Monday, March 30, 2015

What are the odds you’ll have a comfortable retirement?

Just a few weeks ago, I suspect that many of you prepared your brackets for the NCAA basketball tournament. Hopefully, you’re doing well and have correctly picked at least some of the Final Four.

I can say one thing with absolute certainty, though. Not one of my readers has a chance of finishing with a perfect bracket. That’s because a DePaul University mathematician calculated that you have a one in 9.2 quintillion chance of having a perfect bracket. And I’m sure I don’t have quite that many readers.

For those of you not familiar with the term “quintillion,” it’s a number that has six commas in it. Remember, in math a comma separates every three numbers. For those who may be mathematically challenged, quintillion is a number that is so large it’s almost impossible to get your arms around it. It makes a trillion seem like child’s play.

So don’t feel too badly if, in the next two weeks, you’re eliminated from having a perfect college basketball bracket. Instead, you can put your efforts toward building a nest egg that has not one, but two commas in it. It’s something that many of you have an entire working career to accomplish. Let me explain.

Fidelity, the well-respected mutual fund giant, administers countless 401(k) plans throughout the country. They recently disclosed that the average 401(k) balance at the end of 2014 was $91,300. One comma.

They also indicated that the average annual employee contribution combined with the employer contribution totaled $9,670. For participants that have been in the Fidelity program for ten years or more, the average balance was just shy of $250,000.

Again, these numbers are just from the plans that Fidelity handles, but they show me that people understand that it’s extremely important to set funds aside for retirement. Unfortunately, it also shows that most people are not saving enough to enjoy a comfortable retirement.

That’s why the commas are so important to the equation. This may startle a lot of readers, but I think many households are going to need a nest egg with two commas in it. That’s right, they’ll need at least $1,000,000 to maintain a comfortable retirement lifestyle.

I’m not talking about a luxurious retirement, simply one that can keep a retiree self sustaining for such items as health and long-term care needs, senior housing and all the other expenses that crop up, often deep into the retirement years.

As I previously mentioned, the average Fidelity deposit was just over $9,600 per year. Broken down, that’s $800 per month. If an investor saved $800 per month and attained a hypothetical, yet very reasonable rate of return of five percent per year, and did it every year during their working career of 37 years, the likelihood of having two commas in their retirement nest egg is very high.

Often I kid and say that, when it comes to spending, if you’re drilling down to the decimal points, you can’t afford to retire. Conversely, when it comes to retirement savings, the more commas in your nest egg the more likely you are to be financially secure during the retirement years.

Statistically speaking, you will never achieve a perfect basketball bracket. But if you save consistently for financially secure retirement, it’s a slam-dunk.

Monday, March 23, 2015

It’s about time you started saving

The first Monday morning after we adjusted our clocks for Daylight Savings Time, the topic of time sort of took over the news. Later that day, Apple unveiled the much-anticipated Apple watch. It sounds like the new watch will be able to perform an incredible number of functions, in addition to keeping the time of day, of course.

Also that Monday, although there was never a formal bell to signal a bull market, investment experts agreed that the current bull market started its run precisely six years prior.

In other words, while all of us leaped forward an hour and adjusted to daylight savings time, the most famous tech company in the world unveiled what they believe will be revolutionary changes to the wrist watch. Concurrently, many investment experts, while establishing a beginning for the bull market, continue to debate just how long it can continue without a major correction.

That’s the thing about time: when it is gone, it is gone. You can’t roll back the hands of time, nor can you control it. Fortunately, you can manage it.

One thing that investors, especially young ones, need to learn is how to turn time into an ally. Let’s take a look at an example involving two investors, each earning a hypothetical 10 percent per year.

At the age of 20, Ms. A began saving $2,000 per year every year for 20 years. At that point, after investing a total of $40,000, she totally stopped investing for the next 20 years. That is to say, she let time take over for the final 20 years.

Meanwhile, Mr. B played hard for the first 20 years and saved nothing. Then he suddenly became serious and invested $2,000 per year for the next 20 years; also a total investment of $40,000. Now, both are age 60 and want to accept an early retirement offer from their employer.

On the surface, you might think they’ll both have the same amount of money. After all, they both invested exactly $40,000 for exactly 20 years. Of course, that’s not the case.

