Surprisingly, most Americans believed this to be true.  Even more surprising is why no one has clearly stated that “If you only save the maximum 401(k) taxable amount annually it will NOT be enough to retire on.”

Further debunking this myth, the February 9, 2011 edition of the Wall Street Journal featured the article, Retiring Boomers Find 401(k) Plans Fall Short.

Unfortunately, if you are one of the millions who believed this urban myth, the question is what do you do now to recover?

“The Math” – Do the math by creating a current budget of your living expenses.  Add to this gathering up your most recent social security statement, bank statements, credit card and mortgage statements, etc.  The next step is to call someone you trust – your accountant, your lawyer, your rich aunt (after all she must be doing something right) and ask them to help you find your “math teacher” or someone like me. Your teacher is someone who can help you to put your complete financial picture together and assist you in moving confidently toward the future.  Remember your teacher should be a “fee only” planner so they won’t spend your precious time trying to sell you something.

If you start now, you can create a plan that will work in your best interest and successfully guide you on a confident path to your retirement years. The important thing is for you to take control now and bid adieu as another financial myth bites the dust!

Good luck

Distinguished
In Fed We Trust: Ben Bernanke’s War on the Great Panic by David Wessel
13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon  Johnson & James Kwak
The Girl With The Dragon Tattoo by Stieg Larsson and Reg Keeland
The Girl Who Kicked The Hornet’s Nest by Stieg Larsson and Reg Keeland
The Girl Who Played With Fire by Stieg Larsson and Reg Keeland
The Elegance of the Hedgehog by Muriel Barbery
The Shadow of the Wind by Carlos Ruiz Zafon and Lucia Graves

Excellent
The Big Short: Inside the Doomsday Machine by Michael Lewis
City of Thieves by David Benioff
Gertrude Bell: Queen of the Desert by Georgina Howell

Good
American Wife by Curtis Sittenfeld
Angel’s Game by Carlos Ruiz Zafon
The 4-Hour Workweek by Timothy Ferriss
The Help by Kathryn Stockett
The Spies of Warsaw by Alan Furst
The Snowball: Warren Buffet and the Business of Life by Alice Schroeder
Mrs. Astor Regrets: The Hidden Betrayals of a Family Beyond Reproach by Meryl Gordon
Philanthropy Heirs & Values: How Successful Families are Using Philanthropy To Prepare Their Heirs for Post-Transition Responsibilities by Roy Williams and Vic Preisser
Unconventional Success: A Fundamental Approach to Personal Investment by David F. Swensen
Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment by David F. Swensen

Entertainment
This Body of Death by Elizabeth George
Finger Licken Fifteen by Janet Evanovich
Sizzling Sixteen by Janet Evanovich
The Lost Symbol by Dan Brown
Presumed Innocent by Scott Turow
The Assassin by Andrew Britton
Jack Reacher Series 1 – 4 by Lee Child

Don’t Bother
Psychology of Executive Retirement from Fear to Passion: Escape the Rat-Race & Save Your Life by Doug Treen
The Woods by Harlan Coben
The Spellmans Strike Again by Lisa Lutz
The 22 Immutable Laws of Marketing: Violate Them at Your Own Risk by Al Ries and Jack Trout
The Experience Economy: Work is Theatre & Every Business a Stage by B. Joseph Pine, II and James H. Gilmore
Nonprofit Investment Policies: Practical Steps for Growing Charitable Funds by Robert P. Fry, Jr.

Distinguished – Recommend to everyone
Excellent – Recommend
Good – Interesting, but not for everyone
Entertainment – Similar to a chic flick or action movie that entertained me
Don’t Bother – Does this need explanation?!

 Some of Wooden’s championship teams were built around star players such as Kareem Abdul-Jabbar and Bill Walton. Others were made up of players with more modest talent but who executed what Wooden was teaching. And make no mistake: He was good at teaching the Xs and Os of basketball. Yet coaching was just the outlet for his true passion: molding teenagers into upstanding individuals.

 Wooden’s famous Pyramid of Success consisted of 15 qualities — such as loyalty, confidence and competitive greatness — that he believed were essential to maximizing potential. Walton, in particular, embraced these lessons, even writing some of his coach’s noted axioms on his kids’ school lunch bags. As Walton noted, “Everything he said turned out to be right. He didn’t teach basketball. He taught life.”

 Top college coaches now make millions of dollars per year, but Wooden never made much money as a coach. His top salary was $35,000. He even turned down a lucrative offer to coach the NBA’s Los Angeles Lakers. For Wooden, it was the fulfillment of his passion that gave his life meaning.

