Retirement Myths and Realities provides some ideas from former Boeing President, Henry Hebeler:
…
My father used to tell me to save 10 percent of my wages all the time for retirement. And so I did. I never looked at any retirement plan; we didn’t have retirement planning tools in those days.
…
I think the number is closer to 15 (percent) to 20 percent — that’s from the time when you’re a relatively young person, say, 30 years old or something like that.
…
A retiree’s inflation rate is about 0.2 percent higher than the normal Consumer Price Index. When you retire, you have medical expenses that continually increase. You have more need for this service and the unit cost is increasing much faster than inflation.
…
Now, if you’re going to retire at 80 years old, you could actually have a bigger number than 4 percent. If you’re going to retire around 65 or so, 4 percent is not a bad number. Some people are now saying 3.5 percent instead of 4 percent. If you’re going to retire at 55, you’d better spend a lot less than 4 percent because you’ve got another 10 years of life that you’re going to have to support.
He makes some interesting points. I agree it is very important for people to become financially literate and take the time to understand their retirement plans. Just hoping it will work out or trusting that just doing what someone told you are very bad ideas. You need to educate yourself and learn about financing your retirement.
I am not really convinced by his idea that you need to start saving 15-20% for retirement at age 30. But that is a decision each person has to make for themselves. Of course there are many factors including how much risk you are willing to accept, when you plan on retiring, what standard of living you want in retirement…
Related: How Much Retirement Income? – posts on retirement – Saving for Retirement – Our Only Hope: Retiring Later
More Insurers Raise Fees on Variable Annuities
As SmartMoney has reported, this is one way that annuities are failing to live up to their big promises. The guarantees attached to the products – minimum returns of 6% per year or better, market upside, no chance of loss and a lifetime income stream – were designed to attract people in retirement or close to it.
And it worked, attracting $650 billion in assets in the last five years. But the guarantees are only as good as the insurance company’s ability to hedge them, and even when the markets were rising, some insurance company executives admitted their strategies hadn’t been tested by real-life crisis conditions. Now some estimates suggest that hedging costs have doubled in the last year, and insurers are passing those costs along to their customers.
…
For example, an investor might purchase a $100,000 annuity that pays a guaranteed 6% annual return for 10 years, or market returns — whichever is better. The fees for a product like that might look something like this:
- 1.3% annually on the current balance to cover the underlying investment
- 1% annually on the current balance for the insurance wrapper (called the mortality and expense charge)
- 1% of the original purchase price to cover the guarantee
The fees now rising are all in that last category — charges that cover guarantees. At the Hartford, the fees of three different kinds of guarantees are rising, from the current charge of 0.35% to 0.75%.
In general I am not inclined to insurance investment products. They are frequently overloaded with fees. Annuities can provide some balance in retirement, so annuitizing a portion of assets at retirement may be reasonable. But I would not use insurance investment products for a significant portion of my retirement assets.
Related: Personal Finance: Long-term Care Insurance – Many Retirees Face Prospect of Outliving Savings – Investor Protection Needed – Retirement Tips from TIAA CREF
The economy (in the USA and worldwide) continues to struggle and the prospects for 2009 do not look good. My guess is that the economy in 2009 will be poor. If we are lucky, we will be improving in the fall of 2009, but that may not happen. But what does that mean for how to invest now?
I would guess that the stock market (in the USA) will be lower 12 months from now. But I am far from certain, of that guess. I have been buying some stocks over the last few months. I just increased my contributions to my 401(k) by about 50% (funded by a portion of my raise). I changed the distribution of my future contributions in my 401(k) (I left the existing investments as they were).
My contributions are now going to 100% stock investments (if I were close to retirement I would not do this). I had been investing 25% in real estate. I also moved into a bit more international stocks from just USA stocks. I would be perfectly fine continuing to the 25% in real estate, my reason for switching was more that I wanted to buy more stocks (not that I want to avoid the real estate). The real estate funds have declined less than 3% this year. I wouldn’t be surprised for it to fall more next year but my real reason for shifting contributions to stocks is I really like the long term prospects at the current level of the stock market (both globally and in the USA). The short term I am much less optimistic about – obviously.
I will also fully fund my Roth IRA for 2009, in January. I plan to buy a bit more Amazon (AMZN) and Templeton Emerging Market Fund (EMF). And will likely buy a bit of Danaher (DHR) or PetroChina (PTR) with the remaining cash.
Related: 401(k)s are a Great Way to Save for Retirement – Lazy Portfolio Results – Starting Retirement Account Allocations for Someone Under 40
Scott Adams does a great job with Dilbert and he presents a simple, sound financial strategy in Dilbert and the Way of the Weasel, page 172, Everything you need to know about financial planning:
- Make a will.
