MONEY 401k plans

The Secrets to Making a $1 Million Retirement Stash Last

door opening with Franklin $100 staring through the crack
Sarina Finkelstein (photo illustration)—Getty Images (2)

More and more Americans are on target to save seven figures. The next challenge is managing that money once you reach retirement.

More than three decades after the creation of the 401(k), this workplace plan has become the No. 1 way for Americans to save for retirement. And save they have. The average plan balance has hit a record high, and the number of million-dollar-plus 401(k)s has more than doubled since 2012.

In the first part of this four-part series, we laid out what you need to do to build a $1 million 401(k) plan. We also shared lessons from 401(k) millionaires in the making. In this second installment, you’ll learn how to manage that enviable nest egg once you hit retirement.

Dial Back On Stocks

A bear market at the start of retirement could put a permanent dent in your income. Retiring with a 55% stock/45% bond portfolio in 2000, at the start of a bear market, meant reducing your withdrawals by 25% just to maintain your odds of not running out of money, according to research by T. Rowe Price.

150320_MIL_TameMix
Money

That’s why financial adviser Rick Ferri, head of Portfolio Solutions, recommends shifting to a 30% stock and 70% bond portfolio at the outset of retirement. As the graphic below shows, that mix would have fallen far less during the 2007–09 bear market, while giving up just a little potential return. “The 30/70 allocation is the center of gravity between risk and return—it avoids big losses while still providing growth,” Ferri says.

Financial adviser Michael Kitces and American College professor of retirement income Wade Pfau go one step further. They suggest starting with a similar 30% stock/70% bond allocation and then gradually increasing your stock holdings. “This approach creates more sustainable income in retirement,” says Pfau.

That said, if you have a pension or other guaranteed source of income, or feel confident you can manage a market plunge, you may do fine with a larger stake in stocks.

Know When to Say Goodbye

You’re at the finish line with a seven-figure 401(k). Now you need to turn that lump sum into a lasting income, something that even dedicated do-it-yourselfers may want help with. When it comes to that kind of advice, your workplace plan may not be up to the task.

In fact, most retirees eventually roll over 401(k) money into an IRA—a 2013 report from the General Accountability Office found that 50% of savings from participants 60 and older remained in employer plans one year after leaving, but only 20% was there five years later.

Here’s how to do it:

Give your plan a shot. Even if your first instinct is to roll over your 401(k), you may find compelling reasons to leave your money where it is, such as low costs (no more than 0.5% of assets) and advice. “It can often make sense to stay with your 401(k) if it has good, low-fee options,” says Jim Ludwick, a financial adviser in Odenton, Md.

More than a third of 401(k)s have automatic withdrawal options, according to Aon Hewitt. The plan might transfer an amount you specify to your bank every month. A smaller percentage offer financial advice or other retirement income services. (For a managed account, you might pay 0.4% to 1% of your balance.) Especially if your finances aren’t complex, there’s no reason to rush for the exit.

Leave for something better. With an IRA, you have a wider array of investment choices, more options for getting advice, and perhaps lower fees. Plus, consolidating accounts in one place will make it easier to monitor your money.

But be cautious with your rollover, since many in the financial services industry are peddling costly investments, such as variable annuities or other insurance products, to new retirees. “Everyone and their uncle will want your IRA rollover,” says Brooklyn financial adviser Tom Fredrickson. You will most likely do best with a diversified portfolio at a low-fee brokerage or fund group. What’s more, new online services are making advice more affordable than ever.

Go Slow to Make It Last

A $1 million nest egg sounds like a lot of money—and it is. If you have stashed $1 million in your 401(k), you have amassed five times more than the average 60-year-old who has saved for 20 years.

But being a millionaire is no guarantee that you can live large in retirement. “These days the notion of a millionaire is actually kind of quaint,” says Fredrickson.

Why $1 million isn’t what it once was. Using a standard 4% withdrawal rate, your $1 million portfolio will give you an income of just $40,000 in your first year of retirement. (In following years you can adjust that for inflation.) Assuming you also receive $27,000 annually from Social Security (a typical amount for an upper-middle-class couple), you’ll end up with a total retirement income of $67,000.

In many areas of the country, you can live quite comfortably on that. But it may be a lot less than your pre-retirement salary. And as the graphic below shows, taking out more severely cuts your chances of seeing that $1 million last.

150320_MIL_Withdrawals
Money

What your real goal should be. To avoid a sharp decline in your standard of living, focus on hitting the right multiple of your pre-retirement income. A useful rule of thumb is to put away 12 times your salary by the time you stop working. Check your progress with an online tool, such as the retirement income calculator at T. Rowe Price.

Why high earners need to aim higher. Anyone earning more will need to save even more, since Social Security will make up less of your income, says Wharton finance professor Richard Marston. A couple earning $200,000 should put away 15.5 times salary. At that level, $3 million is the new $1 million.

