Last week we covered some of the differences in annuities and the various types of annuities someone can purchase. In our final annuity installment (no pun intended) I want to explain some of the fees and expenses that some annuities and annuity providers employ. As mentioned in my first annuity article annuities are an insurance product – insuring against living too long. Most companies that offer annuities will charge for this insurance by means of what are called mortality and expense charges. M&E charges can be as low as .25% to as high as over 2%. These charges are the expenses the annuity company charges to the entire risk pool of policyholders in order to pay for the few that will outlive their life expectancy. Most policyholders and annuitant will not outlive their life expectancy and thus pay for those that do. M&E charges will also help the annuity company […]
investing
The Other Life Insurance – Annuities
The last few weeks I have been writing about the more conventional form of life insurance that most people are familiar with when I say ‘life insurance’ – which is protection against a premature death. The other life insurance is that which protects your from living too long – and that insurance is the annuity. Over the years annuities have gotten a bad rap – and rightfully so. Like life insurance, annuities are generally sold to the public via a sales force of licensed agents. In most cases, they are not the right vehicle for the individual (I know I am setting the blog up to receive the thunderous rebuttals) but there may be cases where an annuity makes sense. The other reason annuities get a bad rap is because of the pure insurance (longevity) feature that they provide – especially pure life annuities. A pure life annuity is simply […]
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Life Insurance is Not an Investment
Last week I seemed to cause a bit of a kerfuffle when I wrote about which life insurance may or may not be appropriate for the general consumer. For the readers that sent in emails and comments – thank you! It’s much appreciated and we enjoy the feedback. Twitter was also flitting and chirping with the commotion. In particular, the discussion really narrowed down to, and most of the comments we received were regarding the comment I made on life insurance not being an investment. And that’s still true. It’s not. Now there are plenty of people that will argue with me that it is an investment for this reason or that. For this writing I am hoping to explain and to clarify what I meant as an investment. From a pure investment standpoint – meaning saving and investing one’s money for retirement and or college or just saving and […]
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Book Review: Winning the Loser’s Game
Timeless Strategies for Successful Investing Charles D. Ellis, the author of this book (in it’s Sixth Edition), has definitely hit the nail on the head with his subtitle. The strategies outlined in this book are good for any investor in any economic/investing climate. Time and again throughout the book, Mr. Ellis points out that the real key to investment success has nothing to do with finding the right stock, bond, mutual fund or ETF – and everything to do with developing a sound strategy for investing and sticking to it. The strategy requires you to develop an understanding of your own personal tolerance for risk and your need for returns. This can be a difficult undertaking, as it requires the investor to answer difficult questions about what kinds of losses he can stomach with his investments, as well as what sort of return you require for your investments over the […]
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Avoid the Trap
Eating and dining out all the time can drain our money and potential retirement savings without us even being aware of it. We get asked from friends to go to lunch, coffee or we find ourselves skipping breakfast and getting in the line at the coffee shop for a scone and latte. Before we know it, we’re left asking, “Where did the money go?” Or worse, “I can’t afford to save for retirement.” What’s happened is we’ve fallen into the trap – a habit really, but it can be broken and we can relearn. Here’s how: The first thing you can do is to pass on that latte or scone all together. Instead, make yourself breakfast at home. Invest in a coffee maker if you don’t have one, and make your own coffee. Then make a nice meal of scrambled eggs and whole wheat toast, a cup of cottage cheese with […]
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Did the Advent of 401(k) Plans Hurt Americans?
There’s been quite a bit of press lately about the recent Economic Policy Institute study (see this article “Rise of 401(k)s Hurt More Americans Than It Helped” for more), which indicates that the 401(k) plan itself is the cause of American’s lack of retirement resources. I think it has more to do with the fact that the 401(k) plan (and other defined contribution plans) were expected to be a replacement for the old-style defined benefit pension plans, and the fact that those administering the retirement plans did little to ensure success for the employees. Traditional defined benefit pension plans didn’t ask the employee to make a decision about how much to set aside – this was determined by actuaries. Then the company made sure that the money was set aside (in most cases) so that the promised benefit would be there when the employee retires. In the world of 401(k) […]
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What is Risk Tolerance?
What is risk tolerance and why is it important to investors? As an investor you’ve probably been asked this question by yourself, or your financial advisor. It’s not an easy question to answer and not a question that can be answered with one word or a quick sentence. Risk tolerance is simply a particular investor’s appetite for risk. Some investors have little appetite for risk and their stomach churns when they think about losing money in the market. Generally these investors are considered risk averse or risk intolerant. Other investors aren’t really concerned about the ups and downs of the market and are willing to accept these market gyrations in or to receive the benefit of potentially higher returns. This is called the risk/return trade-off. In order for investors to receive higher returns they generally have to be willing to accept more risk for those returns. In other words, these […]
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A Stable Pyramid
One of the basic fundamentals regarding financial planning and saving money revolves around what is known as the financial planning pyramid. You may hear other names such as the wealth management pyramid, the financial house, etc. You may also see different stages or “building blocks” added here or there, but I’ve broken it down for the purpose of this book to three basic levels for easier understanding. The first level is where we see risk management. This is the foundation of your plan. It’s important to have a strong base to build off of, otherwise the slightest of breezes or tremors can send it toppling. Risk management can be simply seen as your insurance – and this can range from your auto, home, renters, life, health, disability, and umbrella insurance, to your will, emergency fund, and debt management. The reason why insurance is the base is due to the fact […]
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Why Diversify?
