If you have a financial question, send me an email and I always do my best to get you timely and professional advice.   A question I often get is, “How do I pay for college and save for retirement at the same time?”

It can be done!

All across America, families are meeting a mighty financial challenge – the challenge of paying college costs with retirement potentially on the horizon. How do they do it? They go about it consistently; they also get creative.
First, make sure the priorities are in the right order. Strange as it may sound, your retirement may need to take precedence over your child’s college education.

Think about it. Your son or daughter might qualify for student loans or financial aid. By the time they are 30 or 35, they may have the earnings potential to pay those loans back. Do you see any ads out there for “retirement loans” or “retirement aid”? For most, it is much harder to earn money at age 65 than at age 35. Because of this, many choose to allow the younger generation to assume the debt.  Assuming debt isn’t always the wisest.

Each student should look at their desired field to see how viable it will be to pay off student loan debt.  Any time, debt is incurred, it should be viewed just like an investment decision: You should ask questions such as – how likely can I pay this loan off?  How much will this debt cost me (over time)?
Here are some short-term and long-term ideas you may want to consider if you have college costs on your mind:

1. Save for college monthly. While dollar-cost averaging is a useful way to build retirement savings, its merit often goes unrecognized when it comes to saving for higher education. If you could put $40 a month even in a basic savings account with a tiny interest rate, over 10 years that is approaching $5,000. That’s nothing to sneeze at, and will certainly help out. Move the money from a checking account each month into a savings account, or …

2. Consider a tax-advantaged college savings plan. Contribute to a 529 plan, which features tax-advantaged growth and tax-free withdrawals when the withdrawn funds are used to pay qualified education costs. Not all 529 plans are the same – in fact, some of them will even provide a small cash “match” or “sign-up” bonus when you start your plan. Some 529 plans are even “prepaid” – that means you may be able to secure future tuition rates at current prices, usually at in-state public colleges. Another advantage of the prepaid plans – they are often guaranteed by the state.

3. Exploit your credit card. No, don’t pay for college with it … well, at least not directly. Some credit cards give you a cash-back rewards option. You may as well put the rewards toward college. Some of the major banks let you do this and so do online shopping websites such as Upromise. Always read the fine print and never carry a balance on the card.

4. Keep your income as low as possible in the base income year. That is the calendar year that starts as your child is in the middle of his or her junior year in high school. That is the year when college financial aid departments start to look at a family’s earned and received income. If you can avoid taking capital gains or a distribution from a 401(k) or 403(b) in that year, that will keep your taxable income low. Will Roth IRA conversions raise eyebrows? Yes, they will.
However, don’t stop contributing to your own retirement savings accounts, and feel free to pay off consumer debts with the money from your savings and checking accounts – the assets in these accounts aren’t used in financial aid formulas.

5. Let the college know if your financial situation has changed. Has the value of your home fallen? Is your business netting you far less than it once did? Financial aid departments should be willing to review these developments and may be able to adjust aid for your student accordingly.

6. Make it a family affair. In some cultures, it is common for all members of a family to pitch in on the down payment or mortgage payments for a home. Consider this strategy as your family saves for college. Close friends and family members may be willing (or even excited) to make ongoing contributions to a college savings plan for your child, and/or an annual “birthday” contribution. They may find giving such a gift to be much more meaningful and fulfilling than a mere toy or item of clothing.

7. Go hunting for every scholarship or alumni connection you can. First, make sure you find a great school at a reasonable price – that’s important. But it may be just as useful (if not more) to be both creative and consistent as you save for college. While it has always been a challenge, by putting some thought into it, most families and students can find ways to respond.  Scholarships and other “student opportunities” can help reduce what you owe each year!

All in all, saving for two goals at the same time is a challenge.  It takes hard work, discipline, and a prudent strategy.  Please let me know if I can help you plan and implement a strategy to tackle both objectives…

You want to retire, and you own a large home that is nearly or fully paid off. The kids are gone, but the upkeep costs haven’t fallen. Should you retire and keep your home? Or sell your home and retire? Maybe it’s time to downsize.

