Our financial guy present examples to learn from. One soon to be retiree was glad to check with him, as he had some company stock in his 401(k) that had appreciated 500%; had he taken other advice and just rolled the 401(k) into an IRA, he would have lost the ability to use a tax scenario with the Net Unrealized Appreciation - and it would have cost him $55,000 ultimately in federal taxes.
Below is a detailed explanation that may be helpful to some. Unfortunately when it comes to financial planning, you can lead a horse to water… I do agree with Dave Ramsey when financial goals differ between H and W, it is a marriage issue - same goes for retirement planning - both spouses need to have some of what they want in retirement for happiness, and that needs to be planned and communicated.
Another example was with a young lady, Hannah, concerned about her parents’ financial nest egg. Hannah told Don that her folks have had the same advisor for years, a broker at _______. He is the same guy everyone uses in their small Northern Illinois town. She said her parents are both in their 50s, have pinched pennies their entire lives to save all they could, and have accumulated a nice little nest egg of just over a million bucks.
Although they have done very well for themselves, Hannah is concerned because she knows they lost 50 percent of their retirement savings in 2008 and she believes their advisor has done nothing since then to change his so-called ‘strategy’. Each week, Hannah sends her parents the online link to _______ in the hopes that they will come to the realization that they need to take control of their financial future and explore new financial strategies. So far they have refused to make any changes. They are putting their heads in the sand. And Hannah is beside herself when she hears their reasons.
Hannah’s parents acknowledge that they lost a lot in 2008, but accept it because in their minds, so did everyone else. Plus, they reason, ‘it’s okay’ since they are back to even now. Don told Hannah to explain to her parents that the financial industry is flooded with myths and misconceptions, and the idea that “everyone lost in 2008” is a big one. When markets started to go south in 2008, some financial strategies went to cash to minimize losses. Those strategies were actively managed to minimize the downside. Unfortunately, during the fiasco of 2008, Hannah’s parents were told by their broker to sit tight and not to sell; they were told that the losses they had were just paper losses. If I lose 50 percent of my money, well, that is a real loss to me. How about you?
And while their portfolio might be back to the amount it was six years ago before the crash, Hannah’s parents lost six years! That means any interest that they could have earned, let’s say 6 percent, has been lost every year. Now, what is 6 percent on a million, and another 6 percent, and another 6 percent, so on and so forth . . . well, a lot! Hannah’s folks are six years closer to retirement, and well behind where they could have been.
Hannah’s parents also believe that their current strategy is fine because their broker has said that, conservatively, he estimates 7 percent growth each year on average for the rest of their lives. Most people would assume that means if you have $100,000, then after five years, you will have just over $130,000. ($100,000, $107,000, $114,490, $122,504, and $131,080). Oh boy, another misconception. Let’s say, as many people predict, the market takes a dip this next year and Hannah’s parents lose 50 percent of their portfolio. But over the next four years they gain 15 percent, 25 percent, 15 percent, and 30 percent respectively. While that leaves them with a 7 percent average growth over five years (-50+15+25+15+30)/5), with that heavy hit in the first year, most of that time is spent trying to recoup their initial loss. If you do the math, after five years they end up with only a bit more than $107,000. Now, imagine withdrawing income from this? Hannah agrees, this is not a pretty picture. This gal gets it. She is smart, and deeply cares for her folks.
Hannah went on to tell me that she told her mom to ask their advisor what happened to their portfolio in 2001, 2002, and 2008, and to ask him what his strategy is to protect them from another year like those. Her mother’s response was that she does not want to know all of those things; she just wants someone to take her money and know what they are supposed to do with it. This could be the final nail in their financial coffin. Unfortunately, in times like these, everyone must take ownership of their financial future and to do that, we must ask some hard questions.
