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5 Mistakes That Could Derail Your Retirement

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Photo credit: Alex Proimos

The following is an excerpt from 5 Simple Mistakes That Could Ruin Your Retirement.

You can make a lot of mistakes in your youth … and assuming none of them get you killed or put in prison, you can generally recover from them. Time is on your side. But the closer you get to retirement, the less room for error you have.

Investing mistakes like that might make the difference between a comfortable retirement and working until the grave.As your nest egg gets larger, investing mistakes cost you a lot more. Think about it. If you lose 30% on a $10,000 portfolio, you’re out $3,000. That might be a single after-tax paycheck when you’re young. But imagine losing 30% on a $1 million portfolio. That’s $300,000. For most Americans, that represents years of income in the prime earnings years of your career.

Today, we’re going to look at five potential retirement mistakes that can dramatically affect your lifestyle. Some will be more relevant to younger investors and others to older investors. But all can potentially torpedo your retirement.

#1. Waiting Too Late to Start

If you save aggressively in your 20s, you have 40 or more years for those gains to compound. You can save at a more moderate level and let the capital markets do the heavy lifting for you. But the later you start, the harder it gets.

The best illustration of this I have ever seen is Richard Russell’s essay, Rich Man, Poor Man. Russell, who until his passing last year had covered the financial markets since 1958, gives an example of two savers. One opens an IRA at age 19 and sets aside $2,000 per year until the age of 25 and then stops. He invests for just seven years and then sits back and lets it compound.

A second saver starts saving at age 26, one year later than when our first investor stopped. He saves $2,000 per year until age 65, a period of 40 years.

So, we have one saver that started early and quit … and one that started just seven years later, but proceeded to save for 33 additional years. At age 65, who had a larger IRA?

Shockingly, the early investor. Assuming annual returns of 10%, Russell found that the early starter had a net worth of $930,641 by age 65 vs. $893,704 for the late starter.

Naturally, tinkering with the returns assumption will make a difference here. The stock market returns roughly 10% per year over the long-term, but returns vary wildly from year-to-year. But Russell’s point was simple enough: Start early when time is on your side.

If you’re already in your 30s, 40s or even older, you can’t undo your savings decisions from the past. But you can start now.

To continue reading, please see 5 Simple Mistakes That Could Ruin Your Retirement

 

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Lessons Learned From Prince’s Untimely Death

I gave my thoughts to Kiplinger’s Stacy Rapacon on lessons we can learn from the unfortunate passing of Prince. The music legend apparently passed away without a proper estate plan. Or if he had an estate plan, no one knows where it is… which is just as bad. See below:

Keep a copy of your will somewhere handy and be sure to tell your family—or at least your lawyer—where it is. All the estate planning in the world is for naught if your loved ones don’t know where the documents are. In Prince’s case, he was unmarried and had no surviving children, so at least in this case there are no grieving widows and orphans to worry about. But chances are that Prince intended his multi-million-dollar fortune to go, if not to a friend or friends, then to a charity. His wishes may never be carried out if his will cannot be found.

I’ve told my wife repeatedly where to look for the documents in the event I meet an untimely end. But I also know good and well that, if that day came, she might not be mentally able to deal with it at first. So, I keep one of the estate lawyer’s business cards pinned to the bulletin board in our kitchen. Yes, it’s a little morbid, but at least the number is there to call if she needs it. The estate lawyer has copies of all of our documents in the event that the originals are lost or destroyed.

You can read the full article here.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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A Little Portfolio Spring Cleaning

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Photo credit: stavos

Around this time every year, “well-used” shirts magically disappear from my closet. For years, I thought I was losing my mind. Then I realized that it was my wife’s not-so-subtle way of telling me it was time to do a little spring cleaning.

Out with the old, in with the new.

She’s right. It was time to throw away the moth-eaten T-shirts with mustard stains. But had she not taken the initiative (or had she actually informed me of what she was doing), they would still be cluttering up my closet.

Spring is a good time to clean out your house and take your old junk down to the curb. But it’s also a fine time for a little portfolio spring cleaning. Tax season has just ended, so you’re more likely to have household finances on your mind.

It’s smart to use this time wisely, take the initiative and do a little house cleaning on your investments. After all, due to the compounding effects of returns, small changes today can make a big difference years or even decades down the line.

So with the following five article, we’re going to do a little portfolio spring cleaning. Enjoy!

Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Looking At Muted Returns? Your 401(k) Might Be Your Best Friend

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First-quarter 401(k) account statements will be arriving in mail boxes in a few short weeks. When they do, a lot of Americans will wonder why they even bothered contributing. For all of the day-to-day noise, the market is going to finish the quarter pretty much where it started. And to think, the market hasn’t even crashed yet.

Running on a proverbial treadmill like that is frustrating, and I’d love to tell you to expect better returns for the rest of the year.