Lower expenses could put more cash in your pocket. If your home isn’t paid off yet, have you considered how much money is going toward the home loan? The typical mortgage payment in the U.S. represents about 30% of gross income and about 50% of after-tax income. When you move to a smaller home, your mortgage expenses may diminish and your cash flow may greatly increase – and don’t forget about interest savings over the life of the loan.

Cut your taxes?

You might even be able to buy a smaller home with cash (if finances permit) and cut your tax liability. Optionally, that smaller home could also be in a region with lower income taxes and a lower cost of living. You could capitalize on some home equity. Why not convert some home equity into retirement income? If you were forced into early retirement by some corporate downsizing, you might have a sudden and pressing need for retirement capital – another reason to sell that home you bought decades ago and head for a smaller one.

The lifestyle reasons to downsize (or not). Maybe your home is too much to keep up, or maybe you don’t want to climb stairs anymore. Maybe a condo or an over-55 community appeals to you. Maybe you want to be where it seldom snows. On the other hand, you may want and need the familiarity of your current home and your immediate neighborhood (not to mention the friends attached).

If you decide to downsize, it may not pay to wait. Anyone who wants to retire in the current economy needs all the financial resources that can be mustered. Of course, the real estate market will eventually improve; it depends on how long you want to wait for improvement. Some people want to retire and then sell their home, but it may be wiser to sell a home and then retire since homes tend to sit on the market these days. If you sell sooner instead of later, you can always rent until you find a smaller house that could save you thousands (or tens of thousands) of dollars.

With a new wave of tax law changes taking place in 2010, it is easy to overlook an exciting new retirement plan option that exists for business owners and employees who belong to a company offering the DB(k).  Let’s look at some of the ins and outs of these new plans to see if they may be a fit for you.

What is a DB(k)?

A DB(k) is a combination retirement plan that is part pension plan along with a matching 401(k) plan.  The “DB” is stands for a defined benefit retirement plan while the “k” of course is the 401(k) component. Why would a company offer these?  First off, they are a great recruiting tool.  If an employee was wiped out by the 2007-2009 stock market collapse or if they are an older employee look for a pension, the DB(k) can lure in potential employees who see the value these plans can offer.  Firms in competitive industries could offer DB(k)s as a perk to seal the deal with a potential employee.

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When retirement planners try to estimate just how much money a couple or individual should take out of their savings annually, their model scenarios often assume a 4% annual withdrawal rate. Why is 4% used so frequently? Was that percentage plucked out of thin air? No, it actually became popular back in the 1990s.

The “Trinity Study” helped popularize the 4% guideline.

In 1998, a trio of professors at San Antonio’s Trinity University analyzed historical market data between 1925 and 1995 in search of a “sustainable” withdrawal rate. They used five different portfolio compositions – 100% stocks, 100% bonds, and 25/75, 50/50 and 75/25 mixes. (For purposes of the study, “stocks” equaled the S&P 500 and “bonds” equaled long-term, high-grade domestic debt instruments.) They tried to see which withdrawal rates would leave these portfolios with positive values at the end of 15, 20, 25 and 30 years.

Their conclusion? If you are retired and withdraw more than 5% annually, you increase the chances of depleting your portfolio during your lifetime.  Subsequently, another such study was conducted by RetireEarly.com using financial market data from 1871 to 1998 – and that report reached the same conclusion.

However, that wasn’t all the study had to say

The “Trinity Study” made some other conclusions that were not entirely in agreement. The professors maintained that most retirees should have 50% or more of their portfolios in stocks. But they also noted that retirees withdrawing just 3-4% a year from stock-dominated portfolios may end up helping their heirs get rich while hurting their own standard of living.

Perhaps most interestingly, the study concluded that an 8-9% withdrawal rate from a stock-heavy portfolio was sustainable for a period of 15 years or less – but not for longer periods.¹ In other words, while our parents and grandparents could confidently withdraw 8-9%, we who might easily live to age 90 or 100 probably can’t.

