Jim'sMoneyBlog

Financial Opinion and Insights

Posts Tagged ‘fee only planning

Why don’t more people go to financial planners?

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Bob Clark, in a recent AdvisorOne article, says the answer is “fear.” Many people are afraid of:

• Being embarrassed by their current financial condition

• learning their financial situation is much worse than they realized

• of getting beat up for not saving more

• of being told to do things they don’t want to do, such as going on a budget, saving more, or buying more insurance.

He’s probably right.  The old adage WIIFM (What’s in it for me) maybe best answers what people really want:  How to get their financial house in order and keep it that way forever; how to achieve their goals with peace of mind; how to minimize risk; how to feel good about what their future!

Jim

———-

The Independent Financial GroupJim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan.  The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com, the IFG Investment Blog and by subscribing to IFG Insights lettersfor individual investors.  Keep up to date with IFG on Twitter: @JimLorenzen

How To Buy or Lease Your Next Car

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Believe it or not, car buying isn’t as much of a hassle as it used to be – the reason is simple:  There’s so much available information through internet sites.

If you’re looking at a new car, it’s now possible to see exactly what the dealer paid – and, I’m not talking about the ‘dealer’s invoice’; that’s a marketing ploy, as is the manufacturer’s suggested retail price (MSRP).

The thing to remember is that car dealers like ‘moving parts’ in a negotiation.  The more moving parts there are, the more they can manipulate.  Moving parts include:

  • The price of the car
  • Trade-in value
  • Financing
  • Fees and other add-ons

So, whether you want to buy or lease, whether you have a trade-in or not, you want to begin with this:

  • You’re paying cash
  • You have no trade-in

You’ve just removed two of the moving parts.   So, here are your steps along with my little story:

  1. Test-drive the cars you’re interested in at various dealerships.  They’ll ask you about your trade-in and whether you plan to lease or buy.  Remember:  No trade-in; you’re paying cash.   If you like a car you driven, ask for the literature on the car, including the `trim line’.
  2. Do your homework.  Consumer Reports has an excellent car buying site, as well as a service, for both new and used cars.  It’s worth paying for the reports on the cars you’re interested in.  Once you’ve decided on a couple of candidates, it’s time to get your ducks lined-up.   Whether you plan to lease or buy, you should know your credit score, which you can also find online.  If you plan to finance, you might check out some local credit unions, your bank, or something like LendingTree.com and get pre-qualified for your loan.  When you’re all ready with homework and financing completed, head back to the dealership(s).  Take your homework with you.
  3. Need to test-drive again?  Do
  4. When the salesman asks you to sit down; remember negotiating isn’t about ‘winning’ or acting tough.  It’s about helping him see your side; but begin with this:“Before we begin talking about the car, can you give me an itemized list of the extra fees that will be added to the price?”A reputable dealership will do it readily and easily.  The last one I asked said, “Sure!” and ran out of the room, returning in 30 seconds with a computer print-out.  You can expect vehicle registration, license, etc.; but if `dealer prep’ charges are there, cross it off in front of him – they didn’t try to charge it in my case.You’ve just removed the last remaining moving part, other than price – the cash price – even if you intend to lease.
  5. The negotiation.  It’s amazing what objective third-party numbers can do to solidify your position.  Now, remember, the dealership has to make money.  They have overhead, payroll, etc., like any other business; but, once armed with the true cost the dealership pays, you’ll know about how much profit you can reasonably build-in.  As I said, the Consumer Reportswebsite will be helpful, here.Make your offer – of course, you’ll low-ball a little; but those third-party numbers and your transparency makes your case pretty compelling.  And, of course, the salesman has no ‘moving parts’ to play with.  It’s strictly about the cash price.

The last time I did this, the salesman was very nice; but, quick and adamant that he just couldn’t meet my price.  I smiled and said, “I understand.  You’re probably right!  The car may indeed be worth more than this… I guess I’m simply negotiating for the wrong car!”  I was packing my things as I said it.  There was a $4,000 spread.  But he insisted it was the right car, despite the fact I had homework on others.

