The good news: life expectancy in the U.S. increased by 50% during the 20th century. The bad news: we'll all need a good deal more money during retirement.
The average 65 year old man can expect to live to age 84. The average 65 year old woman: 87. When you think of couple living off their retirement income, there is a 50% chance that one spouse will make it to 95. That means that most people should have 30 years of retirement planned (assuming they retire at age 65--not necessarily a valid assumption).
This makes a focus on long term returns more important than ever. Specifically, the conventional view of retiring with a conservative portfolio of bonds is probably not the way to go. We'll all need the growth and inflation protection of stocks to keep from running out of money.
It also means the most conservative period of investing is probably right before and after retirement. A large setback in your portfolio right before or after retirement may be very difficult to recover from.
That is why many advisers are recommending high stock portfolios in your early years, low stock allocations close to and right after retirement, and than increasing that stock allocation as you get older.
We simply need the growth and inflation protection that only stocks can offer to build wealth early and then sustain us into old age. But it also means you may want to reduce that stock allocation right before and after retirement.
Longer lives are great. But, to make it great, we're going to have to plan for longer lives.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Showing posts with label retirement planning. Show all posts
Showing posts with label retirement planning. Show all posts
Friday, May 01, 2015
Friday, February 20, 2015
The big benefits of boosting your savings--even by small amounts!
Everyone knows they need to save more for retirement. But most don't because they think they can't afford it.
The reality is that even small boosts in savings can have large impacts over the fullness of time.
A Wall Street Journal article and a report by Fidelity Investments makes this point clear: even boosting your savings by 1% will have a meaningful impact on your retirement income.
It's more fun to focus on getting higher returns, but the most potent force in anyone's retirement plan is their own willingness to save.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
The reality is that even small boosts in savings can have large impacts over the fullness of time.
A Wall Street Journal article and a report by Fidelity Investments makes this point clear: even boosting your savings by 1% will have a meaningful impact on your retirement income.
It's more fun to focus on getting higher returns, but the most potent force in anyone's retirement plan is their own willingness to save.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, July 25, 2014
Comparison shopping
When you go shopping for a house, TV, clothes, or car, you understand that you need to shop around.
Shopping allows you to better understand the nature of the product you might buy. What are the options? What is the price range? How is the product sold? How is it supported after purchase?
If you don't do a good job of shopping around, you are very likely to pick an inferior product or pay too high a price. So, it pays to shop around.
The same can be said when it comes to looking for investing or financial advice: you need to do some comparison shopping. (In fact, I think that the expense and impact of good or bad financial advice far out-weighs the cost and benefit of a house, TV, clothes or car. But, then again, this is what I do for a living.)
But, many consumers don't comparison shop for investing advice. They pick the person they already know who does it, or a golfing buddy. Some people ask for referrals from friends, family or coworkers, but then don't find out who else is out there or what they have to offer. How do you know what you're getting is any good if you don't know what else is being sold and at what price? The worst way to pick such advice is to wait for someone to come to you--you know, the shark with his fin showing.
What types of things do you need to find out from a potential adviser? Start with their track record: how are they doing with their own money?
Would you want to work with a plumber who can't fix her own pipes, or a doctor that can't successfully diagnose patients? Then, why would you want to work with an financial adviser who hasn't succeeded financially themselves (or are on a clear path to doing so)?
It is shocking how few advisers follow their own advice. Most mutual fund managers don't put but a small amount of their own cash into the fund they manage. Many sellers of insurance and annuities buy the minimum required so they can say they buy the product they sell. A good adviser puts most of their money into the product or service they sell. If they say it is good for you, why wouldn't they be fully invested themselves?
Another thing to find out from an adviser is how they are paid. If they are paid a commission to sell a product, don't expect much support after the sale. If they pass you off to someone else after the sale, you just bought a service from a rainmaker--good luck with that. The best situation is when their pay is aligned with your interests in some way. If you don't understand how they are getting paid or they are evasive in answering your questions, be wary.
Another question to ask is how much a potential adviser charges? Be careful, because you may be comparing apples and oranges. A Porsche doesn't sell at the same price as a Yugo, so don't expect a good adviser to be lowest cost. Make sure you understand how much you would be paying relative to similar services. If the rate is above or below average, then assess whether it makes sense to pay more or less. Higher touch service is higher cost, so is higher performance service. Price is not a figure in a vacuum, it belongs in the context of the value you are getting.
Finding good financial advice is hard. There just aren't that many people out there who are good with their money. Also, the investing advice business is structured to sell products and services, not specifically to help clients, so investors are understandably wary.