MONEY Love and Money

11 Financial Clues That Your Spouse Wants a Divorce

torn dollar bill
Getty Images

Certain changes in financial behavior and conversations about money are sure-fire signs that your spouse is preparing to split up.

Over 25 years, I’ve worked on the financial aspects of more than 1,300 cases of divorce. Rarely are both spouses in sync when it comes to filing; one spouse is usually laying the groundwork before the other.

In hindsight, most people on the receiving end of the filing have their “aha!” moment. One homemaker told me that her husband began plying her with gifts and vacations; he also launched all kinds of projects to fix up their house so they could sell it and move to a smaller place. It was all totally unsolicited, much appreciated, and done with loving attention.

Six months into all this thoughtful behavior — as the the couple closed on their new vacation timeshare, downsized to a beautiful condo, and planned for their next vacation — he popped the zinger one Saturday morning: “I want a divorce.”

For another client, the signs were a little more obvious: The bank called her husband to let him know that his mortgage was approved — the mortgage he was co-signing with his girlfriend.

Divorce is an emotional, legal, and financial combat zone. There are actually websites devoted to secretly planning for divorce, in order to “win” the best one possible. Divorces can have win-lose, win-win, or lose-lose outcomes. Preparation helps your case. And the earlier you recognize that divorce is imminent, the better you’ll be able to prepare.

Over the years, I have come up with a list of sure-fire financial indicators that your spouse is heading toward divorce. Changes in behavior about money — some subtle, some not — can be tell-tale signs of a split in the offing.

Most of the time, changes in financial behavior accompany classic non-money signs of marital trouble: lack of communication, stress, physical separation, arguments, and isolation. But it helps to be on the lookout for financial signs on their own. And here’s a good list:

Your spouse…

  1. Argues about money.
  2. Seems to be hiding money.
  3. Has no explanation for why money is missing.
  4. Has stopped direct deposits to your joint bank account.
  5. Puts you on a budget and demands an accounting of all of your spending.
  6. Makes large cash withdrawals.
  7. Pays for his/her own credit card bills — or better yet, has his/her mail sent to the office.
  8. Goes on more business trips than usual and has greater travel and entertainment expenses.
  9. Blindsides you with gifts and trips.
  10. Reduces contributions to savings or retirement. Excess cash is now spent or socked away somewhere else.
  11. Takes out loans because it is a “smart” financial decision during times of low interest rates.

Along with these changed behaviors, there’s a whole other set of red flags to look out for: a noticeable turn for the worse in how your spouse talks about his or her earnings, workplace achievements, or business prospects. He or she starts complaining a lot about money — how business is bad, how jobs are at risk, how this year’s bonus is in doubt.

If your spouse is suddenly and remarkably gloomy about his or her ability to make money, this might be premeditated strategy to lower your financial expectations in a divorce. Attorneys even have a name for it: RAIDS, for “recently acquired income deficiency syndrome.”

On the bright side, if you are familiar with your spouse’s business, customers, and performance reviews, it will be hard for your spouse to paint a credible picture of unexpected gloom. So keep your eyes set on financial reality and do your homework if your spouse complains in detail about the following:

  1. His/her earnings potential is at its peak and is at risk.
  2. Bonuses are reduced or nonexistent.
  3. Company layoffs are imminent or overdue.
  4. The employer has declining revenues and sales.
  5. Clients are deserting the company.
  6. His/her sales territory has been cut despite solid job performance.
  7. It’s the economy, stupid!
  8. His/her age is a negative factor in the business, and he/she is at risk of being fired for being too old.
  9. Our family spending is rampant and unsustainable with probable loss of income or job.

If you start hearing these complaints, it’s time to organize your financial wits and get a handle on your financial lifestyle. If you’re surprised to have a spouse who seems to be premeditating divorce, empower yourself and hire a divorce financial planner. A divorce financial planner will cut through your emotional tangles to track your financial issues and provide a foundation for you to advocate your needs, when and if you should hire an attorney.

———-

Vasileff received the Association of Divorce Financial Planners’ 2013 Pioneering Award for her public advocacy and outstanding leadership in the field of divorce financial planning. Vasileff is president emeritus of the ADFP and is a member of NAPFA, FPA, and IACP. She is president and founder of Divorce and Money Matters, serving clients nationwide from Greenwich, Conn. Her website is http://www.divorcematters.com.

 

MONEY

Keeping Calm When the Market Goes South

150305_INV_KEEPCALM
iStock

A financial adviser shares tips for easing anxiety in a rollercoaster market.

“It’s been too good for too long,” my client said.

She had every right to feel suspicious. With the markets appearing to be at an all-time high, she was justified in having that waiting-for-the-other-shoe-to-drop instinct. I understood her desire to tread cautiously.

The majority of baby boomers are at a crossroad in their lives: They want to retire, they should retire, and it’s time to retire. But they are extremely nervous nowadays about the markets’ record-breaking levels.

