Jonathan Clements's Blog, page 394

Grab the Roadmap

FINANCIAL SECURITY is within your reach. Don���t believe me? Here���s a roadmap that demonstrates it���s possible for most Americans.

Sam is a 22-year-old college graduate. He begins working right after college, earning $50,000 a year. He saves 20% of his income the first year, equal to $10,000. Each year, he gets a 2% raise. This raise is over and above inflation, which we���ll assume is zero to keep things simple. In addition to saving $10,000 a year, he takes half his annual raise and also socks that away.

For example, in his second year on the job, his salary increases from $50,000 to $51,000. He takes half the raise, or $500, and adds that to his annual savings of $10,000, so he saves $10,500. He continues in this manner year after year. Since he���s saving half of each year���s raise, his savings rate slowly increases, reaching 25% at age 32 and 30% at age 43. Sam also consistently invests his savings, getting a long-term average annual return of 6.2%. More on that number later.

Meanwhile, Sam���s standard of living isn���t stagnant. His annual spending rises from $40,000 right after college to $50,000 by age 40 to a little over $60,000 by age 53.

What���s happening to his nest egg? By age 49, Sam has become a millionaire. The year before he became a millionaire, Sam���s cost of living was $56,000. That means, if he retired at 49 and wanted to maintain his current standard of living, he would need to draw 5.6% from his nest egg.

Sam is a conservative guy and thinks 5.6% is too high. Maybe he could swap to a less stressful job with more time off, taking a 50% pay cut in the process. Since he made $82,000 the previous year, a 50% pay cut would mean an income of $41,000. Now, he only needs to draw $15,000 from his nest egg to maintain his $56,000 lifestyle, which would equate to a 1.5% withdrawal rate. That sounds a lot better.

While it sure feels good to know he has options, 49-year-old Sam isn���t quite ready to throw in the towel. He continues to work and save as he���s been doing. Nine years later, at age 58, his nest egg has grown to $2,108,000. Sam is now seriously contemplating a career change or maybe even outright retirement. Can he pull the trigger? You bet. If Sam were to withdraw 4% of his nest egg���based on the popular 4% rule���that would equate to an annual income of a little over $84,000. That���s $20,000 more than he spent the previous year. Not only can Sam retire, but also he could seriously upgrade his lifestyle.

Notice that it took Sam 27 years to become a millionaire, but only nine additional years to reach $2 million. Any guess on how many years it would take Sam to get to $3 million? Just five years. These numbers demonstrate the power of compound interest. Even if Sam stopped saving once he became a millionaire at age 49, his nest egg would still grow to $2 million. Instead of taking nine years, it would take 12 years���just three years longer.

Are my assumptions realistic? The first set of assumptions are largely outside of our control. I call these the��financial��assumptions:

Sam had a starting income of $50,000 a year. As it happens, the average starting salary for a bachelor���s degree graduate was just over $50,000 for the last three years, according to the National Association of Colleges and Employers. Median household income reported by the U.S. Census Bureau for 2016 was $59,039.
Sam���s income grew 2% each year. Median wage growth since 1983 has been 4% a year. Subtract 2% inflation and you get 2% real��income growth.
Sam���s savings collected an average annual return of 6.2%. This number comes from assuming an 80% stock-20% bond portfolio and using real��long-term rates of return of 7% for stocks and 3% for bonds. While we���ve enjoyed such performance historically, there���s a good chance returns will be lower going forward. But that doesn���t change our story much���because what drives Sam���s success, more than anything, is his savings habits.

The second set of assumptions are largely within our control.�� They are what I call the personal��assumptions:

Sam begins to save at age 22, which is the age many young adults graduate from four-year colleges.
Sam saves 20% of his income right off the bat.
Sam takes half of every annual raise and adds it to his yearly savings.

I can already hear the objections: ���Save 20% or more of my income? Get real. Maybe you can do that if you���re making a six-figure income, but otherwise you���re out of your mind. I can barely make ends meet living on $50,000.���

Here���s my rebuttal: If $50,000 covers the bare necessities of life, how are those earning $40,000 surviving? Alternatively, what about those families earning $62,500? Surely they can live off 80% of their income���which would be $50,000���and save 20%? My point: Saving 20% of your income is never easy, because it means denying yourself things that you have the means to obtain right now.

