"THE RETIREMENT GAMBLE" RESPONSE


Check out this video "The Retirement Gamble" by Martin Smith at Frontline.

This is a very thought provoking and well done documentary by Martin Smith. It touches upon many areas that are at the foundation of taking control of your own retirement and understanding how to invest for your safe and secure financial future while not being misled by big, bloated Wall Street Firms whose seemingly only interest is to gouge you with fees (like the ones seen in the documentary with company representatives stumbling over their words poorly trying to defend what they do).

You're in charge of your retirement, so how do ensure you have a safe and secure financial future

- Live below your means by spending less than you take in.

- Don’t get into credit card debt, pay your credit cards down to zero every single month.

- Keep track of your expenses and know how much of your money is going out the door every month and to where it is going, then build up a savings account with 3 to 6 months’ worth of your living expenses (more if you have dependents).

- Consistently invest in a portfolio of low-cost mutual funds that give you exposure to big, medium, and small sized companies from the US and foreign markets (Vanguard and Dimensional Fund Advisors are two great and investment firms offering low-cost products). To learn more about the benefits of a diversified portfolio see my “Diversification” blog post.

- As the documentary points out FEES MATTER! It’s simple math, the less you pay in fees the more money you make. And why do you invest? To make money. Keep your fees as low as possible, to read more about how fees impact you, click here.

- Embrace the miracle of compounding. When you have several decades until retirement properly investing $50 a month and leaving your investments there to compound over those several decades will get you a very nice nest egg come retirement. Saving and investing is a snowball effect - doing a little bit early on doesn't seem like much, but it will continue grow and you will see the benefits when the snowball keeps rolling. If you're in your 20s I recommend reading this and if you're in your 30s I recommend reading this.

Additional thoughts about this video's content

Yes, fiduciary duty should be extremely important to you. When you hire someone to plan for your financial future it only makes sense that s/he should legally and ethically have your best interests in mind at all times. Pensinger Financial is proud and honored to be in the small minority (15% as the video points out) who have fiduciary duty to their clients.

Don't be afraid to ask your investment advisor "How are you compensated?" Compensation should be as straight forward and as transparent as possible. Your advisor should be able to tell you within 30 seconds how s/he gets paid. We gladly lay it out very simple for our clients and our prospective clients - this is how we are compensated, and nothing more.

You should be investing with a Registered Investment Advisor firm whose advisors are licensed as Investment Advisor Representatives for the simple reason that it is much safer for you and you won't be getting sold. Ask your advisor "Are you licensed to advise or are you licensed to sell?" Hopefully you get an answer like this "I am licensed to _____." That way you know if your advisor is advising you or selling you; if you don't get a straight forward answer, then be very cautious with whom you are dealing.

With regards to 401(k)s there are “so many choices it’s hard to understand.” That’s right, fortunately I understand the choices and provide people with in-depth and detailed 401(k) and 403(b) reviews. In my reviews I assemble a specific portfolio that helps you to understand what you are investing in, why you are doing it, and how much it is costing you. I do this for $250, but mention this blog and I’ll knock $100 off the price. I have done reviews for people where by switching them to less expensive investments what they save on fees more than pays for what I charged them to do the review. As the documentary points out saving on fees now can mean having tens or even hundreds of thousands more dollars come retirement time.

“Fund names tell you nothing.” A good rule of thumb is to look for the word “index” in a fund’s title. This doesn’t guarantee you a low-cost fund, but it does mean you’re in an index fund instead of an actively managed fund. This typically means your costs will be lower, because…FEES MATTER! Consider how the documentary offered this opinion: “the role of actively managed funds in the marketplace is to make fees off of investors.” By definition actively managed funds are designed to generate returns for their investors by picking stocks that beat the market, whereas index funds mimic the returns of the market. Actively managed funds try to beat index funds, but at a significantly higher cost than their counterpart index funds, and the higher costs means less return for you. Over time we’ve seen actively managed funds return about the same as index funds, but the investor gets less of that return in his pocket because of the higher fees he’s paid out to be in that fund.

Sadly, there is a lot of misinformation out there and a lot of bad practices as well. Just recently Edward Jones was fined $20 million dollars for overcharging their clients. That shouldn't happen, but part of the reason that happens is because Edward Jones and similar firms (like JP Morgan Chase in the documentary) are licensed to sell you products and are held to the "suitability standard" of investment advice instead of being licensed to advise you and being held to a fiduciary duty.

