Your Retirement Nov 2004 Newsletter3

Category: Education

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Your Retirement Welcome to the 9th edition of Your Retirement, our monthly web-newsletter with information and education that can help you with your retirement planning efforts. We provide straight-forward, easy to understand, unbiased and candid information. Feel free to use this information and to also pass it along to your friends and associates. If you are interested in additional information that can help you, be sure to check out our web site; or contact Robert R. Julian, at ® RETIREMENT PLANNING CONSULTANTS A Guide To Your Retirement Planning - Volume 1 - Number 9 Saving – Investing For Retirement---Twelve Time-Tested Core Principles In our March, 2004 Newsletter we offered principle #1 --Stocks (Stock Mutual Funds) offer the best opportunity to participate in the long-term growth of the economy. In April, principle #2--Buy only what you understand. In May, principle #3--Invest in a combination of stocks for long term growth and bonds for stability and income. In June, principle #4--Asset allocation and diversification does matter. In July, principle #5--You can buy low and sell high. In August, principle #6--Market timing is a mistake. In September, principle #7--Don’t chase hot performance. In October, principle #8--Focus your efforts on what you can control. Here is Principle #9 - No Such Thing As Risk-Free Investing. Several years ago, a lot of people looked at investing as a way to instant riches and there was no downside. Now, we all know there is a downside. The decline of the S&P 500 and the enormous losses suffered by many technology investors in 2000-2002 are proof that stock investing can be dangerous. In investing, risk follows reward as day follows night. The tug of war between risk and reward is the very foundation of the stock market. The two psychological factors that influence investors are fear and greed. Investors fear not making money or losing money. Greed kicks in when investors buy high thinking the market will go higher when in fact, it is likely to begin a downward cycle. You must distinguish between your ability toward and your capacity for risk. Individually, stocks are wildly volatile in the short-term and moderately volatile in the longer term. Every time you buy a stock or a bond, you’re taking the chance that your money will disappear. If you hold stocks long enough, they become no more risky than bonds. In This Issue: Twelve Time Tested Core Saving – Investing Principles: Principle # 9 No Such Thing As Risk-Free Investing; The Realities Of Retirement: #3 In A Series: How Are Today’s Employees Saving and Investing? What You Should Know: How Should I Take My Money From My Retirement Plan? Our Planning – Saving – Investing for Retirement Workshops Homework: How Do The Funds In Your 401(k) Stack Up Against The Ten Largest Funds? Lazy – Low Maintenance Investing With Index Funds: #3 In Our Series: Bill Bernstein No-Brainer Portfolio This Month’s Question : What Should You Know About Your 401(k) Plan? A Retirement Diary: Greed And Fear In Investing: A Personal Perspective How Can I: Compare the Expenses I Pay For Investing In My Mutual Funds With Others? Interesting Perspective: Do The Rich Get Richer? Sandy The Smart Saver Says: How Will You Finance Your Retirement? Sandy Cartoon: Follow Up Report: Are Your Social Security Contributions In A Locked Box? Quick Takes: #1 The Research on Retirement Savings #2 Small Savings Build Your Retirement Nest Egg Stock Market – Investing Humor: Quotable Quotes: Coming In the October 2004 Issue: Why Are Investors Taking Their Brokers to Arbitration? Homework: How Do The Funds In Your 401(k) Stack Up Against The Ten Largest Funds?