But what���s the alternative? The savings rate has hovered around 6% recently. If we run the same scenario as before, but change the savings rate to 6% and the name to Frank, here���s what we find:

Frank reaches the $1 million mark at age 69 and $2 million at age 80.
If Frank retires at 69 and uses the 4% rule, he would have annual income of $41,000. Just before quitting the workforce, however, he had been spending $116,000 a year.

The bleak reality: A 6% savings rate means the financial milestones take many more years to reach. Frank waits two decades longer to become a millionaire. Even worse, the low savings rate equates to a higher spending rate, meaning Frank is faced with a difficult decision at age 69. He can retire and massively downgrade his standard of living���or he can keep working.

Will you be a Sam or a Frank? Just remember the truism that applies not just to personal finance, but to all walks of life: You can have it easier now and harder later���or harder now and easier later. What about easier now and easier later? Lots of folks behave like that���s a choice, but it isn���t.

John Lim is a physician who is working on a finance book geared toward children. His previous blogs��were Bearing Gifts and�� Lay Down the Law . Follow John on Twitter @JohnTLim .

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Keeping It Going

AFTER YOU���VE become successful and accumulated wealth, what comes next? Americans are facing this question more often than ever before. CNBC��notes that the number of millionaire U.S. households grew by more than 700,000 in 2017. This affluence can create a disconnect between parent and child: One generation created the wealth, while the other grows up surrounded by it.

As a financial planner, I���ve learned the younger generation has two options: They can either destroy the wealth or they can add to the family���s legacy. It���s challenging enough to raise your children to become a contributing member of society. Wealthy families have additional complexities to address: There���s a balancing act between teaching children the responsibilities of maintaining wealth and allowing them the freedom to grow on their own.

Instead of simply teaching lessons to the younger generation, the family must work together as a team. It���s this collective effort that will help the family maintain its wealth for generations to come. What���s involved? Families should focus their efforts on four key areas. Don���t consider yourself wealthy? I think these strategies can also be valuable for less affluent families hoping to raise their children to become money-smart adults.

1. Teach stewardship.��The older generation has a responsibility to teach the benefits of wealth to their children. At what age do you start? I believe these conversations can begin as young as age four or five. Family dinners present the opportunity to communicate the family���s values. Work ethic can also be discussed. But more important, you show work ethic by example.

As your children grow older, they can be invited to your workplace, and be involved in both family meetings and meetings with your professional advisors. These experiences help them understand the family legacy and become stewards of its wealth.

2. Share financial information.��For the next generation to succeed, they need to appreciate what���s at stake. Do they need to know all the financial details? No. But they need to know the nature of the family���s wealth. From this, they can develop the skills and desire needed to properly manage and add to the legacy.

A family retreat is an effective way to share the family���s finances. They can be presented in a formal manner, with opportunity for interactive discussion. Meetings should include family members of all ages, to avoid anyone feeling left out.

3. Encourage community service.��If you own a small business, you���re already providing a service to your community. In a small town, the family business that employs 50 people may be more valuable than any community service project that family members could ever undertake.

That said, more formal community service should also be encouraged. This will allow the younger generation to have an impact in areas they feel passionate about. Consider projects that allow you to participate as a family. But also let your children get involved in service projects on their own.

4. Continue the legacy.��As a family extends into the third or fourth generation, cousins will spend limited time with each other. A commitment to philanthropy can keep a family together for yet another generation. Starting a family foundation or donor-advised fund is a great place to begin. To be involved, each family member must contribute through monetary gifts and serving on the board. This helps everyone come together for a greater purpose.

Ross Menke is a certified financial planner and the founder of Lyndale Financial, a fee-only financial planning firm in Nashville, Tennessee. He strives to provide clear and concise advice, so his clients can achieve their life goals. His previous blogs include Flying Solo, Money Date Night and That Extra Step. Follow Ross on Twitter @RossVMenke.

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First Impressions

WHEN I WAS age six or seven, an older man came to our house. My mother answered the door. I couldn’t hear what the man was saying, but my mother mentioned the word ���garage.��� I then followed her to the kitchen and watched her make a sandwich with white bread, sliced bananas and mayonnaise. She then poured a glass of milk and went to the garage.

