Mythological Suze Orman

Yes, Suze Orman is a myth, writ large.  And much of what Suze Orman says on Oprah.com is mythological.  I was especially taken aback by this post.  As far as I know, she hasn't changed her tune.  I almost hate to respond to it and thereby increase its exposure.  But I feel a professional and ethical obligation because this is dangerously harmful advice.

Q: My financial adviser suggested that I invest in index annuities. Are they safe?

Suze: I'm not a fan of index annuities. These financial instruments, which are sold by insurance companies, are typically held for a set number of years and pay out based on the performance of an index like the S&P 500. (Be advised that insurers aren't necessarily transparent about how they calculate any gains credited to your annuity.  [Yes they are.  In explicit detail]) They do offer a guaranteed return, but it can be under the rate of inflation, and there are caps on the amount of interest you can earn. Plus, if you don't want to keep an annuity for its entire term, you could lose 10 percent or more [I haven't seen a charge that high in decades] of your investment to a surrender charge. Honestly, I'd be suspicious of any adviser who wants you to go this route. Instead, I'd recommend that you stick to your workplace retirement plan, if you have that option. You can contribute up to $17,500 this year ($23,000 if you are at least 50). If you don't have a company 401(k) or you have more funds to invest, you can set aside $5,500 ($6,500 if you are at least 50) in a traditional or Roth IRA. [What if she's retiring?  Then she can't do any of that.]

I'm "not a fan of" any celebrity whose celebrity is more important to them than the innocent folks to whom they carelessly dispense flawed and incomplete advice.  "Honestly, I'd be suspicious" of anyone who isn't a fan of indexed annuities, especially these days.  Why do innocent consumers gravitate toward these financial entertainers?  This may be a clue:
https://getpocket.com/explore/item/why-do-people-mistake-narcissism-for-high-self-esteem

To be fair, let me list the True statements Suze makes above about indexed annuities:

1. ". . . sold by insurance companies" [which I suppose is intended to imply something negative]
2. They do offer a guaranteed return [the least important feature, actually]
3. it can be under the rate of inflation [yes, we can practically guarantee the fixed account return will be less than inflation.  We don't care, as I'll explain below.]
4. there are caps [yes, you're not going to get principal protection without fees or limits on benefits]
5. [there can be] surrender charge[s]  [The best contracts almost always have surrender charges.  That's how the company protects the risk pool.  A properly designed plan and allocation will not incur surrender penalties.]
6. The contribution limits were once accurate but not for 2023

But she never answers the question, "Are they safe?", instead going off on an ignorant diatribe ending in defamation of my profession.  (Which, by the way, she left in 1991 to become an entertainer.)  

My key points:

1. In the financial advisory business the key ethic is, "know thy client".  So, an ethical and intelligent response to that person's question would have been:

"Yes, they are safe- for multiple reasons -but why are you asking me?  You should be asking your adviser to explain how their recommendation fits into your overall plan, how they selected that particular annuity and what all the pros and cons are.  I know nothing about you, your goals, your financial situation and have no business telling you anything else.  But they are safe because they will protect you from the greatest retirement risks:  Longevity risk, inflation risk, sequence risk, and market risk.  But I'm neither licensed nor registered to give more than just general money advice [since 1991- see below from https://brokercheck.finra.org/search/genericsearch/grid"]

So here is my question:  Do you really feel safe taking advice from a person who isn't properly trained, licensed, registered and regulated, who knows nothing about you and apparently very little about the latest financial strategies?  Would you choose someone with 9 years of experience or four decades of experience?

2. Orman seems unaware that there are at least Two Stages to retirement planning.  Stage One is the Accumulation Phase, Stage Two is the Distribution phase.  She is stuck in Stage One.

Stage One is like a game of checkers with essentially two moves:  

• Save as much as you can every month.  
• And do it for a long time.  

But then in Stage Two it becomes a game of chess; there are many more moving parts, each with their own rules and strategies.  What if the questioner follows Suze's advice, goes all in the market and then loses another 15-20% this year?  And was planning to retire now??  Terrible advice.

