Am I Diversified?

Podcast Description:

Thanks to the death of private pensions, the devaluation of Social Security benefits and other undeniable retirement factors such as inflation and increased taxes, America is now in a retirement income crisis. Personal Pension Radio show is focused on helping you pack your bags for both halves of the retirement journey. Kraig’s mission is help you build & protect your wealth and lifestyle today and generationally.

Optimizing Retirement income does not happen with a product. Life insurance, real estate, or annuities by themselves will not help you optimize your retirement income. You must have an integrated approach.

Full Transcription:

Kraig: Alright here we go, Personal Pension Radio. Thank you so much for downloading, listening, wherever you are. In the car, on the treadmill, walking the dog, wherever you happen to be. This is Personal Pension Radio. I am the Income Engineer. If you ever need to get in touch with me, it is [email protected] or you can catch me on LinkedIn Kraig Strom on LinkedIn, you can Google me, either way I will come up on the first page of Google as long as you spell my name correctly. 

My mission is absolutely that retirement dream that we have all heard about, it's driven by maximum lifestyle income. The retirement dream is not, Oh, I will just get by. The retirement dream that has been sold and pitched for years and years and years is you know on the beach, you've got your Mai Tai or your little fancy umbrella drink or wherever your quote "beach" is in retirement, that is the mainstream dream right? To get to retirement. That is my mission, is to help you get there. But in order to do that, you've got to pull back the curtain on the Wall Street advice that is out there, that mainstream financial advice to make sure that you actually know that most advisors, they were educated by that same machine that taught me the messaging that work best for Wall Street. That's it. I have said this several times, last week. And I asked this question to folks who asked me well, hey why have not I heard that before? Because I would share something like I did on the last episode like the 4% rule. 

And they would ask, why I haven't have heard of that? Well I answer that by asking this question and I have asked it many times and the answer is always the same but I will asked you right now, think about this, does Wall Street have any financial incentive to teach me, a financial planner, how to teach you to take money out of their system? Well of course not. Wall Street has no financial incentive to teach me how to teach you to take money out of their system in maximum quantities. That is not beneficial for the Wall Street system so of course they do not teach that. Now, that means that the advice on retirement is incomplete. It truly is. The answer to every question is always invest more money, invest more money, diversify, dollar cost averaging, etc etc etc. And the reality is the answer to maximum retirement income is so much more than that. The answer to maximum retirement income means that a singular product, a 401k, life insurance, real estate, stocks and other investments, those thing by themselves they do not fix the maximum retirement income question. You have got to have an actual strategy, a comprehensive approach. And that is what I do.

Now, full disclosure before I jump in. I am not an attorney, I am not a Certified Public Accountant, I am a CFP, Certified Financial Planning Professional. All that said and as qualified as I might be, please do not act on things that you hear on this show as if you are getting advice for you personally. You have got to meet with a qualified financial planner. Of course I hope that person would be me and you can schedule an appointment with me by just sending an email to [email protected], Kraig with a K. K.R.A.I.G.S.T.R.O.M. dot com and I will send you back a link, we can just book an appointment. I work with folks all over the country through the miracle of technology, I can actually connect just remote. You can be in multiple locations, I mean a husband and wife, I have actually met, folks who are at the office, with spouse that is out of the country at the time. So he was in London and she was in Southern California, it works folks. Please remember though, do not act on things that you hear on shows specially from financial entertainers, unlicensed, unregulated, unmonitored, folks who are just giving out random bits of advice as if it was financial planning advice.

Now, let us jump in. No deal of the week this week. I have actually been working on the same projects and did not have anything jumping in. If you have got a deal of the week, I want to put this out to you. I am always curious to hear what someone else is fund out there as a deal of the week. So please send me an email at [email protected], deal of the week in your subject line. And if I think it is absolutely cool, I will definitely share it with the audience here on the show. I would love to do that. This week was actually pretty low key working on the same things that I have already been working on.

