Wednesday, September 30, 2015

"Follow the Money" (Day 3)

I attribute much of my success in losing weight to a great movie called Fathead.  I highly recommend it.  It used to be on Netflix, but you can now watch it on youtube or buy it here.    One of the lines repeated in it is, "Follow the money", as in, "There is a financial incentive for what 'they' do and say".  I like to think that the vast majority of people putting out the misinformation about the food pyramid and low fat diets don't do it with malice, but rather are passing on what they have been told and taught over many years.  I think most of them believe that they are doing a great job of helping people.  That may be more dangerous than intentional lies and misinformation.  Take a look at rates of obesity and the related health problems, and it's obvious that it's not working.  I see the same type of thing with how retirement money is handled.

Since 401(k) plans have become more popular with employers than pension plans, I have seen the same patterns repeated over and over in the years I've been in the business.  Here are the ways I see people handle their 401(k) money.  Most people I talk to fall into one of these categories.
  • Tax avoider:  Big incentive for him or her is to reduce tax burden while working.  When no longer working, doesn't take anything out of qualified funds until has to take RMD's (Required Minimum Distributions) at age 70 1/2, and then only withdraws the minimum.
  • Chicken Little:  Looks at the money as protection from the sky falling.  Again, only withdraws from this when 70 1/2 or has exhausted all other resources
  • Rule follower--Follows the standard rule of many "experts" and takes out 5% per year so that the money will last through retirement (according to "the experts")
  • Live fast, die young, leave a beautiful corpse:  Either believes will die young or "the nursing home will take everything anyway", so spends a lot early in retirement, often buying new vehicles, paying off home, buying "toys" (motorcycle, boat, vacation home, etc.) and/or taking expensive vacations, often also paying for other family members.
Why do most people fall into these categories?  Follow the money.  Who makes the most money from these four categories?  The Tax Avoider?  Chicken Little?  Rule Follower?  Live Fast?  Buzz, wrong answer!  The correct answer is "E.  Whoever is holding the money for all of them."

Ever think about why 401(k) plans are sold, how they are marketed, and so on?  It's to make money for the companies.  Follow the money.  That doesn't mean they are evil, or good, or anything in between.  It means they are smart about money.  Which means that they will do nothing that benefits you unless it also benefits them.  It's not personal, it's business.  And they will do things that will benefit them even if it doesn't help you, and maybe even if it costs you.  How can they maximize their profits?  BY HOLDING ON TO AS MUCH MONEY AS THEY CAN FOR AS LONG AS THEY CAN.  Read that again.  And again.  And as many times more as it takes for it to really sink in.  Follow the money.

Think about the four categories of retirees above.  Three of them are maximizing the profits of the company holding the money.  The one who isn't is probably also the one with the least amount in the 401(k) because of not saving as much as the other three and/or having taken money out along the way for things other than retirement.  Follow the money.  They have excellent marketing and sales departments.  Paid for by the income gained by holding on to money for 20 or 30 or more years.  Paid for by having 100% of the contributions, not the smaller amount that remains after all the taxes are taken out.  Is it any wonder that they have entire departments devoted to getting people to keep their money where it is instead of moving it elsewhere when they leave a company?  That their employees are trained to point out the tax consequences of withdrawing money?  That across the board the company employees point to how much a person has in the account, not to how much income they can receive from the account?  It's no surprise at all.   If they encouraged you to take money out, they would be encouraging you to cut their pay.   Follow the money.

Tuesday, September 29, 2015

I Don't Know Why They Call It "Common Sense"

For day two of 100 days of writing for publication I am publishing this list of common mistakes I see people make regarding retirement.  I have been thinking about doing this for years, but have never decided if I want to make it a series of blog posts, a brochure, a speech, a magazine article, a book, or all or none of those things.  I still haven't decided, but I know I won't get any of them done without getting started, so I'm going to make it a chunk of this 100 days, for a start.