She also seems unaware of functional asset allocation (Of course, that would necessitate spending a lot of time learning about the client and designing a plan.  Which doesn't work if your goal is simply mass appeal and self-promotion.).  At least these three functions must be planned for:

Most of us advisers refer to these as "buckets:

• The Liquid Asset Bucket- this is essential.  Unless you already have an emergency fund of 3-6 months' budget you have no business investing in the stock market.  I see this happening a lot right now (not among my clients):  You've put money in your 401k, have lost your job and have to raid your now shrunken 401k to meet expenses.  And pay extra taxes!
• The Income Bucket- This is the most important bucket, not because I say so but because in study after study retirement satisfaction and security are highest when the retiree has more than sufficient monthly lifetime cash flow.  The risk pooling and longevity credits of income annuities (typically supplemental income riders to indexed annuities) are virtually impossible to duplicate elsewhere.  I've put this challenge out a couple of times in the trade press:  Show me how you would guarantee equal or greater lifetime cash flow with $1.0 mil.  No responses. 
  So for now ignore everything but the orange and green boxes below.  A better alternative to this income annuity would have to guarantee more than $154,284 per year in ten years.  (Or $101,670 in 5 years of deferral.  Choose your year.)  What if the market is flat for the next 10 years like it was after 2000 (13 years, actually)?  Or lower?  If you withdrew 15.42% you would be out of money in 7 years!
  
  
  
  (the specific indexed annuity in this illustration is the IncomeShield10 from American Equity)
  
  
• The Growth Bucket-  Depending on the client and the state of the markets, indexed annuities can shine here too.  Regardless of the investment, the key is some kind of risk management.  Orman, of course, knows nothing about the questioner's current portfolio risk, rate of return needs nor time horizon.  Which is why her advice is dangerous.

Insist on evidence and understanding from anyone who gives you financial advice.  And really?  You're going to take advice from someone just because they're famous?  Bernie Madoff was famous.  Sam Bankman-Fried is famous.  Instead, use local, licensed, independent fiduciaries with a lengthy history documented with the proper regulators:  https://adviserinfo.sec.gov/individual/summary/2510814

Gary

Your Constructive Comments are Welcome!

-30 + 43 = 13

This is a mercifully short blog just to drive home a few points.
First, the heading

-30 + 43 = 13

is indeed a myth, it is false . . . if we're talking about rates of return.  The correct math is this;

-30 + 43 = 0 or, more precisely, -30% + 43% = 0% return for those two time periods.

Suppose last month you invested $1000 in Bitcoin and by the end of the year your share is worth $700, a 30% loss.  If next year you gain 42.85% you would be back to even (700 x 1.4385 = 1000), a zero rate of return. 

In frothy markets like we have currently, everyone is an investment genius.  But our selective memory for achieving double digit returns doesn't accurately project over the long term.  Here are the keys to staying afloat and avoiding herd mentality:

1. Take all ego and emotion out of your investment decision making.

2. Remember your goals.  Very few people come to me with a goal of making as much as possible, especially after we work through what that really means to them.  Over what time period?  Compare to what?  Starting with what and adding how much periodically?  And, most importantly, why?  So you can buy a mansion in Paris that you can't visit?

3. Stick with the plan.  If you've done your Expense Plan, with all your dreams and goals built in to it, and our plan achieves those goals with very little risk, do you really want to let your lizard brain kick in to start running the show?

4. But be flexible.  Sometimes new hazards as well as new opportunities will present themselves and we'll have to adjust, that is, without succumbing to shiny object syndrome or FOMO (fear of missing out).

One of my favorite motivational speakers, Jim Rohn, once said that we have two choices in life, discipline or regret.  It took me many years to understand and absorb that somewhat grim prescription.  Words will fail, you just need to examine and initiate your own disciplined efforts.  What gives your actions power is the order in which you make them.

Look at your heart, for example, and the astonishing daily discipline with which it keeps you alive.  It isn't suffering or complaining at the effort (unless you have heart disease) or wishing it could just stop  and watch some TV.  Its most important task is keeping you, and itself, alive and healthy.  

So, what's most important to you?  Wouldn't it be worth a discussion with someone expert in getting specific with your goals, plans and dreams?

https://calendly.com/g---5 

Your Constructive Comments are Welcome!

EVERYONE SHOULD DO ROTH CONVERSIONS

I should point out, again, that the titles of these blogs are Financial Myths.  Especially this one.
Conversions from your pre-tax retirement accounts such as:

• Traditional IRA
• SEP IRA
• 401k
• 403b
• SIMPLE IRA
• TSA. etc.

must be calculated every year to be sure you don't bump yourself up into the next tax bracket . . . except sometimes.  For example, raising your Federal marginal tax rate from 10 to 12% isn't a big deal, normally.  Unless you're on Social Security and that causes your Social SEcurity to become taxable.  At higher income levels it's not a disaster if the Roth conversion bumps you from 22% to 24%, the upper limit of which is $164,925 for single filers, $329,850 for joint filers.