 I am often asked “How are your services different?” We are committed to helping you establish the means to fulfill whatever you choose. Whether it’s something you’re currently doing, something you’ve wanted to try or something you haven’t yet discovered, our goal is to take the worries of your finances off your mind so you can focus on what’s important to you. That’s our passion.

As the credit crisis has unfolded, the credit profiles of corporations and governments around the world have deteriorated, and states and municipalities have not been spared. State and local income tax, sales tax and property tax revenues are down, and liabilities (in the form of pension obligations and other post-employment benefits) are up.

Nationally, one study estimated that state and local pension plans were underfunded by about $4 trillion as of December 2008. (That is, the value of pension plan assets was about $4 trillion less than the value of pension plan liabilities.) And this does not include any post-employment benefit plan underfunding.

Several states are also running significant budget deficits. Add on to this that outstanding municipal debt is in the neighborhood of $3 trillion, and there is reason to pay attention to the fiscal status of states and municipalities.

Before getting too carried away with these statistics and recent press on the municipal market, it is worth reiterating a few key aspects of the historical data for municipal bonds:

•  Of the issuers that Moody’s rated over the period 1970–2009, only 54 have defaulted. The vast majority of these defaults occurred in the health care and housing project finance sectors.
• Of these defaults, only three have been on general obligation debt.
• The historical cumulative five-year default rate for investment-grade municipal debt is 0.03 percent, compared with 0.97 percent for corporate issuers.
•   Recovery rates (that is, what the investor ultimately gets back after a security has defaulted) on municipal bonds have typically been higher than the recovery rates on senior unsecured corporate bonds (roughly 60 percent versus 38 percent).

So as bad as the current state of some states and municipalities may be, municipal bonds have historically been a safe place to invest, especially when compared with corporate bonds.

Also, yields on high-quality taxable municipal bonds are typically lower than the yields on high-quality corporate bonds. This indicates that the market is pricing in lower credit risk for these bonds than for corporate bonds.

It is also worth noting just how difficult it is for a municipality to file for bankruptcy. States are not even eligible to file for bankruptcy. (Many states also don’t allow their municipalities to file bankruptcy, either.) Also, those that do file for bankruptcy may be cut off from the capital markets in the future.

Summary

High-quality municipal bonds have experienced lower default rates than high-quality corporate bonds. However, a number of states and municipalities are currently experiencing more fiscal distress than they have historically, indicating that the municipal bond market may be riskier in the future than it has been.

It is also worth noting that Treasury bonds are the only fixed income securities generally considered to be free of default risk. All other types of fixed income securities have some degree of credit risk. To the extent possible, this risk can be mitigated by investing in high-quality sectors of the fixed income market (Treasuries, CDs, agencies and municipal bonds), but credit risk cannot be avoided by any means other than investing exclusively in U.S. Treasuries.

• Recent economic activity offers limited predictive value regarding future economic activity.
• The information already is priced into future market returns by the time you hear of it.
• Business decisions and investment decisions are two very different things.

You should not attach particular value to monitoring those indexes in relationship to your portfolios. Take for instance, the Chicago PMI (ISM-Chicago). The Institute for Supply Management compiles a survey/index of business conditions in the Chicago area, commonly referred to as the Chicago PMI. Many think that overall economic activity in the Chicago area is representative of the overall economy. Still, the Chicago PMI number encompasses the data for that specific dataset only. The same is true for a number like jobless claims, which quantify new unemployment claims that are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time.

Financial news commentators may choose to analyze the data from economic indicators and attach additional meaning to it. But the data from any indicator is by its nature looking back at a period already passed. The financial markets are leading indicators, meaning that the collective wisdom of the financial markets has already “priced in” much of the economic data before it is even announced.

It is good to know what these indicators are, especially if you are an executive or business owner. But as an investor, your decisions are best made based on factors that are within your control, such as your own long-term financial goals and risk tolerances.

A big part of your business review may have included taking a closer look at your service providers, assessing which were the ones that were going to help you move forward in 2010. You may have sought second opinions to either verify that your existing relationships were built to last or to provide alternatives if they were not.

So, have you completed the same process for your personal income statement and balance sheet?