Short version:  The dealership came down $3,000, if they could handle the financing.  I had financing in place at 2.95%; he came back and said they’d do 2.9% even, no prepay penalties, blah, blah, blah.

What if they don’t meet your price?  You leave.  There are other cars.  There are other dealerships.  Let him know, “I’m not saying no to you; I’m saying this isn’t the right car.  Maybe there’s another! Maybe you have it!  Want to go test-driving?   They hate that.

  1. We’re done.  Extra add-ons were eliminated early, the price is settled, and the prequalifying allowed me to negotiate the price I wanted. 
    1. If this were a lease deal, I would have worked it the same way. Once the price is established, I could have asked? “What would the residual value of a ___-month closed-end lease look like? Also, ‘What’s your lease factor?”
    2. If I were doing a trade-in, that would come up after everything else is settled.  “I’m glad we have a deal!” Then, I’d stare out the window at my car.  “I’m not sure my niece really needs it – maybe she’d rather have the down payment for another car.  How much do you think my car’s worth?” – you did your homework on that car, too.  I actually gave my car to my brother-in-law.
    3. The ‘business office’ stop should be a formality.  The extra charges (vehicle registration, etc.,) have been previously disclosed and there’s no dealer prep.  The price is set and the financing is in place.  The ‘trade’ value, if any, comes off the price.  The moving parts are done.  My stop took four minutes.

You’ll find that reputable dealerships are easy to deal with because the amount of available information has actually made their job easier.  When there’s transparency – everyone knows the real story – it’s easier to meet with mutual advantage.  If they don’t want to share fees, etc. in front, it’s time to look elsewhere.

Jim

———————

Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Written by Jim Lorenzen, CFP®, AIF®

October 25, 2011 at 8:03 am

Should You Buy or Lease Your Next Car?

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

This is a question people often ask.  If you’re one of them, I hope this will help simplify your decision making.

First, it’s important to understand just how leasing differs from buying – Now, I’m going to ‘make up’ my own numbers here, just for the sake of illustration.  You can get your own.

Let’s suppose a car could be purchased for $35,000.   If buy the car, you would be buying 100% of the equity… all $35,000 worth.  It doesn’t matter if you pay cash or finance it; you’re still buying ownership – all $35,000 worth of equity.  If you’re financing, you would be financing that equity over a certain period of time.

For example, If you have great credit and can get a low rate, say 2.9%, and financed the car over five years, you would be making payments of $625.83 monthly, assuming no down payment.

But a lease is different.  You’re not buying the equity.  You’re simply paying for the ‘use’ of the car. 

Translation:  You are financing the depreciation.  Once the price of the car is determined (the ‘cap cost’), which we’ve stated to be $35,000, then the assumed value at the end of the lease period becomes important, because it’s the depreciation you’re paying for, not the equity.  The same car leased would likely have monthly payments around $375 simply because you’re not buying any of the equity.  At the end of the lease, you have no car and nothing to show for your money.

You can find leasing calculators all over the internet.  You’ll find that auto dealers use a ‘lease factor’.  Those who are more forthcoming will tell you what theirs is – it differs from dealer to dealer.  Just remember this formula:  Lease Factor x 2400 = the interest rate you’re being charged.  By the same token, the interest rate divided by 2400 will tell you the lease factor.

But, should you buy or lease?  It depends.

My opinion:  If you plan to change cars every three or four years, you’re probably better off leasing.  But, if you plan to keep your car five years or longer, you’re probably better off buying.  

If you’re driving a paid-for car now, what’s your rush?  Here in California, we’re in a car culture.  People are often viewed in the light of the car they drive.  Yeah, it’s stupid.  If you can fight-off trying to keep up appearances, put the monthly payments into an index fund and dollar-cost average for five years.  The market may likely buy part of your car for you!

