Daily Gains Letter

Retirement savings


Four Ways to Profit from America’s Wealthiest Citizens

By for Daily Gains Letter | Nov 7, 2013

Wealthiest CitizensHalf of the U.S. workforce is partying like its 1998—and not in a good way. According to the Social Security Administration, the median wage in the U.S. in 2012 was $27,519.10, marginally better than 2011’s median wage of $26,965.43.

That said, the median wage remains virtually unchanged since 1998, when the median wage was $27,519.55 when adjusted for inflation. So actually, you made $0.40 less in 2012 than you did in 1998. But I digress.

The report shows that more than half of Americans earned less than $30,000 in 2012. Incredibly, 15% of working Americans took home less than $5,000, with an average amount of just $2,024.79. During 2012, the S&P 500 climbed 13%, illustrating that the majority of Americans are not benefiting from the so-called recovery we call the U.S. economy.

Fear not, for there is hope. Stagnant wages are not hindering everyone: the number of Americans pulling in more than $5.0 million a year in 2012 increased by 26.8% year-over-year to 8,982. In 2011, just 7,082 Americans earned more than $5.0 million.

These stratospheric numbers only take net earnings into consideration; they do not account for capital gains made on the stock market, dividend growth, etc. Whereas America’s wealthiest citizens turn to the stock market to pad their retirement savings, the majority of Americans rely on increasing property values, income vehicles, and pension funds to pave their way to retirement.

Thanks to a record run on the S&P 500 and Dow Jones Industrial Average, America’s wealthiest have been seeing their holdings increase significantly since the Great Recession ended in 2007. On the other hand, thanks to the artificially … Read More


When It Comes to Retirement, Investors Need to Focus on This Little Four-Letter Word

By for Daily Gains Letter | Aug 22, 2013

Investors Need to Focus on This Little Four-Letter Word“I think it’s all about taking risk; you have to take more of it—get out of your comfort zone. You can’t just keep doing the same thing and expect different results—it’s that simple.” These were the exact words from my friend, Mr. Speculator, on portfolio management. “I am not looking for just a menial 10% return,” he added. “I am in it for a much bigger gain. To gain more, you have to risk more.”

Mr. Speculator is right about one thing: to gain more you have to risk more.

However, long-term investors who are saving for retirement, their kids’ education, or anything else for that matter, should not follow the lead of Mr. Speculator. Taking high risks can be dangerous, and at times, it’s no different than gambling. Being willing to risk it all is not a good investment management technique.

When it comes to retirement, investors need to have a very strong focus on one four-letter word—“risk”—or else one move in the wrong direction could make a dent in their portfolio—which may cause them to push back their retirement or give up on their plans altogether.

Take a look at the current bond market, for example; clearly, the risks are increasing. Look at the chart of the yield on 10-year U.S. Treasury notes below:

10-Year Treasury Note Chart

Chart courtesy of www.StockCharts.com

The yields have increased roughly 75% since the beginning of May.

Bond investors are fleeing. According to the Investment Company Institute, in June, U.S. long-term bond mutual funds had a net outflow of 60.4 billion—this was the first since August of 2011. In July, they continued to flock to the … Read More


If Your Nest Egg is “Broken,” Here’s How to Repair It

By for Daily Gains Letter | Aug 15, 2013

DL_Aug_15_2013_JohnA growing number of American retirement nest eggs are cracked, and the fault lines are getting bigger.

While the S&P 500 and Dow Jones Industrial Average are enjoying record highs, the same cannot be said for the employment rate. In fact, stubbornly high unemployment and underemployment mean a growing number of Americans have had to dip into their retirement funds—and sacrifice their future stability—just to get by.

While the official U.S. unemployment rate sits at 7.4%, the U.S. Bureau of Labor Statistics reports that the underemployment rate—those who are unemployed, want work but have stopped searching, or are working part time because they can’t find full-time work—remains stubbornly high at an eye-watering 14.2%.

