A 401(k) Savings Calculator

Source: Capital Pixel

Ever wonder what your 401(k) balance will be if you save more? How about if you get a higher return or if you delay retirement? These questions are actually quite easy to answer and fun (maybe not for everybody!) to explore.  An important bonus is that you are left with a better feel for your path to a successful retirement.

Your 401(k) balance is worth thinking about because, for most people, it will be a major pillar in retirement.  The rule of thumb is that 4% can be drawn down without running out of money.  So, how do you figure what it will be 10, 20, 30 years from now?

Actually it is quite easy with the calculator at http://finance.yahoo.com/calculator/retirement/pay07/.  The inputs are self explanatory.  Note that there are 2 inputs you have direct control over:  years until retirement and contribution rate.  And 1 input you have partial control over - the portfolio return.

Here is an example of the inputs for a worker making $78,000/year and saving 4% with an employer match:

Source: Yahoo Finance

The really good feature about these calculators is that it is easy to vary the inputs.  As you think about reaching a savings goal, there are really only three steps you can take.  You can save more, delay retirement, or get a higher return.  You can play around with the first 2, although most people push back and say they are at the max on how much they can save and don't want to delay retirement. The third option is not obviously directly controlled.  The markets are going to do what they are going to do.

It is worthwhile still, though, to think about performance.  I would say that the 8% return used in the calculation would be achievable with a 60% stock/40% bonds + cash portfolio.  To get a higher return would likely require a higher stock allocation--although THERE ARE NO GUARANTEES!  The markets are going to do what they are going to do.

Another point to understand about market returns is that the sequence of returns is important when contributions are being made.  Think about it like this:  there are various ways to get an 8% return.  You can have high returns in the early years and lower returns in the later years to average to 8% or vice versa.  It makes a difference whether the lower returns occur when balances are high, etc.  Because of this, you'll want to revisit the calculator at least every couple of years.

Here is a sample output table from the calculator:

Source: Yahoo Finance

 One way to use this output is to work backwards and view the ending balances as the targeted amount you need at various years to be on track to reach a given number.

How Many of These Retirement Investing Mistakes are You Making?

Source:UK.guardian

This list found in AAII Journal (7/2013, p.4) was taken from Bankrate.com's "7 Retirement Investing Mistakes."  Both of these sites are of interest to DIY investors and are worth checking out.  I have added my comments in bold.

One way to avoid these mistakes is to participate  in the online book discussion of Millionaire Teacher which is at the half-way point.

1. Not Taking Full Advantage of Tax Breaks:  Tax-favorable accounts, including 401(k) plans and individual retirement accounts (IRAs), allow savings to grow tax-free; yet many workers do not take advantage of them.  Two simple tax rules to keep in mind:  pay less tax and put off paying taxes as long as possible.  For example, pay less taxes by seeking long-term cap gains and qualified dividends.  Avoid taxes until you withdraw funds by using tax-qualified investment accounts.  If the 401(k) has any kind of a match, swoop up the free money.  This isn't rocket science.

2. Not saving enough, or at all:  Saving 9% of one's salary (including employer matching contributions) may not be enough, especially for those starting late or having gaps in their employment.  Plus, more than 80% of those surveyed by TIAA-CREF said they weren't contributing to an IRA.  I talk to a lot of people about how they will generate an income when they are no longer working at their main occupation.  I have never run into anyone who has said they saved too much prior to retirement! If saving is a problem, there are really good books and websites on how to become more frugal. Ask me and I'll recommend a few.

3. High Fees in Retirement Plans and Investments:  High fees can negate any outperformance, so it is important for savers to be aware of them and to look for low-cost alternatives.  Put on a blindfold, pick up a dart and throw it at this blog.  Chances are you'll hit a post on this very topic.  LOW COST INDEX FUNDS LOWER FEES.

4. Focusing on Only One Risk:  Nearly four in 10 people surveyed by Franklin Templeton believe they can get by without investing in stocks.  Yet, avoiding stocks increases longevity risk--the risk of outliving one's savings.  Not only that - if you think you are safely ensconced in money markets and Treasury bills and notes, YOU ARE BEING EATEN ALIVE BY INFLATION!  Hiding under the bed doesn't eliminate risk; it just increases another risk - of the roof falling on your head!

5.  Investing aimlessly:  It is not uncommon for investors to get aggressive when the market is going up, only to cut back on their holdings when stock prices fall.  Other investors are good at saving, but lack a long-term plan for managing their investments.  Another way to put this is that investors are in the habit of buying high and selling low.  This was a huge part of the impetus for the online discussion of Andrew Hallam's Millionaire Teacher.  It presents a well-thought-out approach to investing that buys low and sells high as part of the rebalancing of a well-thought-out asset allocation.

