In this newsletter, we discuss three topics and trends that could have a big impact on your financial well-being.
1. How much should we be saving each year?
A simple rule of thumb is that by age 35 you would have saved at least 1 times (X) your current salary, then 3X by 45, 5X by 55, 7X by 65, and 8X your ending salary by the time you retire at 70. Assuming a final salary of $300,000, that means an investment portfolio of $2.4 million. For some people that will be more than enough. For others, it won’t. This is where financial planning makes all the difference.
To get to these amounts, you should save and invest 15% – 20% of your total compensation each year. The longer your time horizon and the greater your risk tolerance (and therefore the more you can have invested in stocks – which have a much higher expected return than bonds), the less you need to save. If you are 30 years old and expect to work into your 70’s, 12% could be enough. If you’re 50 and already well-behind in your savings goal (or have a big mortgage), 20% or more might be most appropriate.
ZRC Wealth Management works with investors to help them land on a savings goal and determine what the best investment strategies are for their particular situation.
2. The Fiduciary Rule is important because investors are getting hosed… and the rule (or something like it) will eventually be implemented.
On March 1, 2017, the Department of Labor announced that it is moving forward, under the direction of President Trump, with its efforts to delay the applicability date of the new fiduciary rule, which was slated to go in effect on April 10, 2017. The new “Rule” was designed to require all financial advisors providing investment advice regarding retirement savings to act in the best interest of their clients.
Many of you reading this are asking yourselves, “Not all financial advisors have to act in the best interests of their clients?” Yes – that’s the problem!
The Department of Labor (or DOL), which has no enforcement power by the way, requires those associated with retirement plans (such as 401K plans) to act as Fiduciaries. This means companies, consultants, trustees, and advisors must place investors and 401K participants interests first and be clear and transparent in how they operate (the fees they charge and how each are compensated).
The Fiduciary Rule is designed so that if you hire a financial advisor to help with your retirement planning and assets, that advisor most continue to act as a Fiduciary and in your best interests. As a fee-only registered investment advisor, this is how ZRC Wealth Management operates. However, those advisors affiliated with brokerage firms (such as Merrill Lynch, Morgan Stanley, Wells Fargo, and others) are not held to this standard and only must believe their recommendations or advice are “suitable” to the client. This lower standard of care opens the door for all sorts of undisclosed conflicts of interest.
Many professionals are already held to fiduciary standard; such as doctors. When you see someone who you are potentially putting your life in their hands, shouldn’t you know that they are doing what’s in your best interest and not in the best interest of the say a pharmaceutical company or a knee replacement manufacturer? The same should be true with financial advice.
The Fiduciary Rule wasn’t perfect (no regulation ever is). Investors, along with technology that furthers transparency, will eventually force the issue and accelerate the trend of getting honest advice.
3. Investment fees continue to decline.
Earlier this month, Charles Schwab & Co. and Fidelity both announced they were reducing their equity and ETF trade commissions from $8.95 to $4.95. This is on top of an announcement by Schwab in February that they would be further reducing the expenses of some of their index mutual funds. ZRC Wealth Management has long been a fan of Schwab as brokerage company and used Schwab Advisor Services as the custodian of client accounts since 1999.
In this low interest rate (and potentially low stock return) environment, every dollar counts. To clients, we refer to unnecessarily high or nuisance fees as “leakage.” Every dollar lost to such fees, taxes, needless interest charge, and missed opportunity will hold back the growth of your assets. Mind you, the difference in $100,000 invested in the Schwab US Broad Market ETF (ticker SCHB) which charges fees of 0.03%/year and the Vanguard Total Stock Market ETF (ticker VTI) which charges fees of 0.05%/year (plus $4.95 a trade) is a whopping $20/year.
If you are paying 1% or more in mutual fund fees and expenses you are paying too much. As we’ve explained in previous newsletters, low fees are a very strong predictor of future investment success. This is not to say that some very good funds aren’t worth the 1%/year or more they charge. However, if your average fund fee is more than 1% you are losing out. At ZRC Wealth Management, our average fund fee is less than 0.5%.
Low investment costs are one of the key tenants to investment success. By themselves, they are not a solution, but a building block. After all, a bad investment (even a low cost one) benefits no one.
All investing is subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future returns. Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.