But assuming Roth conversions make tax sense, what do you do with the money?  Where do you invest it?  How?  In many cases the answers are diametrically opposed in terms of investment strategy.  Let's focus on two examples:

**Background #1:  You don't really need the money in your $500,000 IRA that you rolled out of your 401k when you quit work at age 60.  But you know it is a disaster to pass pre-tax retirement accounts to your kids.  Until age 70 you plan to live off cash, capital gains and rental income.  When you start Social Security at 70 you plan to stop taking capital gains in order to reduce its taxation.  (You're delaying Social Security until 70 because when you took the https://www.livingto100.com/ calculator it indicated your mortality age at 94, well past the breakeven age of 83)
Your Roth Conversion Strategy-
a. Convert as much as you can each year up to the top of your 24% bracket.  Why?  Because taxes are going up. 
b. This is also your gift to your kids, taking care of the taxes for them.
c. Invest very aggressively for the long term.  This will easily recoup the taxes you've paid.
Now you'll have a spending cushion that you can tap if you need it without affecting your Social Security taxation.  And when the kids inherit, they'll pay no tax on the Roth funds.

**Background #2:  You've been very conservative in savings and budgeting and if you can just meet your budget throughout retirement you'll be OK.  You need every penny, can't afford losses, and want the assurance of adequate, guaranteed lifetime cash flow.  You quit work at 60 because it was killing you.  You have a nice pension which, right now, is enough to meet your budget.  But it has no inflation protection.  You still have great longevity.  You plan to spend down your excess cash savings to bridge the gap between age 67-70.
Your Roth Conversion Strategy-
a. Convert just enough each year to stay in the 12% bracket.
b. Over the next ten years put it into a Roth IRA income annuity that accepts premiums after the first year. 
c. Once your Social Security kicks in you will need to reduce or stop the conversions to keep Social Security totally or at least partially tax free.
d. Turn on the annuity income in 15-20 years, which will be tax-free and guaranteed to last your lifetime.  It will also have no effect on taxation of your Social Security benefits.  And it will be welcome step-up in income for your later years.  In the meantime your principal and interest credits are protected.

Naturally, all the rules could change in the ensuing years.  Or even this year.  And there are a virtually infinite number of "Backgrounds" we could consider.  I like these because they're based on real people and result in vastly different strategies.  Disclaimer:  Even if one of these examples mirrors your situation exactly I haven't detailed every thing you need to consider because I risk making this blog a sleep aid.  It is well worth the time and expense to consult with your adviser to be sure you make no mistakes.

Your Constructive Comments are Welcome!

Financial Advisers Keep Their Clients From Procrastinating

Well, all know this isn't true.

But it isn't your fault.  This last year Gary Duell was the procrastinator.  None of the smartest people in the room (not including yours truly) could agree on what was going to happen and what to do about it.

 

Now that a major source of craziness will largely be out of the picture, I'm more comfortable with recommendations for this year:

 

1. Focus on Goals and Cash Flow-  block out the massive media intrusions into your lizard brain, the eat, lust, fight, flight instincts.  Focus on your goals and the plans in place- or that we're working on -to achieve them.  Review your budgets and determine which expenses are in your control and which don't contribute to your goals.  Then eliminate them.
2. Manage Risk- note that I don't say avoid risk, commonly defined as volatility.  As I say repeatedly in my classes, when you're accumulating savings volatility is your friend due to dollar cost averaging.  When you're spending, or on the cusp of spending, your retirement funds then volatility is your enemy.  Manage where and to what degree you allow volatility in your portfolio.  This usually consists of either algorithm-based risk managed ETF and/or third party backed guarantees.
3. Remember Taxes!  Taxes, not healthcare, will be your largest retirement expenditure (on average).  Do you have a plan for future [higher] taxation?
   
4. Be a perpetual student.  Recent studies have shown investors procrastinate 5-10 years before implementing our advice.  That hasn't been my experience.  But I get chagrined if my clients wait 5-10 months!  Especially now.  So never stop listening and learning.
   
5. Seek good returns but follow evidence and ethics.  As data becomes easier and easier to collect and analyze, the bad actors in our economy will be taken out of the game.  It's inevitable.  I am really encouraged by the surge in ESG, SR & Impact investing.  Most of us know without being told that lying, cheating and stealing never work out well in the end.  Companies that foist their costs onto the environment or other people will either evolve or die.  Don't invest in them.
   
