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It is becoming more challenging for people to manage their savings for the future.
Back in the 70s, you had a pension guaranteed by your employer. This guaranteed you a percentage of your salary and benefits when you retired. Workers didn’t have to figure out how to manage their own savings plan, it was done for them. They just knew that when they retired, they were promised a secure income over their retired life. It was a great system.
What changed? People started to live longer, new accounting regulations, global competition and market volatility. All these affected the cost of maintaining pension plans for companies – it became too expensive.
The whole savings management and placement trend started in the US. In the late 70s and early 80s, it started as a tax benefit for corporate high-income earners, which said if they put money aside in portfolio, this will have tax advantages. No one thought this was going to apply to the rest of the workers. Bankers quickly spotted an opportunity. With employers, they set up an employment scheme aka 401k as a win-win opportunity for everyone. This was from the first glance a good system. It provided employees, who worked for companies without a pension plan, the ability to save. In addition, it was a portable plan, which allowed the employees to take it with them, as people started to change jobs more frequently. However, the fees are excruciating. We will talk about the reality of 401k and other pension plans in our next article.
Today, we are left with having to manage our savings ourselves. Relying on the government for pension, which will provide you next to nothing, is not an option for a safe financial future. The older we get, the harder it is to find work and your savings must earn you enough to provide at least 80% of your current salary and cover the inflation along the way.
Current financial situation in 4 key points:
Inflation: this is a silent killer of economies and financial well-being. With inflation, prices rise and the value of your dollar/Euro/GBP falls. You may not see your savings going down in actual figures but they are losing value. A 5% inflation means a 5% loss, unless your savings are making a return of 5%. This loss of 5% is not going to jump up again, it’s permanent. Next year your savings must earn 5% + next year’s inflation rate just to maintain the dollar/EUR/GBP value.
Your portfolio: this depends where your savings are invested. If in the 401k, provident funds or insurance programmes, your savings are constantly and continuously hit by fees. In a standard programme, there is a management fee of at least 2% to 3% per year plus fees linked to each fund. Our next article will be on the real cost of 401K. Despite whether your programme is making a return or loss, the providers will deduct the fees from your capital. Check what you are paying in admin, management, advisory and if you have any fund fees (these fees are linked to funds you buy). Sometimes, the funds within your portfolio can do really well, but your programme is not, this is due to fees.
Stock market volatility: with more and more speculators, day traders, and non-qualified investors the stock prices no longer reflect the actual companies’ performance but investors emotional behaviour. For example, taking Amazon stock – Amazon is a powerhouse earning in 2021 was 469bn up from 386bn in 2020, in 2022 to date is 477bn and the earn is not over. Why has amazon lost 40% in stock price since April 2022? Some will say that it didn’t reach analysts expectations, but why should an analyst expectation influence the stock price of a solid company with a revenue increase to date by 7%?
Crypto’s descent: based on the current financial and political turmoil, crypto currencies have fallen as well. Why? This is a domino effect. Most people holding Crypto are normal people looking for ways to increase their returns on their savings. The panic on the markets, rising interest rate and inflation and most of all uncertainties, led to people withdrawing funds from Crypto. Platforms such as Celsius, have stopped allowing withdrawals to stabilise their situation (as they act like a bank and lent the investor’s crypto to others). This cause a ripple effect throughout the whole crypto trading world. Let’s highlight, that this is a relatively new market and thus more volatile to emotional rational of investors. Crypto is still speculative asset class and investors are moving to value-based investments to ride out the storm. However, decentralised currency will survive, it will just wash out the “bad stock”. Where you could put your savings?
A mix between different asset classes:
S&P 500 Index as it has very low fees and the most diversified portfolio with large cap companies. This is recommended by Warren Buffet and many other fund managers.
Fixed Income plans, such as the 12-month Firewood Fixed income plan. This plan for over 10 years have been providing a steady fixed 12%-14% fixed interest on your savings. No fees are applied at all. Contact us to get information on the 12-month Firewood Fixed Income Plan.
Contact us at firstname.lastname@example.org or click here to get more information on the 12-month firewood fixed income plan that has been offering fixed income solutions for over 10 years.