Another 4% advocate: Bill Bengen

In 1994, Certified Financial Planner™ practitioner William P. Bengen published a landmark article in the Journal of Financial Planning presenting his own research findings on withdrawal rates from retirement savings. While Bengen published this article in the middle of a long bull market, he factored in the possibility of extended bear markets, minimal annual stock market gains and sustained high inflation.

Looking at 75 years worth of stock market returns and retirement scenarios, Bengen concluded that a retiree who was 50-75% invested in stocks should draw down a portfolio by 4% or less per year. He felt that retirees who did this had a great chance of making their retirement money last a lifetime. In contrast, he felt that retirees taking 5% annual withdrawals had about a 30% possibility of eventually outliving their money. He put that risk at better than 50% for retirees withdrawing 6-7% per year.

Over time, people began to call Bengen’s dictum the “4% drawdown rule”. The model 4% income distribution could be inflation-adjusted – in year one, 4% of a portfolio could be withdrawn, in year two that 4% withdrawal amount could be sweetened by .03% for 3% inflation, and so on.

A dissenting view

In 2009, William Sharpe (one of the Nobel Prize-winning principals of Modern Portfolio Theory) published an article in the Journal of Investment Management contending that “it is time to replace the 4% rule with approaches better grounded in fundamental economic analysis.” Sharpe thinks that “the 4% rule’s approach to spending and investing wastes a significant portion of a retiree’s savings and is thus prima facie inefficient.” If a portfolio underperforms, he notes, you have a spending shortfall; and if it surpasses performance expectations, you end up with a “wasted surplus”.

So in Sharpe’s view, by adhering to a 4% rule, you either risk living too large or short-changing yourself. Therefore, it would be better to constantly fine-tune a withdrawal rate according to time horizon and market conditions.

While not necessarily a rule, 4% is a frequent recommendation

There is some compelling research to support the “4% rule”, and that is why financial advisers often cite it and tell retirees not to withdraw too much. Would withdrawing 4% of your portfolio annually (with adjustments for inflation) allow you to live well? For some of us, the answer will be yes; others will need to address an income shortfall. As we retire, most of us will want to practice some degree of growth investing. Now may be the right time to talk about it.

Can you withdraw more than 4%?

When retirement planners try to estimate just how much money a couple or individual should take out of their savings annually, their model scenarios often assume a 4% annual withdrawal rate. Why is 4% used so frequently? Was that percentage plucked out of thin air? No, it actually became popular back in the 1990s.

The “Trinity Study” helped popularize the 4% guideline.

In 1998, a trio of professors at San Antonio’s Trinity University analyzed historical market data between 1925 and 1995 in search of a “sustainable” withdrawal rate. They used five different portfolio compositions – 100% stocks, 100% bonds, and 25/75, 50/50 and 75/25 mixes. (For purposes of the study, “stocks” equaled the S&P 500 and “bonds” equaled long-term, high-grade domestic debt instruments.) They tried to see which withdrawal rates would leave these portfolios with positive values at the end of 15, 20, 25 and 30 years.

Their conclusion? If you are retired and withdraw more than 5% annually, you increase the chances of depleting your portfolio during your lifetime.  Subsequently, another such study was conducted by RetireEarly.com using financial market data from 1871 to 1998 – and that report reached the same conclusion.

However, that wasn’t all the study had to say

The “Trinity Study” made some other conclusions that were not entirely in agreement. The professors maintained that most retirees should have 50% or more of their portfolios in stocks. But they also noted that retirees withdrawing just 3-4% a year from stock-dominated portfolios may end up helping their heirs get rich while hurting their own standard of living.

Perhaps most interestingly, the study concluded that an 8-9% withdrawal rate from a stock-heavy portfolio was sustainable for a period of 15 years or less – but not for longer periods.¹ In other words, while our parents and grandparents could confidently withdraw 8-9%, we who might easily live to age 90 or 100 probably can’t.

Another 4% advocate: Bill Bengen

In 1994, Certified Financial Planner™ practitioner William P. Bengen published a landmark article in the Journal of Financial Planning presenting his own research findings on withdrawal rates from retirement savings. While Bengen published this article in the middle of a long bull market, he factored in the possibility of extended bear markets, minimal annual stock market gains and sustained high inflation.