Jim

————————

Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Written by Jim Lorenzen, CFP®, AIF®

October 11, 2011 at 8:10 am

Your Estate Planning Checklist

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

Here’s a quick checklist, courtesy of Kathleen McBride, Editor-in-Chief of Wealth Channel, AdvisorOne.  Sit down with your estate-planning attorney and review it together.

  1. Check your will and create a `revocable trust’ to avoid probate.  Assets pass easily, much like under a will, but you can avoid the probate process.   Make sure your will is placed inside the trust.
  2. When you meet with your attorney, remember to set-up a review schedule.  Current tax law expires in two years.
  3. Assets should be titled in the name of the revocable trust – that includes your home, car, investment accounts, and other property.  Ask your attorney whether IRAs should be included since there are other factors to consider.
  4. Make sure both the trust document  and will reference the new tax law.
  5. You might want to make sure one or more people have a general power of attorney.  If you get into a car accident, someone has to write checks.
  6. Make sure you have a health care directive.
  7. Discuss a limited power of appointment (LPA) with your attorney so that somebody who benefits from the trust can decide where it goes when they no longer need the income.

This is just a `heads-up’ checklist to discuss with your estate planning attorney.  I am not an attorney and I didn’t even stay in a Holiday Inn Express.  I did watch Perry Mason when I was a kid, but I’m not sure that counts.

Jim

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.  He’s been a headline speaker at conventions throughout the United States, Canada, and the U.K. and has appeared in `The Journal of Compensation and Benefits’, as well as in The Profit Sharing Council of America’s `Insights’.    Jim has also appeared on American Airlines’ `Sky Radio’, heard on more than 19,000 flights.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained herein should be regarded as tax or legal advice and the reader is urged to seek competent counsel to address those issues.   The above represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a formal financial and investment plan.   For questions or comments, you can reach Jim at 805.265.5416 or through the IFG website, http://www.indfin.com.

Choosing An Advisor

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

What To Ask – and What NOT to Ask.Having been in the advisory business as long as I have, you can imagine how many people I’ve talked with over the years – either on the phone or in person at various functions, events, and social gatherings.  And, doing what I do for a living, you hear just about everything, particularly since I do this day in and day out.

Last week’s IFG/Morningstar Perspectives Newsletter has a brief item on the last page on how to choose a financial advisor; but, I’d like to give you some tips that weren’t in that newsletter and I think they’ll help you even more.

What many people don’t realize is that not everyone is a good advisory client.    All advisors want new clients, to be sure; but, top advisors are careful who they’ll accept because, after all, we’re talking about what could be a long-term ongoing relationship – my typical client, for example, has been with me for more than a decade and many others more than fifteen years.  Many know my wife and we know their families.    So, since these relationships tend to be, and should be, ongoing, it’s important to make sure the `fit’ is right.

Many advisors who simply sell product may not be so particular; but, top fee advisors who don’t sell products or make commissions know it’s about possibly establishing a long-term relationship.   They’ll likely be as careful in the selection process as the prospective client.  

Here are some things good advisors will listen for in early conversations; things that will tip him or her off about who s/he’s talking with:

First, what NOT to ask.  These are the things I hear from people who truly believe they know what they’re doing but whose questions are simply inconsistent with that belief.  Don’t ever ask these; they will not help your case if you’re trying to impress a `seasoned’ advisor.