-2- Fifty-two percent of workers are counting on pensions and yet, only half of the currently retired population received those benefits We underestimate how long we are likely to live in retirement. Today, a 65-year old man has a 50% chance of living beyond 85. So, if a man retires at 65 and has saved enough money for 20 years, he has a 50% chance of outliving his money. That is a lot of risk. Only about one in five workers know the correct age at which they will be eligible for Social Security benefits. Another survey…the 2004 Merrill Lynch Retirement Preparedness Survey found that 78% of the people it surveyed are confident in their ability to plan for retirement and 51% believe they will have saved enough. However, the median balance of their retirement savings was just $51,000. Let’s just take a minute to look at that scenario a bit closer. The Social Security System reports that in 2004, the average monthly Social Security benefit for a retired couple is $1,487 a month or $17,844 a year. A recent Congressional Research Service report stated that the median value of all retirement accounts held by workers between 55 and 64 years of age was $55,000. This $55,000 would buy a life annuity of about $400 a month or $4,800 a year. Now, if you add the those two figures together ---the $17,844 from Social Security and the $4,800 from an annuity, the retired couple will be living on a total of $22,644 a year. Q. What kind of a life style will $22,644 a year provide in retirement? In Realities of Retirement, in our December issue, we’ll take a look at Which Is The Better Pension Plan For Your Retirement: A Defined Benefit Plan or A Defined Contribution Plan. “We stand at a crossroads. One path leads to despair; the other to destruction. Let’s hope we make the right choice.” Woody Allen, comedian What You Should Know: How Should I Take My Money From My Retirement Plan? As you leave the workforce and enter into the “retired” world, you will face a difficult question----how do I receive my benefits. You will usually have a number of options--- 1. Take the money as a lump sum 2. Take some kind of annuity 3. Take periodic distributions 4. Keep the money in your plan But, before you decide which option you should take, you should consult with a tax-investment professional. Don’t do it on your own. 1. A lump sum. You will receive the value of your account in one single payment and you can then invest as you want to. However, if you do this all at once, you will lose the benefit of tax-deferred earnings growth. And, you may face a large income tax bill the year of withdrawal. There are some tax options that are available that may reduce your tax bill. A good number of experts feel that you should transfer it into a traditional IRA rollover account or have your employer perform a direct transfer into the IRA account. If you However, if you leave a large portion of your money in the bank instead, you are almost guaranteeing that your buying power will diminish over time, because of inflation and taxes. Americans have more than $1 trillion invested in savings accounts that earn around 1 - 2% interest---a return that is lower than the inflation rate. And, that is why you must be prepared to take some risks. As an investor, you must consider how much risk—and what kind of risk—you are comfortable with. It may be enticing to try to get rich in a hurry (greed). But, this only exposes you to the possibility of getting poor in a hurry. And that is why a sound investment strategy relies on the low-risk power of compounding and the discipline of regular saving and investing. “Risk comes from not knowing what you’re doing.” Warren Buffett, (1930 -) legendary investor, Chairman and CEO of Berkshire Hathaway Inc . The Realities Of Retirement: #3 In A Series - How Are Today’s Employee’s Saving And Investing? Today, we have some good news and some bad news. The good news is that retirees can look forward to perhaps 20 to 30 years in retirement. The bad news is that retirees can look forward to perhaps 20 to 30 years in retirement. The good news is that there are approximately 45 million 401(k) participants in America. The bad news is that many of them don’t have a clue as to where their money is going. When we look at the research and the news as it relates to employee retirement, we find some disturbing trends. The 2004 annual Retirement Confidence Survey conducted by the Employee Benefit Research Institute and other surveys indicate that about one-third of American workers have not saved anything for retirement. However, one-half of this group who have not saved for retirement, are at least somewhat confident they will have enough money to retire. Sixty percent of all workers are currently saving for retirement. That means that 4 in 10 workers are doing nothing---and many of the workers who are saving aren’t saving enough. Nearly half of all workers have assets of less than $25,000---not including their home. Ten percent of workers report savings and investments that total between $100 thousand and $250 thousand. Only 8% report assets in excess of $250,000. Of those who do participate in a saving program, contribution rates generally are not increasing. Only about 40% of workers have calculated what retirement income they will need—which means that 60% don’t know what they will need. Now, if you don’t know how much income you will need in retirement, it is really impossible to figure out how much you have to save in order to reach your goal. Of those who did the calculation, more than half of the workers expect to need 50 – 85% of their pre retirement income to live on in retirement. Just 8% expect to need “about the same income” in retirement. More than 50% believe they risk outliving their savings. Too many people don’t know the difference between a stock and a bond. Most investors don’t know what the specific investments in their 401(k) plans are.