To get good advice, you need to shop around. Find out what services are available at what price. Talk to many people in the field to get to the point you understand what you are buying and the quality of the person you are buying from.
As they say, if you don't know jewelry, know the jeweler. To get good investing advice, you don't need to know investing, but you do need to know your investing adviser.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Shopping allows you to better understand the nature of the product you might buy. What are the options? What is the price range? How is the product sold? How is it supported after purchase?
If you don't do a good job of shopping around, you are very likely to pick an inferior product or pay too high a price. So, it pays to shop around.
The same can be said when it comes to looking for investing or financial advice: you need to do some comparison shopping. (In fact, I think that the expense and impact of good or bad financial advice far out-weighs the cost and benefit of a house, TV, clothes or car. But, then again, this is what I do for a living.)
But, many consumers don't comparison shop for investing advice. They pick the person they already know who does it, or a golfing buddy. Some people ask for referrals from friends, family or coworkers, but then don't find out who else is out there or what they have to offer. How do you know what you're getting is any good if you don't know what else is being sold and at what price? The worst way to pick such advice is to wait for someone to come to you--you know, the shark with his fin showing.
What types of things do you need to find out from a potential adviser? Start with their track record: how are they doing with their own money?
Would you want to work with a plumber who can't fix her own pipes, or a doctor that can't successfully diagnose patients? Then, why would you want to work with an financial adviser who hasn't succeeded financially themselves (or are on a clear path to doing so)?
It is shocking how few advisers follow their own advice. Most mutual fund managers don't put but a small amount of their own cash into the fund they manage. Many sellers of insurance and annuities buy the minimum required so they can say they buy the product they sell. A good adviser puts most of their money into the product or service they sell. If they say it is good for you, why wouldn't they be fully invested themselves?
Another thing to find out from an adviser is how they are paid. If they are paid a commission to sell a product, don't expect much support after the sale. If they pass you off to someone else after the sale, you just bought a service from a rainmaker--good luck with that. The best situation is when their pay is aligned with your interests in some way. If you don't understand how they are getting paid or they are evasive in answering your questions, be wary.
Another question to ask is how much a potential adviser charges? Be careful, because you may be comparing apples and oranges. A Porsche doesn't sell at the same price as a Yugo, so don't expect a good adviser to be lowest cost. Make sure you understand how much you would be paying relative to similar services. If the rate is above or below average, then assess whether it makes sense to pay more or less. Higher touch service is higher cost, so is higher performance service. Price is not a figure in a vacuum, it belongs in the context of the value you are getting.
Finding good financial advice is hard. There just aren't that many people out there who are good with their money. Also, the investing advice business is structured to sell products and services, not specifically to help clients, so investors are understandably wary.
To get good advice, you need to shop around. Find out what services are available at what price. Talk to many people in the field to get to the point you understand what you are buying and the quality of the person you are buying from.
As they say, if you don't know jewelry, know the jeweler. To get good investing advice, you don't need to know investing, but you do need to know your investing adviser.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, April 04, 2014
Investment advice isn't only about maximizing returns
Generating above average returns isn't the only way investment advisers help clients.
As Vanguard has recently pointed out, investors on their own tend to make bad mistakes that destroy returns over time.
Investment advisers can help their clients make better decisions in key areas that dramatically impact long run returns:
I agree with Vanguard's findings and believe it highlights what many investors may be missing: investment advisers help clients reach their goals not just through investment selection, but by providing prudent and effective advice that can significantly impact returns over time.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
As Vanguard has recently pointed out, investors on their own tend to make bad mistakes that destroy returns over time.
Investment advisers can help their clients make better decisions in key areas that dramatically impact long run returns:
- keeping clients on an even keel emotionally by guiding them to be fearful when others are greedy and greedy when others are fearful
- guiding clients toward tax-efficient investing without making tax planning an all-consuming goal
- keeping client investment costs low
- guiding clients to rebalance their portfolios: selling what has gone up and buying what has gone down
I agree with Vanguard's findings and believe it highlights what many investors may be missing: investment advisers help clients reach their goals not just through investment selection, but by providing prudent and effective advice that can significantly impact returns over time.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, March 14, 2014
Returns through the windshield, not the rear-view mirror
What kind of returns are you expecting over the next 5 to 10 years?
Most people look at history as a guide to answer such a question, but is that really the right approach?
The Wall Street Journal published a good article last week on just this issue.
Most investors expect 5-10% returns because that's what they've seen in the past. Those same investors thought 15-20% returns were possible in 2000. Not so much. They also thought housing prices would go up much faster than inflation back in 2006. Wrong, there, too.