Over my many years of experience working with clients in this situation — they’re ready to retire, but they can’t quite pull the trigger — I’ve seen how scary it can be to make that potentially irrevocable decision. What if markets go down? Should they have waited? What if this, what if that?

It is human nature to question ourselves at times like these, but then again, times are always a bit uncertain.

I have found that the most important step in keeping clients calm in a volatile market is to have an investment education meeting regarding their risk level and market volatility at the start of our working relationship and routinely thereafter. Our clients are actively involved in assessing their own risk tolerance and choosing a portfolio objective that suits their long-term goals.

We also want to set the right expectation of our management so our clients know that we never sell out of the market just because things are starting to go bad. Market timing has not proven to be a successful growth strategy, which is why we work with our clients upfront to establish a portfolio and game plan they can live with.

Unfortunately, the inevitable will happen: The markets will go south, and clients will panic. How can financial planners ease clients’ anxiety? Here are a few suggestions:

  • Discuss defensive tactics. Show clients the dollar amounts they have in bonds and other fixed income. Translate that into the number of years’ worth of personal spending that is not in the stock market. Have an honest conversation about if that number will be enough over the long-term.
  • Leave emotion out of it. Talk to them about the danger of selling at the wrong time and illustrate how emotional decisions tend to do more harm than good. Remind them of how quickly markets can turn around after a big drop. It’s been known to happen on more than one occasion, so share your knowledge of these experiences. Let them know that you don’t want them to miss the upside.
  • Look at the positives. Reinvesting dividends and capital gains? Are clients making monthly contributions to a 401(k) or other investment accounts? Remind your clients that when markets are down they are buying at lower prices, which can work well for their strategy over the longer term. A down market also often makes investing easier and less frightening to buy, so that might be the time to purchase any equities they once worried were too expensive.

The markets will always have some level of volatility. As an adviser providing regular guidance and support, you want to do everything you can to help clients not overreact to the daily news, hard as it might be. Urge them to continue to think long-term. It may not always be easy to see, but today’s bad news may just be a client’s big buy opportunity, and they won’t want to miss that!

———-

Marilyn Plum, CFP, is director of portfolio management and co-owner of Ballou Plum Wealth Advisors, a registered investment adviser in Lafayette, Calif. She is also a registered representative with LPL Financial. With over 30 years of experience in the financial advisory business, Plum is well-known for financial planning expertise and client education on wealth preservation, retirement, and portfolio management.

MONEY Aging

Handling Family Finances When Dad Is Losing His Grip

family of piggy banks
Sean McDermid/Getty Images

When the person in charge of family finances has dementia or Alzheimer's disease, a difficult transition is required.

A client’s daughter told me recently that she was beginning to notice her father having difficulties with memory and comprehension.

I had known that her father’s health had deteriorated somewhat, but he still seemed relatively sharp mentally up until the last conversation I’d had with him, around Christmas time.

The client’s wife has never been very involved in the family finances, and his son lives out of town. The daughter has been playing caretaker for some time. Now it seemed we needed to have a more in-depth conversation with everyone involved regarding family finances, longevity and what happens after the patriarch has passed away or can’t function as financial head of the household.

The loss of a loved one is unbearable, but far worse is losing a loved one to cognitive conditions such as Alzheimer’s disease or dementia. These decisions may cause personality changes. In some cases, a client may become belligerent or paranoid, especially when dealing with financial issues.

It is always preferable to have a client himself or herself acknowledge that something is wrong, but this may not always be the case. For this reason, financial advisers need to have a plan in place to address situations such as this one.

The first step is to get the family involved. Most of the time, the spouse or children will already be aware of the issue.

In this particular case, I could not discuss financial details with the daughter without a financial power of attorney. Fortunately, we were able to schedule a time for father, mother and daughter to meet and discuss family finances.

What if someone refuses to admit that he is losing his mental acuity? We dealt with this a few years back with another client. He was going through a divorce at the time — a process which may have either contributed to, or resulted from, his mental decline. We ended up being a part of an intervention involving the client, his children, his business partner and his pastor. The pastor referred him to a psychiatrist; luckily, the client pursued treatment that helped.

The key to handling many of these situations is having a ready stable of referable professionals in all aspects of life. In addition to the colleagues we deal with on a regular basis, such as lawyers and accountants, it is helpful to have contacts in the arenas of medicine and psychology.

Solid and consistent documentation is a standard in our industry, but it becomes absolutely imperative when dealing with cognitively questionable clients. Keeping communication records protects everyone involved and can go a long way to explaining client actions to family members if they are unaware of the problem.

Things don’t always go so smoothly. In some situations, you must fire the client. We have had to have these tough conversations in the past. It would be nice to say that we are always able to help facilitate a changing of the guard, but many of these personality issues are beyond our control. When cutting ties, it is important to do it with an in-person meeting. We’re honor-bound to do what’s best for the client, but it is also important to protect our practice. If we are unable to make progress, it may be best for clients to find someone who can better help them.