There, sitting in a lawn chair in our tiny garage, was that man. She gave him the sandwich and milk. As I stared at this man, it was the first time I realized that people went hungry in our country.

I think the reason I have such a sympathetic view of the homeless is because I remember how my mother treated that man. Maybe, if she had been hostile toward him, I might have a different view today.

As a young adult, one of my first investments was a company that went bankrupt. I lost almost all my money. Since that early, failed investment, I have been a conservative investor with a lower-than-recommended percentage of my portfolio in stocks.

Just as my initial investment experience influenced my lifetime behavior, it seems today���s young adults have been scarred by the 2007-09 bear market. According to Barron’s, “An average of just 31% of people ages 18 to 29 held stocks from 2009 to 2017, versus 42% in that age cohort in the years from 2001 to 2008, according to Gallup.”

Jamie Cox, managing partner of Harris Financial Group, commented for the article: “I think the younger people have a more emotional hesitance toward investing than the older people. Your behavior is shaped early in your career.”

First impressions or experiences are hard to dispel, especially those that occur at a young age. They can affect you for the rest of your life. They can withstand the test of time, as if etched and burned into your brain.

I remember the combination of my first lock in the seventh grade: 36, 18, 8. Ask me about my first car? It was a two-tone 1956 Chevrolet Bel Air with a big steering wheel, two-speed automatic powerglide transmission, V8�� 265-cubic-inch engine, radio with vacuum tubes, gas cap in the rear tail light, back seat with a tear on the right side, glasspack muffler, air shocks on the rear suspension, oversized tires at the back and undersized tires on the front end. I can go on and on describing that car. Ask me about my other cars and I wouldn���t have much to say.

One reason first impressions or experiences are tough to shake: Most people get their information from news outlets and people who reaffirm their beliefs. If you watch Fox News, you probably also read a conservative newspaper and listen to a conservative radio station. If you watch MSNBC, you probably read a progressive newspaper and listen to a progressive radio station. Most of us are essentially getting our information from the same source. Result: We aren���t challenging our first impressions or experiences.

Why is all of this important? If you want your children to have a secure financial life, it starts with you as a parent. The most influential finance teacher your children will have is not their high school or college instructor, it’s you���mom and dad. Your children are watching your financial behavior, just as I watched my mother help that man in our garage. What you teach your children about saving and investing through your actions could be with them for their entire life. Tempted to overspend on a luxury item? Just remember, your children are watching.

Dennis Friedman retired at age 58 from Boeing Aerospace Company. He enjoys reading and writing about personal finance. His previous blogs include��Family Inc.,�� Creative Destruction ,�� Taking Inventory ��and�� A Word of Advice .

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November’s Hits

NO SURPRISE:��The most popular blogs on HumbleDollar last month were those devoted to the slumping stock market. But not everybody was obsessing over share prices. Three of November’s top seven blogs were focused on family financial issues:

Just Asking
A Little Perspective
Simple Isn’t Easy
Five Messy Steps
Taking Their Money
Why Wait?
Family Inc.

The site’s most widely read article in November wasn’t one of our blogs. Instead, it was��Fanning the Flames, our newsletter article that discussed the Financial Independence/Retire Early, or FIRE, movement.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . His most recent articles include Taking Us for Fools,�� The View From Here ��and�� A Little Perspective . Jonathan’s latest book:��From Here to��Financial��Happiness.

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Pushing Prices

WITH INCREASING frequency over the past month, I���ve been hearing the question, ���Why does the stock market keep going down? I understand��why the market dipped��when the Fed raised interest rates, but why does it��keep going down��day after day?���

If you’ve been feeling unnerved by recent headlines, you aren���t alone. After gaining 10% in 2018 through late-September, the U.S. stock market reversed course and gave up that entire 10% over the course of just two months, before rallying modestly over the past week. And that’s just the average. Many individual stocks, including Apple and Netflix, have done far worse, down more than 20% in recent months. In short, it’s been an unpleasant year���and it isn’t over yet.

At times like this, in an effort to provide some explanation, investment advisors typically trot out a well-worn quote from Warren Buffett’s mentor, Benjamin Graham. In the short run, Graham said, the stock market is like a ���voting machine,��� but in the long run it���s a ���weighing machine.��� In other words, stock market investors are fickle. From time to time, they will push stock prices to irrational highs or lows. But over time, they act more rationally and, when they do, stock prices will fall back in line with reality. The message: Don’t worry, this too shall pass.

