On a recent show on CNBC, a financial planner surprised everyone when she said a person should have about $2.5 million in his or her retirement plan. Of course, those on hand were aghast by the comments, including myself. But having since thought about it, it does make some sense.
Four Percent Rule No Longer Sufficient for Retirement Savings?
The thing is that the old rule used by financial planners that those in retirement can withdraw four percent annually to live for another few decades simply doesn’t pan out for the majority of people, given their retirement savings and retirement plan.
The problem with the four percent rule and the savings process are the extremely low interest rates and resulting bond yields that make the retirement plan difficult for many.
Based on the low interest rates offered, even a million dollars in a retirement plan could be on the low side, especially if you are expecting a nice and long retirement, as long as interest rates do not pop higher. If this is a low rate era, then you better start pumping up your retirement investing strategy.
At, say, two percent, a million dollars yields you only $20,000 annually, which is nothing in these times. Upping your retirement plan to $2.0 million yields $40,000, which, along with added withdrawals, would give you a comfortable retirement in the sun.
The reality is that the low yields that have been around for more than five years don’t help the income investor and those looking to build up their retirement savings. That’s the reason why the stock market has been as strong as … Read More
“What should you do when the house isn’t in order?”
A good friend of mine asked this question back in 2011. At that time, key stock indices were plunging lower due to issues regarding the U.S. debt ceiling. There was uncertainty, and many wondered what would happen next. I remember this question now because the key stock indices nowadays are falling due to troubles in the emerging markets and there seems to be panic—similar to what we were experiencing when I first heard this question.
When key stock indices are declining, instead of panicking and selling every holding in their portfolio, investors have to be strategic and instead think with an open mind and a long-term perspective.
The first step investors should take is to see where the troubles are coming from and if they are exposed to it at all. For example, these days, we see problems in the emerging markets are causing panic. If investors have a massive percentage of their portfolio invested in the emerging markets, then they should simply reduce their exposure. If they continue to hold their positions, and the markets continue to decline further, their losses will get bigger and it will be much harder to recover. If investors witnessed a drawdown of 25% in their portfolio, it will have to go up by more than 33% for them to just break even. Plus, reducing exposure not only protects investors from potential loss, but it also increases their cash position.
The second step investors should take is to exercise extra caution when key stock indices are falling. Investors should carefully screen the news and … Read More
Are the long-term retirement plans of working Americans being held hostage by the Federal Reserve?
If the point of quantitative easing was to stave off a recession and spur jobs growth, I think it’s fair to say the Federal Reserve’s $85.0-billion-per-month money-printing scheme has been a failure. At the very least, I’m not so sure the money was well spent, and that the end does not justify the means.
I enter as evidence almost $4.0 trillion that the Federal Reserve has dumped into the U.S. economy since 2009. To put that into perspective, the average unemployment rate that same year was around 8.5%; that translates into roughly 13.1 million Americans being out of work in 2009. Fast-forward to today, and the unemployment rate stands at an unacceptable 7.2%, or 11.3 million Americans. (Sources: “Civilian Labor Force (CLF16OV),” Federal Reserve Bank of St. Louis Economic Research web site, last accessed October 24, 2013; “The Employment Situation – September 2013,” U.S. Bureau of Labor Statistics web site, October 22, 2013.)
It could be argued that over the last four years, the Federal Reserve has printed off $4.0 trillion to create 1.8 million jobs.
But at what expense? Since the stock market crash in 2008, the Federal Reserve, through its use of quantitative easing, has sent U.S. interest rates towards near-record lows. In fact, the Federal Reserve has kept the federal funds rate target between zero and 0.25% for almost five years.
That’s terrible news for anyone looking to save money, and near-record-low interest rates make it virtually impossible for people to save money to meet their retirement needs. Sadly, for those nearing … Read More
One of the basic rules that investors should follow when it comes to portfolio management is to not have a bias. What biases eventually do is either hinder investors from making better decisions or cause investors to not even recognize an opportunity that can take their portfolio to new heights.
For example, take the Affordable Care Act, more commonly referred to as “Obamacare.” A friend of mine, who is saving for his retirement, has a bias when it comes to this topic. He says it’s not worth it for Americans, and it’s just another expense to add to the budget. It won’t stick around for long, he believes, and we will eventually end up back at where we are now.
He has his reasons, and as a result, he doesn’t want anything to do with companies that are in any way related to the Affordable Care Act–which includes pretty much the entire health care sector. “I don’t want to expose my portfolio to anything like this,” he said.
Recently, we were having a discussion and he told me that he “missed out on one big investment opportunity for [his] portfolio.” I asked him what that was, and he answered with another question: “Have you looked at the health care sector at all lately?” Please look at the chart below to see what he meant, and what he regrets.
Chart courtesy of www.StockCarts.com
The chart above provides a general idea about how the companies in the health care sector have done. This exchange-traded fund (ETF), which tracks the sector’s performance, is up nearly 100% since the Obamacare law was signed by … Read More
Your 401(k) is supposed to be a retirement account with a long investing horizon—not a day trading platform. Unfortunately, there are a growing number of investors doing just that, throwing not just caution to the wind, but also their long-term financial stability.
Way, way back in 1978, Congress enacted the Revenue Act to help encourage Americans to save more for retirement. The Act allows Americans to save for retirement while, at the same time, lowering their state and federal taxes. The term “401(k)” refers to the section number and paragraph in the Internal Revenue Code: section 401, paragraph (k).
The most widely used investment vehicle, your 401(k) is a long-term diversified investment strategy designed to (ideally) minimize risk while helping you realize your retirement goals. With a 401(k), you make money on long-term investing in a diversified portfolio that takes advantage of capital gains growth and compound interest.
