This past Sunday 3/30/2014) the CBS News show, 60 Minutes, ran a story alleging that the stock market is rigged in favor of the large, high volume/ high speed traders.
This morning, The Wall Street Journalreports that the FBI have been investigating this issue over the past year.
Basically, as it was described on 60 minutes, by using extremely high speed, fiber optic cables, certain traders are able to beat you to buying your stock order and can artificially drive up the price of stock you or your mutual fund manager wants to purchase.
It's like buying 4 seats for a sports game. You go online, see 4 seats all together for $20 per seat. You place your order for 4 seats, but then get a message back that you've only purchased 2 seats and the other two seats are now going to cost you $25.
So, in the stock market, the allegation is that traders, using faster, better technology can get ahead of your purchase, causing you to have to pay more for the stocks you want. It's called "Front-Running" in the stock market world. And it's illegal in many circumstances. But apparently, with this type of electronic trading, there's a loophole. Imagine getting pennies to dollars of each stock trade. There's billions of dollars at stake in this type of fraud.
And the losers in this transaction are the millions of mutual fund owners, pension funds and other stock market investors.
Why do we have a job? It's usually because we want a steady paycheck. We want guaranteed income.
A lot of people will not work on commission because they want a guaranteed paycheck. In fact, many people work in a job or career they dislike for months, years or a lifetime because of that guaranteed paycheck.
Yet, the great irony is that these same people put their hard-earned money from their guaranteed paycheck into the stock market.
A lot of people don't realize that the mutual funds they purchase in their 401(k) are a collection of stocks in the stock market.
Does this make any common sense at all? How has this happened?
It's because we hear over and over again: "Put your money in a 401(k) for your retirement." But the performance of your 401(k) is not guaranteed. As most of us have experienced, you can lose money in your 401(k) at any time.
What's going on?
Yes, there are all kinds of stock market charts and graphs that show that over the long-term, your 401(k) will grow. You look at these charts and believe you will have enough income to live happily ever after in retirement. But is this a hopeful wish or guaranteed plan?
By using a 401(k) as our primary retirement plan, we are trying to build a guaranteed retirement income with money that we are gambling with in the stock market.
Our 401(k) does not produce predictable results. How can it when the stock market is unpredictable? Mutual funds in your 401(k) come with no performance guarantee.
The risk is all yours.
Dwayne Featured Speaker
Dwayne will be speaking April 23, 2014 in Hillsboro TX.
Call 800-583-5865 to reserve your seat. Space is limited.
Dwayne has designed this workshop to help you increase your knowledge and address the pressing financial concerns that you and many others face.
Learn the core elements of using whole life as a financial strategy. Face the future with knowledge and confidence. Plan for a lifetime of safe and predictable financial growth.
Join Dwayne and learn how to build a solid foundation for your retirement.
On January 3rd, the Boeing Machinists here in Seattle voted to accept the latest contract offer from Boeing. One of the core issues in this contract dispute has been retirement benefits.
The Seattle Times, January 4, 2014 article reporting on the machinist vote stated that "Between 1979 and 2011, the share of private-sector workers whose retirement was funded by only pensions dropped from 28 percent to 3 percent according to the Employee Benefit Research Institute."
Most of us have 401(k)s or other qualified plans, so what's the big deal with keeping a pension? Well...perhaps a little history will help answer this question.
You wouldn't know if from all the articles, but using 401(k) and other qualified plans as one of the fundamental financial tools for retirement only started 36 years ago. In 1978, the 401(k) plan (named for the IRS code, Section 401(k)) was initiated as a congressional action intended to offer taxpayers breaks on deferred income. At that time, the 401(k) plan was seen as a way for people to put money for retirement outside of, and in addition to, the traditional pension plan.
While the 401(k) plan was never intended to replace the company retirement pension plan, this is largely what has happened over the past 36 years.
More than 65 million 401(k) accounts now allow participants to invest in stocks, bonds and mutual funds. Many of these financial products are investments, allowing for potential high returns, but are also at risk for loss.
The bottom line: Our 401(k) and other qualified plans shift the investment risk and retirement planning from our employer directly and completely to us (the employee).