6.  Retiring With No Plan for Income:  Investors need to start adapting a more conservative allocation as they near retirement.  This typically means holding less in equities and more in bonds.  This is one of the main purposes of thinking hard about asset allocation.  At some point as investors move towards retirement, they need to do a back-of-the-envelope calculation to include Social Security, pension income, other income, and 4% of their nest egg.  If the resulting amount is not near (after adjusting for inflation) what they need in retirement, then adjustments have to be made. The day you turn 65 is too late for most people to do this calculation!

7.  Holding Onto the Hoarding Mentality:  Retirement portfolios are intended to be drawn down, a concept some retirees struggle with.  An immediate annuity can guarantee a stream of income, while using a 4% withdrawal rate, or similar strategy, can expose the portfolio to market volatility of the markets.  Nobody said this was easy.  You don't know how long you will live, what the rate of inflation will be, or how markets will behave (or not!).  There are tradeoffs no matter which direction you move.  The number one fear of retirees is that they will run out of money.  The trick is to overcome this fear and to seek to enjoy retirement.

Can You Beat the Market?

I always liked it when Regis leaned over and asked the "Who Wants to Be a Millionaire" contestant if he or she wanted to use their audience lifeline.  Beads of sweat inevitably formed on the forehead as the contestant knew the audience was a real ace in the hole for the tough question.

And this isn't surprising to most people.  The crowd knows more than we do - duh!

Except when it comes to investing.

In the investment world ,Mr. Market goes off in the form of literally millions of investors and sets the price of financial instruments.  These investors include employees of the company stock, their suppliers, people off to the side innovating to disrupt specific markets, and, yes, even the lightning quick algorithmic traders.

Against these, the individual does some screen, or sees some formation on a chart, or assesses what he or she thinks the Federal Reserve Reserve might do, and DECIDES THAT MR. MARKET IS WRONG AND PRICES SHOULD BE HIGHER OR LOWER.

I've been around the block a few times, and I've seen people who have done remarkably, even spectacularly, well - for a time.  The thing is--most eventually go down in flames.  Why?  Because markets change.  Just as U.S. auto companies went bankrupt because they couldn't see that large fin gas guzzlers were losers once OPEC started to drive up oil prices,  investors who are successful because they hit a winning theme find it very difficult to change with the markets.  In sports, the cliche for teams in the playoffs is "stick with what got you here."  Not that easy in trying to beat Mr. Market.

In the late 70s and early 80s, all one had to do to outwit Mr. Market was load up on energy stocks.  But then, as the market beaters were high-fiving themselves (and reeling in those who wanted to ride their coattails), oil prices plummeted to single digits in the mid-80s!  More recently, people piled into dotcom stocks, proclaimed they were geniuses, and then ran into a 2x4 as Mr. Market decided at some point earnings are important.  Even more recently, overweighting Apple Computer covered a lot of mistakes and made you feel smart - until it didn't.

All of this is brought to mind by this recent piece, How to Beat 99.9% Of Professional Investors, by one of the elite of the investment world - a hedge fund trader.  DIYers should read the 3rd to last paragraph carefully.

Bond ETF Performance

Fed Tapering?

Here are the year-to-date returns through Friday as reported by Morningstar on the ETFs that I follow.  As you can see, the returns vary widely and the funds are quite different.  For what it's worth, you'll find that most 401(k)s do not offer a decent selection of bond funds - you are forced to select from a couple.  On the other hand, if you have an IRA, you have the selection available below as well as many others - another reason on the side of rolling over 401(k)s.

In general, you want to limit the bond exposure in your brokerage account because of taxes.

Generally, as you can see in the table, the shorter duration or maturity funds did best as would be expected in a rising yield environment.  This impact can be seen by comparing IEI (-2.57%) versus IEF (-5.75%).  The table also shows the poor performance of emerging markets and international in general.

The bogey in the bond market is AGG, the Barclay's Aggregate Bond Index - it is to the bond market what the S&P 500 is to stocks. 

Disclosure:  this post is for educational purposes.  Individuals should do their own research or consult a professional before making financial transactions.

