Investing—time to get some balance

Posted on January 26, 2012January 26, 2012 by Danielle

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It’s that time of year again–time to throw out those New Year’s resolutions. By this time the health club should be cleared out and diet club meetings are back to the regulars. But there is one January task that you shouldn’t forget. It’s time to rebalance. And no, that doesn’t require any exercise equipment.

While I generally preach that you should decide on your investments and change the mix only rarely (when something really major changes in your life, like retirement), I don’t advocate a totally set-it-and-forget-it approach. Don’t look at your investments every day or you’ll shave years off your life, particularly in this volatile market. But don’t ignore them for years, either.

We all want to buy low and sell high, right? And most of us and the rest of the investment world end up doing the opposite. Rebalancing is the best chance you have of getting it right. Really, it’s simple but for some reason it requires intestinal fortitude. Here’s how.

Say you started out with an investment mix of 60% stock funds and 40% bond funds. But say the bonds have done pretty well this year and now your portfolio looks more like 54% stocks and 46% bonds. Move ‘em around—sell or exchange the extra 6% in bonds and buy more of the stock funds. Don’t tell me that bonds are doing better than stocks—that’s obvious. No, you DON’T want to hold on—you want to sell the high flyers (bonds, in this case) to buy what’s “cheap”—the stocks. (no specific investment recommendations intended). As with lottery tickets, it’s not a win unless you collect it! If you’re retired, this is also the time to re-fund your spending account.

Sure, sometimes one asset will keep going up, but over the long run, rebalancing has been shown to eke out better returns and protect you from the overvalued hysteria that inevitably hits certain classes of investments. So, screw up your courage and make those changes. Really, it doesn’t hurt much.

Retirement—How much is enough?

Posted on January 18, 2012January 18, 2012 by Danielle

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If you’ve read even three how-to-retire articles in the last decade, you’ve seen the percent-of-salary argument. It goes something like this: you need “x%” of your current salary to retire. Usually that number is 80%, and then the article proceeds to argue why that isn’t right and how you can, basically, never retire.

So, what do I have to say differently about the subject? Well, it depends—it depends on who you are, what your current level of spending is, what your current expense picture looks like. Like all real life financial planning, it’s a highly individualized process that has to take into account an awful lot of variables. But let me give you a dozen considerations so you have some new things to worry about late at night:

1. Are you currently a saver or a spender?

If you are spending everything you make, you’re probably going to need 100% of your current income in retirement. On the other hand, if you’re already saving at least 20% of your income, maxing out your 401(k) or SEP, or have a ton of unspent cash in your savings account, you can subtract that percentage from your future needs—it’s going to be a hard habit for you to break, but you really can ease up on the saving. This IS what you’ve been saving for!

2. How much do you spend on work related expenses?

Do you drive downtown every day and pay for parking? Are you in Armani? Do you eat every lunch out and stop at Starbucks on the way in? Are you entertaining clients on a regular basis? Most of this you can cut back on in retirement. Figure out what you spend as a proportion of your income, and subtract that from your retirement needs.

On the other hand, if you already work at home, or go to work in jeans and brown bag it, or take the bus, you’re not going to save anything in this category in retirement. So, back up to 100%.

3. How many cars are you supporting?

Each car you live without saves you thousands—both in repairs and maintenance, and in insurance, capital for future purchases, or lease/loan payments. Try out this calculator to see what it’s really costing you. Again, figure any reductions as a percentage of your yearly income and subtract from your 100%.

4. How many people are you supporting?

Any chance your kids might move back in with you (or are still there)? Is there anyone in your family with disabilities that might make them dependent on you? Elderly parents? Based on my own experience, you might be amazed at how much it can cost you to eat at a hospital for weeks (when you’re the caretaker). Or hire a “medicar” to get your elderly parent to the doctor. Or how much the grocery and electricity bills can go up when the kids move back.

5. How’s your health?

Probably fine right now, but that can change big time in the blink of an eye. Whatever you’ve calculated as your potential retirement income (investment withdrawal, Social Security, pensions), is it enough to support $250 a day (that’s $7,500 per month) for, say, 4-7 years at a nursing home? Add maybe another $1,000 per month for “extras” that aren’t included in the nursing home fee, and aren’t paid by insurance. Think you’ll stay home instead? If you need round-the-clock care, it’s even more expensive, which is the secret to why a lot of people ultimately choose nursing homes. At least in the Chicago area, that $250/day isn’t even the nicest nursing homes. If your nest egg for retirement is less than $2 million, you must consider long term care insurance. And maybe start an HSA savings account, if you’re eligible, to pay for the donut hole in drug coverage. Retirement planning, and the amounts needed, must take into account the need for breathtakingly expensive long term care, and the burden of caring for you that loved ones might undertake. And you thought college was expensive!

6. How much debt will you have?

Is your house paid off? Whether it should be is a tough question that I’ll take up in other blog posts. If you go into retirement with a house payment, though, you’ll require enough income to continue to make the payment. If you rent, you’re going to need to plan that that cost will go up over time.