As an added incentive, many employers will match your contribution. In 2013, employees can tuck $17,500 away in their account, and those over 50 years old can put away an additional $5,500.
While plunking down a solid portion of every paycheck into your 401(k) may take discipline, you do so because you want to have some sort of safety net when you retire, which is a long-term strategy. Too many investors, however, are tired of the returns they’re seeing with their 401(k)s, especially in light of the major strides the S&P 500 and Dow Jones Industrial Average are making.
In an effort to chase higher returns on their 401(k)s, many investors are now tapping into it for day trading purposes. This is … Read More
Over the Labor Day weekend, I met up with my old friend, Mr. Speculator. As always, we had a debate about portfolio management. We had a long conversation about what really is the right way to manage your investments—and, for that matter, if there is any. Should investors invest 40% of their portfolio in bonds and 60% in stocks? Should it be the opposite? Or is there another possible combination?
He said, “Moe, I am a firm believer in going for the fences every time for now, but do you really think I will continue to have the same approach in the long run?” (Turns out, there’s actually a rational investor in Mr. Speculator.)
“The answer is very simple: no,” he added. “When it comes to portfolio management, investors really need to realize there isn’t really a one-size-fits-all approach. I take risks now because I can afford to, but for those who are close to retirement, this is certainly not the way.”
I disagree with Mr. Speculator on many aspects of portfolio management, but on this, I can’t help but agree. Portfolio management differs from one person to another, and the amount of risk an investor should take also operates the same way.
A person who is 50 years old and has accumulated a significant amount of funds in their retirement account should not be taking the same risk as a person who is in their late twenties.
A person who has saved money for their retirement and are closing in on their golden years should be conservative with their investments. They should have more of a focus on assets … Read More
When it comes to investing, everyone wants to be in the best performing asset classes. Unfortunately, few, if any, are that good at consistently choosing the top performing asset classes to add to their retirement fund year after year. That’s why diversification is so important.
Riskier investments like stocks provide the best returns over the long term; they also happen to be the most volatile asset. Bonds, on the other hand, are much safer, and, as a result, offer very little when it comes to returns. By combing different types of investment strategies among different asset classes, investors can generate profit and reduce risk levels to meet their retirement goals.
To help minimize the risk of human error, emotions, and uncontrollable outside factors and to maximize long-term performance, investors concentrate on asset allocation—the art of spreading out their money in stocks, bonds, commodities, cash, and, for some, real estate.
The old asset allocation equation used to suggest people keep a percentage of bonds equal to their age in their retirement fund, with the remainder in stocks; a 40-year-old, for example, would park 40% of their investments in bonds and 60% in stocks. But since no two people have the same financial needs, it’s pretty hard to have an asset allocation strategy that works for everyone. The fact of the matter is that it’s up to each individual to find an asset allocation risk level that meets their long-term portfolio needs.
That can be difficult to do in this climate. In spite of weak economic news and high unemployment, the S&P 500 and Dow Jones Industrial Average are hitting new highs. … Read More
On July 23, the Dow Jones Industrial Average hit an all-time intraday high of 15,604.22. That same day, the S&P 500 also hit a new high of 1,698.78. With the markets doing so well, you could be forgiven for thinking today’s baby boomers are laughing all the way to the bank.
But that’s not so! Most baby boomers haven’t really benefited from the bull market. While it runs with reckless abandon, it’s leaving behind most Americans who are in retirement. Over the last five years, stocks and bonds have rallied, but the housing market has remained relatively flat. That means affluent Americans who park their assets in stocks and other financial products have done quite well. Those Americans with their wealth tied up in the value of their homes, however, have not.
Since the beginning of the current bull market in 2009, the S&P 500 has climbed more than 160%. U.S. housing prices, on the other hand, are still more than 25% below their 2006 highs.
Retiring baby boomers are also facing another challenge. Early boomers—those between 61 and 65—are more financially stable (for the most part) than their younger peers (those between 50 and 55). The early boomers worked during a period of economic stability in an era when defined benefit plans were the norm. In 1965, the inflation rate was 1.59%; by 1970, it had risen to 5.84%.
The late boomers, in contrast, started working in a more unsettled economic time. In the 1980s, many companies rolled their retirement plans over to 401(k) accounts, tying their self-directed retirement savings to the ups and downs of the stock market. … Read More
The dream of retiring comfortably is a mirage for the vast majority of Americans. According to the National Institute on Retirement Security (NIRS), the retirement savings shortfall in the U.S. is worse than anyone thought. But it’s not an impossible dream for wise investors.
After the U.S. markets crashed in 2008, many Americans saw the value of their hard-earned nest egg evaporate. While the S&P 500 and Dow Jones Industrial Average have been on a five-year bull run, this hasn’t trickled down to the average American. In fact, unemployment remains high, a record number of Americans receive food stamps, wages are stagnant, and personal debt is up.
All of that makes it difficult to set aside money to save for retirement.
And we are now bearing witness to the number of Americans who are sorely unprepared for retirement. In fact, the NIRS study found that roughly 45%, or 38 million, working-age households do not have any retirement account assets. (Source: “The Retirement Savings Crisis: Is It Worse Than We Think?,” National Institute of Retirement Security web site, June 2013.)
More specifically, when all working-age families are accounted for, the typical family has just $3,000 saved for retirement. Those nearing retirement don’t fare much better, with only $12,000 in the bank.
On top of that, 80% of working families have retirement savings less than one times their annual income. As a result, the U.S. retirement savings deficit has ballooned to between $6.8 and $14.0 trillion.
