The Motely Fool is one of the best web sites for learning about investing (it is one of the sites included in our investing links – on the left column of this page). A recent article on the site is worth reading – Ways to Retire Sooner:
Embrace stocks Saving more is great, but there’s only so much you’ll be able to put aside. You have to make the most of what you have. People are often too conservative in their retirement investments. Despite the sometimes-violent ups and downs of the stock market, the long-term return on stocks far exceeds that of less risky investments like bonds and bank savings accounts.
These are not exactly earth shattering recommendation but so many people fail to take even the most basic steps to assure a economically viable retirement the simple advice needs to be re-enforced. No one piece of advice can assure success but by educating yourself about investing and retirement planning and taking steps when you are in your 20s, 30s and 40s you can succeed. You can also succeed without doing anything in your 20s it just means you have to do more work later. Those that get started earlier get a huge advantage.
Related: Saving for Retirement – Retirement Tips from TIAA CREF – Retiring Later, Out of Necessity – investment risks – IRA (Individual Retirement Accounts)
I am not exactly sure why but for some reason people seem very ignorant of the wealth distribution by age. The richest group by far are those over 65. There are several reasons for this including self preservation. Once you stop working you better have a large pool of capital or you will most likely have little income (you could have a great pension and no other savings but…). Another is that the “miracle” of compound interest. Those that actually saved enough for retirement often find their investments out-earning their spending thus wealth increasing yearly. This effect over time results in wealth increasing dramatically. Many of those that failed to save enough will have their savings dissolve very quickly thus leaving the inverse of a bell curve (a high number of wealthy and of poor and a lessor number in the middle). Social Security helps those that failed to save enough for retirement to slow the decline (and those that saved enough to become even wealthier even faster). The presence of large numbers of poor elderly I think is one reason so many are surprised that they are the richest age group.
I used to be surprised how few people know this – now I know, for those I talk to anyway, they are always surprised. This has several public policy impacts such as why do we have a huge “social security transfer system” (social security including medicare) to move money from the young to the old when the old are wealthier than the young? People see the 7.65% deducted from their check but the employer has to pay an equal amount to this transfer of wealth between the generations bringing the total to 15.3%.
It doesn’t make much sense to me to have those working at Wal-mart and McDonalds transfer 15.3% of the income from their labor to much wealthier people. Yes, paying something in I think is fair. But the system should be adjusted. One method I would use is to reduce (or eliminate) payments to the wealthy elderly (continuing the existing payments to the poor elderly is affordable so I see continuing those payments as good public policy) and reduce taxes on the working poor. Obviously others disagree so we transfer a large amount of money from those working at Wal-mart to those with hundreds of thousands in investments. I think this is wrong. I wish at least the facts would be known so that the decision is made with awareness of the facts.
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The growing divide between the rich and poor in America is more generation gap than class conflict, according to a USA TODAY analysis of federal government data. The rich are getting richer, but what’s received little attention is who these rich people are. Overwhelmingly, they’re older folks. Nearly all additional wealth created in the USA since 1989 has gone to people 55 and older, according to Federal Reserve data. Wealth has doubled since 1989 in households headed by older Americans.
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The implications are far-reaching and can turn conventional wisdom on its head. Social Security and Medicare increasingly are functioning as a transfer of money from less affluent young people to much wealthier older people.
Wow, I don’t recall seeing publications actually point out this fact very often. Good for the USA Today.
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Very nice illustration in Personal Finance Success Comes More From Smart Budgeting Than Smart Investing:
Now, Kevin’s a smart investing cookie and is able to crank out a 16% return each year. I just take my money, dump it in a Vanguard 500, and move on with life, which means over the long haul I earn a 12% return. Who earns more in the long run?
After five years of this same investing, Kevin has $34,385.68 in his investment account, while I have $63,528.47 in mine, a difference of $29,142.79 in the frugal guy’s favor. Even at the twenty five year mark, if the investments have continued for that long, Kevin has $1,246,070.12 in his account, while I have $1,333,338.70 in mine, a difference of $87,268.58.
I would use lower returns (to better match what I think is reasonable to use in projections about the future) but by using higher returns it actually makes a stronger point (the compounding at 16% is extraordinary – I was actually surprised that at the 25 year mark that the results were the way they were). The lesson is powerful. Your personal finance situation is a factor of several things, but very close to the most important is just actually saving money, as the post illustrates.
Related: Trying to Keep up with the Jones – Earn more, spend more, want more – Living on Less – Saving for Retirement – How much have people saved?
