Category: History

Planning to Retire Someday? Start Planning Today!

A recent survey showed that most Americans don’t want to do their own financial planning, but they don’t know where to go for help.  60% of adults say that managing their finances is a chore and many of them lack the skills or time to do a proper job.

The need for financial planning has never been greater.  For most of history, retirement was a dream that few lived long enough to achieve.  In a pre-industrial society where most families lived on farms, people relied on their family for support.  Financial planning meant having enough children so that if you were fortunate enough to reach old age and could no longer work, you could live with them.

The industrial revolution took people away from the farm and into cities.  Life expectancy increased.  In the beginning of the 20th century, life expectancy at birth was about 48 years.  Government and industry began offering pensions to their employees.  Social Security, which was signed into law in 1935, was not designed to provide a full post-retirement income but to increase income for those over 65.  (Interestingly enough, the average life expectancy for someone born in 1935 was 61 years.)

For decades afterwards, retirement planning for many Americans meant getting a lifetime job with one company so that you could retire with a pension.  The responsibility to adequately fund the pension fell on the employer.  Over time, as more benefits were added, many companies incurred pension and retirement benefit obligations that became unsustainable.  General Motors went bankrupt partially because of the amount of money it owed to retired workers via pension benefits and healthcare obligations.

As a result, companies are abandoning traditional pension plans (known as “defined benefit plans”) in favor of 401(k) plans (known as “defined contribution plans.”)  This shifts the burden of post-retirement income from the employer to the worker.  Instead of knowing what your pension income will be at a certain age and after so many years with a company, now employees are responsible for saving and investing their money wisely so that they will have enough saved to adequately supplement Social Security and allow them to retire.

In years past, people who invested some of their money in stocks, bonds and mutual funds viewed this as extra savings for their retirement years.  With the end of defined benefit pension plans, investing for retirement has become much more serious.  The kind of lifestyle people will have in retirement depends entirely on how well they manage their 401(k) plans, their IRAs and their other investments.

Fortunately, the people who are beginning their careers now are recognizing that there will probably not be pensions for them when they retire.  Even public employees like teachers, municipal and state employees are going to get squeezed.  Stockton, California declared bankruptcy over it’s pension obligations.  The State of Illinois’ pension obligations are only 24% funded.  Other states are facing a similar problem.

In fact, many younger adults that we talk with question whether Social Security will even be there for them.  They also realize that they need help planning.  Traditional brokerage firms provide some guidance, but the average stock broker may not have the training, skills or tools to create an unbiased financial plan; many are only after your investment accounts or using the plan to persuade you to buy an insurance product.  Mutual fund organizations can offer some guidance, but getting personal financial guidance via an 800 number is not the kind of personal relationship that most people want.

Fortunately there is another option.  The rapidly growing independent RIA (Registered Investment Advisor) industry offers personal guidance to help people create and execute a successful financial plan that will take them from work through retirement.  Many RIAs are run by Certified Financial Planner (CFP™) professionals.  Many are fiduciaries who put their clients’ interests ahead of their own.  And many, including us, offer financial plans for a fixed fee as a stand-alone line of business, meaning that we don’t push or require you to do anything else with us except create a plan that you’re happy with.  Contact us to find out more.

The Biggest Problem for Wealthy Families

I recently visited a house that was once the largest private residence in the country: the “Biltmore” mansion. It was built by the grandson of the founder, “Commodore” Cornelius Vanderbilt, who built the original family fortune. His son doubled the fortune which, in today’s dollars would be worth $300 billion, making the family one of the ten richest in human history. But the heirs managed to run through this immense wealth.

Biltmore

Within just 30 years of the death of the Commodore no member of the Vanderbilt family was among the richest in the US. And 48 years after his death, one of his grandchildren is said to have died penniless.
In less than a single generation the surviving Vanderbilts had spent the majority of their family wealth!

No one today is that wealthy, but there is a lesson here for those who have accumulated multimillion dollar fortunes. While families today will openly discuss formerly taboo subjects like same-sex marriage and drug use, talking about family wealth seems to be harder to discuss.

Most wealthy people have wills and trusts but a substantial number of children have no idea of how much money their parents have. I have experienced this frequently in our practice when we disclose to heirs how much money they are actually inheriting. This applies not just to the wealthy but also the moderately “comfortable.”

According to a recent study, approximately 80{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} to 90{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} of families who have inheritable wealth have an up-to-date will. Only about half have discussed their inheritance with their children.

The reasons why parents don’t talk about money with their children range from not thinking it’s important, don’t want children to feel entitled, or they just don’t talk about money.

The problem is that the receipt of sudden wealth can have a deleterious affect on people. Too often a family fortune that has been created with great effort is squandered by people who have no idea that their inheritance is finite.

