April 4, 2014

CONSUELO MACK: This week on WealthTrack two outstanding personal finance journalists, Jonathan Clements and Jason Zweig tackle the biggest financial challenges facing Americans and how to overcome them. Retirement income, market volatility and getting good financial advice are next on Consuelo Mack WealthTrack.

Hello and welcome to this edition of WealthTrack, I’m Consuelo Mack. A constant theme on WealthTrack in recent years is how income starved most investors are feeling. According to recent financial well-being surveys of American workers done for Principal Financial Services Group, 63% of employees are concerned about having a financially comfortable retirement. They will need income! And 36% fear the rising costs of inflation, which of course cuts into their purchasing power big time. These fears are justified. In just the last decade the yield on high quality short-term bonds has dropped from 2.4% to under 1%. On government bonds, including treasuries and agency bonds, yields fell from above 3% to under 2%, and investment–grade corporate bond yields have fallen from four and a half percent to close to 3%. And even with relatively benign inflation the loss of purchasing power over the last decade has been significant. With annual inflation averaging under two and a half percent, the cumulative effect is a loss of about 25% in purchasing power over the last ten years! These are just two of the major financial challenges facing American citizens. And they are concerns this week’s two guests have researched and written about extensively.

I am delighted to have two of the best personal finance journalists in the country with us. Both have been WealthTrack guests since the early days. They are columnists and authors and both are now working at the Wall Street Journal. Jonathan Clements recently returned to the paper to write a weekly column for the Wall Street Journal Sunday, having spent the last five years as director of financial education for Citigroup’s U.S. Wealth-Management business. Before that Jonathan spent 18 years at the Journal where he wrote its “Getting Going” personal finance column. He is the author of several books including “The Little Book of Main Street Money”.
Jason Zwieg has written “The Intelligent Investor” column for the Journal since 2008. It is considered to be a must read by many WealthTrack guests, prior to that he was a senior writer for Money Magazine. He is particularly well known for his research on the neuroscience of investing and how the brain can sabotage financial judgment. He wrote one of the first books on the subject, titled “Your Money and Your Brain”. He is also the author of “The Little Book of Safe Money”.

I began the interview by asking them about one of the greatest challenges facing Americans: finding enough income for retirement.

JONATHAN CLEMENTS: Well, you know what the big story is. You go back to 1981. We had the 10-year Treasury note yielding almost 16 percent. That rolled all the way down to July 2012. We hit 1.4 percent. From there we’ve bounced up a little bit. We got pretty close to three, but still we are at a very low level, and for a lot of retirees it’s like I can’t live off three percent. Where am I going to turn for income? And my first suggestion is you should exploit the one advantage that we all have. We’re going to die, and the way you exploit that advantage is, one, you can buy an annuity that will pay you lifetime income, and the longer you wait to buy that annuity, the more income you’re going to get. What I’m talking about here is like plain vanilla, immediate fixed annuities and, second, if you’re interested in the annuity idea, the best annuity out there is Social Security. So if you want that lifetime stream of income, what you should think about doing is delaying Social Security for as long as possible, preferably to as late as age 70. If you do that, delay until age 70, the amount of income you’re going to get will be more than 70 percent higher than what you would have got at age 62, and on top of that there will also be inflation increases.

CONSUELO MACK: Jason, would you agree with Jonathan, number one, on how we’ve started this conversation and Social Security and a fixed immediate annuity, would be two things that you should really look seriously at?

JASON ZWEIG: Yeah, well, definitely. I mean, I think one thing that retirees and near retirees tend to forget is they think of Social Security as a source of income which, of course, it is. They don’t really think of it as an asset, and one of the useful things … I don’t know what multiplier you would use, Jonathan, but maybe as a rough rule of thumb something like 30. Right? You would say, well, if I get $1,000 a month from Social Security, that’s $12,000 a year, so that’s sort of the equivalent of owning maybe 350, 400 thousand dollars worth of bonds as a very rough rule of thumb.