7. Have you figured in inflation?

If you’ve paid off the mortgage, do you have sufficient investment cash to continue the likely escalation in property taxes, utilities and a fund for major home repairs? For example, if you’re retired for 30 years, you’re probably going to need to reroof at some point during that period. A rule of thumb I’ve seen is to budget 1% of the value of your house for home repairs every year. In my case, it’s been at least that much and in some years, much more. But take 1% of your house’s value, and add it to your retirement budget—otherwise, a re-roof or a new driveway can be a budget buster that requires you to break into your retirement principal or skip a lot of vacations.

8. How much do you do yourself?

Cleaning service? Landscaper? Even if you think you might handle some of this in retirement, your health may not allow it at some point. Try to make a guess at these costs.

9. How cutting edge are you?

Are you first with the newest or are you still driving a coal-fired computer? How early you buy and how quickly you discard can adjust your number up or down, particularly if you change your habits in retirement (in either direction).

10. How much do you want to gift?

Taking a couple of grandkids to lunch and the ballet, or a week in Disneyland, or buying a new set of tires for a child who’s broke can quickly add up (thanks, Mom & Dad). If you’re anywhere near affluent enough to consider doing these things, you’re going to do them. Make them part of your budget.

11. Do you belong to an organization or a church?

Will your donations be time and effort or cash? Generous cash givers may want to adjust donations down in retirement, giving time instead, or adjust up, if supporting an organization is one of the goals you’d always planned for in retirement. Also, I’ve found as I get older that neediness tugs at my heart strings even harder than when I was in my twenties.

12. Do you plan to move?

To a cheaper place? A different area? Can you wait out the market to sell your house? Have you calculated closing costs, travel to a new location, the possibility of rental costs between purchases, or the cost of packing and moving itself?

So now, is it 80%? or 50%? or 100%? Thinking maybe you’ll work a little longer?

Should your financial advisor be a nice guy?

Posted on January 11, 2012January 11, 2012 by Danielle

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Guy?! What! what! If you’ve read even a few of my blog posts, you already know the answer. I’ll even ignore the word “guy” for a while, that part of the answer being just too obvious. What’s sparking my ire is 45 pages in the November Chicago magazine (I read it at the doctor’s office) of sycophantic advertorial crap about the top wealth managers in the Chicago area. I hope people aren’t stupid enough to identify this as actual reportage, although that’s certainly what the magazine and the “winners” are hoping for, and shame on Chicago magazine. Oh shucks, I guess they’ll never feature me now.

Okay, for 35 pages I’ve looked at smiling white-guy suits (with some chicks thrown in, mostly blondes and under 40) declaring how they give “unbiased advice”, are dedicated to the “best interests of the client” and talk about how hard they work and how they’ll work to build your wealth. Yeah, right, but they’re gonna work to build THEIR wealth a lot harder, I guarantee. Because surprise, surprise, every one of them as far as I can see is a stock broker(okay, maybe a CPA or attorney thrown in). They have no legal duty to work for your best interests, only to recommend “appropriate” investments. So let’s see what these nice guys will cost you.

I’m going to give them the benefit of a doubt and assume they’re going to recommend fairly reasonable investments to you, say, a large cap mutual fund and not some insane hedge fund scheme or Ponzi-scheme non-traded REIT. Okay, so this lovely fund carries a 5.75% load (par for the course if the fund is called Lord Abbett or Putnam or Oppenheimer–bet you’ve heard those names if you’ve ever talked to a broker). Plus, the Lord Putheimer fund has yearly management fees of, let’s be nice, 1.5%. Invest a million bucks and you’re going to lose 7.25% right off the bat–$72,500. No wonder those guys are smiling. Are you? Do you think the Lord Putheimer fund is going to make you that much this year?

In contrast, I’ll meet with you on an hourly basis. If you have the most complicated investments around (you were working with a broker, right?), you can still take a zero off that number and cut it in half–it’s highly unlikely that advice alone would cost more than $3,500, and plenty of clients pay far less. Want investment management? My fee, which includes a financial plan and an actual person who will talk to you without canned junk to sell you and do most of the worrying for you, would cost you $8,000 for that million, billed over a year. Not cheap, but not $72K, either. The funds I recommend generally have management fees in the range of 0.17% to 0.50%, so you’ll get professional management and investments at less than their funds alone nick you for. I don’t collect any commissions, or referral fees. I do get some free brochures from Vanguard, pens from Scottrade, and a refrigerator magnet now and then, which I can assure you are compelling my recommendations. Not. I’ll even wear a lavender tie if it’ll make you feel better. I draw the line at blonde.

But back to the original question. I don’t think nice is the important quality here. There’s no nice way to tell you your dog is dead. You are paying for and should be getting honest advice–the truth–not some suck up that will pat you on the back as he picks your pocket. The advisor who really has your best interests at heart will tell you the truth about any stinkers in your investments, help you face what you need to, and move forward with investments that have a reasonable chance at success without skinning you alive. THAT will be a lot nicer when you look to your dough for retirement, or sending your kid to college. A lot nicer than visiting that nice guy in his very nice office.