  • “What kind of return do you get for your clients?”.  Seasoned pros don’t have a `return’ number, and here’s why.  Advisors handle a variety of clients from 80-year-old widows who care about income to wealthy individuals who are concerned only with preserving purchasing power and providing for a grandchild’s education.  Some are concerned with taxes while others are concerned with meeting long term objectives.   Anyone who’s truly done any real planning with a professional should know the term `risk-adjusted return’, which means that there is an `optimum’ return for a diversified portfolio for each unit of risk assumed – and everyone has different attitudes about risk.   The question assumes everyone has the same objectives , same tax issues, same time frame, same assets, same income requirements, and has the same risk profile.   The question shows this person thinks everyone is a `broker’ and has never really seen a real plan.
  • “Where do you think is a good place to put my money right now?”  This is absolute proof this person does not have a long-term, written plan with an Investment Policy Statement (IPS) defining a long-term investment discipline designed to meet personal long-term goals.  This question tells me this person does need help and might be a client candidate.    I’ll usually respond by saying, “It depends, what is your purpose for your money?”   Most people don’t even think about that.  Purpose is different from goals.   That answer, plus other things I hear, will generally either confirm or disqualify this person as a serious candidate.  Candidates will answer with a genuine, “What do you mean?”  Most will answer with, “I just want to make more money.”   Clever, huh?
  • “What do you do that’s different?” Different from who?  See the above question.  Compared to some, I could write a book.   Compared to other quality non-conflicted advisors, maybe nothing.  Who knows?  It depends on what and who you’re comparing.  Again, this question tells most good advisors that this person really doesn’t even know what s/he’s looking for.
  • “How do I know you’re any good?” The fact they never ask that of their doctor, dentist, CPA, or estate planning attorney automatically proves they’re not seeing the advisor as providing guidance on a proven long-term disciplined process as much as they see the advisor as an investment provider.  The danger is simple:  If that’s what they’re shopping for, that’s what they’ll get; and, it’s not what they usually need.   Strategic Planning and portfolio guidance is a process far different from picking winning investments – good luck with the latter.  The truth is, they just don’t know what else to ask.   The short answer to the question is (1) experience and (2) credentials.   The CFP, ChFC, and similar credentials both have education and experience requirements, and extensive coursework followed by rigorous exams.  The CFP Board’s exam, for example, is a ten-hour exam given over two days, twice each year on identical dates in a handful of selected cities.  If a quality advisor believes your serious and a good match, s/he will furnish you with a few references, but no advisor wants clients bothered by a lot of calls from people who can’t decide to decide.

That’s enough.  We don’t want this to go on forever.  So, what should you ask?  Here are a few questions that your potential advisor should be willing to answer – in writing – along with my own answers:

  1. Are you held to a fiduciary standard in all dealings with me and my financial affairs?  Will you acknowledge that status in writing?Yes.  The Independent Financial Group embraces fiduciary status and will acknowledge this status in writing.  Fiduciary status is important.  It means will they be legally bound to put your interests first – a higher standard than `suitability’  – and will they accept this status for BOTH the planning process AND the investment selections?
  2. Do you disclose all conflicts of interest, both actual and potential, that exist or might exist in my relationship with you?The Independent Financial Group receives no payment from any investment or other service provider.    Disclosing doesn’t make conflicts right.  Avoiding them does.
  3. Do you forego any type of commission-based compensation in favor of receiving all compensation via fees that are fully disclosed in dollar terms?Yes.   Refer to #2, above.  IFG compensation is `revenue-neutral’, meaning it isn’t affected by the course of the plan or the investments or managers chosen.  Disclosing in dollar-terms is key.  Is there hidden compensation you’re not aware of from other service providers?
  4. Do you provide full service financial planning services as well as investment advisory services?Yes.  A client, however, would be wise to realize that the best comprehensive financial planning is usually the result of a collaborative effort that includes the client’s tax professional, estate-planning attorney, as well as the financial planner, with the client’s involvement at every stage.
  5. If you provide full service, comprehensive financial planning services, are these services performed by individuals that have obtained the CERTIFIED FINANCIAL PLANNER™ (CFP®) certification?Yes.  James Lorenzen is a CFP® , as well as an Accredited Investment Fiduciary™ (AIF®) granted by the Foundation for Fiduciary Studies in association with the Katz Graduate School of Business, University of Pittsburgh.  Experience: 20 years with clients located in New York, Florida, and California.
  6. Have you ever been disciplined by regulatory authorities?  Do you have a clean compliance record.  How can I check?   20th year and never an issue.   I’m proud of having a clean compliance record.  You can see for yourself by searching James M. Lorenzen or The Independent Financial Group at www.adviserinfo.sec.gov.

