Baby Boomers Are Jamming Retirement Traffic – So What Now?

Baby Boomers Are Jamming Retirement Traffic – So What Now?


Basically, the story goes like this:

Between 1946 and 1964, a bunch of American parents got really busy, which resulted in an estimated 70 to 80 million babies being born. This baby boom has been very good for America as a whole. That’s because, as you’d expect, these babies needed things like food, clothing, toys, and education … and they grew up to become doctors, lawyers, police officers, teachers, factory workers, fire fighters … and they bought houses, cars (and SUVs), computers, clothes, as well as paying taxes – Uncle Sam definitely looked forward to that day.

That was a crash course in Macroeconomics, but it provides a fairly good idea about what an awesome impact the baby boomers (and all other generations, for that matter) have had on our economy.

The Looming Mega-Issue

However, if you do some quick math, you’ll realize that these 70 to 80 million boomers are starting to hit age 65. In fact, beginning January 1 of 2011, and for the next 19 years – continuously without a break – an estimated 10,000 baby boomers will turn age 65! That’s 1 boomer hitting retirement age every 8 seconds for the next 19 years straight! Here’s why this trend could cause huge tax problems for you.

By turning 65 years old, these baby boomers become eligible for Medicare. “So what’s the big deal?” you may be wondering. “They’ve paid into Medicare all their working lives for this very day.” You see, you’re correct on the part about their paying in. BUT the federal government has not been holding those payments in an account so that they can be used for Medicare payments once those who paid in hit age 65. That’s the theory in principle, though the reality in Washington, D.C. is actually quite different.

As a matter of fact, as we speak, Medicare is saddled with a $23 trillion (with a “T”) unfunded liability problem. That’s the difference between the benefits promised and the tax revenue actually being paid into the program today. As crazy as this may sound, the reality is that the federal government never kept those taxes that were deducted from these baby boomers’ (or anyone else’s) paychecks.

Just so we are clear, I’m not suggesting that these retiring boomers will be denied their benefits, because I don’t believe that even in the slightest sense. Regardless of which party is in office, they would just not let that happen. However, this leaves only one option – bringing in enough revenue today to cover the benefits for the enormous generation of retiring baby boomers. Here’s the thing: 100 percent of that revenue must come from taxes!

Now, in the face of this new reality, where would you think tax rates are headed? UP, of course! No honest, realistic individual would dispute this. Yes, we have an extension of the historically low tax rates for two more years. But what did the folks in D.C. (the ones who reached the historic compromise to extend those rates) call it? “A temporary extension.” Get it now? It would be very smart of you to take my word for it, but I won’t be offended if you don’t.

However, you would also have to ignore this conclusion in the Congressional Budget Office’s 2008 report on Medicare, Medicaid, and Social Security. “…At some point, policymakers will have to increase taxes…”

What About YOU, Specifically?

Do you, as an individual, have a plan to protect your retirement dollars from higher taxes? Could you postpone your taxes forever? You do realize that higher taxes means less money for you to live on in retirement, and waiting for tax rates to increase before trying to change gears is not even a remotely good idea, right? You see, whether you, your financial advisor, favorite TV host, or radio personality thinks it’s unnecessary at this time is completely beside the point – you should emphatically answer those questions for yourself.

Let me end with this saying: A word to the wise is enough.
_____________
If you'd like some help crafting a retirement strategy that is most tax-advantageous for you, please call us today at 301.949.4449 or visit us on the Web at LaserFG.com.

Dear AARP, Your Report “Should You Carry a Mortgage into Retirement?” Is Completely Out of Touch With Reality

Dear AARP, Your Report “Should You Carry a Mortgage into Retirement?” Is Completely Out of Touch With Reality

Let me begin by reiterating something that those who read my columns regularly are already aware of: I do not engage in generalized, much-ado-about-nothing talk. And today is no exception to that standard. My goal today is to point out the apparent flaws in a June 2009 “Insight on the Issues” publication by the AARP Public Policy Institute, which sought to determine whether it’s a good idea for retirees to continue to carry mortgages. In my professional view, this report generated its own skewed data to “validate” its intended foregone conclusions. You can draw your own conclusions after reading this argument.

