What is your background, Mr. Meeks?
I came to Money most directly from SmartMoney magazine. I was there for 14 months editing the feature stories, and I spent eight years at Forbes magazine before that as both a writer and an editor. I started as a writer, and then was an editor for several years and then went back to writing after I got tired of editing. So, that’s my professional career in a nutshell.
What kind of information do your publications provide?
We’re giving basic investment and retirement investment information. A lot of people, especially unsophisticated investors, worry about risk and losing money. What if the stock market goes down? or what if I lose money? So they put their money in a money market account or a stable value account where they know the money won’t go down. They don’t realize the bigger risk is inflation.
What about the volatility of the stock market?
Though the stock market is volatile, the long term trend has been consistently up, I believe, since 1926. The average annual return spread out over time is 10.9%. The stock market is really best if you are 25, 30 or 35 years old because you are continuing to invest for 40 years. Keep in mind, you don’t take all of your money out and spend it the day you turn 65.
What kind of returns can you expect?
As a long term investor, you don’t have to worry about the ups and downs, because the long term trend is going to be up. After you take inflation into account, I think the long term average is your money will double in stock funds, based on the average, every seven years. After you take inflation into account, that’s every 10 years. The historical inflation rate is 3.1%, which is a little bit higher than it is today. And a money market account historically averages 3.7%, although money markets don’t have the history of going back 70 years.
How long would it take a money market account to increase?
With a money market account, it would take 20 years to double, in dollar terms. You would have the advantage of knowing that the account value did not fluctuate, but after inflation, it would take many years for that money to double. The real difference if you look at the difference in 4% and 10.9%, it is really much higher because you have to take out 3% for inflation. Plus instead of being two to three times the annual return, it is more like six times the annual return. We’re trying to educate people on the risks and there is another kind of risk in retirement savings that many may not be aware of inflation rather than the market going up and down.
Is it better to pay down an existing debt or to invest for the long term?
That depends. It might be better to pay off your credit card debt if you are paying 17% on it. If you have a low interest mortgage, you might be better of holding on to that. It’s all relative to an individual’s situation.
What do you suggest for new chiropractors who come out of school owing anywhere from $80,000 and up?
What is important, especially, in the beginning when you’re in your twenties, is to strike some sort of balance and get into the habit of saving, even if you are putting most of your extra cash into paying off your loans. You want to be in the habit of saving money for retirement, because the biggest advantage you have is time. If you put away $2,000 per year, in your first two years, and then increase it as you go along, you have a real advantage because if you are 26, that $2,000 has 40-50 years to compound. It then becomes a very substantial amount by the time you retire. You really shouldn’t wait.
This example illustrates a fun fact of compounding. If you start saving at age 25 by paying $3,000 per year for 40 years until you are 65, and say it grows at 8%. If you put $3,000 into a 401k plan and your employer provides a 50% match, that’s $4,500 per year. Let’s say you put $4,500 in some sort of tax-deferred account for 40 years. When you are 65, you will have saved $180,000 total. If it grows at 8%, which is a fairly reasonable number because it is far below the average annual return in the stock market, then you would have $1.26 million dollars at age 65.
If you wait 10 years until you are 35, you are having to save $6,000 per year instead of $4,500 in order to put away the same amount of money because the money has less time to compound. It then multiplies out to a return of $734,000. You can easily see the advantage of those extra ten years.
Another half million dollars…
Yes, and you’re saving the same amount of money. Even if you have to start saving small, it pays to start as early as possible.
That’s encouraging, but say you save $2,000 starting at age 25?
The example I gave was based on $4,500, but $2,000 invested over 40 years would come out to $560,000. Over 30 years that would be $326,000. So just by starting early, you gain a huge advantage.
Our average reader is in their early 40’s. What age bracket are you in serious trouble if you haven’t started saving?
Well, at that age you have other things to be thinking of, for example, your kids’ college education. If you haven’t started saving at all by age 40, you are in rather serious trouble. You can catch up, but it is really difficult. If you start saving at 40, by then you have hopefully hit your stride in your practice and you may have a very comfortable income-perhaps allowing you to catch up. But it has to be at the expense of a lot of other things. I can’t emphasize enough, there is no substitute for starting early.
Is this the biggest mistake people make?
Yes, putting it off is a really big mistake, because when you are 25, $100-200 per month is a lot of money. You’d much rather spend it on beer, cars and cigarettes or whatever. However, if you have it set up so the money is automatically withdrawn from your paycheck the same way that social security, income tax and everything else is, it is virtually painless, because you aren’t writing a check every month. It really adds up. The first year or second year, it doesn’t seem like a lot, but after a few years of compounding, you suddenly realize you have more money than you expected or thought you could save.
That’s what happened to me when I was at Forbes contributing to our 401k plan. The first few years it didn’t seem like there was a lot in there, but by the time I left after eight years and had been in the program seven years it was much more money than I expected to have put away for retirement. Each year it is the magic of compounding.
What constitutes a tax-deferred account?
