Just finished the short book,
How to Retire With Enough Money by Teresa Ghilarducci.
Ms. Ghilarducci is a heavyweight in the world of retirement planning and the overall concern with the looming retirement crisis in the U.S.
So I was surprised to come away disappointed. The book is mainly directed towards promoting her plan which is basically a hybrid of Social Security - take money out of paychecks and have required employer contributions all invested by professional money managers.
She admits she is no fan of 401(k)s and IRAs. This in spite of some examples in her book whereby they have done well for investors.
My beef is that like so many other instances a government solution is offered in lieu of people taking personal responsibility. Here's the nitty gritty: we expect to reach our mid 60s some day and we know (unless we've been living under a proverbial rock) that Social Security alone will not provide a sufficient income for a comfortable retirement.
So, we can go over some arithmetic in the crazy exercise of trying to pin down how much needs to be saved to reach a so-called magic number.
Forget that. Know that you need to save and the more you save the happier your 65 year old self will be with you. So, look at your 401(k). If it has low cost index funds and especially low cost retirement date funds you're done. Have 10% deducted from your paycheck into these funds.
If you don't have a 401(k) you're not toast like so many commentators suggest. You can open up an IRA and contribute up to $6,000/year. Where? I like Schwab but there are many other places as well such as Vanguard, Fidelity etc. All offer low cost funds that you can invest in yourself or they may offer low cost products whereby they handle all the investing. You just set it up so that a deduction is made from your paycheck on a regular basis.
But don't just take it from me. Here's what Warren Buffett recently said "All you have to do is just buy a cross-section of America and then never listen to people like me or read the papers or do anything subsequently".
So again, this isn't rocket science. And, admittedly, there are some nuances. For example, legally there are some differences between IRAs and 401(k) regarding creditor rights. If you aren't paying alimony payments, are a reckless driver or get in fist fights with your next door neighbor you might want to avoid the IRA. Ms. Ghilarducci emphasizes this in her book.
I know that a lot of what I have covered glosses over some points that most people may not know, For example, if you open up an IRA with a broker you need to know what a ticker symbol is, how to calculate how many shares you can buy etc. All of this is trivial. I offer one hour sessions at $160 that covers all the basics but you can cover other advisors as well that will do this with you,
Showing posts with label retirement planning. Show all posts
Showing posts with label retirement planning. Show all posts
Tuesday, April 30, 2019
Wednesday, January 25, 2017
Retirees Don't Run Out of Money
Polls consistently show that the number 1 fear of retirees is running out of money. But rarely do retirees literally run out of money. It doesn't happen that Joe goes to Mildred and says "darling we've only got $100 in our account. What are we going to do?"
Instead, what people tend to do is run out of lifestyle. More typically Joe will go to Mildred and say, "honey, it looks like we can only afford to visit the kids twice this year instead of three times." And Mildred responds, "but Joe we are only 71, in good health, and my number 1 thing in life is seeing my grand children".
Of course, the academic literature needs to simplify and where possible interject the math. So they frame the problem in terms of how much can be withdrawn over a given period without running the balance to zero. The magic number of course, which is debated, is 4%. With a nest egg, the rule of thumb is that 4% adjusted for inflation can safely be drawn down.
Thinking about lifestyle rather than some percentage can be enlightening however. It gets pre-retirees to focus on what is important in their retirement years. How many times do you want to visit the children? How much does it cost to play golf constantly to realize your dream of reaching the pro tour? How big a house do you need to live in and how much does it cost?
In fact, many people will only have a satisfying retirement if they can continue in the same house they lived in when they had 3 or 4 kids at home. It is important, of course, to know this going in.
Then we also have the world travelers working off a so-called 'bucket list". Some people view their dream retirement as one whereby they will be able to take at least 3 major trips/year.
All of this leads to a type of bottom up approach. It suggests the idea that in approaching retirement a list should be made listing the important things that you want in retirement and their estimated cost.
This then can be used to see if the anticipated income stream satisfies the needs. A tricky part , of course, is to keep medical needs in mind. A couple's lifestyle can be upended by medical surprises.
Instead, what people tend to do is run out of lifestyle. More typically Joe will go to Mildred and say, "honey, it looks like we can only afford to visit the kids twice this year instead of three times." And Mildred responds, "but Joe we are only 71, in good health, and my number 1 thing in life is seeing my grand children".