Toward the end of 2008, a study posted in The Wall Street Journal stated: “81% of investors with $1 million or more in investable assets plan to take money away from their current advisor. … The irritation is especially high at the ‘brand’ firms — large brokerages and banks.” (Robert Frank, “Wealthy Investors Stage Revolt Against Advisors,” The Wall Street Journal Online, September 30, 2008)

So, particularly if your wealth was managed by one of those brand firms, did you act on these kinds of plans?  If you went through the same process with your personal finances that you did at your business, you would have sought a second opinion on your financial advisor, CPA, estate and philanthropic plans, family wealth dynamics and more. 

Second opinions are not sales calls. They are the process of having someone look at your situation with fresh eyes to see any gaps in your planning. Top advisors only want new clients for whom they can add value, so this is a process they are willing to do for free. It’s in their best interest as well as your own to determine if the fit seems right. 

If you haven’t sought a second opinion on your wealth, what’s stopped you? Maybe it is time. In my experience, it usually takes about one hour upfront and one hour to review the findings. Let’s see. It’s free, it will probably help you feel more confident about future financial decisions, and it shouldn’t take more than two hours of your time. Tell me again what you’re waiting for?

Another hurdle can be selecting a good source for that second opinion. To help you with that, check out Larry Swedroe’s blog on the subject, to ensure that you screen for an advisor with whom you’d really want to work if a change is warranted.

There are lots of reasons affluent parents avoid discussing family financial matters — time, discomfort, habit, mistrust, fear — but the results are more universal. If you don’t prepare your children for the privileges and responsibilities that come with wealth, who will? How will they be equipped to make satisfactory, independent decisions about their money?

This year, as the family gathers for the holidays, tear your kids away from their Beatles Rock Bands and Zhu Zhu hamsters. Set aside your own new iPod. Talk to each other for a while about what wealth means to each of you, and how your children can become an integral part of family wealth planning in 2010.

Pre-Teen and Teenagers — There are many affluent families like the Rockefellers, Forbes and Rothschilds, who have raised very productive children. How have they done it? First, they’ve let their children experience their own successes – and their own failures. Confidence and self esteem comes from doing it yourself; be it as a banker, teacher or carpenter. Perhaps this explains why Warren Buffet and Bill Gates are planning to limit their children’s inheritances.

But communication also is important, if daunting. The Financially Intelligent Parent by Eileen Gallo, Ph.D. and Jon Gallo, J.D. provides some great advice on that.[1] The Gallos offer examples of how to combine your values with projects or events that engage your children at various ages. They also emphasize the importance of identifying your financial perspective before you try to share it. Or, as they describe it, “Get your own money stories straight.”

Young Adults — As your children become adults, you may fret about how they are financing those new cars, new homes or grandkids’ upbringing. If you see or perceive that your children may be suffering from debt, it can be tempting to come to the rescue rather than let them fail. It’s a tough lesson to learn but, if we act too quickly to help solve adult children’s financial, educational or emotional problems, we risk extending the failure.

Spanning Generations — Estate planning is another area where communication remains critical. According to the estimates of The Williams Group Organization, “two-thirds of all wealth transfers fail after transition.”[2] It happens even after engaging high-powered estate attorneys and tax planners to set up complex partnerships or trust vehicles. It’s usually not the process that fails, it’s the lack of individual, emotional preparation. Preparing and include your heirs in the planning process – talking to them, that is – doesn’t have to be expensive or complicated, but failing to do so can be.

As The Wall Street Journal commented, “The change – one of the biggest and most important on the IRA landscape in years – will widen the entryway to one of the best deals in retirement planning.”(1)

Like any “best deal,” I hope you will first review the fine print. Yes, the change may offer you important new wealth management opportunities, but it also has become a marketing feeding frenzy, as the many financial product pushers out there realize this may be the chance to attract easy new business by offering to help people with their Roth conversions.

Make no mistake. Opportunities may abound, but so do important caveats. As with any major shift in your strategy, you’ll want to “do the math,” as I like to say, to ensure that all consequences are carefully considered – both the ones that are obvious as well as the ones that require seasoned industry expertise and a deep understanding of your specific wealth profile. Only then can you figure out an equation that sums up well for you.

For an overview of the evolving conversion rules, you can refer to my Fall 2009 newsletter (page 3). The following provides an overview of some of the items I consider under the new rules, when analyzing IRA conversions for my clients. Most issues are covered under these questions:

• Do you have enough wealth to live on without your IRA?
• What are your estate planning needs?
• What are the tax consequences of early conversion?

Do you have enough wealth to live on without your IRA?
(Tax now or tax later?)
As a U.S. citizen obligated to pay income taxes, you are also allowed deductions and exemptions. If you require your IRA assets to support your lifestyle for the remainder of your life, then the distributions you take can or will be offset against these deductions when determining your future taxes. Why would you pay taxes now if, through these deductions, you won’t pay taxes when you take a distribution? That is the question your CPA is going to pose before he or she suggests a conversion. So before you go down this conversion road, you need to do the retirement planning you may have been avoiding since the market meltdown.

