Before You Fall for Those "Target-Date Funds"

Target-date funds are funds that allow investors to link their portfolios to a particular time frame – which typically is their expected retirement date. For example, let’s say you intend to retire in 2018 – you would choose a fund with the closest date. In this case, 2020.

This is how they are marketed: The “experts” have already built the “amazing” portfolio for you, and as your retirement date gets closer, the portfolio – supposedly – becomes more and more conservative, reducing the percentage of stocks to bonds and cash.

The Pension Protection Act of 2006 formally permitted employers to use these funds as the default investment option for employees who do not specify where they want to invest their retirement savings. I can therefore infer that Congress believes – or believed in 2006 – that these target date funds were a great idea. In fact, to some in the media, these funds are the long-awaited breakthrough for which investors have been waiting.

In February 2008, a Kiplinger article noted that target-date funds were “the best way to save. Critics are overthinking a sweet and simple concept.” The article claimed these funds “simplify long-term investing.”

On January 12, 2009, CNN Money’s expert, Walter Updegrave –who is also a senior editor with Money magazine – referred to these funds as “an excellent way…”

On June 19, 2009, John Waggoner’s article in USA Today was titled, “Don’t shy away from target-date funds.”

A recent MSN Money article on how readers can fix their 401(k)s contained this quote: “ If you want to keep your financial life simple, a target-date retirement fund can be a great choice.”

Congress, the media, and so-called financial experts spoke, and unsuspecting investors listened, as always. So far, investors have poured more than $150 billion of their retirement assets into these funds.

What Would Have Actually Happened – and DID Happen

A few months ago, Boston College’s Retirement Center ran scenarios that assumed investors had contributed 6 percent of their pay for 40 years, investing in target-date funds. They never touched the savings until retirement and had annuitized (converted the balance into a series of payments ) the resulting balance.

Before I tell you the shocking results, notice how this is the perfect scenario preached by our “expert” friends. Gee, finally people save money for 40 years straight without touching it – finally, that perfect long-term planning scenario, right?

Based on the above assumptions, those retiring in 1999 could replace 51 percent of their pre-retirement income, while those retiring in 2008, could replace only 28 percent.

Gaining Some Perspective

So let’s put this into perspective. What it means is that if you were making $50,000 per year, you could replace $25,500 if your 40 years were up in 1999. On the other hand, if you retired in 2008 – after 40 years of using target-date funds – you would have to magically figure out a way to live on $14,000 per year.

On June 24, 2009, The New York Times reported that in 2008, some 2010 target-date funds – which many investors thought would be invested safely by then because it's only a year or so away from the target date – lost 40 percent of their value. That was even more than the 38.5 percent plunge of the S&P 500. Among the 31 funds with 2010 target dates tracked by Morningstar, the average 2008 loss was nearly 25 percent!

I get angry – good anger, by the way – when unsuspecting investors get duped this way. Yes, duped. Before you think I’m crazy, put yourself in the shoes of someone who is retiring in 2010 (that’s next year, by the way) and lost 40 percent of their ENTIRE nest egg last year.

What makes it worse is that someone did not keep their end of the bargain to deliver exactly what they promised. They sold investors on the “excellence” of these funds because the necessary portfolio changes would occur to make them more conservative as they got closer to the target-dates. Right? According to Morningstar, the Oppenheimer Transition 2010A fund, which lost 41 percent last year, held "a mere" 65 percent of its assets in stocks for investors retiring next year. Are you kidding me? You see why I'm telling you that people are being scammed? Is it then a huge surprise that it lost 41 percent?

And what reason are the so-called experts giving frustrated investors to explain these monumental losses? The same old "focus on the long-term" nonsense. Here is the response of Oppenheimer’s spokeswoman, Jeaneen Pisarra:

They were designed to be long-term investments. One-year results are not a true
assessment of long-term performance.

So I guess it’s just too bad that you cannot retire? Hang in there for the “long term,” regardless of your age.

Does this make any sense to you? Why, then, are some so-called experts and writers describing these funds as the best, most excellent, and simplest strategy that investors should jump into with both feet? Sure would be nice if Kiplinger, the CNN Money expert, and the other “experts” could explain what I’m missing or overthinking.

My Solution

The only strategy that works, as far as I am concerned, in planning for retirement is common sense. Period! No matter what color it is, at the end of the day, a chameleon is a chameleon. You see, there are certain fundamental truths that can never be changed, not even by Congress or the smartest of the so-called- financial gurus. Investing your money directly in the stock market is a pure gamble – nothing can or will ever change that.

