Investing Curiouscatblog

Category: Retirement

  • 401(k)s are a Great Way to Save for Retirement

    401(k)s are a great way to save. Yes, today those that have been saving money have the disappointment of bad recent results. But that is a minor factor compared to the major problem: Americans not saving what they need to for retirement in 401(k)s, IRAs, even just emergency funds… Do not use the scary financial market performance recently as an excuse to avoid retirement savings (if you have actually been doing well).

    The importance of saving enough for retirement is actually increased by the recent results. You might have to re-evaluate your expectations and see whether you have been saving enough. I am actually considering increasing my contributions, mainly to take advantage of lower prices. But another benefit of doing so would be to add more to retirement savings, given me more safety in case long term results are not what I was hoping for.

    Now there can be some 401(k) plans that are less ideal. Limited investing options can make them less valuable. Those limited options could include the lack of good diverse choices, index funds, international, money market, real estate, short term bond funds… My real estate fund is down about 2% in the last year (unlike what some might think based on the media coverage of declining housing prices). And poor investing options could include diverse but not good options (options with high expenses… [ the article, see blow, mentions some with a 2% expense rate – that is horrible]).

    But those poor implementations of 401(K)s are not equivalent to making 401(k)s un-viable for saving. It might reduce the value of 401(k)s to some people (those will less good 401(k) plans). Or it might even make it so for people with bad 401(k) options that they should not save using it (or that they limit the amount in their 401k). I don’t know of such poor options, but it is theoretically possible.

    The tax deferral is a huge benefit. That benefit will only increase as tax rates rise (given the huge debt we have built up it is logical to believe taxes will go up to pay off spending today with the tax increases passed to the future to pay for our current spending).

    And if you get matching of 410(k) contributions that can often more than make up for other less than ideal aspects of a particular 401(k) option.

    Also once you leave a job you can roll the 401(k) assets into an IRA and invest in a huge variety of assets. So even if the 401k options are not great, it is normally wise to add to them and then just roll them into an IRA when you leave. If the plan is bad, also you can use an IRA for your first $5,000 in annual retirement savings and then add additional amounts in the 401k (if they are matching funds normally adding enough to get the matching is best).

    401(k)s, 403(b), IRAs… are still great tools for saving. The performance of financial markets recently have been poor. Accepting periods of poor performance is hard psychologically. But retirement accounts are still a excellent tool for saving for retirement. Using them correctly is important: allocating resources correctly, moving into safer asset allocations as one approaches and reaches retirement…
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  • More Americans Working Into Late 60’s and Beyond

    Americans working past retirement

    While the average retirement age remains 63, that standard may soon be going the way of the gold watch — a trend expected to accelerate as baby boomers close in on retirement without sufficient savings.
    …
    Twenty-nine percent of people in their late 60s were working in 2006, up from 18 percent in 1985, according to the Bureau of Labor Statistics. Nearly 6 million workers last year were 65 or over. Over the next decade, the number of 55-and-up workers is expected to rise at more than five times the rate of the overall work force, the BLS reported.
    …
    Working another three years — from 62 to 65, for example — and continuing to save 15 percent of salary could raise annual income from investments by 22 percent. Make it five years and boost savings contributions still higher — even better.

    Putting off retirement also may enable people to delay when they start taking Social Security benefits, which can significantly increase payments.

    “The longer the delay, the better” financially, said Fahlund. “To me the ideal would be 70, because you get the biggest Social Security benefit possible and all those additional years of employment. And it keeps you going mentally and physically too.”

    The economic reality is retiring at 62 is not realistic for most people today. Retirement age has barely budged at life expectancy has increased by 20 years. I have long felt the best practice for the economy is to provide part time work to transition into retirement. This allows people to slow down their work lives, but not completely leave it behind. And the financial benefits are very helpful to all those that did not save enough early in their lives.

