Variable Annuities. I HATE Variable Annuities.

Probably the most surefire sign that you should flee an existing or potential financial adviser is if he or she tries to sell you on variable annuities.  Never, ever, ever sign up for one of these.  For starters, it mixes and matches insurance with investments, which is unnecessary.  Next, the fees are outrageous.  Often 10% of the principal invested.  So they make great sense for the person selling them, but are awful to the buyer.  Finally, they are wildly complex.  Just try reading through the contract.  Simply put, few people will have any idea what they are agreeing to.

There is probably one case in a thousand where the variable annuity makes sense, but don’t gamble that you are that case.  Just stay away.

–Tim Shields, UBS

March Madness

Like in many workplaces, we have a low-stakes March Madness pool going in my UBS office.  Winner gets $50!  No, gambling is never a ‘financial plan’, but at low stakes it can be fun.  My own view is that small purchases of lottery tickets and similar games are ok, so long as the amount spent is truly de minimus… inconsequential to the person.  Essentially, it becomes an entertainment expense, not a financial strategy.

By the way, I am one of those who believes that no one will ever have a perfect bracket.  The odds against it are staggering; incomprehensibly low to the human mind, except to say the odds are zero.  It’s impossible.  To perfectly predict the tournament, a person would have to correctly guess the outcome for 67 games.  Assigning even odds to every game, the odds of a perfect bracket are 1 in 147,573,952,589,676,000,000.  I believe that is 1 in 147.6 quintillion.  Assuredly, the odds are a little better… it’s not exactly unreasonable to assume that a #16 vs a #1 is not a 50/50 game.   But the most generous assumptions you can make won’t push the overall number out of the ridiculous realm.

But does anyone have any interest in an NCAA Tournament that doesn’t include Stanford?  😉

Cost Management

No matter how much income a household has, there just never seems to be enough.  This is as true of millionaires as it is of those struggling paycheck-to-paycheck on minimum wage.  I don’t mean to equate all expense management issues: there is a far bigger difference between determining whether to pay the rent or buy groceries versus deciding between vacation in Bali or leasing a Porsche.  The first situation is tragic, the second is absurd.  In both cases, though, the common thread is expenses matching incomes.

There is a tendency for families to match an income increase with a dollar-for-dollar increase in expenses.  Or worse.  Sometimes new items are added to the cost base that actually outstrip the income gains.  Perhaps one of the best money life hacks is a measured approach to lifestyle changes as income improves. For example, a $100 per week post-tax income improvement being met with a $40 per week addition to expenses, and a $60 per week addition to savings and investment.  Holding lifestyle relatively flat while income improves is a terrific way to build wealth.

–Tim Shields, UBS

Retirement? You’re on Your Own

One of the more frightening, if under-reported news items of the week as the GAO report that said the average 401k balance of a 60-year old was $160,000.  That is horrifying, as that is nowhere near enough to sustain a person through a 20-to-30 year retirement.

The scale and impact of this problem will only get worse as fewer and fewer Americans are on track to receive any kind of guaranteed pension in their retirement years.

There is no way to emphasize enough the need to start prepping in your younger years.  401ks and 403bs should be a regular part of your savings plan, and funded to the max.  IRA accounts (held at a respected brokerage company like Schwab or Fidelity or UBS) should be funded annually to the legal limit.  Home debt should be paid down.

As hard as it is to save today, it is far harder to generate income late in life.