . The last few years has definitely shaken that ideal at the core, making it a bit harder for one to believe they will retire as once imagined. This reality has increased one’s attention on how to best plan for retirement. What is the best retirement investing strategy? With an IRA or IRA rollover should one look to invest in mutual funds or index funds? Should you manage your own investing or seek advice from an investment adviser? And what about paying attention to creating an asset allocation suited to your risk tolerance and retirement goals? When answering these questions and entertaining various investment options, make sure you understand the fees that are being paid as they will stand in your way from maximizing your retirement dollars.
Robert Powell of MarketWatch uncovers in his recent article ‘Advice You Can Count On?‘ the dirty little secret of many managed IRA accounts – fees are out of control and returns are down. This has led to recent legislation to bring some fairness back to IRA investing. Even the White House has chimed it stating, “if investment advisers receive compensation for steering workers into investment options with high fees and expenses, they face conflicts of interest that can undermine the reliability of their advice.”
It may be years before any law is passed protecting you from high fees and expenses, so in the meantime consider taking matters into your own hands by managing your own portfolio and investing in index funds or exchange traded funds. The money saved on fees will compound over time making for a more financially stable retirement.