Getting things straight: about Bill Clinton and asset allocation

Posted on September 14, 2012September 14, 2012 by Danielle

One of the principles of a blog is that it’s supposed to be regular and I mostly get that, but phew! the last few weeks. First, there was the college drop off of my dearest beloved child (and the shoveling out of the remains of her room), the usual medical and veterinary crises, and a conference or two, mixed in with just about everyone in Northern Illinois deciding to finally get their financial life in order and call me (which I am definitely NOT complaining about). It’s been a busy few weeks. But in between time I watched the political conventions and now I, like everyone else, think I could do better on policy. At least in one area.

To be honest, I didn’t watch the one (very much) that featured Scarecrow and the Tin Man, but I had to tune in to watch Bill Clinton work that old black magic. He’s getting pretty grey now, but honestly he’s the only man who has ever held the job that I can actually imagine anyone ever wanting to date. Barack looks like excellent husband material, but if you really want to get in trouble on a Saturday night, Bill was certainly the go-to guy. But I digress. What this post is actually about is asset allocation. Lost you right there? Wait!

Because it’s now or not-until-next year for their 401ks, most people who have called me lately want to talk about what investments they actually should have selected instead of that target fund they picked when they couldn’t decipher the other offerings. If all you have is the 401k, the target fund may not be such a bad choice. But no, 99.99% of people I work with have a bigger coin collection.

You’ve probably got a 401k (or two, or three, depending on how many jobs you’ve held). Maybe you taught or worked for a non-profit, so a 403b is lurking around somewhere. In a burst of frugality, I’ll bet you opened (and maybe continued to add to) an IRA, maybe a Roth, and if you had a side gig or self-employment, you probably collected money in a SEP-IRA. If your income increased over the years, you’re probably not allowed to add to some of these any more, and you might also have a plain old mutual fund account or brokerage that our beloved IRS is happy to collect taxes on. So when I see all the internet advice on “proper asset allocation” and “tax-smart investing”, I realize it’s just about as much a fantasy for most of us as keeping our houses clean, our dresser drawers neat, and our dogs brushed.

I spent about 7.5 hours yesterday trying to sort out a client’s accounts and move around the large collection of investments to a coherent plan they could manage, understand, and withdraw from. If I’d have actually billed them for the amount of time it took, at least one of them would have croaked and I’d be talking to the remaining one about settling the estate. And when I present these things, the client’s eyes just glaze over. Sure you can simplify, dear client, but that probably means cutting down your 15 or 16 accounts to 8. One solution, of course, is that they sign up for professional ongoing management, but they’re trying to be frugal and handle it, and I support that and really want to help. Truth is, it’s hard and it took me a good long time to learn to do asset allocation properly—and I began investing 30 years ago and the books I’ve studied on the topic are bending several shelves in my bookcase.

I have another solution, and it’s political. Why can’t we just have national retirement accounts? You get one—if you have a generous employer, they can match your contribution. If you make under $X, your contributions are deductible, otherwise, no. If you’re self employed, maybe you get to contribute a little more. You choose the investments and where to house the account. There’s a default option (maybe a target fund) and a default deduction (if employed). All these different programs, deductible, non-deductible, different income thresholds, different contribution limits, rollovers—well, it’s just plain crazy. Maybe accountants and financial planners get plenty of business out of this, but it’s crazy making for the investor.

With my idea (which admittedly needs flesh on the bones) many middle to moderately affluent citizens (maybe even the rich guys, though Mitt would find a way to beat it) would end up with one, maybe two accounts: retirement and maybe regular investing/savings/brokerage. So much easier to get reasonable diversity without trying to spread out choices among seven or eight accounts. You might actually be able to see what you have. You wouldn’t lose track of it when you changed jobs, or be tempted to cash in the seemingly small sum (no. no. no.) And when retirement comes, you could have a rational withdrawal plan that would be manageable as you age.

Now, I’m not trying to privatize social security (omigod people can’t even invest decently under the system we have. What a nightmare.) or advocating a flat tax because then I’d probably have gone over to the dark side, er, become a Republican. But isn’t there anyone in at least one of the parties that could think a little bit about coming up with a streamlined way for most of us who want to save for retirement to actually do that without using up most of our precious remaining grey cells?

Until that happens, I’m here to help. It ain’t easy and you’re not dumb if it isn’t crystal clear on the first run-through. Maybe after the dust settles, retirement savings could get some attention? After we get done worrying about where Barack was born.

Social Security—Take the money and run?

Posted on August 22, 2012August 22, 2012 by Danielle

English: A bag of money, US dollars, spinning ...

(Photo credit: Wikipedia)

If I had a euro for every time I’ve heard Social Security is going broke, I’d have decamped to Paris by now and wouldn’t be dispensing all this sage financial advice. C’mon guys and gals, if you’re old enough to even think about collecting Social Security (exception being my 18 year old who worries about this stuff), it’s going to be around for you. So then it comes down to—when to collect. Lately several people have posed the idea that they will collect it at 62 or 66 and invest the money instead of spending it. Aside from the fact that I’ll believe it when I see it, here’s a look at whether you’d actually be ahead. Sure, my example is filled with assumptions that you can disagree with, but play along here for a moment.