Remember Enron? I think we all do. Enron was once a powerhouse company that saw its empire crumble and took the wealth of many of its employees with it. Why was that the case? Many of Enron’s employees had their 401(k) retirement savings in Enron stock. This was the classic example of having all of your eggs in one basket and zero diversification. Let’s say that the employees had half of their retirement in Enron stock and half in a mutual fund. Enron tanks but their mutual fund stays afloat. This means that they lost, but only lost half of their retirement, all else being equal. Imagine if they had only a quarter of their retirement in Enron and the remaining 75% in three separate mutual funds. Enron’s demise is only responsible for a fourth of their retirement evaporating. This could go on and on. The point is that when […]
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Book Review: Asset Allocation-Balancing Financial Risk
This was a re-read for me, with the recent publishing of the fifth edition of this very important book. Roger Gibson has updated his excellent work with the results of his strategies during the Great Recession, up to date as of late 2012. Advisors have much to learn from Mr. Gibson’s tome regarding the optimal methods for allocating your investment assets. Throughout the first portion of the book, the concepts of market-timing and superior asset selection are summarily debunked, and the benefits of market index investment and diversification are shown to be optimal. The author uses real-world data to underpin his findings. The result is the explanation that, with known investment time horizons, an optimal mix of investments can be determined that will produce superior long-term risk-adjusted results. Much is written in the book, which is directed primarily to investment advisors, about the mind-set of the investor himself or herself. […]
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Book Review: The 7Twelve Portfolio
The 7Twelve Portfolio is an excellent concept for financial planners and novice investors alike. The book is very well written and easy to comprehend as Dr. Israelsen keeps the concepts simple and analogies easy to follow. The crux of the book is regarding diversification and Dr. Israelsen uses the analogy for making salsa as a reference. For example, you don’t have salsa of you just have diced tomatoes and it really doesn’t improve if you simply add some onions and salt. It improves a little bit, but still isn’t salsa. The same is true for diversification. You’re not diversified if you own one stock or bond in your portfolio and have all of your holdings in that one asset. The benefits of diversification begin when you start adding additional ingredients to the mix. This starts to lower risk and help maximize return. This is a concept us nerdy planners call correlation. The […]
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Book Review: A Random Walk Down Wall Street
Right from the start this book will be an excellent read for both financial advisors as well as their clients. Dr. Malkiel provides academic insight on the reasons why passive management works and some great commentary on the use of index funds as part of someone’s overall portfolio. This was the second time I read this book and certainly not the last. It’s great reinforcement on why we invest our clients’ money the way we do and provides solid academic evidence that doing anything to the contrary is counterproductive, more expensive and simply playing a loser’s game. Some of the bigger takeaways from the book are Dr. Malkiel’s thoughts and research on the different part of the Efficient Market Hypothesis or EMH. The EMH consists of three parts – the strong form, the semi-strong form and the weak form. The EMH essential admits that markets are efficient – meaning that current […]
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What a Mutual Fund Manager Won’t Tell You
Most people reading this article will have some experience with mutual funds. Whether part of your IRA, 401(k), or other savings vehicle mutual funds play a key role in helping people achieve their savings goals with access to a wide variety of companies and diversification along with professional management. By professional management we mean an individual or team of managers that run the day-to-day activities of the fund such as buying and selling of stocks and bonds as well as running financial analyses of the different companies whose stock they are looking at adding to or selling from the fund. Mutual funds and their managers vary and from the macro level you essentially have two types of managers – active and passive. Active management means that the managers of the fund actively trade securities in hopes of achieving higher than market returns or outperforming their respective benchmark, such as the […]
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The Crystal Ball
Every so often we get asked by our clients or prospective clients which direction the market is going to go. This is always and entertaining question to get – and some of our “regulars” already know the answer. Having a bit of a sense of humor (albeit dry sometimes) I’ll joke with clients and tell them that the day they handed out crystal balls in my investment class, it was the one time I called in sick – and you only get one chance at the coveted crystal ball. Thus, I forever lost the opportunity to predict the future of the markets. Darn. Inevitably, clients laugh and understand the joke – and take away the underlying theme of the jocularity – that we can’t predict the future, especially in securities markets. But this doesn’t mean we can’t plan ahead. So why do we invest? Why do we save for retirement? […]
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Book Review: Think, Act, and Invest Like Warren Buffett
