The credit markets meltdown

It was disheartening to see the Government pass the $700 billion bail out plan last week. Supposedly, the intention of the plan is to stabilize the credit markets and ultimately restore the American consumer's ability to get the credit that we "need" and "deserve". Immediately after the bill was passed by the Senate, and prior to it's passage in the House of Representatives, one misguided senator justified the Senate's decision by explaining that if consumers were unable to borrow money, they would be unable to purchase goods such appliances and other household items. What I'd like to know is, "What ever happened to paying cash"? Credit Cards didn't even exist prior to the 1970's, and yet many of us are so frightened by the prospects of being denied credit, that we are willing to give even more power to the Government. Yes, we might have been given a brief reprieve, but creative financing and credit extensions are not the solution to our long term problems. And, as we shift personal responsibility from the individual to the Government, we are yet another step closer to Socialism.

No Load Mutual Funds vs Load Mutual Funds ,and the on-going debate.

What are the differences between No Load Mutual Funds and a Load Mutual Funds, and which is better?

No Load Mutual Funds are mutual funds that don't carry a sales commission. They're typically found at discount brokerage firms and can be purchased directly without using the services of a broker.

Load Funds carry a sales commission and are sold by Brokers or other Financial Professionals employed at full-service brokerage firms, banks, and other institutions. These funds are typically available to individual investors in 3 share classes:
• The A share carries an up-front sales charge to purchase the fund. This charge usually falls within 4.00% and 6.00%. A person spending $1,000 to purchase A shares in a fund that has a 5% sales commission would be investing $950, after paying the sales charge. Load Funds also have a fee called a 12b-1 fee. This fee continues to pay the broker between .25% and .35% annually until the fund is sold.
• The B share has no up front charges, but carries a back-end load that diminishes over time, usually 5 or 7 years. It also has a higher 12b-1 fee imbedded in its annual cost. After the fund is held for a specified length of time, the 12b-1 fee is reduced to that of an A share. Like the A share, this fee continues to compensate the broker until the fund is sold. Since it carries no up front charges the B share looks more attractive than the A share, at first glance. But, the selling restrictions and higher 12b-1 fee makes the B share less preferable than the A share.
• The C share carries no up front sales charge, and has a level 12b-1 fee of usually 1 percent. This fund must be held for a specified period of 12 to 18 months, or the buyer is subject to a back end load. The 12b-1 fee remains at 1 percent until the fund is sold.

No Load Funds and Load Funds both have underlying administrative fees. These fees defray the operational costs of the mutual fund companies. Which type of fund to purchase depends on the individual investor. If you are a do-it yourselfer, understand or are willing to learn about investing, and are cost sensitive, then No Load Mutual Funds are the likely candidate. On the other hand, if you believe that your broker has your best interest at heart, you don't understand investing and aren't inclined to learn, then perhaps Load Funds are more suitable.

I would like to offer a few words of caution. All mutual funds, both load and no load, are basically invested in the same "stuff", i.e. stocks and bonds. The returns on the underlying investments are the same whether you own a No Load Fund, or a Load Fund. For this reason, the investor should be price sensitive and aware of what he is actually paying. Over the long run, the erosive effects of fund expenses and sales commissions can be detrimental to a comfortable retirement.

The trouble with commissions

I began my finance career working for a major brokerage firm as a Financial Advisor trainee. The first phase of my job was to obtain the licenses to sell investments and insurance. Upon receiving my licenses, my next task was to obtain clients and create investment portfolios with the numerous products available through the firm. Along with my peers, I was given a sales quota, a desk, and a phone. The firm appeared indifferent about which investments were selected, it's concern was only that I produce. The company had a variety of investment products that paid varying degrees of compensation to me. So far so good...

As I commenced the process of gathering clients, I began to experience internal conflict. Early on, I had decided to use a fee-only platform in which clients were charged a flat fee rather than a commission. I was having some success with this platform, but found myself discounting fees to a level that I believed was appropriate. I noticed that some of my peers were selling Annuities which carried higher commission rates than other Investments. Still others were selling a more expensive share class of mutual funds than was required. It dawned on me that this was an inherent flaw built into the Advisor pay structure. In the area of self-interest the incentive to use higher commissionable products was creating a conflict of interest between the broker and the client. The question arises, " Is the investment I'm selling to the client in his best interest, or is it in my best interest. After several weeks of agonizing over this issue, I decided to exit the firm and seek a model that was in-line with my value system.

Retirement Number

I recently read an article discussing the ING television ads which show people performing their daily activities while carrying a sign under one arm. On each persons sign is a 6 or 7 digit number that represents that persons required nest egg figure. The author explains that rather than focusing on a specific number, the saver should focus instead on how much income will be needed, and then plan accordingly. He suggests that the reader use an online retirement calculator to derive his specific income need based on various data inputs.