Have less than $25K in savings? Get in line
What is a very rough estimate of what you need? Well obviously factors like a pension, social security payments, age at retirement, home ownership, health insurance, marital status… make a huge difference in the total amount needed. But something in the neighborhood of 10-25 times your desired retirement income is in the ballpark of what most experts recommend. So if you want $50,000 in income you need $500,000 – $1,250,000. Obviously that is difficult to save over a short period of time. The key to retirement saving is consistent, long term commitment to saving.
Related: Saving for Retirement – Start Young with 401k and Roth IRA – Retirement Delayed: Working Longer
Boomers on brink of retirement wonder if they can afford it:
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Scholz doesn’t go that far, but he does question the popular notion that most baby boomers are “blowing it” in their preparation for retirement. He says the group’s research showed that, by and large, Americans born between 1931 and 1941 were faring quite well financially during their retirement. “That was very surprising to us,” he says. “So then an interesting question is, does the experience of that generation carry over to households that are younger?”
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“They’re like, ‘Well, I finally got a cell phone.’ They use a computer but it’s one that’s eight years old. Their cars run forever.” That mindset is far different from most baby boomers, Haunty argues. To them, items once viewed as luxuries are now considered necessities. And, he adds, this “propensity to consume” is even more prevalent among Americans in their 20s and 30s. Haunty says he’s not advocating that baby boomers “save every penny and wear the same jeans they wore 10 years ago. But they’ve got to strike a balance.”
Well said. If you have enough money to afford whatever you want and can maintain an emergency fund, buy disability insurance, buy health insurance, save for retirement, avoid personal debt, save for children’s education… great. If not, then choices need to be made about what is most important and then you get to live with the consequences of those choice.
There are few investment opportunities as valuable as IRAs (tax sheltered retirement accounts) – nor many more critical to successful personal financial success (for younger or older really). Roth IRAs a smart bet for younger set by Tami Luhby.
The beauty of the Roth IRA and 401(k) is that there’s no tax on the capital gains in the accounts, so the longer you have to accumulate those gains, the better.
Mathematically, if the tax rate in the year of the contribution and the tax rate at the year of withdrawal are equal a Roth IRA and regular IRA provide the same value. However, in addition to earning less money in while young and therefor being in a lower tax bracket there is also the benefit from a Roth IRA of eliminating the risk of an increasing tax rate structure. Since money withdrawn from a Roth IRA is not taxable. This is a huge benefit.
So add to your IRA for last year if you have not already and add to your IRA for this year now. Also add to any employer matched 401(k) for your long term retirement savings. Few investments will have the long term impact of adding to retirement accounts early and often.
Related: Saving for Retirement
Do lower oil prices mean the end of the saving glut?:
There is also clearly a savings glut in the oil exporting countries. Lahart – drawing on work by Higgins, Klitgaard and Lerman of the New York Fed – notes that the oil exporters saved about ½ the surge in their oil export revenue over the past few years. The result: the current account surplus of many oil exporters surged to over 30% of their GDP.
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The oil exporters seem to have gotten noticeably less frugal over time. They were very frugal in 2004. A bit less frugal in 2005. And even less frugal in 2006.
As usual a good post by Brad Setser. The details of understanding the “savings glut” get complicated but essentially the idea is that huge savings from China, OPEC countries… create huge sums looking for investments (and fund the huge USA debts – public and private). And to some economists create the market for the debt (for example, without the savings glut their belief is there would not have been money to finance the huge questionable mortgage market over the last few year). As stated in, The Global Savings Glut:
And nearly all economist agree the “savings glut” creates the very low interest rates we have seen the last few years around the world.
Related: The Global Saving Glut and the U.S. Current Account Deficit by Ben Bernanke – Savings Glut (The self-serving explanation for America’s bad habits) by Daniel Gross – Global Savings Glut Revisited – The Savings Glut
Earn more, spend more, want more:
It does seem many people lose focus on happiness and instead focus on buying more things. This is something that I believe is a problem.
I make $6.50 an hour. Am I poor? by Karen Datko:
I am no longer proud.
Pride should not be tied to how much money you have. It is, often, but it shouldn’t be. If you act foolishly or you waste money or you act irresponsibly being ashamed is possibly reasonable. When you have extra money, you can waste some and not feel ashamed because you have some to waste. But when you are doing your best you should be proud no matter how much money you have. Buying more pairs of shoes, or fancy coffee or a new video game or the full cable TV package… is not what you should take pride in.
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How to make your kids millionaires by Walter Updegrave:
Your first goal: Encourage them to contribute enough to get the employer match, without worrying about sorting through all the investment options. Just have them stick the money in a target retirement fund (or if that’s not an option, a stock-index fund).
You can talk to them later about boosting their contribution and fine-tuning their strategy.
Related: Saving for Retirement – Start Young with 401k and Roth IRA – what is a 401k? – articles on investing for retirement