Even at the best of times it can be difficult to plan for retirement. After two recessions (2001 and 2008), even the most optimistic can give … Read More
Will your retirement mantra be, “save, save, save,” or “work, work, work?” That depends on how close to retirement you are—at least, according to a recent study published by The Pew Charitable Trusts. (Source: “Are Americans Prepared for their Golden Years?,” The Pew Charitable Trusts web site, May 16, 2013, last accessed June 13, 2013.)
When the Great Recession hit in 2007, the oldest baby boomers were just a few short years away from retirement. And, after a lifetime of economic expansion and planning for retirement, they faced the real possibility of losing a significant portion of their savings. The economic downturn also heightened retirement planning concerns facing virtually everyone else.
Many Americans who had held off saving for retirement saw their situations exacerbated by unemployment and a bleak job market. Many more also found themselves saddled to homes that were worth a lot less than they were just a few years before—though that’s a better predicament than those who discovered their houses were worth less than the mortgages they were carrying.
According to the report, early baby boomers (those born between 1946 and 1955) were heading toward retirement with enough savings to maintain their financial security. And thanks to both the “Dot-Com” boom and housing bubble, early baby boomers had higher overall wealth, net worth, and home equity than the Great Depression babies (those born between 1926 and 1935) or war babies (born between 1936 and 1945) had at the same ages.
But that doesn’t mean their retirement plans didn’t take a hit. Between 2007 and 2010, every age group experienced a significant loss of wealth. Early boomers lost … Read More
Retirement confidence seems to follow the trends of the global economy. At least, that’s according to one recent survey that looked at 12,000 workers and retirees in 12 European, North American, and Asian countries, including France, Germany, Hungary, Japan, the Netherlands, Poland, Spain, Sweden, China, the United Kingdom, the United States, and Canada—making this one of the largest studies of its kind.
The study found that 65% of the participants believe future generations will be worse off in retirement than they are today; more than half of the American workers (55%) feel that way, while 80% of the workers from France and Hungary expect future generations to be worse off. The Chinese are the least pessimistic, with roughly one in five participants feeling the same way. Only nine percent of respondents believe future generations will be better off in retirement than those in retirement today.
Thanks to government cutbacks, 63% of employees think their government retirement benefits will be less reliable or helpful; American workers come in near the top at 65%. America’s retirement pessimism continues, with just 12% saying their personal retirement planning is “very well-developed.”
A further 37% of Americans don’t know if they can achieve their desired retirement income. Only 12% are very optimistic that they will have enough money to live on, and only another 12% are very optimistic that they will be able to choose when they retire.
Not surprisingly, you have to have a handle on what it takes to retire to actually be able to plan for a comfortable retirement. The current retirement-related risks have increased on the backs of “financial illiteracy”—with only … Read More
Do you want to save more or less by the time you reach 65? It might seem like a question with an obvious answer, but…
Back in the 1950s and 1960s, Americans on the cusp of retirement had their defined pension plans to look forward to and didn’t really worry too much about saving for retirement—or running out of money. All of that changed in the 1980s, when many companies rolled their retirement plans over to 401(k) accounts. That one simple act meant a worker’s retirement savings now fluctuated with the ebb and flow of the stock market.
While it’s important to invest in your 401(k), it’s also important to know what your money’s being invested in and where it’s going. Unfortunately, most of us don’t. A recent study that looked at American investing knowledge found there’s a large gap between what we think we know and what we really know.
The study found that “nine out of 10 Americans (92.6%) dramatically underestimated the total 401(k) fees the average household will pay over the course of a lifetime.” When asked how much the average American household with two working adults will pay in 401(k) fees over the course of their lifetime, only 3.3% of respondents answered correctly, at $150,000–$200,000. The largest group (38.1%) was the most off the mark, saying it would cost less than $10,000. (Source: “The Online Investing Knowledge Gap: 2013 Investment Literacy Survey,” NerdWallet, March 18, 2013.)
So if you want to save more money for your retirement, there may be better options out there. If you’re looking to take advantage of the stock market, whether it’s … Read More
Saving for a comfortable retirement is what motivates many people to start their wealth management planning regimen. Whether you’ve been planning for retirement since you were 25 or 50, saving is only half the battle; after retirement, the real work begins. With your primary source of income gone, you have to figure out how to make your retirement fund last. That’s not as easy as it sounds.
In 2008, at the beginning of the financial crisis, Metropolitan Life conducted a survey asking people who were about to retire on their 401(k) plans what they thought a safe withdrawal amount would be. The answer, on average, was about 10% annually.
That number might have made sense years ago, when interest rates were high and retirees could bank on making money on fixed-income investments like Treasuries. But today, 30-year Treasuries are paying just 2.8% annually, and 10-year Treasuries offer a lowly 1.66%.
Interestingly, not even the financial crisis got people thinking more seriously about retirement withdrawal rates. In a 2011 Fidelity Investments survey, the mean annual withdrawal rate came in at a solid 8.4%; but the answers were all over the place, ranging from a conservative one percent to a no-holds-barred 25%.
In lieu of a one-percent, 10%, or 25% annual withdrawal rate, many advisors have been telling their clients that four percent is a safer number (adjusted for inflation). But is that sustainable? One study showed that an inflation-adjusted withdrawal rate of more than five percent significantly increased one’s risk of wiping out their retirement savings.
The following chart shows how long a hypothetical $500,000 retirement portfolio (containing 50% stocks, 40% … Read More
From home repairs, to fixing cars, to crafts, publishing, and decorating—in a do-it-yourself culture, nothing is out of bounds. Thanks to low interest rates and underperforming assets with terrible returns, many who are on the cusp of retirement are looking after their own retirement plans in an effort to boost their retirement income. Meanwhile, those already in retirement are looking for ways to sustain their savings.
