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The Failure of Financial Planning; What went wrong? January 7, 2009

Posted by shaferfinancial in Finance, Uncategorized.
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By now it is beyond doubt.  Folks following the common advice from the financial planning industry are in trouble.  It is clear that the accumulated wealth for folks approaching retirement is nowhere near the amount needed to retire comfortably.  This despite most families having two incomes.  What went wrong?

I believe there are several area’s of failure.  Most of the models of financial planning over estimated the amount of years folks would have the luxury of saving and investing.  The models assumed an average time of 35 years for this accumulation phase or roughly from age 30 to 65.  But the actual data demonstrates that families really only have 20 years to accumulate.  Rare is the individual who has disposable income in their twenties and thirties that is not dedicated to purchasing a home, building a reserve fund, or starting a family.  This age cohort is too busy trying to establish a career, hold on to a job, or find their way in life to aggressively save.  And now we see folks well into their 40s being laid off from jobs and using any acquired wealth to get to that next job.

When we use twenty years as a accumulation phase it causes all sorts of difficulties.  First, is the obvious less time means dramatically less accumulation.  But beyond that, when we look at the stock market (the favorite  investment suggestion from financial planners) in 20 year intervals we see a very different environment than in 35 year intervals.  For example if you were investing in the S & P 500 Index with no expenses for the last 15 years you would have a total return of around 150%.  So if you had $100,000 invested 15 years ago you would have $250,000 now.  But few people have such a large lump sum sitting there to be invested, so most people do monthly contributions.  If you would have invested monthly for a total of $100,000  over the last 15 years, you would have slightly over $130,000.  How do you get from there to $1M in five years?  Looking at the last 10 years you have a negative return of around 2%.  So if your first half of your savings life were the last 10 years you need huge returns the last half to get anywhere near your goal.

Finally, the fact is most people will miss their goals.  It’s great to set a goal, but the facts remain we are eternal optimist by nature.  So, if your goal was $1M by retirement, you should create a plan that puts you at $1.5M.

Of course, the big issue is the fact that most financial planners put mutual funds or annuities at the center of folks retirement planning, which I have blogged on endlessly.  Combining all these issues lead us to the fact of folks not accumulating anywhere near what they need to retire comfortably.

Ready to listen to some “uncommon” financial advice?  Take a look at your investment statements and answer that question!

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