I often tell new customers, "I like to think I'm smarter than everyone else, but my wife and kids will tell you otherwise.  It's not that I'm smarter, it's that I work with this stuff every day, while you are dealing with it for the first time".  One huge advantage I have right now is that I have been working with another agent for several years who is in his 80's.  Supposedly I'll take over his customers when/if he ever retires.  He has customers he has worked with for 30+ years, so I often tap in to their 20/20 hindsight.

I don't want to make it a "Top Ten" type of list because sometimes on those the focus turns to whether #3 should really be # 5 instead of how to solve both #3 and #5, regardless of where they are in the hierarchy.  However, there is a clear #1, so this post will focus on it, and it will be the theme I consistently refer back to when discussing the others.  Speaking of the others, here are the main others, in no particular order.  (I keep thinking of more, but I need to sleep some time.)
  • All or almost all of savings tax-deferred
  • Unrealistic picture of what will/won't happen when one spouse outlives the other
  • Basing decisions on averages
  • Lack of communication with children and others
  • Lumping everything together instead of separating out "paychecks" and "playchecks"
  • Basing decisions on how long they think they will live
  •  Basing decisions on how good or poor they think their health will be in retirement
  • Spending too much or too little (much more common with people I see) early in retirement
  • Doing the same thing that their friends, relatives and/or parents do or did, ignoring how those people's situations vary from their own
  • Having only a saving plan, not a spending plan
  • No plan for how to take Social Security and/or pension
  •  Having way too much or way too little insurance
  • Focus on how much money they have (or don't have) rather than how much they can or can't spend after the bills are paid
  • Worrying too much about how long they will live instead of how well they will live
The biggest problem by far, however (which could be argued to be the main cause of all the other mistakes), is not having a basic understanding of general principles of finances.  I am constantly amazed how little most people know and understand regarding taxes, interest, dividends, cash flow, insurance, and general accounting.  You don't have to be a genius or an expert, but you do need to at least have a rudimentary grasp of the language so you can converse with the experts you hire.    Without that, you can't even ask the most basic questions to make sure you are doing the right things.  You'll be like the people I often work with who say things like, "I don't really understand this, but I trust you, so I'll just do what you think is best".  Lucky for them, I am honest and do what is best for them, but it is just luck on their part.  Make your own luck.  Educate yourself.

Here are a couple of places to start.  I don't agree with everything these guys say (could be a whole other series of blogs there), but they are fairly easy to read, and you can join groups to learn that way if you aren't a reader.  The nice thing about them is that they've both sold enough books that you can find them at Goodwill for a buck or less. 

Monday, September 28, 2015

100 Days of "Success"

My friend Calvin Johannsen issued this challenge a few days ago.  I'm taking him up on it.  I missed the first few days, but no time like the present.  I am challenging myself to publish every day for 100 days, or at least write content with the intent to publish.  I'm giving myself that "out" only for the times that I may be working on a longer piece that takes 2 or 3 days.

I journal fairly regularly.  I constantly come up with ideas of things to write about.  However, most of the time I'm the only one who reads what I write, and often I don't even read it after I write it.  A large part of that is that I am reluctant to publish anything that isn't polished.  So I'll write down an outline or rough draft of something, but then I get busy with something else and don't ever finish and publish it.  I will use this 100 days to break that habit.

Here is my first unpolished piece.  I wrote this a few days ago in a book I have called A Father's Legacy, a book I've had for several years and have been writing in sporadically.  Each page poses a question that I'm supposed to answer, the idea being that when I'm dead and gone then my kids or grandkids or other interested  parties will be privy to my vast wisdom.  I see no reason to wait.  It is also an appropriate topic to start this challenge since a lot of what I wrote about are things I've discussed with Calvin.  Here it is, unpolished but published.

How do you describe "success"?
Living your life on your own terms, doing what you want to do rather than what you have to do.  Or what others tell you to do.  Freedom.  I'm not there yet, but I'm gaining.  When people aren't "free", most often it's because of shackles that they have put on themselves.  For many, it's "stuff".  They put themselves in debt buying cars and houses and education that they could get for much less or don't need at all.   They trade their freedom for those things.  The successful person is one who can make sufficient money doing things he enjoys in order to have time to enjoy friends, family, adventure.  Success is owning one's own time, the most valuable thing in the world.