So consider this source: I am an independent advisor, and I have been in the industry for 15 years. I have worked for big banks, small banks, a retail brokerage, fledgling hedge fund managers, registered investment advisory firms, and now I am completely independent and objective. I have seen it all and have had exposure to almost every tool or investment product that exists out there. I don’t say this to brag by any means. There are probably far smarter and better experts (as they say) out there. I just want you to consider the source!
Why am I writing this article? After 15 years, I am fed up. I am fed up with all the crap that exists out there to confuse you. I am fed up with my clients’ lack of education, I am fed up with the way they have been treated, and I am fed up with the fact that the industry is stacked against them now. I want to help the little guy! So I intend on being in your face, and I intend on giving it to you straight! These are my opinions based on my experiences. I want to help create, build and preserve a better retirement for people. Many think they have a handle on it, but they really don’t.
So let’s start with this big money expert: the banks! So how do you feel about the banks these days? What do you like about the banks? Do you like the fact that they are paying below 1% on your deposits? Do you like the fact that they are safe? Do your research on FDIC insurance. How safe are the banks? Do you know what the banks really do with your money? Whatever they want! It’s your money right? Or is it? I believe in 2009 the FDIC was actually broke. There are trillions in bank deposits, and I know for sure there are not trillions in the FDIC! Isn’t it interesting that the federal regulators allow banks to widely advertise and promote the FDIC? If they didn’t, you would put very little of your money in the bank. But the investment and insurance industries are heavily regulated, hardly allowed to advertise at all, and if they are, they have to have every little word checked for compliance. For instance, we are not allowed to say to a client that annuities have a dollar-for-dollar reserve; we are not allowed to say that most states guarantee annuity premiums up to $300,000. Sounds better than the FDIC to me, but the industry is not allowed to boast like the banks are? I wonder why that is? I will let you come to that conclusion on your own. Remember, I worked in the banks, and I understand and know what is going on there. Basically, the bank takes your money and gives you a paltry rate to park it with them. They then take it and lend it out to others, they invest it as they wish, and they reap the high returns. That seems like a great deal? Current rates, I would say, are criminal. Don’t forget the Fed let’s them basically borrow money from them for free too.
Of course we need money in the banks for liquidity, we need an emergency fund, and we need to pay our bills and such, but I would never keep large amounts of your wealth in the bank. Yet every day I meet with people that do and have had the majority of their wealth sitting in the banks, and they don’t know or understand that their wealth and purchasing power is eroding daily. They are there for one reason and one reason only – fear!
That brings us to the real and most important reason why your money should not be in the banks: INFLATION! It is amazing to me that throughout my years of experience, almost every person, client or even advisor who I have run into does not factor this or even consider it. This is the No. 1 silent killer of people’s wealth today. When you factor inflation, taxes and fees into your equation, I can show most that their deposits sitting in the bank are eroding. They are actually losing money! Even after you put it all down for them, some are still reluctant to move large sums out of the bank because of fear! The fear does several things: It puts them in a mode of indecision so they actually do nothing and prevents them from listening to advisors. Some think we are all Madoffs or sharks, but if you think that, at least take control of your own money! Take control of your own destiny! At least put your money into an investment that will keep pace with inflation!
Do you know how the CPI numbers are calculated? You would be surprised, did you know that the government changed the way they calculate it in 1983, and low and behold that method lowered the number. Why did they do this? So they didn’t have to increase COLA of course. Ask yourself how much a gallon of milk cost you five years ago and how much it is now; ask yourself how much a gallon of gas cost! Then tell me that getting less than 1% on your money is a good thing. Others tell me, “well I like my money in the bank because I know where it is, and I can control that.” Once again, where is your money really?
Over 6000 banks collapsed in 2009 alone. Was your money safe? All the FDIC does is act as a bully. They come in to a well-run, healthy bank that made good decisions and tell them, “hey you need to take over that failing bank across the street.”
I am sorry, but the No. 1 fear you should have is running out of money in retirement.
There are many tools to combat inflation, but let’s first talk about why we really need to combat inflation! Then we will talk about some of the tools. We need to combat and plan against inflation for one reason and one reason only! RETIREMENT! Retirement planning is the No. 1 reason clients come to me, and I would venture that most advisors would say the same. What do we need in retirement? We need income, right?