But based on where stocks are priced today, I wouldn’t get your hopes up. Looking at the cyclically-adjusted price/earnings (CAPE) ratio, the S&P 500 is priced to deliver annual returns of zero… over the next eight years.

You’ve no doubt heard the conventional wisdom that stocks “always” return 7%-10% over the long-term.

Well, that’s certainly been the case up until now… and will probably be the case going forward.

But again, we’re talking over the long-term, which in the world of financial planning might mean 30 years. In the interim, the results can look a lot different.

From September 1996 to March 2009 – a period of more than 13 years – the S&P 500 went nowhere. And not to be outdone, old timers that survived the bear markets of the 70s might remember that the market went nowhere from 1968 to 1982…

And that’s before adjusting for inflation.

Adjusting for inflation, it would have been well into the 1990s before investors saw a positive return on their 1968 investments!

So again, while stocks “always” return 7%-10% over time, there can be long stretches when returns come nowhere close to that. And based on today’s valuations, we may well be at the front end of one of those periods today.

So… what should you do with your savings?

Well, to start, you should max out your 401(k) plan at work.

You might want to read that last sentence again. Yes, I am recommending (if I had the authority, I would say I was ordering) that you put every last penny you can afford to save into your company 401(k) plan.

And I say that fully expecting the returns on most mutual funds to be terrible in the years ahead.

Even with a bleak market outlook, your 401(k) plan is likely to be your best bet at earning a reasonable return.

Remember, investment returns are only part of your total “effective” returns. These can be broken down into:

  1. Investment returns
  2. Employer matching
  3. Tax benefits

Let’s say you keep your entire 401(k) balance in a money market or stable value fund earning a big fat zero in returns.

Well, guess what? The other two sources of return are looking pretty good.

Let’s start with matching. This will vary from employer to employer but usually falls into a range of 3%-6% of your salary. If your employer is matching you dollar-for-dollar, your effective return on the portion they match is 100%. You’ve doubled your money as of day one.

The tax benefits are also nothing to take lightly. Every dollar you pay to the government in taxes is a dollar you no longer have.

Frankly, I’d rather run my money through a paper shredder one dollar bill at a time than give it to the government.

But every dollar saved from taxes by stuffing it in a 401(k) plan is a real addition to your wealth. If you’re in the 25% tax bracket, then you’ve effectively “earned” 25% on the salary you defer into your 401(k) plan.

Let’s use real numbers. Say you earn an even $100,000 per year and that you’re in the 28% tax bracket. You’re disciplined and you manage to defer the full $18,000 per year… and you keep the funds in a money market fund earning effectively nothing. Your employer is fairly generous and matches you at 4%. Here’s how the numbers shake out:

Investment Return:$0
Matching ($100,000 * 4%):$4,000
Tax benefits: ($18,000 * 28%):$5,040
Total gains:$9,040

You just made a 50% “return” on your $18,000 contribution… without putting a dollar at risk in the stock market.

Naturally, I have to put the usual disclaimers here. Empployer matching and tax savings are not “returns” in any traditional sense of the word. But they most certainly can add to your wealth over time, so it can make all the sense in the world to maximize your 401(k) contributions.

So I’ll repeat. The market may not offer much in the way of upside. But it still makes all the sense in the world to stuff every dollar you can get your hands on into your company 401(k) plan.

Photo credit: Ken Teegardin

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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All About Robo-Advisors

robot

Tadas Viskanta at Abnormal Returns posted an interesting piece on the rise of robo-advisors: Peak Robo-Advisor? Tadas asked his fellow financial bloggers to chime in on the robo revolution, and I shared my thoughts below:

Q: Venture capital has likely dried up for stand-alone robo-advisors. If so, where does the business of rob-advising go? Or said another way is robo-advising simply going to be the way advisors manage client accounts going forward?

A: I really see the robos getting atomized into smaller and smaller operations. We’re nearly to the point where every advisor can offer their own robo. In fact, I’ve been working with Wes Gray and his team at Alpha Architect to do exactly that.

This is a big deal because the biggest impediment to an advisor growing their practice is time. Your instinct is to try and serve every client that knocks on your door. But the reality is, you can’t. Your time is simply too valuable to do a lot of sit-down meetings with clients that have only modest sums to invest. Time has a monetary value, and you actually lose money on smaller clients. You have the same amount of regulatory compliance headache with a $10,000 client as a $10,000,000 client. Arguably, you actually have more.

But a robo setup changes that. With a robo setup, you can still profitably serve smaller clients, get them the same portfolios you would give a high roller, and all the while keep the regulators happy. A robo setup also allows a larger client to “kick the tires” and try out your services before committing a larger portion of their net worth to your management.

You can read the rest of the answers here.

Photo credit: e-lame

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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