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More People Preparing to Eat Dog Food in Retirement

guest poster — Tue, 17 Jan 2012 23:24:53 +0000

To make it through tough times more Americans have borrowed, stolen or raided their small retirement funds to make ends meet.

Loans from retirement funds jumped 20 percent last year. This really can’t be a big surprise to many. Faced with difficult financial decisions people will tend to gravitate towards the oath that seems easiest and less painful immediately.

It’s actually a classic example of hyperbolic discounting where a situation at hand today feels more urgent than one in the future.

The alarm over not being able to afford things leads people to make decisions in order to avoid more painfully imagined solutions like bankruptcy.

But what is actually more painful, a bankruptcy now that will take a couple years to overcome or retiring with little to no money left?

Logically an immediate bankruptcy makes the most sense. It allows people to discharge their debt, not have to raid the retirement accounts and actually leaves them better able to save for the future.

Along with setting themselves up to have to eat dog food to feed themselves in a future broke society, their poor debt relief decisions have left them unable to contribute as much to their retirement funds.

According to the Employee Benefit Research Institute survey, 27 percent of respondents said they are “not at all confident” they will have enough to retire comfortably. The reality is the actually number is much higher since acknowledgement would require people to overcome denial.

If you retire without sufficient income your choices are to continue to work, and most likely at menial jobs, or find a way to live for less.

The standard of life we expect in retirement may fall significantly short of what we will actually face.

At risk also are college savings for aspiring students. Parents already struggling to just make it month-to-month are having to cut back on their savings and are not able to put aside as much for college for their children.

The lack of college savings will require more student to either not attend college or go further in debt with dangerous student loans.

According to the College Board, students are already borrowing about twice as much as they did only a decade ago.

The more logical outcome to making these issues work is going to be to maintain a smaller or lower lifestyle than expected. That’s going to be tough for many people.

@GetOutOfDebtGuy

Author: This article was contributed by GetOutOfDebt.org, a site that provides free debt help and debt advice for people looking for answers.

Source: More People Preparing to Eat Dog Food in Retirement
Photo Credit: cw3283

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Can I Retire? Review

Elle — Thu, 13 Oct 2011 15:31:16 +0000

When I was at the Financial Blogger Conference last month, I got to meet many personal finance bloggers, representatives from banks and financial sites, and authors.

One blogger/author attending the conference was Mike Piper from Oblivious Investor. In addition to running the site he’s written seven personal finance book, including the one I’m reviewing today – Can I Retire?

Basic Book Info

Full Title: Can I Retire?: How Much Money You Need to Retire and How to Manage Your Retirement Savings, Explained in 100 Pages or Less
Author: Mike Piper
Price: $14.00

Can I Retire? Overview

What’s Inside

If you’re curious about what Can I Retire? covers, here is the table of contents:

How Much Money Will You Need?
Safe Withdrawal Rates: The 4% “Rule”
What if 4% Isn’t Enough?
Index Funds and ETFs vs. Active Funds
401(k) Rollovers
Asset Allocation in Retirement
managing Your Long-Term Bucket
Roth Conversions
Distribution Planning
Asset Location
Other Tips for Taxable Accounts
Finding Help With Your Plan

As you probably noticed right away, all of these topics are extremely important to retiring successfully. Mike doesn’t have fluff in this book; he jumps right into what matters.

Mike designs his book to be concise as his books are 100 pages or less. He has recommendations for those who want to investigate deeper with their retirement portfolios and plans. His audience are those interested in getting a quick grip on their finances.

My Highlights from the Book

First off I want to point out that I was able to read the book on the car ride back to our place. Mike’s writing is so clear and understandable that I was able to glide through the chapters. It really is a quick read and will allow you to either have enough knowledge to get your retirement setup started/adjusted or have an intelligent discussion with your financial planner.

I also appreciated how easy Mike made it for me to find more information about relevant taxes and why index funds and ETFs are a smart investment. I recommend getting a highlighter to mark off things you need to do once you’re finished reading. It’s packed with plenty of practical information.

Thoughts on Can I Retire?

I highly recommend this book for anyone looking at retiring in the near future. It’s a great way to become familiar with retirement planning and it may encourage you to look into further.

I love to hear from other readers and their perspectives on the book. Did you find it beneficial for your situation?

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How Much Do We Need to Retire?

Elle — Mon, 18 Apr 2011 12:00:32 +0000

When we did our taxes a couple years back, we were advised to contribute more to retirement. She explained to us that it could lower our taxable income and set aside our money for retirement. We’ve taken her advice and have been contributing towards our retirement. The problem was we didn’t have a hard core number to work towards. Instead, we set aside a percentage of our income towards retirement.

