Retirement Success

April 30, 2013

Financial Advisor had a recent article in which they discussed a retirement success study conducted by Putnam.  Quite logically, Putnam defined retirement success by being able to replace your income in retirement. They discovered three keys to retirement success:

  1. Working with a financial advisor
  2. Having access to an employer-sponsored retirement plan
  3. Being dedicated to personal savings

None of these things is particularly shocking, but taken together, they illustrate a pretty clear path to retirement success.

  • Investors who work with a financial advisor are on track to replace 80 percent of their income in retirement, Putnam says. Those who do not are on track to replace 56 percent.
  • Workers who are eligible for a workplace plan are on track to replace 73 percent of their income while those without access replace only 41 percent.
  • The ability to replace income in retirement is not tied to income level but rather to savings level, Putnam says. Those families that save 10 percent or more of their income, no matter what the income level, are on track to replace 106 percent of their income in retirement, which underscores the importance of consistent savings, the study says.

I added the bold.  It’s encouraging that retirement success is tied to savings level, not income level.  Everyone has a chance to succeed in retirement if they are willing to save and invest wisely.  It’s not just an opportunity restricted to top earners.  Although having a retirement plan at work is very convenient, you can still save on your own.

It’s also interesting to me how much working with a financial advisor can increase the ability to replace income in retirement.  Maybe advisors are helping clients invest more wisely, or maybe they are just nagging them to save more.  Whatever the combination of factors, it’s clearly making a big difference.  Given that the average income replacement level found in the study was 61%, working with an advisor moved clients from below average (56%) to well above average (80%) success.

This study, like pretty much every other study of retirement success, also shows that nothing trumps savings.  After all, no amount of clever investment management can help you if you have no capital to work with.  For investors, Savings is Job One.

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Stock Market Perception vs. Reality

September 21, 2012

It’s no secret that investors have had a fairly negative outlook toward the stock market lately.  Their negative perception shows up both in flow of funds data and in our own advisor survey of investor sentiment.

One possible—and shocking—reason for the negative sentiment may be that the public thinks the stock market has been going down!

Investment News profiled recent research done by Franklin Templeton Funds.  Here is the appropriate clip, which is just stunning to me:

One surprising finding shows that investors are likely so consumed by the negative economic news, including high unemployment and the weak housing market, that they haven’t even noticed the strength of the stock market.

For example, when 1,000 investors were asked whether they thought the S&P was up or down during each of the past three years, 66% thought it was down in 2009, 48% thought it was down in 2010, and 53% thought it was down last year.

In fact, the S&P gained 26.5% in 2009, 15.1% in 2010, and 2.1% last year.

That blows me away.  I have never seen a clearer case of the distinction between perception and reality.  This data shows clearly that many investors act on their perceptions—that the market has been declining for years—not the reality, which has been a choppy but steadily rising market.

The stock market is ahead again year-to-date and money is continuing to flow out of equity mutual funds.  I understand that the market is scary sometimes and difficult always, but really?  It amazes me that so many investors think the stock market has been dropping when it has actually been going up.  Of course, perhaps investors’ aggregate investment decisions are more understandable when it becomes clear that only a minority of them are in touch with reality!

Advisors obviously have a lot of work to do with anxious clients.  The stock market historically has been one of the best growth vehicles for investors, but it won’t do them any good if they choose to stay away.  Some of the investor anxiety might be lessened if advisors stick with a systematic investment process using relative strength—and least that way, the client is assured that money will only be moved toward the strongest assets.  If stocks really do have a long bear market, as is the current perception, clients may be somewhat shielded from it.

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More on the Value of a Financial Advisor

September 5, 2012

I noticed an article the other day in Financial Advisor magazine that discussed a study that was completed by Schwab Retirement Plan Services.  The main thrust of the study was how more employers were encouraging 401k plan participation.  More employers are providing matching funds, for example, and many employers have instituted automatic enrollment and automatic savings increases.  These are all important, as we’ve discussed chronic under-saving here for a long time.  All of these things together can go a long way toward a client’s successful retirement.

What really jumped out at me, though, was the following nugget buried in the text:

Schwab data also indicates that employees who use independent professional advice services inside their 401(k) plan have tended to save twice as much, were better diversified and stuck to their long-term plan, even in the most volatile market environments.