Self-directed retirement investing is a great way to manage a retirement nest-egg. And there is a wide array of resources and tools available to help retirees going it alone to make informed decisions, including: online calculators (which help determine how much you need to save for retirement), articles, webinars (instructional seminars conducted online), and online videos.
While the Internet is the easiest place to turn to for self-directed wealth management and retirement planning advice, you have to be discerning. Making the wrong decisions can be costly, and it could significantly undermine how comfortably you enjoy retirement.
What follows are two popular wealth management retirement strategies that are commonly offered to those entering their golden years—but that investors need to seriously reconsider.
1. Postpone Retirement to Increase Savings
Whether you’re retired or near retirement, your time is still worth something. You just have to decide how financially set you are and what your time in retirement is actually worth in dollars and cents.
A lot of people nearing retirement are at the peak of their earnings potential. And in some cases, they may not want to quit—even if they are in their late 60s and financially prepared for retirement. The reason many want to … Read More
For those nearing retirement or already enjoying it, retirement planning and wealth management has become a dangerous place for unsuspecting seniors. After saving diligently for decades, baby boomers are relying on their retirement savings to take them through their golden years. At the same time, there are unscrupulous individuals out there selling financial products and touting retirement “wealth-creating” practices that can drain your accounts before you know it.
What’s one of the biggest investment traps retirees should be wary of? According to the North American Securities Administrators Association (NASAA), one of the biggest threats to investors is “inappropriate advice or practices from investment advisors.” (Source: “NASAA Top Investor Threats,” North American Securities Administrators Association web site, August 21, 2012, last accessed March 20, 2013.)
That’s right—investment advisors—though obviously not all retirement investment advisors (RIAs), just the unqualified ones. But spotting the “bad” ones is easier said than done, especially when you consider how many well-off, financially solid millionaires saw their retirement assets vanish at the hands of Bernie Madoff. If Madoff and others of his ilk have taught us one thing, it’s that serious problems can exist undetected in a qualified investment advisory firm.
Aren’t retirees supposed to be able to trust RIAs? Technically, yes. Investment advisors are licensed to give specific investment advice, as opposed to brokers, who simply handle securities transactions. And that’s where part of the problem lies.
Thanks to Bernie Madoff, RIAs are under increased scrutiny from both state regulators and the Securities and Exchange Commission. Between 2010 and 2011, state actions against investment advisor firms doubled and focused on general compliance practices and advice to … Read More
Retiring doesn’t mean just leaving your job behind. For some retirees, it also involves packing up the house and moving to another state. Not so they can be closer to their grandchildren, warmer climes, or better golf courses; but because they want to pay fewer taxes and stretch their investment dollar.
Retiring to another state is about finding a good quality of life at a reasonable price. Why live frugally if you don’t have to?
The largest state in the nation is also the most tax friendly. In addition to having no income tax and state tax, Alaska pays out an annual dividend from its Permanent Fund. The oil wealth savings account administered by the state is paid out annually to everyone who has lived there for at least one year.
In 2012, residents were paid $878.00, less than 2011’s payout of $1,174. The payout was less as stock market losses began to be averaged into the five-year dividend calculation formula. Over the years, the amount of the Permanent Fund check has ranged from a low of $331.29 in 1984 to a high of $2,069 in 2008. (Source: “2012 Alaska Permanent Fund dividend payout: $878,” Alaska Dispatch September 18, 2012, last accessed March 18, 2013.)
Furthermore, only 25 municipalities even levy a property tax. Of the state’s 162 municipalities, 62 impose local sales taxes of up to seven percent. There are other types of local taxes, including: hotel/motel “bed” taxes, severance taxes, liquor and tobacco taxes, gaming (pull tabs) taxes, and fuel transfer taxes. (Source: “Alaska Tax Facts,” Office of the State Assessor, Alaska web site, last accessed March … Read More
Retirement isn’t the finish line when it comes to retirement savings; it’s just another stage, and it’s one that retirees need to adjust to. After decades of contributing to tax-deferred retirement savings plans that reduce taxes, you’re now withdrawing from those accounts and paying taxes at the regular rate.
For those on the cusp of retirement, there’s more to making smart financial decisions than just making money. At this stage, there are a number of unique tax-planning opportunities that can help you save money over the long run.
What’s next for your 401(k)? Workers about to retire should do everything they can do increase or max out their contributions to tax-deferred retirement plans, like individual retirement accounts (IRAs), 401(k)s, or 403(b)s. In 2013, you can contribute a maximum of $17,500, or $23,000 if you’re over age 50.
Depending on your tax bracket, every dollar deposited into a 401(k) could save you anywhere between $0.10 and $0.40 in income taxes for the year in which the contributions are made. For example, if you contribute $5,000 to a 401(k) the year before you retire, it would be taxed at 35%. Withdrawn in retirement, the funds are taxed at 15%, meaning the 20% difference in tax rates translates into a savings of $1,000.
Should You Delay Claiming Social Security?
For those already retired, you can consider delaying your Social Security checks. One benefit of waiting to collect Social Security until you’re older is that your checks will be larger. Even though you can start collecting Social Security any time between 62 and 70 years old, for every year you wait, your check will … Read More
Retirement planning doesn’t end once you retire. It just moves into a different phase. One of the safest paths to building wealth for those already in retirement is through big blue-chip stocks that provide consistent quarterly dividends.
Slow and steady isn’t good enough for some investors, though. Some retirees need to build wealth more quickly. A recent report shows that Americans’ confidence in their ability to retire comfortably is at historic lows.
Just 14% of Americans say they are “very confident” they will have enough money to live comfortably when they retire, while 23% say they are “not at all” confident. Almost 60% of middle-class retirees will likely run out of money if they maintain their pre-retirement lifestyle and don’t cut spending by at least 24%. (Source: Helman, R., et al., “The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings,” Employee Benefit Research Institute web site, March 2012, last accessed March 14, 2013.)