I started working on up on a number and I came up with a retirement number based on an estimated annual income of $45,000. It gave us an idea of what to shoot for, but it’s still just an estimate.

A few months ago J from Budgets are Sexy shared his retirement number that he received from ING Direct’s online tool. His turned out to be $2,6,52,343. Seeing as it was a bit of fun and we could get an idea of what we needed, I did it. When I completed the short survey, My Number (which was for both my spouse and I) was $2,546,875.

Curious about getting a number and a plan together, I started looking at the different pieces of retirement planning. I hope it’ll help you figure how much you need to save to retire comfortably.

Identify Retirement Expenses

I think the big question people have when trying to figure out their retirement number is how much they will need as a couple to retire. Of course that completely depends on your own family’s circumstances. However if you’re looking for some specific numbers to base your information on, here’s some information from one study done:

The ongoing Georgia State University RETIRE (Retirement Income Replacement) project, conducted for the federal Department of Labor, looks at the income requirements of households before and after retirement at three-year intervals. In 2004, the project found:

A single-earner couple making $30,000 annually needs 84 percent of that income, or $25,200 a year, after retirement.

A $50,000 to $60,000 single-earner couple needs to replace 79 percent of their pre-retirement income, or $39,500 to $47,400 a year.

A two-income couple needs to replace 84 percent of $30,000 a year pre-retirement ($25,200), 77 percent of $50,000 ($38,500) and 78 percent of $90,000 ($70,200).

A $90,000 single-earner couple needs to replace 82 percent of pre-retirement income, or $73,800 a year.

Source: LendingTree

While these aren’t bulletproof numbers, they can at least help you determine how much you need for retirement. According to the GSU study,we’re looking at having expenses that around 77% of our current income.

Identify Retirement Income

Since you now have a general idea of how much you’ll need on an annual basis, you should do an assessment of your expected income streams during your retirement period. I’m going to list the main ones people encounter, but if you have an additional income, please include it.

We do not have any expected windfalls or inheritance, so we aren’t including those in our calculations.

Social Security Payments

I’m personally a little leery of using Social Security as part of my calculations. There has to be a major overhaul of the program if it’s going to last when I retire. My assumption is that you’ll at least have to wait later until you can claim benefits. Since we’re planning on taking retirement before then, we’ll not be relying on these payments when working on our retirement contribution plan.

However if you’re closer to retirement, you may want to go ahead and include your expected Social Security payments into your calculations.

401(k)

A 401(k) is part of the US Internal Revenue Code that deals with retirement plans, and which defers the taxation of your retirement savings. One big benefit of some 401(k) plans is the employer match. Some employers will match a percentage of your retirement contributions – effectively adding free money into your account. That can help you as the money grows along with your contributions, speeding up the progress that you make.

Not every company offer this, but it is definitely to your benefit to check with Human Resources and see if your company does. You’ll also want to check to see if there are stipulation on your 401(k) matches, like a vestment period.

My husband’s job offers a 401(k) plan and a matching plan, which he takes advantage of. He had set up a portion of his pay to be taken out automatically be invested in his plan. He invests in some of the index funds offered with the plan. He started as soon as he could (when he became a permanent employee) and

Individual Retirement Accounts (IRA)

If you’ve never opened an IRA before, you should review some of the pros and cons of a traditional or a Roth account. The main difference between the two IRAs has to do with when you’ll be taxed:

Roth IRA – contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free.
Traditional IRA – contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made with pre-tax assets”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income.

Source: IRS Publication 590

I have a Roth IRA that I contribute towards. I invest mainly in various index funds.

Maximize Your Retirement Contributions

If you have the money, then look at maximizing your contributions. Here are some of the more common annual contribution limits for 2011:

401K – $16,500
Roth IRA – $5,000
Traditional IRA – $5,000

Please keep in mind that these annual limits are per person. For example, a couple can contribute $10,000 total annually to their Roth IRAs. Of course, if you have high interest debts, then you may want to hold off on making contribution on your IRA and only contribute to your 401(k) to get the employer match. With credit card rates around 20% and higher, it would be smarter to pay this debt first off first.

While you may be limited on what you can contribute now, you should plan ahead for when you can increase your deposits.

Developing a Retirement Plan

Now that there’s a general number, the next step is coming up with a plan to actually get started with investing for your own retirement.

Participate in 401(ks)

Like mentioned before, my husband has been regularly contributing to his account at work. Some personal finance experts suggest put 5- 10% of your paycheck. You can always increase the amount as you receive raises and promotions.

If your company an Employee Stock Purchase Program, you may want to consider participating. ESSP allows you to have some of your paycheck deducted to buy your company’s shares at a discount from its market price. Just remember to be diversified with your retirement fund and not too heavily invested in your company.

