Karlan Tucker, CEO, Tucker Financial Solutions
By Karlan Tucker
If something you thought to be true turned out to be exactly the opposite, how soon would you want to know about the actual truth? It was once believed that the world was flat, and that the earth was the center of our solar system. It was also believed that atoms were the smallest particles in existence. These once-held truths are hardly given a second thought today. Our “new” way of thinking is the result of many years of advanced discoveries and facts being passed from generation to generation. But imagine how hard it must have been to grapple with the idea that one could actually sail around the earth rather than falling off the edge of it. People were mocked, ridiculed, and even persecuted for an idea so preposterous as the sun being the center of the solar system instead of the earth.
Fast-forward several hundred years. Although it now seems almost laughable to reflect on this way of thinking, we must not forget the human process of wrestling with truth, particularly when it goes against what we have been taught for much of our lives. Decisions become exponentially harder to make when they go against ingrained thought patterns.
Investing is no exception to this rule. When it comes to choosing our investments, the same mental challenges are present that were there hundreds of years ago. When choosing the best vehicles to invest our retirement funds, what we have been taught may or may not be true. We owe it to ourselves to perform the proper due diligence and consider the best place to invest our money in this ever-changing economic environment. Below are three suggestions that will help serve as catalysts to begin this process:
- Do not let your emotions get in the way of your investing. While this may be easier said than done, it is vital to making the best financial decisions. You need to base your financial choices on factual, sound evidence and not conventional wisdom. When you notice your emotions beginning to dictate your decisions, take a step back for as long as you need to gain composure. Remember, it was conventional wisdom that sent stocks down almost 50% during the great recession.
- When doing research, avoid publications that are clearly biased. When a magazine is littered with advertisements from mutual fund companies, it is probably going to be a pro-mutual funds publication. Not everyone is a financial expert – just because someone has a slew of letters behind their name doesn’t mean they know everything. Be aware of extreme language. When people start describing investments as a sure thing, bullet-proof or the worst idea ever, it could be a sign of a biased point of view.
- Perfection does not exist. If an investment existed that was entirely safe, 100% liquid and could outperform the market all the time, there would be no need for diversification. Everyone would simply place all of their money in this type of investment. This perfect investment vehicle simply does not exist. So remember: If something appears too good to be true, it probably is.
Many people find themselves on the outside looking in when it comes to retirement. This means, quite simply, that before you retire, you are probably only seeing the retirees in a very limited capacity. You see someone enjoying their financial freedom. You see a person who dresses in golf attire every day, enjoying AARP benefits and movie theater discounts.
However, when you reach the age at which you plan to retire, there are personal feelings and desires that you must deal with. These are things you probably don’t notice too much, because the majority of them are internal. To assist you with your retirement planning, let’s take a look at some of the positives and negatives of what you might go through leading up to your retirement, and afterwards.
In today’s age, many retirees are utilizing their time to reinvent themselves. Maybe you have a passion that you’ve been forced to curtail due to your job. Now is the time to delve into that passion and have fun with it. That could be anything from rebuilding an old clunker to starting a book club. Or, thanks to technology, that could mean creating your own website and blogging on a daily basis about a subject you’re passionate about. And for some retirees, this is a time to reinvent themselves by embarking on a new career. Now that they are no longer shackled to their jobs, many see this as a period of self-discovery and improvement in a professional sense.
Negative: Pent-up Anger
There’s a good chance that you’ve felt some anger from time to time as you’ve progressed through life. Anger is a very natural reaction when things go wrong. Retirement is definitely no exception. For example, many retirees still feel a great deal of anger over the effects caused by the Great Recession. Despite the fact that it reportedly ended three years ago, Americans are still feeling its affects daily. They might also find themselves angry over rising health care costs or the years they spent working and saving to have their retirement accounts depleted. If you find yourself holding onto this anger, you need to find ways to cope with it. Anger can quickly become a debilitating problem. It’s best to get rid of it now.
Positive: Vast Opportunity
Many individuals have a successful retirement because they’ve worked tirelessly for years and saved opportunity along the way. Now that those days are over, you have a fantastic opportunity to improve other aspects of your life. Many retirees in this situation decide to improve their family relationship. They connect with lost relatives, invest more time with their children and spouse, and even spend a great deal of time working on relationships that might have been a bit forsaken while they were working so hard to create a strong retirement.
Negative: Petrifying Fear
This can be a big issue. Although “petrifying” might be too strong a word, the fact remains that a lot of people fear what is waiting for them throughout their retirement. They see older retirees, maybe their own parents, and have taken note of what they go through. They watch while others have health problems and become dependent on family and friends. This is a life that frightens them immensely. In addition to this, many also fear being unable to cope with no longer having a purpose in life, despite how incorrect that statement might be.
Although not the answer to all retirement problems, a strong and well managed porfolio can help alleviate many of these fears by offering peace of mind that you will be protects from life’s inevitable storms.
Believe it or not, today’s retirees are experiencing what you might call a Golden Age. This means that current retirees, at least many of them, are living rather comfortably. They have enough money to last throughout their retirement, their health care is secure, and they don’t have to worry about working in order to supplement their income.