Looking at 75 years worth of stock market returns and retirement scenarios, Bengen concluded that a retiree who was 50-75% invested in stocks should draw down a portfolio by 4% or less per year. He felt that retirees who did this had a great chance of making their retirement money last a lifetime. In contrast, he felt that retirees taking 5% annual withdrawals had about a 30% possibility of eventually outliving their money. He put that risk at better than 50% for retirees withdrawing 6-7% per year.

Over time, people began to call Bengen’s dictum the “4% drawdown rule”. The model 4% income distribution could be inflation-adjusted – in year one, 4% of a portfolio could be withdrawn, in year two that 4% withdrawal amount could be sweetened by .03% for 3% inflation, and so on.

A dissenting view

In 2009, William Sharpe (one of the Nobel Prize-winning principals of Modern Portfolio Theory) published an article in the Journal of Investment Management contending that “it is time to replace the 4% rule with approaches better grounded in fundamental economic analysis.” Sharpe thinks that “the 4% rule’s approach to spending and investing wastes a significant portion of a retiree’s savings and is thus prima facie inefficient.” If a portfolio underperforms, he notes, you have a spending shortfall; and if it surpasses performance expectations, you end up with a “wasted surplus”.

So in Sharpe’s view, by adhering to a 4% rule, you either risk living too large or short-changing yourself. Therefore, it would be better to constantly fine-tune a withdrawal rate according to time horizon and market conditions.

While not necessarily a rule, 4% is a frequent recommendation

There is some compelling research to support the “4% rule”, and that is why financial advisers often cite it and tell retirees not to withdraw too much. Would withdrawing 4% of your portfolio annually (with adjustments for inflation) allow you to live well? For some of us, the answer will be yes; others will need to address an income shortfall. As we retire, most of us will want to practice some degree of growth investing. Now may be the right time to talk about it.

A new perception has taken hold: “independent” is better.

Times have changed – and so have financial advisors. Today, people don’t want financial advice from a salesman. Instead, they want a relationship with a financial professional who is candid, trustworthy and thoroughly educated, who provides personalized financial consulting for each client.

That search often leads them to a fee-based or fee-only financial advisor or a Registered Investment Advisor.

A pleasant alternative to Wall Street. A paradigm shift is happening, and the traditional brokerage houses are lagging. While old-school “stock brokers” have gone the way of the wooly mammoth, you still have a sales-first mentality in place at big banks and Wall Street brokerages. If you’re employed by one of them, the mantra is simple: make a sale, earn a commission.

As they try to serve their clients, these “wirehouse” brokers regularly contend with sales quotas and the inherent potential for conflicts of interest. It wears on them: a 2010 survey revealed that only 15% were “very satisfied” at their firms, and another 20% wanted to leave within two years.

Given the tarnished reputations of so many giant banks and brokerages, it isn’t surprising that consumers are turning elsewhere for financial advice. Here are three popular destinations.

A fee-based financial advisor has structured his or her practice to promote earning income from fees instead of commissions. The emphasis is on advice. An independent, fee-based financial advisor also has freedom – freedom to choose the most appropriate products and services for your risk tolerance and investment goals. (More about that in a moment.)

Fee-only financial advisors earn no commissions at all. They derive 100% of their income from client fees – annual management fees or hourly or per-project consulting fees. With this compensation arrangement, you know that a fee-only advisor is available to help you address myriad issues in your financial life, not simply those that could lead to a commission.

A Registered Investment Advisor (RIA) usually works to manage the assets of high net worth investors. An RIA receives management fees and does not receive commissions. The management fees usually represent a percentage of the assets a client has invested. RIAs have to register with the Securities and Exchange Commission and any states in which they operate.² Individuals, couples, families and institutions with sizable wealth management concerns often turn toward RIAs.

Even as the market has struggled since the end of 2007, independent Registered Investment Advisors have gained a greater share of assets under management in the U.S.

People need unbiased advice. That’s probably the #1 reason why people seek an independent financial advisor. They know that the advice they receive is not influenced by sales incentives or directives. There is often a candor to the discussion that may not always be present at a bank or a brokerage.