There are firms out there that help their clients invest the right way, they do it at a low-cost (because it saves you money and therefore makes you more money), they put your interests ahead of theirs at all times (this is fiduciary duty), and they don't see you a revenue generator, rather they see you as individual or family who wants to be led to a safe and secure retirement. I'm very proud to say, and stand by the fact that Pensinger Financial is one of those firms.

WHO SAYS YOU CAN'T TIME THE STOCK MARKET? WHY MARKET TIMING IS EASY.

At some point every investor, trader, or stock picker has dreamt of buying a stock right before some major news turning him/her into a retired millionaire seemingly overnight.

It’s fair to think that way, and I’ve done it myself several times. After all we buy stocks to see our investments go up in value. So wouldn't it be great to buy stocks before the market goes up? This is called market timing. Others might tell you it's impossible to time the market. Well, it's actually pretty easy to do. Click here to find out how.


WANT A HIGHER RETURN PICK A CHEAPER MUTUAL FUND

When choosing mutual funds for our portfolio too often we get caught up in the returns of the fund while not asking ourselves the most important question. How much does this fund cost? A common thought is the fund which returned the most last year or over the last handful of years must be the best fund and thus the right fund for me, but that is not always the case. Click here read more and to find out how to get yourself a better return.

GIVE YOUR KIDS THE GIFT OF TAX-FREE GROWTH

The best way to pay for college out of pocket is with a 529 college savings plan. These plans were created in 1996 with the intent of participants setting aside funds to pay for college sometime in the future. The best part of these plans, and what makes them such an effective tool to pay for your kid’s college, is earnings in the plan grow tax-free if used for qualified higher education expenses. Why is tax-free growth so important and what are qualified higher education expenses?

Tax-free growth is so important because it saves you a ton of money. If you set aside money in a taxable account you will have to pay capital gains tax on any earnings when you sell an investment (for example if you bought a mutual fund for $5,000 and you sold it for $7,500 you will have a $2,500 capital gain that is subject to capital gains tax). Currently (and they can and have changed), capital gains rates will be either your ordinary income tax rate, 20%, 15%, or 0%. So the tax on your $2,500 capital gain can be anywhere from $990(.396 tax bracket * $2,500) to $0.

If you put that same investment into a 529 college savings plan your $2,500 of earnings will not be subject to capital gains tax as long as you use the earnings to pay for qualified higher education expenses. In the most egregious example you would not pay $990 to the IRS; instead with a 529 college savings plan that $990 goes to your kid’s college expenses. In other words, the full $2,500 instead of $1,510 goes towards paying the tuition bill. In addition, unlike with a taxable account, you will not owe taxes if you move money around in the account (like exchange shares of one low-cost mutual fund for another).

Fortunately, the government allows a wide range of expenses to be classified as qualified higher education expenses, such as, tuition & fees, room & board, books & supplies, and possibly computer related equipment & software and internet access if used for educational purposes.

What is also great about these plans is anyone can contribute to them. You can set up a plan and have grandpa and grandma contribute some birthday money to it. For example, the plan we have for our children makes is very easy for us to send out an email link asking for a contribution as little as $15 to our kids’ plans for birthdays and holidays. $20 towards a college savings plan goes a lot further than some plastic toy our kids are done with after two weeks.

How do I get access to 529 plans? There are two ways: direct sold plans and advisor sold plans. With direct sold plans you take it upon yourself to open up the 529 plan; with advisor sold plans an advisor acts as a middle man and sells you a more expensive plan. But beware, a more expensive plan can come with higher fee mutual funds (bad) and with the advisor skimming a few bucks off of the top (worse) for not really doing anything additional that warrants the added fee. High fee funds and a commission charge negatively impact the returns of your plan. Over time you will have less money for college expenses in an advisor sold plan than with a direct sold plan. Clearly, the choice is obvious, go with a direct sold plan.

If you need help check out this site to learn more about 529 college savings plans, or contact a fee-only financial advisor who specializes in college planning if you want to pay for his/her guidance. Keep in mind, a fee-only advisor should only charge you a one-time nominal fee to set you up with a direct sold plan (not advisor sold plan).