So, I am going to jump right in to Watch Your Step. Last week, I did actually cover the 4% rule. If you want a good primer on the 4% rule and what it means, go back and listen to the last episode. For sure, trust me the 4% rule is not something that you want to retire on. Unfortunately, it is exactly what Wall Street has been telling people for 35 some odd years and they keep telling them 4%. So please, you definitely do not want to invest on the 4% rule or retire on the 4% rule. You have got to know what it is before you can avoid it. This week, a question that comes up of often. To invest or not to invest? So watch your step on this. Okay? Watch your step. This word or this phrase, irrational exuberance, it's a real word, real phrase used to describe a situations exactly like the one we are in right now. What is the stock market done over the last 8 years? It is just this parabolic up swing, it is awesome, this is great, everybody is excited. Well, what happens when that frenzy of buying and rising up of the market, it just gets exciting and people become irrationally exuberant. And they ask me questions like this, it came in last week. It is like, hey man my daughter is two years from going to college, I am wondering if I should increase her college savings account, monthly savings that I do, I should bump that up to a thousand dollars a month right? 

Well what makes you say that? I asked. 

Well she is 2 years away and man the market is just cranking along, it is great. 

Like whoa, whoa, whoa. Had to slow this person down. Let us think it through. Number 1, this is a college planning question, as far as saving for college. We are only 2 years away, what is the most important aspect of the compounding growth equation? You know if you are going look at compounding interest or compounding returns, the most important part of the equation I would suggest is time. So how much time does this guy have? 2 years. Well there is no time. There is no time for the effect of compounding to happen. And where are we in the market cycle? Well we are at the top, it is argued, well maybe we are not exactly at the top but the roller coaster is clicking right on its way to the top. So is now the time to jam a bunch of extra money into an account that you are going to need in 2 years? No it is not. If it is something maybe 5 years or more, that you could afford to take a market correction, no. When could that market correction come? Is it possible that that market correction could come within a year, within 24 months? And that would be exactly the wrong time that you would want to experience a market correction in a college planning account that you need to pay for college. We are at the top of this markets right now. Then I say theses markets because so many of the markets are just up up up up. We are at the top of the real estate market. We are at the top of the stock market. Putting in extra cash for this individual was more appropriate to even just bank it. Just put it in a bank because you are going want to keep that money safe and ready to deploy for school. Because if he puts that into his college savings account right now and fully invest it, it is entirely possible that there will be a market correction in the next 24 months that can wipe out a big chunk of that. So why risk it right now? We do not have the time value on our side in this question. So please, watch your step. If you find everybody around you talking about oh this and oh that and wow I got to invest in that. Whoa! Slow down for a second and remember this irrational exuberance conversation here on personal pension radio.

Now, another big watch your step. It is a two for watch your step this week because this just makes me mad. I want you to heads up, think about this, if you are a CPA if you are an attorney listening to this, if you are a financial advisor listening to this, know that I am talking to you and thinking about you as I am going through this. Because it really does just burns me as I am thinking about this. 

Recently I met with, I was introduced by a client of mine to a widower. A husband who lost his wife to cancer last year. It was cancer they knew was there but then it really just jump up and took her quickly. It was just very unfortunate and she was young, she was just in her 60s. It is just ugh. Just an unfortunate situation. They live together still on joint income and on a business that she ran the business, he was really a silent partner but she was the business. She was part of a class action lawsuit and the settlement is going to be very large. It is going to be a very large amount of money. 

Now, lawyers for the settlement case will not send the husband the money for the settlement because the estate may need to go through probate. What? Hear what I just said. There is a huge settlement out there, they lived on joint income basically coming from a business that she ran and now she is gone the income from that business is at risk. The widower, the husband, survivor is barely hanging on does not have a whole lot of cash left and was expecting to receive this class action lawsuit settlement that he would ultimately be able to survive financially. Well now the lawyers for the settlement case who had been working with this couple on a settlement for months and months and months, never mentioned any of that. Never mentioned that oh by the way, if she passes away and you do not have your estate in order, well we will not be able to send it to you until you settle probate. What in the world is going on? 