People want more investment choices. An independent financial advisor is free to offer investments from dozens, maybe hundreds of companies, rather the investments of a single company. In addition, that independent advisor can unhesitatingly tell you if an investment is or isn’t appropriate for your financial situation.

This is the age of independence. When it comes to the financial future, no one wants to be “sold” – just advised. That’s why we’ve seen the rise of a new kind of financial advisor who puts the client relationship first.

We’ve all heard about the “new retirement”, the mix of work and play that many of us assume we will have in our lives one day. We do not expect “retirement” to be all leisure. While this is becoming a cultural assumption among baby boomers, it is interesting to see that certain financial assumptions haven’t really changed with the times.

In particular, there are two financial misconceptions that baby boomers can fall prey to – assumptions that could prove financially harmful for their future.

#1) Assuming retirement will last 10-15 years. Historically, retirement has lasted about 10-15 years for most Americans. The key word here is “historically”. When Social Security was created in 1933, the average American could anticipate living to age 61. By 2005, life expectancy for the average American had increased to 78.

However, some of us may live much longer. The population of centenarians in the U.S. is growing rapidly – the Census Bureau estimated 71,000 of them in 2005 and projects 114,000 for 2010 and 241,000 in 2020. It also believes that 7.3 million Americans will be 85 or older in 2020, up from 5.1 million 15 years earlier.

If you’re reading this article, chances are you might be wealthy or at least “affluent”. And if you are, you likely have good health insurance and access to excellent health care. You may be poised to live longer because of these two factors. Given the landmark health care reforms of the Obama administration, we could see another boost in overall American longevity in the generation ahead.

Here’s the bottom line: every year, the possibility is increasing that your retirement could last 20 or 30 years … or longer. So assuming you’ll only need 10 or 15 years worth of retirement money could be a big mistake.

In 2010, the American Academy of Actuaries says that the average 65-year-old American male can expect to live to 84½, with a 30% chance of living past 90. The average 65-year-old American female has an average life expectancy of 87, with a 40% chance of living past 90.

Most people don’t realize how much retirement money they may need. There is a relationship between Misconception #1 and Misconception #2 …

#2) Assuming too little risk. Our appetite for risk declines as we get older, and rightfully so. Yet there may be a danger in becoming too risk-averse.

Holding onto your retirement money is certainly important; so is your retirement income and quality of life. There are three financial issues that can affect your quality of life and/or income over time: taxes, health care costs and inflation.

Will the minimal inflation we’ve seen at the start of the 2010s continue for years to come? Don’t count on it. Over the last few decades, we have had moderate inflation (and sometimes worse, think 1980). What happens is that over time, even 3-4% inflation gradually saps your purchasing power. Your dollar buys less and less.

Here’s a hypothetical challenge for you: for the rest of this year, you have to live on the income you earned in 1999. Could you manage that?

This is an extreme example, but that’s what can happen if your income doesn’t keep up with inflation – essentially, you end up living on yesterday’s money.

Taxes will likely be higher in the coming decade. So tax reduction and tax-advantaged investing have taken on even more importance whether you are 20, 40 or 60. Health care costs are climbing – we need to be prepared financially for the cost of acute, chronic and long-term care.

As you retire, you may assume that an extremely conservative approach to investing is mandatory. But given how long we may live – and how long retirement may last – growth investing is extremely important.

No one wants the “Rip Van Winkle” experience in retirement. No one should “wake up” 20 years from now only to find that the comfort of yesterday is gone. Retirees who retreat from growth investing may risk having this experience.

How are you envisioning retirement right now? Has your vision of retirement changed? Is retiring becoming more and more of a priority? Are you retired and looking to improve your finances? Regardless of where you’re at, it is vital to avoid the common misconceptions and proceed with clarity.

After 6 years, Tiger Woods recently made a major change.  Before you start with the infidelity jokes, I’m talking about major changes in his career – professional golf.    Tiger got to the top of his golf game with a little help from his coach.  However after six years of coaching, Tiger called it quits.