I’m very thankful the daughter came to me, rather than my having to reach out and have what could have been an unpleasant conversation. At this point we have now gathered financial powers of attorney and reviewed updated wills and trusts, coordinating with the family attorney. The mother and daughter are much more aware of the family financial situation and are not nearly as fearful about the future. I expect the daughter will take a more active role in the management of the family’s finances. We want to make sure that everyone involved is aware of, and on board with, the transition.

———-

Joe Franklin, CFP, is founder and president of Franklin Wealth Management, a registered investment advisory firm in Hixson, Tenn. A 20-year industry veteran, he also writes the Franklin Backstage Pass blog. Franklin Wealth Management provides innovative advice for business-minded professionals, with a focus on intergenerational planning.

MONEY Financial Planning

Financial Advice Is Good, but Emotional Well-Being Is Better

On the surface, good financial planners help you manage your money. Dig down deeper, though, and they're improving your emotional life.

On the surface, comprehensive financial planners provide advice and services in areas such as investments, retirement, cash flow, and asset protection.

We need to drill deeper, however, to get at a planning firm’s core purpose. After exploring this question over recent months, my staff and I have agreed that our core purpose is to transform the financial and emotional well-being of people. That’s the part of our work that gets us out of bed in the morning.

Here’s a closer look at the three key words of that purpose:

  • Transform: To achieve long-term financial health, people often need to transform their relationship with money by making permanent changes in their attitudes, beliefs, and behaviors. An example of transformation might be someone learning to reframe a money script that has blocked their ability to save for the future.
  • Well-being: This is a multidimensional word that includes financial, emotional, and physical aspects of people’s lives. Our purpose focuses on both the financial and emotional aspects. Since some 90% of all financial decisions are made emotionally, separating financial and emotional well-being is almost impossible.
  • People: By referring to “people” rather than “clients,” we acknowledge that, in order to foster transformation and well-being for our clients, we also need to be concerned about the well-being of all the members of our staff.

Once a firm has defined its core purpose — the “what” — the next step is to create a framework of principles to accomplish that purpose. This is the “how” that guides the operations of the company. The principles might be something like the following:

We…

  • Put clients first.
  • Guide people to reach a destination in an unfamiliar area.
  • Give sound advice and creative solutions.
  • Constantly educate ourselves.
  • Practice what we preach.
  • Are serial innovators.

Finally, behind the “what” and “how” of what a firm does is the “why.” These are the core values, the touchstone that brings everyone in the company together and forms the basis of the company’s culture. These values are non-negotiable. Even though a company’s purpose or principles may change over time, the values will stay the same. Core values might include:

  • Trust. Our work and personal interactions are based on real, unquestionable evidence, reliability, and trustworthiness.
  • Unbiased Advocacy. We are defenders, supporters, and interceders on behalf of our clients and one another.
  • Well-Being. Everything we do is in support of achieving and maintaining, for our clients and one another, a state of being happy, healthy, and prosperous.
  • Continuous Improvement. We focus on improving our processes, our client experience, and ourselves.

In defining the core purpose for a comprehensive financial planning firm, it’s essential to appreciate the importance of both financial health and the well-being it supports. One can’t have well-being without the financial means to support physical health and emotional happiness.

This is why our firm defines its purpose as transforming people’s financial and emotional well-being. This core purpose is based on the belief that comprehensive financial planning goes beyond building financial independence. It also helps clients and staff members change destructive money behaviors, clarify goals, and achieve the dreams that represent happiness to them. In the broadest sense, real financial planning offers investment advice that supports people’s investment in their own well-being.

———-

Rick Kahler, ChFC, is president of Kahler Financial Group, a fee-only financial planning firm. His work and research regarding the integration of financial planning and psychology has been featured or cited in scores of broadcast media, periodicals and books. He is a co-author of four books on financial planning and therapy. He is a faculty member at Golden Gate University and the former president of the Financial Therapy Association.

MONEY financial advisers

Proposed Retiree Safeguard Is Long Overdue

businessman putting money into his suit jacket pocket
Jan Stromme—Getty Images

The financial-advice regulations pushed by the Obama administration will save retirees, on average, an estimated $12,000.

When you are planning for retirement and ask for advice, whose interest should come first — yours or the financial expert you ask for help?

That is the question at the heart of a Washington debate over the unsexy-sounding term “fiduciary standard.” Simply put, it is a legal responsibility requiring an adviser to put the best interest of a client ahead of all else.

The issue has been kicking around Washington ever since the financial crisis, and it took a dramatic turn on Monday when President Barack Obama gave a very public embrace to an expanded set of fiduciary rules. In a speech at AARP, the president endorsed rules proposed by the Department of Labor that would require everyone giving retirement investment advice to adhere to a fiduciary standard.

The president’s decision to embrace and elevate fiduciary reform into a major policy move is huge.