Why can history be a poor guide? Think about throwing a ball into the air. If you project the first part of its upward flight into the future, you'd think it would keep going up. But, that doesn't factor in good ole gravity.
The same is true with investing. You can look at the past, but you have to factor in where things started, where they ended, and what forces may cause projected trends to change.
By looking at such underlying factors, I think you can expect 1% to 7% returns over the next 5 years, 4% to 8% returns over the next 10 years, and 6% to 8.5% returns over the next 20 years.
Keep in mind, those numbers include inflation, so you have to subtract around 2.5% from each figure to get the real return (what your dollars can actually buy in the future). And, yes, that means we could experience negative real returns over the next 5 years.
Those numbers aren't terrible, but they aren't what most people are expecting (especially after a year when the S&P 500 was up over 32%!).
If you need to drive from Colorado Springs to Denver and need to arrive at 4 pm, you can't get there by leaving at 3:30 pm and driving 120 miles per hour. Assuming the wrong rate prevents you from reaching your destination on time.
The same is true with investing. Assuming the wrong rate of investment growth will cause you to save too little, and not have enough to retire when you want.
To plan a safe retirement journey, plan accordingly.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Most people look at history as a guide to answer such a question, but is that really the right approach?
The Wall Street Journal published a good article last week on just this issue.
Most investors expect 5-10% returns because that's what they've seen in the past. Those same investors thought 15-20% returns were possible in 2000. Not so much. They also thought housing prices would go up much faster than inflation back in 2006. Wrong, there, too.
Why can history be a poor guide? Think about throwing a ball into the air. If you project the first part of its upward flight into the future, you'd think it would keep going up. But, that doesn't factor in good ole gravity.
The same is true with investing. You can look at the past, but you have to factor in where things started, where they ended, and what forces may cause projected trends to change.
By looking at such underlying factors, I think you can expect 1% to 7% returns over the next 5 years, 4% to 8% returns over the next 10 years, and 6% to 8.5% returns over the next 20 years.
Keep in mind, those numbers include inflation, so you have to subtract around 2.5% from each figure to get the real return (what your dollars can actually buy in the future). And, yes, that means we could experience negative real returns over the next 5 years.
Those numbers aren't terrible, but they aren't what most people are expecting (especially after a year when the S&P 500 was up over 32%!).
If you need to drive from Colorado Springs to Denver and need to arrive at 4 pm, you can't get there by leaving at 3:30 pm and driving 120 miles per hour. Assuming the wrong rate prevents you from reaching your destination on time.
The same is true with investing. Assuming the wrong rate of investment growth will cause you to save too little, and not have enough to retire when you want.
To plan a safe retirement journey, plan accordingly.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, February 07, 2014
I wrote a couple weeks ago about the right stock/bond mix before and during retirement.
Another good article appeared in the WSJ this past week that is also worth reading on the same subject.
The concept of reducing your stock exposure slowly as you age is being questioned. Perhaps it's better to have a lot less stock just before and early into retirement, but then increase the stock portion as retirement goes on.
I think this is a much more intelligent way to think about retirement planning and should be reiterated.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Another good article appeared in the WSJ this past week that is also worth reading on the same subject.
The concept of reducing your stock exposure slowly as you age is being questioned. Perhaps it's better to have a lot less stock just before and early into retirement, but then increase the stock portion as retirement goes on.
I think this is a much more intelligent way to think about retirement planning and should be reiterated.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Saturday, December 21, 2013
How much will you spend in retirement?
The Wall Street Journal just published a good article about retirement income.
I tend to be conservative in my planning, so I assume 100% pre-retirement spending, and spending 3.33% of savings per year, but the article highlights the more conventional view of 75% to 85% pre-retirement income and 5% per year spending.
The choice is really up to each individual, but I prefer a bigger rather than a smaller margin of safety.
If you were told you had a 1 in 20 of getting into a major car accident today that would cause debilitating injuries, you probably would elect not to drive. But, when people are told they have a 5% chance of running out of money in retirement, they don't seem to grasp that 1 in 20 and 5% are the same odds.
Depending on the kindness of strangers--or worse, family members!--in your 80's or 90's sounds about as enticing as a debilitating car accident, to me.
The issue isn't so much what numbers you plan for retirement spending and saving, but that you think about it. The article referred to above gives a great set of ideas to consider in your retirement planning.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
I tend to be conservative in my planning, so I assume 100% pre-retirement spending, and spending 3.33% of savings per year, but the article highlights the more conventional view of 75% to 85% pre-retirement income and 5% per year spending.
The choice is really up to each individual, but I prefer a bigger rather than a smaller margin of safety.