Of course, the academic literature needs to simplify and where possible interject the math. So they frame the problem in terms of how much can be withdrawn over a given period without running the balance to zero. The magic number of course, which is debated, is 4%. With a nest egg, the rule of thumb is that 4% adjusted for inflation can safely be drawn down.
Thinking about lifestyle rather than some percentage can be enlightening however. It gets pre-retirees to focus on what is important in their retirement years. How many times do you want to visit the children? How much does it cost to play golf constantly to realize your dream of reaching the pro tour? How big a house do you need to live in and how much does it cost?
In fact, many people will only have a satisfying retirement if they can continue in the same house they lived in when they had 3 or 4 kids at home. It is important, of course, to know this going in.
Then we also have the world travelers working off a so-called 'bucket list". Some people view their dream retirement as one whereby they will be able to take at least 3 major trips/year.
All of this leads to a type of bottom up approach. It suggests the idea that in approaching retirement a list should be made listing the important things that you want in retirement and their estimated cost.
This then can be used to see if the anticipated income stream satisfies the needs. A tricky part , of course, is to keep medical needs in mind. A couple's lifestyle can be upended by medical surprises.
Monday, October 24, 2016
Can't Save? Think Again.
Probably the number one excuse for not saving for retirement is that people need every single penny of their paycheck. Most of us have been there and done that. This isn't just at the lower end of the economic spectrum but admittedly is most prevalent there. At least that's the most frequent response I get from people. The "I can barely make ends meet as it is, how am I supposed to make contributions to a 401(k) or an IRA " is a frequent refrain.
But the fact of the matter is people are already saving. It is forced saving. Out of every paycheck 7.65% is deducted for Social Security and Medicare. Think about this. If this was a choice I would be willing to make a sizable bet that many people would opt out and take the 7.65% each paycheck. Clearly this would exacerbate the retirement crisis that is building in this country. Sadly, many people have to be coerced into doing what is good for them.
To hammer home the idea imagine the task of trying to find people, especially as you move down the economic spectrum who don't welcome with open arms their monthly Social Security payment.
As you think about this you realize that this retirement payment is made through the years as you pay off your student debt, take on a house mortgage, have medical problems, have car payments, consider college for the kids etc. In other words, through all the usual excuses for putting thinking about retirement on the back burner.
An important corollary to all of this is that saving is more important than market returns in building a retirement nest egg, especially in the beginning. But many people use the uncertainty of the capital markets as an excuse to shy away. Know this: saving dominates. In fact, as is widely stated savers who are building a nest egg should cheer a negative stock market which gives them an opportunity to buy in at more attractive prices.
But the fact of the matter is people are already saving. It is forced saving. Out of every paycheck 7.65% is deducted for Social Security and Medicare. Think about this. If this was a choice I would be willing to make a sizable bet that many people would opt out and take the 7.65% each paycheck. Clearly this would exacerbate the retirement crisis that is building in this country. Sadly, many people have to be coerced into doing what is good for them.
To hammer home the idea imagine the task of trying to find people, especially as you move down the economic spectrum who don't welcome with open arms their monthly Social Security payment.
As you think about this you realize that this retirement payment is made through the years as you pay off your student debt, take on a house mortgage, have medical problems, have car payments, consider college for the kids etc. In other words, through all the usual excuses for putting thinking about retirement on the back burner.
An important corollary to all of this is that saving is more important than market returns in building a retirement nest egg, especially in the beginning. But many people use the uncertainty of the capital markets as an excuse to shy away. Know this: saving dominates. In fact, as is widely stated savers who are building a nest egg should cheer a negative stock market which gives them an opportunity to buy in at more attractive prices.
Monday, September 12, 2016
A Proposal - Summary
This proposal's purpose is to give everyone at least a framework of how to go about building a nest egg for retirement, as presented in the previous 4 posts. Like many areas we have gone 90% of the way to handling a problem but then stop just short of wrapping it up.
The 401(k) and similar qualified plans are excellent for getting people to a successful retirement. The problem is many don't know how to use it. The purpose of the proposal is to fix that. As mentioned in previous posts if you know how to invest or have a different approach then go for it. Again, a caveat, if you are hell bent on beating the market by picking stocks or active Funds or timing the market all I can say is "good luck". The odds are against you.
