Understanding the financial problems middle America families face todayArticle added by Lew Nason on June 2, 2011
Joined: October 13, 2006
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It is time that we as a nation face a glaring reality. We have some very serious financial problems in the United States.
We can’t escape the fact that Social Security retirement income will probably not be there for many middle American families when they retire. At the very least it probably won’t be there in its current form.
The federal government is already taking back a big chunk of Social Security from most middle American families, in the form of a hidden income tax. Couple that with the fact that most of today’s middle American workers do not have a company-paid pension plan, consumer debt is out of control and retirement savings is at an all time low.
Are we, as a nation, looking at a significantly reduced standard of living, for the first time in our country’s history, for this and future generations?
There are a multitude of reasons for the financial problems middle America faces today. A few of the most damaging reasons for our financial problems are summarized below. However, most of the financial problems we face today are within our control and can be corrected once we take the time to understand where they come from and we are able to put them into their proper perspective.
The longer I write this column, the less faith I have in conventional financial wisdom. We all rely on rules of thumb and generally accepted notions because we don’t have time to research every financial issue and probe every assumption. Life is just way too short. Yet conventional financial wisdom often doesn’t stand up to close scrutiny.
Bad advice from the media
Jonathan Clements, Wall Street Journal
Most of the financial information we receive daily about investing our money as presented by the financial media — newspapers, magazines, radio and television shows — is really geared towards the top 20 percent of the U.S. population who are already wealthy. These wealthy people are the ones who can afford to take risks in the stock market with their discretionary money that is over and above what is needed to generate an income to provide for their yearly living expenses.
In 1998, the top 20 percent (of the U.S. population) owned 83 percent of all wealth.
Is there any question that these wealthy people live in an entirely different world? They are not concerned about qualifying for financial aid so their children can afford to go to college. They are not concerned about eliminating debt to improve their cash flow so they can afford the health insurance premiums or put braces on Mary's teeth. They don't have to worry about whether there will be food on the table or a roof over their family’s heads if something happens to them.
Edward Wolff, professor of economics at New York University, May 2003
Unfortunately, the financial media’s ultimate goal is to sell their advertising space. So, they use controversy, hype and grandiose claims to increase their ratings and readership to get more advertising, to make more profits. Much of their banter has given most of middle America a very unrealistic expectation of their overall investment returns.
And, in most cases, by the time the media presents us with their information, it is totally outdated! The problem with using historical data is that by the time a fund is reported as a top performer, its performance has already peaked and has nowhere else to go but down.
The investor of today does not profit from yesterday's growth. If past history was all there was to the game, the richest people would be librarians.
Mutual funds do a terrible job for most investors by underperforming the market over the long run, and charging exorbitant fees to boot.”
Financial institutions are focused only on making a profit
“Mutual Fund History: the Terrible Truth,” by Dr. Mark Skousen, Advisory Panelist, Investment U., Sept. 2005
The second reason for our financial problems is that we are falling prey to less than ethical sales practices of many of the financial services companies (banks, investment houses, insurance companies, brokerage firms, etc.) who are primarily concerned about making the quickest and largest profits they can today. Accordingly, many of them are designing products that suit their best interests first. Many of the products they sell are designed to make them huge profits with a multitude of hidden fees, smoke and mirrors, and bait and switch tactics.
…the majority of mutual funds fall short because of the fees they charge you to be a shareholder. You pay for the privilege of active management. You pay for a fund's sales force, slick marketing, Super Bowl halftime ads, trading costs, and the fund manager's cloth-napkin business lunch and weekend home in the Hamptons. The costs of being in the average actively managed mutual fund over time are, put simply, very, very severe.
Poorly trained financial advisers
“What's Wrong With Mutual Funds?’”, David and Tom Gardner, The Motley Fool
The third problem is that in the last 10 to 20 years there has been a very serious breakdown of financial services adviser training and industry support organizations. The financial services industry, as a whole, is doing a very poor job of training insurance agents, financial planners and financial advisers.
They are not teaching them how to ethically market their services, generate sales and really help people. They aren’t spending the time or money needed to actively promote their industry support and training groups.
According to Edwin P. Morrow, CLU, ChFC, CFP, RFC, CEP, Chairman & CEO of the International Association of Registered Financial Consultants, membership to our financial industry associations is consistently and sharply declining. (Except the IARFC, with an 800 percent increase in the last five years).
In addition, the focus of the financial services industry associations has changed dramatically. Their focus is primarily on the technical aspects of financial planning. This change of focus has created a very serious problem in the financial services industry.