Now suddenly, Congress, the SEC, and the Labor Department are beginning to cry “Foul!” The answer is not additional oversight. But I do wonder what Kiplinger, the CNN Money expert, and the others would say now? I do think we need a boatload of common sense in retirement planning.

How about this?

Imagine where these investors would be right now if their investments had NOT lost any value last year, and instead, their accounts had earned 5 percent interest! Yes, while the target-date funds lost 40 percent or more, their investments earned gains. And imagine if, when the markets recover, these investors' indirectly linked investment accounts were credited a higher interest rate – based on an index – up to a cap of 15 percent, for example.

This is no dream. It's not only possible, it happens for our clients every day. Isn't this just plain old common sense?

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Want to know how to join this growing group of smart investors who are keeping their money where it belongs - in their control? Call Laser Financial Group today at 301-949-4449 or visit them on the Web at www.laserfg.com.

OK, the Federal Deficit Is More Than $1 TRILLION – So What?

Exactly a week ago today, the U.S. Treasury Department reported that nine months into the current fiscal year – with three more months to go – the American budget deficit is a little over $1 TRILLION! The exact the figure they gave was $1.086 TRILLION!

I will leave the obvious stuff like the how, the why, and the generic effects – possibility of rising interest rates, inflation, and a host of others – to the traditional news organizations and bloggers. As a matter of fact, here are a few for you: Yahoo News, Market Watch, Michelle Malkin, and the Huffington Post.

As is always the case here, I'd prefer to focus on the critical things that no one seems to echo, yet which directly affects your financial well-being. It's entirely probable that most people will shove off a story discussing the federal government’s budget deficit when they have their own deficits to deal with. Also in my opinion, most media outlets make the discussion so mundane that everyday folks simply feel removed from it.

For instance, a TV commentator or reporter might say something like, “The federal budget deficit is now over a trillion dollars. This is due to the fact that we are funding two wars and dealing with a recession. Some are concerned such a deficit could lead to rising interest rates and inflation, which will further weaken the dollar.” On hearing that, are you likely to stop to consider whether or how that has an impact on your day-to-day life? If you're like most people, probably not – and that's a completely understandable reaction.

Let me explain why such news is critical to your personal financial planning. But first, the really big deal is that this is the first trillion-dollar budget deficit in world history. It has never happened before, ever – until now. It’s like the first light bulb, plane flight, telephone conversation, or man on the moon.

So What?

Just like you and I, when Uncle Sam is in debt, interest has to paid in the short term at least, and then sooner or later, the principle will have to be paid down as well. Think about a 30-year mortgage loan with an interest-only feature. You can make the interest-only payments for up to, say, the first 5 or 10 years, after which you MUST start paying down the principle, in addition to the interest.

Uncle Sam has two – responsible – options for paying down this monstrous deficit:

(1) Reduce spending. (2) Increase taxes.

It would be extremely naïve to think that the federal government will realistically reduce spending by cutting programs like Social Security and Medicare or fulfilling campaign promises. Given the two alternatives, Uncle Sam will tax more, rather than spend less. This has nothing to do with politics; it’s just how government works. It should not surprise you that already there are tons of government proposals in the works aimed at raising tax revenue.

While You Still Can

Very shortly, it will be extremely difficult to find an expert (one who actually knows what they are doing) who believes that tax rates will do anything but increase. So get your money out of a taxable environment and into a tax-free environment, now! Like we do for our clients (and I’ve been telling people all along), build assets that you can access without creating what the IRS calls a taxable event. Because if your assets are not taxable, your tax rate is zero percent, meaning that when rates go up, they won’t affect you.

If that sounds odd to you, you have more than likely been following conventional financial advice. Or your financial advisor has successfully made you believe the LIE – that a Roth IRA is your best bet. Or you have been brainwashed into believing the myth that you’ll be in a lower tax bracket once you retire, so it’s a good idea to use qualified accounts like 401(k)s now.

Like I always say, I am not a fortune teller, so I do not have exact answers. You are free to choose to believe whoever and whatever you like about the future. But if someone were looking at the darkening skies, watching the zigzagging lightning streaks, and listening to the thunder rumble, and still concluded there was no possibility of rain, wouldn't you consider that person more than a bit naïve?
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Call (301) 949-4449 today for your free consultation or visit Laser Financial Group on the web.

Is a New Consumer Financial Protection Agency REALLY the Solution?

On June 17, 2009, the White House released a proposal seeking to create the Consumer Financial Protection Agency, whose primary mission would be centralizing oversight and regulation of financial products – especially mortgages and credit cards.

Basically, the Obama Administration believes that if credit card and mortgage documentation were easier to decipher by consumers, the current financial tsunami could have been prevented. So the new agency's goal would be to overhaul the maze of paperwork into a one-page, easy-to-understand document.