Why is Tiger Woods parting ways with his golf coach?  The reality is Tiger needed to make a move.  When something isn’t working, it is really frustrating – for everyone involved!

I talk with hundreds of people each month via the telephone, email, and in person. Money always seems to be a hot topic!  With the stock market back on a roller coaster course – people are more dazed and confused!  Many coaches, financial advisors, and stock brokers are asset gatherers not asset managers.  They have a vested interest to keep you invested in the markets even when it may not be the best choice for you.   Is your coach part of your team or do they have a hidden agenda?  Why not find an advisor who help bring light to your situation?

It may be time for you to change coaches too

Just like Tiger, it may be time for you to change coaches. The sharp ups and downs recently in the markets are a shocking reminder of what we saw in 2008 and 2009.  Don’t go back down that path! If you have found that you are not where you need to be financially or not getting the help you desire, it may be time for a coaching change! Take control of your future today.  Email me at jay@jayperoni.com for a FREE 30 minute evaluation of your financial situation!

With over 15 years of experience, I can look at your:

• Investment strategies
• Retirement plans
• Business ideas and ways to grow business
• Estate and legacy plans
• Tax efficiency (or lack thereof)
• Savings and spending
• Debt management
• And how all these tie together with your faith and values

Matthew Sapaula  is a great radio host in the Chicago area.  He’s one of those positive, uplifting, wise, and helpful kind of guys we should all surround ourselves with.  He recently featured a conversation we had about annuities at his site.  Check it out!  

What mistakes do investors often make when they look at annuities?

Most of the money gurus attack annuities.  For the most part the criticisms are justified. After all, when you look at the fee structure, commission incentives for agents, the often lengthy surrender charges, inflexibility, and the many stories about seniors getting taken advantage of because of improper annuity sales, it’s easy to see why they get such a bad rap.

 There are two main types of annuities: fixed and variable. In a fixed annuity, your money grows at a fixed rate usually determined by current interest rates. Another variation of the fixed annuity is an indexed annuity which ties your interest to an index like the S&P500 or Dow Jones.  You usually have a cap (maximum you can earn) and a floor (lowest return you could achieve). A variable annuity, on the other hand, allows investors to participate in mutual fund-like subaccounts. The assets in a subaccount may be allocated across a mix of stocks, bonds and money market funds. 

Let’s look at six of the biggest mistakes investors make when they choose an annuity.

Mistake 1: Underestimating variable annuity fees

In addition to high commissions, variable annuities have high costs compared to many other investments. These expenses essentially guarantee you won‘t achieve a reasonable long-term rate of return. It‘s like you have a ball and chain!

Here’s a typical expense structure:  

Mortality and Expense Charge 1.50% 

Sub Account Management Fees 1.00% 

Unreported trading costs 0.78% 

Annual Administrative Expenses 0.15% 

TOTAL EXPENSES 3.43%  

Mistake #2: Tying money up for years 

Many annuities (fixed and variable) have surrender periods ranging from 3 years to 15 years or longer.  The typical surrender period is seven years! This means your money is tied up! If you want to sell your annuity, you will pay dearly. For example look at a typical surrender schedule on a 7 year annuity: 

Surrender Schedule 

Year 1: 8%  

Year 2: 7%  

Year 3: 6%  

Year 4: 5%  

Year 5: 4%  

Year 6: 3%  

Year 7: 2% 

This means on a $100,000 investment you may have to pay $2,000 to $8,000 or more to sell your annuity. Talk about inflexible! Yes, most annuities do allow you to withdraw up to 10% per year without penalties, however, you can never completely cash out until the surrender period expires. In the investment world seven years is a long time and things change rapidly. Being stuck in an expensive annuity is not a place you want to remain in limbo. 

Mistake # 3: Not reading the fine print 

For most investors, annuities are quite complex investments. Between knowing what a subaccount is, how living and/or death benefits work, surrender schedules and fees, withdrawal options, living benefits, how cap rates work, on and on. Fixed and variable annuities are often so complex that even the advisors who sell them truly don‘t fully understand what they‘re selling. The prospectus that comes with an annuity is often filled with legal jargon galore! 