This means that a group of attorneys out there did not ask the right questions. They did not help this couple get prepared for what they knew was going to happen, she was going to die. There was no ifs and or buts about it. Now this couple had gone to legal zoom. Sadly they just wanted to save a few bucks. So they went to legal zoom and they got wills and trusts and that kind of stuff, and the trouble is that she got sicker much faster and they never finished the documents. We thought we found some finished documents but not valid. That is what happened. They were not valid, they were not signed, even some of the basic documents were just missing one or two additional signatures that might have helped. But no, they were not signed. So this means that the assets of the wife, who's now a passed away will have to go through probate in California. 

Folks, what that means is they might have saved $1500 bucks by going to legal zoom but it could actually cost the husband his house and $30,000 in probate fees and lawyer fees and everything else. Hear that. Saving $1500 because, I do not want to pay an attorney to do my will and trust and everything, you know, I do not want to talk to a financial planner who could help me, I am going to save $1500. No! There is an entirely good chance that is going to cost your family, your survivors, your loved ones a huge amount of money and the terrible part is that probate in California is 18 months minimum. The survivor, the widower, will be broke and living on a basic social security check by the time probate finally settles. I am telling you folks this is scary. There may be some options, we are working on it now, we have got lawyers involved, see I have already made introductions to the widower, to the husband to speak with some lawyers to see if there is any way that we can sort this out. Folks, you got what you paid for. Legal zoom is worthless if you do not execute it correctly and that is where the big risk comes from. Get good counsel, talk to a financial planner first someone who can help to coordinate everything.

Now, questions in segment two. This question came in last week was regarding special needs planning and my big advice was, get life insurance. If you have a special needs child or family member that would be financially in bad shape if you were to die, goodness me get life insurance and put it in a special needs provision in a living trust that an attorney helps you with. Please go back and listen to that episode. If you know someone with a special needs family member, please go back and listen to the last episode, share it with them. Now this week, this question came in from a podcast listener that said am I diversified? They sent me a copy of their investment account statement. Now congratulations they have got a great amount in their investment account, it is excellent really good. And I asked them if they felt that they were diversified? Then they said yes. Because their investment professional has them in this 7 different investments. 

So let me just tell you straight up, they sent me this seven investments and I already knew they were not diversified. But I always like to research it and give more than just my opinion, I like to actually give real answers so I like to research it and dig in, I am a geek for that. So they have seven different investments. This are pooled buckets of various investments in their account. In 3 different accounts I mean. Now here is the thing, seven of them, and here is what I do, I go to a chart. It is very fancy, it is really exclusive, it is so difficult to get to, I like to use Yahoo Finance. Yahoo Finance is available to everyone and you can do this yourself. So what I do is I go and I pull up a chart of the Standard and Poor's 500 stock market index, and then I overlay each of the seven investments on a 5-year period and I overlay those seven investments and compare them to the S&P 500 which is the Standard and Poor's, the biggest companies in the world. 

Now guess what? All seven of the investments that they are supposedly diversified moved up and down at the same time when the stock market S&P 500 moves up and down they all move up and down in the same place. Some more severely than others but the point is folks if you are all seven of them are lock step moving up and down in the same directions, are you diversified? No. That is a clear indication that you are not diversified. Diversified investments will tend to move in different directions. One goes up, one goes down, one stays flat, one goes up. They move in different directions. So number 1, these folks are not diversified. And as part of my questioning, I was like, well why do you work with an investment advisor? 

Oh, I wanted to have you know, professional advice etc etc etc. 

So well, you know that that cost money right? 

Oh, no no no. They do not charge any kind of a fee, they say. No no no. There is no fee, it is just whatever the investments themselves cost that is what our cost is. 