“The White House knows that this is the most significant action it can take to promote retirement security without legislation,” said Cristina Martin Firvida, director of financial security and consumer affairs at AARP, which has been pushing for adoption of the new fiduciary rules.

Today, financial planning advice comes in two flavors. Registered investment advisors (RIAs) are required to meet a fiduciary standard. Most everyone else you would encounter in this sphere — stockbrokers, broker-dealer representatives and people who sell financial products for banks or insurance companies — adhere to a weaker standard where they are allowed to put themselves first.

“Most people don’t know the difference,” said Christopher Jones, chief investment officer of Financial Engines, a large RIA firm that provides fiduciary financial advice to workers in 401(k) plans.

The difference can be huge for your retirement outcome. A report issued this month by the President’s Council of Economic Advisers found that retirement savers receiving conflicted advice earn about 1 percentage point less in returns, with an aggregate loss of $17 billion annually.

The report pays special attention to the huge market of rollovers from workplace 401(k)s to individual retirement accounts — transfers which often occur when workers retire. Nine of 10 new IRAs are rollovers, according to the Investment Company Institute mutual fund trade group. The CEA report estimates that $300 billion is rolled over annually, and the figures are accelerating along with baby-boom-generation retirements.

The CEA report estimates a worker receiving conflicted advice would lose about 12% of the account’s value over a 30-year period of drawdowns. Since the average IRA rollover for near-retirees is just over $100,000, that translates into a $12,000 loss.

What constitutes conflicted advice? Plan sponsors — employers — have a fiduciary responsibility to act in participants’ best interest. But many small 401(k) plans hire plan recordkeepers and advisers who are not fiduciaries. They are free to pitch expensive mutual funds and annuity products, and industry data consistently shows that small plans have higher cost and lower rates of return than big, well-managed plans.

The rollover market also is rife with abuse, often starting with the advice to roll over in the first place. Participants in well-constructed, low-fee 401(k)s most often would do better leaving their money where it is at retirement; IRA expenses run 0.25 to 0.30 percentage points higher than 401(k)s, according to the U.S. Government Accountability Office. Yet the big mutual fund companies blitz savers with cash come-ons, and, as I wrote recently, very few of their “advisers” ask customers the basic questions that would determine whether a rollover is in order.

The industry makes the Orwellian argument that a fiduciary standard will make it impossible for the industry to offer cost-effective assistance to the middle class. But that argument ignores the innovations in technology and business practices that already are shaking up the industry with low-cost advice options.

How effective will the new rules be? The devil will be in the details. Any changes are still a little far off: TheDepartment of Labor is expected to publish the new rules in a few months — a timetable that already is under attack by industry opponents as lacking a duly deliberative process.

Enough, already. This debate has been kicking around since the financial crisis, and an expanded fiduciary is long overdue.

MONEY financial advice

The Investing Danger That Smart People Face

man sitting in front of a wall of certificates
C.J. Burton—Corbis

You may be brilliant and a giant in your profession, but that can get you into a lot of trouble.

While returning from a business flight last year, I experienced a queasy stomach sensation. Later than night I woke up with searing pain across my abdomen. At my internist the next morning, I asked, “Do I have food poisoning?”

“I would say something more serious,” the doctor replied. “We need to get you a CAT scan.”

Off to the imaging center. The radiologist came out: “You have appendicitis,” he said. “You cannot pass Go, you cannot collect $200. You have to go straight to the emergency room. Take this copy of your images.”

I checked in at the hospital and was triaged. I slumped in a corner, clearing my email and calling the office. Eventually a doctor came out and asked why I was there.

“I have appendicitis,” I replied.

“Really?” he said. “Did you self-diagnose on WebMD?”

“No,” I said. “I went to a radiologist. I have slides! Look at my slides.”

He did, and then he operated on me.

In recovery later that day, I realized my surgeon has the exact same problem I have: “Yeah, doc, I know you have a medical degree and 30 years of experience, but I’ve been reading WebMD and I think…”

Or in my case: “Yeah, Dave, I know you have an MBA and 30 years of investing experience, but I’ve been reading [pick one] Motley Fool/Zero Hedge/CNBC/TheStreet.com, and I think…”

What do I say when clients think they know more than I do?

At my firm, we work with executive families. Our clients are brilliant; many have advanced degrees from top universities. These clients have ascended to the pinnacles of their careers and are accustomed to being the smartest person in the room.

Trouble starts, though, when the clients confuse brilliance with experience. For the most part, the clients let us do our job, but every once in a while, we’ll get an order along the lines of:

  • “Buy Shake Shack in my account.”
  • “Put 50% of my assets in emerging markets.”
  • “Put 100% of my assets in cash! So-and-so says the sky is falling!”
  • “My 14-year-old has ideas for restructuring the portfolio.”

We could say, “That is a stupid idea. We are totally not going to do that.” But that approach leads to resentful clients who may take their resentment, and their account, to another adviser.