While I generally agree with this way of looking at the market, I believe there���s a third factor influencing stock prices today���one that wasn’t a significant factor in Graham’s time. That factor is momentum trading.

As the name suggests, momentum trading is based on the straightforward assumption that stock price movements don’t happen all at once. They tend to move in stretches���sometimes up and sometimes down. For example, when a company releases a quarterly earnings report that tops investors’ expectations, that company’s stock will tend to rise over a period of several days. The first day might see the biggest move, but a positive trend often continues well beyond that.

Why is this the case? Suppose a company issues an earnings press release on Tuesday at 5 pm. At that point, the news is out there. But it still takes time for investment analysts to write up their reports, and then more time for investors to read and digest this information, before deciding whether to trade the stock.

Moreover, investors don’t all react at the same time. Hedge funds, for example, might place their trades within seconds of receiving a press release, while mutual funds might trade a day or two later. And individual investors might not react until several days or weeks after that. This is what causes stock prices to exhibit ongoing momentum.

We���ve long seen this sort of momentum in stock prices. What’s changed? An increasing number of investment firms have launched funds to take advantage of this momentum effect. These momentum funds scour the market, looking for stocks that are displaying strong directional moves. When they find them, they effectively jump on the bandwagon, buying stocks that are going up and selling stocks that are going down. While it���s difficult to quantify, these momentum funds amplify the market’s ups and downs by bidding up stocks that are already going up and putting downward pressure on shares that are already headed lower.

Momentum strategies have been around since the early 1990s, but they are gaining in popularity. While they used to be the relatively obscure purview of professional investors, major fund companies are now promoting momentum strategies to individual investors. Of particular note, industry leader Vanguard Group��launched��a momentum fund earlier this year. Given Vanguard���s reach, I assume it���ll only be a matter of time before this fund accumulates significant assets, contributing further to the amplification effect I described above.

When the market is going down, it���s natural to worry. That is why I think it’s so important to understand���as much as possible���why the market is doing what it’s doing. My hope: You���ll sleep easier when you know what forces are at work pushing the prices of your investments up and down.

One final note: You may be wondering whether it would be worth allocating a portion of your portfolio to one of these momentum funds. In other words, if you can’t beat ’em, should you join ’em? My answer is ���no.��� Their performance is inconsistent and unconvincing to me. They���re also more volatile and more expensive than standard, broadly diversified funds.

Adam M. Grossman���s previous blogs��include Counting Down,��Deadly Serious��and��Five Messy Steps . Adam is the founder of�� Mayport Wealth Management , a fixed-fee financial planning firm in Boston. He���s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter�� @AdamMGrossman .

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Taking Us for Fools

IF THE STOCK market decline resumes, we���ll soon be reading articles about remorseful everyday investors bemoaning their earlier foolishness.

No doubt some folks have been foolish. Perhaps they���ve belatedly discovered that Amazon and Apple aren���t one-way tickets to wealth, that they aren���t the investment geniuses they imagined, or that they misjudged their courageousness and shouldn���t be 100% in stocks.

But mostly, I view these articles as patronizing garbage that propagate the myth that all amateur investors are clueless and all professionals are super-savvy. What���s the truth? It���s a lot messier than Wall Street would like you to believe. Consider four points:

1. Professionals have an incentive to disparage ordinary investors.

General Motors doesn���t dismiss drivers as hopelessly incompetent. McDonald���s doesn���t joke about obese, calorie-crazed customers. Cable channels don���t mock the viewing habits of their subscribers. But on Wall Street, belittling clients is considered fair game.

Why? It���s a storyline Wall Street loves. If it can persuade individuals that they���re foolish and best served by professionals peddling sophistication, the Street has itself a double win: It can charge investors for high-priced handholding���and it can sell them overly expensive, over-engineered financial products.

2. Professionals have shorter time horizons.

You���ll likely make good money If you hold a globally diversified stock portfolio for the next 10 years. Even if we get a recession in, say, 2020, the economy will soon start growing again, corporate profits will rise and share prices will follow suit.