Contribute to an IRA

If your job doesn’t offer a 401, then you may want to look into opening an IRA. You have many options on starting one. Banks, brokerages, and credit unions offer IRAs. Some charge a flat fee for the year, some take a fee for each transaction made, others can take a percentage, and some do all of this. Compare your options to see if you’re getting a good deal.

If you want a system that is easy to manage and has a track record of long term growth, you want to look for low cost index funds to put your money in. These are mutual funds that track a market index such as the S&P 500. They have low expense fees because they not usually actively managed.

Retirement Spreadsheets

If you really want to run the numbers for yourself,please check out some of the spreadsheet below.

Thoughts on Your Retirement Number

How many of you have come up with a ballpark figure on how much you need to retire? What tools have you used to estimate your retirement goals? Are you counting on Social Security for your retirement plans?

If you’re looking at getting started, check out my Betterment review and my guide to investing with a $1,000 or less. I hope the posts can help you create a plan that works for your own family.

Photo Credit: cw3283

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Asset Allocation and Your Age – What You Need to Know

Elle — Thu, 17 Feb 2011 13:00:57 +0000

What’s the Point of Asset Allocation?

The main idea behind proper asset allocation is maximizing your portfolio’s return while minimizing your risk. While maximizing returns seems clear, risk is subjective and differs person to person. Everyone has their own risk tolerance based on a variety of factors, so you’ll see different investors choose different investment vehicles even if they are the same age.

A benefit of having the proper asset allocation is to fit your goals. Usually investors seek aggressive growth in the long term and shift to more stability of their money in the short term (i.e. for people retiring soon).

Looking at Target Mutual Funds

To give you an idea of possible asset allocations, I use Vanguard’s guidelines for their target mutual funds. Vanguard has earned a reputation for good performance and customer service and I know several people in my family who enjoy investing with them. These guidelines are just rules of thumbs, not to be used as a definitive answer to your investing needs.

I’m not going to list all of the funds, just a few to give you an idea of how your portfolio should shift as you age. With stock and bonds listed in the examples below, I would suggest looking at index funds to reduce costs instead of hunting of individual stocks and bonds to put your money in.

If you’re more aggressive, you may want to include some specific stocks that pay a dividend in your portfolio. What is a dividend? It’s money a corporation pays shareholders after taxes. In addition to having your stock increase in value you also can receive additional payments. You can decide what you want to do with that money.

Asset Allocation (Ages 18- 22)

Retirement is usually in the back of many people’s mind as they are just starting off their careers. However, investing early can have a tremendous impact on your portfolio and you can use compound interest in your favor.

Here’s Vanguard’s 2055 fund‘s breakdown:

90% Stocks
10% Bonds

Asset Allocation (Ages 28-32)

As one becomes more established in their careers it would be a great time to ratchet up contribution amounts as they receive raises. For instance if you started with a 3% or 5% contribution, could you raise it up to 5% or 10%? Hopefully you won’t notice a bigger chunk going towards retirement because it’s automatically deducted from your higher salary.

Here’s Vanguard’s 2045 fund‘s breakdown:

89.67% Stocks
10.15% Bonds
0.18% Short Term Reserves

You still have decades before you retire, so don’t jump into conservative investments like bonds quite yet.

Asset Allocation (ages 38-42)

If you haven’t eliminated your non-mortgage debt, you could be hurting your retirement funding. Your monthly budget could be squeezed and you may be tempted to put off increasing your contributions. If so, get on a debt reduction plan like the Total Money Makeover or do your own debt snowball.

If you’re in a sound financial state and either have only have mortgage debt or no debt, then consider maximizing your annual contributions to take advantage of employer matches and tax breaks.

Here’s Vanguard’s 2035 fund‘s breakdown:

88.68% Stocks
11.22% Bonds
0.10% Short Term Reserves

Asset Allocation (Ages 48-52)

Hopefully by this time you’ve become accustom to contributing 10-15% of your monthly income for your upcoming retirement. If not, now is the time to get serious about your monthly budget and including enough to set aside for your upcoming retirement.