Ms. A used time as an ally and benefitted from the magic of compound interest. By starting early and taking advantage of time, her $40,000 will have a value of $317,000. Mr. B who saved the identical $40,000 but began twenty years later will have a significantly smaller amount. Just $82,000. The difference, time!

This is just an example, but it demonstrates that time is an integral yet often overlooked component of investing. Over an extended period of time, the investment world will have its ups and downs. That’s why investors need to begin at a young age and use time to their advantage.

It doesn’t matter what kind of device you use to keep time. It could be with an old sand-filled hourglass or your great grandfather’s Swiss pocket watch. Perhaps you sport a Rolex or maybe even the new high-tech watch from Apple.

What does matter is how you manage time. So, come age 60 when you’re thinking about retirement, which song will you be singing? The Willie Nelson classic “Ain’t It Funny How Time Slips Away?” Or the early Rolling Stones song “Time Is On My Side?”

If you start investing early, I know the answer.

Tuesday, March 17, 2015

Traveling back through time and into the future

Some popular old television shows seem to live on forever. Seinfeld comes to mind, but I believe one television show in particular has gone where no other show has gone before. I’m speaking, of course, about Star Trek.

Leonard Nimoy, aka Mr. Spock, recently passed away. You might forget that he was a stage actor, an author, a poet, a film director and a photographer. You might forget that he had recurring roles on other television series, including Mission Impossible and Fringe.

But you will never forget that he was Spock.

The Spock character he played as an actor was probably his greatest life defining moment. No matter what he did after the Star Trek television series, he was always typecast as Mr. Spock. Years later, even though he was much older, the producers found ways to incorporate his character into the Star Trek film franchise. He even directed a few of them.

Yes, Star Trek and Mr. Spock bring back many memories of the 1960s. But Star Trek was a television show, not real life. Many other significant cultural and social events were taking place. Many other people were rising into prominence.

In no particular order, when I think about the ‘60s, I am reminded of the Kennedys, Dr. Martin Luther King, the Beatles and the British Music Invasion, the Ford Mustang, social unrest in Detroit and, of course, the Tigers winning the 1968 World Series.

I do not mean to slight anyone here. Certainly there were many more significant events and great accomplishments. These people and events are simply those that quickly came to mind.

Getting back to Star Trek, it’s been almost 50 years since it first aired in 1966. At that time, there were no 401(k) retirement programs. In fact, the deductible IRA didn’t come into existence until 1974. True, life expectancy was less than what it is today, but at that time you just had Social Security and savings.

Some, especially autoworkers, were fortunate enough to have pensions, but for most other hard-working citizens there were no other retirement accounts.

A common method for measuring the cost of living is the Consumer Price Index. Using the CPI inflation calculator, it would take $7,200 today to be the equivalent of $1,000 in 1966. I mention this because I fear that too many retirees seem to ignore that costs tend to go up over time.

But while costs may increase, technology improves and competition helps keep costs down. I doubt any of my readers or clients are watching the same television set they had in 1966. Since Star Trek debuted, we now have microwave ovens, wireless telephones, computers, E Readers and Dick Tracy Watches.

The calculator I paid plenty for in college can now be bought at the supermarket for a few dollars. And yet, the cost of living will probably continue to increase over time. Perhaps at an astronomical rate. That’s why people need to continue saving and investing.

As long as research and innovation continue, the quality of life is likely to improve. And with it, the cost of living. Nonetheless, I’m hoping that someday soon, instead of going through the hassles of the airport check-in, I will simply be able to ask the airline attendant to beam me up.

Monday, March 9, 2015

Preparing for the inevitable, no matter how difficult

For the second time in nine months, I buried an aging parent. This time it was my mother-in-law. On one hand, my wife and I were very fortunate to have them for as long as we did. But, as so many others have, we learned that assisting aging parents requires a lot of love, patience and time.

Unfortunately, aging parents often spend a lot of time at medical facilities. That being said, my hat’s off to the professionals in the health care industry. It was quite gratifying to see a doctor stop by the funeral home and comforting for my wife to receive condolences from other doctors.

It was my first real experience with hospice workers and I was truly impressed with the professionalism and the heartfelt concern they displayed.

As children, our parents make our decisions. As they age, we become their decision makers. That’s why it’s so important to know what they really want when they’re no longer capable of deciding for themselves.

As a financial adviser, I can’t stress enough the importance of planning for inevitable events. No matter how difficult discussions may be they can lead to appropriate actions and help minimize potential family conflict.

