Posts Tagged ‘ investing ’
When the market failed the blame game started. Workers were laid off and they blamed their employers. The government blamed the big banks. Citizens blamed the government.
And clients blamed their financial advisors. After all wasn’t it the advisor who laid out the financial plan that was suppose to provide the retiree a solid foundation? In many cases yes. In other cases it depends.
There are basically 2 methods of retirement planning;
- Some advisors dictate all of the investments their clients buy. In some cases the advisor has personal preferences, the things they like and feel good about. Or they simply use their company’s computer models to make recommendations. Usually these recommendations are based on set preconceived personality and risk tolerance assessments. The client is then “type cast” into a certain group and instructed what to buy based on the group.
- These are advisors who operate more like coaches and work in collaboration with their clients to make decisions. They present a variety of concepts for the client and avoid “type casting” them into certain risk tolerant groups. In this method the client is making the decision about what is best in their situation at any given point in their life.
- In this model retirees are free seek the advice and do business with more than one planner.
Which advisor model are you more comfortable with?
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Once upon a time retirement was simple you could count on money from a pension and Social Security with bit of personal savings. Not any more. Pensions have mostly gone away causing you to depend on Social Security and personal savings more than in previous generations.
In the last few years people have found these to be risky and have lost a significant portion of their retirement savings forcing them to postpone retirement and work longer.
- Save more you may need to save more than you think because we are living longer than ever before you may live 20 years or more in retirement. So you have to make sure your money lasts as long as you do.
- You may need to retire earlier than you plan due to a job loss or poor health.
- More leisure expenses
- Increased medical cost
Active money management is required
- Seek clarity determine how much money you have saved and how much money you’ll need each month
- Access your comfort level. How worried are you about thought of losing money? If it keeps you awake consider protecting part of it.
- Think about the cost of living and how increases over time.
- Plan for certainty make sure you will not run out of money no matter how long you live.
To help learn and think about the new retirement realities watch this short educational video.
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According the SEC
“Fraudsters who carry out affinity scams frequently are (or pretend to be) members of the group they are trying to defraud. The group could be a religious group, such as a particular denomination or church. It could be an ethnic group or an immigrant community. It could be a racial minority. It could be members of a particular workforce – even members of the military have been targets of these frauds. Fraudsters target any grup they think they can convince to trust them iwth the group member’s hard-earned savings.”
The SEC indicates, affinity fraud usually involves:
- a phony investment
- promote false information such as historical returns, track records of investors, risk of loss and/ or idenity of the investment promoter.
- many affinity frauds are pyramid schemes.
How do you protect yourself from affinity fraud:
- Even if you know the person make sure you research their background no matter how trustworthy they seem.
- Research the investment on your own.
- Be aware the person explaining the investment to you may have been fooled into believing the investment is legitimate when it is not.
- Never make an investment based solely on a recommendation of a member of the organization.
- Do not buy investments that promise huge profits.
- Be very wary of any investment that claims there is no risk of loss. No investment is risk free.
- Become very suspicious if you are told to keep it secret.
Don’t let anyone rush you into buying before you have had time to do your research. Just because someone else claims to have made money does not mean you to will make money. Be very leery of any sales pitch claiming the investment is ”once in a lifetime” or based on “inside information”.
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On August 21 the Wisconsin Department of Financial Institutions (DFI) released a list of the top 10 financial products and practices that threaten to trap unwary investors. DFI has added 3 new threats this year because they are concerned these practices will be used to exploit new federal laws intended for job creation and economic recovery.
According to Patricia Struck, Administrator of the Division of Securities:
DFI is particularly concerned about two provisions of the recently passed JOBS Act that could unwittingly open the door to fraud. These include provisions to expand crowdfunding to allow businesses to raise money from investors and to allow the general solicitation and advertising of private placement offers. According to Struck, the top 10 investor threats are:
- Crowdfunding and Internet offers (new)
- Use of self-directed IRAs to mask fraud (new)
- EB-5 investment-for-visa schemes (new)
- Oil and gas drilling programs
- Promissory notes
- Ponzi schemes
- Real estate investment schemes
- Reg D/Rule 506 private offerings
- Affinity fraud
- Gold and precious metals
Examples of crowdfunding include sites like www.kickstarter.com used by entrepreneurs to fund their new business ideas and http://power2give.org/ used by nonprofits to fund charitable causes. It is estimated about $250,000,000 has been raised using these sites and others like them. There are no government security forms to file meaning small startups and charities do not need to pay high legal fees in order to begin raising money. Many legitimate concerns use crowdfunding to get started.