When the retirement pension plan is eliminated and exchanged for 401(k) or other qualified plan, as the employee we are no longer promised a guaranteed benefit upon retirement by the company.
What we have instead, is the ability to control our investment, but absolutely no guarantee of financial performance or benefit over the short or long term. This is because products such as mutual funds within a 401(k) do not produce predictable outcomes or offer any performance guarantees.
Effectively, we're hoping to build a secure financial foundation for retirement on money that is at risk in the stock market.
I'm not saying that qualified plans are bad or that you shouldn't place money in your 401(k). What I am saying is that your money within your 401(k) may be at greater risk of loss than you realize. And that's why the Boeing machinists have been so concerned about their pension benefit.
A strong financial strategy will manage the risk of potential stock market losses and investment risk by placing part of your retirement money outside of qualified plans - in financial products that are focused on saving and not investing.
When I initially meet with people and ask them what is going on in their financial life, what comes out almost 100% of the time is that they worry about their money. Regardless of where it is or what is going on, they worry.
Every day they look at the stock market and hear the latest news: the market is up, the market is down. Folks wonder if 401(k) money will be available to them they retire. They also wonder if they will have enough money to be able to do the things they want whether a vacation, paying for college, weddings, you name it.
It doesn't have to be this way.
Consider that you have available to you a far greater number of financial products and choices than you realize. You may not know it but you have other choices than simply placing your money in mutual funds inside your 401(k) and hoping for the best.
Remember, each financial product (such as those mutual funds within your 401(k)) comes with strengths and weaknesses. When you have money in the market place, you may hope for greater returns. But you have no control over what happens. Placing money in the stock market that you can afford to lose is a different strategy that placing retirement money you cannot afford to lose in the stock market.
So why not step back and think about your money in a different way? With a little knowledge, you can set yourself on a different financial path.
Start now and shed the weight of all that worry.
Any financial plan based on a hoped-for return in the stock market (or any market, for that matter) is not a plan, it's a wish.
An effective lifetime financial strategy will work in strong and weak economic times and allow us to mount an effective response to changing and challenging life events.
Any financial plan you can live with and follow for a lifetime must also:
To accomplish this we need to educate ourselves as to what a healthy financial situation actually looks like. Despite all the financial jargon out there, the elements of a solid and realizable financial strategy are really not that complicated. It all boils down to thinking about and planning five common sense elements:
Remember that achieving financial independence and empowerment is a dynamic process and a journey. You can start out at any age and make a difference. One of the questions I ask myself when I want to make a change is simply, "What am I going to do differently today that will make a difference in six months?"
By not expecting that change can be accomplished in a day or perhaps even in six months, I give myself room to breathe. I implement little actions each day to move forward. Small actions, over six months or six years, cover enough distance to reach my goal.
You can increase the amount of money you receive on your Social Security checks by delaying when you sign up for Social Security.
When you delay payment until age 70, the monthly payment is 32% higher than it would be if you had started to take benefits at age 66. Your payment at age 66 is 25% higher than at age 62. And these percentages don’t factor in the impact of the COLA (which makes the percentage differences between when you take your Social Security payments even greater).
Take a look at the chart below. Your Primary Insurance Amount (or PIA) the the monthly amount payable to you from Social Security as a retired worker who begins receiving benefits at full retirement age (or if you're disabled and have never received a retirement benefit reduced for age).
Admittedly, depending upon your personal financial situation, sometimes you cannot delay claiming your Social Security payments. You may need the benefits at age 62. Life throws us curve balls.
However, if your life circumstances allow you to delay claiming at 62, then you can benefit from this because the government offers a benefit of 8% interest per year on your primary insurance amount.
What this means is that each year beyond age 62 that you delay claiming, you grow your annual Social Security paycheck by 8% until age 70.
As you can see from example to the left, if your PIA is $2,466 then if you claim your benefits at age 62, you receive a reduced monthly benefit.
If you wait until your Full Retirement Age (the age at which you first become entitled to receive full or unreduced benefits based on age), in this example age 66, then you receive your full PIA of $2,466.
If you are able to delay claiming until 70, when you do claim, your monthly payment will be $3,255. And this payment will stay this way (with cost of living increases) for the rest of your life!