This book, by Larry Swedroe, is a must read for individual investors that are looking for the answer to the age-old question – How should I invest? Warren Buffett certainly makes any list of “best investment minds” of our era, no matter who you are. Author Larry Swedroe would likely make any such list as well, given his many books that he has written on the subject, such as “The Only Guide to a Winning Investment Strategy You’ll Ever Need”, “Investment Mistakes Even Smart Investors Make”, and just as well, the subject of this review. Mr. Swedroe starts out with the basics of Mr. Buffett’s advice, with the sage’s commentary backed by the facts behind them. For example, regarding market timing: “Our favorite holding period is forever.” Swedroe follows this advice with evidence of why it pays off for the individual investor in the long run, due to the fact […]
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How Financial Advisers Get Paid
As you begin your search for a financial professional it’s going to be important to know how the particular professional you choose will get paid. It will also be important to ask questions not only in regards to their compensation, but who actually pays the adviser. There are generally three ways in which financial advisers and planners get paid. Commission: An adviser that’s paid on commission generally gets paid based on the underlying product they sell. Commission rates vary depending on the product sold – anywhere from 5% to 50%. Term Life insurance for example, will have roughly a 40% commission rate on the annual premium for the first year. Whole Life insurance is generally 50% the first year. The difference being Term Life may have an annual premium of $1,000 where Whole Life may have an annual premium of $5,000. It can be difficult to be objective when an adviser can make $2,500 versus $400 […]
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Your Employer’s Retirement Plan
Whether you work as a doctor, teacher, office administrator, attorney, or government employee chances are you have access to your employer’s retirement plan such as a 401(k), 403(b), 457, SEP, or SIMPLE. These plans are a great resource to save money into, and some employers will even pay you to participate! Let’s start with the 401(k). A 401(k) is a savings plan that is started by your employer to encourage both owners of the business and employees to save for retirement. Depending on how much you want to save, you can choose to have a specific dollar amount or percentage of your gross pay directed to your 401(k) account. Your money in your account can be invested tax-deferred in stock or bond mutual funds, company stock (if you work for a publicly traded company), or even a money market account. Your choice of funds will depend on the company that […]
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How Dollar-Cost-Averaging Can Work to Your Advantage for Your 401(k)
When you invest in your 401(k) plan with salary deferrals from each and every paycheck, you are taking part in a process known as Dollar-Cost-Averaging (DCA). This process can be advantageous when investing periodically over a long span of time, by smoothing out the volatility of the market and giving you an average cost of your investment shares over time. How does this work, and how can it be advantageous? Dollar-Cost-Averaging When deferring income with each paycheck, typically you will be investing in your 401(k) plan each pay period, whether monthly, bi-weekly, or weekly. Each pay period the same amount is deferred and invested, no matter what the price of the underlying investments are at the time. Since you’re always putting the same amount into the investment, when the price of the shares is higher, you purchase fewer shares; when the price is lower, you are purchasing more shares. Note: […]
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Why Designations Matter
Throughout my career I have had the occasion to talk with several financial advisors, planners, insurance agents, brokers, and other industry professionals about some of the reasons why people choose to pursue or not to pursue designations. I have heard differing views on the topic and thought I’d share some of my insights as to why I chose and still choose to pursue designations and degrees. Before I do, let me start by talking about some of the reasons why the advisors I have spoken to decide not to earn a designation. More often than not, the typical answers that I receive are not having enough time, not sure which designation to pursue, lack of funding to afford the designation, and lack of support on earning the designation – either from their employer or family. On the latter two points, some companies may not be able to “support” the designation […]
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Save 1% More! Here are 7 ways to do it
United States (Photo credit: Wikipedia) Seven bloggers have now published articles encouraging all Americans to commit at least 1% more to retirement savings this year as they make their benefit elections. We have several more bloggers who are going to put their posts up soon. See the original post for details on how to join the action: Calling All Bloggers! Listed below are the articles in our movement so far: From Michele Clark: Employer Retirement Accounts: 2013 Contribution Limits From Roger Wohlner: Need Post-Election Financial Advice? Try the 1% Solution From Sterling Raskie: A Nifty Little Trick to Increase Savings From Theresa Chen Wan: Saving for Retirement: The 1% Challenge for 2013 From Mike Piper: Investing Blog Roundup: Saving 1% More From Robert Wasilewski: Increase Savings Rate By 1% From Steve Stewart: Seriously. What’s 1 percent gonna do? Thanks to all who have participated so far – and keep those […]
Sterling Raskie, MSFS, CFP®, ChFC®
The latest in our Owner’s Manual series, A 401(k) Owner’s Manual, was published in January 2020 and is available on 
A Medicare Owner’s Manual, is updated with 2020 facts and figures. This manual is available on 
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Sterling’s first book, Lose Weight Save Money, can be 
An IRA Owner’s Manual, 2nd Edition is available for purchase on Amazon. Click the link to choose the 
Jim’s book – A Social Security Owner’s Manual, is now available on Amazon. Click this link for the 
And if you’ve come here to learn about queuing waterfowl, I apologize for the confusion. You may want to discuss your question with Lester, my loyal watchduck and self-proclaimed “advisor’s advisor”.