Retirement Income Blog

This article is retirement help on how you can recover the $150,000 loss in your 401k in the next 6 months (for tactics to employ now, see my post at ).  This article is about understanding how and why that $150,000 evaporated and why you will not get it back in the next 6 months or likely the next 6 years.

The recent financial crisis is NOT a temporary drop in the market, your 401k and your IRA savings. It is a PERMANENT adjustment in the valuation of assets that became overvalued.  So don’t think of your 401k as down.  It’s now about the right value.  A year ago, your 401k and your house value was artificially inflated due to excessive credit.  Valuable retirement help is to tell you the truth–adjust your retirement plans downward.

Be realistic, how can an economy survive when

1. people can buy houses with 0% down and without the income to make the payments
2. stocks of companies involved in the housing balloon trade as if those houses are worth what the appraiser says

People now see that the emperor has no clothes.  The retirement help we can provide is to advise that you adjust your retirement plans downward and not think that the market will adjust itself for you.

The house that sold for $500,000 has a true value of $250,000. And all of the people involved in the housing market–the Realtors and the mortgage brokers are unemployed.  The lenders who made these ridiculous loans now realize that the loan, carried on their books at $500,000 must now be written down to $250,000, wiping out the lender’s capital.  The person who resided in the home gets foreclosed on and he might also lose his job because the housing calamity ripples through the entire economy (i.e lenders have stopped making loans to individuals or business).  People who had been taking vacations, buying cars, buying second homes and enjoying the good life by borrowing against their home equity can no longer do so as they have no equity.

So the value of real estate and assets in generally, reflected in stock prices, has now returned to a sustainable valuation and not some value created by a mass fantasy.  We all engaged in a fantasy that life could be so good without paying for it.  Reality does not work that way.  Now that you’ve swallowed the truth, let’s get to some retirement help.

Most Americans need to adjust their standard of living downward.  If you planned to retire at age 62, that will now be 66.  That’s four years less of doing as you please and instead, reporting to work.  The 3,000 square foot house you had planned as your retirement residence, better make that an 1800 square foot condo.  Your plans to remain in high cost Southern California, better think about a comfortable community in low cost Texas.  Unfortunately, all of the visions of retirement that you thought could be must now be scaled down to reality.  The best retirement help and advice we can offer is to make your adjusted and realistic retirement plans now. The good news is that you won’t go bankrupt and you won;t miss any meals.  But the fairy-tale visions we all held about a comfy retirement must now be exchanged for the truth.

Its not so bad, it’s just reality.

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After the dot-com bust, the 10 largest securities firms paid a $1.4 billion fine to the SEC for inappropriately recommending stocks to investors.  But the public still had faith and the big firms seemed to be little harmed as to their reputation.  In 2008, we have some of those same big financial asset management firms going under or being merged: Bear Stearns, Lehman, Merrill Lynch (more to follow  in 2009).  This time, the employees, specifically the brokers, have lost faith and are leaving to start their own financial asset management firms.

As employees of these larger companies, the brokers often work on a commission basis.  When they leave, they obtain a Registered Investment Advisor certificate from the SEC to set up shop on their own.  They can no longer charge commissions but rather, operate on a fee basis (e.g. charge a 1% fee to manage your stock portfolio).  It’s estimated that there are 1,000 of these independent financial asset management shops being set up annually.  Can you trust an individual with no “big firm” backing?

How much trust you have in a big firm is up to you.  Understand however that if an individual broker becomes an independent financial asset manager, your portfolio is still maintained at a large firm such as Charles Schwab, TD Ameritrade, E-trade, Fidelity, etc. So you are trusting the intellectual capacity, integrity and advice of your financial advisor but your assets are actual on deposit with a large well known custodian. 

It appears that affluent investors, the typcial clients of independent financial asset managers, have embraced the services of these independent providers. Charles Schwab’s semi-annual “Independent Advisor Outlook Study” for 2008 reports affluent investors turning to independent financial asset managers and away from full-service financial asset management firms. Mutual fund manager, Rydex, found the average registered investment advisor was already doing well before the recent turmoil and had increased their client base by 7 percent in 2007.

Michael Weiss, founder of Frontier Financial Advisors says, “Investors are moving their accounts from the
large brokerage firms and banks to boutique financial asset management firms….For the first time in years, the small boutique asset management firms are better positioned than the larger firms to serve the individual investor.”

For you as the investor, you need to decide if your comfort comes from the individual that you deal with and your relationship with that financial advisor or if you feel batter about your financial asset management being handled by a big name.

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