In order to have a comfortable retirement tomorrow, you need to develop your plans today. A comfortable retirement doesn’t just happen. It takes planning and we can help you. We can help you to develop a step-by-step process; a saving - investing “road map.” We will provide you with straight-forward, easy-to understand, unbiased and candid information. We don’t get bogged down with financial jargon. We keep it simple. Over the years, we have helped thousands of people with their retirement planning efforts. Ninety-two percent of the participants in our recent sessions have rated the workshops as “good” to “excellent.” Each workshop participant receives a copy of our three extensive workbooks (80 pages plus) that contains worksheets, questionnaires, charts, graphs and a full range of examples and illustrations what will help them to understand and use this information. With our thirty years of working – researching – teaching in this area, we know how to inform – educate and help people with their plans. Your retirement may be years away but planning for it shouldn’t be. Talk to the people in your benefits – compensation office about our workshops and ask them to get in touch with us so that we can bring our sessions to your workplace. If you’d like to see a brochure which details what we do in our three sessions, send us an email --- -3- follow this procedure, you won’t owe taxes on the transfer and your money will continue to grow tax-free until you withdraw it. Some experts feel that this approach will provide you with the most flexibility in planning how to withdraw your money. 2. Annuity option. An annuity is a fixed monthly payment for the duration or your life or you may opt to arrange for a joint and survivor annuity. In the event your death, your spouse will continue to receive a portion of your retirement income. If you do not select this option, your monthly payments cease with your death. One drawback of this approach is that once you move your money into this account, you can no longer get at your principal because you have converted it into income. 3. Periodic distributions. If you are happy with the way your money is invested in your 401(k), but you still will need some money before you reach 70 ½ years and if your employer permits this, you can arrange to take monthly or quarterly distributions. You will be allowed to change the amount you withdraw but be careful with your decision----you will want to make sure this money will be there for as long as you need it. 4. Keep the money in your plan. Some employers will allow you to keep your money in your 401(k) after you retire. If you have adequate sources of income, you may not need this income and you can leave it untouched until you reach 70 ½ years. Then, you will have to start taking withdrawals. The options you have at this point may be limited by the rules of your plan. It’s a tough decision and that’s why you should have some professional assistance that can help you with your plans. Obviously, you will want to have a long and fruitful retirement. Just make sure that the choices you make will help you to reach your objectives. “I'll probably put it in a savings account and just live off the interest.  Or maybe I'll buy an annuity payable at age twelve, or maybe I'll invest in some mutual funds, or even buy some stock in one of our local companies that seems to be getting bigger.” Charlie Brown in Charles Schulz comic strip---Peanuts Homework: How Do The Funds In Your 401(k) Stack Up Against The Ten Largest Funds? The ten largest domestic equity mutual funds gained an average of 29.8% in 2003. They beat the S&P 500 Stock Index’s return of 28.7%. How did your funds perform during the past 1 – 3 – 10 years against these ten large funds? Find your latest statement and then go to page 9 and check out the numbers. Good luck!!! Our Planning – Saving – Investing For Retirement Workshops Retirement 101: The Basics Retirement 201: Advanced Concepts Retirement 301: Where Do I Save – Invest? Three brand new workshops specifically developed to help you to learn about, understand and utilize the basic concepts and principles of planning - saving - investing for retirement. “We have received many positive comments on your class. It is obvious that your students thought the world of you. We are very fortunate to have you as a leader. Many indicated they wanted more.” Debbie Bosanko, Coordinator, Lifelong of Tompkins County Lazy - Low Maintenance Investing With Mutual Funds: #3 In Our Series: Bill Bernstein No-Brainer Portfolio This simple portfolio is the brainchild of William Bernstein, a financial adviser, Smart Money columnist and author of the Intelligent Asset Allocator. Dr. Bernstein is not only one of the more sophisticated financial analysts around; as a practicing neurologist he has a unique understanding of the workings of the brain. When it comes to investing, however, Bernstein is a no-nonsense, keep-it-simple strategist: “If over the past 10 or 20 years, you had simply held a portfolio consisting of one quarter each of indexes of large U.S. stocks, small U.S. stocks, foreign stocks and high quality U.S. bonds, you would have beaten over 90 percent of all professional money managers and with considerably less risk. Yes, it beats 90 percent of the pros.” Bernstein feels that this mix is far better than the scattershot portfolios of most investors.