The report begins by making this point: “Most households will be better off by paying down their mortgage than by seeking a higher rate of return in stocks or other assets.”

Then, at the very end, the report concludes: “The above analysis indicates that retired households are, in theory, better off repaying their mortgage. In addition to this theoretical conclusion…”

In this world in which we live, I have yet to meet anyone who has achieved anything financially noteworthy in theory. The last time I checked, we were still living in reality. Before I comment on the other aspects of the report, can you see how the words “theory” and “theoretical” make the opening paragraph MATERIALLY different from the conclusion? I wonder why those two key words were omitted from the opening of the report. Or do I? You see, most retired folks are smart enough to realize that they are not living in theory, so they’d be more inclined to take an interest in a report that did NOT contain those words. But by the time they reach the very end of the report, what’s the likelihood that these two unassuming words would even draw their attention?

The report’s introduction notes that “…liquidity considerations aside… rejects the argument that households should retain their mortgage…” It went on to say, “If the after-tax return on the household’s risk-free assets, such as bank certificates of deposit, Treasury bills, and Treasury bonds, exceeds the after-tax interest cost of the mortgage, the household has an opportunity to make a risk-free profit. As discussed below, this situation is rare and, liquidity considerations aside, the household will generally be better off using such assets to pay down its mortgage.”

I am glad the author at least alludes to the financial real-life fact that you’d be pretty savvy, it would be a good thing, and you could actually become wealthier by not paying off the mortgage IF the money you’re using to pay off your mortgage were able to generate a return higher than the cost of the mortgage, and then some.

But realize how the report quickly shifts from this position by assuming that the only so-called risk-free investments are bank CDs and treasury notes. The author’s investment choices are strikingly odd to me because those instruments have extremely low rates of return. It would require a modern-day miracle (on the proportion of the parting of the Red Sea) for these instruments to beat the after-tax cost of almost any mortgage. So it’s no mystery why this writer’s conclusion was foregone before even the first letter of the report was written.

Here’s what I want to know: Is the author aware of other investments with absolutely NO market risk that are paying fixed interest rates in the neighborhood of 5 to 5.5 percent in today’s market? If not, I would like to suggest they contact us, because our clients have been using those instruments, and my office would be glad to give them a crash course on the subject.

Also notice how, in those quotes from the report, the author repeated “liquidity considerations aside”? I find that utterly preposterous, because the whole issue of whether a household should or should not pay off their mortgage is about LIQUIDITY, period! So how could anyone have this discussion and actually advise millions of AARP members, as well as other Americans, while completely ignoring the most important issue?

The author also mentions, in support of the report’s conclusion, that the alternative to paying off their mortgages is to “invest those dollars in stocks.” I don’t know about you, but any financial professional who would make such a recommendation appears, frankly, stupid! As I point out in my book, Savvy Strategies for Turning Your Mortgage into a Goldmine, those critical dollars should never be exposed to any market risk. But that does not mean you could not make a decent profit – the fact is, you can, even in today’s market. I know this because we have clients who are experiencing this reality!

I am relieved by the fact that the author actually notes that the report completely ignores liquidity considerations and that its conclusions are theoretical. But, in my humble opinion, I don’t think the label “Insight on the Issues” is appropriate, because the report generates its own issues to arrive at a foregone conclusion. This one would have been more aptly titled, “Opinions on Topics We Want to Discuss.”

This reminds me of a story from my school days. There was a student who was convinced that the 1-question test for which he was studying was going to be about birds. So he studied only the chapter about birds and ignored all the other topics on the syllabus. Well, the test day finally arrived, and the question was about the forest. This student began by writing, “A forest has several habitats, like trees, soil, grass, as well as various kinds of animals and birds. One may ask, what is a bird…” and then went on to write all he had studied about birds. You can guess the outcome.