If you were told you had a 1 in 20 of getting into a major car accident today that would cause debilitating injuries, you probably would elect not to drive. But, when people are told they have a 5% chance of running out of money in retirement, they don't seem to grasp that 1 in 20 and 5% are the same odds.
Depending on the kindness of strangers--or worse, family members!--in your 80's or 90's sounds about as enticing as a debilitating car accident, to me.
The issue isn't so much what numbers you plan for retirement spending and saving, but that you think about it. The article referred to above gives a great set of ideas to consider in your retirement planning.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, April 02, 2010
Self-imposed retirement delusion.
The American dream is financial independence, but we aren't saving or planning enough for retirement. Everybody knows this, but we aren't doing enough about it. Frankly, the gulf between what people know and what they're doing has progressed beyond "inadequate planning," it's outright delusional.
How much do you need? Around 20 times your annual spending needs. That will allow you to withdraw 5% a year and still handle the bumps and bruises that markets will inevitably serve over time. Conservatively, I use 22 times my desired retirement spending needs, and that doesn't include income from any source other than savings.
If you have a pension or fixed annuity, you can subtract that from your annual needs to do the calculation. If you're older than 50, you can probably plan to receive the social security benefits you've been promised. If you're 40 to 50, be ready to give those benefits a significant haircut. If you're below 40, like me, don't count on it (by the way, the more you save, the less likely you'll be to get it).
Assuming the average John and Jane Doe need around $40,000 a year to live on, they'll need $800,000 to retire. Americans aren't even on a glide-path to reach that point--they're on a different planet.
According to the Employee Benefit Research Institute's 2010 survey, 54% of those currently working have less than $25,000 in savings and 88% have less than $250,000. Those already retired are even worse off: 56% with less than $25,000 and 88% less than $250,000.
It's not just a matter of not having saved enough, it's a matter of even having thought about it. Both retirees and workers are confident they have or will have enough to retire. And, this is from a group where only 46% have even tried to calculate how much they'll need! Delusional.
How do workers and retirees expect to get by? That's where the survey gets scary. 66% of workers expect to keep working past 65. The percent of actual retirees that work past 65? 39%. In other words, people expect to keep working past 65, but don't--not because they don't want or need to, but because they can't. Why? Because they get fired, can't find work, or, most frequently, have health issues that make working impossible.
A startling 70% of those currently working expect to continue working in retirement to pay the bills. The percent of retirees who actually manage to do this: 33%.
The average worker expects his retirement income to come from working in retirement and a pension (even though the vast majority admit they don't have pensions and won't because few companies offer them). Where do actual retirees get most of their retirement income? Social security.
So, most people are planning to keep working, but the data clearly shows that won't happen for most. And, most expect to get a pension even though they don't have one and have no clear path for getting one. The reality is that most retirees rely on social security, but only 30% of people working and 52% of those currently retired expect social security to be available. This fantasy will turn to farce, but it's won't be funny.
The stock market--by itself--won't bail us out, either. Trend-line growth of 6% plus a 2% dividend yield means we should expect only 8% returns (which includes 3% inflation). But, most people won't even get those returns because they'll pay too much in fees and then they'll chase performance (selling what "didn't work" to buy what's recently "been working"). The reality is that most people will get returns that simply match inflation.
What's the real solution? Save more, save more, save more (which conversely means: spend less, spend less, spend less). I'm 39 and have 20% of the savings I'll need in 26 years (assuming 65 retirement, whether I like it or not!). Assuming I can get market returns (even though I've beat the market by 5% on average, annually over the last 14 years), I'll need to save 10% of my annual income to get there. I'm saving 20%. In other words, I'm not planning to get there with just enough if everything goes right, I'm assuming things won't go right and building a margin of safety into my plan.
It's time to drop the delusion and act. That action means saving more, spending less, investing wisely, and planning to have more than needed. The benefits are more than simply having peace of mind, it'll be food on the table and a roof over your head when you're too old to fix past mistakes.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
The American dream is financial independence, but we aren't saving or planning enough for retirement. Everybody knows this, but we aren't doing enough about it. Frankly, the gulf between what people know and what they're doing has progressed beyond "inadequate planning," it's outright delusional.
How much do you need? Around 20 times your annual spending needs. That will allow you to withdraw 5% a year and still handle the bumps and bruises that markets will inevitably serve over time. Conservatively, I use 22 times my desired retirement spending needs, and that doesn't include income from any source other than savings.
If you have a pension or fixed annuity, you can subtract that from your annual needs to do the calculation. If you're older than 50, you can probably plan to receive the social security benefits you've been promised. If you're 40 to 50, be ready to give those benefits a significant haircut. If you're below 40, like me, don't count on it (by the way, the more you save, the less likely you'll be to get it).