 

You probably noticed I didn’t spend a lot of time on experience, etc..    Even though I’ve been doing this for twenty years, there are many less experienced advisors who are very good – and others more experienced who I wouldn’t trust with pocket change.   Some newer advisors may lack experience; but, they have access to others with vast experience, while at the same time bringing a strong desire to truly be of help as they begin their careers.  I wouldn’t reject anyone on experience alone.  Besides, if they have credentials, most of the prestigious ones have experience requirements built-in.   Let’s  face it, newer doctors can be very good, why can’t advisors?

Hope this helps!

Jim

—-

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.  He’s been a headline speaker at conventions throughout the United States, Canada, and the U.K. and has appeared in `The Journal of Compensation and Benefits’, as well as in The Profit Sharing Council of America’s `Insights’.    Jim has also appeared on American Airlines’ `Sky Radio’, heard on more than 19,000 flights.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained herein should be regarded as tax or legal advice and the reader is urged to seek competent counsel to address those issues.   The above represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a formal financial and investment plan.   For questions or comments, you can reach Jim at 805.265.5416 or through the IFG website, http://www.indfin.com.

Own or Loan – Choose Carefully!

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

I remember when I first entered the business of financial advice in 1990, I went through `broker 101’ training with what was in those days Dean Witter.   One of the first things we learned was that there was only three things someone can do with their money:  They can own, loan, or consume.  Maybe the #2 thing was that every financial instrument in the world essentially is a stock or a bond.

When you loan money, you don’t get growth.  You get income, and a fixed one at that!

The choice is simple:  You can loan your money and collect interest and get the same dollar units back at a later date (worth less due to inflation), or you can acquire ownership in something that fluctuates but historically moves higher over time.   Real estate and ownership of quality companies are examples.

Nick Murray, in his book, Simple Wealth, Inevitable Wealth – a book I consider a `must read’ for anyone who truly wants to understand what the real path to wealth is, requiring of course that you turn off the `white noise’ of the idiot box – uses the postage stamp example.  Advisors have been using the postage stamp as a proxy for inflation for years; but, Mr. Murray’s example is one of the best:

Realizing that the average retirement age today is 62 and the average life expectancy is around 92 for a non-smoker, it’s today very reasonable to plan on thirty years in retirement!  

Well, in 1980 (okay, that’s 31 years, but you’ll still get the message), a first class stamp sold for 15-cents.  Suppose that 15-cent stamp was the only thing you had to buy from your retirement income (it represents your expenses in your first year of retirement), and the income from your CDs and bonds was 30-cents.  You’d be VERY happy.  Your CD and bond income would be TWICE what you need to live on.

Flash forward 30 years to 2010.  Even if interest rates had stayed the same – and we know they didn’t; your income would have declined to almost nothing – your 30-cents wouldn’t even buy a first class stamp today!  The first class stamp, our proxy for inflation, went up to 44-cents.  That’s about TRIPLE! 

In the meantime, far from your 30 cents income  providing you with  twice your cost of living, it’s now well below your costs – again IF rates had stayed the same – requiring you to cut back your living standard by almost a third!

But, of course, rates aren’t the same.  Your income from interest would have gone down to practically nothing –  you’d have been using principal just to pay expenses.  That’s how people run out of money.

But, aren’t stocks risky? 

Hey, what’s risk?  The example above shows inflation is the real risk.  In fact, it’s virtually a sure bet!  The next real risk isn’t our investments, it’s our own behavior.

Mr. Murray in his book points out that from 1990 through 2009 – a period that includes one of the greatest decades for stocks in history, followed by one of the worst – the average U.S. equity mutual fund produced an average return (with dividends and capital gains reinvested) of 8.8%; but, during that same period, the average equity investor earned an average annual return of 3.2%.

The best equity mutual fund in the `lost decade’ of 2000-2009, he points out, earned an average annual return of 18.2% per year , but the average investor in that same fund during the same period managed to LOSE 11% per year!   Reason:  Buying high after the run-up, probably based on the fund making all the `best-dressed’ lists in the media, then bailing out after the downturn.