Please, let’s offer clean, practical, proven, straightforward information to investors who are looking for ways to grow their wealth. It’s plain and simple. Thank you!
____________
Call Laser Financial Group today at 301.949.4449 - or visit us on the Web - to schedule your complimentary consultation where we will give you real, practical, honest answers about whether continuing to carry your mortgage makes sense for YOU.

The Hidden 401(k) Fees You Are Paying (and Don’t Even Know About) – PART 2

The Hidden 401(k) Fees You Are Paying (and Don’t Even Know About) – PART 2


401(k) plan fees generally fall into three categories:

(1) Plan administration fees


(2) Individual service fees


(3) Investment fees

Plan administration fees are charged for things like toll-free numbers, online account access, seminars, and the customer service representatives you speak to when you call the company. You didn’t think these offerings were free, did you? The cautious good news here is that some employers may cover these plan administration fees. The bad news is that those employers are quite few and far between – if I were to bet my house on it, I’d say you are covering your own plan administration fees.

Individual service fees are assessed to you only if you use specific optional services, like taking out a loan from your 401(k). And to be very clear here, this is a separate charge from the interest you will pay on the loan. The best way to describe an individual service fees is as a processing fee of some sort.

This post focuses on the investment fees, because they are by far the largest and most lethal of the three. And the manner in which these fees are treated is quite disturbing – let’s see what you think after you’ve read the post.

Generally speaking, you might see the plan administration and individual services fees – which tend to run just a few bucks – on your 401(k) statement. BUT for some bizarre reason, the investment fees – which are by far the largest (and we’re talking an-arm-and-a-leg large here) – NEVER show on any of your statements. Really? Yes, really! It’s strange, and rather unfortunate, but information about your investment fees does NOT show anywhere on the statements you’ve been receiving. Is it just me, or do you also find that rather interestingly odd?

So How Are These Investment Fees Charged?

Your 401(k) investment fees are charged against your investment returns. So let’s say your 401(k) statement shows a positive 8 percent return (which is good, because you made money) – your fees have already been deducted. So if the fee were 2.5 percent, your investments would actually have gained 10.5 percent (the 10.5 percent total, minus 2.5 percent in fees, equals your 8 percent return).

In the 401(k) world, this nocturnal approach is called INDIRECTLY deducting the fees from your returns. You’ may be thinking, “Since my returns are down because my investments lost money, there won’t be a charge.” That would be nice, but sorry!

Here’s how that side of the equation works. Say your statement shows negative 7 percent (I know you don’t like losing money, but bear with me for just a moment). You haven’t avoided the 2.5 percent fee we are assuming for this example. It was still deducted, thereby making your loss much deeper than it would have been otherwise. In effect, your investment actually lost only 4.5 percent, but the 2.5 percent fee brought your total loss to that negative 7 percent. Again, this is done INDIRECTLY. You see, when you lose money, your fees are deducted from what you’ve already saved. Yes! That’s how it works.

How Can You Figure Out Your 401(k)’s Investment Fees?

Perhaps you are very concerned (or even pissed-off) right about now, and are trying to determine how much your 401(k) fees are costing you right now. The problem is that 401(k)s are not one of those investments where you can just ask and someone will give you the dollar amount or percentage of your investment fees. Here’s how that process (yes, process!) goes:

First, you’ll need to contact your plan’s administrator (who is usually someone outside your HR office). So you will likely end up calling an external vendor or even having to make that request in writing. Once you do that, you’ll receive a thick document containing, among other things, a bunch of numbers. This may take 7 to 10 business days to arrive. Then you’ll have to sort through that document for the fees (called expense ratios) for the SPECIFIC funds your money is invested in (because that book usually contains fees for all the funds that your administrator handles). Next, you’ll have to grab your 401(k) statement and multiply the expense ratio for each of your funds by your ending balances to determine their costs. (If your money is invested in, say, 13 different funds, you’ll need to do this for each of them). Then you’ll need to add them up! How easy and fun do you think this expedition will be for you? If it sounds like a full day’s job, that’s almost exactly how it will seem.

