A Daughter’s Concern

15474917_sMost Cutter Family Finances readers are 40 years old and up. You all have a common thread that joins you together. You are trying to understand how this somewhat complicated financial industry works and how to make it work for you. You are trying to create a system that will lead to financial security and success. So, I was a bit surprised last week when I got a call from a young woman in her 20s. She explained to me that she is not worried about her finances, rather she is very concerned about her parents and did not know where else to turn.
 
Hannah told me that her folks have had the same advisor for years, a broker at Edward Jones. He is the same guy everyone uses in their small Northern Illinois town. She said her parents are both in their 50s, have pinched pennies their entire lives to save all they could, and have accumulated a nice little nest egg of just over a million bucks.
 
Although they have done very well for themselves, Hannah is concerned because she knows they lost 50 percent of their retirement savings in 2008 and she believes their advisor has done nothing since then to change his so-called “strategy.” Each week, Hannah sends her parents the online link to Cutter Family Finances in the hopes that they will come to the realization that they need to take control of their financial future and explore new financial strategies. So far they have refused to make any changes. They are putting their heads in the sand. And Hannah is beside herself when she hears their reasons.
 
Hannah’s parents acknowledge that they lost a lot in 2008, but accept it because in their minds, so did everyone else. Plus, they reason, “it’s okay” since they are back to even now. I told Hannah to explain to her parents that the financial industry is flooded with myths and misconceptions, and the idea that “everyone lost in 2008” is a big one. When markets started to go south in 2008, some financial strategies went to cash to minimize losses. Those strategies were actively managed to minimize the downside. Unfortunately, during the fiasco of 2008, Hannah’s parents were told by their broker to sit tight and not to sell; they were told that the losses they had were just paper losses. Now, I’m a simple man and pretty good with math. If I lose 50 percent of my money, well, that is a real loss to me. How about you?
 
And while their portfolio might be back to the amount it was six years ago before the crash, Hannah’s parents lost six years! That means any interest that they could have earned, let’s say 6 percent, has been lost every year. Now, what is 6 percent on a million, and another 6 percent, and another 6 percent, so on and so forth . . . well, a lot! Hannah’s folks are six years closer to retirement, and well behind where they could have been.
 
Hannah’s parents also believe that their current strategy is fine because their broker has said that, conservatively, he estimates 7 percent growth each year on average for the rest of their lives. Most people would assume that means if you have $100,000, then after five years, you will have just over $130,000. ($100,000, $107,000, $114,490, $122,504, and $131,080). Oh boy, another misconception. Let’s say, as many people predict, the market takes a dip this next year and Hannah’s parents lose 50 percent of their portfolio. But over the next four years they gain 15 percent, 25 percent, 15 percent, and 30 percent respectively. While that leaves them with a 7 percent average growth over five years (-50+15+25+15+30)/5), with that heavy hit in the first year, most of that time is spent trying to recoup their initial loss. If you do the math, after five years they end up with only a bit more than $107,000. Now, imagine withdrawing income from this? Hannah agrees, this is not a pretty picture. This gal gets it. She is smart, and deeply cares for her folks. I like this gal!
 
Hannah went on to tell me that she told her mom to ask their advisor what happened to their portfolio in 2001, 2002, and 2008, and to ask him what his strategy is to protect them from another year like those. Her mother’s response was that she does not want to know all of those things; she just wants someone to take her money and know what they are supposed to do with it. This could be the final nail in their financial coffin. Unfortunately, in times like these, everyone must take ownership of their financial future and to do that, we must ask some hard questions.
 
I suggested to Hannah that she try to educate her folks. Teach them that historically, we have had a major correction every five to seven years, and we are in year six since our last. I suggested that she advise her parents to ask the broker, in the event of another major correction, what his strategy is to preserve their capital, since they are planning to retire within the next few years. Her parents’ major concern should not be average rates of return but rather, cumulative rates of return. Essentially, if they had a buck in 2000, how much is that buck worth today and how bumpy was the ride to get there?
 
Hannah vows to continue the fight to help her parents take control of their financial future. “After all” she said, “when I was growing up, my folks always taught me the questions I needed to ask myself to keep me focused on school and sports and to stay out of trouble. Now it is my turn to help them.”
 
I hope they listen; Hannah is a smart gal.
 
Be vigilant and stay alert, because you deserve more.