In retirement planning, we need to find what I call your FINANCIAL SPEED! Your speed is your velocity of money, how much do you need to put away, at what rate of return over what timeframe do you need to get you to your goal, and what is your goal? A good retirement is one with income to accommodate your lifestyle throughout your entire retirement – not just the first few years, but 20 to 30 years! So what are all those figures? Those comprise your FINANCIAL SPEED! I think it is simple, but it really isn’t! There are many forces and variables that can break your stride! The guidance and the help of a planner can help. I like to put several scenarios in front of my clients to show them what they could expect.
What I see so often is that people think they really have a handle on things based on some simple calculations they make. They often use some retirement calculator on a website, and within five minutes, they are safe! There is so much more to it than that. But the common mistake I see is the lack of planning to bridge that income gap! What is the income gap? Most will say, “ok, when I retire at age 62 or 66, I will need amount x, and that amount at a certain rate of return will provide x amount of monthly income, and that monthly income plus my Social Security will provide enough income to take care of my current monthly expenses.” Keep in mind this calculation is usually based on current needs. How do we really know what our future needs will be? We may need $5000 in today’s dollars to provide for us, but what does that need to be in 20 or 30 years? It may need to be more like $8000, and that $3000 dollars a month is the income gap, so how do we fill that? That is where true planning comes in. To accomplish that, you will need investment expertise. Go ahead and try it on your own if you want, but I don’t suggest it. So often, I hear people bragging about their returns on or yields on an investment, and I have to say I don’t really care what that is. I care about what you kept in your pocket after taxes, fees and inflation because that’s your real return, and most of the time that isn’t so exciting is it? It is also dragging your FINANCIAL SPEED!
So let’s look at some tools that may help you get to retirement and sustain it. In fact, some tools that you are probably already using or have used. The No. 1 tool we are all relying on is Social Security, right? That brings some questions to mind: How many of your advisors or brokers are talking to you about Social Security planning? How many use it in their planning? When was the last time your advisor asked to see your Social Security statement, and when was the last time your broker asked to see your tax return for that matter? Too many times, Social Security is one of the largest investments people have contributed to and accumulated during their working years. They say the average worker has worked 90,000 hours by the time we retire. This is a simple tool that we will use to do one thing and one thing only in retirement, and that is to GENERATE INCOME!
There are other tools that we can invest our money in to potentially generate income, right? These tools are CDs, annuities, stocks, bonds or mutual funds, gold, real estate, and ETFs to name a few. These are great tools, but be mindful of what I discussed earlier: taxes, fees and inflation. From these tools, we would expect different results. CDs for instance, they are paying a whopping .5 or .6% these days. Again, why have your money here? Yet there is over $10 trillion sitting in banks. Stocks and bonds may provide growth and gains, which we need to fuel our financial speed, right? But once again, I am only concerned when I am planning on the after-tax return of these.
What about annuities? Annuities can provide lifetime income, growth and tax deferral. They may also by-pass probate, in some states they are creditor proof, they provide a competitive rate of return, they can provide liquidity, typically 10%, and they have provisions to allow full liquidity for nursing home or terminal illness care. The disadvantage is that you have to hold them for a while, and some don’t get you the full market. Did you know that there are some annuities that will pay you monthly income for the rest of your life even if you run out of money? Will the bank do that for you? Most people don’t understand how annuities work, and even worse, I think there are some advisors who don’t either.
All of these tools can provide a combination of results like growth, income, diversification, safety and taxes. What we may or may not know is that all these tools and results are useless if we don’t have life! If we don’t have our health, relationships, faith, etc., none of these tools mean a thing! You may want to travel, you many want to play golf in retirement, no matter what you want to do, none of the planning or tools and results matter if you don’t have life, health and faith. What is most important in your life? Very few say their mutual funds, and why is that? Because we all know that these tools are just a means to an end, and they are tools we use to accomplish these things we talked about to ultimately give us one thing!
Don’t ever fall in love with your investments; fall in love with the end results. IF we have millions in the right tools, but we lose our health, does it really matter if we have millions in our investments? Nope, it won’t extend our life one single breath. So if your tools are not accomplishing what you bought them for, we need to reconsider if it is time to look at new tools. I believe that the real purpose of money dictates where you put it. All these investments are nothing more than a tool we can use to generate income for our retirement. There is no retirement without income! There is no retirement if you don’t know what your FINANCIAL SPEED is. Without the right tools and the right planning, the No. 1 fear can be realized – RUNNING OUT OF MONEY! I believe all of this comes down you and an advisor putting together a solid retirement income strategy. This will give you the peace of mind you need. DO you have a plan that guarantees you can never run out of money?
It truly isn’t about the tools or the products; it is about the plan, your after-tax returns, fighting inflation, and bridging that income gap so you can create and preserve your retirement.