If history is any indicator, it looks as though the underemployment rate will remain sky high for the near future. That’s because more Americans are being forced into part-time jobs to pay the bills. In fact, almost four times as many Americans are taking on part-time work as opposed to full-time jobs—the complete opposite of last year. (Source: Luhby, T., “Want a job? Good luck finding full-time work,” CNN.com, August 12, 2013.)

Why are American companies hiring more temps and part-time workers? It depends on who you ask. Economic uncertainty, weaker consumer confidence, and a lack of consumer demand are certainly major reasons why employers are holding back on hiring full-time workers, but when it comes to the economy, it’s open for debate.

What isn’t open for debate is that more than one-third (36%) of unemployed or underemployed American workers have been forced to tap into their retirement accounts just to get by. On top of that, … Read More


The Markets Have Changed; Time to Change the Way You Invest?

By for Daily Gains Letter | Aug 13, 2013

The Markets Have Changed; Time to Change the Way You InvestSimplicity still prevails when it comes to investing for the long term—namely, saving for retirement. My good long-time friend, Mr. Speculator, disagreed with me on this statement while we were having a debate about simple versus complex investment management.

“You see, gone are the days when it worked,” he said. “Markets have changed. To manage their retirement savings and portfolio, investors really need to start using advance portfolio management techniques, or else they won’t have enough by the time they need the funds.”

Mr. Speculator may be right: some aspects of the markets have certainly changed. For example, the introduction of computerized trading (high-frequency trading) has made markets prone to wild swings. Remember the flash crash in 2010? The Dow Jones Industrial Average plunged about 1,000 points, and then recovered a few minutes later.

Sadly, Mr. Speculator is forgetting that when you are saving for retirement, you are looking at a long-term horizon. Investors shouldn’t be focused on day-to-day fluctuation when they are investing for the long term.

Simple investment management, such as buying good companies for a long period of time, works.

Consider a person saving and investing for retirement in 20 years. Instead of looking for quick profits and worrying about wild swings in the markets, they can just look at companies like The Procter & Gamble Company (NYSE/PG).

Look at the chart below of the company’s stock price in the last 30 years. As you can clearly see, it has risen in spite of all the wild swings we have seen in the overall markets over the last decade, such as the tech boom and the subprime … Read More


Is Retirement at Risk for Late Baby Boomers?

By for Daily Gains Letter | Jul 29, 2013

Retirement at Risk for Late Baby BoomersOn 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 Stocks You Need to Know About Now to Protect Your Retirement

By for Daily Gains Letter | Jun 27, 2013

retirement savingsThe 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


Retirement Post Recession: Why It’s No Longer the Golden Years

By for Daily Gains Letter | Jun 14, 2013

Retirement Post RecessionWill 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


What Withdrawal Rate Will Make the Most of Your Retirement Fund?

By for Daily Gains Letter | May 1, 2013

Retirement FundSaving 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


Three Tips for Getting Your Savings into Shape

By for Daily Gains Letter | Apr 22, 2013

Three Tips for Getting Your Savings into Shape

Even after taking a slight breather last week, the Dow Jones Industrial Average and the S&P 500 are still unabashedly bullish. However, that doesn’t mean the average American is basking in the glow of the greenback.

While a small majority of American consumers have more savings than credit card debt, almost 25% say they have more credit card debt than money in the bank. And 16% say they have no credit card debt or savings. This means that 40% of Americans are in a financially precarious position. (Source: “February 2013 Financial Security Index charts,” Bankrate.com, last accessed April 19, 2013.)

At the end of 2012, total household debt in the U.S. came in at $11.35 trillion. The largest portion of debt went to mortgages at $8.06 trillion, for a national average of roughly $200,000—non-housing debt is at $2.75 trillion. Broken down, student loan debt has increased to $970 billion, or $24,803 per person. Credit card debt rose to $680 billion; 40% of Americans have at least one credit card with a balance of $15,799. Meanwhile, auto loan debt increased slightly over the third quarter of 2012 to $780 billion. (Source: “Household Debt and Credit Report,” Federal Reserve Bank of New York web site, last accessed April 19, 2013.)