Again, it’s about owning vs. loaning.  It’s about the long term.  It’s about our behavior.

People thought real estate was safe until the meltdown; then no one wanted to buy even with rock-bottom rates!   My first home cost me $62,000 in 1978.  It’s now valued at $325,000, even in this terrible real estate market.

All good financial planning begins with four basic questions:

  1. How much monthly income will you need to take from your investments during the first year of your retirement.
  2. When do you plan to retire?
  3. How much do you have set aside now (retirement plans, other accounts, etc.)?|
  4. How much do you feel you’ll be able to contribute on a monthly basis until you retire

It’s only a starting point.  But, that’s where all journeys begin.  And, how you get there from here is what counts.

You can’t avoid risks – get that out of your head – but you can manage them.

Hope this helps!

Jim

—–

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained herein should be regarded as tax or legal advice and the reader is urged to seek competent counsel to address those issues.   The above represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a formal financial and investment plan.   For questions or comments, you can reach Jim at 805.265.5416 or through the IFG website, http://www.indfin.com.

Inflation is Sneaky – The Hazards Are Huge

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

Inflation is like glaucoma.  You can’t see it on a day-to-day basis, but the erosion of purchasing power is still there.  Do you remember when $50,000 a year was a lot of money and $5,000 would buy a luxury car? 

My dad retired in 1974 and lived 32 years in retirement!  Suppose he had $800,000 on the day he retired and someone had sold him a guaranteed 5% investment that would pay him $40,000 annually for the rest of his life.  It would have looked good to many people in 1974; but after 20 years of inflation, that $3,333 per month—BEFORE taxes—wouldn’t have looked so good… and he would live more than another decade!

Consider a 54-year-old widow who puts $2,500,000 into a guaranteed fixed-income investment yielding 4%.   A $100,000 a year income sounds pretty good and the money is considered safe!  But, let’s examine the situation in the real world.

The Impact of Inflation

Widow, age 54, 30-year life expectancy

4% Interest Rate

3% Inflation Rate

$2,500,000 invested

                     (A)                                   (B)                    (C) = A x B

Capital      Interest                   Real

Year          Purchasing Power     Rate               Yield

Now          $2,500,000                        4%                   $100,000

10             $1.860,235                        4%                   $  74,409

11             $1,384,189                        4%                    $ 55,368

12             $1,029,967                        4%                   $  41,199

Source: Asset Allocation, Roger C. Gibson, McGraw Hill, 4th Edition.

 

Notice the chart above which shows what really happened.  Her `safe’ money  was worth less and less  – and the same thing happened to the purchasing power of her income from interest.  At twenty years, with still a decade ahead of her, her income was worth just over half what it used to purchase and the same was true for her principal.   And, we didn’t even factor-in taxes.  That would be too scary.

Was this income certain?  Yes.  Was the outcome certain?  Yes, that too.  And, buy the way, what if inflation and taxes didn’t stay the same?    I’m getting beyond the scope of this piece, but you get the idea.

When it comes to stocks, investors seem to be hurt more by their behavior than their investments.  DALBAR, Inc., a Boston-based firm that provides research to the financial industry published an often-cited study entitled, “Quantitative Analysis of Investor Behavior”, comparing the track-record of the average investor in equity mutual funds to that of the S&P Index of U.S. large company stocks for the 20-year period between 1986 and 2005.  Based on the timing of contributions to and withdrawals from equity mutual funds, the average equity mutual fund investor earned just 3.9% while the S&P Index had an average annual return for the same period of 11.9%.  The major reason:  Investors chasing performance, which by definition is always past.

So, how does the average investor protect against inflation and taxes while still not exposing her portfolio to an unacceptable level of volatility?  The answer lies in the asset allocation that results from a properly researched and constructed plan.   You can request my paper on The Asset Allocation Process by using the `Request Info’ button on the IFG website.

Jim

—-

Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.