I prefer to use these requests as opportunities for education, laced with humor. Several clients asked us about the Shake Shack IPO in January. We showed them a simple metric: stock market capitalization divided by store count. We asked, “If Shake Shack is valued at $26 million per store and McDonald’s is valued at $2.6 million per store, do you think that the Shake Shack burger is ten times better than the McDonald’s burger?” That reality check then led us into a discussion of the risks and rewards of emerging growth stocks versus value stocks.

Clients have told me that picking stocks must be easy.

“Really?” I say. “Do you like to play poker?”

“Love playing poker,” comes the reply. “Every Saturday with my buddies.”

“Really? Do you ever go to Atlantic City and play with the pros?”

“Gosh, no! I’d get my eyeballs ripped out.”

“Really? You don’t have an edge in poker, but you think you do have an edge in stock picking, which is 10,000 times more complicated than poker? Really?”

I started investing at 17, so it’s not out of the question that a 14-year-old might have good ideas (though the same parents who think their child could manage their portfolio never allow that kid to drive their car). If a parent wants to involve a child, we’ll send that child several books on investing and instructions on how to “paper trade.” If the child is willing to paper trade for a year and show me the results, I’m willing to take his or her input. (That conversation hasn’t happened yet, but one day!)

Ultimately, there has to be a line we won’t cross. If a client starts sending daily orders, or even worse, jumping into his or her accounts and making trades without us, we have to fire the client. That is a no-win situation for us: Anything that goes well in the portfolio is because of the client’s brilliance, while anything that goes badly is our stupidity. We’ll set that client free to make room for clients who do respect our expertise.

———-

David Edwards is president of Heron Financial Group | Wealth Advisors, which works closely with individuals and families to provide investment management and financial planning services. Edwards is a graduate of Hamilton College and holds an MBA in General Management from Darden Graduate School of Business-University of Virginia.

MONEY retirement planning

The Proven Way to Retire Richer

Looking for more money for your retirement? Who isn't? This study reveals that there is one sure-fire way to get it.

Last June, the National Bureau of Economic Research with professors from the University of Pennsylvania, George Washington University, and North Carolina State University, released a study entitled “Financial Knowledge and 401(k) Investment Performance”.

In it the authors found that individuals who had the most financial knowledge — as measured through five questions about personal finance principles — had investment returns that were on average 1.3% higher annually — 9.5% versus 8.2% — than those who had the least financial knowledge.

While this difference may not sound consequential, the authors noted that it “is a substantial difference, enhancing the retirement nest egg of the most knowledgeable by 25% over a 30-year work life.”

Yes, knowing the answers to five questions had a direct correlation to having 25% more money when you retire.

So what are those questions? For example, and for the sake of brevity, here are the first three:

Interest Rate: Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

Answers: More than $110, Exactly $110, Less than $110.

Inflation: Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?

Answers: More than today, Exactly the same, Less than today.

Risk: Is this statement True or False? Buying a single company’s stock usually provides a safer return than a stock mutual fund.

While the questions aren’t complex, they’re tough. And few people can answer all three correctly (with the answers being: More than $110, Less Than Today, and False).

So what did those people who were able to answer those questions most accurately actually do to generate the highest returns? The authors found one of the biggest reasons was that the most financially literate had the greatest propensity to hold stocks (66% of their portfolio was in equity versus 49% for those who scored lowest). And while their portfolios were more volatile, over time, they had the best results.

This is critical because it underscores the utter importance of understanding asset allocation. This measures how much of your retirement savings should be put in stocks relative to bonds. A general guideline is the “Rule of 100,” which suggests your allocation of stocks to bonds should be 100 minus your age. So, a 25-year-old should have 75% of their retirement savings in stocks.

Some have suggested that rule should be revised to the rule of 110 or 120 — and my gut reaction is 110 sounds about right — but you get the general idea.

This vital distinction is important because over the long-term stocks outlandishly outperform bonds. If you’d invested $100 in both stocks and bonds in 1928, your $100 in bonds would be worth roughly $7,000 at the end of 2014. But that $100 investment in stocks would be worth more than 40 times more, at $290,000, as shown below:

Of course, between the end of 2007 and 2008, the stock investment fell from $178,000 to $113,000, whereas the bonds grew from $5,000 to $6,000, displaying why someone who needs the money sooner rather than later should stick to bonds. But a 40-year-old who won’t retire for another 20 (or more) years can weather that storm.

Whether it’s $100 or $1,000,000, watching an investment fall by nearly 40% in value is gut wrenching. But in investing, and in life, patience is key, and as Warren Buffett once said, “The stock market serves as a relocation center at which money is moved from the active to the patient.”

While everyone’s personal circumstances are different (my risk tolerance is vastly greater now than it will be in 30 years) knowing that you can be comfortable allocating a sizable amount of your retirement savings to stocks will yield dramatically better results over time.