Indeed, historically, there have been very few 10-year periods when stocks haven���t posted gains. The good news: Most of us have at least a 10-year time horizon. Even 65-year-olds should have plenty of time to ride out a market decline���and their heirs almost certainly do.

That brings us to an obvious question: If we can be reasonably confident that results will be decent over the next 10 years, why would anybody fret over the next 12 months? I can imagine three groups who potentially would be concerned.

First, there are those who have made the mistake of keeping money in stocks that they���ll need to spend soon. Second, there are those who have recently realized they���re uncomfortable investing so much in stocks.

Who���s the third group? That would be professional money managers. Unlike the typical amateur investor, you���ve got to imagine they���re extremely concerned about performance over the next 12 months���because their paycheck depends on it. I���m not saying the typical Wall Street professional has been selling shares in a panic for the past two months. But let���s face it: They, more than anybody, have an incentive to limit short-term losses by dumping stocks.

3. Professionals drive stock prices.

In terms of setting stock prices, it isn���t who owns stocks that matters. Instead, it���s who trades them���and professionals likely account for well over 90% of the stock market���s trading volume. High frequency trading alone accounts for about half of U.S. trading. Make no mistake: The U.S. stock market is down 6% from September���s all-time high because professionals are selling, not you and me.

To be sure, money managers and investment advisors could be dumping stocks because their clients are yanking their accounts or asking them to dial down risk. But that raises the question: If these folks consider themselves savvy professionals, how could they possibly have allowed their clients to invest in a way that clearly doesn���t suit their risk tolerance? That suggests these professionals are anything but.

4. Evidence of amateur incompetence isn���t conclusive.

We are in the 10th��year of the current bull market. But as I noted in a blog earlier this year, there���s scant evidence of investor euphoria. Margin debt���often taken as a sign of overconfidence among individual investors���rose just 0.8% in 2018 through September, when the market peaked. Mutual fund investors pulled $191.3 billion out of U.S. stock funds in this year���s first 10 months���hardly a sign of speculative fervor.

But what about the famous Dalbar study, which purports to show that mutual fund investors garner results that are so much worse than the market averages? That���s been trotted out for decades as proof that everyday investors are incompetent���despite the fact that the study���s methodology has been criticized by me in The Wall Street Journal��(2004), the Finance Buff���s Harry Sit (2011), The Wall Street Journal���s��Jason Zweig (2014), Michael Edesess et al (2014) and the American College���s Wade Pfau (2017), prompting some fiery responses from Dalbar.

And yet financial firms continue to publicize the Dalbar results. Why? Ladies and Gentlemen, kindly direct your attention to point No. 1.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . His most recent articles include The View From Here,��A Little Perspective��and��Simple Isn’t Easy. Jonathan’s latest book: From Here to Financial Happiness.

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Bird in the Hand

WHEN IT CAME to money, I long had a slight degree of magical thinking—that there would always be enough, that some higher power would ensure that my checkbook was balanced and that I could be that super-generous person, even if I really couldn’t afford to be.

This sometimes landed me in trouble when, for some inexplicable reason, a check would bounce or I discovered I had less in my checking account than expected. To a great extent, I depended on intuition to manage my cash flow. This, I was always aware, was not a sensible way to live.

So it was a great relief when apps appeared that were designed to help folks manage their money. I tried many, including Clarity Money, Digit and Mint, and have come to rely on one that suits my personality. It’s called Dollarbird.

You don’t have to pay anything to use the basic version of Dollarbird’s app. It isn’t flashy or highly technical. You have to enter all data by hand and it hasn’t mutated over the years into anything more than a basic cash flow management system. At the beginning and in the middle of every month, I enter my paycheck and any upcoming costs I can think of. This includes everything from my younger daughter’s allowance to my older daughter’s college tuition payment. I also include my credit card as a cost. That’s where miscellaneous expenses inevitably go. For that entry, I use my average monthly credit card bill.

The app automatically calculates how much I will have left in my checking account at the end of the period. I immediately plug the total cash left into the next period, under a category I’ve named “saved from two weeks ago.” I begin from there, again entering all income and costs expected to fall between the start of the month and the 15th or between the 15th and month’s end. I often pre-fill two or three months at a time, so I can better predict what lies ahead.

