Avoid These 4 Numbers
In 5 seconds or less estimate the product of each set of numbers below.
8 x 7 x 6 x 5 x 4 x 3 x 2 x 1 = _______
1 x 2 x 3 x 4 x 5 x 6 x 7 x 8 = _______
Your estimates for each should be roughly the same. They weren’t, were they? Most estimate a higher number for the first set of numbers. The reason is anchoring bias but that’s not why I write. (Anchoring can cost you money when buying a home.)
This numerical lesson is from the Michael Lewis book, “The Undoing Project” and is an illustration that captures the theme of the book: We don’t really know what we think we know. Let’s look at four numbers.
1. $103,000 represents the median account value of savings for those ages 55-64 according to USA Today January 2017.
2. $343 per month is 4% of $103,000 which (the 4% rule) is the amount you can safely withdraw and probably not outlive your money.
3. $1,341 is the average monthly Social Security retirement benefit for January 2016.
4. $20,208 annually ($1,684 a month) is what you would be required to live on using the median and average figures noted. Whether you are 25 or 65 ask yourself how that will work out? I know the answer which is why I’m alarmed.
 Wait, you thought financial advisors and brokers did act in your interest, your fiduciary interest? Most often they don’t.
One stark example: An investor who had $200,000 in a mutual fund paying the average annual fee vs. the same sum in a broad-stock-market index fund and average annual index fee could cost the investor over $350,000 in savings over a 30 year period.
Wait, you thought real estate brokers did act in your interest, your fiduciary interest? Most often they don’t.
One stark example: Some time ago Homebuyer Associates had a client who looked at a home for $695,000. Our client was adamant. “We’re not paying more than $650,000”, to which I responded, “Let’s see what it’s worth.” Our client purchased the home for $600,000. We work only for you.
I’m alarmed because an executive order was signed putting in motion a potential repeal of a recently passed standard that would have made it harder for financial advisers to give conflicted advice by requiring advisers to put their clients’ interests ahead of their own. The rule has long drawn rebuke from Wall Street.
I write for practical, not political reasons. When it comes to retirement it’s a wonderful thought that people should be accountable for their actions. That’s a thought. Sometimes government rules serve a greater good.
I started Homebuyer Associates to represent the fiduciary and agency interests of the home buyer. I didn’t need the Department of Labor to pass a rule. It was the right approach to buying a home.
At the time, Homebuyer Associates’ approach to home buying drew rebukes from the real estate industry. Over time the industry co-opted the idea and now offers buyer agency – but with conflicts of interest. Think Fox. Think Hen House.
 If we are to believe behavioral economists then we must believe that very often “We don’t know what we don’t know.” Let me summarize:
A. We often don’t know what we don’t know (not good for you).
B. Financial advisors have to meet a “suitability” test when giving you advice, not a fiduciary test (not good for you).
C. Real estate agents don’t work for you and if they do work as a buyer agent they may be negotiating against an agent from their own company (not good for you).
D. There is a reason the median and average numbers for your retirement may require you to live on $20,208 annually (not good for you).
It’s possible you don’t need a law to protect you. Maybe you’ve learned enough in this newsletter to know now to ask two questions, “Who do you work for and how are you paid?”
With answers to those questions you may be able to retire a bit more comfortably.
For more information on the fiduciary rule: https://www.nytimes.com/2017/02/03/your-money/estate-planning/fiduciary-rule-is-now-in-question-whats-next-for-investors.html?smprod=nytcore-ipad&smid=nytcore-ipad-share&_r=0Thanks for reading,
Michael D. Holloway
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