Consider the victims who lost tens of billions of dollars to hedge fund Ponzi-schemer Bernard Madoff, many of whom were near or in retirement. The prime targets of the Madoff scam (and of most financial scams) were people in their 50s and older who worry about their standard of living and income, though they’re what most people consider financially comfortable. Within this group was another target group: Entrepreneurs and successful professionals. Risk-taking usually is part of their personal profiles, and risk-takers often are attracted to unique and little-known strategies. That’s why con artists seek them.
Madoff investors lost so much money in such a total fraud primarily because of a lack of homework. Victims failed to conduct proper research (or even any research) on Madoff’s claimed returns. They simply invested with Madoff due to the recommendations of others investing with him. With a private money manager like Madoff, investors should have been far better educated regarding his investing options and conducted lots of due diligence. They should have insisted on knowing what his investment strategy was and how it was supposed to work. They should have reviewed audited statements of the amount of assets he claimed to be managing. If they had, they would have noticed that the market for the stock options he claimed to be trading wasn’t big enough to support his portfolio, much less all the other investors’ trading options.
Interestingly, it came out that Madoff largely refused to provide much information to inquisitive prospective investors and essentially blew them off and turned them away. In retrospect, such behavior makes sense because Madoff wasn’t interested in and didn’t need to accept money from investors who were asking too many questions. After all, they may have uncovered his enormous fraud.
Developing your estate plan
Your financial circumstances of course will change in the years ahead, and so, too, tax and probate laws will likely change. Planning your estate involves many issues, including ensuring your own financial security, taking care of your affairs in the event you’re unable to do so yourself, and protecting and providing for your heirs. Head to Part 4 to find out more.
Taking personal responsibility for your financial future
Our lives are filled with responsibilities — jobs, family obligations, bills, household maintenance, you name it. We all try to make time for friends, fun, and recreation as well.
With all these competing demands, it’s no wonder that many folks find that planning for their financial future continually gets pushed to the back burner. Most people don’t have the time, desire, or expertise to make good financial decisions. But you’ve taken a huge step to erase those obstacles in reading this book. We provide sound counsel and advice, and now you’re investing the time and energy to get on a better path toward retirement.
Saving and planning sooner and smarter pays off
Throughout this book, we discuss financial strategies and tactics for making the most of your money over the coming decades of your life. The sooner you get control over and optimize your finances, the bigger your payoff will be.
Consider, for example, something that nearly everyone wants to do: save and invest for future financial goals such as retirement. Take the case of the Fuller family, who came to Eric for financial counseling years ago. The Fullers enjoyed a healthy and relatively stable income, yet they saved little, if any, money annually. They knew how to spend money!
In terms of savings, they had about $100,000, which may sound like a lot, but given their annual income ($150,000) and ages (late-40s), they still hadn’t accumulated savings equal to a year’s worth of income. The money they had wasn’t well invested — nearly all of it was in low-interest bank accounts and a pricey life insurance policy that provided just $500,000 of coverage (not nearly enough given their incomes and the fact that they had dependent children). Of course, they could have done worse (at least the money was growing slowly). However, they weren’t going to reach their retirement goals unless their money started working harder for them.
Over a number of months, the Fullers worked with Eric and were able to implement the following changes, which they stuck with for the years that followed:
They increased their savings rate. They were able to consistently save about 15 percent of their annual incomes (about $22,500 per year), which was up from just 4 percent ($6,000). They accomplished this through a combination of reduced spending and reduced taxes by directing their savings into tax-advantaged retirement accounts including a 401(k) and SEP-IRA.“Cutting our expenses was easier than I thought. We were wasting money on things we didn’t really need or even use in some cases,” said Mrs. Fuller. Her husband added, “We felt much more relaxed and less stressed by cutting our expenses and boosting our savings.”
They improved their investment returns. Rather than earning a meager return having their money in low-interest bank accounts, the Fullers enjoyed 8 percent annual returns by investing in a diverse mix of stocks around the world along with some high-quality bonds.
They purchased better insurance coverage. The Fullers needed about $1.5 million of life insurance coverage — triple the amount they had been carrying. They were able to buy that increased level of coverage along with some additional needed disability insurance by raising their deductibles on some other insurance policies and by switching to lower-cost (but still high-quality) providers.
So what were these changes worth to the Fullers? As they themselves said, they had much more peace of mind and comfort with their new financial situation. In the remaining part of this section, we briefly examine the true financial value to them over the decades following the changes.
If the Fullers had continued saving as they had been (saving just 4 percent of their incomes yearly and keeping that money in a bank account), in ten years (when they reached their late-50s), they would have accumulated $188,000. This would have put them in a relatively poor situation for their future retirements given their annual income of $150,000.
On the other hand, the changes (saving 15 percent annually and instead earning an average investment return of 8 percent yearly) would lead the Fullers to have more than $541,000 in ten years — nearly triple what they would have had if they hadn’t made changes. The differences are even more dramatic looking 20 years out. Check out Table 1-1 to see the calculations.