Here’s Vanguard’s 2025 fund‘s breakdown:

73.60% Stocks
26.29% Bonds
0.11% Short Term Reserves

My Own IRA’s Asset Allocation Model

In case you’re curious, I’ll share my own IRA plans for asset allocation. I based mine on David Swensen’s model. Swensen has had a long track record of solid returns at Yale. The general asset allocation Swensen recommends includes:

Domestic Equity (30 percent)
Real Estate Investment Trusts (20 percent)
Foreign Developed Equity (15 percent)
U.S. Treasury Notes and Bonds (15 percent)
Emerging Market Equity (5 percent)
U.S. Treasury Inflation-Protection Securities (TIPS) (15 percent)

Since I have decades before I expect to draw money from this account, I don’t really have much in the way of bonds and the more conservative investments. (Clarification due to reader comment – I’m working toward the Swensen model, but currently have more invested in foreign developed equity and emerging markets than Swensen suggested. As I continue with contribution I’ll add more conservative investments. )

I use a combination of index funds and exchange traded funds. If you’re looking at this model for yourself, Get Rich Slowly has some index funds and ETFs that you can build with.

Asset Allocation Based on Age for Retirement

How are preparing your retirement fund in terms of asset allocation? Is there a particular model that you’re following? What have been your returns over the past 5, 10, or 20 years?

Remember these are only guidelines and you may decide to invest more aggressively or conservatively based on different factors, including your own risk tolerance. I’m not a financial professional, so if you’re looking for a professional trained to help with your finances and you live in the United States, try using The National Association of Personal Financial Advisors (NAPFA) to find a fee based financial planner. They should be able to work with you and your individual financial situation.

Photo Credit: Tomitheos

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Asset Allocation – Deciding for My IRA

Elle — Thu, 07 Oct 2010 14:41:25 +0000

As I’ve noted with our latest net worth update, my husband has his 401(k)contributions automatically deposited to receive his company’s match and I have a Roth IRA that I’m contributing towards. The year is winding down and we’re checking our finances to make sure we’re sticking with our goals.

I’ve been working on and adjusting my IRA’s asset allocation recently. My hope is to get closer to my target model.

Getting Started with an IRA

I’m grateful to a former boss for regularly encouraging his staff to plan for their retirement even though everyone was 30 years old or younger. I took his advice and I started setting aside money for retirement when I was 21. I would love to say that I continue contributing faithfully and have a huge balance, but I made a bad decision a few years ago. When I switched jobs, instead of rolling it over my IRA, I foolishly cashed it out.

I started again at another job and opened up an IRA. Later, I learned about the advantages of Roth IRAs, so I moved my money into one. Learning from that mistake, I’m been building up my retirement funds.

Importance of Asset Allocation

The gist of proper asset allocation is maximizing your return while minimizing your risk. While maximizing returns seems clear, risk is subjective. Everyone has their own risk tolerance, so you’ll see different investors choose different investment vehicles.

My Personal Allocation Goal

I’m basing my plan on David Swensen‘s model. He’s probably best known for his track record as Yale University’s Chief Investment Officer. His book, Unconventional Success: A Fundamental Approach to Personal Investment, offers individual investors advice on what to invest in.

The general asset allocation he recommends includes:

Domestic Equity (30 percent)
Real Estate Investment Trusts (20 percent)
Foreign Developed Equity (15 percent)
U.S. Treasury Notes and Bonds (15 percent)
Emerging Market Equity (5 percent)
U.S. Treasury Inflation-Protection Securities (TIPS) (15 percent)

Note: JD from Get Rich Slowly found index funds and exchange traded funds (ETFs) that work with the model.

While I’m working on building it upon Swensen’s model, I’m leaning a bit more towards emerging market and a little less on REITs. I think it’s a better fit for my risk tolerance. His model isn’t the only one to consider. If you’re looking for more information on creating your portfolio plan, I recommend you check out The Intelligent Asset Allocator by William Bernstein.

If you’re curious about your current asset allocation, check out MorningStar’s X-Ray tool. It’s free to join and you’ll get a snapshot of your portfolio. If you have it already, you can also check with Quicken on your portfolio and get extra information on moving it towards your own goals.

Where to Open an IRA

Here are some places to consider for opening an IRA if you haven’t already started. The earlier you start, the more you can take advantage of compound interest.

E-Trade (Annual fee and minimum are waived when you sign up for electronic statements)
Vanguard (Some funds require $3,000 minimum)
T. Rowe Price
Charles Schwab ($1,000 minimum is waived if you direct deposit $100/month)
Zecco ( No minimum to open; $30 annual fee)

I currently have my IRA at Sharebuilder and it’s worked fine for me. I have family that uses Vanguard and are extremely happy with them.

Thoughts Asset Allocation for Retirement

I’m not a financial professional, so if you’re looking for a professional trained to help with your finances and you live in the United States, try using The National Association of Personal Financial Advisors (NAPFA) to find a fee based financial planner. They should be able to work with you and your individual financial situation.

If you’re handling your own investments, I’d love to hear your thoughts on the topic. How did you determine your asset allocation? What resources do you recommend on learning more? Are there any hurdles people should look out for when investing?

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