Assuming the average John and Jane Doe need around $40,000 a year to live on, they'll need $800,000 to retire. Americans aren't even on a glide-path to reach that point--they're on a different planet.
According to the Employee Benefit Research Institute's 2010 survey, 54% of those currently working have less than $25,000 in savings and 88% have less than $250,000. Those already retired are even worse off: 56% with less than $25,000 and 88% less than $250,000.
It's not just a matter of not having saved enough, it's a matter of even having thought about it. Both retirees and workers are confident they have or will have enough to retire. And, this is from a group where only 46% have even tried to calculate how much they'll need! Delusional.
How do workers and retirees expect to get by? That's where the survey gets scary. 66% of workers expect to keep working past 65. The percent of actual retirees that work past 65? 39%. In other words, people expect to keep working past 65, but don't--not because they don't want or need to, but because they can't. Why? Because they get fired, can't find work, or, most frequently, have health issues that make working impossible.
A startling 70% of those currently working expect to continue working in retirement to pay the bills. The percent of retirees who actually manage to do this: 33%.
The average worker expects his retirement income to come from working in retirement and a pension (even though the vast majority admit they don't have pensions and won't because few companies offer them). Where do actual retirees get most of their retirement income? Social security.
So, most people are planning to keep working, but the data clearly shows that won't happen for most. And, most expect to get a pension even though they don't have one and have no clear path for getting one. The reality is that most retirees rely on social security, but only 30% of people working and 52% of those currently retired expect social security to be available. This fantasy will turn to farce, but it's won't be funny.
The stock market--by itself--won't bail us out, either. Trend-line growth of 6% plus a 2% dividend yield means we should expect only 8% returns (which includes 3% inflation). But, most people won't even get those returns because they'll pay too much in fees and then they'll chase performance (selling what "didn't work" to buy what's recently "been working"). The reality is that most people will get returns that simply match inflation.
What's the real solution? Save more, save more, save more (which conversely means: spend less, spend less, spend less). I'm 39 and have 20% of the savings I'll need in 26 years (assuming 65 retirement, whether I like it or not!). Assuming I can get market returns (even though I've beat the market by 5% on average, annually over the last 14 years), I'll need to save 10% of my annual income to get there. I'm saving 20%. In other words, I'm not planning to get there with just enough if everything goes right, I'm assuming things won't go right and building a margin of safety into my plan.
It's time to drop the delusion and act. That action means saving more, spending less, investing wisely, and planning to have more than needed. The benefits are more than simply having peace of mind, it'll be food on the table and a roof over your head when you're too old to fix past mistakes.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Tuesday, April 14, 2009
Retirement prospects look poor
An article in the Wall Street Journal today highlighted that those in or preparing for retirement are less confident than ever.
Only 13% of workers say they are very confident about having enough money to retire comfortably. That's a record low.
This is not a surprise considering that 49% of people 55 and older have saved less than $50,000. That's so far short of what's needed as to be outrageous. That could pay out around $4,400 a year over 30 years assuming an 8% return. Nowhere near enough money.
Those retired or going to retire over the next decade or two may at least have the benefit of social security and perhaps a pension. Younger folks should know that social security will be so far insolvent as to be unavailable to everyone.
Hope is not a strategy.
Only 25% of workers are highly optimistic about covering food and housing costs in retirement. That means 75% of people know--absolutely KNOW--they can't take care of themselves in retirement. Stunning!
For those currently retired, only 20% are confident about being able to afford a secure retirement. Only 25% say they have enough for medical expenses. Only 34% are optimistic about covering basic expenses. That means two-thirds of retirees believe they can't pay for the basics. Unbelievable!
On the bright side, workers are doing something to change their situation. They are cutting spending, working more hours, saving more, and talking to a financial professional. I hope they get good advice.
One major problem is that so many believe they can work longer to postpone retirement. But, 50% of current retirees left the workforce sooner than they expected because of health problems, downsizings or obsolete skills. Counting on working longer is not a solution.
Also, two-thirds of workers planned to work after retiring, but less than 35% actually ended up being able to work. Hoping to work more is not necessarily a viable option.
What do people need to do? They need to save more. They need to invest that money wisely. They need to think hard and independently about the amount of money they will need and why. They need to plan to take care of themselves, not hope that things "work out." Hope is not a strategy. Hope for the best, plan for the worst.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
An article in the Wall Street Journal today highlighted that those in or preparing for retirement are less confident than ever.
Only 13% of workers say they are very confident about having enough money to retire comfortably. That's a record low.
