We’ve all heard it before, and many of us have probably said it at some point in our lives. But the scary reality is that a 2015 Nielsen study found 25% of American families making $150,000 or more a year live paycheck to paycheck. One in three households earning between $50,000 and $100,000 find themselves in the same predicament.
Is saving for retirement that includes an actual strategy suffering from a lack of making money; or is it from a lack of understanding about some of the long-term impacts? In one of our other articles, we reflect on how we learn to save and invest, as well as getting a glimpse of the practices and products of wealthy individuals that are also available to us.
But what if you’re not living paycheck to paycheck? Many of our clients started off having a good income and were saving; but they had questions lurking in the back of their minds when it came to a solid strategy.
You don’t have to be a stock broker, but you need to have some knowledge about your wealth. Why? Because your current method, way may be costing you dearly!
Let’s take a look at some immediate things we need to understand to increase our financial wealth.
“What kind of retirement plan allows millions of people to lose 30-50 percent of their life savings just as they near retirement?” This question was raised in a report on CBS’s 60 Minutes regarding 401(k)s,
Many of us remember what happened in 2008. And yet, most still put in a large amount of money into a 401(k) acct. Money is being poured into the account because there’s ‘free’ money in a company match. And honestly, it’s become a habit, so we feel comfortable doing it. It’s allowing us to be lazy with our money by automatically contributing to it, hoping it will be enough by retirement.
Let’s look at some facts about 401(k) plans: Did you know –
They were started as complements to the pension system, specifically at the executive level, and were never intended to be the main source of retirement income. We’ve now seen them as a retirement savings vehicle for about 30 years, and we also now see the struggles it creates at retirement time.
• The Government can change the rules on your account at any time; e.g. regulations could make you wait until you’re 68 or 75 before you take withdrawals without a penalty.
• Most participants vastly underestimate fees – which can eat up to half of your gains over a
30-year period…yes that’s right, HALF! With 401(k)s, there are usually more than a dozen undisclosed fees: legal fees, trustee fees, transaction fees, stewardship fees, bookkeeping fees, finder fees and more. But that’s just the beginning. The mutual funds inside 401(k)s also have fees.
• Participants believe they’ll come out ahead from a tax perspective, but are they? Deferring taxes is not the same as not paying them.
• Using your account as an emergency fund can backfire. There are typically deadlines with penalties along with other charges.
— You can learn more about strategy in our Precision Strategy Learning Section —
What you need to know about the fees –
In 2013, PBS’ Frontline had an eye-opening segment on how Americans are dealing with retirement and the cost and impact of retirement fees. The Retirement Gamble is well worth the watch if you haven’t seen it.
https://www.pbs.org/video/frontline-retirement-gamble/
In that report money columnist, Ron Liebere reminded us how 2% from a small amount of money is not a big deal short term, but as your money grows 20, 30 even 50 years, that fee is now six figures!
Another incredible example from the Retirement Gamble segment. The mutual funds inside 401(k)s often take a 2 percent fee off the top. If a fund earns a gross 7 percent for the year, they take 2 percent and you get 5 percent. Most people are okay with this because it seems acceptable, right? The problem here results from the compounding effect on your money. Using a compound calculator, comparing the 5% and 7% gross earnings over 50 years, you would have lost two-thirds of what you had because of that 2% fee.
As Jack Bogle, the founder of Vanguard explains it, “What happens in the fund business is the magic of compound returns is overwhelmed by the tyranny of compound costs.” Bogle puts it like this, “Do you really want to invest in a system where you put up 100 percent of the capital, you take 100 percent of the risk, and you get 30 percent of the return?”
If you’re like most investors, compound costs are not part of your everyday vocabulary. But it’s something that must be understood when it comes to money. It’s easy to keep avoiding what we don’t know. Let’s face it, if it wasn’t for our 401(k), we wouldn’t be saving anything. But even with these type of accounts, why are so many professionals questioning their retirement money?
It’s estimated that 50% of those eyeing retirement will have to live on 50% of their current income.
Chase things that may be hard
A friend who is in the financial business typically speaks about the fact that in a few years we’re going to see the ‘Hot Mess’ that is occurring in our retirement cycle. We’re at a serious point in which we need to understand what is going on with our financial wealth. Clients tend to have concerns when it comes to medical costs, alternative living expenses, and social security.
Are you building a financial puzzle, but only have a table full of pieces? The reality is that when you’re making money decisions, it’s much harder to learn and implement new ways of putting together your wealth strategy than it is to hand your money to someone else and hope it grows.
Choosing the path of least resistance probably doesn’t lead anywhere. Conversely, it takes effort to build wealth. Investors who are willing to learn and leverage that knowledge will experience more success in creating and pursuing their wealth-building goals.
— You can learn more about strategy in our Precision Strategy Learning Section —
