LEGACY: Wealth-Building Through the Generations

By Keith Laing

Financial wisdom comes in stages, and if there was an instruction guide that detailed what you should do with your money and when, then, perhaps, the statistics wouldn’t be so staggering. According to a recent survey by Argosy Research, conducted for Ariel Mutual Funds and Charles Schwab Corporation, African Americans earning $50,000 or more annually average half of the total savings of similarly situated. Blacks average $48,000 in savings, while whites average $100,000. More generally, by their early forties, blacks have saved $11,000 for retirement, compared with $48,000 for whites.

Making matters worse, blacks tend to invest less. The study found that 76 percent of whites own stocks or mutual funds, but only 57 percent of blacks do.

And those numbers do not figure to improve with the national economy screeching to a halt, but they should, says Merrill Lynch financial advisor George Peterson.

“[Throughout] history, there have always been reasons in our mind not to save,” he says. “Go back to the 1940s and the Cold War. It was a challenging time, but not a reason not to save. [Sept. 11] was a terrible time in our nation’s history, but it was not time not to save. If you are a saver and an investor, you should save and invest in all markets.”

Peterson is confident that the economic troubles of the present will soon be memories of yesteryear. “History has shown that [the economy] will balance out,” he says.

That’s why Peterson counsels his clients who aim to build wealth to start saving as early as possible. Here’s how those who know best suggest you and your peers — however old you are — approach wealth building.

Just Starting Out: 20- and 30-Somethings

“The younger you start, the more diverse markets you are going to experience,” Peterson  says. “When you start saving later, you have fewer years to let the market cycles run their natural course.”

Another advantage of beginning to wealth build early is the ability to be more aggressive, Peterson adds. Young savers can invest more in lucrative stocks rather than reliable bonds.

“A twenty-something stepping out into a new career is going to grow [financially] given success in their career. Those people can be more aggressive in the equity space.”

That’s why wise young investors will have as much equity in their portfolio as possible.

“Individuals in their 20s and 30s can afford to have 100 percent of their investments in equity,” he explains. “No bonds and little to no cash, [but] they would still have a balance, diversified portfolio invested across industry segments.”

Peterson acknowledges that the cost of entry to the financial trading game may dissuade some 20- and 30-somethings from even playing the game, especially those who accumulated debt in college and are struggling to gain sound financial footing.

“Unless they hit the lottery or inherit a bunch of money, chances are [young investors] don’t have a lot of money,” he says.

That may be true, but investors in their 20s and 30s still have plenty of options to consider. Among them, are mutual funds and exchange trade funds [ETF], both of which have lower entry costs, but can be traded like common stocks.

Another potential problem for investors trying to establish themselves is the cost of doing business. No matter which market they are listed on, transactions involving publicly traded stock generally involve fees. That’s why Peterson suggests buying stable assets and holding on to them.

“I strongly recommend a ‘buy and hold’ strategy to keep the cost down. We’re not talking about doing a lot of trading.”

Young savers can also form good financial habits more easily.

“They have to get used to paying themselves first, like any other bill,” he says. “They need to build discipline. If a 24-year-old saves $100 a month for 12 years, they have $12,000. If they invest that in stocks and never touch it until they are 65, that person would have $250,000.”

Daphane Simmons, president and founder of Nvest Wise, a Georgia-based investment advisory firm, adds that savings is particularly important for Generation Now.

“Retirement is so far off for them; they can’t see it,” she says. “They say they like working and they are going to work forever. We have to help them see that retirement is part of their future.”

Although it’s never too early in your career to start thinking about contributing to a retirement savings account, professionals in their 20s and 30s can get into the habit of tucking money away for any goal, such as making a down payment on a house, financing graduate school education or travel. Individual Development Accounts, the non-retirement savings alternative to an IRA or 401(k), allow professionals and budding savers to do just that.

The match incentive — similar to an employer match for 401(k) contributions — is provided through a variety of government and private sector sources. For every dollar you save you get a 100 percent matching contribution. Organizations that operate IDA programs often couple the match incentive with financial literacy education, training to purchase their asset, and case management. www.idanetwork.org

 Agenda Topper:

-Join a stock investment group like Trasherfunds.com which helps you create a portfolio with low-risk, low-fee mutual funds that mesh with the lifestyle of younger investors. www.trasherfunds.com

Halfway There: 40-Plus

The approach to wealth building in the 40s is not much different for people half that age, claims Troy Young, Financial Planning Advisory Services partner.

“If you are anywhere from 20 to 40, and in some cases 50 [years of age], you are still in the accumulation [of wealth] phase,” explains Young. “While you are accumulating, you are trying to eliminate debt, save for emergencies and take a long-term view on investment, whether that’s putting money into your 401(k) or an IRA.”

Provided through employers, 401(k) are retirement plans that allow workers to save for retirement with taxes deferred until withdrawal, while Investment Retirement Accounts, are typically private accounts that provide similar tax shelters.

Simmons recommends investing up to 20 percent in your company’s 401(k).

“The benefit to you is ‘free’ money from your company match and less taxes to pay the IRS,” she says.