This is not a surprise considering that 49% of people 55 and older have saved less than $50,000. That's so far short of what's needed as to be outrageous. That could pay out around $4,400 a year over 30 years assuming an 8% return. Nowhere near enough money.
Those retired or going to retire over the next decade or two may at least have the benefit of social security and perhaps a pension. Younger folks should know that social security will be so far insolvent as to be unavailable to everyone.
Hope is not a strategy.
Only 25% of workers are highly optimistic about covering food and housing costs in retirement. That means 75% of people know--absolutely KNOW--they can't take care of themselves in retirement. Stunning!
For those currently retired, only 20% are confident about being able to afford a secure retirement. Only 25% say they have enough for medical expenses. Only 34% are optimistic about covering basic expenses. That means two-thirds of retirees believe they can't pay for the basics. Unbelievable!
On the bright side, workers are doing something to change their situation. They are cutting spending, working more hours, saving more, and talking to a financial professional. I hope they get good advice.
One major problem is that so many believe they can work longer to postpone retirement. But, 50% of current retirees left the workforce sooner than they expected because of health problems, downsizings or obsolete skills. Counting on working longer is not a solution.
Also, two-thirds of workers planned to work after retiring, but less than 35% actually ended up being able to work. Hoping to work more is not necessarily a viable option.
What do people need to do? They need to save more. They need to invest that money wisely. They need to think hard and independently about the amount of money they will need and why. They need to plan to take care of themselves, not hope that things "work out." Hope is not a strategy. Hope for the best, plan for the worst.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Wednesday, September 19, 2007
401k investing
Many investors are just plain baffled about how to invest their money. They don't know where or how to invest to reach a comfortable retirement.
One of the best investment vehicles out there, if it's available through your employer, is the 401k plan.
Traditional 401k plans allow for pre-tax contributions that grow tax-deferred until retirement (when withdrawals are taxed as ordinary income). Roth 401k plans allow for after-tax contributions that grow tax-deferred and are not taxed on withdrawal (they also provide more flexible withdrawals and better estate planning options).
Many employers match employee contributions. This is like getting a raise in salary, yet less than 66% of all employees eligible participate in such plans.
If a 401k plan is available to you, you should almost certainly be contributing to it.
The earlier you start saving, the sooner you don't have to work for other people or the bigger your retirement will be. Start saving NOW!
Before you invest, you should learn a few things about the plan available from your employer. You'll want to know your employer's policy on matching contributions, the vesting schedule for contributing, and the plan's maximum contributions.
The hardest part about investing in a 401k--after clearly understanding you should--is picking the right investment(s). Most plans offer anywhere from 25 to 900 choices. Almost all investors are overwhelmed by such choices.
Unlike most advisors, I don't necessarily believe that investors should go crazy diversifying their money to the 4 corners of the investment world. There are better and worse investing opportunities, and any good investment advisor will know the difference between the two.
Don't necessarily go for target date funds, either. Their allure seems wonderful because someone else does the thinking for you, but their high fees and necessarily mediocre performance may not meet your personal desires or your investment needs.
Finally, I would advise you not to invest in your company's stock through such a plan. Your pay check is already dependent on the company, so you probably don't want your retirement nest-egg to be in the same spot. The folks at Enron, Worldcom and Arthur Anderson found out the hard way what a big mistake that can be.
If you need any help making these decisions, I'd be happy to help. Just give me a call at 719-761-3148.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Many investors are just plain baffled about how to invest their money. They don't know where or how to invest to reach a comfortable retirement.
One of the best investment vehicles out there, if it's available through your employer, is the 401k plan.
Traditional 401k plans allow for pre-tax contributions that grow tax-deferred until retirement (when withdrawals are taxed as ordinary income). Roth 401k plans allow for after-tax contributions that grow tax-deferred and are not taxed on withdrawal (they also provide more flexible withdrawals and better estate planning options).
Many employers match employee contributions. This is like getting a raise in salary, yet less than 66% of all employees eligible participate in such plans.
If a 401k plan is available to you, you should almost certainly be contributing to it.
The earlier you start saving, the sooner you don't have to work for other people or the bigger your retirement will be. Start saving NOW!
Before you invest, you should learn a few things about the plan available from your employer. You'll want to know your employer's policy on matching contributions, the vesting schedule for contributing, and the plan's maximum contributions.
The hardest part about investing in a 401k--after clearly understanding you should--is picking the right investment(s). Most plans offer anywhere from 25 to 900 choices. Almost all investors are overwhelmed by such choices.
