Real World Reality Retirement Planning for Real People
Friday May 8 2015
Description: A very REAL World conveyance focusing on true retirement planning for real people living in the real world. I caution that some of the concepts outlined go against current standards in the Financial Advising and the Investment Advising industry…I dare anyone to debate the facts, however.

I think we all need to wake up as Investment/Financial Advisors and stop parroting what we have been brainwashed into believing, and, therefore, saying to clients.

Typically, Most Financial Advisors have all left one firm to join another--most of us more than once.  Each time we were required to sit through a week or two of various ‘alleged’ training workshops.  Hopefully, we now realize these training seminars were merely sales coaching events; ways for the employing firm to cover their butts against potential lawsuits by having the proper allotment of compliance and ethics related presenters speak to us, as if a 15 minute speech on ethical behavior was going to change any unethical people in that room. A shark is a shark no matter how much training.

Take, for instance; "Risk Tolerance Questionnaires", doesn't every client answer the same questions the same way? Clients want to earn the most money with the least risk, young or older. How many advisors actually do the math for the clients after the Questions are answered?  Let's say the client answers the typical question of "How would you feel about losing 10% of your account value in a typical market downturn?”, with ”I can’t lose 10%”.  By this time the appointment has already taken about 45 minutes, and the ‘salesman’ knows not to overburden the sales event. Does the advisor then go through the math of how the account would have to be allocated in order to guard against a 10% downturn? No, they sidestep the issue with an attitude of “I gave the information; the client can do the math.”  

The REALITY is that in order to guard against a 10% downturn, the account would have to be 100% in cash, or bank CDs, but CD rates haven't come close to meeting inflation for over 20 years now. Not even 100% into bonds would guard against a 10% drop, as we all saw after 2008 when the bond market was hit, and hit big, then take into account the miserable returns bond funds returned years before the event, and after and you can see my point. Also, would the “Sales Manager” of any firm allow any of their 'sales rep advisors'  put people into cash only allocations that don’t pay commissions? They may allow it, but the Advisor wouldn’t be there long not making the firm commissions.

One of the biggest fallacies which needs to stop is skewing client allocations to a 80-90% position in Fixed Income/Bonds/Bond Funds as they near retirement, especially at these rates. It‘s not good for the client. Most of the salespeople posing as Financial Advisors out there adopt this allocation protocol, and they are encouraged to do so by the firms that employ them. The theory behind this protocol is that the closer you get to retirement, the less time you would have to rebuild your retirement after a market fall. Let’s take each reason that makes this incorrect one at a time. First, the day you retire you probably didn't intend to withdraw the whole amount. You should only be withdrawing the amount you need monthly. Any analyst will confirm that the market fully rebounded shortly after the 2008 fall. Second, the typical advisor charges about 1.5% per year in management fees. Bonds have been yielding about 1.60% for many years, which means the funds that contain these bonds yield the same, so you do the math. The 1.6% yield is bad enough, but the actual gain as you can see is barely a dribble after the 1.5% annual advisor fee is removed. Third, are bonds the safe portion of the allocation they are touted as being? No. Look at ANY bond fund chart, load or no-load in the timeframe of 2006 to present. Notice that HUGE dip after 2008? Now calculate the miserable returns the holders of those bonds/bond funds received prior to, and after that downturn, then ask yourself if they are really TRULY safe. Facts are facts, if the Equity markets plummet 20%, they will bounce back, and if they don’t, having money in bank CDs won’t be worth a dime either. I’ve always wondered why the other side of the ‘equation of doom’ is never outlined. I always hear that “clients are afraid to lose all their money in the market”.  Now for the TRUTH, if the markets go to ZERO, then the economy is dead, period, and even your money in FDIC guaranteed bank CD’s is worthless, except for kindling. Our economy is dependent on the stock markets, and stock markets have to rebound after falls, or else no one will invest. Would you invest your money into something that doesn’t go up?  

I have a client now that is a good example. Her name is Valeri. She recently lost her husband and had about $300K to invest. She found an advisor at a big firm and they put her into the typical high fee account. After a few quarters she noticed that the only person making any money was the “alleged advisor”, her words.  She was referred to me by her late husband’s attorney. He called me and asked to look over her account statements. Sure enough, $100K was put into a high commission annuity, and the other $200K was put into a BOND Mutual Fund. The fees were 1.5% annually. It doesn't matter what fund it was in, for my point. The Advisor's fees were 1.5% per year, and the fund was only yielding 1.67%! She was making a whopping .14%, or $280 a year with only 10 more years until her retirement. I see this kind of malfeasance all the time as I review prospective client accounts.

Let's get real, If the market is showing validation for an 80% equities 20% Fixed income/Bond allocation when a client is 30 years old, then the same should hold true for the 65 year old as well. If the equity market takes a 10%-20% hit, you take 70%-90% out of the bond allocation and put it into the equity allocation, Thus turbo-charging the returns during the rise back up. When the market regains the loss %, you reevaluate the model and allocate accordingly. Buy low, sell high.

Now for the 'myth of Gold', Gold is safety favorite of most advisors--well-known, well-educated advisors. We’ve all seen the commercials telling of Gold hitting $10,000 or even $20,000 an ounce warned for years by Peter Schiff! I’m going to risk an outlash from Gold enthusiasts, but I doubt that Gold will ever hit $20,000 an ounce. I dare say that if Gold went from the present $1200 an ounce to $10,000 an ounce within a shorter span than typical market trend increases, the economic forces causing that dramatic rise would have already taken their toll on the economy. Or better said, there would be no economy left, other than the barter of bullets, grain, and farm produce.

The reason I am bringing up such things is to inform, and, therefore, enable the true discussion and realization. The United States would never let the Stock market collapse to nothing, and If it were unable to prevent it, money would not be worth anything, anywhere, anyway. The point being that you can’t avert the market’s end, or protect against permanent severe losses by investing a large part of your limited assets into non-producing allocation models, for extended periods of time. Time value of money is an essential element in investing. It basically means that money sitting, not making a return, is a waste.

Do you plan on going to your account and withdrawing all of your money the day you retire? No, of course not. So, if we have established that a total economic meltdown can’t be averted, and that bond’s or CD’s aren’t the safe haven we’ve been led to believe, and the returns of those alleged safety hedges are actually in the negative when calculating the necessary current inflation element, then we can formulate the following statement: When the market goes down, it will always go back up, or it will be worthless anyways. Realizing this, the best course during a market downturn is to move money from the limited growing allocations and into the allocation that has gone down.

Steve Casull

CEO & Founder

Casull Financial Advisory, LLC