Wow!  That really speaks to the value of a good professional advisor!  It hits all of the bases for retirement success.

  • boost your savings rate,
  • construct a portfolio that is appropriately diversified by asset class and strategy, and
  • stay the course.

If investors were easily able to do this on their own, there wouldn’t be any difference between self-directed accounts and accounts associated with a professional advisor.  But there is a big difference—and it points out what a positive impact a good advisor can have on clients’ financial outcomes.

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The Purpose of Financial Advice

June 13, 2012

This little piece from The Economist takes the position that it is silly to pay for financial advice, as even experts cannot predict what the markets will do.  While the article is completely right about the forecasting abilities of experts, skipping financial advice is crazy.

The true function of financial advice is not based on guessing what the market will do over the next month, quarter, or year.

Several studies show that investors with advisors do better than investors without—and it’s not because they have advisors who can predict the market.  What good can an advisor do?  Here is a partial list of important benefits to having a good financial advisor.

  • Behavior modification.  Most investing problems are, in truth, caused by investor behavior.  Switching and/or abandoning strategies when they are temporarily out of favor tops the list of no-no’s.  There is voluminous research showing that clients are terrible at managing their own behavior.  Any advisor than can improve a client’s staying power is worth the fee.  An advisor that can persuade a client to add money when a strategy is out of favor, when returns have been poor, or when markets have been exceptionally volatile should get an award.  Maybe even be knighted.  Behavior modification is really difficult, but it can have an enormous positive impact on returns.  An advisor who has worse behavior than the client should be flogged with a wet noodle.
  • Portfolio construction.  Asset allocation is an important first step, but a skillful advisor will move right along to combining strategies or return factors that have low correlations.  A great advisor will do a great job creating real diversification in a portfolio.
  • Accountability.  You know how you are more likely to go to your exercise session if you have a trainer or a buddy?  It’s not just because you’ve paid for it or because you’ve put it on your calendar—it’s because you are accountable to another person.  A good financial advisor makes you accountable for all of those things that you would otherwise procrastinate about, like that IRA beneficiary paperwork or that account contribution you’ve been meaning to send in.  We all have good intentions, but it’s pretty easy to blow things off if there is no one to hold us accountable.  A good advisor helps you do the things you know you need to do.

It goes without saying that an advisor that is not doing any of these things is not adding a lot of value.  If all you’re getting is a generic pie chart allocation and a few good jokes, well, it might be time to look around again.

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7 Questions to Consider When Doing Asset Allocation

March 13, 2012

Here are seven questions that can lay the foundation for a fruitful relationship between a financial advisor and their client:

Question #1:  What investments make up your investment universe?  Does your investment strategy allow you to invest in a broad range of asset classes, including U.S. equities, international equities, currencies, commodities, real estate, and fixed income?

Question #2:  What role do current market conditions play in the asset allocation decision-making process?  Does your investment strategy have a means of increasing exposure to asset classes in secular bull markets and decreasing exposure to asset classes in secular bear markets?

Question #3:  Does your portfolio include investments in complementary strategies?  Relative strength and value are both long-term winning investment factors.  They also tend to have low, or even negative correlations to each other, thereby providing useful diversification.

Question #4:  Is your asset allocation divided into segments?  Breaking a portfolio into an income segment, balanced segment, and growth segment can provide tremendous psychological benefits and therefore may increase the odds that you will stick with your investment plan over time.

Question #5:   Do you have a plan for systematic contributions?  There are many ways to accomplish this goal, including setting up a monthly automatic withdrawals from your bank to your brokerage account or regularly sending 15% of every dollar earned to your brokerage account, but the key is to have some systematic means of continuing to save money for your financial goals.

Question #6:  Do you have a plan for how you will approach distributions from your portfolio during retirement?

Question #7:  Do you have a financial advisor that will give you the TLC you will need to be educated and guided along all the inevitable bumps in the road?

Some relevant resources:

Savings or Growth? 

Expected Returns

Safe Withdrawal Rates

What’s Your Retirement Number?

Strategic Allocation Bites

The Upside of Mental Accounting

The Bucket List

Combining Global Macro & MDLOX

Why Tactical Asset Allocation

What is a Balanced Fund, and Why Should You Care?

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