Sage Financial Advice: Prepare for the Worst

Paul Merriman provides sound investing for every stage of life. He has worked in the financial space for over 50 years and his sage advice and dedication to educate the aging population is helping many seniors. Gain financial insight in this exclusive interview.

“Give a man a truth and he will think for a day. Teach a man to reason and he will think for a lifetime.” ~Phil Plait

Entrepreneur, financial expert and humanitarian Paul Merriman has combined his talents to help educate the public about the importance of financial planning and retirement preparation.

When he became semi-retired at age 40, Merriman decided to spend the rest of his life either teaching or helping people learn to invest on their own; while also advising those who desired financial services.

For almost 30 years his seminars were a hit and just before he retired he was asked to do a piece for PBS for a Pledge Week Special, “Financial Fitness After 50.” Merriman comments:

“I was so excited. The PBS show gave me a whole new group of people to help. I gave free financial workshops and was able to help people on a whole new level; which included starting a personal investing for non-finance majors class at Western Washington University in Bellingham. I was even invited to start writing at Market Watch. I also did weekly podcasts. I was just ‘having a ball’ as I was helping people prepare for their futures. The experience gave me a sense of purpose and I hoped it was adding real value for people following my work.”

Merriman shares some of his retirement financial insight in the Q&A below:

1. Is America Prepared for the Future?

Merriman: Some are doing great but the majority of people are definitely undersaving. My life philosophy is ‘hope for the best, but prepare for the worst.’ I’d say most people are not doing the latter.

The financial markets have struggled for many years. For example, from 1975 to 1999, the S&P compounded over 17 percent per year. Since 2000 it has compounded about 5.5 per year. Think of the difference. Most financial experts say that you need to save no less than ten percent of each paycheck — and some say you should save 20 percent. Retirement planning has never been more important.

People are saving about 50 percent less than they were 40 years ago. If we don’t teach people as much about saving as investing, they’re not going to be financially prepared for the last third of their life.

2. What tips do you have to organize finances in preparation of retirement?

Merriman: You must have a plan. How much money do you need to save? What rate of return do you need to achieve your goals? How much risk do you need to take? What combination of investments will address your need for return and tolerance for loss? An expert in the financial space can definitely help. I have a financial advisor because I know, if left to my own devices, I will let my emotions get in the way of my intellect. A good advisor is better than gold!

A fiduciary advisor can provide valuable insights and an unbiased perspective. For example, as you are getting ready to retire, risky investments are not smart. There’s a point at which, even when you’re still working, that should change your investment from growing your investments to protecting your investments.

Self-education is also important, in addition to an advisor’s help. On my website, there is a free eBook section. There is a link to 101 Investment Decisions Guaranteed to Change Your Financial Future. The steps in that eBook can change your life and help give you financial peace of mind. Everyone, with the help of a professional, needs to figure out those steps. Spending a few hundred bucks is nothing when it comes to the return you can get for the investment of working with an expert.

Unfortunately, one mistake can sink your retirement financially. Advisors and planners give you better protection against the unexpected.

3. What are some tips on how to make more money in your 401(k)? What is the #1 flaw you talk about in 401(k) plans?

Merriman: While many Americans have individual retirement accounts (IRAs), for millions of investors the primary vehicle for retirement savings is the 401(k) or similar senior investments. Benefits of these retirement plans are that 1. Saving is automatic, and 2. Employee contributions and the earnings in the account are not taxed until they are withdrawn; which is usually when the employee is retired and in a lower tax bracket.

For those with access to and choose a Roth 401(k), the earnings in the account are never taxed, and all retirement distributions are completely tax free. Tax laws discourage early withdrawals; that means the money is likely to be there when it’s needed. In the best plans, employers match part or all of the employees’ contributions. The down side is that most 401(k) plans fall short of their potential to help employees finance their retirement years. Two of the biggest problems are that most plans have only limited choices of investment options and that most employees don’t know how to make the best possible use of the few options they have.

The good news is that the academic community has taken the time to identify the most productive asset classes using over 100 years of historical evidence, and many of those classes are not offered. The bad news is people are not offered access to asset classes that will likely produce higher rates of return on their 401(k)s with very little additional risk.