Mistake # 4: Underestimating inflation.  

Many investors choose fixed annuities instead of the variable option. In a fixed annuity, your money grows at a fixed rate. At first that kind of financial predictability sounds wonderful, but there are two problems that come with it. One, your rate of return might be meager compared to what you could earn in the stock market. Two, inflation is going to make that fixed return worth less and less with the passing years, unless you pay (possibly through the teeth) to have the rate of return adjusted. 

Mistake # 5: Relying on a variable income guarantee 

Many variable annuities let you benefit from stock market gains while shielding you against stock market losses. In the past, many have offered the annuity holder at least a minimum rate of return (a GMIB, or Guaranteed Minimum Income Benefit). Many have also offered guarantees that the annuity value will not dip below the value of the initial principal (a GMAB, or Guaranteed Minimum Accumulation Benefit). Be very careful that you understand how these benefits work and what strings are attached.  These benefits often come with a high price tag and require that you follow a ton of rules to take advantage of the benefits. 

Mistake # 6:  Thinking an index annuity will perform better than the market 

Equity Indexed annuities are not necessarily all they’re cracked up to be. They are a class of fixed annuity that is linked to the performance of a stock market index, commonly the S&P 500. An EIA has a guaranteed minimum rate of return (guaranteed by the insurance company, not the FDIC), and it gives you a chance to capture some of the stock market gains. That’s the upside. (On the whole, EIAs are not designed to beat the stock market; they are basically designed to perform a little bit better than the fixed markets.) Many investors assume they get all of the good side of the markets with none of the bad.  Often I have found that the average return and investor gets with an indexed annuity is more in line with the bond market than the stock market because of the annual caps set by the insurance company issuing the annuity.  For example, the cap may be set at 8 percent and that is the maximum you can earn that year.  The market may be up 20, but you will only earn a maximum of 8.  This cap limits your long-term rate of return.As you can see, annuities are quite complex and often confusing.  They offer many benefits but you need to fully understand what you’re getting and know the benefits along with the limitations.  Before investing in annuity always get a second opinion and read the fine print carefully.  As with any investment, buyers beware!

Mistake # 1: choosing a salesperson instead of an independent professional with a fiduciary responsibility.

According to Registered Representative Magazine, salespeople in the financial services industry earn on average $175,000 to $200,000 per year. It’s not uncommon for financial advisors to earn millions annually.

Though many advisors may claim to have your best interest at heart, you actually fall to the third slot on the totem pole of many advisors:

1. Your advisor’s interests
2. His or her firm’s interests
3. Your interests

The Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) govern brokers and investment advisors.  However, the odds of an advisor facing daily conflicts of interest are as common you spotting a Toyota while running an errand.

Conflicts are so widespread and entrenched on Wall Street that all attempts at reform have failed. The backroom deals, commission incentives, payments for shelf space, etc are happening as you read this.  Advisors are often “glorified salespeople” who have one goal: make as much money as possible.  Most have no fiduciary responsibility so the prudent rule says they can invest in anything as long as it does not harm you.   So the advisor is free to sell you a variable annuity with a 10 percent commission.  Your cost? Five percent annually in fees and by the way you can’t sell it for at least ten years or you’ll pay huge penalties.

So in essence, they are not bound to act solely in your best interest.  With commissions on the line, many sales people will act in their own self-interest, justifying the product with the highest commissions. With two identical product choices (one paying a 7% commission, the other 4%, which do you think the advisor would choose?)

From a legal standpoint, an advisor is only required to avoid selling you an “unsuitable” investment product. This meets a very minimum standard.  There is no requirement to act in

your best interests or as a fiduciary on your behalf. Additionally, they don’t even have to disclose any conflicts of interest that may exist.  Talk about a bum deal for you!

Mistake # 2:  Listening to the media

Money magazine, Fortune, USA Today, CNBC’s Jim Cramer, Forbes, you name it; they are all there to entertain! Let me repeat this they are all there to entertain. This means sell you something! If you don’t tune in, buy from their advertisers, and continue to frequent them regularly, they go out of business. Bold headlines, irrational advice, entertaining news, sensationalized stories…it must capture your attention.