No matter how you look at it, this adds up to a significant debt load for the average American family; and our ability to pay off that debt is limited—and becoming tougher and tougher. In December 2012, the average real disposable income was $32,663 per person, lower than the $32,729 recorded in December 2006. (Source: “Real Disposable Personal Income,” Federal Reserve Bank … Read More


What Cyprus Taught Me About Retirement Savings

By for Daily Gains Letter | Apr 2, 2013

020413_DL_whitefoot

In light of the events that occurred in Cyprus over the last couple weeks, many investors may be wondering if it’s safer to hide your retirement savings under a mattress. After all, what’s to say it couldn’t happen here?

In June 2012, Cyprus, like many members of the European Union (EU), sought a bailout after suffering heavy losses. The company’s banking sector was hit by the economic crisis that crippled Greece. Cypriot banks had made loans to Greek borrowers that were worth 160% of the country’s gross domestic product (GDP).

In mid-March, the EU and the International Monetary Fund (IMF) agreed on a bailout for Cyprus, which included Cyprus raising billions of euros of its own money by taxing bank deposits—essentially seizing money. The government said it would impose a one-time tax of 6.75% on savings of $26,000–$130,000, and would tax higher savings at 9.9%. Not surprisingly, this didn’t sit well with wealthy Russians who shelter their money in Cyprus. It also didn’t sit well with the rest of country.

As one would expect, Cyprus managed to cobble together an 11th-hour deal with the EU and IMF, taxing only those accounts with deposits over $130,000.

Could it happen here? What couldn’t? Since 2008, the U.S. and much of the Western world have experienced an economic implosion no one would have otherwise thought possible. In response, governments around the world have taken unprecedented action to “remedy” the situation.

Cyprus aside, there are many reasons why we shouldn’t stash our retirement savings under the mattress.

First, cold-hard cash provides little protection against inflation and increases in the cost of living. While the … Read More


Too Much Time and Not Enough Money: Wealth Management for Your Later Retirement Years

By for Daily Gains Letter | Mar 27, 2013

270313_DL_whitefootThe recipe for a comfortable retirement is all about budgeting and making the numbers add up. Living below your means and setting aside money for the future isn’t an easy task. Nor is it particularly fun to postpone doing something in the here and now for a retirement that will last for an undetermined amount of time.

That disconnect can be found around the world. A recent survey, based on over 15,000 consumers in 15 global markets, found that over half of non-retirees (56%) say they are not adequately preparing for a comfortable retirement. That number maxes out at 72% in Egypt, 71% in Taiwan, and 66% in the U.K. (Source: “Retirement,” HSBC web site, last accessed March 26, 2013.)

Here in America, we can expect to spend about 21 years in retirement, but we will burn through our savings in just 14 years. This means that most Americans have not, and are not, financially prepared for the last 33% of their retirement. This isn’t exactly a surprise when you consider that 36% of Americans say they are not preparing adequately and a staggering 20% say they are not preparing at all.

In spite of inadequate retirement savings and a bleak long-term outlook, the short term has greater appeal; 43% of respondents are more likely to save for a trip than retirement.

This poses major questions about how people will fund not only their “active” retirement years, but how they will also cope with the financial burden of possible long-term care costs associated with aging in their later retirement years.

Right now, those nearing retirement (55–64 years old) say the … Read More


Top Tax-Deferred Savings Tips for Retirees

By for Daily Gains Letter | Mar 18, 2013

180313_DL_whitefootRetirement 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


Make the Fed’s Monetary Policy Work for You

By for Daily Gains Letter | Mar 4, 2013

040313_DL_zulfiqarDuring 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


Five Inconvenient Truths About Retirement

By for Daily Gains Letter | Jan 29, 2013

DL_John_290113-150x88Even 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