To address these downsides I have tried to help investors make the most of what is available. I offer my recommendations to assist millions of American workers and retirees invested in these plans. You can find your company’s 401(k) plan on my website.

For each plan, I make specific recommendations for choosing from among those options. You will find percentage allocations for aggressive, moderate and conservative portfolios. In general, if you are closer to retirement, you should choose more conservative allocations.

In addition to 401(k)s, there are other retirement investments, like IRAs. Even adding an additional 10 percent of savings each year can be a ‘game changer’ to building your nest egg over time with compound interest.

4. What is your advice to get ‘mentally’ prepared for retirement? What are the challenges people face and how do you recommend avoiding those challenges?

Merriman: There are financial and emotional challenges as well as a handful of huge lifestyle decisions that need to be made. There are many people who are depressed in retirement because they may have not prepared adequately. They are afraid of spending too much because they’re not sure if they have saved enough, so they ‘put off’ doing things they planned to do because they live with the fear the market is going to go down and they will be underfunded.

Basically, many people get to retirement and they haven’t created a plan that addresses the needs of a retiree. This planning should be done ahead of time so you can grow with, and into, your new life. Think about it: You can, but you shouldn’t, just walk into retirement without considering the forces that make life fulfilling.

Just as I recommend pople use a financial advisor for retirement planning, I also recommend a life coach — especially for couples — to help with the emotional side of retirement. There are a lot of important changes to face. There are smart people who have been through this and know the pitfalls. I like Warren Buffet’s take on learning from others: “It’s good to learn from your mistakes. It’s better to learn from other peoples’ mistakes.”

Most of my friends are working as hard to help others in retirement as they did when they were working. Basically, they have stayed engaged and busy in their work as a hobby. For example, the website and non profit Global-Help.org was put together by my friend Dr. Lynn Staheli, the head of orthopedics at the Seattle Children’s Hospital. His free medical text books and videos, aimed at doctors and healthcare workers in developing countries, have changed hundreds of thousands of kids’ lives. And he did it all without a penny of compensation.

I think of myself like a ‘used car,’ well worn, lots of dents and scratches and over 200,000 miles, but I know that I, and a lot of retirees, have insight and experience as well as the ability to learn, help and stay involved. I recently worked with a 19-year-old kid who is introducing me to video making technology. This experience is not only giving me a sense of being younger, but also a sense of learning something new and putting the technology to use to help others.

Preparing for Retirement Should Be a Priority

Managing retirement wealth in the 21st century can be complex. The digital age is shifting the financial marketplace to leverage cloud, big data, mobile and social technology – which means it pays to be a digitally-enabled investor and find a financial advisor you can trust. Merriman notes:

“I think the biggest risk we have is trusting the wrong advisor. Finding a financial expert you can trust is huge. Make it a priority to find someone who is competent and ethical. Also, take the time to educate yourself is important. You shouldn’t make any investments you don’t understand.

Finding an advisor who can answer questions so that your finances become more understandable should lead to better returns and more peace of mind. They call those of us who are 65, “the elderly.” We elderly people have worked hard and deserve peace of mind in retirement. Sometimes the first step is to understand if you’re getting what you deserve from your investments. For most of us it means getting an education. Investing has never been simpler. It’s not too late to get that education.”

Warren Buffet said it perfectly: “To be a success you only have to do a very few things right in your life, so long as you don’t do too many things wrong.” A good financial education will help you learn some of the ‘few things’ you can do right to help you succeed financially.

Make an effort to get educated today. Read Merriman’s books, listen to his podcasts, and find a professional financial advisor who can help you prepare for your future.

About Paul Merriman

Paul Merriman is a nationally recognized authority on mutual funds, index investing, asset allocation and both buy-and-hold and active management strategies. Now retired from Merriman, the Seattle-based investment advisory firm he founded in 1983, he is dedicated to educating investors, young and old, through weekly articles at Marketwatch.com, and via free eBooks, podcasts, articles, recommendations for mutual funds, ETFs, 401(k) plans and more, at his website.