6. Take care of your physical, mental and social health.  Without a mind and body it's tough to enjoy anything.  Keeping connected to others, to nature and things outside yourself, your odds are improved!
   

Your Constructive Comments are Welcome!

MYTH : Trump's Social Security Tax Holiday Will Help Employers and Their Employees

Well, this is a solid myth, that's for sure.  Smart and ethical CPAs are recommending that their clients not just walk, but sprint away from the Memorandum Deferring Payroll Tax Obligation.  Let me preface this by declaring that I'm not an attorney and that all of this is my opinion.  But I can read and think. 

First, a little background.

The current IRS Commissioner is Trump appointee Charles Rettig, who, during his confirmation hearing, "told lawmakers he would ensure that the agency is 'impartial and non-biased from top to bottom' and follows the law."  

This seems unlikely, given that Rettig's Beverly Hills law firm specialized in defending wealthy clients against taxing authorities.  Since taking over the IRS, Rettig has slashed 4000 employees, including 19% of enforcement and compliance staff.  Like every single other Trump appointee, Rettig was selected for his ability and enthusiasm to vandalize the very agency to which he was appointed.

So Trump's Memorandum Deferring Payroll Tax Obligations allows any employee with bi-weekly pay of less than $4000 to defer paying of their 6.2% share of Social Security tax.  This appeals to two kinds of Trump supporters:  the wealthier ones who hate Social Security and, including this group, the less well-off supporters who hate taxes and government in general, despite all the benefits they enjoy as a result.

The key word here is "deferring".  What could make this tax easier to pay in the future?  Some tax people are rightly claiming that only Congress has the ability to waive such taxes.  But they've already granted that right to the President in the event of a national emergency, which Trump declared in April due to the [fake, according to him] pandemic.  

In fact, it will simply put employers at risk of fees and penalties.  On top of that, I've seen nothing in the regulations that prevents employers from going after former employees for reimbursement. According to our Senator & Senate Finance Committee ranking member Ron Wyden, "Donald Trump's scam is obvious — juice paychecks before the election and sock workers with a massive tax bill early next year when he’ll be out of office or never have to face voters again. While many businesses are unlikely to go along with Donald Trump’s fake tax cut, billions could be drained from the Social Security trust fund. This scheme is designed to give Donald Trump a talking point — it won’t benefit workers in any way.”*

Whether you're an employee or an employer, don't be seduced by this nonsensical campaign trick.

 

*Thanks to Think Advisor for their excellent article on this and choice quotes.

Your Constructive Comments are Welcome!

Follow Your Gut

I want to profusely thank Brian Love for his excellent Behavioral Finance article in the latest issue of Financial Advisor IQ (The Incredible "Shrinking" Advisor).  Love's article reiterates why the most important aspect of our profession is not securities analysis or projecting rates of return.  So I title this post with the myth that you should follow your gut when choosing investment options.  To the contrary.
Shown in the graphic below are the six primary mental and emotional biases investors suffer.  Which cause them to experience worse returns than unmanaged indices.  Wall Street & the financial media primarily exploit these biases rather than curing them.
Personally, I think the most destructive is the 5th one, a preference for Lotteries.  Just look at the billions that flow into national & local government sanctioned lotteries, for example.  Like any other bias-subject commodity on the market, this bias causes lotteries to be way over-valued.


Your Constructive Comments are Welcome!

All Financial Advisers Are Screened by State and Federal Regulators

I hope it isn't getting too redundant for me to remind you gentle readers that the headings of these posts are MYTHs.  This one is no exception.  Sort of.

Depending on who they work for and the kind of work they do, financial advisers are indeed somewhat screened by regulators.  After all, there are education, training & licensing requirements both up front and annually.
But does this mean that you can just trust any licensed "adviser"?  According to a recent article in Financial Advisor (a Financial Times service), the answer is . . .  "no".  The title of one article appearing in today's issue is, "Half the FAs Fired for Misconduct are Rehired in a Year". (by Alex Padalka).  He goes on to say,  "Getting fired over misconduct doesn’t necessarily mean an advisor’s career is over — in fact, almost half of them are back and advising clients within a year of termination, according to a study cited by WealthManagement.com".  In addition, 8% of FINRA registered advisors have a "disclosure event" on their records.  [I would provide both links but both sites are subscription services]  Finally, they found that "some firms specialize in misconduct and cater to unsophisticated consumers".  Amazing.

