The Sunday Times included an excellent article on the perils of conventional approaches to retirement planning. All of us responsible adults postpone consumption and save to finance the days when our earnings in the work force will decline and eventually end (yes, retirement).
Be aware that the conventional approach of most financial advisors fails to transition people responsibly from the accumulation life-stage to the retired life-stage. One of the causes is a conflict of interest in the financial advisor’s business model since the right transition and de-cumulation approach results in “dead assets” because the advisor cannot earn a high commission or fee. If you were 58 in 2004 with a large allocation to equities and you hoped to retire by 65 in 2011, because the equity markets would return 8-10% annually, you very likely lost a bet that you may not have realized you were making. The result may be outliving your savings by 5-10 years more than anticipated.
Anybody in their late 40s or early 50s must begin to build a solid, risk-free floor to cover their expected future consumption liabilities now. This means calculating what these liabilities are and slowly shifting your savings into assets that you can count on in the years of your retirement. Anything left over can be exposed to riskier asset classes with higher expected returns to finance a better lifestyle.
Posted by Ken Ehrenthal on February 8, 2011 at 5:40 pm
I enjoyed reading your essays. In no way of criticism…many of the people I’ve been working with do not have the funds to really invest. Some have programs that are employer controlled or just find some broker through free contact coursed offered in schools, etc. I truly believe that this whole investing model was invented to con many Americans into the belief that they have a stake in the businesses they “invest” in when they have absolutely no control. It is a lure into the great gambling casino called “wall street” Your DAD!
Posted by Financial Literacy, LLC on February 9, 2011 at 10:49 am
I’m a little less cynical than you about the system, but I do think too many people play a dangerous game that benefits the professionals who almost always win. We just need to get the word out that participating in the growth of the economy in securities markets is fine as long as people restrict their gambling to the casinos. You are right, about 4 in 10 households cannot save enough to have this problem…which creates a whole other problem….
Posted by Ken Ehrenthal on February 9, 2011 at 11:11 am
amen!