    Related: Retirement Delayed, Working Longer – Our Only Hope: Retiring Later – Many Retirees Face Prospect of Outliving Savings – Retirement Savings Survey Results – Saving for Retirement – Spending Guidelines in Retirement – Tips To Allow Retiring Sooner

  • Bankruptcies Among Seniors Soaring

    Bankruptcies among seniors soaring

    The average age for filing bankruptcy has increased and the rate of bankruptcy among those ages 65 and older has more than doubled since 1991, say researchers Teresa Sullivan of the University of Michigan, Deborah Thorne of Ohio University and Elizabeth Warren of Harvard Law School.

    Expensive health care costs from a serious illness before a patient received Medicare and the inability to work during and after a serious illness are the prime contributors to financial crises among those 55 and older. But even among those 75 to 84 and receiving retirement, Social Security and Medicare benefits, the rates soared—from just 1.8 percent of all filers in 1991 to 5 percent in 2007.

    Most Americans have two major assets: their homes and their retirement plans. And borrowing against those assets can present new risks when home values and stock markets decline, Sullivan and colleagues say. In some cases, older Americans trying to help children and grandchildren, borrow too much, putting themselves at risk.

    Related: Boomers Face Retirement – Retirement Tips from TIAA CREF – Saving for Retirement

  • Spending Guidelines in Retirement

    Retirement planning is a huge financial need and one of the areas where financial literacy can pay off very well. Understanding the incredible power of compound interest can be used to start your retirement savings early and provide you with a huge benefit. Understanding the risks of inflation can guide your investment decisions. The recent Business Week Retirement Guide is very good. In Spending Safely, they explore how to spend while preserving your capital in retirement.

    For more than a decade, financial advisers have warned retirees that draining over 4% of their nest eggs in their inaugural retirement year could ultimately lead to financial ruin.
    …
    Bengen now suggests that the 4% figure – actually 4.1% for a 60/40 portfolio of large caps and bonds and 4.5% if you toss in small caps – merely seems impressive when plugged into Excel (MSFT) spreadsheets. In practice, the strategy, which Bengen stopped using with his own clients about three years ago, is inflexible and unrealistic he says – and the formula is too stingy.
    …
    Flexibility is factored into Bengen’s revised approach, which permits withdrawals to fluctuate within guidelines. His “floor-and-ceiling strategy” suggests that an initial withdrawal rate of 5.16% would be appropriate if a retiree pares back subsequent withdrawals by as much as 10% of the initial withdrawal during hard times (the floor). On the other hand, a retiree could withdraw extra cash equaling up to 25% of the first-year withdrawal (the ceiling) when the market is strong.

    This adjusted thinking is correct I believe. People want simpler answers but some things just require a more complex understanding.

    Related: How Much Retirement Income? – Add to Your Roth IRA – Retirement Tips from TIAA CREF – Our Only Hope: Retiring Later

  • Many Retirees Face Prospect of Outliving Savings

    Many Retirees Face Prospect of Outliving Savings, Study Says

    Nearly three out of five middle-class retirees will probably run out of money if they maintain their pre-retirement lifestyles, a new study from Ernst & Young has concluded.
    …
    Middle-income Americans entering retirement now will have to reduce their standard of living by an average of 24 percent to minimize their chances of outliving their financial assets, the study found. Workers seven years from retirement will have to cut their spending by even more — 37 percent.

    This is one more study pointing out how many people are failing to take the most basic steps to manage their finances. Saving for Retirement is not very complicated. The details can get a bit complex but some of it is really basic like saving at least 5-15% of your earnings each year (or more if you fall behind) in tax differed savings accounts (IRA, 401(k)…). Many people just choose to sacrifice their future to buy more toys today.