An IRA [Individual Retirement Account] is a tax-deferred account. Most of your readers would probably not qualify for putting money in pretax, but if they set up a SEP-IRA [Simplified Employed Pension], you can then put in money pretax if you set up a Keogh plan. This allows you to put in money for yourself and for your employees on a pretax basis.
The money is being put into the account before taxes, so for example, if you are in the 28% tax bracket, then $2,000 out of your pocket would actually include $560 on a pretax basis that is going into the account. That’s just one more reason why it pays to have some sort of retirement plan for your company, even if it is a small company. There are options for that, because the money goes in pretax and stays in until you are at least 59 and a half. You may then start taking it out, although you will pay taxes on it at the same rate you would have to pay on your ordinary income. However, it’s had all of those years to grow without you having paid taxes on interest, capital gains, dividends or anything else throughout that time.
To simplify, you are earning money from money which you would have otherwise paid taxes?
Yes. You would have paid taxes on the money before investing it in an account. For example, say you invest your after-tax money in a stock mutual capital or bond fund. Then when you have capital gains and dividends or if you are collecting interest on a bond fund, you would end up paying taxes on it again and again. Every year, in fact, on the income you earned. However, since you put it in a tax-deferred account, all of the money stays in that account and continues working for you until you ultimately take it out.
So you only pay taxes on it once?
Right. You might want to talk to someone who specializes in small accounts for business just to understand what the different options are.
What have you done with your own retirement accounts?
Well, it goes back to what I was saying before that because of the long time horizon when you are investing for retirement, it really makes sense to invest in stocks and not to worry if you hear that the market has gone down 250 points. Don’t agonize about what happens day-to-day or month-to-month because the long-term trend in our economy is that corporate profits go up and when corporate profits go up, stocks go up. I don’t expect that to change. On a daily or monthly basis, that might change, but in 20 years, it’s going to be substantially higher than it is today. If you have a 30, 40, 50 or 60 year time horizon, you don’t have to be concerned with the volatility and the ups and downs. What you should worry about is getting the best return after inflation.
What about short versus long term investing?
If you’re investing on a short term basis with a long term time horizon, you’re doing things wrong. If you are worried that you are going to lose money in the short term and you steer clear of stocks in favor of a money market account or a stable market account or a bond, then you’re using short-term thinking for long-term planning and that is a mismatch.
If you are saving money to buy a house three years from now, buying stocks would be the wrong approach, because the stock market could go down substantially and the money you are saving could wind up being substantially less than what you’d invested. When you have a short term goal, you need to take a short term approach to preserve your capital, get the best returns and be sure that you’re preserving your capital. However, from a long term standpoint, you have the same potential disaster you could have in the short term if the market turned down. In the long term, inflation would gobble up your money and your purchasing power you know, when it comes time to spend the money there could be little more than the amount of dollars you saved, plus the purchasing power on your money when you saved it.
If you invest and receive a 4% return from a money market account, and inflation takes away your purchasing power at a rate of 3% a year, you are compounding only 1% a year. The number of dollars might increase, but what the money will actually buy will not grow very substantially.
When do you suggest a chiropractor seek a professional for individual financial planning?
I think when you are just starting out by saving just a few thousand dollars a year, you are likely focusing on putting the money in stock funds or index funds based on the Fortune 500 or something similar. You can really do that on your own if you read Money magazine or some of our worthy competitors, and can acquire a basic financial knowledge without investing a huge amount of time. Once you have to juggle retirement and college savings and you’re also juggling your own business – once there is a little more at stake, you might want to get professional help.
What is a good rule of thumb for saving a good percentage of your net income?
If you are saving in a retirement account, you are saving a percentage of your pretax as opposed to take-home or net. And you want to start with at least 5% or more if you can afford it. But if you are just starting out and you have those loans to pay and other expenses, it might be hard to save more than that.
The point I keep coming back to is that if you get into the habit of saving, even if you are not saving a very large amount in the very beginning, it just becomes a part of your budget. You don’t see it as, “I am saving this money instead of buying a car.” It becomes a part of your financial outlook and really starts becoming substantial after a few years. Once you see this happening, it reinforces all the habits someone like me would be saying you should pursue. Then you don’t need anyone to tell you because you see it for yourself in your own account.
Do you suggest finding a mentor?
Yes, if you know someone who has been saving hard for retirement for a while and you then see how they have done. One person I was talking to said his father showed him his retirement account and he had been saving half his money in bond funds and half in stock funds. With the same amount of money going into each, it was very clear to him where he should be investing his money.
Because money is such a personal thing, people will discuss it in general but it is hard to get specific…
It is difficult to get people to show you their earnings. When I was at Forbes and became eligible for the 401k plan, the managing editor of the magazine came by, gave me the paperwork and said, “You should do this.” Generally he said he was planning to retire and implied that he would retire very comfortably because he had contributed to this 401k plan. He inspired in me the urge to do so, although he certainly did not tell me how much money he put away. But coming from someone you respect, when they tell you that, “I’ve done this and it’s been successful for me and I urge you to do the same,” it carries a lot of weight.