- Pay off your credit cards.
- Get term life insurance if you have a family to support.
- Fund your 401(k) to the maximum.
- Fund your IRA to the maximum.
- Buy a house if you want to live in a house and you can afford it.
- Put six months’ expenses in a money market fund. [this was wise, given the currently very low money market rates I would use “high yield” bank savings account now, FDIC insured – John]
- Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker, and never touch it until retirement.
- If any of this confuses you or you have something special going on (retirement, college planning, tax issues) hire a fee-based financial planner, not one who charges a percentage of your portfolio.
Recent market collapses have made it even more obvious how import proper retirement planning is. There are many aspects to this (this is a huge topic, see more posts on retirement planning). One good strategy is to put a portion of your portfolio in income producing stocks (there are all sorts of factors to consider when thinking about what percentage of your portfolio but 10-20% may be good once you are in retirement). They can provide income and can providing growing income over time (or the income may not grow over time – it depends on the companies success).
…
Strategy #3: Buy common stocks with solid dividends and a history of raising dividends for the long haul. That way you let time and compounding work for you. While you may be buying $1 per share in dividends today with stocks like these, you’re also buying, say, 8% annual increases in dividends. In 10 years, that turns a $1-a-share dividend into $2.16 a share in dividends.
3 of this picks are: Enbridge Energy Partners (EEP), dividend yield of 15.5%, dividend history; Energy Transfer Partners (ETP), 11.2%, dividend history; Rayonier (RYN), yielding 6.7%, dividend history.
Of course those dividends may not continue, these investments do have risk.
Related: S&P 500 Dividend Yield Tops Bond Yield: First Time Since 1958 –
Discounted Corporate Bonds Failing to Find Buying Support – Allocations Make A Big Difference
Feds Rethink Rules on Retirement Savings
Among the possible changes: allowing taxpayers to delay taking required withdrawals from their individual retirement accounts, 401(k) plans and other similar accounts this year — or at least reducing the amount that must be withdrawn. Also under consideration are various ways to provide tax relief for people who already have made their required withdrawals for this year.
This is silly. Everyone in the situation of having to make a withdrawal has know about the requirement for years. My guess is this has been the law for over 20 years. Yes, the stock market is down. Yes, being forced to sell now would be bad. And how does providing “tax relief” to those who already made required withdrawals make any sense? Why not just have the treasury send checks to every American, who had a loss on an investment this year, equal to the amount of their loss? (By the way this is sarcasm – they should not really do that). These people have lost any sense of what investing, planning, responsibly… are.
First, knowing you have required withdrawals from your IRA, you should not hold those assets in stock (I suppose you could have significant cash assets outside your IRA and chose to just use the next option). Second, you can buy the stock outside your IRA at the same minute you sell them in the IRA. What is the big deal: the cost should be about $20 in stock commission for each stock – you save that much each time you fill up your gas tank lately (compared to prices this summer). All that not having to withdraw funds does is let those wealthy enough not to need a small amount of their IRA or 401(k) savings by the time they are 70 1/2 to keep deferring taxes on their investment gains.
Therein lies one of the major problems. This year’s distributions are based on Dec. 31, 2007, levels — a time when market prices generally were far above today’s deeply depressed values. As a result, “millions of Americans are forced to withdraw larger-than-anticipated amounts from already-depleted retirement funds,” says David Certner, legislative policy director at AARP, an advocacy group that represents nearly 40 million older Americans.
What kind of 1984 newspeak is this? I mean this is absolutely ridicules. You have to withdraw the exact amount you knew on January 1st 2008. Nothing about that has changed in almost a year. How can the Wall Street Journal report this without pointing out the completely false claim.
Read more
Long term care insurance is an important part of a personal financial portfolio. It provides insurance for for expenses beyond medical and nursing care for chronic illnesses (assisted living expenses). So while looking at your personal finance insurance needs (health insurance, disability insurance, automobile insurance, homeowners [or rental] insurance [with personal liability insurance – or separate personal liability insurance] and life insurance don’t forget to consider long term care insurance.
Can You Afford Long-Term-Care Insurance?
…
AARP estimates that a 65-year-old in good health can expect to pay between $2,000 and $3,000 a year for a policy that covers nursing-home and home care.
“About 70 percent of individuals over age 65 will require at least some type of long-term care services during their lifetime. Over 40 percent will need care in a nursing home for some period of time.” – National Clearinghouse for Long-Term Care Information
Advice on buying long term care insurance from AARP, the Department of Health and Human Services and Consumer Reports.
Read more
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…
Read more
Americans working past retirement
…
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
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