-4- Bernstein states that “The key to success isn’t picking the best stocks. It’s simply having the correct mix of assets.” Bernstein developed his Basic No-Brainer Portfolio with Vanguard Funds because they are no-load funds with low expenses and diversified across thousands of stocks and fixed-income securities. The makeup: 1. Vanguard 500 Index (VFINX.) The fund has a portfolio of 500 stocks 2. Vanguard Small-Cap Index (NAESX) This fund tracks the Russell 2000 Small Cap Index. 3. Vanguard European Stock Index (VEURX) This fund tracks the Morgan Stanley Europe Index. 4. Vanguard Total Bond Market Index (VBMFX. During the past 5 years, the Bernstein Basic No-Brainer Portfolio returned 3.52% annually. For the past 10 years --- 9.15%. For the past 15 years 10.29%. For the past 20 years --- 11.69%. (12/2003) Bernstein also has the No-Brainer Coward’s Portfolio. This portfolio has a total of nine funds: (40%) Short-Term Corporate Bond Index (VFSTX), (15%) Total Stock Market (VTSMX), (10%) S&P 500 Value Index (VIVAX), (10%) Small-Cap Value (VISVX), ( 5%) Small-Cap Index (NAESX), ( 5%) REIT Stock Index (VGSIX), ( 5%) European Stock Index (VEURX), ( 5%) Pacific Stock Index (VPACX), ( 5%) Emerging Markets Index (VEIEX). The nine-fund No-Brainer Coward’s Portfolio uses short-term bonds, a more conservative choice, and a total market index instead of the S&P 500 index. And it divides the international allocation among European stocks, Pacific-Rim stocks and emerging markets. It returned 24.1 percent last year, with long-term returns at about 11 percent. You can find information on his portfolios in his book, The Four Pillars of Investing. You can also find additional information on his web Bernstein states that an important element of this approach is to stick to it. Adjust your positions regularly so that you can keep the overall allocation constant. He says that you should do this once a year and by doing this, you can enhance the portfolio return by about 1% a year. “There is no such thing as stock picking skill. It’s human nature to find patterns where there are none and to find skill where luck is a more likely explanation (particularly if you’re the lucky manager). We are looking at the proverbial bunch of chimpanzees throwing darts at the stock page. Their success or failure is a purely random affair. Ninety-nine percent of fund managers demonstrate no evidence of skill whatsoever.” William Bernstein, Intelligent Asset Allocator This Month’s Question: What You Should You Know About Your 401(k) Plan? Before you embark on a trip, do you do some homework? When you buy a car, do you do your homework? When you apply for a job, do you do your homework? When you sign up for a 401(k) plan, do you do your homework? According to 401(k), when it comes to knowing about and understanding their 401k retirement plans, most workers are in the dark. They have little or no knowledge of the plan which often impacts their perception of this important benefit. The Questions: 1. When can I join the plan? 2. Can I transfer money from a previous employer's plan or an IRA? 3. How much can I deposit to the plan each pay period? 4. Does the company "match" my deposits and if so, what is the match and when is it deposited to my account? 5. Are employer deposits subject to a vesting schedule and if so, what is it? 6. What are the investment options available to me and how do I get more information about them? 7. How often can I reallocate the money in my account between investment options? 8. Can I access my account via the Internet and if so, how? 9. How often will I get a statement that reflects the current status of my account? 10. Are loans allowed from the plan? 11. Are hardship withdrawals allowed from the plan? 12. Does the plan offer any type of educational material or advice service to help me properly invest my account? 13. Does the plan allow me to make catch-up contributions when I'm age 50 or older? 14. What happens to my money if I quit working for this company? 15. Who do I contact if I have questions about the plan?  (questions: 401(k) A Retirement Diary: Greed And Fear In Investing: A Personal Perspective Back in August, when Googlemania was sweeping the country --- “Shall I bid and see if I can get in on the next Microsoft”--- I thought back to another opportunity (?) to buy an Initial Public Offering (IPO). Hey, you can make a ton of money (greed). Hey, you can lose your shirt (fear). I was in Boston visiting family in the fall of 1999 and there was quite a bit of discussion about investing in technology companies. Why not? All technology initial public offerings (IPOs) were taking off like space ships. One that was in the news was a company called “Akamai.” The initial offering of Akamai (AKAM) was on October 29, 1999. The initial offering price was $29 a share. It did The following test, consisting of 15 questions, can help you to determine how much you know about your plan. Knowing the answers can help you to have a better working knowledge of your plan and help you to take the necessary steps toward a better awareness and appreciation of this benefit.


- 5 - not stay there long. The closing price on October 29 was $110. In November it was $200---$283 in December---In January 2000, it hit $344 a share. Was there any “greed” in this market. It then started to fall and by April 2001 it was $8 a share. Was there any “fear” in this market? In 2002, it was priced under $1 a share. In August 2003, it was $3.87 a share. In October, 2004, it was about $15 a share. Will Akamai rebound? Will it once again hit $345? Are the people who bought in at $345 still in there and waiting for a rebound? I don’t know what will eventually happen with Akamai. But, what I do know is that I am happy that I didn’t buy in at $100, 200, 300 or $345 a share. Then, there was was started up by two Cornell University students in 1998. The Globe was a place where visitors go to check the weather, stock quotes and all sorts of other daily information. On the initial day of trading, the opening price was $9 a share and it went all the way up to more than $90, making it one the most successful IPO’s is on record. In May 2001, it was selling for about 8 cents a share. In August 2003, it was $1.24 a share. It now has a different name ---voiceglo. Voiceglo is now a global communications company. In October 2004, it was selling for about 40 cents a share. There were a lot of dotcom stampedes in a run-away market. We did not live in patient times. We heard about a stock going up 600% a day, and many of us wanted a piece of the action. What Is The Moral Of This Story? In Holland in the 1630’s, prices for tulip bulbs soared. At the height of the mania, traders bought and sold futures on third rate