    There are different strategies but the minimum you should be doing (in the USA where social security will provide a portion of retirement savings) is saving, in a 401k, IRA or something similar: 5% in your 20s, 8% in 30s, 10% in your 40s, 11% in your 50s, 12% in your 60s. If you save more earlier you may be able to save less later. And if you fall behind you will have to save more. To retire earlier, than say 68 (today, or say 70 by 2020, and if you assume life expectancy rates will continue to increase you need to plan on working longer or saving more for a longer retirement), you should save more.
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  • New Graduates Should Live Frugally

    Graduates should put off living large after college

    Good habits are important to start early,” said Laura Tarbox, founder of Tarbox Group, a financial planning firm in Newport Beach. “Take your finances as seriously as you do your relationship and career decisions, and you’ll end up way ahead of everybody else. But you’ve got to do it now. If you start even five years later, it just doesn’t work.”

    The key, experts say, is a simple one: Live like a poor college student for a couple more years. While you’re doing that, you can pay off your debt, start a savings plan and embrace healthy habits that will serve you well for life.

    This is exactly what I did. Outside of paying for college, extra living expenses in college were small. Just retaining the spending habit of college gets your personal finances off on a good start.

    Sallie Smart, 22, economizes like crazy in her first years after school so that she can save $500 a month in her 401(k), and she keeps that pace up indefinitely. Her employer matches 50%, pitching in $250 a month. If she earns a 9% annual return on her investments, when she wants to retire at age 65 she’ll have $4.1 million in her nest egg.

    Patty Procrastinator lives a little better when she first gets out of college and doesn’t start saving in the 401(k) until she’s 32. From that point, she also saves $500 a month, her employer adds $250 a month, and she earns a 9% return — just like Sallie. But at age 65, Patty will have only $1.7 million. That decade of delay will cost Patty $2.4 million.

    Incidentally, Sallie contributes from her own money just $60,000 more than Patty does. The rest of the difference comes from employer contributions and investment returns.

    By immediately starting to save for retirement and other needs you create a great foundation for your finances. Start saving for a house, a new car, create an emergency fund… Then you can create a situation where the only loans you need to take are for a house and maybe a new car – avoiding credit card debt or other personal loans.

    Related: Personal Finance Basics: Health Insurance – Initial Retirement Account Allocations – Why Americans Are Going Broke

  • Gen X Retirement

    Half of Gen X Doesn’t Expect to Retire

    Boomers who are frustrated that they can’t afford to retire may turn out to be lucky compared to their kids. A new survey shows that more than two-thirds of Generation X don’t think they’ll be able to retire at all.
    …
    “They are earning money and paying into Social Security and yet they fear they may never see the payback,” said Moloney. “They feel they deserve it, but it looks like a financial black hole to them right now.”

    The government certainly is failing to pay for future obligations today instead choosing to raise taxes on the future. But Social Security itself is actually in better shape than most think. We really do need to move out the benefit payment date (when it began projected life expectancy was almost the same as the date payments would start – which would mean moving the retirement date more than 15 years later, I believe). Going that far is not needed but it should be moved back. But really social security is in good shape for 30 years or more. First, it isn’t going to go from good shape to failed in a day. And second, they will make adjustments as they have in the past to make it work (the adjustment they made in the last 15 years helped a great deal so now they can just add some additional delays in when it starts paying out… and extend the good condition of Social Security without too much trouble).

    Medicare is the huge problem. The country either needs to stop paying an extra 50-80% for health care than other countries do (and thus reduce the cost of Medicare liabilities) or massively cut benefits or massively increase taxes. Likely a combination of all 3.
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  • 401k’s are a Great Investment Option

    The title of a recent article asks: Are you a sucker to invest in a 401(k)? The answer is an emphatic: No.

    Let’s say you put $10,000 in your 401(k) and invest in a stock-index fund that earns an average of 8% a year. After 20 years it will be worth $46,610. Withdraw the money all at once and you’ll pay $13,051 in taxes, assuming you’re in the 28% bracket, leaving you $33,559 to spend.

    But what if instead you had bought that tax-efficient stock fund outside your plan? Wouldn’t your tax bill be lower? Yes, but that’s the wrong way to look at it. If you skip your 401(k) in favor of a taxable account, you must first shell out taxes on that $10,000, which leaves you with just $7,200 to invest (assuming the same 28% bracket).