MONEY Love and Money

A 3-Step Plan for Avoiding Money Arguments

black and white chess pieces on top of stack of money on chessboard
Hitoshi Michael—iStock

It's normal for couples to have disagreements about money. Here's a guide to overcoming them.

The last really big money fight my wife and I had was about a vacation. Yes, after 23 years of marriage, the very thing that was meant to bring joy to our lives was causing each of us to seriously question whether we had married the right person.

Since I’ve spent my entire career helping people with their finances, you might think that I would be a good person to talk to about money. Unfortunately, this wasn’t true for my wife.

But is it any surprise that a big decision with significant financial implications can lead to a heated conversation? After all, how you spend money is deeply personal, because it is an expression of what you value.

So how can people make the best decisions together when they come to those decisions with different values?

This question is more complex than it seems, because seldom are big decisions simply economic and intellectual. They usually have emotional implications. And three major obstacles get in the way of making sound money choices: One, we are all biased in our perspective about money. Two, we feel like we are right even if the facts disagree with us. And three, deferring a discussion about money with a loved one can frustrate us, leading to an explosion over a seemingly small issue.

Here’s a three-step plan to help you the next time you and someone close to you have to make a big money decision:

1. Know your biases.

I am a protector. I grew up in Zimbabwe, Africa, in an environment of scarcity and need. I worked from age 11 to have money. My wife grew up in Los Angeles with a very different life, one with financial stability. She is a giver and a pleasure seeker. I want money to give me security; she wants money to share with family and to enjoy life. I concentrate on the cost of things; she thinks more about the enjoyment something can bring. There’s no right or wrong way to view money, but it definitely affects how we think and feel about financial choices. When it came to our vacation, she wanted it to be longer than I felt was prudent. We both felt strongly about our perspectives. Knowing what biases we each bring to a financial decision helps us to take a more balanced approach. My firm’s Money Mind Analyzer tool can help you and your partner understand your money personalities.

2. Look for a compromise rather than a choice.

When it comes to money conversations, we often decide a firm choice has to be made. What we are really making, however, is a tradeoff between different preferences. Emotions are natural when it comes to big decisions, but they can lead to real lasting frustration. Why? Because they often end with one person convincing the other to “see it my way.” But the best answer is often a compromise of perspectives. I tend to be the more outspoken person, and that simply wasn’t fair to my wife. She was rightly frustrated at not having her voice or opinions heard. So look for the middle ground where you can both win a little.

3. Have a disciplined process.

One of the best pieces of advice I have ever been given is to have scheduled meetings with my spouse to discuss life and our choices. Having the right mindset can change everything. We have a weekly meeting now with a list of things we need to jointly decide. We have rules, like staying calm and hearing each other’s perspective. We also use a checklist whenever we have a big decision to make. Ready to start holding regular meetings to discuss important financial matters? You can use a checklist our firm has developed to help people come to an agreement about a big decision.

There is no magic to living a great financial life. It’s all about your choices and how you make them. If you are on the voyage with someone else, then finding a positive way to decide together will make your life meaningfully better.

After that big fight about that family vacation, my wife and I decided that we had to find a different way. We still have different perspectives and passionate disagreements, but we usually find a middle ground where we each feel heard and both our needs are considered. One of the side benefits is that our three daughters get to see how we make financial choices — something neither of us got to see our parents do.

By the way, the vacation to Italy was great, and a little longer than I would have planned. I am eternally grateful to my wife for those extra few days I had fought against staying for.

———-

Joe Duran, CFA, is CEO and founder of United Capital. He believes that the only way to improve people’s lives is to design a disciplined process that offers investors a true understanding about how the choices they make affect their financial lives. Duran is a three-time author; his latest book is The Money Code: Improve Your Entire Financial Life Right Now.

MONEY stocks

How I Plan for the Stock Market Freakout…I Mean Selloff

150217_ADV_StockFreakout
Mike Segar—REUTERS A trader works on the floor of the New York Stock Exchange (NYSE).

Advising people not to dump their stocks in downturn is easy. Actually persuading them not to do so is harder.

I got an email from Nate, a client, linking to a story about the stock market’s climb. “Is it time to sell?” he asked me. “The stock market is way up.”

Hmmmm.

If I just tell Nate, “Don’t sell now,” I think I might be missing something.

At a recent conference, Vanguard senior investment analyst Colleen Jaconetti presented research quantifying the value advisers can bring to their clients. According to Vanguard’s research, advisers can boost clients’ annual returns three percentage points — 300 basis points in financial planner jargon. So instead of earning, say, 10% if you invest by yourself, you’d earn 13% working with an adviser.

That got my attention.

Jaconetti got more granular about these 300 basis points. Turns out, much of what I do for clients — determining optimal asset allocations, maximizing tax efficiency, rebalancing portfolios — accounts for about 1.5%, or 150 basis points.