bulbs for sums greater than what they could have hoped to earn in a decade. That speculative frenzy couldn’t go on forever and it didn’t. The bubble burst. In the 18th century we had the “French Mississippi Scheme.” This involved both the refinancing of the French government debt and the issuing of vast quantities of money in the novel form of paper. This frenzy couldn’t go on forever and it didn’t. The bubble burst. Also in the 18th Century, there was “Britain’s South Sea Episode.” A company formed to refinance government debt quickly turned into a pyramid scheme. This couldn’t go on forever and it didn’t. The bubble burst. The first century of industrialization in this country saw repeated cycles of investor euphoria--for canals, railroads, electricity, and scores of other innovations--each followed by busts in which many companies went down and thousands of speculators lost their shirts. In March, 1928, Radio Corporation of American’s share price rose from $95.50 to $160 in only 10 days. When the market bottomed in 1932, it sold for $2.50 a share. From the gold fever days of the “Forty-Niners’ to the allure of day-trading, Americans have always been convinced they can bring the rags-to-riches story to life. There is a long history of investment bubbles that helped to pave the way for major technological-economic advances. This has been true for railroads, electricity and automobiles. However, in many instances, the advances become generally apparent only long after the bubble burst. The NASDAQ composite peaked on March 10, 2000 at 5048. By mid April, it had fallen to 1638. The frenzy couldn’t go on forever and it didn’t. In February 2004, it was 2007. When will it return to 5000? The bubble burst. Burton Malkiel, in his book “A Random Walk Down Wall Street”, states, “In their frenzy for money, market participants throw over firm foundations of value for the dubious but thrilling assumption that they too can make a killing by building castles in the air.” Think back to your childhood days. Did mother ever ask you the question----“If everyone jumped off a bridge, would you jump too?” It’s great to be the first in line, numero uno, at the top of the ladder. However, being ahead of the herd and the stampede isn’t so smart if it means you’re the first one to plunge off a cliff --- or a bridge. Are we beyond the IPO mania of the 1990s? Maybe, but don’t bet on it. Greed will always be a part of investment behavior. You can bet on it. “Those who do not remember the past are condemned to repeat it.” George Santayana (1863 – 1952) Philosopher How Can I: Compare The Expenses I Pay For Investing In My Mutual Fund With Others? You can compare the costs involved and how much money you pay and compare the funds you own or are contemplating buying. As more than one expert has stated, “the costs are not chicken feed.” Check out the mutual fund cost calculator found on the Securities and Exchange Commission web site at Interesting Perspective: Do The Rich Get Richer? During the last couple of months, I have been reading about the two separate but vastly different segments of savers – investors in America --- the H.N.W.I’s (High Net Worth Individuals) and the O.J’s (Ordinary Joe’s). I thought about them when I read a piece written by Warren Buffett, the CEO of Berkshire Hathaway Inc., a diversified holding company, for the Washington Post newspaper. In the piece, Mr. Buffet --- who really is a H.N.W.I (those with a net worth of above $1 million)--- compared the taxes he pays with the taxes paid by his receptionist at Berkshire Hathaway --- an O.J. (those with a net worth less than the above mentioned figure). Mr. Buffett is the world’s second richest man --- Bill (H.N.W.I.) Gates is #1. Buffet has been called “the world’s greatest stock market investor.” Buffet states, “The taxes I pay to the federal government, including the payroll tax that is paid for me by my employer, Berkshire Hathaway, are roughly the same proportion of my income -- about 30 percent -- as that paid by the receptionist in our office.” Buffet adds that his earnings, “like many rich people are a mixture of capital gains and ordinary income.” But then, to


- 6 - his credit, he points out a huge problem with our tax system. “As it works out, I pay a somewhat higher rate for my combination of salary, investment and capital gain income than our receptionist does. But she pays a higher portion of her income in payroll taxes than I do.” Buffet looked at the proposal from the Senate which states that dividends should be tax-free to recipients. “Suppose this measure goes through and the directors of Berkshire Hathaway (which does not now pay a dividend) therefore decide to pay $1 billion in dividends next year. Owning 31 percent of Berkshire, I would receive $310 million in additional income, owe not another dime in federal tax, and see my tax rate plunge to 3 percent.” How would this affect his receptionist? “She'd still be paying about 30 percent, which means she would be contributing about 10 times the proportion of her income than I would to such government pursuits as fighting terrorism, waging wars and supporting the elderly. Let me repeat the point: Her overall federal tax rate would be 10 times what my rate would be.” Buffet states that “Administration officials say that the $310 million suddenly added to my wallet would stimulate the economy because I would invest it and thereby create jobs. But they conveniently forget that if Berkshire kept the money, it would invest that same amount, creating jobs as well.” Buffet adds that “the first President Bush had a name for such activities: "voodoo economics." “The manipulation of enactment and sunset dates of tax changes is Enron-style accounting, and a Congress that has recently demanded honest corporate numbers should now look hard at its own practices.” Buffet states that the administration should not cut the taxes of individuals with huge portfolios of stocks held directly. “Instead, give reductions to those who both need and will spend the money gained. Enact a Social