FYI: I will link the interview as soon as it becomes available for free, sometime early Saterday Morning.
Regards,
Ted
June 4, 2015
Dear WEALTHTRACK Subscriber,
Since the launch of WEALTHTRACK ten years ago, many of our guests have stressed the importance of paying attention to fees. As Financial Thought Leader, Burton Malkiel, the author of the investment classic, “A Random Walk Down Wall Street” recently told me, “the one thing I am absolutely sure about is the lower the fee that I pay to the purveyor of the investment service, the more there’s going to be for me as an investor.”
Investors have taken that truism to heart and are driving fund expenses lower. According to a recent Morningstar study, 95% of all fund flows over the past decade have gone into funds in the lowest-cost quintile. Needless to say, passive funds have benefited the most. The entire fund industry is paying attention. Over the past five years, 63% of the fund share classes and exchange-traded products in Morningstar’s universe reduced their expense ratios. Only 21% increased them.
For those of you interested in a deeper dive into fee trends, Morningstar is sharing the full study with us. You’ll find it on wealthtrack.com, starting over the weekend.
It’s currently pledge season on public television, so WEALTHTRACK might not be airing on your local channel. Consequently we are replaying an interview of increasing importance to us all!
We are focusing on retirement with another Financial Thought Leader, who also co-authored a book with his good friend Professor Malkiel. Titled “The Elements of Investing: Easy Lessons for Every Investor”, it is one of the best primers on investing every written.
Paying for retirement is a huge national challenge in this country and a fast approaching crisis.
Americans are living longer and spending more years in retirement than ever before. According to a recent report on mortality from the Centers for Disease Control, a woman who turned 65 in 2012 can expect to live another 20 and a half years on average to 85 and a half. A 65 year old male in 2012 will live another 17.9 years on average to 82.9. The golden years have never lasted this long, nor been so difficult to finance.
Aside from longevity, many other factors that used to contribute to a secure retirement have changed. Up to thirty years ago about half of the private sector work force had defined benefit pensions for life, managed and guaranteed by their employers. They also had company provided health benefits. Now the vast majority of private sector workers are managing their own retirement funding through defined contribution plans, such as 401ks. And they are doing so much less effectively, saving far less than they need. In addition, they are paying an ever increasing portion of their health benefits.
In 2013 the median household approaching retirement with a 401k or IRA had $111,000 in its retirement account. If a retired couple withdraws the widely recommended 4% of that amount a year, they receive only $400 a month of inflation adjusted income, usually their only source of income aside from Social Security.
Unfortunately, Social Security is contributing less to retirees’ income than it has in the past for several reasons, including the phasing in of already legislated budget cuts, increases in Medicare premiums, which are deducted from Social Security benefits, and taxation of those benefits.
In 1985 Social Security replaced about 40% of the typical workers pre-retirement income. If that worker had a non-working spouse the replacement rate jumped to 60%. It is now estimated that Social Security will replace only 31% of the average worker’s pre-retirement income by 2030.
Despite all of these challenges, Charles Ellis believes retirement is a solvable crisis on both the individual and societal level.
Ellis, a legendary financial consultant was the founder of Greenwich Associates, an international business and investment strategy consulting firm. He has been a business school Professor at both Harvard and Yale, and is the author of 16 books including the investment classic, Winning the Loser’s Game.
He is also the co-author of the recently published Falling Short: The Coming Retirement Crisis and What To Do About It. It is a terrific and short book, always a plus, on how and why the retirement picture has changed so dramatically in just 30 years and the simple, straightforward steps we can take as a nation and individuals to fix the crisis.
As always, the show is available to view online, as a podcast, or on our YouTube channel. You can watch on our website here. On EXTRA this week, I ask Ellis why he chose to spend his valuable time on tackling the nation’s retirement crisis.
Have a great weekend and make the week ahead a profitable and productive one.
Best Regards,
Consuelo