The other 150 basis points, or 1.5%, comes from what Jaconetti called “behavioral coaching.” When she introduced the topic, I sat back in my seat and mentally strapped myself in for a good ride. One hundred fifty basis points, I told myself — this is going to be advanced. Bring it on!

Then she detailed “behavioral coaching.” I’m going to paraphrase here:

“Don’t sell low.”

Don’t sell low? Really? The biggest cliché in the world of finance? That’s worth 150 basis points?

But it isn’t just saying, “Don’t sell low.”

It’s actually that I have the potential to earn my 150 basis points if I can get Nate to avoid selling low. That means I need to change his behavior. Wow. Didn’t I give up trying to change other people’s behavior January 1?

Inspired by Nate and the fact that the stock market is high (or maybe it’s low; the problem is we don’t know), I decided to think like a client might think and do a deeper dive into the research. Why not sell now? Why do people sell low? How can I influence, if not change, client behavior? I’ve got nothing to lose and clients have 1.5% to gain.

One interesting thing I learned in my research: Not everybody sells. In another study, Vanguard reported that 27% of IRA account holders made at least one exchange during the 2008-2012 downturn. In other words, 73% of people didn’t sell.

Current research on investing behavior, called neuroeconomics, includes reams of studies on over-confidence, the recency effect, loss aversion, herding instincts, and other biases that cause people to sell low when they know better.

Also available are easy-to-understand primers explaining why it’s such a bad idea to get out of the market.

The question remains, “How do I influence Nate’s behavior?” The financial research ends before that gets answered.

Coincidentally, I recently had a tennis accident that landed me in the emergency room. While outwardly I was calm, cracking lame jokes, inwardly I was freaked out.

Despite my appearance, the medical professionals assumed I was in high anxiety mode, treating me appropriately. The emergency room personnel had specific protocols. Quoting research and approaching panicked people with logic weren’t among them.

They answered my questions with simple sentences and gave me some handouts to look at later.

Selling low is an anxiety issue. And anxiety about the stock market runs on a continuum:

Anxiety Level Low Medium High
Client behavior Don’t notice the market Mindfully monitor it. “Stop the pain. I have to sell.”

That brought me to a plan, which I’m implementing now, to earn the 150 basis points for behavioral coaching.

During normal times, when clients are in the first two boxes, I make sure to reiterate the basics of low-drama investment strategy.

When I get a call from clients in high anxiety mode, however, I follow a protocol I’ve adapted from the World Health Organization’s recommendations for emergency personnel. Seriously. Here’s what to do:

  • Listen, show empathy, and be calm;
  • Take the situation seriously and assess the degree of risk.
  • Ask if the client has done this before. How’d it work out?
  • Explore other possibilities. If clients wants to sell at a bad time because they need cash, help them think through alternatives.
  • Ask clients about the plan. If they sell now, when are they going to get back in? Where are they going to invest the proceeds?
  • Buy time. If appropriate, make non-binding agreements that they won’t sell until a specific date.
  • Identify people in clients’ lives they can enlist for support.

What not to do:

  • Ignore the situation.
  • Say that everything will be all right.
  • Challenge the person to go ahead.
  • Make the problem appear trivial.
  • Give false assurances.

Time for some back-testing. How would this have worked in 2008?

In 2008, Jane, who had recently retired, came to me because her portfolio went down 10%. The broader market was down 30-40%, so I doubt her old adviser was concerned about her. Jane, however, didn’t spend much and had no inspiring plans for her estate. She hated her portfolio going down 10%.

Jane didn’t belong in the market. She didn’t care about models showing CD-only portfolios are riskier. She sold her equity positions. She lost $200,000!

The protocol would have worked great because we could have worked through the questions to get to the root of the problem. Her risk tolerance clearly changed when she retired. She and her adviser hadn’t realized it before the downturn.

Then there was Uncle Larry.

Like a lot of relatives, although he may ask my opinion on financial matters, Larry has miraculously gotten along well without acting on much of it.

Larry is in his 80s and mainly invested in individual stocks. This maximizes his dividends, which he likes. The problem was that his dividends were cut. The foibles of a too-big-to-fail bank were waking him up at 3:00 a.m. Should he sell?

When he called, I suggested that Uncle Larry look at the stock market numbers less and turn off the news that was causing him anxiety. I reassured him that he wouldn’t miss anything important. We discussed taking some losses to help him with his tax situation.

Although he listened, I didn’t get the feeling this advice was for him. Actually, the emergency protocol would predict this; the protocol doesn’t include me giving advice!

Uncle Larry and I discussed his plan. He ended up staying in the market because he couldn’t come up with an alternative. He also thought, “If I had invested in a more traditional way, I’d probably have ended up at the same point that I am at now anyway. So this is okay.”

He’s now thrilled he didn’t sell and, at 87, is still 100% in individual stocks.

Your browser is out of date. Please update your browser at http://update.microsoft.com