Random Roger's Retirement Planning

This is from Abby Joseph Cohen as quoted in Barron's.

There are many investors who have dramatically shortened their time horizons. That always happens when volatility picks up, and in some ways it adds to the volatility because these investors look at momentum rather than value.

This is a useful comment about psychology causing people to make bad decisions reacting to moves of the market.

Cohen goes on to use this is a basis for a buying opportunity which is not so clear to me.

First, apologies for not updating this page for a while. The combination of busier at work and fire season in full swing gives me less time.

Before I get into this post let me say this is not a pitch to think about hiring me. This post is in response to something I read. With that, on to the post.

I grabbed the June Kiplinger to look through while I rode the recumbent bike yesterday. There was an article about a couple from Georgia, he is 40 and she is 33, who were looking for a financial advisor.

The article followed their progress and their thought process as they interviewed a father and son team from AG Edwards, a broker from Raymond James and an independent advisor.

The way I read the article the couple had assembled a list of 9 questions to ask an advisor. There was a question about how they assess client needs, one about how they do research and get information, two questions about meeting availability and frequency, two about fees, two about how to complain and one about results of other clients.

While I can't say the questions are unimportant there were some important ones missing. The one that I think is important is how they decide to sell, reduce, get defensive or any other way to describe protecting assets when preservation is more important than growth. I would be surprised if the two wirehouse candidates had a good answer and the independent was a DFA guy so he would probably have a very compelling argument for why taking defensive action is futile, at least the one DFA guy I know says this.

Another line of questioning might be some convincing that the broker himself knows anything about markets and investing. Trust me when I say plenty of folks in the business know very little. If the salesman is the person you will be speaking to I think it would be nice to know that he understands what is going on and furthermore even keeps up with what is going on.

Of course this may not be easy if he has 400 clients and is looking for more.

And speaking of how many clients, if there are 13 weeks in a quarter and the person you hire has 200 clients and is soliciting for more clients, how much time will you get in the quarter?

According to the article the AG Edwards fees would be 1.5%-2.0% and the Raymond James fees would be 1.75% to 2.0%. The brokers need to get paid as do the managers that the brokers select, hence the fees. If you are going to have a manager of some sort ultimately making the decisions why pay for a broker? If you pay a brokerage firm 75 basis points in extra fees on top of the 1% that goes to the manager (I do not know how the fee is split but work with me here) for 20 years on $500,000, well I think that works out to $75,000. That could be a year's worth of living expenses traded in for what kind of extra value?

Another aspect of the article that I wish would have been explored further was that the couple had expectations for annual returns. He wanted to average 12% per year and she would be happy with 9%. This can be tricky. First of all the couple in the article has done a decent job of saving and is committed to saving enough. I do believe that over long periods of time, stock markets will average what they have always averaged. People who save enough money just need to stay close to the market. If they miss 1/3 of the next down 30% stretch they will dramatically beat the market over their investing lifetime.

This is tough to grab onto but the numbers work if you just let them. Too many people get in the way of letting the numbers work for them.

One last thing to touch on is that at one point in the article the husband of the profiled couple questioned whether he would be better off doing it himself with ETFs. Well not having to overcome a 200 basis point bogey every year would help but there was not much said as to how much he knew and how much time he was willing to spend. I am not a fan of relying on just one product but there are people that can learn to do it themselves. The biggest obstacle for these people is their own emotion.

If you are considering doing it yourself you need to have some introspection about your strengths and weaknesses. People that have the wrong emotional make up are absolutely better off paying a fee for help even if the fee seems high.

The Economic Beat column in Barron's was primarily about the run up in gold, whether it has been justified or not and how far it might go. One point made that is relevant to this blog is that gold, adjusted for inflation would need to go to $2000 to equal its 1980 high of $850.

The point here is not to debate what gold will do or how useful looking at gold adjusted for inflation is.