ETF	YTD RET.	DESCRIPTION
HYG	-0.7	HIGH YIELD
AGG	-3.61	TOTAL MARKET
SCHZ	-3.46	TOTAL MARKET
MBB	-3.43	MBS
CSJ	-0.3	1-3 YR. CORP.
IEI	-2.57	3-7 YR. TREAS.
IEF	-5.75	7-10 YR. TREAS.
EMB	-10.85	EMERGING MKT.
BKLN	1.4	BANK LOANS
IHY	-3.43	INT'L. HIGH YLD.
PFF	-0.52	PREFERRED STK.
FLOT	0.19	FLOATING RATE
BSJF	0.73	2015 HIGH YLD.
LQD	-5.56	INVEST GRADE CORP.
BAB	-6.21	BUILD AMER.
BOND	-3.38	PIMCO TOTAL RET.
HYS	1.74	0-5 YR. HIGH YLD.
VCIT	-5.12	INTERM. CORP.

A Quote

Benjamin Graham

A quote worth reflecting upon from Biz of Life site :

I blamed myself not so much for my failure to protect myself against the disaster I had been predicting, as for having slipped into an extravagant way of life which I hadn't the temperament or capacity to enjoy. I quickly convinced myself that the true key to material happiness lay in a modest standard of living which could be achieved with little difficulty under almost all economic conditions.

~ Ben Graham

Ben Graham, of course, is the father of value investing and co-author of the most widely read investment book of all time,  Security Analysis.

The quote fits in well with the first chapter of the online book discussion of Millionaire Teacher I am facilitating on my other blog.  I am reminded of a lady who one time read the first 3 chapters of Millionaire Teacher and with a lilt to her voice told me, "I already know this stuff."  In looking over her finances, she really didn't!

Reacting to the Bear

I recently wrote about my downsizing.  After more than 30 years in beautiful Howard County, Maryland, my wife and I looked around one day, saw that the kids were out of the house, saw empty bed rooms and a rec room basement that was hardly used.  We decided it was time to make a change.  We downsized to a considerably smaller abode in the mountains of Virginia.

One of the adjustments I had to make was to figure out a workout routine.  I've never been attracted to health clubs and the sort - instead, I have preferred using whatever is at hand.  I settled in on hiking.

As it turns out, there are gravel roads going upwards looking out to our cabin from the right and the left.  I settled on a routine where I would first hike the road to the right of the cabin and then come down and hike the roads upwards to the right.  It turned out to be a real good workout where I could adjust my pace, get my heart pumping, and come in at the end completely drenched.  Truth be told, I read on Yahoo! somewhere that the best workout was cranking up the angle on the treadmill to the highest level and then walking.  No jogging required.  This was the outdoors version.

And, this worked really well the first couple of weeks.  Until, one day when I (reason unknown) invited my son.  We hiked around the bend to the right--I pointed out that the rocks were at right angles to the ground and mentioned that I wondered about the powerful forces that shifted these rocks.  I pointed to the crevice where on a previous day I saw a large lizard enter.  And we went higher.

As we moved higher up the road, I pointed to the woods on the right and mentioned that Dusty, our dog and companion on the hike, had entered the woods and had come running out on previous hikes.  I wasn't sure why this was.

Near the top on this particular day, Dusty was in front, then David about 15 yards back, then me about 10 yards back of David.  Then, David stopped, put his right hand in the air, and pointed to the right. There standing against a tree and scratching was the biggest bear I had seen in the wild outside of a zoo and south of Alaska.

I have to say that these animals are bigger than you expect  when you see them in the wild.  We came across a rattlesnake in the Shenandoah one time and, to this day, I tell people that I couldn't believe how big that thing was.

As we sized up the bear, David whispered "Dusty," who was busily sniffing the trail, to hopefully get him to turn back; but this, of course, got him to look up and notice the bear--after which he bolted.  For those who don't know, bears are really fast.  The bear took off, Dusty eventually gave up his pursuit, and we cautiously backed off.

Today, I don't hike that particular section of the road.  I come by this behavior genetically.  It is why my ancestors were not eliminated from the gene pool.  Genetically we are wired to back away from danger. INTERESTINGLY, THIS SAME BEHAVIOR WILL ELIMINATE YOU FROM THE INVESTMENT POOL.

Think back to early 2009.  The market was devastated.  In 2008, stocks dropped 37% and then dropped sharply from there in early 2009.  As Baron von Rothschild would say, "there was blood in the streets." The bear was on the prowl.

If you were in the market, your genes were screaming in 2009 to get out before the world came to an end.  An interesting question is how many did get out and never returned.  There were a lot.  But those who stayed actually recouped all of the downturn and are ahead today.  Those who could fight the instinct to run for cover and could put on their buying hats prospered greatly.

The ability to stay and not alter course is key to a successful investment philosophy.  The failure to do this is why most individuals and professionals underperform the market.

Anyone up for a hike?