An even better financial move, is contributing to your IRA. “If you are in the income range to contribute to a Roth or IRA, I would recommend you contribute the max each year,” she suggests. “The advantage is tax deferred for IRA Traditional, and more investment choices to choose than what you have in your 401(k).”Simmons recommends those who cannot afford to maximize their IRA investment at least strive for their company’s match amount.

“I prefer to have better investment vehicles, and this is the reason I suggest maxing out the Roth/IRA versus your company 401(k). However, you have to at least put in what your company will match otherwise, you are giving away money.”

Many companies do not match 401(k) contributions. In this case, it’s still important to save because the benefits of pre-tax saving outweigh the notion of not saving at all, or saving with money that has already been taxed.

Trend Watch:

Commercial real estate is the wealth builder of the future. Individuals who have money for investing and who are in it for the long haul should consider real estate equity funds. The key strategy is to choose the equity fund that best gels with your desired investment and then commit to investing for over a seven-year period, after which you have the option taking the return and re-investing either a portion or the full amount into another project. It gets you into the habit of rolling over funds.

 

The Golden Years: 50 and up

Simmons says that clients who are still aiming to accumulate and even manage wealth later should follow the same strategies as their younger counterparts, but should be prepared to contribute more money per year to investing in order to achieve their goals.

However, those who have successfully executed accumulation by age 50 move into a new phase of wealth management: maintenance. Young says staying financially comfortable is often just as hard, if not more so, than becoming financially sound.

He advises clients in this phase to play their finances smart, encouraging them to consider bonds in lieu of volatile stocks.

“You want to maintain a diversified portfolio that is not taking too much risk, so you want to have a smaller percentage of equity than when you are in the accumulation phase, but you have to have some exposure to equity to offset against inflation and taxes.”

He adds, however, that it is possible to begin saving in your 60s, as well.

“It’s never too late to start saving, but it’s all about defining wealth,” he says. “If you are 80 years old, wealth to you might be paying for all your medicine. Wealth building has become such a common term; it is really about defining goals for yourself and working to achieve them. But, the goals need to be realistic.”

Simmons contends that those who have been successful at wealth building need to follow it up with plans for what to do with the money they have saved.

“If you have accumulated investable assets, you may want to start a dividend strategy,” she recommends. “If you have not accumulated any assets, then you will need to start aggressively budgeting so that you can contribute more to your retirement accounts and other accounts outside retirement.” Pending retirees, she suggests, should determine at what age they will need to begin accessing their money to continue living comfortably after work. In most cases, distribution can begin at age 59 ½. Retirees should consider how long their money will last, as well.

She encourages older savers to consider things such as health expenses when setting their retirement living goals.

“They have to look at what is needed for retirement. How much are they making now? How much are they spending? That’s where you find a strategy to reach that goal.”

Another problem facing seniors is what to do with the wealth they have amassed over their careers.

“They have to figure out how to distribute income from all the wealth they have built over the years,” Peterson says. “There are no instructions. We are starting to see baby boomers who knew how to save, but have to figure out how to start paying themselves.”

Simmons stresses that retirees seek help with financial planning this intricate.

“There are financial and investment advisors to help you do this. Most people are trying to be craftsmen in their own field; therefore, they understand the value an advisor brings. I recommend [that you] don’t try to do this on your own, but find someone you can trust, [who] loves what they do, [is] outperforming the market and willing to educate you so that  you can do it on your own if you decide to in the future.”

The Gold Standard:

Consider adding a precious metal like gold or silver to your investment portfolio. It’s important not to invest a significant amount in precious metals because they often serve as a ‘hedge asset’ and their value is contingent on the value of the dollar. If the dollar’s worth is declining nationally and internationally, then gold’s value tends to appreciate and vice versa. The key is to diversify your portfolio make-up enough so that you have a considerable amount of thriving assets regardless of the global economy or the status of the dollar.

Advice for Everybody

Young tells his clients – just starting out, seasoned and in between — that they must overcome three things to truly develop their wealth: debt, taxes and their own lack of discipline.

He encourages any interested in wealth development to live below their means and avoid accumulating additional consumer debt like finance charges. He suggests they consult with a financial professional on how best to file their taxes and that they allow a trusted confidant to make sure they stay on task.

“You have to make yourself accountable to someone other than yourself, whether it’s a spouse, a parent or a sibling,” Young says.

Creating a budget or a spending plan can also help with discipline, and are increasingly effective when they are adhered to long-term. “One month you may go over [budget], but then you come back and look at what went wrong,” he says. “You write a plan out and then you continue to massage and manage it. The constant monitoring will make the difference.”

And when they are planning their budget, savers should focus on putting away a fixed percentage of their income, Simmons says.

“Don’t look at a dollar amount, look at a percentage,” she says, “so that way when you get raises, you end up saving more.”

Although the advice he gives to each generation of wealth builders may be different, Peterson encourages every group all to do one thing no matter which age bracket they fall in: save.

“When you stop setting goals, then you are at point to stop wealth building,” cautions Peterson. “You stop saving when you aspire to do nothing.”

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