Begin by emphasizing the importance of starting early and putting away at least 10% of every paycheck.
So, the proposal: start with an appropriate target date/life cycle/retirement date Fund . How to do this will be presented in a 15 minute video when you take your job. Secondly, once you reach $60,000 or so in your 401(k) switch to low cost index Funds with an appropriate asset allocation. Typically this would be somewhere around 70% stocks/30% bonds. Finally, when you reach the point where you are thinking of generating an income off of your portfolio consider creating a dividend stream by using bonds Funds and Dividend Funds and even individual dividend stocks.
The first two steps require very little time. The third is a bit more time consuming.
As explained in the previous 4 posts there is no need to switch at various points. If you have no interest and just want to stick with the life cycle approach you can do that. Or you can stay with the low cost, index Funds. The only reason to switch at various times is to lower the costs a bit. It is worth noting that directly investing in the dividend stocks can potentially be the most rewarding because you have opportunities for tax loss harvesting, judicially increasing yields oner time etc.
The bottom line is that this proposal provides a way to emphasize to workers that by following some very basic steps they can end up enjoying a nice retirement.
The 401(k) and similar qualified plans are excellent for getting people to a successful retirement. The problem is many don't know how to use it. The purpose of the proposal is to fix that. As mentioned in previous posts if you know how to invest or have a different approach then go for it. Again, a caveat, if you are hell bent on beating the market by picking stocks or active Funds or timing the market all I can say is "good luck". The odds are against you.
Begin by emphasizing the importance of starting early and putting away at least 10% of every paycheck.
So, the proposal: start with an appropriate target date/life cycle/retirement date Fund . How to do this will be presented in a 15 minute video when you take your job. Secondly, once you reach $60,000 or so in your 401(k) switch to low cost index Funds with an appropriate asset allocation. Typically this would be somewhere around 70% stocks/30% bonds. Finally, when you reach the point where you are thinking of generating an income off of your portfolio consider creating a dividend stream by using bonds Funds and Dividend Funds and even individual dividend stocks.
The first two steps require very little time. The third is a bit more time consuming.
As explained in the previous 4 posts there is no need to switch at various points. If you have no interest and just want to stick with the life cycle approach you can do that. Or you can stay with the low cost, index Funds. The only reason to switch at various times is to lower the costs a bit. It is worth noting that directly investing in the dividend stocks can potentially be the most rewarding because you have opportunities for tax loss harvesting, judicially increasing yields oner time etc.
The bottom line is that this proposal provides a way to emphasize to workers that by following some very basic steps they can end up enjoying a nice retirement.
Monday, August 29, 2016
A Proposal - Step 3
Ok...so here's the deal. We started our career and recognize that we are responsible for our own retirement. But we've had no training or education on how to achieve that retirement. So, we start by saving at least 10% of our gross income and doing that by putting it into our company 401(k).The specific investment we select is the retirement date Fund corresponding to when we are in our mid 60s.
And then we go to work, live our life and get promoted and maybe get bonuses. Some people of course will find it difficult to save at least 10%. It is very easy to have your lifestyle adjust to whatever income you have. Interestingly there are professional athletes raking in millions who for the life of them cannot apparently save a cent.
I have found that if you fortunately are in a position to get raises and promotions as time goes by and don't automatically increase your lifestyle each time then you should be able easily to meet the 10% and higher saving goal.
Anyways...get it done. Sit down and have a face-to-face with your 65 year old self and let him or her know that you are doing it for them. While you're at it motivate yourself by recognizing you are doing it for the kids. The last thing they want is a broke mom and pop when they are trying to get their family going.
So, we're saving, time goes by, as it always has, and we reach a point where the 401(k) is starting to reach a decent size. For the sake of argument we can take this to be $80,000 or so. The next phase comes into play. At this point you may want to consider investing in individual Funds within your 401(k). This should save you .50% or so annually. This may not seem like a lot but when you consider the savings over 25 to 30 years it becomes meaningful. And the beauty of it is that it isn't difficult.
As an aside you don't have to do it. If you deem your efforts better used in other areas then stick with the target date Fund approach.