CONSUELO MACK: No, but that’s a really good way to look at it.
JASON ZWEIG: Yeah, and so a lot of people feel going into retirement, you know, I need to own a ton of bonds because I need to generate all this income, but you already own some bonds in the form of the Social Security that’s being generated for you, so you should factor that into your thinking.

CONSUELO MACK: I’m richer than I thought.

JASON ZWEIG: Yeah, exactly, exactly, and I guess the flip side to the annuity argument is that Americans need to be careful of annuities that are pushed really hard by people with what I think we could call sort of obscene incentives to sell them. Not the immediate income annuities that Jonathan is talking about but a lot of other fixed annuities carry commissions of nine, ten percent or higher, and you should really ask yourself. If somebody has to get paid 10 percent to sell this to me, how good could it be? When much lower cost alternatives are available, you probably don’t want to buy the thing that somebody wouldn’t be willing to sell you if he wasn’t going to be able to earn 10 percent to do it.

JONATHAN CLEMENTS: The biggest risk in retirement is that you’re going to outlive your savings, and so what you want are lifetime streams of income, and you get that from Social Security and you can get that from an immediate fixed annuity. So what I would suggest people do is if you’re going to spend down your savings at any point, spend them down early in retirement so that you can put off buying that immediate fixed annuity. You can put off claiming Social Security, and that way you’re going to get that larger stream of lifetime income. You’ll say to me, “Well, okay, but what if I do die young?” Well, it’s not a decision you’ll live to regret.

CONSUELO MACK: You can buy an immediate fixed annuity at any time, and you’re saying that the later you wait, the longer you wait, the later you buy it the better off and the more money you’re going to get for whatever investment you make in it.

JONATHAN CLEMENTS: That’s correct.

CONSUELO MACK: There are other people who have advised us on WealthTrack to stagger your purchases of these annuities. For instance, to buy $50,000 now and then in another five years when interest rates are higher buy another 50,000. I mean, what about that kind of strategy?

JONATHAN CLEMENTS: I think that’s a pretty good …

CONSUELO MACK: Because you’re assuming, number one, that you’re going to get more money, but also you’re assuming that interest rates will be higher than they are now which are still pretty much near record lows.

JONATHAN CLEMENTS: Yeah, well, it’s hard to forecast interest rates, but we do know, and Jason’s much more adept at talking about this than I am, investors tend to have this aversion to regret and so people don’t want to make that annuity purchase all at once, so if you stagger it over time, what you do is, at least in your head, reduce the risk that you’re going to make the big annuity purchase and then keel over and die. Right, Jason?

JASON ZWEIG: Yeah, for sure, and part of what investors always need to diversify is the risk in their own behavior. So one risk is people are averse to annuities because they don’t like shelling out a lump sum upfront and to get dribs and drabs over time. So what you can do is you can say, “Well, I’m a little uncomfortable shelling all this money out today that I’m going to receive over the next 10, 20 or 30 years, so maybe I’ll do some today, some one year from now or five years from now.” The trick to that is you have to make a pre-commitment to it.

CONSUELO MACK: How so? Just psychologically you do or … ?

JASON ZWEIG: No. If you make a psychological commitment, you’ve just committed yourself to fail because your willpower alone will never be sufficient to make sure you follow through on your intentions. What I would suggest is that you use technology that’s widely available to make it work for you. There are various websites that enable you to commit to goals. One is called which kind of has some nice techniques for making sure you live up to a commitment, but if you …

CONSUELO MACK: Stick to your commitment. Is that where that comes from?

JASON ZWEIG: That’s the idea, and if you simply say to yourself, “Okay, I’ll buy some now and then I’ll buy some five years from now,” well, five years from now… first of all you won’t remember you have a commitment, but if you do remember, you’ll say, “Oh, well, yeah I was supposed to do it today but, after all, I made the commitment five years ago, so what the heck. I’ll wait until tomorrow,” and then you’ll die.

CONSUELO MACK: Are there rules as far as how much you should pay in commissions? That’s another scary part because people are afraid of annuities because they sound complicated.

