Retirement prospects look poor

An article in the Wall Street Journal today highlighted that those in or preparing for retirement are less confident than ever.

Only 13% of workers say they are very confident about having enough money to retire comfortably. That’s a record low.

This is not a surprise considering that 49% of people 55 and older have saved less than $50,000. That’s so far short of what’s needed as to be outrageous. That could pay out around $4,400 a year over 30 years assuming an 8% return. Nowhere near enough money.

Those retired or going to retire over the next decade or two may at least have the benefit of social security and perhaps a pension. Younger folks should know that social security will be so far insolvent as to be unavailable to everyone.

Hope is not a strategy.

Only 25% of workers are highly optimistic about covering food and housing costs in retirement. That means 75% of people know–absolutely KNOW–they can’t take care of themselves in retirement. Stunning!

For those currently retired, only 20% are confident about being able to afford a secure retirement. Only 25% say they have enough for medical expenses. Only 34% are optimistic about covering basic expenses. That means two-thirds of retirees believe they can’t pay for the basics. Unbelievable!

On the bright side, workers are doing something to change their situation. They are cutting spending, working more hours, saving more, and talking to a financial professional. I hope they get good advice.

One major problem is that so many believe they can work longer to postpone retirement. But, 50% of current retirees left the workforce sooner than they expected because of health problems, downsizings or obsolete skills. Counting on working longer is not a solution.

Also, two-thirds of workers planned to work after retiring, but less than 35% actually ended up being able to work. Hoping to work more is not necessarily a viable option.

What do people need to do? They need to save more. They need to invest that money wisely. They need to think hard and independently about the amount of money they will need and why. They need to plan to take care of themselves, not hope that things “work out.” Hope is not a strategy. Hope for the best, plan for the worst.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

The returns you get on your money matter…A LOT!!!

Although I understand clearly the argument for low cost index funds, especially for more risk averse people, I want to briefly make the argument for going after above average returns.

Why? Because it can have a HUGE impact on your quality of life. Getting above average returns can greatly improve your safety and security both before and during retirement.

Let me give you some a examples to clearly illustrate my point.

Suppose Bob starts saving at 30, retires at 65 and dies at 95. Also, suppose he saves $100 a month from the time he’s 30 until he reaches 65. Finally, suppose he gets 7% returns from age 30 to 95. How much will Bob have to live on? Around $13,400 a year from the time he’s 65 until he dies at 95.

Now, suppose Fred does the exact same thing as Bob, except he gets 8% returns from 30 to 95–only 1% better than Bob! Fred will have around $18,400 a year to live on from the time he’s 65 until he dies at 95. That’s 37% more a year to live on!

Using slightly different savings inputs, that’s the difference between having $50,000 a year in retirement versus having $68,500 a year! That’s HUGE!!!

You can plug any numbers you want to in the scenario above, and you’ll get the same general answer. Getting better returns–even mere 1% better returns–can hugely raise your standard of living in retirement, thus giving you more peace of mind, safety and security.

More provocatively, let’s suppose you don’t know when you’re going to die–most people don’t! How long will your money last when your retire?

Let’s use the same numbers above, except let’s assume both Bob and Fred don’t know when they are going to die, so they spend $17,500 a year. How long will their money last if Bob gets 7% returns and Fred gets 8% returns? Bob’s money will last 17 years–he’ll run out of money at age 82. Fred’s money will last 38 years–he’ll have money until 103 years old!

Can you imagine running out of money at 82 versus having enough to last to 103? That’s a huge change in safety and security!

My point here is not that everyone should try to get above average returns. My point is that getting above average returns may REALLY be worth it if you have the tolerance and ability to go after above average returns.

I’ve been beating the market, after fees, by around 3.5% a year for the past 12 years (past results are no guarantee of future performance). Want to guess what my retirement projections look like? Want to guess how much peace of mind I have?

If you have the right temperament and the right financial situation to go after above average returns, it can have a huge impact on your current and future lifestyle. In my opinion, it’s well worth going after.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

401k investing

Many investors are just plain baffled about how to invest their money. They don’t know where or how to invest to reach a comfortable retirement.

One of the best investment vehicles out there, if it’s available through your employer, is the 401k plan.

Traditional 401k plans allow for pre-tax contributions that grow tax-deferred until retirement (when withdrawals are taxed as ordinary income). Roth 401k plans allow for after-tax contributions that grow tax-deferred and are not taxed on withdrawal (they also provide more flexible withdrawals and better estate planning options).

Many employers match employee contributions. This is like getting a raise in salary, yet less than 66% of all employees eligible participate in such plans.

If a 401k plan is available to you, you should almost certainly be contributing to it.

The earlier you start saving, the sooner you don’t have to work for other people or the bigger your retirement will be. Start saving NOW!

Before you invest, you should learn a few things about the plan available from your employer. You’ll want to know your employer’s policy on matching contributions, the vesting schedule for contributing, and the plan’s maximum contributions.

The hardest part about investing in a 401k–after clearly understanding you should–is picking the right investment(s). Most plans offer anywhere from 25 to 900 choices. Almost all investors are overwhelmed by such choices.

Unlike most advisors, I don’t necessarily believe that investors should go crazy diversifying their money to the 4 corners of the investment world. There are better and worse investing opportunities, and any good investment advisor will know the difference between the two.

Don’t necessarily go for target date funds, either. Their allure seems wonderful because someone else does the thinking for you, but their high fees and necessarily mediocre performance may not meet your personal desires or your investment needs.

