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That's me practicing for a job interview. I was born in 1946, so I am in the first wave of the now aging "baby-boomers." I need a fall back position if my retirement funds start running low because of poor planning. If I have to go back to work in my 70's because I made planning mistakes, I may have to settle for being a greeter at the local Wal-Mart. Gotta have a "Plan B," and that's mine.
Silly? Maybe. But, in my law practice I do a lot of estate and retirement planning.
I have no doubt that many of us baby-boomers are going to be in deep financial weeds when we try to retire. "Try" is the key word. We boomers will find retirement uncertain and worrisome.
Background: Beginning in the 1970's the concept of "retirement" and how it is paid for changed. We boomers got our degrees and went to work. But our work did not include (as it did for our parents) job security and guaranteed pensions from paternalistic employers. Few of our parents planned for retirement, because their employers did that for them. Our parents worked for one employer for thirty years, earned a pension, retired with lifetime health insurance, sold the family house for a tax-free profit, moved to Florida, and started to collect social security. Good for them.
That is certainly not the world for aging boomers. "Long term" employment means three years. Few employers have defined benefit pension plans. Even if your employer has one, who stays there for thirty years to cash in on it? The 401(k) plan is the centerpiece for most of our retirement funding, and that means we have to pay for it and we are responsible for investment decisions. Social security? Don't get me started.
Daymon Runyon said "Life is tough, and it's really tough if you're stupid." Many of us boomers are financially stupid and our retirement years are going to be really tough.
Mistakes: At the risk of sounding like a bad combination of Suzy Orman, Bob Brinker, and Dr. Laura, here are the stupid retirement planning mistakes I see clients make.
- The single biggest mistake: the client didn't marry money. Me included, and it's too late now.
- The client vastly underestimates the amount of money he must have to retire. Even with inflation "under control," the cost of everything creeps up. Divide the number "72" by an assumed interest/inflation rate. The result is roughly how long it will take money to double. So, money invested at 7% will double in roughly 10 years. Even if inflation remains "under control," things will cost about twice as much in twenty years. How much did you pay for a car in 1984? I graduated from Syracuse Law (a private university) in 1974. My three years of tuition, room and board, and books cost a total of $10,000. My son is now attending Gettysburg College, where $10,000 buys about one half of one semester (beer not included).
- The client vastly underfunds his 401(k), IRA, or Roth IRA. There's always a more pressing immediate need for money. The client will "catch up" later, which never comes.
- The client vastly underestimates his ability to manage investments, especially 401(k)s and IRAs. I call this "financial arrogance." You'd think the collapse of the "dot com" bubble would have taught the boomers something, but I haven't seen it. Most clients think "asset allocation" is having six mutual funds, all in S&P 500 index funds. I tell clients that every time they make an investment choice, they are playing against the pros at their own game. We're playing golf against Tiger Woods and he's not giving us any strokes.
- The client entirely misunderstands "average returns." This is deadly in planning retirement fund withdrawals. (The finest explanation I have seen of this blunder is in Frank Netti's book, Retire Sooner Retire Richer. His three page analysis is worth the price of the book.) If the stock market's "average return" over the past 30 years has been 10% per year, and if you withdraw 10% per year going forward, you'll never run out of money, right? Just to be safe, withdraw 8%, or to be super-safe, 6% per year. Right? Wrong. You may go broke fast. You're driving forward but looking backward. While the stock market's past "average" return is 10% per year, that's no guarantee of anything in the future. In fact, the market has almost never returned exactly 10% in any single year. The market fluctuates wildly from year to year -- up 30%, then down 20%. You may hit long stretch of sub-10% years. When you continue the 6% withdrawals in the down years, you consume capital that will then be unavailable in the up years. The rate of return you will need to replenish the lost capital from your diminished remaining capital is unattainable. That's the nugget of wisdom from Warren Buffet, the investment genius. He has two rules for investing. Rule #1 is "Don't lose money." Rule #2 is "Don't forget Rule #1." In World War II a platoon of soldiers in training drowned in a swamp with an "average depth" of three feet. The "safe" withdrawal rate may be less than 3%, which is far lower than one would guess. It is curious that the IRS rules for minimum IRA distributions require a 3.8% withdrawal at age 70, and that rate increases each year. Stay out of swamps.
- The client vastly underestimates the need to invest in stocks. The client fears "risk" of losing capital, but doesn't understand the risk of inflation, low interest rates, etc. Stocks are a strange commodity. When they are low and on sale, clients run away from them. When they are overpriced and high, clients can't buy them fast enough. Fear and greed. It has never been different and it will never change.
- The client is a closet market timer. The client can "sense" when it's time to get in and out of the market. He watches CNN and reads the paper. So, he's got a "feel" when it's time to get in and out. But, market timers always lose in the long run, because success requires three correct decisions: when to get in, when to get out, and when to get back in again. You might get one or two right, and occasionally all three. But you can't do it forever as the law of averages catches up.
- The client vastly underestimates how costs affect returns, and he has no idea what investment costs he is currently paying. Those loads, fees, back-end loads, A shares, B shares, C shares, 12b-1 fees, etc. of "only" a few percentage points" can consume a portfolio.
- The client misunderstands basic estate planning and tax concepts. Many otherwise sophisticated and successful clients are amazed that their life insurance and IRAs are not controlled by their wills at death. The most common estate planning mistake we see involves an incorrect beneficiary designation.
- The client (the husband, most often) handles the investments, but doesn’t share that information with his wife. Husbands tend to die first. That leaves the wife "at sea" when she needs the most help. The husband has always told the wife, "If something happens to me, go to Mr. or Ms X. They will take care of everything." In my experience, this scenario leads to a lot of problems for the survivor. Prepare your wife (or husband) to be a widow (or widower).
- The client refuses to hire professional investment advice or financial planning services, because it's "too expensive" or "I can do it just as well." You get what you pay for.
Meanwhile, "Welcome to Wal-Mart." Go find your own "Plan B."
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