What can be done? Creating an environment and venue where family wealth can be discussed can be facilitated by a family’s financial advisor, ideally a Registered Investment Advisor – rather than a broker – who has the best interest of the family at heart.

If you need someone who can help you talk about money with your heirs, give us a call. We’ll be happy to help.

What is the purpose of a stock market?

Before there was a stock market, there were stock companies.

A stock company allows individuals to pool their money to create an organization to operate and grow.  Stock is used to determine how much a person owns of a company.  Owning a stock does not necessarily create wealth.  Wealth creation can only occur if the stock can be sold to someone else who is willing to pay you more for it than what you originally paid.  This led to the creation of a market for people who owned shares in stock companies.

A stock market has two functions.  First, it allows the owners of stock to sell their ownership interest easily and quickly.  Second, it also allows people who would like to be owners to buy an ownership interest quickly and easily.  Now even people who do not have substantial financial resources can participate in the growth in value of large enterprises.

For example, the founders of Apple were able to raise money for their company by selling their shares of Apple stock to people who were willing to bet that the company would be successful.  That was 1976.  In 1980 the shares of Apple were first allowed to be publicly traded.  As a result, the founding shareholders were able to profit from their original investment and the company itself raised millions of dollars that it could invest in growth.  It also allowed people who did not personally know the founders to become partial owners and benefit from the company’s growth.  The stock market allowed people who believed in Apple computers to bet on the company’s future, and also provided them with a ready market for their shares if they needed to sell or decided they no longer believed in the company’s future.

The bottom line is that the stock market creates liquidity.  Without liquidity it becomes much harder for a company to raise the capital it needs to grow in a modern economy.

Retirement planning more important than ever

The concept of retirement planning is relatively recent in human history.

Let’s face it, for most of human history there was no such thing as “retirement.” People’s lives were shortened by hunger, disease, childbirth, wars, and accidents.  A relatively few lived to a ripe old age.  For those who did, the plan was to have enough children who would support them when they became too old to work.

In the lifetimes of our parents and grandparents, pensions were created that provided an income after leaving work.  And, of course, social security made its appearance in the 1930s to supplement savings and pensions.

Due to poor investment performance companies realized that they could not continue to pay generous pensions for thousands of retirees so they who dropped them in favor of 401(k) plans, taking the burden of providing retirement income from the employer to the employee.   Even governments are finding that there is a limit to their ability to tax and pay people in retirement.    There are many ways people can take care of their retirement income needs:  401(k)s, IRAs, and the ever-faithful investment account.

The generation that can count on pension income for their retirement is now retiring.  The younger generation now has the responsibility to take care of its own future.  This makes retirement planning more important than ever, and no place for amateurs.  Give us a call to help you meet your retirement goals.

With rising interest rates, what to do about bonds.

With interest rates increasing investors are noticing that their bonds are not doing nearly as well as their stocks.  In fact many investors may have lost money on bonds this year.  For example, the typical tax exempt bond fund has lost between 4 – 5{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} year-to-date.  What should investors do about bonds when the likelihood of rising interest rates is high?

The October issue of Financial Planning magazine give us an insight into what happened in the past when interest rates rose.

During the five-year period from 1977 through 1981, the federal discount rate rose to 13.42{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} from 5.46{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}, an increase of nearly 800 basis points, or 145.8{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}. During that period, the five-year annualized return of U.S. T-bills was an impressive 9.84{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}.  But T-bills are short-term bonds.

But bonds did not fare nearly as well. The Barclays one- to five-year government/credit index had a five-year annualized return of 6.61{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}, while the intermediate government/credit index had a 5.63{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} annualized return. The long government/credit index got hammered amid the rising rates, and ended the five-year period with an annualized return of -0.77{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}. Finally, the aggregate bond index had a five-year annualized return of 3.05{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}.

As every investor should know, bonds go down in price when interest rates go up but that decline is offset by the interest paid on the bonds.  If an investment manager knows what he is doing and protects his portfolios by avoiding exposure to long-dated government bonds the results will be acceptable. An annualized return of 5.63{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} is quite good when rates are increasing.

But one important note: It does not seem prudent to avoid bonds entirely during periods of rising interest rates. Bonds are a vitally important part of a diversified portfolio containing a wide variety of asset classes – during all times and seasons. Rather than trying to decide whether to be in or out of bonds, the more relevant issue would seem to be whether to use short-duration or long-duration bonds.

This, of course, is consistent with a strategic approach to portfolio design. Rather than completely remove an asset class from a portfolio, advisors and clients would be well advised to thoughtfully modify the components of an asset class. To use a nautical metaphor, rather than swapping boats, we simply trim the sails.

 

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