So, how do you use individual Funds? Take a look at your 401(k) Fund offerings. They hopefully include low cost index Funds. For the sake of argument assume that Fidelity is your 401(k) Fund advisor. Assume as well you have been investing in the Fidelity Freedom 2050 Fund, ticker symbol FFFHX. If you go to www.morningstar.com and put the ticker symbol in the quote box you find that FFFHX has an annual expense of .77%.
The new approach of using individual Funds would include FUSEX, an S&P 500 Fund (.09%), FSGUX, a global ex U.S. Fund (.18%), FBIDX an Index bond Fund (.15%), and FSSPX, a small cap index Fund (.19%). The respective annual fees for the Funds are shown in parentheses.
You can use these 4 Funds to set up your asset allocation. For example, if you are 40 years old you may decide to allocate 70% to stocks and 30% to bonds if you are fairly comfortable with some portfolio volatility. If not, reduce the stock allocation to 60%.
For your stock position you may want to have 15% in the global Fund, FSGUX, and 5% in the small cap Fund, FSSPX. The global Fund gives diversification and exposure at the present time in a part of the market that hasn't done well. The small cap Fund increases volatility a bit in a sector that has provided higher returns.
You'll undoubtedly notice that this simplifies your investment setup. The 2050 Fund is comprised of many more Funds. Which is better? Wouldn't the greater complexity and more Funds in the 2050 Fund mean better performance? Actually, we don't know unless we have the proverbial "crystal ball".
The simpler structure does however mean that it is easier to understand and analyze and the fact that it saves approximately .5%/year means that over the long term it has the odds highly in its favor to meaningfully outperform.
To recap: on day 1 of starting your career you elect to have at least 10% of each paycheck go into the target date Fund offered by your 401(k). After a few years go by and it has reached a sizable amount consider investing in individual Funds in order to reduce the annual expenses. This will take you to your mid 60s at which point your goal shifts meaningfully from getting growth of your portfolio to generating an income from your portfolio. That will be the subject of the next post.
Let me reemphasize that you don't obviously have to follow this approach. You may feel you are a great stock picker. You may believe you can time the market. If so, go for it with my blessing. Just understand that the odds are extremely high that you are wrong and that it could be very costly learning that fact.
And then we go to work, live our life and get promoted and maybe get bonuses. Some people of course will find it difficult to save at least 10%. It is very easy to have your lifestyle adjust to whatever income you have. Interestingly there are professional athletes raking in millions who for the life of them cannot apparently save a cent.
I have found that if you fortunately are in a position to get raises and promotions as time goes by and don't automatically increase your lifestyle each time then you should be able easily to meet the 10% and higher saving goal.
Anyways...get it done. Sit down and have a face-to-face with your 65 year old self and let him or her know that you are doing it for them. While you're at it motivate yourself by recognizing you are doing it for the kids. The last thing they want is a broke mom and pop when they are trying to get their family going.
So, we're saving, time goes by, as it always has, and we reach a point where the 401(k) is starting to reach a decent size. For the sake of argument we can take this to be $80,000 or so. The next phase comes into play. At this point you may want to consider investing in individual Funds within your 401(k). This should save you .50% or so annually. This may not seem like a lot but when you consider the savings over 25 to 30 years it becomes meaningful. And the beauty of it is that it isn't difficult.
As an aside you don't have to do it. If you deem your efforts better used in other areas then stick with the target date Fund approach.
So, how do you use individual Funds? Take a look at your 401(k) Fund offerings. They hopefully include low cost index Funds. For the sake of argument assume that Fidelity is your 401(k) Fund advisor. Assume as well you have been investing in the Fidelity Freedom 2050 Fund, ticker symbol FFFHX. If you go to www.morningstar.com and put the ticker symbol in the quote box you find that FFFHX has an annual expense of .77%.
The new approach of using individual Funds would include FUSEX, an S&P 500 Fund (.09%), FSGUX, a global ex U.S. Fund (.18%), FBIDX an Index bond Fund (.15%), and FSSPX, a small cap index Fund (.19%). The respective annual fees for the Funds are shown in parentheses.