Unlike most advisors, I don't necessarily believe that investors should go crazy diversifying their money to the 4 corners of the investment world. There are better and worse investing opportunities, and any good investment advisor will know the difference between the two.
Don't necessarily go for target date funds, either. Their allure seems wonderful because someone else does the thinking for you, but their high fees and necessarily mediocre performance may not meet your personal desires or your investment needs.
Finally, I would advise you not to invest in your company's stock through such a plan. Your pay check is already dependent on the company, so you probably don't want your retirement nest-egg to be in the same spot. The folks at Enron, Worldcom and Arthur Anderson found out the hard way what a big mistake that can be.
If you need any help making these decisions, I'd be happy to help. Just give me a call at 719-761-3148.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Monday, September 10, 2007
Bad reasons not to save
Jonathan Clements, who writes for the Wall Street Journal, had a somwhat amusing article on September 9th.
His title was, "Six Bad Reasons Not to Save for Retirement." I couldn't agree more.
Bad reason #1: I still have plenty of time.
Say you start saving for retirement as a diligent 25 year old. Your goal is to have $1 million by retirement, which you plan to start at 65 years old. You'd need to save around $846 a month for 40 years.
If you wait until 35, you'd have to save 70% more a month, or $1,441 per month for 30 years. If you wait until you're 45, you'd have to save 322% more a month, or $2,726 per month for 20 years. If you wait until 55, you'd have to save 803% more a month, or $6,791 per month for 10 years.
It pays to start as early as possible. The longer you wait, the more painful reaching retirement will be.
If you think you'll earn more money as you age and have more money to save later, you're right on the first issue but wrong on the second, because I almost guarantee you're expenses will go up faster than your income as you age.
Start saving as soon as you can, as much as you can, and you'll reach a bigger retirement with a lot less stress and strain.
Bad reason #2: My house is worth a bundle.
See my previous post on this subject. Counting your home as a retirement asset usually doesn't work out.
Bad reason #3: My investments are doing great.
They may be doing well, now, but what matters is how they do over the full length of your retirement years.
For those who retired in the late 1990's with enough money, the sell-off during 2000-2003 slammed them right back into working again. It's not enough to have a lot of money at the peak.
A retirement plan should be set up with a margin of safety, not merely "enough money to get by as long as everything goes well."
The best way to get there is to save continuously into your retirement plan (which should be based on reasonable assumptions).
Bad reason #4: I'll receive a fat inheritance.
Very few people, after inheritance taxes, will receive enough money to retire on, perhaps 1.6% as Clements suggests.
If you are part of that 1.6%, congratulations.
If not, get to saving.
Bad reason #5: I have a pension.
41% of households currently have a defined-benefit pension plan, whereas 62% of workers expect to receive a pension.
If you actually have a pension and are not part of the 21% of "land-of-fantasy" types who expect a magical pension to appear in the future, be sure it will cover your actual expenses in retirement.
Also, keep in mind that, because of recent accounting pronouncements and the expense of defined-benefit plans for companies, many defined pension plans are going the way of the dodo.
If you don't have a pension or are part of the 21% who are clicking your heels for the future-fantasy-pension, get to saving.
Bad reason #6: I'll work in retirement.
This is actually not a bad idea.
I love my job and don't plan to stop working until I'm unable to work, so I can sympathise with this argument.
But, many people don't want to or can't work into their 70's and 80's.
Planning to work into your 60's makes sense, but assuming you'll be capable of working into your 70's and 80's is gambling where the odds are against you.
Plan to work if you can and want to, but have enough money saved in case you just plain can't.
Saving for retirement is like paying for insurance. You may never make a claim or need as much money as you've saved, but that doesn't mean you don't want to make regular payments so you are safe and secure in your old age.
Save for retirement as soon as you can, as much as you can, and as regularly as you can. You'll sleep better and have greater peace of mind.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Thursday, February 15, 2007
Retirement withdrawal planning can be very complex
I read a fascinating article recently about retirement withdrawal planning in the November/December 2006 issue of the Financial Analysts Journal (Withdrawal Location with Progressive Tax Rates, Stephen M. Horan, CFA). Let me warn you, the Financial Analysts Journal is not light reading. However, the issues of the article and some of it's conclusions are important to consider.
Planning withdrawals in retirement can be complex because it's possible to have so many different kinds of retirement accounts to withdraw from: Roth IRA, traditional IRA, taxable accounts, etc. Which account you withdraw from and when can have huge implications on your standard of living and the length of time your money may last.