So let’s say you’re single, 60 years old, have an average annual salary of $100,000, and your full retirement age is 66. (It’s way more complicated for couples, so I’m not even going to get into that here. Call your friendly local financial planner—me!) Using the nifty little free estimator at AARP, your benefit would be $1,911/month at 62 ($22,932/year); $2,548 at 66 ($30,576/year); and $3,363 at 70 ($40,356/year). Okay, we agreed you’re not going to spend one penny of that money you start collecting at age 62, but are going to invest it in a half-way decent portfolio of no-load mutual funds that averages, let’s be generous in today’s market, 8% return. So on the face of it, you’ll have $255,822 more at 70, right? Nice chunk of change, no? Not so fast…

At a safe withdrawal rate from your savings of, oh, 4% a year from 70 onwards, your added portfolio will give you an extra $10,232.88 per year, or about $853 per month. So instead of collecting $3,363 from Social Security at 70, you’ll have an income of $2,764 per month—you’ve cost yourself $599 per month. That buys a lot of cat food.

Let’s say you collect Social Security at 66 instead—four years of saving and the same 8% return. Now your extra cache is $107,685. At that same 4% withdrawal rate, you’ve got $4,307.38 per year, or about $359/month, giving you a total of $2,270 per month, instead of the $2,548 you would have had. Maybe $278 isn’t that much, but multiply it over a 30 year retirement–better die quick.

But wait, it’s even worse. Social Security is adjusted for inflation. Your investments aren’t. So your actual Social Security payment is likely to be more, and the spending power of your savings is less ($101,014 at 66, $223,629 at 70, assuming 3% inflation). And oh-oh, you have to pay taxes on that Social Security if you’re still working. And taxes on your investment returns, unless they’re in a tax sheltered account. Another big hit. .I don’t think I need to run through any more numbers for you to see why not only do financial planners beg you not to take benefits at 62, but we really like to see you wait until 70, unless you have some serious medical problem that makes a different strategy compelling.

Just. Don’t. Do. It.

Optimize everything?

Posted on August 10, 2012August 10, 2012 by Danielle

Hamster on Wheel (Photo credit: Wikipedia)

One of the benefits to the flood of information available on the web, and the self-publishing industry that the web makes possible, is that in two seconds or less, you can learn the ultimate best way to pick stocks (so they say), paint your porch, or manage your office work flow. Not a day goes by that I don’t get calls or a dozen emails from people pitching me to optimize my insurance recommendations, my archival backup, or my time management. Have a senior in high school? If they don’t know how to write a college admissions essay, hundreds of books and consultants will drum it into their slacker little heads.

But should we? Maybe even Harvard can’t transform Junior from a slack-ass into a star. Of course, if Junior’s last name is Bush, it won’t much matter in the slacker department. If not, he better be knocking himself silly from seventh grade on. In the rush for college admissions that consumes the better part of all day, every day from September to January for parents and high school seniors, I’m bemused (horrified, actually) at the number of kids I know with eating disorders, super-sensitivities, self-harming behavior, can’t be touched, not interested in the opposite sex—all the same issues as stressed lab rats in too small cages. In “my day” we just smoked dope, hated our parents, and went to protest rallies. And didn’t think the world would end if we didn’t go to Ivie U.

So let me ask you, have you had anything like these conversations lately?

“So, how have you been?” “Really busy, as always.”

“I’m sorry I haven’t gotten back to you, I’ve just been so BUSY.”

“Is now a good time to talk?” “There’s not really ever a good time.”

Yeah, me too. Regrettably. And I keep picturing a future when things are sure to “slow down”.

Then there’s the endless financial and job advice.

Are you saving enough for retirement? (the answer is always no).
Is this a good time to buy ______? (No, but whenever you didn’t, THAT was the good time)
Is this the optimal mix of investments? (let’s argue about whether you should have 8% or 11.5% in internationals).
Should I buy Apple? (Even if you did, you won’t be happy. Because then you should have bought it in 1985, when it was $15 and your ex-husband wouldn’t let you. Or you did buy 25 shares at $200, but why didn’t you buy 100? Both of those would be me.)

So, my financial advice for today is, go live your life! Go slurp down a frappucino without thinking about the calories or the cost. Your kid will survive a few rejection letters. Don’t have a virtual life.

Maybe, just maybe, financial planning advice could set some of these things to rest. As to the optimal mix of investments, we do know what “works” and it’s pretty simple—keep costs down, don’t churn your account, have a decent mix of types of investments, save and live below your means. A financial advisor can certainly help with a plan, set it in motion, and help you manage it. Professional advice can do much of the fine-tuning (and worrying) for you. But really, lighten up. You can only control your decisions, not every possible outcome. Make a sensible plan and let go.