JONATHAN CLEMENTS: In terms of the immediate fixed annuities, I mean, you definitely want an insurance company with a top rating, but just one alternative that people might want to consider given this issue of aversion to regret is there’s a little publicized type of annuity but is seriously worth considering. It’s what’s called a charitable gift annuity which is if you have a favorite charity, call them up and see if they offer a charitable gift annuity, and it’s very similar to an immediate fixed annuity. The income is going to be somewhat less because you are making a charitable gift, but the good news is if you do indeed go under the bus two years from now, it’s not the big nasty insurance company that benefits from your early demise. Instead it’s going to be the charity that you are looking to support.

CONSUELO MACK: Interesting that neither of you have yet mentioned, maybe because you haven’t had a chance to, dividend-paying stocks which has been a huge topic of conversation on WealthTrack over the last several years, and obviously bond with interest rates starting to come up. Where do those factor into your search for income?

JASON ZWEIG: Well, I’ll take the dividends first. You know, I think dividend-paying stocks are a great source of income in the stock portion of your portfolio. The problem arises when people come to think of them as bond equivalents, and there are a lot of financial advisors and stock brokers out there who encourage people to do just that.

CONSUELO MACK: There are bond investors and mutual fund investors investing in stocks now.

JASON ZWEIG: That’s correct. The problem will arise if we get a replay of the financial crisis. In 2008 and 2009 dozens of high dividend-paying stocks lost at least 50 percent of their value in a matter of months. These things are not the equivalent of bonds. Treasury bonds went up in 2008. A lot of investment grade corporate bonds went up in 2008 and 2009. Dividend-paying stocks went down. They went down like rocks, and that doesn’t mean that you shouldn’t own them. It doesn’t mean that they don’t provide income. It does mean that you should own them in the risk-taking part of your portfolio along with your other stocks. You should not think of them as bond alternatives, bond substitutes, bond equivalents, bond like. They’re stocks and they’re risky.

CONSUELO MACK: They’re just income-producing stocks.


JONATHAN CLEMENTS: So sort of following on from what Jason is saying, I mean, I’m a big fan of dividend-paying stocks, but if you’re a retiree and you’re structuring your portfolio, what you want to think about is, okay, supposing we did get another 2008. Where are you going to go for income? Because even if you’ve got a set of stocks that deliver you three percent income, you’re probably going to need a little bit more than that from your stocks, so what are you going to do? And the solution is really pretty straightforward. When you look at your portfolio, there’s that growth portion where you might have your dividend-paying stocks, but then you probably want to set aside a chunk of money in CDs, short-term bonds that are going to cover, say, your next five years of portfolio withdrawals from the portfolio side. So you say, “Okay, I need $20,000 a year from my portfolio in each of the next five years.” Take $100,000, five years worth of income, and stick it in CDs and short-term bonds so that you know that whatever happens to the stock market over the next five years you’re going to be set. That then frees you up to be more aggressive with the rest of your portfolio.

CONSUELO MACK: Even though you’re not going to get much income from any of those things right now.

JONATHAN CLEMENTS: It’s true but you also are not running the risk that you’re going to wake up tomorrow and find out the S&P 500 just dropped 57 percent.

CONSUELO MACK: That’s another huge challenge for Americans is the markets and market volatility. So how do we handle that challenge?

JASON ZWEIG: The way I would advise people to think about it is to ignore the overall question of whether stocks are slightly overvalued or wildly overvalued and instead ask yourself, what did I do in 2008 and 2009 when the stock market dropped 57 percent or so in 12 to 18 months? What did I do? If you sold when stocks went down, then yes, stocks are insanely overvalued right now for you, because when they drop again you’ll sell again.

CONSUELO MACK: And you will lose big time again.

JASON ZWEIG: You’ll probably lose even more than you did the last time because you’ll kick yourself twice as hard for being in it when you had a hunch you should be out. So if that’s your experience then you need to be very careful about repeating it.

CONSUELO MACK: How does one cope with the market volatility and the potential that you could lose 40 percent of your money at any given time?