The reason is simple, each type of account is taxed differently when you withdraw the money. Roth accounts have no tax consequences at withdrawal. Tax deferred accounts (like traditional IRAs, 401(k)s, Thrift Savings Plans, etc.) are taxed at income tax rates, where the tax increases as you withdraw more money. Taxable accounts are currently taxed at a maximum of 15% for capital gains and dividends or at your marginal income tax rate for interest or non-qualified dividends (dividends that haven't been taxed at the corporate level like Real Estate Investment Trusts and Business Development Companies).
Which account you withdraw from may have significant tax consequences, and withdrawing from different accounts at different times could also significantly impact the amount of money you can pull from your retirement accounts and the length of time your money lasts. Added to this, tax deferred accounts like traditional IRAs require mandatory withdrawals, even further increasing the difficulty of figuring out how to withdraw your money.
The article mentioned above attempts to find the optimal strategy for withdrawing money. To simplify the problem, the author only looks at Roth and traditional IRAs to find the best strategy. He starts with the simple strategy of withdrawing from the traditional IRA for income needs first, and then withdrawing from the Roth IRA once the traditional runs out. Then, he tries the reverse strategy, Roth first then traditional. It turns out withdrawing from the traditional first leads to significantly higher withdrawal levels and longer lasting withdrawals.
He also tests mixes of withdrawals from Roth and traditional IRAs. What he finds is that withdrawing up to the 15% tax bracket level from the traditional and then pulling from the Roth next to meet spending needs is the optimal strategy. Of course, this depends on how much money you have saved, too. And it doesn't include taxable accounts, or pension distributions, or social security, etc.
I hope you're getting the picture: this is complex stuff. The article's math is very complicated, and as soon as tax rates change, his conclusions need to be retested. This is one difficult problem to solve, and it can have huge impacts on how much money you live off in retirement and the amount of time your money will last.
I hope some genius designs a computer program that will solve this problem for people. You know, just plug in the amount you have from each source and what you're getting from a pension and social security, and it tells you to pull out X dollars from A account, etc., so you optimize your income and its longevity. But, in the meantime, this will be one difficult problem to solve.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
I read a fascinating article recently about retirement withdrawal planning in the November/December 2006 issue of the Financial Analysts Journal (Withdrawal Location with Progressive Tax Rates, Stephen M. Horan, CFA). Let me warn you, the Financial Analysts Journal is not light reading. However, the issues of the article and some of it's conclusions are important to consider.
Planning withdrawals in retirement can be complex because it's possible to have so many different kinds of retirement accounts to withdraw from: Roth IRA, traditional IRA, taxable accounts, etc. Which account you withdraw from and when can have huge implications on your standard of living and the length of time your money may last.
The reason is simple, each type of account is taxed differently when you withdraw the money. Roth accounts have no tax consequences at withdrawal. Tax deferred accounts (like traditional IRAs, 401(k)s, Thrift Savings Plans, etc.) are taxed at income tax rates, where the tax increases as you withdraw more money. Taxable accounts are currently taxed at a maximum of 15% for capital gains and dividends or at your marginal income tax rate for interest or non-qualified dividends (dividends that haven't been taxed at the corporate level like Real Estate Investment Trusts and Business Development Companies).
Which account you withdraw from may have significant tax consequences, and withdrawing from different accounts at different times could also significantly impact the amount of money you can pull from your retirement accounts and the length of time your money lasts. Added to this, tax deferred accounts like traditional IRAs require mandatory withdrawals, even further increasing the difficulty of figuring out how to withdraw your money.
The article mentioned above attempts to find the optimal strategy for withdrawing money. To simplify the problem, the author only looks at Roth and traditional IRAs to find the best strategy. He starts with the simple strategy of withdrawing from the traditional IRA for income needs first, and then withdrawing from the Roth IRA once the traditional runs out. Then, he tries the reverse strategy, Roth first then traditional. It turns out withdrawing from the traditional first leads to significantly higher withdrawal levels and longer lasting withdrawals.
He also tests mixes of withdrawals from Roth and traditional IRAs. What he finds is that withdrawing up to the 15% tax bracket level from the traditional and then pulling from the Roth next to meet spending needs is the optimal strategy. Of course, this depends on how much money you have saved, too. And it doesn't include taxable accounts, or pension distributions, or social security, etc.
I hope you're getting the picture: this is complex stuff. The article's math is very complicated, and as soon as tax rates change, his conclusions need to be retested. This is one difficult problem to solve, and it can have huge impacts on how much money you live off in retirement and the amount of time your money will last.
I hope some genius designs a computer program that will solve this problem for people. You know, just plug in the amount you have from each source and what you're getting from a pension and social security, and it tells you to pull out X dollars from A account, etc., so you optimize your income and its longevity. But, in the meantime, this will be one difficult problem to solve.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
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