If I were looking for an adviser* I would want to use every tool available to screen them.  So should you.  In addition to simple Google searches, here are two essential background check sites:

1. BrokerCheck, and
2. The Division of Finance and Corporate Securities (Oregon)

Your Constructive Comments are Welcome!
*You'll note I spell "adviser" ending in "er" while most places you'll see it spelled "or".  The regulators want us to spell it "adviser".  So I do.

ADVISERS DON'T MAKE ANY DIFFERENCE

Well, according to a recent survey by John Hancock Retirement Plan Services (as reported by the American Retirement Association) there is "an impressive retirement preparations gap among those who use the services of a financial advisor"(sic) and those who do not.

Here are some stats:

• Regarding 401(k)s, those with advisers were more than twice as likely to be saving the maximum (28% vs. 13%) as those without advisers.
• Those with advisers were more than twice as likely to be ahead or on track in retirement savings (70% vs. 33%).
• And the same for those who knew how much they needed to save to be on track:  33% vs. 14%.
• And yet again with saving for emergencies:  58% with an adviser had emergency funds.  Only 26% of those without advisers did.

The sample size was a very statistically valid 2000.

I take these results with a grain of salt, mostly because they are what I would like to hear.  Based on my own clients, those who are doing well already are also more likely to seek, and follow, my advice.  So it's possible the same is true of the 2000 folks studied by Hancock:  They already suspected they were doing OK but just wanted to be sure that was true, and, to avoid any mistakes.  That is the most often repeated explanation when I ask new clients why they came to see me.  So I don't think we advisers can take all the credit for the better results our clients achieve.

But see how I can make a difference for you:  http://garyduell.com/services/

Your Constructive Comments are Welcome!

ADVISERS DON'T MAKE ANY DIFFERENCE

Well, according to a recent survey by John Hancock Retirement Plan Services (as reported by the American Retirement Association) there is "an impressive retirement preparations gap among those who use the services of a financial advisor"(sic) and those who do not.

Here are some stats:

• Regarding 401(k)s, those with advisers were more than twice as likely to be saving the maximum (28% vs. 13%) as those without advisers.
• Those with advisers were more than twice as likely to be ahead or on track in retirement savings (70% vs. 33%).
• And the same for those who knew how much they needed to save to be on track:  33% vs. 14%.
• And yet again with saving for emergencies:  58% with an adviser had emergency funds.  Only 26% of those without advisers did.

The sample size was a very statistically valid 2000.

I take these results with a grain of salt, mostly because they are what I would like to hear.  Based on my own clients, those who are doing well already are also more likely to seek, and follow, my advice.  So it's possible the same is true of the 2000 folks studied by Hancock:  They already suspected they were doing OK but just wanted to be sure that was true, and, to avoid any mistakes.  That is the most often repeated explanation when I ask new clients why they came to see me.  So I don't think we advisers can take all the credit for the better results our clients achieve.

But see how I can make a difference for you:  http://garyduell.com/services/

Your Constructive Comments are Welcome!

THE DEVIL IS IN THE DETAILS

This blog heading is colloquially true, especially when it comes to Investment Adviser contracts.  A recent review of compliance violations found- first of all- that 22% of advisers didn't have contracts with their clients.  A contract isn't required unless a fee of some kind is collected from or owed by a client.  So if you are paying a fee of any kind- flat, hourly, percent of assets, performance based -a contract is required.

So what devilish details should you watch for in an advisory contractual relationship?  Here's a short list:

• First and foremost:  The absence of a contract altogether!  Do you really want to work with and pay someone without formalizing rights and expectations on paper?
• Any provision that compensates the adviser based on "a share of capital gains upon, or capital appreciation of, the funds- or any portion of the funds -of the client. (Sec. 205(a)(1) of the Investment Advisers Act).  I see these so-called performance fees in contracts all the time.
• Mandatory arbitration clauses.  These have become so common that the average person doesn't blink an eye signing them.  By doing so, you're giving up- in most cases -the right to sue individually or to be party to a class action against the adviser.  My contract only has a voluntary mediation clause; we agree to sit down and talk about a dispute before consigning our souls to the lawyers.  Never had to use it.
• Be aware of with whom it is you're actually contracting.  Is it the adviser himself or some obscure LLC or other obfuscatory entity that your adviser can hide behind?  My clients contract with me, and only me, directly.

Your Constructive Comments are Welcome!