What do you think about all this revelation and the word TRANSPARENCY? You know, I often hear buzz about credit card fees being crazy and outrageous! And I’m not saying that they aren’t. But at least those credit card companies have the guts to show borrowers exactly how much they are being charged. That’s fair! Compare that with your 401(k) or other employer-sponsored retirement plan for which you have absolutely no idea how much you are actually paying. When it comes to any other investment program, aren’t the fees among the first things you’d inquire about?

Another interesting thing is that under the Employee Retirement Income Security Act (ERISA), employers are required to ensure that 401(k) fees are reasonable in the light of the level and quality of services provided. I trust that you know well what that key word “reasonable” means. No fear if you don’t, because even more bizarrely, your employer probably doesn’t know either! Ask about it at work, and you’ll be directed to – guess who? – the plan administrator. Yes, the same one.

Talk about a classic case of out of sight out of mind. One thing I’ve always wondered is what would happen if everyone actually saw their fees in plain sight – just like they do for credit cards and other forms of investments?

One last question: Has this ever come up in your discussions with your financial advisor? Or does he or she believe that those fees don’t matter much? For all you know, you may be working hard to line someone else’s pocket, being completely ripped-off in the process. Who in their right mind wants to do that? Or are millions already doing that?
_____________________

Call us at 301.949.4449 or visit us on the Web to schedule your complimentary consultation to determine how effective - or ineffective - your employer-sponsored plan is for your retirement-planning needs.

The Hidden 401(k) Fees You Are Paying (and Don’t Even Know About) – PART 1

The Hidden 401(k) Fees You Are Paying (and Don’t Even Know About) – PART 1


Indulge me for a moment by imagining that I am your financial advisor and I am recommending that you invest your retirement nest egg in a financial product where you would not know exactly how much you’d be paying in fees. Just to be clear, it’s not that there are no fees associated with this investment (there are, and you’ll be paying them) – they just wouldn’t be in plain sight as would normally be the case for similar investment options. Would you follow my recommendation? Of course not! Who would, right? You’d probably tell me I am out of my mind – or at least think it – and then get up and leave.

In that same spirit, let me direct this question to those who own 401(k) plans or other forms of employer-sponsored retirement plans: Do you know how much you are paying in fees for your plan? I mean, do you have even the vaguest idea, you know, in a general sense? I wouldn’t blame you if you don’t have a clue, because roughly 99.99 percent of folks believe they don’t pay any fees, or that there may be fees but their employers cover them. In fact, why don’t you ask around your office or among your friends, family, acquaintances, or even total strangers and find out their thoughts on this subject?

As a financial professional specializing in retirement-income planning, I can emphatically tell you that employer-sponsored retirement plans – 401(k)s, 403(b)s, and the like – are the least transparent when it comes to fees. That statement may give rise to some discomfort because, by default, so many Americans believe (or behave as if they believe) that since these plans are sponsored by their employers, they are all transparent. If you think about it, folks tend to automatically jump on the 401(k) bandwagon, period! It’s offered, so they do it – almost without thinking. Yet how is that any different from the scenario I described earlier?

This absolute lack of transparency should be very frustrating to those who own these kinds of plans. But how can you be outraged if you are not even aware of how much you are being charged to begin with? And yet it happens all the time, because 401(k) statements don’t mention anything about their hidden fees! It’s true! There is absolutely no such information on any 401(k) statement! Go examine yours now to confirm my point.

Is It Even That Big a Deal?

I’ll let you decide that for yourself after considering this simple example.