How poor is the advice from the media? In 2000, Case Western Reserve University conducted a study showing that investors who follow media recommendations lose 3.8% of their money in the following six months after the recommendation. So why do so many people blindly follow the media’s investment advice? Predictions made about sports, weather, and Wall Street make good conversation pieces, but poor investment strategies! Instead of listening to unqualified professions, listen to people like Dan Celia, who have been advising clients using biblical principles for over 30 years!

Mistake # 3:  Listening to friends and family talk about “what’s hot”

Since 1990, we’ve seen investing fads come and go. In the 1990s it was technology stocks, followed by real estate, and then it became oil and gold, then emerging market countries like Brazil, Russia, India, and China. Today many flock to any form of green or environmental investing. Investment fads are only in vogue until everybody knows about them. Once they become cocktail party conversation, financial magazine material, or an internet sensation, the fad is as good as dead on arrival.

I remember late in 1999 when I received a call from one of my beloved clients Molly. Molly was in her mid-80s and a very conservative investor. She was wondering if she should sell many of her dividend stock investments and put them into an Internet mutual fund. I asked Molly about her nearly 30% return from the prior year. Was she not happy? She said she had a friend (and everyone has one of these friends) who made over 100% the prior year in an Internet fund. After explaining the risks, and discussing her personal situation, I talked Molly out of investing in the Internet fund. Not that I had a crystal ball or anything, Molly had no place being in the internet.

Normally a fixed income and dividend stock owner, this would have taken her risk level from a 4 all the way to a 10. Molly took my advice and we all know how the Internet story unfolded. I don’t always claim to get it right when it comes to trends or predicting short-term movements in the stock market, but what I can spot are troubled signs that a strategy is headed for disaster. Human nature drives people to invest in fads only after prices have already risen. This means those late to the game are the most apt to get hurt. We only hear about a trend after people have already been successful making it less and less likely that you can follow their success. Instead, you need to figure out how to buy low and sell high. Here’s a hint: investing in fads is not the way.

So what should you do?

How about getting an independent, unbiased review of your portfolio situation?  We can take a look and analyze both the moral and financial implications of where you’re investing. How should you be investing the money God has entrusted to you?  Let’s look at your strategies and see if they make financial sense.

Give us a call today at 877-832-3847 or email me at jay@valuesfirstadvisors.com.  I will be more than happy to take a personal look at your accounts and give you my best advice.

Captain Chesley “Sully” Sullenberger avoided catastrophe by safely landing a US Airways plane on the Hudson River.  On January 15, 2009, Sullenberger was the pilot in command with an extensive flight and military experience, the kind of guy you want in the control pit with the slightest hint of danger.

According to reports:

“Shortly after taking off, Sullenberger reported to air traffic control that the plane had hit a large flock of birds, disabling both engines.  Several passengers saw the left engine on fire. Sullenberger discussed with air traffic control the possibilities of either returning to LaGuardia airport or attempting to land at the Teterboro Airport in New Jersey. However, Sullenberger quickly decided that neither was feasible, and determined that ditching in the Hudson River was the only option for everyone’s survival.  Sullenberger told the passengers to “brace for impact”, then piloted the plane to a smooth ditching in the river at about 3:31 P.M.”

The Miracle?

Every passenger survived!  To land the way Sullenberger did in such a small space with no casualties was beyond a miracle.  With God’s protection and Sullenberger’s expert skills, this flight is remembered for what was saved not what was lost…

There are some things best left to a professional

I can think of a short list of professionals I would want by my side in a jam:

• Doctor for my health issues/problems
• Attorney for my legal issues/problems
• CPA for my tax issues/problems
• CFP for my financial issues/problems

People often refer to the professionals when it comes to legal and health issues, but when finances enter the picture, all too often people tackle their 401ks, IRAs, and investments alone without consulting a professional.  I’d like to say these do-it-themselves-ers often land safely, but unfortunately miracles are few and far between…

This  only confirms to me that sometimes having a professional makes all the difference in the world!