    Plus, over the next 20 years, you’ll have taxes on any dividends and gains the fund pays out. Even though you will get a lower 15% rate on your gains when you sell, you end up with $28,950, or about $4,600 less than with the 401(k). A tinier final tax bill can’t make up for having to pay taxes all along.

    This is a very good short simple personal finance article. It explains an issue that might be tricky for some to understand. Those that read it can learn more about personal finance. And it has several points – some of which, I can imagine, might be hard for some to understand. But it does a good job of explaining things simply. And a few points, made well in the article, are often overlooked or under-appreciated:

    tax rates will go up – we are passing higher taxes onto the future by not paying our bills now
    the tax deferral is a huge benefit – often minimized when people discuss the benefits of IRAs
    401(k) employer matches are another huge benefit

    As I have said before, learning about personal finance is a long term effort. If you don’t understand everything in an article that is fine, over the years you want to learn more and more. Hopefully this is a useful step on that journey.

    Related:
    Roth IRAs a Smart bet for Younger Set     – Saving for Retirement

  • Starting Retirement Account Allocations for Someone Under 40

    One of the most important financial moves you can make is to start investing for your retirement early. This post is directed at those in the USA (but you can adjust the ideas for your particular situation). Retirement accounts with tax free growth, tax deferred growth and/or even tax deductible contributions can add to the benefits of such an investment. And matching by your company can give you an immediate return or 100% or 50% or some other amount. With 100% matching if you invest $2,000 your company adds $2,000 to your retirement account. For 50% they would add $1,000 in the event you added $2,000.

    In other posts I will cover some of the other details involved but some people can be confused just by what investment options to chose. Normally you will have a limited choice of mutual funds. Hopefully you will have a good family of funds to choose from such as Vanguard, TIAA-CREF, American, Franklin-Templeton, T.Rowe Price etc.). If so, the most important thing is really just to get started adding money. The details of how you allocate the investment is secondary to that.

    So once you have made the decision to save for your retirement what allocation makes sense? Well diversification is a valuable strategy. Some options you will likely have include S&P 500 index fund, Russel 5000 (total market index – or some such), small cap growth, international stocks, money market fund, bond fund and perhaps international bonds, short term bonds, specialty funds (health care, natural resources) long term bonds, real estate trusts…

    Just to get a simple idea of what might make sense when you are starting out and under 40 and don’t have other substantial assets in any of these areas (large mutual fund holdings, your own house, investment real estate…) this is an allocation I think is reasonable (but don’t take my word for it go read what other say and then make your own decisions):

    25% Total stock market index (~Wilshire 5000)
    25% international stocks
    20% small cap stocks
    10% real estate
    10% high quality short term bonds in a Euros, Yen…
    10% short term bonds (or money market)
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  • Your Home as an Investment

    A house is where you live–not an investment

    If you’re living in the house you plan to live in for the rest of your life, you shouldn’t view it as an investment.

    Very good point – as long as you fall into that category of living there until you die. True for some people but far from all. Also, even for those people, it is not a complete view of the financial situation.

    A reverse mortgage will allow you to sell the house and get paid for the rest of the time you live there. So you can build up equity over 20,30,40 years and then take a reverse mortgage and get payments every month (based on your investing in your house). Reverse mortgages, like many financial tools, can be applied poorly and is I would guess unethical behavior related to them is fairly high (so be very careful!). If you think of such an option you need to do your research and actually understand what you are doing – you can’t afford to be like the many ignorant mortgagors. The AARP offers information on Reverse Mortgages.

    Additionally, you lock in a large part of your housing cost (you still have maintenance and taxes but you do not have every increasing rent. Now ever increasing rent is not a certainty but for many it is very likely rent will go up on average over the long term. Ownership of your home removes the risk of being priced out of the area you want to live by increasing rental prices over time. You also lose the potential of benefiting if rent prices fall over time, but I would say the more valuable of those options is avoiding the risk of rising rental prices.

    Related: How Not to Convert Equity – Housing Inventory Glut – articles on home ownership and real estate