Security tax "holiday" or give a flat-sum rebate to people with low incomes. Putting $1,000 in the pockets of 310,000 families with urgent needs is going to provide far more stimulus to the economy than putting the same $310 million in my pockets.” “Supporters of making dividends tax-free like to paint critics as promoters of class warfare. The fact is, however, that their proposal promotes class welfare. For my class.” Correct Answer: A How about B? Your chance of winning the lottery (six numbers) is almost 14 million to 1---not very good odds!!! How about C? Getting an inheritance? You have affluent parents? If you do, they’ll probably spend it all on their retirement. How about D? Finding money under the mattress? There’s nothing there. I already checked. How about E? The last time I talked with the guys over at Social Security, they told me that they were trying to work out some problems with long term financing of the system at about the same time that you retire. And for your information --- this year, the average monthly Social Security benefit for a retired worker is $922 a month---$11,064 for the year. The average benefit for a retired couple is $1,523 a month---$18,276 for the year. Social Security alone will not provide a luxurious life style. Listen up pal!!! I’m going to make three quick suggestions. One---take advantage of your retirement saving program where you work. The experts tell me that the biggest mistake that people like you make is not taking advantage of your 401k, 403b or 457 plan. Two---maximize, not minimize the amount you put into the pot every pay period. Three---manage your investments. Know something about the investments you are selecting. Don’t buy anything just because someone on TV said it was “red hot.” Building your retirement nest egg is your responsibility and it is your responsibility to work at it. When you commit to a regular program of putting something into the pot every paycheck ---with perhaps a matching contribution from your employer---you give compounding a chance to work its magic. Now, that’s a better bet than your lottery ticket. “Money isn’t everything, but it sure keeps the kids in touch.” Unknown Planning - Saving - Investing For Retirement Sandy Says: How Will You Finance Your Retirement? Sandy The Smart Saver Hi, I’m Sandy The Smart Saver and I am here once again to give you some tips on Planning-Saving- Investing For Retirement and I am still taking a light- hearted approach and still trying to make the whole saving- investing for retirement process a “fun” event. And of course, I am still not your average squirrel. It’s time for a quick quiz. How do you plan on financing your retirement? A- Allocate a set amount of each pay check into your 401k, 403b, 457 plan. B- Buy a lottery ticket every week and pray that your number will be the number that appears in the newspaper on Monday morning. C- Pray for a rich inheritance. D- Find some mysterious envelopes containing a very large amount of money under your mattress. E - Social Security will take good care of me for the rest of my life.


- 7 - A Follow Up Report: Are Your Social Security Contributions In A Locked Box? In the May 2004 edition of “Your Retirement,” we said that it was time to fix the problems associated with the Social Security system. In this column, we follow up and look at the security of the Social Security Trust Fund. We all know we contribute to Social Security. They take a chunk out of our paycheck each week and send it to Uncle Sam in Washington. But, what happens to it once it gets there? That is a good question. Is it sitting there in an envelope at the U.S. mint with your name on it? Not exactly. The records for your contributions are kept in a computer that keeps track of what is called the Social Security Trust Fund. If you listened to the presidential debates in 2000, you may have heard of it. In April, 1983, a Social Security Commission recommended a number of changes in an effort to save the system from a financial crisis. Congress passed and President Ronald Regan signed legislation which increased the tax you and your employer pay in to the system, increased the age of “normal” retirement from 65 to 67 and began to tax some benefits. These changes were made so that workers would pay more into the system than would be necessary to pay the current retirees. The reasoning was that this surplus funding over a 50 year period would create a large “trust fund” that could be used to pay benefits to the baby-boomer generation that would start to retire in the 2008 – 2010 period. This “trust fund” currently has about $1.5 trillion. So, what happens to money in the trust fund? It is invested in Treasury securities (bonds) that pay an average of about 6% a year and this interest goes back in to the Trust Fund. But, is it just sitting in that envelope with your name on it? Not exactly. The government, as you may know, spends more money than it receives in taxes---(does that sound familiar?) --- and it spends money from the Trust Fund (yours and mine) to cover the differences and in return it gives the Fund an IOU. The experts say that the Fund will continue to grow until 2030 and at that point Social Security will have to redeem ‘securities’ (see preceding paragraph) to help pay for benefits. So, the big question is-----where will the money come from to cover those bonds so that the benefits can be paid? Sandy Cartoon Sandy: The stock market may be down but I slept like a baby last night. Camille: (Sandy’s wife): You did? Sandy: Yep. I woke up every hour and cried. Camille: You poor baby. Uncle Sam has only two sources----taxes or borrowing. Borrow money or increase taxes? Doesn’t this just increase the size of the federal budgetary problem? The Hoover Digest on its web site back in 1999 in an article entitled “What Trust Fund?” gives us the two final sentences for this article----“No, Virginia, there really is no Social Security trust fund. Politicians have already spent it, behind their smoke and mirrors.” Quick Takes: #1: The Research On Retirement Savings