Finally, I would advise you not to invest in your company’s stock through such a plan. Your pay check is already dependent on the company, so you probably don’t want your retirement nest-egg to be in the same spot. The folks at Enron, Worldcom and Arthur Anderson found out the hard way what a big mistake that can be.

If you need any help making these decisions, I’d be happy to help. Just give me a call at 719-761-3148.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Bad reasons not to save

Jonathan Clements, who writes for the Wall Street Journal, had a somwhat amusing article on September 9th.

His title was, “Six Bad Reasons Not to Save for Retirement.” I couldn’t agree more.

Bad reason #1: I still have plenty of time.

Say you start saving for retirement as a diligent 25 year old. Your goal is to have $1 million by retirement, which you plan to start at 65 years old. You’d need to save around $846 a month for 40 years.

If you wait until 35, you’d have to save 70% more a month, or $1,441 per month for 30 years. If you wait until you’re 45, you’d have to save 322% more a month, or $2,726 per month for 20 years. If you wait until 55, you’d have to save 803% more a month, or $6,791 per month for 10 years.

It pays to start as early as possible. The longer you wait, the more painful reaching retirement will be.

If you think you’ll earn more money as you age and have more money to save later, you’re right on the first issue but wrong on the second, because I almost guarantee you’re expenses will go up faster than your income as you age.

Start saving as soon as you can, as much as you can, and you’ll reach a bigger retirement with a lot less stress and strain.

Bad reason #2: My house is worth a bundle.

See my previous post on this subject. Counting your home as a retirement asset usually doesn’t work out.

Bad reason #3: My investments are doing great.

They may be doing well, now, but what matters is how they do over the full length of your retirement years.

For those who retired in the late 1990’s with enough money, the sell-off during 2000-2003 slammed them right back into working again. It’s not enough to have a lot of money at the peak.

A retirement plan should be set up with a margin of safety, not merely “enough money to get by as long as everything goes well.”

The best way to get there is to save continuously into your retirement plan (which should be based on reasonable assumptions).

Bad reason #4: I’ll receive a fat inheritance.

Very few people, after inheritance taxes, will receive enough money to retire on, perhaps 1.6% as Clements suggests.

If you are part of that 1.6%, congratulations.

If not, get to saving.

Bad reason #5: I have a pension.

41% of households currently have a defined-benefit pension plan, whereas 62% of workers expect to receive a pension.

If you actually have a pension and are not part of the 21% of “land-of-fantasy” types who expect a magical pension to appear in the future, be sure it will cover your actual expenses in retirement.

Also, keep in mind that, because of recent accounting pronouncements and the expense of defined-benefit plans for companies, many defined pension plans are going the way of the dodo.

If you don’t have a pension or are part of the 21% who are clicking your heels for the future-fantasy-pension, get to saving.

Bad reason #6: I’ll work in retirement.

This is actually not a bad idea.

I love my job and don’t plan to stop working until I’m unable to work, so I can sympathise with this argument.

But, many people don’t want to or can’t work into their 70’s and 80’s.

Planning to work into your 60’s makes sense, but assuming you’ll be capable of working into your 70’s and 80’s is gambling where the odds are against you.

Plan to work if you can and want to, but have enough money saved in case you just plain can’t.

Saving for retirement is like paying for insurance. You may never make a claim or need as much money as you’ve saved, but that doesn’t mean you don’t want to make regular payments so you are safe and secure in your old age.

Save for retirement as soon as you can, as much as you can, and as regularly as you can. You’ll sleep better and have greater peace of mind.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Savings crisis

I was blown away by an article I read at CNNMoney.com today. The article addressed the recent 2007 Retirement Confidence Survey conducted by the Employee Benefit Research Institute and Matthew Greenwald & Associates.

The survey attempted to assess how much workers are saving for retirement. It showed that nearly 50% of all workers saving for retirement have less than $25,000 saved. 68% of those with less than $25,000 saved for retirement are between the ages of 25 and 34, which didn’t surprise me much. But, what did surprise me was that half of workers between 35 and 44 and one third of workers age 45 to 55 and over have less than $25,000 saved. I thought, “What do those folks plan to do in retirement, collect aluminum cans?”

40% of respondents said they are not saving for retirement, and 34% said they didn’t have any retirement money saved at all. 25% said they had no savings at all–for retirement or emergencies or anything! Are these folks playing the lottery or what?!

30% of workers said they thought they would need to have a nest egg worth less than 5 times their current income to live in retirement. Yeh, sure, 5 times current income will work as long as they can get 16% returns in retirement, don’t mind risking a 50% chance of running out of money, and don’t mind having a declining standard of living due to inflation!

27% of workers thought they needed between 5 and 10 times their income in savings. Even assuming 7% returns, 10 times your income in savings risks a 50% chance of running out of money and a declining standard of living due to inflation.

To top it all off, 62% of those surveyed said they expected to receive a pension when they retired, even though only 41% said they knew of a pension they or their spouse had coming. How could 62% think they have a pension coming when only 41% know of a pension coming? It’s beyond me.

The best research I’ve seen says that people should plan to withdraw around 4% of their money each year to successfully navigate their way through retirement without running out of money. According to my calculations, that would require 20 times your current income assuming you spend 80% of your pre-retirement income while retired. I’m also assuming no pension or social security income, which may seem overly conservative until you consider how many people have pensions and the financial Ponzi scheme that social security is.

There’s a saving crisis in this country, and it’s nobody’s fault but the people not saving. I seriously wonder how many of those without savings or with minimal savings have spent as much time thinking about how they will put food on the table and a roof over their head in their golden years as they think about their vacations, home buying, or vehicle purchases.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.