You can use these 4 Funds to set up your asset allocation. For example, if you are 40 years old you may decide to allocate 70% to stocks and 30% to bonds if you are fairly comfortable with some portfolio volatility. If not, reduce the stock allocation to 60%.
For your stock position you may want to have 15% in the global Fund, FSGUX, and 5% in the small cap Fund, FSSPX. The global Fund gives diversification and exposure at the present time in a part of the market that hasn't done well. The small cap Fund increases volatility a bit in a sector that has provided higher returns.
You'll undoubtedly notice that this simplifies your investment setup. The 2050 Fund is comprised of many more Funds. Which is better? Wouldn't the greater complexity and more Funds in the 2050 Fund mean better performance? Actually, we don't know unless we have the proverbial "crystal ball".
The simpler structure does however mean that it is easier to understand and analyze and the fact that it saves approximately .5%/year means that over the long term it has the odds highly in its favor to meaningfully outperform.
To recap: on day 1 of starting your career you elect to have at least 10% of each paycheck go into the target date Fund offered by your 401(k). After a few years go by and it has reached a sizable amount consider investing in individual Funds in order to reduce the annual expenses. This will take you to your mid 60s at which point your goal shifts meaningfully from getting growth of your portfolio to generating an income from your portfolio. That will be the subject of the next post.
Let me reemphasize that you don't obviously have to follow this approach. You may feel you are a great stock picker. You may believe you can time the market. If so, go for it with my blessing. Just understand that the odds are extremely high that you are wrong and that it could be very costly learning that fact.
Monday, September 16, 2013
Are My Retirement Savings on Track?
This is the easiest calculator ever! All you have to do is put your age in the calculator.
The calculator takes into account interest rates, inflation, risk, life expectancy, and starting point in deriving the number. These inputs change on an ongoing basis; so, as time goes by, you want to be sure to recheck the number. The calculator also can be used to flip the question around and estimate the amount you should have today to generate a given inflation adjusted income at retirement.
For example, if you put in 56 as your age, it derives $12.93. This tells you that each $12.93 you have in retirement savings today can generate $1 in inflation adjusted income in retirement at age 65. Thus, for example, if you have $193,618 in retirement assets, it can produce 193,618 /12.93 = $14,974 annually in retirement.
If, instead, you flipped it around and input $14,973 as the desired income in the first year of retirement, you'll find you need $193,616 today. This use of the calculator will give you a really good idea if you are on track to meet your retirement goals.
If you play around a bit more with the calculator ,you'll see that you can easily calculate daily index values as shown in the table:
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| Source: BlackRock |
These values were for 9/13/2013. Notice that the levels increase a bit more than 4.5% each year. This is the amount your portfolio needs to grow once you are on track. As a result, your portfolio needs to grow at least 20% in the last 5 years. This points to the observation that adverse markets can easily throw a plan off kilter and it, therefore, is probably not a good idea to get too smug as you approach retirement unless you are well over your targeted amount.
This post is for educational purposes only. Readers should pay special attention to BlackRock's disclaimers.
Sunday, July 21, 2013
How Many of These Retirement Investing Mistakes are You Making?
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| Source:UK.guardian |
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.
Friday, August 24, 2012
The Value of Retirement Plan Calculators
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| Source: Capital Pixel |
Anyway, this seems to me to be a reason for those in their 40s and early 50s to begin playing around with retirement calculators. Although you have plenty of time to go before you exit the work force, you'll see if you are on the right track and, most importantly, you'll be introduced to the important financial determinants of a successful retirement.
There are a number of good calculators online. One I like is the AARP retirement calculator. It is simple, straightforward, and asks the basic questions. It doesn't get you into Monte Carlo analysis and a lot of mumbo jumbo about your portfolio allocation. It has straightforward assumptions built in, which you can change if you want.
By going through the questions, it focuses you on your saving, social security, when you plan to stop working full time, etc. It asks about the lifestyle you contemplate in retirement. An important side benefit is it should get you and your spouse talking and thinking about these issues.
As an advisor, I can tell you that, more often than not, I have seen couples surprised at their spouses' answers when these questions have come up.
The earlier you begin playing around with these kinds of calculators, the easier you will find it to make adjustments to get on the right path. If you google "retirement plan calculators," you'll come up with several in addition to the AARP calculator.
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