Unfortunately, many believe that those days are over. The new batch of retirees are discovering that they might not have it as easy as many of their older counterparts. Let’s take a look at some of the facts concerning this possible death of the Golden Age of Retirement. (https://www.msnbc.msn.com/id/47063385/ns/business-personal_finance/#.T6fb1dVDNnU?utm_source=facebook&utm_medium=social&utm_broadcast=b36d5902-4b3c-4a11-a419-425dd223acc4)
Fact #1: Older Baby Boomers will have an easier time than their younger brethren.
Baby Boomers who are enjoying retirement right now are doing exactly that: enjoying it. Many of these lucky millions are well off thanks to such things as company pensions, sizable inheritances, the equity in their expensive homes, and a number of other luxuries. Unfortunately, the same is not true for people who are currently approaching retirement, including the younger portion of the Baby Boomer clan. These new retirees are not in the same financial circumstances that their older peers are. This is why many are saying that this marks the end of the Golden Age.
Fact #2: Spending has not stopped.
Spending has always been a problem for millions of Americans. We want what we want, and many of us are likely to buy items that we desire even when we can’t afford it. This is especially true for a number of Baby Boomers, because many of them were quite comfortable with their finances, and had the money to spend. They were never afraid to spend their cash, because more was always on the horizon. Spending money isn’t a crime, of course, but if you choose to do so, then you need to also make sure that money is being put away for your future. Unfortunately, this doesn’t seem to be happening as much as it should. (https://www.nytimes.com/2011/10/29/business/americans-savings-rate-drops-again-puzzling-experts.html)
Fact #3: The recent financial crisis is partly to blame.
Four and a half years ago, we entered an era dubbed the Great Recession. Since then, millions of Americans have either lost their jobs, seen their financial portfolio dwindle, or both. Officially, this Great Recession ended in 2009, but the effects have proven to be long-lasting. Many people approaching retirement are still reeling from their own financial collapse, whether that may be due to a severe decrease in inheritance, a lack of a company pension, or some other similar reason. Of course, people need to realize that the financial crisis isn’t the only reason they’re experiencing problems.
Fact #4: The recent financial crisis isn’t the only issue.
While many people have blamed the financial crisis for their troubles, and rightfully so, a number of individuals approaching retirement have caused their own problems. The most important of these is also the simplest … they are, flat out, not saving for retirement. They are procrastinating each and every year, and all this will do is ensure that their retirement doesn’t exactly go as planned. Some of these individuals may have been hurt by the financial crisis as well, but their actions are not helping things to get better. No one is going to save for your retirement for you. It’s all up to you. Future retirees have a difficult road ahead, and if you don’t take steps to avoid the pitfalls, you may find yourself looking back with regret.
If you’re like most investors,, it is very likely that you have a 401k as part of your retirement plan. In fact, there’s a solid chance that your 401k could be the backbone of your entire financial portfolio. If this is the case, you definitely aren’t alone. They can supply you with a healthy amount of retirement income, there are tax benefits, and if you obtain one through your employer, you may receive matching contributions.
That being said, 401k plans could be in trouble. And we’re here to tell you exactly how…
Federal Government’s Massive Budget Deficit
Unless you’ve been living on the moon, you’ve surely been painfully aware of the deficit our country is facing. The federal government is trying to decide how exactly to bring down that iever-growing amount, and 401k plans could become a target. More precisely, proposals have recently been made that would target the tax benefits enjoyed by the contributions you make into your 401k. The effect would especially be felt by individuals with a higher income. The basic thinking is that the contributions you’ve been making into your 401k cannot be taxed right away, and that is something that has raised the eyebrows of a variety of lawmakers.
Flat Tax Credit Proposal
Last September, an idea was given to the U.S. Senate Finance Committee to help improve the country’s deficit. It was suggested that the pre-tax and tax-deductible contributions be replaced by a flat tax credit of 18%. This would go for both companies and their workers who contribute into these accounts and take advantage of their tax benefits. While this would raise $458 billion over the next decade for the government, individuals would be forced to pay taxes on any money contributed into their 401k accounts. Losing this benefit could be devastating, at least to those with a sizable amount of income.
Lower Income Would Benefit, Higher Income Would Suffer…
How you feel about this proposed change might very well have a lot to do with whether you are considered to be in the lower income or higher income bracket. Basically, this change would add an increased incentive for those in the former category, while those in the latter category would be negatively affected. Why? Because a 15% tax bracket would be the line dividing the two groups. If you are below this bracket, you would receive a greater benefit with this proposed “new” system. If you’re above the 15%, however, your benefit would decrease from how it exists in the current plan.
… Or Maybe the Higher Income Individuals Wouldn’t Suffer, After All
Despite the decrease that this proposed system would cause to pre-tax benefits, there is a good chance that most, if not all, higher income individuals wouldn’t be affected. This is because they would simply alter their financial portfolios to take this into consideration. In all likelihood, they would simply move the funds normally utilized for a 401k and other newly taxable accounts into a retirement account where contributions are not taxed. Shifting funds might be a bit of an inconvenience, but it’s something most higher income individuals would be fine with. Especially since many of them have a financial adviser that handles all of these issues for them. Plus, the lower income investors could really use an incentive, seeing as how a recent survey by EBRI found that barely a third of individuals earning less than a $35,000 yearly salary are currently saving for retirement.