What are your final thoughts on saving for retirement?
It’s the sort of thing that once you see it happening it takes patience and it does take a few dollars out of your pocket suddenly you see it is not oh-so-difficult. It really does pay to be informed, to try to understand. The business we are in is to try to keep people informed and to demystify financial matters. Your readers are certainly more sophisticated, but still they may not know as much as they should, especially if they are starting out cold.
You don’t have to be completely consumed to be an educated consumer of financial products. If you are invested in stocks and tend to panic because the stock market is going down, with a little bit of knowledge, you can stay the course better. When stocks go down, you will probably panic, as people tend to do. Say the stock market goes down, you sell, and it will start going back up again before you buy back. Let’s say it drops from $15 to $10, you sell, and then it goes back up to $12 and you say, “Oh! It’s good. I’ll buy it.” You’ve lost that $2 spread when you panicked. If you had just held on, you are much better off. It happens a lot that people panic because even if they know this, when it happens, it’s hard to hang on. You have to keep reading Money magazine. Keep reinforcing those habits, so when it happens, you will hang on.
Fleming Meeks was named senior editor of Money magazine’s fast-growing stable of employee education materials and manages Money’s two existing quarterly retirement-savings newsletters, Managing Your Future and My Money which have a combined circulation of 1.4 million. Mr. Meeks is also leading the roll out of additional employee-education products Money plans to introduce this year, including a Spanish translation of My Money. Mr. Meeks joined the nation’s largest financial publication after a stint as articles editor at SmartMoney. Prior to that he spent eight years at Forbes. Working his way from staff writer to senior editor, Mr. Meeks has won several awards, has written for diverse publications, such as Publishers Weekly, Spy and Art in America as well as writing comedy material for The Tonight Show host, Jay Leno.
Please contact Mr. Meeks at: My Money, C/O Money magazine, Time & Life Building, Rockefeller Center, New York, NY 10020
How Four Financial Pros Invest for Their Retirement
The pros’ strategies vary so widely that one or another of their approaches ought to appeal to almost every retirement investor. But the four agree in one respect: Each is a long-term investor who’s willing to hold investments through turbulent times as long as the reasons he bought the securities still hold. The pros’ portfolios are described in rising order of aggressiveness.
Financial Planner Michael Chasnoff, 38 of Advanced Capital Strategies in Cincinnati tries to minimize the time he devotes to his own portfolio. Says Chasnoff, “I don’t have time to keep fine-tuning my portfolio to have a shot at beating the market. So I’ve resigned myself to matching it.”
His entire portfolio consists of six Vanguard index funds. Chasnoff has 11% of his money in the Fixed Income Long-Term U.S. Treasury bond fund and nearly 56% in two U.S. stock funds, large company Index 500 (37%) and Index Small Cap (19%). Another 33% is divided among three international funds: STAR Total International (15%), International Equity Emerging Markets (10%) and International Equity-Pacific (8%). He invested in the last of these funds because 76% of its assets are in Japanese equities. “I felt that while the U.S. market is fully valued, Japan’s market is undervalued, Chasnoff says.
Don Phillips, 35, president of Chicago fund rater Morningstar, favors value funds, which load up on stocks the managers think are underpriced. Phillips has invested 75% of his portfolio in 25 mutual funds (15 in tax-deferred retirement accounts and 10 in taxable ones), all but four of them are value-oriented. The exceptions are Brandywine, Fidelity Emerging Growth, PBHG Growth and Strong Growth. The others include large-company stock funds Clipper and Selected American Shares, mid-size company, Oakmark Select and small company, Fidelity Low-Priced Stock.
As editor of the No-Load Fund Investor, Sheldon Jacobs has naturally invested his entire retirement portfolio in no-load funds. He has nearly 70% of his money in equities, 7% in fixed income and the rest in cash. Nearly 80% of his equity money is divided between U.S. growth funds, such as American Century Equity Growth and Baron Growth & Income, and domestic value funds including Third Avenue Value and Vanguard Equity-Income. The remaining 20% is in international funds, such as Founders Passport and Scudder Latin America. Jacobs, 66, believes that the smartest way to diversify is among managers who follow different investing styles growth, value and a blend of the two.
At age 50, Financial Planner Steven Enright of River Vale, NJ, figures he still has 15 years or more of employment left, so he invests aggressively. He keeps about 15% of his retirement money in a private investment partnership and 15% in individual growth stocks such as $800 million HFS, a franchiser of hotels and residential real estate brokerage office, and $4 million drug manufacturer, Lidak Pharmaceuticals. The remaining 70% is divided among a dozen mutual funds. For stability, he has invested 25% of his fund money in large-company portfolios such as Clipper, Janus and Vanguard Index 500. But the rest of his funds fly high. “I wouldn’t recommend my approach for most people, but risk doesn’t bother me,” he says.
Excerpted with permission from Retire With Money, August 1997, published by Time, Inc. To subscribe call 1-800-284-5300.