To my dismay, many go entire lifetimes without drafting a will or trust. Even approaching the back nine of life, they fail to complete the Durable Power of Attorney forms for health care decisions.

Ignoring discussions doesn’t eliminate problems; it often makes them worse because there is no resolution. It’s unfair to put too much on one sibling’s shoulders without adequate instructions or documentation.

Even when planning for life goals such as retirement, it’s important to prepare for the unexpected. You never know what lies ahead. I’ve worked with numerous clients that never quite close the planning loop.

For example, many have accumulated a substantial nest egg. When asked if all their children are capable of handling a large lump sum distribution, most couples smile and point out that one of their children will quickly and inevitably blow their inheritance.

With proper planning, you can put restrictions for specified beneficiaries on IRA distributions. With trusts, you can also dictate periodic distributions as opposed to lump sum.

A frequent mistake I encounter is aging parents putting their financial assets into joint ownership with adult children. Even if they all get along, how do the assets get distributed fairly to others without gift tax or adverse income tax issues? In most instances, they cannot.

Without proper life planning, families can be torn apart over money issues while mom or dad is hospitalized. The time to do end-of-life planning is when you’re in good health and have your wits. All parents should dictate what measures they want taken by medical professionals.

My father’s wishes were clear and there was no need for the emergency medical teams to attempt revival. My mother-in-law’s wishes and instructions made it easier for my wife and her siblings to say enough is enough and bring her home one last time.

Proper financial planning isn’t just accumulating wealth for such life goals as a college education. It also includes end-of-life instructions and post-life distributions to loved ones and charities, thereby enabling happy memories to live on. Poor planning can often lead to family turmoil and conflict.

Monday, March 2, 2015

Bonds, Lame Bonds: You can lose money as a bondholder

I can say with some certainty that most households are in better financial shape now than they were during the recent financial crisis that crippled the entire economy. In the years ahead, when historians look back at that financial meltdown, I believe we’ll discover that we were a lot closer to a financial collapse than we realized.

Things do seem to be improving, although perhaps not at the level we’d like to see. But it does appear that we are heading further and further away from a meltdown.

Locally, we nearly lost our region’s heart and soul, the auto industry. We also saw our state’s major city go through a long and contentious bankruptcy proceeding. From an investor’s perspective, I’d like to address bondholders about a couple of lessons we learned from these events.

To review, bonds are essentially nothing more than IOU’s. They are debt instruments with a promise to pay back the loaned amount plus interest. Bonds are generally considered safer than stocks, but as history shows, it’s possible to lose money when investing in bonds, just as with stocks.

That’s somewhat contrary to what you learn in financial planning classes. Bondholders are supposed to be the first in line to get paid in the event that something goes wrong with the company.

Looking back, when the auto industry was near collapse and trying to settle with creditors, I was somewhat stunned that the bondholders who thought they were first to be paid were, in essence,

demoted and pushed back in line behind the auto unions.

Don’t get me wrong. I’m not bashing the unions; it was a good thing for them. But the whole procedure was contrary to what was taught in financial planning classes. Seeing that bondholders weren’t the first in line was quite a surprise.

For years, the city of Detroit borrowed money to meet many of its legal obligations. The investors who loaned the money to the city, the bondholders, loaned it because there were legal provisions that they thought guaranteed they would be paid. As it turned out, the bondholders did not get back what they thought they were guaranteed.

From the near collapse of the auto industry and the city of Detroit’s bankruptcy, I believe there are some serious lessons bondholders need to learn.

One obvious takeaway is that, in spite of the legal requirement, you may not get paid as promised, especially if the borrower is having financial issues. Apparently, the financial condition of the company or organization can outweigh your legal claims.

Another lesson you should learn as an investor is that, rightly or wrongly, you are considered Wall Street. If there is ever an issue that pits Wall Street against Main Street, you can be sure that the sentiment lies with Main Street.

In this day and age, not only do rules change faster than the weather, there are also exceptions to every rule. As an investor, in this case a bondholder, you are simply on the wrong side of public opinion.

Again, it’s great that the auto industry has rebounded and Detroit can put its bankruptcy behind it. Unfortunately, many investors were surprised that they lost money in what they thought were conservative, low-risk bond investments. Looking ahead, that’s something