Things are not always the way they seem.
We often fall into the trap of believing our frame of reference is the only one. I see this in conversation with people who don’t have a clue what they don’t know.
Are you ever shocked by learning a fact that seems incredible? Here’s an example, a story. I’ll let you do the math.
Abraham sent his most trusted servant to find a wife for Isaac, his son. He took ten camels with him and traveled to the city of Nahor in Mesopotamia.
When he got to the well outside the city, he had a test to find the right woman for Isaac. It involved water and camels. Rebekah came along and passed the test. The deal was she was to offer to – and actually - water the camels.
Now, a small camel can drink 27 gallons of water in 10 minutes. A large camel can drink 59 gallons of water in ten minutes. She watered them until they stopped drinking. How many gallons was that? Somewhere around 500 or 600, I’d guess. When you read that story before, did it ever strike you what an incredible job that was?
We often don’t have a clue about the facts behind the story. Just like most people don’t have a clue what goes into a comprehensive financial plan. They just see the externals – like watering 10 camels – how much work could that take. But when you dig a little deeper, you’re amazed at the details.
It’s been proven in a study – confusion causes inertia.
The study was about participation in a 401k plan. As a planner, I like to see lost of choices – because then the participant can get a good cross-section of asset allocation.
A recent study* compared two plans – one had 60 choices and the other had 2. Guess which plan had more participation. The 2 choice plan.
How do most people choose their 401k plan investments? By the best returns last year? That’s a loser – that means they are “buying high” – not something any competent financial advisor would recommend. But I suspect that is how they do it. Certainly most people in 401k plans don’t have the scientific method of choosing investments – a fully diversified asset allocation, picking the best choices available – and rebalancing yearly. Maybe they choose by familiarity of the name.
In the course of analyzing someone’s investments recently, I was looking at their 401k information and was very excited to see two of my favorite, high performing mutual funds as choices. These two funds were blowing the covers off the ball for the past 4 years. When I looked at the choices the guy was actually investing in, those two were not among them. They were unfamiliar names. PIMCO and State Street Research.
Dig a little deeper. In your 401k plan – asset allocate (into 10-15 choices) rebalance once a year – around this time. To rebalance, you take some money out of the fund sectors that did well and put them into the sectors that did not, to bring your asset allocation percentages back to where you started. That’s buying low and selling high. If this is too hard for you, contact me via the planningsense.com website and ask to see a CALLAN Chart. It may convince you that flying blind is not smart.
* Study by Sheena Iyengar, Columbia Business School
In 2002, 18% of workers said they planned to retire at age 66 or later. In 2003 that number was up to 24%.
Most people who want to retire at 65 cannot afford to. Many of them retire anyway. Then they live lives of increasing poverty – not right away – but as soon as inflation erodes their purchasing power. About ten years after retirement, they realize they’ve miscalculated – but by then it is too late to go back and fix things.
I really don’t understand how anyone can plan to retire without seeing a financial analyst or an accountant who can take a comprehensive look at what will happen in retirement.
The ideal time to do this is when you start work in your 20s. Right! Well, a few do. The next best time is in your 40s after the kids are educated and gone. A good advisor can help you figure out the best way to pay off parental college and other debt and get your planning on the right track. You could go it alone – but then you have to consider that old adage – If you always do what you’ve always done – you’ll always get what you always got. Or something like that.
Most of us have bad habits we need to change. Often we don’t see them – or understand their impact on our finances. Maybe taking a look at a projected failed retirement will motivate change? I know it would with me.
The big problem is most people don’t realize their retirement stool has only one leg. The three-legged retirement of the past included a company pension, substantial retirement savings and Social Security. If you are 55 or younger, Social Security is not secure. We can’t afford to pay for that plus prescriptions and health care for the aging population. Medicaid is drawing more and more for payment of nursing home expenses for people who are poor – either actually or by design. The money just won’t be there for Social Security.
What to do? Start saving like crazy and buy some long-term care insurance. Then find yourself an advisor who can help you take a look at it all.
Are you doing your taxes?
If you need help you may want to consider a source other than the IRS. They posted a report recently that revealed that at their tax-help centers – only 57% of the answers provided were correct.
Even excellent software programs – like tax cut, cost $15 – assume a certain amount of knowledge of your deductions. They will prompt you, but if you didn’t have a clue something was deductible – like your investment fees, would you have kept track of them?
Just about everyone I talk to is looking for a tax planner. They say, my accountant is really good at doing the taxes, but doesn’t help me with tax planning.
Actually, our entire tax system is counting on people not finding and taking advantage of all the deductions they are eligible for. If everyone followed wise tax planning, the tax rates would have to go up to bring in the needed revenue.
It’s the same with the college financial aid system. If everyone got the financial aid they were eligible for, the system would run out of money.
If everyone grieved their property tax assessment, the tax rates would have to go up – but at least everyone would be paying their fair share, instead of some being way overcharged.
When too many people are on Medicaid, the system will adjust and benefits will decrease. When the cost of health insurance gets too high for companies to pay it and YOU have to start paying it (about $7000 a year for a family) people will start to question the necessity of a 10% increase in medical costs each year. As long as there are third party payors and no accountability, systems will spin out of control financially.
A lot of things work that way, if you just think about it.
Mark Twain said: “In investing when you’re rich, it’s on paper and when you’re poor, it’s in cash.”
I met a couple recently who had accumulated over 6 million dollars in assets. In my analysis, that makes them balance sheet affluent – and yet, they were never what I would call income statement affluent. That is, they never earned what I would consider to be a lot of money.
.45% - a little less than half a percent - of households have a net worth of 5 million or more.
Does that seem like a lot of money? It equates to an income, in today’s dollars, of a little under $200,000 a year. Nice, but not lavish – especially after income taxes.
Young professionals, who get the message early in their careers will accumulate 15 – 20 million – and it will pay out an income about equal to the $200,000 I just mentioned – in future purchasing power. What will happen to those who did not save? Things will get grimmer and grimmer as the gap widens between those who planned and saved and those who did not.
I think I mentioned last week that I was examining my own money attitudes in light of things I learned by observation in my childhood. Those old lessons have to either be unlearned or compensated for – or you will be poor. I’ve gotten out of the trouble I would have been in, largely because being in the financial field, I know what makes sense. I just had to find some ways to get those things done. If money runs through our hands like water, if you are 40 and haven’t saved an amount at least equal to 5 times your annual income - maybe you need to put your savings on automatic pilot and then begin to work on your money attitudes.