In fact, the fear of outliving retirement income is actually greater than the fear of dying. An astounding 61% of baby boomers fear outliving their money in retirement more than death. (Source: “Outliving Your Money Feared More Than Death: Allianz Life Study Reveals Boomers Guessing at Retirement Needs,” Allianz Life Insurance Company of North America web site, June 17, 2010, last accessed March 14, 2013.)
Those already enjoying their golden years, unhappy with the measly returns that bonds, Treasuries, certificates of deposit (CDs), and banks are providing and impatient with the small gains made on blue-chip stocks, may want to consider one of the more lucrative areas for investing—small-cap dividend stocks.
When it … Read More
Whether you’re on the precipice of retirement or still a few years away, it’s never too late to start saving. That said, the longer you wait, the harder it’ll be to meet your retirement goals.
What’s the best way to increase retirement wealth? While many may think the key is picking the best investments, the truth of the matter is that the best place to start is by simply saving. Regardless of where you’re at, if you start saving now and stay diligent, you can significantly improve your retirement prospects.
Savings that can have a positive impact on your retirement plans can only come from choices that affect your day-to-day life. And by saving, I don’t mean giving up your daily coffee; I mean changing your lifestyle—saving 10% of your gross income right off the top, or more if possible.
Granted, there isn’t one single path to fulfilling your retirement planning goals. However, there are certain steps everyone can take to help prepare financially for retirement.
A Little Goes a Long Way
How much of your salary should you put aside? There is no definite equation, but some experts recommend 10%–15% of your annual income, or more if you’re closer to retirement and haven’t started saving.
By living off of 70% of your salary or working a few more years, you can cut the savings levels you must reach by 10%–25%, or by even more if you save and work past the average retirement age.
How can you set aside that much from each paycheck? Again, it comes down to lifestyle choices. Cut back on everyday expenses where possible: the … Read More
During the financial crisis, when the banking system was on the verge of collapse, the Federal Reserve came to the rescue. As a result, the central bank ended up reducing interest rates in the U.S. economy to the historical low level.
The reasoning behind this was very simple: the financial system needed liquidity—and the banks weren’t lending to anyone.
On one hand, the argument for these actions by the Federal Reserve was that when interest rates go down, businesses and consumers alike will be more prone to borrowing, because it simply costs them less to owe money. This phenomenon has its own implication—when businesses and consumers borrow, they spend money, and from there, economic growth kicks in and so on and so forth.
On the other hand, these activities by the Federal Reserve were not well received. Those who opposed the Fed’s policies reasoned that it was a short-term fix, which doesn’t do much in the long haul. In addition, they argued that the banks were the only ones who took advantage of this.
While both arguments have their backing, in the midst of it all, these actions had—and, as a matter of fact, they still have—a silver lining for those who are planning for retirement or simply looking for ways to save more money or cut expenses. One way you can take advantage of the Federal Reserve policy is to refinance your mortgage.
Refinancing Your Mortgage
As the Federal Reserve slashed interest rates to boost economic growth, the mortgage rates offered by the banks also decreased. In January of 2013, the conventional 30-year fixed-rate mortgage in the U.S. economy … Read More
Life doesn’t stop at retirement; neither should your investment strategies.
Retirement planning isn’t just about tucking money away for retirement and hoping it lasts. It’s about replacing your main source of income once you retire, with other sources of income; preferably with those that continue to generate income.
In the old days (during the 70s and 80s), the retirement rule of thumb suggested that the portion of a portfolio be weighted toward bonds is equal to the investor’s age. This means that if you were 40, 40% would be in bonds and 60% in stocks. When you hit 70, bonds would make up 70% of your portfolio—stocks, just 30%. The older you get, the more you want to have in bonds, because bonds, as the story goes, provide dependable interest.
And back in the day, it made sense to do that. At the beginning of 1979, the U.S. 10-year bond rate stood at 9.1%; at the end of the year, it had risen to 10.4%. By 1981, the rate was an astounding 15.3%. Today, U.S. 10-year bonds pay about two percent. (Source: “Historical US Treasury Bond Rates,” ForecastChart.com, last accessed February 20, 2013.)
If you had a $500,000 portfolio in 1981, you could look forward to receiving $75,000. In 2012, that same portfolio would hand you just $10,000 a year. Toss in the $1,280 a month you receive from Social Security, and you’re looking at an annual retirement income of just $25,000 a year. That’s not much retirement income for anyone to live on.
According to the Federal Reserve, in 2007 (right before the Great Recession) a $100,000 short-term certificate … Read More
Saving money for retirement is a long-term process. It is true that the longer you have, the more you can save. Unfortunately for some, this might not be the case. For example, a person starting to save for retirement at the age of 25 can certainly save more over time by saving smaller amounts than a person starting to save higher amounts at the age of 55 and planning to retire by the age of 65.
Consider this; if a 25-year-old saves $150.00 a month, by the retirement age of 65, they will have total savings of $72,000—assuming no investing of any sort. On the other hand, the person who begins at 55 and puts away $300.00 a month—twice as much—towards retirement savings will only have $36,000 at the age of retirement.
But don’t let this discourage you if you are in the latter situation—there are ways to increase your savings significantly without really putting up extra income and making changes to your lifestyle.
Look at WisdomTree SmallCap Dividend (NYSE/DES) exchange-traded fund (ETF), for example. (Please note that this is not a specific buy recommendation, but is meant to serve as an example of the type of opportunity you should seek out.)
This ETF seeks to follow the performance of the WisdomTree SmallCap Dividend index. The fund invests in companies that the index comprises—mainly small-cap dividend paying companies in the U.S. (Source: WisdomTree web site, last accessed February 15, 2013.)
