By Edward Leone Jr. CFP RFC DMD MBA
Contact Information: edleonedds@gmail.com
I am being exposed to many issues regarding wealth building and retirement saving of late. It is becoming evident that due to our economy and its slow recovery, that many are looking to IRAs and 401Ks as their piggy bank. According to Bloomberg Business week, $5.7b was paid out in early withdrawal penalties in 2011. It appears that the Home Equity Loan strategy has been replaced since the attempt for many to borrow against the equity in their residence is not possible due to strict underwriting in the banking industry as a result of the economic event of 2008 related to home mortgage performance collapse.
This issue along with funding issues of which many who have a 401K are engaged do not work well in preparation for retirement. Please avoid to following do not’s:
1. Don’t defer just 3% of your compensation to your 401K because that allows you to take advantage of the usual employer match program. Adequate deferral to reach needed funding for retirement will require a 10 to 12% deferral.
2.There has been much investigation of the 4% rule of thumb draw down rate as safe. Do your home work in identifying life style expense in retirement and funding it adequately with consideration for the impact of inflation over the years.
3. The 120 minus your age in establishing a portfolio allocation for the bond equity mix may not be serviceable as the future unfolds. Seek the advice of a CFP on this issue.
4. Understand that brokers and many advisers who are not CFP holders, are not held to a fiduciary standard equal to the CFP designate. Many of the non CFP advisors are motivate by sales commissions and administrative fees rather than your best interests. We all experience the tactic of instilling fear in order to make a sale of products or services. Investments are no different!!
It is very interesting to observe the dynamic of what is know as Behavior Finance. Many of us are guilty of these behaviors which include loss aversion and herd mentality. Loss aversion, a bias which causes investors to avoid losses as to acquiring gains, can lead to a focus on the short term and less focus on the long term when making investment decisions. Herd mentality will cause individuals to come to similar conclusions based on sketchy or inaccurate information and act in a similar fashion promoting the same mistakes in regard to financial market volatility.
Another area which concerns me as I visit with people who own rental property and feel that this is the perfect investment under all conditions. It is easy to screw up as a land lord by under estimating your cost when setting rent levels, not understanding local land lord tenant legal issues, not vetting tenants adequately and not giving attention to renters insurance programs. Be careful of these issues and understand the tax impacts upon and income property sale regarding recapture of depreciation and capital gains taxes!
These are still trying times for many of us. The US and global economies are improving slowly. Be patient and on guard for challenges and opportunities.
For The Record:
DJIA 16,924.28
NASDAQ 4,321.40
S&P500 1,949.44
Suggested Reading: “Ethics and the Conduct of Business” By Boatright
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