You might imagine it’s tedious to enter everything manually, but I find it fun. I like being in charge of telling the app what my expenses are, choosing the different colors for each category and simply entering the amount. I had tried apps where data was pulled automatically from my bank account and credit cards, and I found them overwhelming. If the app didn’t know what category to put an expense in, it went into “miscellaneous” and then you had to manually categorize myriad transactions. Also, while these other apps told you where things stand, they don’t predict future cashflow—which is what I find so comforting about Dollarbird.

To be sure, those predictions aren’t always accurate. At the end of the period, I sometimes have to go back and enter an unexpected expense, like a haircut or a gift for a child’s birthday party, and then readjust the balances left for the weeks ahead.

Still, it’s a relief to go from guessing my cash flow to having a good idea of what will be left at the end of two weeks. I sleep better at night. I also know how generous a person I can be, which—alas—isn’t as generous as I once thought. I know when I can spring for that small luxury for myself or my family. I can anticipate how much I will be able to budget for Christmas gifts. I may not be as free as a (dollar) bird, but I am freer.

Lucinda Karter is a literary agent in New York. Her previous blogs were Pillow Talk and Closet Saver. She’s a fan of Pilates, tennis and Jonathan Clements—but she has to say that, because she’s married to him. Follow Lucinda on Twitter @LucindaKarter.

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That Extra Step

WHAT DOES financial success look like? To some, it might mean owning a mansion, vacation home and luxury cars. But to most Americans, it’s far different: Being able to pay their bills in full, save for retirement and spend time with family is enough.

Unfortunately, even this level of financial success doesn’t come easily. Look at the current state of our financial affairs. Credit card debt is on the rise. We don’t spend enough time with family. Retirement savings are lagging. According to Bankrate, workers cite a flat or decreasing income as the main reason for not increasing retirement contributions. It will take a special effort to turn all this around.

To achieve financial success, we need to manage our money—and our lives—thoughtfully and with a sense of purpose. Everyone has their own definition of success and our definitions may change over time. My contention: We can live on less than society leads us to believe. Being more thoughtful about our spending can benefit both our net worth and our happiness.

Start by asking yourself, “What do I truly need?” Instead of accepting what the world gives you or says you need, be proactive in your decisions. Take advantage of the opportunities presented to you. You can choose to show up to work and put in the minimal amount of effort. Alternatively, you can create a life of abundance just by taking the next small step. The extra steps you take today, or fail to take, compound over time—for better or for worse.

I encourage my clients to follow these three principles to get on the path to financial success:

1. Create job stability. There are two sides to the cashflow coin: income and expenses. A reliable income sets you on the right path. Increasing your abilities through professional development make you more valuable to your employer. Diversifying your income through side hustles and investments will smooth out any employment changes. As you increase the value of your human capital and diversify your income sources, you’ll have greater flexibility in where, how and when you work.

2. Incrementally increase savings. Human beings like things to stay the same. But your savings rate should not be one of them. This means you should implement systems to help you increase savings without any effort.

If you aren’t enrolled already, sign up for your 401(k) plan’s auto-increase feature, so your contribution rate increases every year. Similarly, always contribute the maximum amount to your traditional IRA or Roth IRA. These accounts have contribution limits that rise every few years, as they adjust for inflation. The IRA limits are increasing from $5,500 in 2018 to $6,000 in 2019—and your contributions should be increasing, too.

3. Take care of your health. The No. 1 financial concern for retirees is paying for health care, according to AmericaSaves.org. You want to budget for health care expenses in your retirement plan. But you should also take action today to improve your overall health. Living an active lifestyle can save you money down the road—and bring you happiness today. I’ve found cooking meals at home, taking my dog on walks and exercising regularly helps me to be both happier and healthier.

Ross Menke is a certified financial planner and the founder of Lyndale Financial, a fee-only financial planning firm in Nashville, Tennessee. He strives to provide clear and concise advice, so his clients can achieve their life goals. Ross’s previous blogs include Slow Going, Flying Solo and Money Date Night. Follow him on Twitter @RossVMenke.

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Daylight Robbery

WANT TO SEE the very worst of human nature? Look no further than financial salespeople—and the way they exploit their clients.

Incentives drive their behavior. High commissions make brokers and insurance agents do unconscionable things. The worst products contain the highest payouts. Result? Consider seven real-life examples. Names are withheld to protect the innocent and, unfortunately, also the guilty.