In addition to providing diversification by investing in companies in different sectors, this WisdomTree ETF also pays out a monthly dividend. The current yearly dividend yield on this ETF is … Read More
Many dream about being self-employed; being their own boss, and making their own hours. But, being self-employed also means being responsible for your own retirement savings. Unfortunately, many self-employed Americans seem to have forgotten this or have maybe simply chosen to ignore it until a later date.
That could be a costly mistake.
At present, only 50% of the U.S. workforce is covered by an employer-sponsored pension plan, unchanged over the last three decades. Furthermore, 71% of small businesses with fewer than 25 workers do not sponsor a retirement plan. (Source: Lichtenstein, J., “Financial Viability and Retirement Assets: A Look at Small Business Owners and Private Sector Workers,” U.S. Small Business Administration web site, December 2012, last accessed January 30, 2013.)
More alarming is the fact that there are over nine million self-employed individuals without retirement plan coverage. (Source: Copeland, C., “Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2011,” Employee Benefit Research Institute Issue Brief 378, November 2012.)
This low level of involvement is not because there is a lack of self-employment retirement options. Quite the opposite. Despite the wide variety of options available for the self-employed, only a small percentage actually has a retirement plan. And a large number of those who are unprepared are actually on the cusp of retirement. Less than two percent of small business owners own a Keogh plan (retirement plan for self-employed individuals); only about 18% of business owners participated in a 401(k)/Thrift plan. (Source: Lichtenstein, J., “Saving for Retirement: A Look at Small Business Owners,” U.S. Small Business Administration web site, March 2010, last accessed January 30, 2013.)
What follows are three … Read More
Even at the best of times, saving for retirement is not an easy task. Throw in economic uncertainty and low savings rates, and the idea of a well-fortified retirement plan can simmer away on the backburner, undisturbed for years. This may be a taste of things to come when you consider that Americans are retiring earlier, living longer, and saving less.
A recent report shows that the confidence of Americans in their ability to retire comfortable is at historic lows. Just 14% are “very confident” they will have enough money to live comfortably when they retire; on the other end of the scale, 23% say they are “not at all” confident. (Source: “The 2012 Retirement Confidence Survey; Job Insecurity, Debt Weight on Retirement Confidence, Savings,” Employee Benefit Research Institute web site, March 2012, last accessed January 29, 2013.)
And, approximately 60% of middle-class retirees will likely run out of money if they maintain their pre-retirement lifestyle and don’t cut spending by at least 24%.
Even though the majority of baby boomers view retirement as a crisis, few understand how much money they’ll actually need to retire. (Source: “Outliving Your Money Feared More Than Death: Allianz Life Study Reveals Boomers Guessing at Retirement Needs,” Allianz Life Insurance Company of North America web site, June 17, 2010, last accessed January 29, 2013.)
This disconnect is a recipe for disaster, and it makes investing for retirement more important than ever. The more people understand about how much they’ll need to retire in comfort, the more likely they are to act.
But first, there are five inconvenient retirement facts you should know if you … Read More
For most investors, the financial crisis of 2008 has taken a heavy toll on their portfolios. Many Americans saw their retirement savings wiped out because of the market downturn. No matter where you looked, the returns were in the negative. For example, the S&P 500 and other major key stock indices in the U.S. economy fell by more than 50% from their highs.
How bad was it for the U.S. economy? The financial crisis and the recession following it were considered to be the worst economic downturn faced by the U.S. economy since the Great Depression of the 1930s. To give you some idea of how bad the U.S. economy has become since, consider that in January of 2009, nearly 32 million people were on food stamps. Now the number sits around 47.7 million. (Source: “Supplemental Nutrition Assistance Program,” U.S. Department of Agriculture, December 7, 2012.) Food stamp use has increased by more than 49%!
If this wasn’t all, from 2010 to 2011, the median household income in the U.S. economy fell 1.5% to $50,054, and the country’s poverty rate was 15%—that’s 46.2 million people under the poverty line—a number that has increased for three years. (Source: “Income, Poverty and Health Insurance Coverage in the United States: 2011,” United States Census Bureau, September 12, 2012.) Almost one in seven Americans is living in poverty!
In addition to all of this, analysts are now expecting the U.S. economy to head into another recession in 2013 if things don’t get in order—the fiscal cliff, national debt, and unemployment.
Those who are saving for their retirement should ask themselves a question: are my … Read More
By Sasha Cekerevac for Daily Gains Letter | Jan 16, 2013
When it comes to creating an investment strategy, there are many things to consider. Getting back to the basics, there are four points that everyone must accomplish to get the biggest bang for their buck.
1. Reduce Credit Card Debt
While many might not consider reducing credit card debt as an investment strategy, it clearly is., the reason being that you are paying a very high interest rate on that debt. It is not easy to generate massive returns in the stock market, so if one’s credit card interest payment were 20%, one would need to generate a bigger return than that in the stock market to justify not paying off that debt.
Reducing or eliminating unnecessary credit card debt is an easy initial step to getting a better return from a long-term investing plan.
2. Pay Down Excess Bills
Long-term investing is all about opportunity cost. You have $1,000, and there are many choices you can make with that money. These days, many large purchases can be bought through payment plans. This can be dangerous, because they will hurt your investment strategy as the monthly bills start to increase substantially.
Pretty soon, you’ll find that there are no excess funds to place into any long-term investing plan because of unnecessary bills. In reality, you do not need as much stuff as you want.
Reduce the excess material goods, and focus on your investment strategy.