Well, of course the investment advisor gets paid. They get paid. This folks were kind of oblivious to that, they were like, oh yeah okay. They do not really know what it really cost. So let us take a look at it. Number 1, they are not diversified. When your investments, you go to Yahoo Finance and map it out, when they all go up and down together, you are not diversified, you are lock step. You are completely correlated. It is correlated. Now, the other pieces, fees. That is what I was going to get into. So in their case, these folks, I think they are getting the advice to go you know with a financial advisor but they do not have to pay for it. Their fee is .65% on average, that is not bad. That is not a bad thing at all but let us take a look, a deeper dive though on what that really means. That if over the course of 25 years, these folks are young, so I said 25 years, let us just take $12000 a year saved in to this account and if they could earn 8%. $12000 a year at 8% is $947,000 that is awesome. But, you do not get to invest for free. So $12,000 a year for 25 years at 7.35% of course that is 8% minus those investment fees, instead of $947,000 you end up with $856,000. That is a $90 000 difference. Over the course of 25 years, point 65% (0.65%) which sounds so cute and cuddly and small, that is a $90,000 block of fees. Basically that money eroded out of the investments. So a 0.65% fee erodes $90,558 out of this example. 

So now, going back though, we got to dive in a little deeper. So we have got seven different investments, we are clearly not diversified. However, there is additional fees because these are pooled buckets of investments, there is something called turnover. And in this case the average turnover in their investments is 38%. What this means is that there is a big buckets of investments going on and every year on average, the investment management teams are buying and selling and turning over 38% of the portfolio. Now that is not huge, there are so much larger percentages of turnovers, but what that means is they end up with capital gains and losses. They end up with taxable income in many cases on assets that they did not necessarily want to sell, but because the investment management team turns over the portfolio 38% of it, it generates capital gains which means taxes on money that they have never seen, on profits they never saw because it's inside their pooled investments. So turnover is a big deal. These folks actually have a large enough account between their three different accounts that they could have a very nice diversified portfolio on their own without pooled investments and it would eliminate a good deal of capital gains taxes that they have been paid. That is a whole separate story folks. But that is a key piece there. 

Now, they were really about just do it yourself but they thought they really should work with somebody and the key is if they really wanted to do it themselves and get the basic same results, remember what do we say they are tracking the Standard and Poor's 500. Well, they could track the Standard and Poor's 500 on their own. They could, cheaper. They would not be truly diversified away from just the markets but they would be saving a lot of money. So in my example earlier, remember their current portfolio in my example would cost them over $90,000 in loss growth because of the fees. And again that is not gigantic in the world of investments but it is a significant amount of money. If they invested on their own, in their own account managed by themselves and just held on to it, the cost savings could be as high as $76,000. They could actually have the same performance for $75,000 almost $76000 less. Folks, fees are a critical piece. But diversification is also one of those big things out there that most people misunderstand. Just because you have seven different pooled buckets of investments in your account does not mean you are officially diversified. In most cases it means you are not. Okay? 

If you want to know whether you are diversified and if you want to know what your retirement income analysis really looks like, email me [email protected],  subject line Am I Diversified, retirement income planning, whatever whichever one you are interested in, write both in there if you are really interested in it. If you want to know if you are diversified and you want to get my take on it, absolutely. Get in touch [email protected]. And I am going to go back to watch your step. If you have not done your living trust your wills your powers of attorney, if you have gone to legal zoom and you don't know for sure that you have signed them and executed everything correctly, if you wanted to just have a quick conversation and a double check on this stuff please [email protected] I am here to help. I just cannot stand this kind of situations like that where CPAs and financial advisors and just lawyers even out there with their clients and they have not prep them and alerted them to taking care of this, I want to help you make sure that your family never has to go through that probate nightmare that this poor husband is gonna be going through. And I just know it can be fixed for you if you just take action, that is the key. 

Take action, hear this stuff and then just pull the car over ,get off the treadmill, put the bike down and send me an email to [email protected] let us talk. I will get back to you again with another episode next week. Take care.