“If it hurts when you do it, stop doing it”
I recently read yet another article lamenting the fact that 401k and IRA Plans are falling well short of expectations (Americans Aren’t saving Enough for Retirement but one change could help). As I read these articles, I am constantly reminded of the financial devastation that market downturns wreck on an unsuspecting public. But, while no one disagrees that the “401k and IRA path to retirement” has been a dismal failure for most Americans, it never ceases to amaze me how they still refer to them as a “Savings Plan”. In fact, it only took two sentences for this recent article to use the term “Savings Plan”.
First and foremost, let’s get something straight… a savings account that is exposed to stock market risks is NOT a good plan! Exposure to Market risks makes it a Securities Investment at RISK of total loss… NOT a Savings plan!
And that leads us to Secret #1… Do not confuse Stock Market Investments (Risky) with Savings (Safety). If you cannot afford to lose it, then do not take the risk! And very few of us can afford another “Lost Decade”.
Now, I know what you are saying, “That’s not a secret, that just common sense”, but simply take a look around you at all the examples of deceptive brokerage house marketing and even US government propaganda. We have been programmed to ignore the fact that IRA’s and 401k plans are still predominately “Stock market risk plans”, not “Safe and steadily growing savings plans”. It always amazes me how obvious this is to some, yet so obscure to so many. In fact, whenever I articulate this to others at cocktail parties or events, I feel like the boy who said the emperor has no clothes. But, if you are one of the millions of Americans who have been duped by this high stakes gambit, it’s not all your fault… but after you read this blog that may change.
Have you ever heard those so called Financial Gurus piously state… “You Need to Save More”? I certainly have, but is that really the main culprit. I say NO! It’s not your rate of savings that has created the failures it’s the losses in our accounts and the subsequent lack of gains that really creates the failures. In fact, I pose the following question to anyone who truly dares to strive for a better retirement… “If you could simply eliminate the losses within your retirement savings and investments do you think your “rate of savings” would be as critical?” Of course not, but why does it seem that I am the only one proposing this idea? Could it be the 30 years of relentless propaganda and Wall Street marketing that has convinced America that any money outside of the stock market is now deemed as “lunacy” and downright “crazy talk”. It’s to the point that most Americans have been duped into believing that a “Diversified Stock Portfolio” is the only way to manage risks in their “Retirement Savings Plan”. The unfortunate result for millions of Americans, was the “The Lost Decade” with losses that may never be recovered. But hey… “You need to save more”… No, we need to save differently!
Now, I know what you’re thinking, “Where else can you save your money where it can grow consistently without taking risks?” … I know of only two, and these are secrets #2 and #3. These “Secrets” are also obvious but obscured, and just like Secret #1, they too “fly in the face” of the propaganda and Wall Street marketing machines and they are illustrated below:
In this chart, we show a hypothetical $100,000 invested in each category of “Risk & Growth” during the years 2000 – 2009, the “Lost Decade”.
The first columns represent a typical Compound Interest bearing account such as Bank Savings, CD’s or Cash value Life Insurance. For this example we applied a Safe Interest rate of 3% since that is generally available in Cash Values and some Bank Savings vehicles.
The middle columns represent a typical Mutual Fund that claims to match the “Market” In this case the S&P 500 total returns. This is also generous because on average, Mutual Funds lag the S&P 500 by almost 2%. But for this example we will assume that this mutual fund matches the index.
The right most columns represent a typical Fixed Indexed Annuity (FIA). For this example we selected a 70% participation rate, no ceiling, and a floor of 0%. So in effect, your money will never go negative (No Losses with 0% floor) but in return you only get 70% of the stock market gains (The 70% participation rate).
As you can see, just by eliminating the losses during “The Lost Decade”, Americans could have increased their savings by over 82% instead of losing nearly 10%. That is a 92% swing without having to “Save more and live on less”, proving you need only to “save differently” to “save more”!
If you want more information on this approach and a better explanation of these columns and these types of assets, they can be found in our book “Future Proof Investing”, but for today’s discussion let me close with this… Like a voice in the wilderness, we state that any retirement savings plan that exposes your savings to losses is a dumb plan at best. We further contend that a proper plan maintains a Maximum of 20% exposed to market risks and a minimum of 80% of your savings and investments in safe, protected and income generating vehicles. If you do this correctly, your savings will grow steadily and 3000 days from now you can avoid being one of the “unlucky” Americans after the next Lost Decade (Yes, I said “Next” Lost Decade)…. Or maybe I am a lunatic, just as your stock broker contends?… I’ll let you decide but don’t stop learning and thinking.