3. Keep Track of Your Income Statement
Everyone has an income statement. Keeping track of how much money you earn and how much money you spend is crucial for a successful long-term investing plan. Once … Read More
Retiring doesn’t mean staying put, living frugally, and stretching your investing dollar. If you’re more adventurous or not tied down geographically, there is an almost endless number of foreign destinations to consider retiring to. That said, some foreign countries are more suited to retirement than others.
While warmer climes, cheaper taxes, and cultural discoveries are major reasons why some Americans have chosen to retire outside the U.S., for many, the point of packing up and moving away after retirement is about finding a destination that offers something that’s become increasingly difficult to find here in America—a good quality of life for a reasonable price.
With the state of the economy, more and more Americans are looking elsewhere to park their retirement dollars—and for good reason. A recent report shows that Americans’ confidence level in their ability to retire comfortable is at an historic low.
Just 14% are “very confident” they will have enough money to live comfortably when they retire; on the other end of the scale, 23% say they are “not at all confident.” (Source: “The 2012 Retirement Confidence Survey; Job Insecurity, Debt Weight on Retirement Confidence, Savings,” Employee Benefit Research Institute, March 2012.)
American baby boomers nearing retirement could also be looking outside the borders. The same report shows that 60% of workers report that the total value of their savings and investments (excluding primary home and defined benefits plan) is less than $25,000. Almost 20% say they are “not at all confident” that they have done a good job preparing for retirement.
Roughly 60% of middle-class retirees will likely run out of money if they maintain their … Read More
Simply stated, pension is the money an individual might live on during retirement years. Employees put a small portion of their income into a pension fund to which their employers then contribute, expecting it to grow over time. The hope is that once a person retires, he or she will have enough funds to generate income for life after retirement.
Unfortunately, due to the dismal state of the U.S. economy, pensions for Americans have come under scrutiny. Pension funds are running dry and have significant obligations that need to be paid—flashing red signals for those completely relying on a pension.
The truth of the matter is that the pension funds are emptier than ever before. According to Milliman Inc., one of the world’s largest actuarial firms, there are unfunded liabilities of $1.2 trillion in the 100-largest pension funds in the U.S. economy—that’s $300 billion higher than previously estimated. (Source: “Exclusive: Study shows $1.2 trillion gap for public pensions,” Reuters, October 15, 2012. last accessed December 24, 2012.)
If that wasn’t enough, according to a study done by investment research firm Morningstar, Inc., 21 states in the U.S. economy have pension systems that are in poor financial condition or that are not fiscally sound. Among the states, Illinois, Kentucky, and Connecticut are the lowest-funded states—at 43.4%, 50.5%, and 53.4%, respectively. (Source: “The State of State Pension Plans: A Deep Dive Into Shortfalls and Surpluses,” Morningstar, November 26, 2012, last accessed December 24, 2012.) As per Morningstar’s standards, a pension system must have a funded ratio of 70.0% or more in the U.S. economy to be considered financially sound, meaning it should … Read More
On January 1, 2011, the first raft of baby boomers began celebrating their 65th birthdays. All told, 77 million Americans were born from 1946 through 1964, and, for the next 17 years, 10,000 a day will be retiring. The Woodstock generation has become senior citizens.
Are they prepared for retirement? Americans’ confidence in their ability to retire comfortably is at historic lows, with only 21% of retirees confident they have enough money to last throughout their golden years. In 2007, before the market meltdown, 41% were confident. (Source: “The 2012 Retirement Confidence Survey; Job Insecurity, Debt Weight on Retirement Confidence, Savings,” Employee Benefit Research Institute, March 2012.)
What’s more, many American workers believe they just don’t have enough extra money to set aside for retirement—not surprising when you consider 43% say job uncertainty is the most pressing issue facing America today, with many saying they have virtually no savings or investments. The same report shows that 60% of workers report the total value of savings and investments (excluding primary home and defined benefits plan) is less than $25,000.
What will it take for those baby boomers born in the late ’50s and ’60s to better prepare for retirement? Experts think some of the biggest barriers to saving for retirement are psychological. And the best way around that could be as simple as picturing your aged self at retirement.
New research has found that providing a virtual glimpse into the future could help motivate people to save more for retirement. The study showed that people who saw age-enhanced images of themselves were more likely to save more for retirement and take … Read More
Not surprisingly, ever since the markets crashed in 2008, Baby Boomers have become increasingly pessimistic about retirement and running out of money. A recent report shows that Americans’ confidence in their ability to retire comfortably is at a historic low. (Source: “The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings,” Employee Benefit Research Institute, March 2012; last accessed December 21, 2012.)
Just 14% are “very confident” they will have enough money to live comfortably when they retire; on the other end of the scale, 23% say they are “not at all” confident. A full 43% of American workers say job uncertainty is the most pressing issue facing America today.
Many workers also noted that they have virtually no savings or investments. The report shows that 60% of workers report the total value of savings and investments (excluding primary home and defined benefits plan) is less than $25,000.
In total, 19% of workers are “very confident” they have done a good job preparing for retirement; almost 20% say they are “not at all confident” in their preparation for retirement.
Of those already retired, 27% believe they have done a good job preparing for retirement; before the Great Recession, it was around 40%. At the same time, only 21% are confident that they have enough money to last throughout their retirement; in 2007, 41% were confident.
All told, almost 60% of middle-class retirees will likely run out of money if they maintain their pre-retirement lifestyle and don’t cut spending by at least 24%. Not spending can certainly help your retirement money last longer, but it’s not the only … Read More
There are a lot of people out there that don’t have pensions. I know a lot of business owners, real estate agents, and contractors who basically will be relying on their own savings for their retirement; and make no mistake, they want to keep the same lifestyle they have now, or better.
Many friends have become disheartened with the stock market, and Wall Street especially, but they do realize that equities are probably going to be a component of their holdings in retirement.
