Saving early enough?

I attended a brief seminar last week that featured a former Department of Labor investigator.  As current trends in the qualified retirement plan area were discussed, the following statistic came up among pre-retirees: “the largest regret about my retirement is that I didn’t save enough (or at all) during the first five years I worked” – Did you know that by beginning to save when you get your first job, especially during the first 5 years, you can dramatically increase your retirement success rate?  Two key factors come into play: 1) your investments have longer to compound and grow, and 2) most who do so develop a positive habit of disciplined saving.  If this window has passed by, do you have loved ones you need to encourage to start investing now?  And if you are late, why not start now anyway?  Call us and we can help.

Well-equipped for retirement?

According to the Population Reference Bureau, 76.4 million Americans were born in the period 1946–1966.  For retirement, a majority of these Baby Boomers must rely on the 401(k) system or equivalent defined-contribution plans (where the worker does a majority of the savings and, in many cases, may receive matching contributions from their employer).  This is because the key retirement predecessors, “defined-benefit” plans (such as pensions), have increasingly become a thing of the past.

What’s troubling is the Quantitative Analysis of Investor Behavior 2014 DALBAR survey results indicate that investors are not very effective in managing their own investment portfolios.  And among other things, the survey shows that workers aren’t saving enough for retirement.  To quote Dr. Olivia Mitchell, Executive Director of Wharton’s Pension Research Council “more than half of U.S. retirees will rely on Social Security for more than 50% of their total income.”  This will sadly leave them with the painful choice of a significant drop in their standard of living, or even more concerning, the risk of outliving their retirement savings.  One simple conclusion, workers should seek help to review and plan for their retirement – a second set of eyes to help them get, or even stay, on track.

Improving your Retirement Picture

In a recent national retirement plan survey conducted by Matthey Greenwald & Associates of Washington, D.C., employer retirement plan participants shared some interesting facts. Here is a clip of some of the key findings provided by American Century Investment Services: 

  • A majority of participants, particularly older participants, have at least some regret about not doing a better job saving for retirement. In fact, participants gave themselves roughly a C+ on putting money away for retirement and on investing. 
  • The large majority of participants across all age groups wish they had saved more in the first five years of their working lives. 
  • Only one in ten strongly agrees that they knew what they were doing with their investments. 
  • Seven in ten are at least fairly interested in having a program that would increase their savings by 1%. 
  • Roughly two-thirds in each age group expect the financial advisor to play a major role going forward when it comes to preparing for retirement. 

Does all this make sense to you?  If we can help you or someone you know have enough for retirement please give us a call now.  We are ready to help.

XYZ Strategy #1

As a kid, my parents jokingly shouted “XYZ” if I ever exited the bathroom without zipping up my pants!  Let’s be honest, sometimes we get going so fast that we forget some of the most basic, fundamental needs we have.  As a Gen-X (ages 38-48) or a Gen-Y (ages 19-37) investor, did you know that you are a part of a group that boasts one of the highest earnings power?  Maybe you are moving along so fast that you need to stop to reconsider your plans for the future – something that seems way off, but in reality something that may come quicker than you realize.  Doing so can help you Zip-up (take care of) some essential needs in regard to your financial hopes and plans… these are the XYZ Strategies.

XYZ Strategy #1Develop a strong, sound savings strategy

Many Gen-X investors are doing this.  Many Gen-Y investors are starting (or have thought about it).  And some of you have an inheritance you unexpectedly received, providing a solid foundation on which to build.  Regardless of your situation, a key need for you is to develop a disciplined investment strategy.  This is how you accumulate net worth over time, and also build up what you need for retirement.  So what defines a strong savings strategy?  Here are some five basic criteria to consider.

1) Just begin – if you haven’t already, you need to start saving.  Do you realize it is much more difficult to save later on in life than it is today?  This, not to mention the opportunity cost of forfeited compounding, inflation, etc. are reasons to start today.  Plus, the math tells us that you shouldn’t be required to put aside as much now compared to waiting to start years later (when you get that pay raise, after you get married, once the car is paid off, etc.) saving for that goal.

2) Go automatic – systematic bank drafts work best and take the emotions out of investing.  There’s no second guessing and you don’t miss $’s that aren’t in your checking account.  If you get paid on the 15th and 30th each month, set up drafts for the 16th and 31st each month.  Before you realize it, the years pass and you could have significant accumulated savings that you funded without the pain of writing a check each month, or wondering if “now” was the right time to invest.  Dollar cost averaging is a proven, sound investment strategy.

3) Stick to your guns – in other words, don’t stop your plan… not when your car breaks down, not when the A/C unit stops working or the roof needs repair, not even when you have unexpected medical expenses.  That’s what your emergency fund is for.  Instead, benchmark that you won’t stop saving – and that you will even increase the amount you save every year.  When is the best time for this?… usually after your annual employment review (or bonus).

4) Spread it out – while you can’t argue with the tax-advantages of saving in a company retirement plan (401k, SIMPLE IRA, etc.) or a Roth IRA (tax-free growth over time), it is still important to diversify your savings.  Sound investors will also have taxable accounts (individual, joint, TOD, etc.) and disciplined families will have accounts set up for their children (UTMA, 529, ESA, etc.).  Not putting all your eggs in one basket doesn’t just apply what you invest in, but also to the type of accounts you are funding over time.

5) Ask for help – set aside the pride and work with an advisor.  It’s a sound way to receive professional, objective advice and it’s never a bad idea to have a second set of eyes on things.  Plus, they look at investments most every day – it’s what they are paid to do.  Let’s face it – life happens and before we know it time has slipped by, so enjoy the weekend and let your advisor worry about the investments.

Re-Building Retirement Wealth, Part 2

In Part 1 posted on 3/4/10 we discussed the benefits of a reasonable lifestyle, both today and during retirement. So let me illustrate to you what I meant and the benefits of spending within reason. Notice how much someone needs at age 66 to support a much higher standard of living. I would call this “living within your harvest.”

To illustrate, let’s make the following basic assumptions for a married couple:
— Current age of 55 and Retirement age of 66
— Combined Social Security income of $2,400/month (in today’s dollars)
— Growth rate on investments of 4% post-retirement
— Retirement period of 19 years (live to age 85)
— Current inflation rate of 3% annually

Based on these assumptions, someone may need to have accumulated the following amounts at retirement (Source: American Funds retirement calculator):

Living Expenses during Retirement —- Amount Required at Retirement (age 66)
$6,000/month —- $1,066,488
$10,000/month —- $2,158,247

Keep in mind this is just for simple illustration purposes, makes common assumptions, and assumes no market volatility. In real life, change is frequent and retirement assumptions, rates of return, inflation, etc. can vary from year to year. Plus, it’s very common that individuals will experience some type of unexpected need during their retirement years (such as increased medical expenses)… requiring more savings or a lifestyle change. Remember, everyone’s situation is different and should be monitored closely by a financial professional.

So what do you think? Which spending level can you truly afford?

The above information is for illustrative purposes only and is not intended to provide investment advice or portray actual investment results. Your financial situation and goals may change, so you might want to revisit the American Funds retirement calculator at least once a year. Be sure to discuss your results with your financial professional. The above information does not take certain factors into account, including early withdrawal penalties, required minimum distributions and holding periods. Regular investing does not ensure a profit or protect against loss. Hypothetical annual rates of return are not intended to reflect actual results; your results may vary based on market conditions. The above information compounds earnings annually and assumes that withdrawals are made at the beginning of the year. To access the American Funds retirement calculator go to https://www.americanfunds.com/retirement/calculator/.