Sunday, January 10, 2010

Retirees Are Trading Their Golden Years For tThe Golden Arches

It seems like every time I take my 10-year-old to McDonalds lately, I’m giving my order to someone who probably hangs out with my grandparents. In fact, I’m guessing most of them ARE grandparents. I started thinking that maybe they knew something I didn’t about the best place to work – a free uniform, discounts on quarter pounders, an extra order of McNuggets – but then I realized that these retirees were working not because they wanted to, but because they HAD to. After all, if you could choose between traveling, playing golf and enjoying your golden years or standing behind the cash register at the golden arches…well, the choice would have already been made.
Unfortunately, retirees are heading back into the workforce – a result of watching their nest egg lose 25 – 50% of its value over the past few years. They were all convinced by the financial gurus that the best way to retire was to spend 30 years contributing to a plan that would be heavily taxed and prone to losing money for 80% of the participants. They listened to the Ramsey’s and the Orman’s shout lies about unrealistic returns and believed the hype that “there is no other way!” when it comes to preparing for the day you (hopefully) stop working (for good) and start living your dreams. The result, hundreds of thousands of baby boomers frantically trying to find a way to recover, and even more retirees heading back to work – finding that the competition is so stiff the only place they can easily find employment is somewhere that asks “would you like fries with that?”

For retirees, it’s too late. The damage is done and they’ll be recovering for the rest of their lives. For baby boomers, the time is now to take big steps to secure your future. Continuing on with the status quo will get you to the same place as today’s retirees. Waiting around for the market to recover is NOT a plan, it’s insanity (insanity – doing the same thing and expecting different results). Do the math; if your account lost 50% in last year’s sell off (ie. your balance went from $100,000 down to $50,000), the market has to go up by 100% just for you to BREAK EVEN! The average time it takes for the market to go up 100% is 7 – 10 years!! The average recovery time (a flat market) after a recession is 16 years! Are you starting to see the problem?

Fact – the average mutual fund investor has actually lost one percent per year, adjusted for inflation.
Fact – 80% of all investment advisors and mutual funds do WORSE than the overall market every year.

I am an advisor, so the truth hurts…but that does not make it any less true. Advisors do their best to help, but the numbers don't lie. I’m sure you’re thinking you’ll be one of the 20% whose account continues to rise – beating the market and building a fortune for your later years. That’s what today’s retirees thought as well, convinced of this lie every time they turned on CNBC or talk radio. If they’ve got you convinced as well, please keep doing what you’ve always done – the world will always need someone to put down another batch of fries for the lunch rush.

Thirty-somethings and forty-somethings need to start planning for their retirement in different ways. They need to shift some of their retirement savings into accounts that don’t fluctuate with the market. Another lie out there in the media is that the stock market averages 10-12% per year…NO WAY! The actual inflation-adjusted, long-term average is 6%, and it comes with all the stress of the constant roller coaster ride and the knowledge that the year you decide to retire could be another year the market drops and you lose 1/2 of your money.

The other problem retirees are facing are ever-increasing taxes. Convinced that their 401(K)’s were the best place for their retirement savings, they built up as much pre-tax savings as they possibly could. They were told (as you are today) that it is better to postpone taxes until retirement because you’ll be earning less and be in a lower tax bracket. There are TWO problems with this line of thinking:

1. No one is in a lower tax bracket now than they were 20-30 years ago because taxes have gone UP, and continue to go up. We’re in store for more tax increases in the next few years – a necessity to pay for the increased government spending and bailouts. Seniors who were in a 15% net tax bracket 20 years ago no longer have the tax breaks they did when they were younger (children at home, mortgage interest, etc, and are paying 25-30% in taxes today.

2. Who wants to PLAN on being in a lower tax bracket when you retire? Think about it, that means you are planning on having less money then you do now. Do you feel like you have too much right now? If not, why would you want to PLAN on having less in the future?

There has never been a better time to sit down with an advisor who is focused on tax-free, risk-free planning and evaluate the road you are headed down to determine where you’ll be when it’s finally time to retire. A Chinese proverb states, “no matter how far down the path you discover you are going the wrong direction…TURN AROUND! Continuing will only put you farther away from your desired destination.”

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