JONATHAN CLEMENTS: I don’t want to sound like I’m parroting what Jason is saying. There are worse people to parrot. You know, if you’re sitting there today and saying, “Which way is the stock market heading because I want to know whether I should buy or not,” what I would say to you is if you ask a stupid question, you’ll get a stupid answer. If your decision to buy today depends on where the market is going next month or next year, you’re already toast. Nobody can forecast the stock market return. You can’t forecast the market’s direction. Jason can’t forecast the market’s direction and I most certainly can’t forecast the market’s direction. So you have to find some other basis on which to make your decision, and the thing that you can control is risk, and it’s not just how much risk you take in your portfolio but also thinking about how much risk you can personally take. I mean, how are you going to react when the market goes down? How many people really were buying in early 2009? I mean, I look back and I say that was probably the greatest buying opportunity of my adult lifetime, and so many people missed it.

JASON ZWEIG: Well, there’s one other point I’d like to make, Consuelo, and that is if you think about what people say about Las Vegas, right, that there’s only two kinds of people who leave, losers and liars, I mean, so many American investors now are looking back at the financial crisis and deluding themselves into thinking they stayed put. They bought more when stocks or non U.S. government bonds dropped in value, and people are looking back and they’re sort of … or when they look in the mirror they see Warren Buffett looking back at them, and he wasn’t there for them. The reason it was a panic was because people were panicking, and you can’t lie to yourself about that, and the single most useful exercise any investor can do is sit down with your five-year-old account statements and look at what happened to the value of your account and look at what you did in response, and if you have a financial advisor you really want to look back at the decisions that financial advisor made with you or for you and see whether in hindsight they were wise, and that’s a much more useful way to assess the risk of the stock market for you today than trying to figure out whether the stock market is overpriced.

CONSUELO MACK: I’m looking at you two, of course, for financial advice because you two are top personal financial journalists and, Jonathan, where do we go for good financial advice? That is a question I get on WealthTrack all the time.

JONATHAN CLEMENTS: When you think about financial advice, there are really two issues that you need to address or you need to be concerned about. One is the cost because the cost because the cost of getting financial advice could be huge, and second you need to worry about the chance for mischief because the fact is we’re dealing with your future, your financial future, how you’re going to pay for retirement, and just as you can’t afford to panic at the bottom of the market in early 2009 and get out of stocks at the worst possible time, similarly you can’t hitch your wagon to some financial advisor who’s then going to take you to the cleaners. So you need to worry about the cost, and you need to worry about mischief, and I would say that if those are your two concerns the place where you should be most concerned is when you’re paying somebody in the form of commissions. I mean, that is the point when it becomes most treacherous because all the financial incentives are wrong. The financial advisor has an incentive to get you to buy and sell, preferably to buy and sell stuff that has high commissions, and that may not be the best thing for you to do. I’m not saying that paying commissions isn’t necessarily the cheapest way to invest. It can actually be a relatively low-cost way for people to invest if it’s done properly even with a financial advisor but the chance for mischief is enormous, and that’s why I would tend to be leery of commission arrangements.

CONSUELO MACK: Except we have an issue. Jason has an issue with fee-based.

JASON ZWEIG: Yeah, I mean, one of the problems is we’ve moved in this country to a situation where many financial advisors charge their clients on the basis of the assets under management.

CONSUELO MACK: Yes, and normally it’s what? One percent of assets under management.

JASON ZWEIG: One percent is certainly the most typical arrangement. So if you have, say, $500,000 or less you might pay somewhere between one and a half and two percent a year to have your money managed but also to get financial advice, and that’s really the problem I have with it. If you go to your lawyer, you pay for legal advice and you pay for it by…

CONSUELO MACK: By the hour usually.

JASON ZWEIG: By the hour and you write a check for the legal advice. You don’t pay your lawyer a percentage of your net worth for his legal advice. When you go to a financial advisor, you may or may not get real financial advice. That’s a different conversation, but you’re going to pay for it as a percentage of your assets even if what the financial advisor is doing for you has not that much to do with managing your money. You may want estate planning, tax planning, retirement planning all of which are more or less independent of the amount of money you happen to have, and to pay one percent of $100,000, $500,000, a million dollars, $10 million but to be getting similar advice in every case seems kind of bizarre.