There are too many agents, managers and companies out there who have a misconception of what the financial services business is really about. They believe that their business is just about their products and making sales to earn the highest commissions and fees available. Unfortunately, this type of thinking is what promotes client deception, replacement of existing policies, piggy backing of policies and all the other less than ethical sales practices we see today. These are the major reasons for all the law suits and the negative publicity the financial industry receives.
There is very little effort today to educate insurance agents, financial planners and advisers on how to truly help middle American families. In the past 20 years the financial services industry has primarily concentrated their efforts on servicing the top 20 percent of the U.S. population — the wealthy — because that’s where they believe they can make the most money.
The financial services industry appears to have forgotten whom they were servicing for the past century and where they made the majority of their money.
Consequently, most agents and advisers are not getting the ongoing training and support they need, and they aren’t focusing on servicing middle America. They either aren’t aware of the existing industry support and training organizations or don’t understand and appreciate their value. The majority of agents, planners and advisers don’t know what they don’t know.
Accordingly, they see ongoing training and support as an unnecessary business expense. The only training that the majority of these agents, planners and advisers receive today is their company training, which again teaches them to do whatever it takes to sell the most profitable services and products that they can get away with.
While there is wholesale agreement that many agents and companies are at fault for unsupervised and unethical conduct, the greatest problem is the fact that neither the brokers/agents nor the consumers knew very much about what they are doing.
Out of control spending
E. F. Moody Jr., MBA, PhD, CFP
The fourth problem is that consumer debt is out of control as middle Americans are constantly being enticed to spend money above and beyond their means to pay it back. We have become a society where we are unwilling to wait for anything. Much of this has to do with the advent of credit cards, because it has allowed us to get anything and everything we want right now. The trend of charge now and pay later has a direct correlation to the record number of bankruptcies being filed today.
Millions of families are saving less and borrowing more to make ends meet. Between 1989 and 2001, credit card debt grew by more than 40 percent among households earning less than $50,000.
“Closing the Gap, Helping Working Families Make Ends Meet,” August 3, 2004, www.demos.org
Nearly 1.5 million couples or individuals filed bankruptcy petitions in 2001, a 360 percent increase since 1980.
Traditional financial advice isn’t working today
Administrative Office of the U.S. Courts, “Record Breaking Bankruptcy Filings Reported in Calendar Year 2001.”
The fifth and maybe the most serious problem we have today is that the traditional financial advice (conventional wisdom) that has been passed on from generation to generation from the people we trust and respect — our friends, parents and grandparents — is outmoded and doesn’t work in today’s financial world. Much of today’s conventional financial wisdom was born out of the Great Depression. It is what our great-great grandparents and great grandparents learned they had to do in order to just survive.
While many households will spend a great deal of time shopping for an automobile, the decision of who to trust with their wealth too is often made without as much thought.
Dr. James Mallett, Stetson University
A recent U.S. Department of Labor study said in the 1970s employers paid 89 percent of the cost of retirement and employees 11 percent. In 2000, employees paid 51 percent and employers 49 percent. Now, people are having to pay for themselves, and it’s a horrendous situation.
Solving our financial problems
By Hedrick Smith, Executive Producer, PBS Frontline – 2006
We can correct the above problems by becoming better educated and learning how to put our finances into their proper perspective.
We all have the opportunity to live debt free and truly wealthy without dramatically sacrificing our current lifestyle, if we take the time to learn the proven financial strategies that have enabled the top 20 percent of all Americans to accumulate their great wealth and if we learn how to avoid the problems as detailed above.
I find it fascinating that most people plan their vacations with better care than they plan their lives. Perhaps that is because escape is easier than change.
Isn't it time for you to learn about these simple, unconventional Found Money Management™ concepts? You’ll discover how to take charge of your financial future, by simply learning how to find the money to live debt free and truly wealthy.
According to the Social Security Administration, 96 percent of Americans are not able to fund a retirement that will last for their lifetime, allowing them to live the lifestyle they wish to live. This is the case for highly compensated people as well as average wage earners.
Unless Americans change their ways, many will struggle in retirement.
Alicia Munnell, director of the Boston College Retirement Study 2006 and a former member of the White House Council of Economic Advisers.
The answer is saving more and working longer. The economic facts are that the median (typical) household in America has a net worth of $15,000, excluding home equity. The median household net worth for the top one-fifth of American households, excluding home equity, is less than $60,000. Consider, without Social Security benefits, almost one-half of Americans over age sixty-five would live in poverty. (And Social Security is in trouble!)
Michael Gray, CPA, profitadvisors.com
If you know how to spend less than you get, you have the philosopher's stone.
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