DFI fears unscrupulous types will setup shell companies to lure in unwary investors and skip out leaving no paper trail for regulators to follow.
Self-Directed IRAs may provide respectability to hollow investments. Some investors mistakenly think if an investment can be used in an IRA then the government has approved this investment. This of course, is not true.
EB-5 investment-for-visa schemes are methods for investing outside the U.S.
Investors should always independently verify investment opportunities. Investors who think they have encountered fraudulent practices should contact DFI at 608-266-1064.
You may ask questions in the comments or contact me privately:
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The stock market crash of October of 2008 devastated nearly everyone’s 401k plans; many have not fully recovered or are back to pre-crash levels only because workers have continued to contribute additional money. How did we get here and how to prevent it from happening again?
Until 1978 when tax code 401(k) was added to the U.S. tax code annuities (defined pensions)were the normal and preferred way of funding worker’s retirements. Wall Street equity firms successfully lobbied the regulators to implement rules excluding all other types of investments and savings. Today the vast majority of 401(k)s allow only equity market based funds with one or two fixed cash account options.
All kinds of safe investments which are allowed in IRAs are excluded from 401k plans. Perhaps if workers had safe money options to choose from in their 401ks they would not be facing underfunded retirements.
The U.S. Treasury Department in 2007 started studying the advantages that would result to workers if annuities were an option inside 401(k)s. Finally the government appears to be concluding the rules need to be changed.
Here is an excerpt from a Bloomberg interview with J. Mark Iwry, senior advisor to Treasury Secretary Timothy Geithner.
Q: You’ve introduced proposals to make it easier to offer annuities and other income products in retirement plans. What problems do these address?
A: Helping manage longevity risk. Let’s say you’ve reached retirement age. You’ve got your pot of money accumulated in a 401(k) or IRA. For many people, figuring out how to manage that pot of money is an unprecedented challenge. What’s a prudent withdrawal rate, and how do I use it to replace my former paycheck?
You start with the fundamental uncertainty about what lifespan to plan for. At age 65, a man has about an even chance of living to age 84 and a woman has about an even chance of living to age 86. For a married couple, there’s a good chance that at least one of them will live into their 90s. Given uncertain investment returns and the possibility of outliving your life expectancy, many financial planners explain it’s not prudent to withdraw more than about 4 percent of one’s savings every year. (That assumes you make no adjustments over time in response to changing circumstances.) A typical reaction is, “Gosh, I’ve got a quarter of a million dollars in my account. That feels like a lot of money. But 4 percent of $250,000 is only $10,000 a year to add to Social Security. That’s not enough.”
Q: How are you trying to change the current retirement system to solve that dilemma?
A: One solution is to provide for a predictable lifetime stream of income, such as an annuity provided under a retirement plan or IRA. By pooling those who live shorter and longer than average, everybody can essentially put away what’s necessary to reach the average life expectancy, and those who live longer than average will be protected. The longevity risk pooling means that an annuity might provide an annual income of more like 6 percent or 7 percent, rather than 4 percent, depending on interest rates and the terms of the annuity.
Q: So if this goes according to plan, our readers are going to see more chances to buy annuities through their 401(k)s.
A: That’s right; the range of choice in those plans should expand. We’re also focused on defined benefit pension plans, which often offer the choice of an annuity — which will last your whole life — or a lump sum. If framed as an all-or-nothing choice, too often people pick the lump sum. We’re trying to encourage plans to get away from an all-or-nothing “choice architecture.”
Had annuities been utilized as 401k investments no one who chose a fixed annuity option would have lost any of their funds in the 2008 market crash. Nor would they have lost any additional money during the ongoing Global Financial Crisis (GFC) or Great Recession.
Hopefully the rules will be changed sooner rather than later.
You may ask questions in the comments or contact me privately Tim Barton, ChFC
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