A good friend, Brian, owns several small homes (all with mortgages), and he rents them to students in a university town. His goal is to manage these properties until retirement from his position as a seed and fertilizer salesman for a large agricultural firm. He’s not saving now, but selling these homes will be the basis of a retirement fund from which he plans to invest in income-generating securities. Brian works hard and has a plan. He doesn’t want the government or his employer to take care of him in retirement. He doesn’t invest, and he is not saving cash, because any excess money he receives from his employment income goes right to paying down his mortgage debt on his rental properties. Brian says that he will probably have to work with a stockbroker at some point, but doesn’t particularly want to.
A lot of self-employed people are going to have to do a similar kind of thing if they want a retirement lifestyle similar to the way they live now. Over the last decade or so, the stock market has proven to be so volatile and … Read More
It seems so simple. To retire, most Americans just want to have enough money to sustain the lifestyle they have. Unfortunately, to plan for the retirement of your dreams, you have to take into account the risks that are seen and unforeseen, including inflation, healthcare costs, and the potential need for long-term care.
Inflation is the hour-hand of a clock. It’s hard to imagine the significant impact it can have on your retirement fund because of the slow and steady pace of price increases. Not planning for or even considering the cost of inflation could spell trouble for those preparing for retirement.
It’s an absolute given that, thanks to inflation, a dollar today will be worth less at retirement. Even a modest three-percent rise in prices means $100.00 worth of groceries today may cost $200.00 in 24 years. If you want your retirement fund to, at the very least, keep pace with inflation, you will need to broadly diversify your investments.
That doesn’t mean you need to throw caution to the wind and invest in more volatile stocks, thinking they will give you greater returns. Yes, you need to consider your investing risk level, but you also want to look at suitability, how far you are from retirement, and how long you want to be invested.
In spite of ongoing uncertainty and volatility, investors don’t need to take on higher-risk stocks to get higher returns. In fact, recent research shows that stocks with low volatility have provided investors with better returns than stocks that fluctuate more sharply.
One recent study tracked the returns of 1,000 stocks (with the largest market … Read More
One question usually arises when it comes to retirement planning: if you are in your early 50s, is it too late to start saving for retirement? No; fortunately, it is still possible to start now. A lot of people get discouraged by the fact that they haven’t put aside anything for their retirement, and when they come to a certain age, they just lose hope and don’t even try anymore.
Saving for retirement is important if you want to live your life worry-free during your later years. Just to bring in some perspective, 36% of all Americans don’t save anything for their retirement. What is more troublesome is that 35% of people who are 65 years or older completely rely on Social Security. (Source: “Retirement Statistics,” Statistic Brain, February 7, 2012, last accessed December 18, 2012.)
Although starting to save for retirement in the later years of life isn’t ideal, it is certainly possible to begin now for a comfortable retirement. If a person starts early, they just simply have more time.
Keep in mind that as you start saving for retirement in your later years, it may require a lot of changes to your lifestyle.
So, where does one start? Once again, it depends on each person, but there are certain steps a person might take to start saving for retirement.
It is necessary to know where the money comes from, and where it goes. Budgeting helps in that regard. Once a person has made a budget, saving can become easy, and it is easy to manage where the money is coming from and where it will … Read More
Planning for retirement is hands down critical for everyone. It is the stage of life where a person should be able to sit back and relax, rather than worry about where the money will come from for the next month’s bills.
To give you an idea, according to a study done by National Bureau of Economic Research this year, 46% of Americans die with less $10,000 in assets. Majority of the people die with no housing wealth and are completely dependant on the social security. (Source: https://www.nber.org/reporter/2012number1/venti.html)
Similarly, according to Retirement Confidence Survey (RCS), conducted by the Employee Benefits Research Institute, the confidence of Americans in their ability to retire comfortably is at its historical low levels. They are concerned about their job uncertainty and amount of debt they hold.
In addition, to their bleak confidence in retirement, American workers are not preparing for their retirement properly. Fifty-six percent of the workers have not calculated the amount of money they need in order to retire peacefully. Moreover, 60% of the workers reported that they have total household savings and investments of less than $25,000. (Source: https://www.ebri.org/pdf/surveys/rcs/2012/PR962_13Mar12_RCS.pdf.)
So, by now, it should be clear that retirement planning is important. If a person doesn’t plan for retirement, then they are in for a period of worry when it’s time for them to enjoy their life. As they say, when you fail to plan, you plan to fail. It is wise to have a plan for retirement.
When starting to plan for retirement, there are three most important questions that a person must ask themselves. These questions provide guidance for how to plan … Read More
You know, there’s a reason why the Federal Reserve is doing everything it can to pump billions into the U.S. economy by increasing the money supply and keeping interest rates artificially low. It’s because the party’s over; there is no more real economic growth. Too much debt and too much spending have crippled the ability of fiscal policy to positively affect the economy. It’s happened to budgets at the individual, municipal, and national levels for many countries, including the U.S.
In a way, all that’s left to tweak is monetary policy, and all the Federal Reserve knows how to do is print money. In my mind, real economic growth comes from innovation and hard work, not inflation. It’s a perilous time when you consider the consequences of all this sovereign debt and the potential for inflation in commodities. All of it results in the inability to create real economic growth, and that’s what you have to plan for with your retirement savings.
It used to be that once you got to retirement, your savings and your portfolio (if you had one) would be set up in a very conservative fashion, with income and preservation of capital being top goals. Frankly, because we are now in the age of austerity and economic growth is minimal, even new investors should be taking this route with their retirement savings—a highly conservative investment strategy with room for just a little bit of speculation.
The reason for this is because the prospect for real economic growth (that is economic growth above the rate of inflation) is minimal, probably for the rest of this decade and … Read More