I agree with the writer that focusing on retirement income makes more sense than trying to derive your magic nest egg number. But, I would challenge the reader to take the concept a step further. Based on my experience with clients, it seems that their main concern is to maintain the same standard of living post-retirement that they was attained during their working years. For many, this will present an enormous problem. In attempts to maintain present lifestyle demands, many are postponing their retirement savings. And, as lifestyle demands continue to increase, current paychecks have become barely sufficient to keep up with the monthly bills. Many are subsidizing their financial needs through a variety of methods including refinancing, home equity loans or lines of credit, borrowing on credit cards, and financing as much as possible. Such demands on present and future income makes calculating a retirement income an unrealistic fantasy.

So, here's the challenge. Suppose that you have no mortgage, loans, or monthly credit card or car payments. Run the calculator again (without all of these payments) and you'll discover that your retirement income requirements are dramatically reduced. Retirement begins to look like a tangible concept that almost anyone can achieve.

The following steps provide the means for you to lower your present and future income requirements:

(1) Separate your wants from your needs.
(2) Stop borrowing money.
(3) Develop a budget and stick to it.
(4) Pay off your debt and stop creating more.
(5) After your debts have been eliminated, begin saving as much as you can for retirement. Ten percent is a good place to begin.
(6) Persevere

I agree that this process appears to be too simplistic. But, implementing the process and seeing it through presents quite a challenge. However, I can assure you that it is an endeavor that is worthwhile, and one that will increase the odds that you attain the retirement of your dreams.

Why should I plan?

Financial planning isn't simply about socking away as much money as you can during your working years and then hoping that you don't run out in retirement. Rather, it provides a means to attain the things that are important to you in the present and throughout your life. Not too long ago, I read a quote that went something like this; "If you fail to make a plan, you'll be working for someone who has a plan for you." Now, if you're one of those few people who actually knew what they wanted early in life and then went for it, then this quote likely doesn't apply to you. For the rest of us, it rings true. If we take it a step further, we find that this message applies to many facets of our personal lives as well. While businesses spend countless hours and millions of dollars annually to find ways to get us to part with our money, most of us toil away at jobs we don't like to pay for things that we don't need and all the while wondering why we're unhappy. Happiness isn't found in the accumulation of stuff and at the whims of creditors. Rather it's found in taking control of your life and being responsible for your actions. Begin living your life on purpose. Develop a plan, and discover how rich and fulfilling life can be. In doing so, you'll stop working for creditors and begin working for yourself.

So, what wrong with making payments ?

Most of us are currently making payments on items for which we couldn't pay cash. So, what's wrong with making payments? For some of us nothing. But, for most us a lot! Here's the problem. Making payments has become a way of life for many Americans. Many are so mired in debt that it is robbing us of our financial peace. Now, my concern isn't about mortgages, rather it's about the average American's addiction to debt. Instead of asking how much something costs, we begin by asking what the payments will be. When I was a child in the 1970's, the extent of most peoples indebtedness was their mortgage. In the 1980's, as the price of auto's increased, financing became more common. Credit cards also began gaining in popularity since they made items that for most of us were unaffordable, affordable. We no longer had to delay our satisfaction!
Fast forward to 2008, it's now normal to have two car notes, a mortgage, a second mortgage or home equity loan, and several credit cards. Most households require two incomes just to stay ahead of the creditors! And, you'd better not be late on the payment or your rates will sky rocket. Many people believe that they are in so far over their heads that there's no way out. So, what are we to do? We've got to get back to money basics, which include spending less than you make, saving for emergencies, budgeting, and delaying gratification. If you're unsure of where to begin, here's the first step, "Stop Borrowing !"

So, how much should I be saving for retirement?

You're told that should be saving as much as you can for retirement. So, you contribute diligently to your employers retirement plan. Maybe you also maximize your annual IRA contribution, all in an attempt to hopefully have enough saved so that your money won't run out in your retirement. But how much will you need, really?
In order to develop an understanding you should first create a picture of what you want your retirement to look like. For some, retirement means travelling abroad and sampling exotic foods. For others it means being home more and spending time with the family. Obviously, our required nest eggs are as varied as our retirement dreams.
Once you've created your picture of retirement, ask yourself what it would cost annually in todays dollars and additionally, how many years you expect to live in retirement. Armed with this information, google "retirement calculators" and try your hand at a couple. You will likely have to supply the following figures; how much you have currently saved, how much you're contributing each month, and how many years you have left before you retire. The calculator will tell you if you are saving enough, and if not, how much more you should be saving monthly.
Try changing a few figures in your calculations. Try putting retirement off a couple of years, and/or change the monthly contribution amount.
While there are many additional factors to consider, this will give you a basic idea of where you're at on the retirement track. Hopefully you also discovered how making a few subtle changes can have a huge impact on whether or not you attain the retirement you'd envisioned.
In summary, this article has attempted to provide a basic understanding of how to determine and save for your desired nest egg. For some it will provide a wake up call, others will say it's too simplistic, and still others will say that the results are unrealistic. Whatever your reaction, I'm convinced that most of us are capable of creating the retirement of our dreams, but it comes at a price tag.
It might even mean delaying immediate gratification in this era where we've been conditioned to live for today.