Harvard Law School professor Elizabeth Warren, one of the new agency’s creators who is also the chairman of the Congressional Oversight Panel which oversees the Troubled Assets Relief Program – don’t you just love the way the government comes up with these names? – puts it this way:

Today, it’s not possible for a customer to compare three or four credit card
products to determine which one is the cheapest or which one poses the least
risk. This agency is about changing that.

Just as a reminder, I’m not a political commentator of any kind. This is a financial blog with a mission to educate readers and discuss tools and methods I believe will actually work. Of course, I still have my opinions about things, which is what I'm sharing here: my view.

This new agency is intended to simplify things. In my experience – and that of most people I come in contact with – the government doesn’t understand the concept of “simplify.” Ever received a letter from a government agency? Or been asked by a government office to complete a form? The bill that was sent to Congress on June 30, 2009, to create this agency whose goal is simplify things is 152 pages – but that may not mean a thing.

Regulators don’t always know the right answers. They are not superhuman – in fact, they're not always the sharpest knives in the drawer (hope I’m not in trouble here). Just look at the current mess we're experiencing and notice that, for the most part, the regulators missed all the signs. So to think that a new set of regulatory eyes will solve the problem once and for all is questionable, at best. It may work, but it's equally likely that it may not work.

Certainly there are people who were taken advantage of because of the complexity of the documentation involved. I say the perpetrators should be held liable to the fullest extent of the law. However, I often hear politicians quip that the financial meltdown was as a result of Wall Street’s greed. I humbly submit that they are misguided. The greed that caused our current economic situation ranged from Wall Street to Main Street to Every Street.

The truth is that the sorts of things buyers need to know about mortgages and credit cards in order to make smart, responsible decisions are not rocket science. It doesn't require a PhD to understand that buying a home with a 1 or 2 percent teaser interest rate that is scheduled to reset to 7 or 8 percent in a couple of years, or purchasing a $400,000 home on a $40,000 per year income, is dangerous and irresponsible. For my take on what actually happened with this housing crisis, read the blog I posted on February 9, 2009.

Usually, new regulatory agencies introduce new procedures and reporting requirements with which service providers – in this case mortgage bankers, credit card firms, etc. – must comply. This drives up the cost of doing business, and it's the consumers – you and I – who end up paying for it.

What REALLY Needs to Be Addressed

I contend that some people have a spending problem. They simply don’t know when to stop buying things they don’t need to impress people they usually don’t like with money they don’t have at interest rates that climb faster than their salaries. This new agency cannot save such people. I would like to recommend an agency called the “Consumer Spending Responsibility Agency,” which would have a goal of teaching financial responsibility, because frankly, that’s something we could really use.

The Answer Is Ethics and Morals – Not More Regulation

Do you think those unscrupulous folks who swindled consumers would not have done so if this agency had been in existence two or three years ago? And what about Bernie Madoff?

Actually, Madoff was once the Chairman of the Board of Directors of the NASD (now FINRA) which, interestingly enough, is a regulatory body in the securities industry; yet that didn't stop him from running a ponzi scheme, now did it?

In the midst of all the chaos, even as you are reading this, guess what? Some unethical people are duping others in various shapes and forms. No agency – no matter how large or simple – can stop that.

You’ll Most Likely Live Longer Than You Think

What a couple of weeks we’ve had. All of a sudden it seems like everybody is passing away – from Ed McMahon to Farrah Fawcett to Michael Jackson and Billy Mays. In light of all these people’s deaths, I wanted to bring some interesting statistics to your attention.

Centenarians (those aged 100 and beyond) are the fastest growing segment of the American population. In April 2008, Carl Bialik wrote a column in the Wall Street Journal titled “Hallmark’s Census of Centenarians” in which he reported that Hallmark – you know, the greeting card folks – sold 85,000 one-hundredth birthday cards in 2007. Yeah, some people might have received multiple cards, but Hallmark is not the only place you can buy birthday cards for 100-year-olds. From whichever angle you look at this, I believe it is an unprecedented statistic.

This shouldn’t be a huge surprise, though. You don’t have to be a sociology expert to realize that humans are living healthier, hence longer, lives. Chances are decent that you have a gym membership, even if you don’t use it as often as you should. Or perhaps you are all about the organic, fat-free, cholesterol-free, caffeine-free foods, as well as yoga, meditation, and other good-for-you stuff.

Well, thanks to the healthy living habits and advancements in medicine, the US Census Bureau reports there were about 51,000 individuals age 100 and beyond in the year 2000. In 2010, that figure is projected to increase to 131,000, and to reach 1.1 MILLION by 2050! Mortality experts are telling us that a baby girl born today has a possible life expectancy of 137 years!

