Get Smart About Your Money: A Conversation with Dan Solin

Posted by Anita Thompson, Editorial Director, Costco Publishing

Reprinted from The Costco Connection, with permission

 

From the volatility of the stock market to the low returns on savings accounts, how to handle one’s money is a common challenge these days. We turned to Costco member and New York Times bestselling author Daniel R. Solin, senior vice president of Index Funds Advisors (www.ifa.com), author and financial columnist with the Huffington Post and AOL, for his take.

Solin’s national bestsellers, The Smartest Investment Book You’ll Ever Read and The Smartest 401(k) Book You’ll Ever Read are available in trade paperback at Costco warehouses, as is The Smartest Retirement Book You’ll Ever Read, also available at Costco.com.

 

The Costco Connection: You stress the importance of asset allocation as key to maximizing one’s investments. What is asset allocation, and how do you determine what’s best for your situation?

Daniel R. Solin: Asset allocation is the division of your portfolio between stocks, bonds and cash. It’s critical for investors to have the correct asset allocation in their portfolios. It’s far more important than stock picking and market timing, yet investors spend much more time on these less important factors.

 

Fortunately, determining the right asset allocation is not difficult. There are many asset allocation questionnaires on the Internet. I have one on my website www.smartestinvestmentbook.com.

 

 

CC: You write that an immediate annuity is a good retirement vehicle. Could you explain what that is and why it’s a good choice?

DS: If you ask most retirees what they fear most, it’s running out of money. That’s where immediate annuities come in. With an immediate annuity, you give an insurer a lump sum. It gives you a monthly, quarterly or yearly payment for the rest of your life, or for the rest of your life and your spouse’s life, or for a specified length of time (like your expected lifespan plus a stated number of years).

 

You can also purchase a fixed or an inflation-indexed immediate annuity. Of course, you pay for the inflation protection. Your periodic payments will be as much as 30 percent lower than the ones you would receive for a fixed annuity that is not inflation indexed.

 

A prudent approach to immediate annuities might be to compute your monthly expenses, deduct income from all sources and purchase an immediate annuity to cover the difference.  

 

The industry leaders in low-cost immediate annuities are Vanguard and TIAA-CREF.

 

 

CC: What is a common mistake people make in their estate planning, besides not having a will?

DS: There are many mistakes people make in their estate planning. Here are the most common ones:

• Not taking advantage of trusts to avoid or minimize probate

• Not naming a beneficiary for retirement accounts (or not having the beneficiary designation current)

• Not creating payable-on-death accounts, or transfer-on-death registrations, which would automatically transfer ownership of cash or securities accounts to one’s heirs

• Not having a prenuptial agreement in place, particularly for second marriages or marriages that occurred later in life

 

 

CC: You have a chapter in one of your books which basically states, “Don’t trust the government.” What do you advise instead?

DS: Most investors don’t understand the awesome power of the government and how it can affect their retirement nest eggs. For example, it’s perfectly legal for the government to pass retroactive tax legislation going back as far as 10 years! Low-hanging fruit for this kind of taxation are 401(k) plans and IRAs.

 

Investors should be aware of the possibility that the tax rules for these (and other) investments could change dramatically. It might be prudent not to put all of your investment eggs in any one retirement basket. Instead, spread out your investments among 401(k) plans, traditional IRAs, Roth IRAs (if you qualify) and after-tax accounts.

 

CC: We’re in a season of turmoil economically. What’s ahead, and how should people prepare? What do you see on the financial horizon?

DS:We need to fundamentally change the way investors invest and even think about investing. There is no investment guru who has the ability to predict what will happen to the markets, to the economy or to the price of any individual stock.

 

Markets are random and efficient. What drives stock prices is tomorrow’s news, and no one knows what that news will be. Want proof? British Petroleum started the year with its stock priced at $60 per share. It’s now hovering around $30. Obviously, the decline was caused by the massive oil spill in the Gulf of Mexico. No one could have predicted that catastrophe.

 

You need to tune out short-term noise and focus on long-term data. If you have less than five years before you will need 20 percent or more of your invested funds, you should have no exposure to the stock market. If you have a time horizon of five to 12 years, you should take an asset allocation questionnaire and determine an asset allocation appropriate for you. It will range from a high of 100 percent stocks to a low of 15 percent stocks. Be sure your funds are invested in a globally diversified portfolio of stock and high-quality bond index funds.

 

Lastly, ignore the daily financial news. Just sit tight and benefit from the long-term returns you earn by participating in the capital markets.

 

 

Copyright 2010 The Costco Connection

 

 

The Smartest 401(k) Book You'll Ever Read

 

 

 

 

 

The Smartest Investment Book You'll Ever Read

 

 

 

 

 

The Smartest Retirement Book You'll Ever Read

Comments

[Jordan 5]

A lot will come out over time but the truth has been out there for a long time as well but that doesn't give you what you want so this dance just goes on and on.

[James Morgan - Puritan Financial Advisor]

It’s critical for investors to have the correct asset allocation in their portfolios. It’s far more important than stock picking and market timing, yet investors spend much more time on these less important factors.