The nuts and bolts of college savings plans: plans come with contribution limits, so check with the plan administrator; you may owe gift taxes if you contribute more than annual gifting limits; you will owe taxes and possibly a 10% penalty if you withdraw money from the account and do not use it for qualified higher education expenses; some states will offer a tax deduction on your state tax returns if you contribute to your state’s plan; if your kid’s situation changes and she doesn’t end up getting a higher education, you still have many options to name a new beneficiary of the account (say a niece or nephew), so all is not lost.

The bottom line: if you think you’ll be footing the bill for your children’s higher education needs start saving with a 529 college savings plan today – it’s the smartest move you can make. One of the best gifts you can give your children is the gift of an education. It’s clear how important an education is in today’s society, but education, especially higher education, comes with a hefty price tag. There are various ways to pay for college, such as scholarships, grants, loans, or to pay outright for the education itself. Scholarships, grants, and loans aren’t guaranteed to be available, so some parents will have to fall back to paying for college out of pocket.

IS YOUR 401(K) PLAN SECRETLY STEALING YOUR MONEY?

In January my wife started a new job. She gave me her 401(k) plan brochure so that I can discuss her investment options with her. I was pretty upset to find out that her plan offered extremely high-fee actively managed mutual funds (every fund had an expense ratio greater than 1%) and her plan only presented one index fund - an S&P 500 fund that charged a pretty high .60% expense ratio.

An expense ratio of 1% means $1 on every $100 you have in the plan is paid by you to the fund itself. You don't see these fees come out of your account at the end of the quarter, these fees are rolled into the price of the mutual fund. The mutual fund price is known by the acronym NAV (net asset value) - it's like the price of a stock, but for a mutual fund instead. It might not seem like a lot, but it is, and it adds up over time to a lot of lost money on your part. If your plan offers low-cost investment alternatives in the form of index mutual funds you can see that fee drop to maybe 20 cents on $100 or even less.

To put that into prospective would you pay $20 for a gallon of gas or would you go across the street and buy it for $4 a gallon. And the gas is the same; $20 gas isn't 5 times better. And what if your car maker forced you to buy $20 gas and you had no other choice even if you knew there was equally good gas out there for $4?

It's not my wife's fault, and it's not even her company's fault either. Too many companies are unknowingly placed into 401(k) plans with poor investment options because they haven't been shown there's a better way to invest and unfortunately I think at times advisors are someway incentivized or even compensated to set up employers with these inferior plans. Those additional fees are going to somebody.

Check out this great mutual calculator provided by bankrate.com: http://www.bankrate.com/calculators/retirement/mutual-funds-fees-calculator.aspx

Keep these numbers constant: investment amount, rate of return, and holding period (you want to compare apples to apples). Take the expense ratio for your mutual fund, that amount goes into total operating expenses, put in 1%, .5%, .2% and see how that impacts your final balance over time - it's drastic and startling at the same time.

Here's an example: say my wife had $100,000 in the S&P 500 Index fund with the .6% expense ratio. She's got 30 years until retirement (holding period), if she were to get an average annual return of 7% (rate of return), she would have $635,484 in her plan at retirement. This is good, but it can very easily be better. If her plan offered a low-cost S&P 500 Index Fund with say a .15% expense ratio, my wife would have $727,705 in her plan at the end of 30 years - both plans will offer the same return cuz they simply track the same index - they're both the same gallon of gas. That's a difference of over $92,000 just because of the lower operating expenses!

Fees matter!!! Check your 401(k) plan's investment options, are your mutual fund choices loaded with high fees? Look at the expense ratio for the fund, if you can't find it (generally a warning sign right there) punch the fund symbol (it should be 5 letters long and end with an X) into the quote lookup box at yahoo/finance.com. Click on 'profile' and check out the Fees & Expenses box at the bottom. Generally if your fund is not less than .5% you've got a high-fee fund and it is secretly stealing your retirement fund!

The solution: go to your employer and demand low-cost index funds for your 401(k) plan; it will simply save everyone more money for retirement. If enough people speak up, or maybe it just takes one person to alert his/her employer that there are better less expensive options out there, we can all start saving more money for retirement.