Over 56 million people, or one in six Americans, receive monthly benefits from Social Security. In many instances, Social Security payments are most beneficiaries’ major source of income (National Academy of Social Insurance, 2012).
Social Security is an incredibly important program because it offers you two valuable benefits:
1. Income you cannot outlive, and
2. An annual adjustment for increased living costs (referred to as a Cost of Living Adjustment or COLA)
When you are working, you contribute via automatic deductions from your paycheck. You see this deduction, but while you are employed you may not give much thought to what you think of as a retirement supplement.
Like many people, you may also believe that when the time comes, you’ll apply for Social Security benefits and then you’ll “get what you get.” But this thinking is not correct. The millions of people who take this approach are potentially leaving thousands of dollars in Social Security benefits behind.
Because with Social Security, there are important strategic decisions that affect the amount of money you can receive from this program.
Over the coming days, we’re going to take a look at six (6) important factors that can affect your Social Security payments.
Many of us pay a large amount of money (in the form of loan interest and fees) to others for the privilege of borrowing their money. You pay loan interest on our cars, homes, and other loans. If you carry a monthly balance on our credit cards, you can be paying an interest rate as high as 29.99% or more.
You also pay other people to help us manage your money. At your financial institution, you likely pay ATM fees, debit card fees, account maintenance, and transaction fees. In your qualified plans, you can pay transfer fees, paper fees, and service fees, to name but a few.
Any approach you choose for your lifelong strategy should allow you to reduce the amount of loan interest, fees, and service charges you pay.
By reducing loan interest, fees, and service charges, you decrease how much money you let leak out of your financial system. Consequently, you grow your wealth faster. Think about filling a child’s inflatable swimming pool. When there are leaks, it takes a lot longer to fill the pool and it does not stay full. When you find and seal the leaks, it takes a lot less water to fill the pool and it stays full.
When you eliminate many of the fees and service charges banks and other lenders charge, this money stays in your financial system. Over time, the effect of reducing these financial leaks can be significant. Just as with the swimming pool metaphor. Once you eliminate the small but steady leaks in your financial system and capture or reduce the outflow, your money stays with you.
You don’t have to earn, or grow, as much money over your lifetime if you’re not losing it.
Throughout the last 30 or so years we have been exhorted and encouraged to place a great deal of reliance on qualified plans, such as our 401(k), to fund our retirement.
Qualified plans are supposed to provide us with the income we need in retirement. It’s the approach that is embodied by the financial counsel we hear or read every day:
“Stay in the stock market, ride out the down-turn, the market will rebound.”
“Invest for the long-term.”
“Focus on your rate of return.”
Let’s consider the 401(k) plan once more. Many people have a very large percentage (if not all) of their retirement "savings” money situated within mutual funds in a 401(k).
But remember, a mutual fund is an investment vehicle, subject to loss at any time. Saving and investing are not the same thing. You invest for greater growth at the risk of loss. You save for moderate growth with security, stability, accessibility and minimal risk of loss.
Control…or Lack of It…
You do not have control over how your mutual funds will perform in the marketplace. Clearly, we all want the stock market to go up and the value of our 401(k) funds to increase. But what if this doesn’t happen and you lose money inside your qualified plan?
Mutual funds are operated by money managers. Does the fund manager lose money when you lose money? The money manager may lose sleep, but not money. The fund manager still gets paid and the institutions still collect their fees.
You’re the only one who loses. Your money is at risk, not theirs. Their ultimate loss is that they may lose you as a client. However, it’s you who have to endure the consequences of losing your hard-earned money.
When you are chasing a rate of return, you are not focused on what would happen if you lost your principal. Instead you concentrate your energy on possible gains. You do not think about how you would cope if you lost some or all of your initial investment.
Loss of your original capital is critically important to consider since the greater your loss, the harder it is just to get back to your starting point.
When you combine the loss of your original capital with the erosion of your wealth due to taxes, inflation, and fees, the financial result can be, and often is, devastating. Also, as you get older, you have less time to recover from the effect of loss.
At some point in your financial life, you need to decide whether you want to chase a return or create a financial strategy.
An effective financial strategy will consider growth.
But the cornerstone of your lifelong financial strategy should be a solid foundation of security and stability.