I am always on the lookout for what I call “a good line.” And, I found one when I read a Scott Burns (Dallas News columnist) column entitled “Don’t Fall Off The Retirement Savings Cliff.” Scott said, “When it comes to retirement, most Americans are to financial planning as Thelma and Louise were to travel planning.” If you recall, “Thelma and Louise” is a 1991 movie where an Arkansas waitress and a housewife shoot a rapist and take off in a '66 Thunderbird for a series of wild adventures. Loved that movie. If you follow any of the writing on financial planning and saving – investing for retirement --- including this years 14th Annual Retirement Confidence Survey --- you will always find the following-----We don’t save enough. We don’t earn a high enough rate of return on our investments. Most retire without enough to live on --- etc. etc. etc. The 2004 RCS shows that 58 percent of workers say they are currently saving for retirement, but the amount they have saved is low. The survey finds that 45 percent of all workers report total household assets, excluding the value of their home, of less than $25,000. The proportion of workers who say they are currently saving for retirement has remained unchanged since 2001 (58 percent in 2004 vs. 62 percent in 2003, 61 percent in 2002, and 61 percent in 2001). The RCS also found that over 1/3rd of those surveyed reported they will need money to make ends meet. A poll by USA Today/CCN Gallup found that almost 50% of those polled felt they will have to postpone retirement. Scott Burns supplies the closing line for this piece when he says that “if you’ve read this far and don’t see yourself in any of these figures, then you’re a saver.” “Give yourself a pat on the back.” “I am guilty of the great crime of optimism.” Edward Teller when he was asked about Star Wars. (1908 – 2003), Expert on defense policy, energy policy, national security affairs Quick Takes #2 Small Savings Build Your Retirement Nest Egg You really like your ice cream, don't you?  A lot of us do.  Let's say that you and your very special ____go to the ice cream parlor twice a week.  Each stop will add up to a total of $6 for you and your very special____.  NO!!!  NO!!!! NO!!!  I am not going to suggest that you go completely "cold turkey" from your ice cream fix.   I will suggest a once a week stop.  This will amount to a saving of $6 a week or $312 a year.


Now, if you invest that $312 in your 401(k) in a mutual fund that earns a 9% annual return over 20 years, your investment would be worth a total of $15,962---not exactly an eye popping, knock your socks off amount but, let's look at it this way.  Two scoops of Baskin Robbins Rocky Road ice cream will have about 300 calories.  If you eliminate the one trip, you will not consume 15,600 calories and about 730 grams of fat in the course of just one year.  Just think of what that could do for your diet and your waist line?  You might even be able to get into those pants that were too small last year!!!  And, your doctor will not give you a lecture at next years annual exam!!! Quotable Quotes  “Where ignorance is bliss, 'Tis folly to be wise." Thomas Gray (1716 - 1771) On A Distant Prospect of Eton College,  English poet "If ignorance is bliss, there should be more happy people."  Unknown - "If you think education is expensive, try ignorance." Derek Bok,  former President of Harvard from 1971 - 1991 "The first thing a security salesman learns is to gain the confidence of his customer.  This enables the salesman to more easily sell the customer the products that pay the salesman the highest commission."  Jane Bryant Quinn,  Making The Most of Your Money  --- a quote she received from a stock broker. "Little by little you can safely stock up a strong reserve here, but not until you start."  A sign in the window of a bank    "It must be apparent to intelligent investors that if anyone possessed the ability to forecast stock prices consistently and accurately, he would become a billionaire so quickly that he would not find it necessary to sell his stock market guesses to the general public."  Charles Ellis, Author, The Loser's Game Stock Market – Investment Humor Stock broker proudly states: I am responsible for making John a millionaire. Friend: What was he before? Stock broker: A billionaire. - 8 - Coming In The December Issue:__Why Are Investors Taking Their Brokers To Arbitration? Back in 1976, Howard Beale, the aging TV news anchor in the movie “Network” is angry. The network has just fired him because of low ratings. He goes on the air and urges his viewers to go to the windows and yell, “I’m mad as hell and I’m not going to take it anymore.” Today, it appears that a good number of investors are taking Beale’s advice and they are taking their brokers to arbitration because they lost money in the market. The losses are mounting and it’s time to start to look for someone to blame. Who is the likely person to blame? Could it possibly be the broker or the financial advisor? Why? Well, it’s not entirely because they lost money. Hey, a lot of us lost money back in 2000 – 2002. But, these folks are angry because of some of the sales practices and advice they received. Barbara Roper, director of Investor Protection for the Consumer Federation of America states that “the fact that your investment performed more poorly than you’d hoped is not the basis of a claim.” What are some of the more common abuses? A good number of investors claim that their broker was “churning” their account --- excessive trading that generates commissions for brokers. Others say their broker engaged in unauthorized trading in their account. An investor with a complaint against a U.S. brokerage firm is almost guaranteed to end up in arbitration. Most brokerage contracts generally require that a customer will go that route. But, before you blame someone, be sure that you take the necessary steps so that you are sure that you have a valid case. In our December issue of “Your Retirement,” we’ll take a look at the things you should do before your pursue arbitration.