Let’s say that Jimmy, age 35, just left his previous job for a new one and has $100,000 in his old 401(k). For simplicity’s sake, let’s also assume that he no longer contributes anything to this old account and he earns 7 percent annually. If Jimmy’s 401(k) charges only 0.5 percent in fees annually, his $100,000 will grow to $227,000 at age 70. On the other hand, if the fees were 1.5 percent, Jimmy’s account – the exact same $100,000 – will reach only $163,000 by the time he turns 70. Just that 1 percent difference in fees will shrink his retirement nest egg (and livelihood) by a whopping 28 percent! But I believe the much bigger issue for Jimmy – and 99.99 percent of folks with 401(k)s – is that they don’t have the slightest idea how much their fees are! So how can they knowledgeably assess whether the plan is worth it or is a total rip-off?

Don’t you find it completely preposterous that the very fees (and most of these plans do cost an arm and a leg) that could prevent you from enjoying a financially comfortable retirement, cause you to have to work much longer, or even cause you to run out of money, are not transparent to you?

I believe this is enough revelation for today. In next Monday’s post, I’ll discuss what it will take for you to figure out how much your 401(k) or other employer-sponsored retirement plan is actually costing you. Stay tuned, because you won’t want to miss that!
_____________________
In the meantime, call us at 301.949.4449 or visit us on the Web to schedule your complimentary consultation to determine how effective - or ineffective - your employer-sponsored plan is for your retirement-planning needs.

If the Affluent Are Delaying Retirement, What Can the Rest of Us Expect?

If the Affluent Are Delaying Retirement, What Can the Rest of Us Expect?

HAPPY 2011! I wish you a prosperous and fruitful year ahead. Today I’d like to discuss a troubling finding from the “Merrill Lynch Affluent Insights Quarterly,” which was released in October:

61 percent of the affluent Americans surveyed expect to retire later than they had originally planned, up from 29 percent in January 2010. In terms of investing, the survey also found that a large number continue to take a more conservative approach to managing their investments.

May I suggest you reread that finding again, this time paying close attention to what is happening here? This is both sad and scary! You see, this particular study seeks to measure the financial priorities and concerns of affluent Americans – although I doubt you’ll think this situation is limited to this group of Americans. Now, let me explain why I believe this is both sad and scary.

I’m thinking the only logical explanation as to why such a predicament would befall so many hard-working Americans is because they have been receiving and following the completely wrong financial roadmaps for all these years! As I have been saying all along – and pointed out in this article I recently wrote for the Maryland Women’s Journal – there is a right approach and a wrong approach to retirement finances. The sad thing, though, is that the vast majority of Americans spend a lifetime working hard and saving money, but pursuing the wrong, unrealistic financial strategies … only to realize it when it is usually far too late. How unhappy would you be if this were you?

What makes this finding scary is that most people follow some form of financial guidance either directly, by hiring a financial planner, or indirectly, by following advice from books, magazines, talk shows, blogs, newspapers, and other sources. Given that this particular study focuses on the affluent, it is not outrageous to assume that they have access to so-called top-notch, expert financial advisors. So how good can the strategies/advice be that they have been receiving all these years? Wouldn’t you agree that’s pretty scary?

How would you feel to realize that you can’t retire when you intended to because your nest egg was just crushed by something you should have been prepared for all along? The fact of the matter is that every investor needs to understand that investing is real and not theoretical, as it seems some advisors would have them believe. And in reality, approaching the investment of your life’s savings with a strategy hinging on the probability that you might get lucky has never been and will never be a viable plan. But that’s exactly how most Americans invest their hard-earned dollars. So should it be a surprise that their retirements face eminent danger?

I am especially proud about the fact that not a single one of our clients will have to delay their retirement by even a couple of hours due to the fact that the stock market tanked. I know for a fact that only a few smart investors are working with practical advisors who pursue stable, realistic strategies like the ones we employ here at Laser FG. This is one area where it is actually a good thing to be in the minority!
___________________
Please join me for a special workshop to explore practical concepts you can implement right away to eliminate most of the guesswork and count on a comfortable retirement. The date is Saturday, January 15, 2011. Call 301.949.4449 or follow this link today for more information and to reserve your seats.