Think of the $850 as someone's monthly living expenses in 1980. The same lifestyle today would cost $2000. Applying the same inflation rate over the next 26 years would take today's $2000 in expenses up to $4705 per month. A portfolio today would need to be worth $480,000 to meet the $2000 monthly income need. That same portfolio would need to grow to $1,129,200 while paying out the income need along the way.

However much an investor put into bonds 26 years ago is how much he has today. The S&P 500's high water mark in 1980 was 140 and today it is 9.3 times higher at 1310. So in the last 26 years inflation is up 2.35 times and stock prices are up 9.3 times.

This idea is probably not new but it reiterates the point of how important equity exposure is.

It is very possible that the next 26 years will not offer the same returns as the last 26 years. The domestic returns cold be much worse. This creates the potential need for better understanding of foreign stock markets. The starting point of these decisions can be a very simple logic. The numbers are what they are and will be very similar in the future even if you have to go to other countries for those same numbers.

Business News - Retirement - New York Times

The Times has several articles on this link that I believe tie in with some the things I have been writing about on this site.

You will need to register but it is free.

Barron's had an interesting cover story about longevity possibly expanding well beyond what people now think in terms of how long they will live.

On one level longer life seems intuitive in that all technology is advancing at an accelerating pace. Michael Miliken says cancer will be gone by 2015. There will also be advances in how heart disease is managed and treated. There article then talks about nano technology creating little robots that go all through the body fixing things.

A big part of aging is caused by damage that occurs in cells. Science will find more and more ways to prevent or reverse this damage. Some of this will happen within the timeline stated in the article. How much will happen is the variable.

I do not want to turn this into a morality debate. It makes sense to think about living longer from a dollar and cents standpoint.

This could mean (recurring theme alert) planning retirement will have to be done differently. We will have to work longer, we will have to own a lot of equities longer and it will create many stresses on our economy, our social services, natural resources and many other things.

This ties into an idea that the US will need evolve in order to prosper. I believe that it can but this could be serious.

In my opinion successful retirement planning includes staying in touch with new fill in the blank. New will never stop. Staying in touch with new can make retirement planning much easier or perhaps a better way to look at would be that staying in touch with new can stave off hardship.

Managing the Income Portfolio -- GuruFocus.com

This is a very good read with a lot of detail

A reader expressed an interest in buying a CD from Millennium Bank that appears to be a very high yielding product.

The reader wonders whether I would buy something like this and then why or why not. While I did not read the fine print, the main page is very clear that there is no getting your money out early. They are not saying if you break the CD you pay a penalty, they are saying you cannot get to the money, period.

As a matter of philosophy I don't like to lock up money in this way. This is not a comment on investing but personal preference and so probably does not offer much value. I prefer to keep options open to me, not just financially.

I can't say that the reader should or should not but the CD I am just saying this is not for me.

This is the general warning from an article in the WSJ. Too many Americans will come up short in their retirement savings. One scary tidbit was that only 25% of Americans over age 55 have $250,000, or more, saved for retirement. The scary part is that people who live to age 90 will need $215,000 for medical expenses. That leaves $35,000 from to draw 5% from. Oops.

The article also talks at length about planning to need 70% of what you make now to live on and questions whether instead of 70% you should target replacing 85% of your income.

Advice like this is too broad. Plenty of people have a mortgage when they are younger. Whether the mortgage is paid off in retirement matters and would be a huge determinant as to how much of your income you need to replace. Some people need to drive a particular type of vehicle when they work, pay for it a particular way and replace it at a specific time interval. No car payment or a lower car payment could also affect income need in retirement.

The bigger point is to not rely on a generic number but to analyze your own situation to determine how much you need. If the number you come up with is too low you might want to reassess.

My wife and I have almost no expenses now. Really, all we pay for is utilities, groceries and various insurance premiums. Layer on top of that two trips per year.

I expect my expenses will increase in retirement due mostly to normal health costs. Also, we currently make no car payments but they way have lived so far we have a car payment about 1/3 of the time, we drive cars until they die, well close to it anyway.

I am often critical of brokers and bankers for trying to label customers as tab A or tab B and then fitting them into slot A or slot B. Don't label yourself in the same way.