A widowed nurse inherited her husband’s $1 million IRA. An unscrupulous insurance salesperson convinced her to put the funds into a high-cost variable annuity. He collected over $80,000 in commissions for this dastardly deed. When a friend tried to undo this transaction, it was too late. The advisor could not be reached because he was on a European vacation with his family.
We helped an investor who had 45 different mutual funds in his portfolio. Every quarter, they were all sold and replaced with new products as part of some insane investment strategy. It turns out the advisor was receiving lots of soft dollar perks from his broker-dealer, such as free technology. He repaid the favor by generating thousands of dollars of unnecessary commissions from his client’s portfolio.
An investor in his early 40s had several expensive and complicated index annuities in his rollover IRA. These products are sold with claims that they’ll deliver market returns with downside protection. The client explained to us that, in truth, market volatility didn’t rattle him in the least. Paying for things you don’t need is a common theme.
We are currently working with a client who is trying to escape from nine different annuities. Many are from the same company. For salespeople, having clients constantly buy and sell annuities keeps the commissions flowing, while also opening up opportunities to place funds in even more expensive products.
We saw a 401(k) account that consisted of dozens of master limited partnerships, as well as exchanged-traded funds (ETFs) and notes (ETNs) that owned many of the same securities. For good measure, the portfolio also held some shares of Panera Bread, which was then publicly traded, and a South Korean ETF. Sometimes, people are screwed by their advisor’s incompetence, rather than dishonesty.
We spoke to a teacher who pays 4.75% for every paycheck contribution to a 403(b) plan and almost 2% in fund fees annually. Add it up and that’s almost 7% in annual fees on every new dollar invested.
A couple in their 30s, with two small children, were sold an expensive whole life insurance policy. The policy would have barely replaced one year’s worth of the couple’s income. For less money, they could have purchased a 20-year term insurance policy that would have paid out millions of dollars. It’s the same old story: The salesperson was chasing the high commission of the whole life policy, instead of looking out for the clients’ best interests.

Tony Isola’s previous blogs for HumbleDollar were 403 Beware and Seven Deadly Sins. Tony works at Ritholtz Wealth Management, specializing in helping educators reach their financial goals using a fiduciary model. To learn more, visit his blog,  A Teachable Moment, or follow him on Twitter   @ATeachMoment.

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Required Irritation

IT’S THAT TIME of the year. We seasoned citizens must take our required minimum distributions (RMDs) from our retirement accounts, like it or not, needed or not. Uncle Sam forces us to take these taxable withdrawals, so he can get his share.

It’s a fairly simple process to figure out how much needs to be withdrawn. Determine the total value of your qualified retirement accounts, such as your 401(k) and traditional IRA, as of the previous Dec. 31. Get your hands on the right IRS chart. Look up the required percentage to be distributed based on your age. And there you have it.

Now comes the tricky part: Getting your recordkeeper to act.

I have to deal with three different recordkeepers—one for my 401(k) plan and two for my IRAs. I’ve been meaning to consolidate, but you know how that goes.

The recordkeeper for my 401(k) does a great job, so I’ll tell you who it is: Fidelity Investments. I go online and my RMD amount is listed there, right after the first of the year. I select a distribution, enter the amount of tax I want withheld, and the next day or so the money is transferred to my designated bank account. All done.

Recordkeeper No. 2 adds more administration, so I’ll skip the name. Here I must speak with a representative, who can tell me the RMD, which is not available online. But they can’t handle the transaction. Instead, they must send me a form via fax, e-mail or snail mail; I get to choose. I elect email, receive the form, complete all the sections, scan it and send it back via email. They couldn’t open the file on the first attempt. The second try was a success and the distribution was transferred to my brokerage account.

Now we get to No. 3, “the winner,” he said sarcastically. Here I must call my “advisor,” a person I have never met. We talk on the phone and he gathers all my information. He then initiates a call with a processor, who asks the same questions just to confirm my request. I will receive a check in three business days, which is about as long as I was on the phone.

What gives? This is the 21st century. We do everything else online for ourselves, don’t we?

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous blogs include We’re Stuffed, Clueless, Hard Earned and Time to Choose. Follow Dick on Twitter @QuinnsComments.

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