It’s a new year. The fiscal cliff is behind us and most of us didn’t get hurt too badly. The market is up, the Dow is at record highs and the S&P 500 is well above1500. Life is good and we have nothing to fear, right?
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Well, not for me. This is just one man’s opinion, but we are not out of the woods just yet. Read on and you’ll see where I’m coming from.
This is not to suggest you shouldn’t invest money or that there’s no place for the stock market, but there is a big difference between saving and investing. I’ve been in the business for almost 23 years and have seen it all. I deal with people that make a very nice living and don’t have a lot of savings to show for it. Why? They never saved money, they just invested a lot of money in a 401(k) plan and in their brokerage accounts, and most of us know how that turned out. Just because we had a decent year in the market doesn’t mean we are out of the woods.
I look at my own 401(k) and it appears I have more money than when I started. Why? The only reason is that most of it is my own money, which I contributed to the plan. My brother-in-law “dollar cost averaged” into mutual funds and when my niece went to college last year, he had less money than he put in. For the average “investor,” nothing, or very little, has been made in the last decade. All the investor got was heartburn.
A Different Tune
I look at some of my happiest clients, those who wake up with a smile on their face, whose biggest worry is when to eat lunch. These people were savers, like my father and mother who raised five kids, paid off their debt, had money set aside, and had no worries about making ends meet because they had pensions and lived within their means. Similar to my client who never made more than $50,000, even in her peak earning years, yet managed to have over $1,000,000 in the bank; and like my other client who ran a successful business for 30 years and has large homes and big cars (and, oh yeah, they also have $15 million in the bank!). The common thread here is that they never invested their money. They saved their money.
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There are no “get rich quick” ideas. Don’t bother going on some mutual fund website and answering a bunch of questions on some financial calculator to see what your asset allocation should be. Try this asset allocation: have enough money in the bank for two years worth of expenses. Have money in the market if you want, but if you can’t afford to lose it, don’t. Take the balance and set it aside for retirement and future needs – safely!
Those of us who are lucky enough to have a pension will have a never-ending source of income to use. Many of us, though, will not have that luxury, so be sure to create your own. Today, you can put a lump sum in a fixed index annuity with an income rider that will grow the income value at a guarantee of 4-7%.
No, this is not a typo because it’s not a bank account. This type of product is specifically designed to grow money with certainty and later turn that amount into a guaranteed stream of income for life. Today, a 45-year-old putting in $250,000 (maybe from a bank account with too much in savings, or money in an IRA to use for retirement) and growing at 6% will grow to $801,783 and provide a guaranteed income of $36,080 for life.
We have all learned many things in the past that no longer work in today’s world. My father once told me not to rent, but to save and buy a house because I’d be able to sell it for 5 times more than I paid for it. He told me to put savings in a bank CD because it pays 5% and banks are safe and don’t fail, and to work hard for the same company for 40 years so you will retire with a pension. This worked in 1963 but not 2013.
There are many people who saved to buy a house only to find they now owe more on their house than it’s worth. Since 2008, there have been over 1,000 banks in America that have failed, and the national average of a one-year CD is 0.64%. Who works for the same company for 40 years and has a pension? Not many.
Betting your retirement security on investing no longer works, either. You need to SAVE money.