CONSUELO MACK: What’s the alternative?

JASON ZWEIG: Well, there’s a few things you can do. First of all, for people who have relatively modest sums of money this structure, this fee-only financial planning, may be pretty cost-effective. It’s wealthier people who can end up paying a lot more than they might otherwise need to, and those people should consider looking for a financial advisor who charges hourly fees or an annual retainer or charges effectively by the job and says, “Well, for what you’re asking me to do I would charge you $5,000”.

CONSUELO MACK: One investment for a long-term diversified portfolio. I ask every guest that. Jonathan Clements, what would it be? What would you have us do or invest in?

JONATHAN CLEMENTS: We talked earlier about dividend-paying stocks, but if you’re going to invest in dividend-paying stocks you really want to be diversified internationally. Everybody thinks about U.S. stocks, so there are a number of relatively low-cost ETFs out there that focus on international dividend-paying stocks. One you might want to look at is Wisdom Tree DEFA Equity Income Fund. I think the ticker symbol is DTH. It’s going to yield pretty close to three percent. Expenses are maybe moderately higher than I would like, 0.58 percent. Nonetheless, you are getting that international diversification but with it comes currency risk, but anybody who’s building a stock portfolio should be diversified internationally.

CONSUELO MACK: What would yours be, Jason?

JASON ZWEIG: I think, Consuelo, I would suggest either TIPS, Treasury Inflation-Protected Securities.

CONSUELO MACK: Even though there’s no inflation around.

JASON ZWEIG: There’s no inflation around, and we’ll get to that in a second, or I Bonds which are kind of savings bonds issued by the government that also offers an inflation protected interest payment. I Bonds are only available in small denominations although you can game it a little by buying in the names of all your family members and things like that, inflation is quiet right now, but what TIPS and other inflation-protected securities offer you is insurance against unexpected inflation. If we were all talking about, oh, inflation is picking up, then that would probably be the time not to buy inflation- protected securities because everyone would be expecting inflation. They protect you against inflation surprise which is the thing you really need protection against. So I’m a fan of those and somewhat more so than I would have been a year ago based on the pricing.

CONSUELO MACK: And spoken as a value investor as well I will add.

JASON ZWEIG: Yeah, exactly.

CONSUELO MACK: So Jason Zweig, so great to have you here. Jonathan Clements, the two of you together now both once again at The Wall Street Journal as columnists. Thanks very much for joining us.

JASON ZWEIG: Thank you.


CONSUELO MACK: At the close of every WealthTrack we try to give you one suggestion to help you build and protect your wealth over the long term. This week I want to pick up on Jason Zweig’s brilliant observation that your social security benefits are the equivalent of having a substantial and high quality portfolio of bonds. So this week’s action point is treat your social security as a bond holding. It does generate regular and reliable income no matter what the market climate and to duplicate it you would need a large position in bonds. For instance 10-year treasury bonds have been yielding around 3%, if you are getting $21,000 of social security income a year that is the equivalent of having a $700,000 dollar portfolio of 10-year treasuries. $9,000 in social security income would take a $300,000 treasury portfolio. It is definitely worth getting the most out of this asset. Social security guru Marybeth Franklin recommends the website social security where you can get three levels of personalized reports for modest fees.
Next week we will sit down with financial thought leader and entrepreneur Rob Arnott who is shaking up the money management industry with his fundamental index approach. Has he created a better mouse trap? To hear more of our interview with Jonathan Clements and Jason Zweig go to the extra feature on our website. Also we are introducing a new feature on our website, it’s called “WealthTrack Women”, investment pros who specialize in advising women clients will answer questions vital to their financial health.

Before we leave you we have a big personnel change to tell you about at WealthTrack. Our show producer, Teresa Abbate who started with us almost at the beginning 8 years ago as an associate producer and through her phenomenal skills and talent became WealthTrack’s producer is leaving us to pursue new dreams. The sky is the limit for Teresa and we can’t wait to see what she decides to conquer next. We will really miss her!

In the meantime have a great weekend and make the week ahead a profitable and a productive one.

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