Thursday, July 23, 2015

Individual Investing the 'Smart Club' Way ... Government Provided Social Security and Medicare Benefits Must Be Supplemented with MOM (My Own Money)

Here are a few words that a 'Smart Buyer' lives by ... Caveat Emptor, aka Let the Buyer Beware.

And here are a few more ... Self Reliance is safer than Government Reliance.

In both instances it's a simple MOM thing.

A 'Smart Buyer' also knows the answers to two important questions about his investment adviser/broker --- (1) Does the adviser/broker have his skin in the same game? --- that is, does he invest his own money in the same way that he proposes to invest the money of the Smart Buyer? (2) How much is the 'pro' paying himself, both directly and indirectly, from the money the Smart Buyer entrusts to him for investing purposes?

A 'Smart Club' buyer quickly learns to do what's in his best interests. He also knows two critical facts: (1) how the investment adviser invests his own money and (2) how much he is being compensated, both directly and indirectly, by the buyer.

And a smart buyer doesn't follow blindly the advice and counsel of sales people disguised as investing experts who offer to sell to the unsuspecting customer their preferred and highly commissioned products. These products are 'pushed' by the seller because they pay the selling 'adviser' the highest commissions. It's almost never because the products represent the best investment for the buyer. A smart buyer knows this and is guided accordingly.

To repeat, it's Caveat Emptor (Let the Buyer Beware) whenever a seller and a potential buyer interact. So the smart buyer who is forewarned is sufficiently forearmed.

How your adviser can rip you off --- and you'll never know tells has the tale of too many individual investors:

"I talk to dozens of people each week about their investments. After a while, you begin to notice a peculiar similarity among many of them. They've had the same retirement adviser for years, yet they strongly distrust that person. . . .

They know they pay too much in fees. They know high costs hurt their chances of retiring on time. But they find it hard to break long-standing . . . relationships.

Department of Labor Secretary Thomas Perez . . . wants anyone calling himself a retirement adviser — such as stockbrokers, insurance agents and investment managers — to act in their clients' best interests. {NOTE: Here's my take. Formally, that would create a formal fiduciary relationship as opposed to the typical buy-sell arrangement. Practically it would mean little, if anything.}

Tooth and nail

It's that simple, yet the industry is fighting the proposed rule tooth and nail. Imagine proposing a law that says the opposite — that retirement advisers do not have to put clients first. . . .

Many people mistakenly believe that a fiduciary standard already is common practice, perhaps even the law. Nearly half of Americans believe investment advisers put them first and nearly 60% believe that retirement advisers going by the titles "financial adviser" or "financial consultant" do so as well.

Unfortunately, it's just not true. . . .

The industry is loudly proclaiming to any and all who will listen that the net effect of the coming Department of Labor ruling, should it be approved, is that everyday retirement investors will no longer have access to much-needed retirement advice.

As you might have guessed, when it comes to Washington the opposite is actually true. The business of Wall Street isn't about giving personalized, careful advice. It's about gathering assets as quickly as possible, slapping on stiff fees and hoping that nobody complains. . . .

Putting clients first is what people intuitively believe is right. It's time to put those words into action and ensure that our retirements aren't eaten alive by a retirement industry happy to keep us all in the dark."

{NOTE: Caveat Emptor is the approach followed by the 'Smart Buyer.' He realizes that he sits on one side of the bargaining table, and that the seller will sit on the other side. It's that simple.

So whether the seller is called a fiduciary, a sales person, a bank lending officer, a college recruiter, a car dealer, a realtor or something else, he always has motivation which is at variance with that of the buyer. He's a self interested compensated agent of the seller --- not that of the buyer. And that's fair enough for the 'Smart Buyer' since he knows the way the game is played.}



It's caveat emptor all over again as future Social Security and Medicare benefits will need to be supplemented by private savings.

A 'Smart Buyer' will want to retire comfortably and live out his years without worrying about financial matters.

That means he won't rely exclusively on Social Security and Medicare benefits. He will depend on his younger self to take care of his older self when retirement time comes --- and it will come sooner than his younger self thinks it will.}

Social Security disability fund now faces 'urgent threat' of 2016 shortfall: trustees has this alarming but unsurprising information about the forthcoming financial shortfalls of Social Security and Medicare:

"The Social Security disability-insurance program faces the “urgent threat” of reserve depletion in late 2016 unless Congress acts to replenish the fund . . . . Trustees said that Congress should take “prompt corrective action” to shore up the disability fund. In the past, Congress has diverted tax revenue from Social Security’s main retirement program to allocate more revenue to disability benefits . . . .

Treasury Secretary Jacob Lew said he was confident that Congress would come up with a fix. {NOTE: Taking from Social Security to fund the Disability program's shortfall will only hasten the Social Security fund's insolvency.}

If the disability fund is depleted, it will be able to pay only 81% of benefits.

Social Security’s combined funds will be solvent until 2034 . . . .

The Medicare hospital-insurance trust fund will be able to continue paying full benefits without any changes in the law through 2030 . . . .

Social Security and Medicare together accounted for 42% of federal spending in fiscal year 2014. {NOTE: As recently as 2010, the combined total was 'only' 36% of federal spending. The trend definitely is neither the future retiree's nor the future taxpayer's friend.}

The programs face long-term challenges as millions of baby boomers reach retirement age.

Total Medicare costs will grow from about 3.5% of gross domestic product in 2014 to 5.4% of GDP by 2035."

Summing Up

(1) Whether the seller is designated as a fiduciary or not by government regulators doesn't change one unassailable fact. He's a self interested seller and if he's being compensated based on commissions and transactions, he's not objective, even if he is knowledgeable about investing, which most sellers aren't.

And very few of these sales personel disguised as investing experts have much, if anything, of their own 'skin invested.' It's the skin of the buyer that they want to get.

Thus, the knowledgeable 'Smart Buyer' will adopt and internalize Caveat Emptor as his way of buying and investing.

He knows that a low cost and transparently compensated adviser, and one who is already invested in the same way he's advising the buyer to invest, is the 'Smart Buyer's' best choice.

(2) And long before he reaches retirement age, he will fully understand and internalize that Social Security and Medicare are continuously becoming less reliable as the primary financial security providers for his retirement years.

Thus, the 'Smart Buyer' will save and invest in a 401(k)/IRA during his working years in order  that he will be able to live comfortably when the soon-to-come oldster years arrive.

Each of us needs to make a serious effort to become a 'Smart Buyer.' Welcome to the 'Club.'

That's my take.

Thanks. Bob.

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