The First Thing You Need to Know About Retirement

Source:www,capitalpixel.com

One of the first steps in retirement planning is figuring out where your income will come from as you transition from receiving a career paycheck to receiving a paycheck from Social Security, your nest egg, a pension, and possibly other sources.

Today, you can find out how much you can expect to receive from Social Security by spending a few minutes online to create an account. If this was a recipe on the Food Network, it would be rated at the "Easy" level.

Go to www.socialsecurity.gov/mystatement/.  Create an account. Write down your password and the answers to the security questions in a safe place (especially if you are approaching the age where you plan to start taking Social Security!).

You'll come to a page that shows the amount you are expected to receive if you begin at "Full Retirement."  Next click "View Estimated Benefits" as shown:

Source: Social Security Administration

This will give you three numbers:  amount you would receive today (if you are over 62 years old), amount you can expect to receive at your full retirement age, and amount you can expect to receive at age 70.

This, of course, is an important first step in retirement planning.  At what age to take Social Security is the next step, and here a number of variables and assumptions come into play including spousal benefits, longevity assumptions, other sources of income, etc.

While you are on the site, be sure to check that your earnings record is correct.  If you are looking for a source that analyzes the question of when to take Social Security, check out A Social Security Owner's Manual by Jim Blankenship.

If you are looking to do a good deed on this beautiful Memorial Day, pass this information on to someone you think might find it useful.

"1st Quarter Returns 2010" addendum

The Biz of Life has posted "1st Quarter Returns 2010" which shows that a very well diversified portfolio of ETFs achieved a return of 4.26% for the quarter based on Morningstar data. This is worth spending some time looking at and, I believe, is very valuable information. Again, the portfolio is very well diversified. It uses funds indexed to the REIT market, to small cap international, international fixed income and munis, along with more basic ETFs. In all, 15 different indexed funds with their respective weightings are shown.

There are 2 small typos in the data : the VTI fund returned 6.04% rather than 6.4% and VSS returned 4.5% not 4.55%. Also, the ticker symbol for the Wisdom Tree fund is DLS not WLS. These results do not affect the conclusion:  the fund achieved a return of 4.25% for the quarter.

Here's my first question:  What was your return for the first quarter? If you are typical, you'll throw up your hands and say it will take you at least a week, if not longer, to get a number. In fact, you may not be able to come up with a number at all.

Here's my second question:  If you have your money professionally managed, how much did it cost?  I'll help you here. The lowest cost fee-only registered investment advisor will charge you 1% of the market value of your assets. So if your portfolio was $1.0 million, you would pay ($1.0 * .01) / 4 = $2,500. And most people would be glad to pay that because it looks very complicated to set up this kind of portfolio. For the record, I would charge a lot less and seek to show you how to manage it yourself; but that's detailed in other parts of this blog.

The fee you pay your advisor is only part of the story. If s/he is using mutual funds or, even worse, funds of funds, at least 1.4% is coming out before the results are even reported to you. If you are in actively traded funds, there are trading costs piled on. The cost of the index funds examined in the post, on a weighted basis, was .27%!  Not 1.4%.  So, if your advisor's returns are less than 4.25%, it is not necessarily that they are poor performers but could be because of the fees that are taken out all along the line.

Here's the news:  for the first time in the history of markets, small investors can easily get well diversified in many areas of the domestic and global markets at a low fee without a lot of trading restrictions thrown in and worries about capital gains taxes because of active trading.

If you are satisfied that your advisor is a great stock picker or market timer, then by all means stick with him or her. At least, now you have a benchmark to compare them to.

For the record, I want to emphasize that the data here is from sources judged to be reliable but, obviously, cannot be guaranteed and any errors  here are solely my own.