Most of us are in the habit of gauging our life expectancies based on how long our parents lived or what’s happening around us. I’ve met a few folks this past week who seem to suggest that age 50 seems to be the norm now. Statistics and facts show differently. The healthy living stuff is working!

Not too long ago, life insurance companies assumed that rarely would anybody live beyond age 95 – which is why life insurance policies endowed at age 95. Quite recently, the mortality (life expectancy) table was updated so that life insurance policies could now endow at age – take a wild guess – 120! What could possibly be the reason? And there is already talk of increasing it to 140!

Okay. I’m hoping I have successfully convinced you that you’ll probably live longer than you thought. So now what?

In the past, people had about 45 years to work and save money for retirements that lasted for about 10 to 15 years. Today, we have those same 45 years for working, but we are looking at 20 to 30 years of retirement, meaning it’s a totally different ballgame. And you definitely want to be sure that your nest egg will last as long as you do.

Here are 4 things you CANNOT afford to do with your nest egg:

1. Stop saving because of the condition of the stock market.

I understand that it sucks when the market is down. But to quit funding your retirement because of that is dangerous. I’ll bet stock market and 401(k) advisors are liking me right now … until they read my next statement.

As we have always taught, the stock market is not the best place to accumulate retirement wealth. In other words, if you are using an accumulation vehicle that causes you to question its validity and ability to help you retire – to the point that you decide to quit for a while to prevent losses – you are not in the right place.

Our clients do not have that problem because they do not lose a dime when the stock market tanks, yet they make money – based on a stock market index – when the times are good. They know at the very least that the money they are saving is guaranteed to be there, so there’s motivation to save as much as possible instead of stopping to play it safe.

2. Keep losing the money you put into the stock market.

What I’m trying to say here is that you hurt your chances of a nicer retirement each time your account takes a hit. Although some so-called experts would have you believe that if you invest in the stock market with a “long-term” view, your retirement will somehow turn out great, my position is that long-term – whenever that is – is equal to the aggregate of the results that have occurred over shorter periods. If you keep losing in the short term, guess what has to happen when the long term hits?

We do not invest our clients’ serious cash in the stock market, and guess what? They are doing just fine. Actually, they are doing great, better than most Americans. In spite of the market’s cataclysmic drop, our clients have not lost a penny of their investments’ values. How would you have felt if your account earned 5 percent interest last year while the S&P 500 lost over 30 percent? By the time you recover to your break-even point – and no one knows how quickly that will happen – where do you think our clients’ accounts will be? Much larger, of course. I’m sure you get the point.

3. Park your money at a place where your NET (after tax + fees) return is less than the rate of inflation.

Usually, when most folks who have their money invested directly in the stock market “pull out,” they instead invest in cash instruments like CDs and money market accounts.

These vehicles traditionally earn lower returns, which net out – in most cases – to a negative, compared with inflation. That’s not good from a financial perspective, but they usually feel great because they got out and prevented even bigger losses.

My take? Employ a strategy that guarantees you won’t lose money due to market risk, and that will allow you to earn returns linked to a stock market index – because it’s great when the market is performing well. Such a move allows you to lock in your gains, from year to year. That’s what we put together for our clients because it makes sense, it’s proven and time-tested, and above all, they can sleep at night.

4. Use qualified plans like 401(k)s, 403(b)s, and the like which simply postpone your tax liability to retirement, or whichever time you make your withdrawal(s).

It simply is a very, very bad idea to cut a deal where Uncle Sam decides how much he wants to keep in the future (tax rate) before you get to spend the remainder.

I’m not a fortune teller, so I cannot tell you what the tax rates will be when you retire. But realize that your financial advisor or 401(k) expert is not, either. Just take a wild guess whether tax rates are likely to be lower, the same, or higher in the future. And bear in mind that Uncle Sam HAS to pay for the humongous budget deficit, as well as the unfunded liabilities of Social Security and Medicare (which we will discuss in detail at a later date).

Let’s end with this exercise:

Assuming a 33.3 percent marginal tax bracket (for easy math) and an interest rate of 7.5 percent (again for easy math), how long do you think a $1 million nest egg would last with a net income of $75,000 (meaning we’ll need to withdraw $112,500 to pay $37,500 in taxes) annually? If you do the math, that $1 million would be totally depleted in 14 years.

On the other hand, if it were income tax-free (like what we implement for our clients), in 14 years there would still be $1 million left. Because netting $75,000 would require a withdrawal of $75,000 – income tax-free!