Retirement Planning Consultants provides a number of resources designed to help individuals make informed decisions on planning – saving – investing for retirement. We offer unbiased and easy-to-understand information from an impartial outside source. We’ve been doing that for almost 30 years. Our “Planning – Saving – Investing For Retirement” workshops have helped thousands of individuals. For additional information or if you have any questions, contact, Robert R. Julian, Retirement Planning Consultants, 313 Blackstone Avenue, Ithaca, New York 14850, (607) 255-4405, email: Visit our website at - 9 - This newsletter intends to present factual up-to-date, researched information on the topics presented. We cannot make any representation regarding the accuracy of the content or its applicability to your situation. Before any action is taken based upon this information, it is essential that you obtain competent, individual advice from an attorney, accountant, tax adviser or other professional adviser. Information throughout this newsletter, whether stock quotes, charts, articles, or any other statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. No party assumes liability for any loss or damage resulting from errors or omissions based on or use of this material. Ten Largest Total Net Domestic Equity Investment Assets Star Funds Style (Bil.$) Ranking Returns Through 12/31/2003 (%) 1- 3-Year 10-Year Year Annualized Annualized Vanguard 500 Index/Inv Large-Cap (VFINX) Blend 75.34 3 +28.5 -4.2 +11.0 Fidelity Magellan Large-Cap (FMAGX) Blend 68.00 3 +24.8 -5.6 +9.2 Investment Company Of America Fund/A Large-Cap (AIVSX) Value 58.35 3 +26.3 +1.0 +12.0 Washington Mutual Investors Fund/A Large-Cap (AWSHX) Value 55.58 4 +25.8 +2.8 +12.5 Growth Fund of Large-Cap America/A (AGTHX) Growth 48.07 3 +32.9 -3.1 +13.5 Fidelity Contrafrund Large-Cap (FCNTX) Growth 36.05 3 +28.0 +0.4 +12.1 Fidelity Growth & Large-Cap Income (FGRIX) Blend 30.57 2 +19.0 -4.0 +10.3 Dodge & Cox Stock Large-Cap Fund (DODGX) * Value 29.44 5 +32.3 +9.0 +15.4 Fidelity Low Priced Small-Cap Stock (FLPSX) * Value 26.73 5 +40.9 +18.7 +16.0 Vanguard Total Stock Market Index/Inv Large-Cap (VTSMX) Blend 24.06 3 +31.4 -2.6 +10.5 S&P 500-Stock Index +28.7 -4.1 +11.1 *Closed to new investors. Source: Standard & Poor’s. Total returns are in U.S. dollars and include reinvested dividends. Ten Largest Funds 2003 Performance The ten largest domestic equity funds gained an average 29.0% in 2003, beating the S&P 500-stock index’s 28.7 return. Of the five that outpaced in the index, the best performer was the $26.7 billion Fidelity Low Priced Stock (FLPSX) with a remarkable 40.9% annual return, the only small-cap fund found among the ten largest domestic equity funds. This fund normally invests 80% of its assets in low-priced stocks-priced at or below $35 per share -- which generally leads to investments in small - and medium-sized companies For the three-year period through 2003, nine out of the ten largest funds outperformed the S&P 500 index with an average annualized return of 5.3%. For the ten-year period through last year, six funds outpaced the index with an average annualized return of 1.2%. Performance data and Standard and Poor’s star rankings, which are based on a fund’s three-year risk- adjusted returns, are shown below. The funds are listed in descending order by total net assets. Homework: How Do The Funds In Your 401(k) Stack Up Against The Ten Largest Funds?

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