What is the appeal of a Roth? Well, for starters, there will be no taxes on any future growth or income and Roth IRAs do not have required minimum distributions. For those who can afford to leave their traditional IRAs to their heirs, they can convert them to Roth IRAs, pay the resulting tax bill, then leave the assets untouched to be passed on without any future taxes on distributions.

What are your estate planning needs?
Will the IRA be left to charity? Donating an IRA to charity is a tax-free event. In this case, it would be imprudent to convert to a Roth because this would create an unnecessary tax bill. This is only one critical example of how your overall estate-planning needs must be taken into consideration as you manage your wealth.

What are the tax consequences of early conversion?
For example, how does your current tax bracket compare with what’s expected in the future? If you expect your tax rate to be lower in the future, which is often the case for older individuals, you may end up paying higher taxes now through a conversion than simply paying taxes later when you receive distributions. On the other hand, if you expect your tax rates to increase which is typically the case for younger individuals, you may see a substantial benefit by paying a lower tax rate now and letting your assets grow tax-free.

I still don’t think any of us predict the future, but doing some math here can be particularly important. Also, an advisor who understands how to maximize allowable recharacterization techniques for structuring your conversion (such as converting into multiple accounts based on asset class exposure), may be able to better effect the most tax-advantaged conversion possible, or perform a timely “undo” if conversion ends up being ill-advised under evolving market conditions.

Have you looked before you leap?
For many, the new rules governing IRA income limits in 2010 represent a window of opportunity. But the conversion decision is not an easy one, as there are many factors to consider. You should work with your wealth advisor and tax experts to determine the tax, estate-planning and overall wealth implications of your decisions.

But have they?

Nobody would argue that the past year has been ho-hum. But take a step back from the trees and view the longer history of the financial forest. Dimensional Fund Advisors has provided the chart at right, which shows bull and bear markets, from January 1926 through June 2009. (Click  here, or on the image to view a larger version of it.)

First, I think this excellent visual shows that what is allegedly “new” seems far more likely to be another wave of old. As an added bonus, it shows that the good times generally have lasted longer than the bad, and resulted in more gains than losses.

But the economy is now different, some argue, and has changed the way we should think about investing. In reality, economic indicators such as employment are backward-looking indicators that the market already has incorporated into its forward-looking pricing faster than you can say “same old, same old.” If you ask me, the Rolling Stones had it right when they sang, “Meet the new boss, same as the old boss,” in “Won’t Be Fooled Again.”

Why are so many folks willing to buy into the far less likely scenario that the markets really are new and different? Look to behavioral psychology on that point, and a deeply embedded instinct of ours known as “recency,” or: “the human tendency to estimate probabilities not on the basis of long-term experience but rather on a handful of the latest outcomes” (as defined by Jason Zweig in his great book “Your Money & Your Brain.”1)

If there’s a silver lining in the recent cloudy markets, it’s that most of my clients now better recognize that I’m for real when I repeat over and over one of the unchanged principles of sound investing: risk and reward are related. They now have witnessed first hand — and recently — that risk is not just some mythical creature. It’s a living, breathing monster that periodically comes out to play. Yes, risk is very real. It should never be forgotten, even when it is no longer a recent memory. But so too are the expected returns for taking the risk to begin with. And that’s nothing new.

That’s why I want to reiterate some recommended reading I mentioned a couple of blogs ago: “The U.S. Economic Crisis: Root Causes and the Road to Recovery” (Journal of Accountancy, October 2009). Authored by University of North Carolina at Chapel Hill business school professors Gregory W. Brown and Christian Lundblad, below is the executive summary they provided in their article. Whether or not you agree with every point, these seem like points worth exploring:

•  The root cause of the economic crisis is excessive consumption accompanied by record low savings rates and huge budget and current account deficits.
• Thawing credit markets alone will not mean a rapid economic recovery in output growth and employment.
• Unemployment will remain high in the near term and only decline slowly over many years as adjustments are made in the skills of the labor force.
• Expect inflation to remain low in the near term. Inflation risks will be present in the long run as the result of monetary stimulus provided by the Federal Reserve.
• The current fiscal stimulus package may not be the best approach since it ignores the need to reduce consumption relative to income.
• Higher tax rates and lower spending will be required once the economy has stabilized.