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Best Practices, Numbers Don't Lie, Saving

Are You In Financial Trouble?

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According to the National Financial Capability Study which has occurred every 3 years since 2009:

  • Out of Pocket Medical Expenses are a significant source of financial strain.
  • Since low education and low income often go hand-in-hand with poor health and lack of insurance, households with low socioeconomic status are both more likely to face economic shocks and less prepared to deal with them.
  • Those who are most likely to face a health shock — are 15 to 30 percentage points less likely to have money to cover an emergency than respondents on the opposite end of the scale.
  • The NFCS-ALP reveals a widespread lack of planning. Only 40% of respondents have ever thought about their retirement savings.
  • Only 47% of workers aged 40 to 59 have planned at all.
  • Among younger (workers aged 18 to 39) the figure is much lower: it is only 31%.
  • Even when it comes to individuals aged 60 and older, less than 50% have thought about planning for their post-work years.
  • More than half of older workers on the verge of retirement have not done any retirement planning.
  • As further evidence of the financial fragility of American families, only 44% are certain they could come up with $2,000 if an unexpected need arose within the next month.
  • Among workers over the age of 60, the median financial wealth is only $1,500 for those who have not planned.

The moral of this story is obvious: Americans are not preparing themselves for their financial futures. The long-term implications are serious and not to be ignored. For fear of sounding like a broken record, the earlier you start saving for your retirement the better off you will be. But regardless of your age it’s never too late to start saving. Lastly, the NFCS study found that “…Higher financial literacy correlates strongly with whether individuals plan for retirement and have rainy day funds.” Educate yourselves and enjoy your golden years.

Best Practices, Retirement Analysis

The AARP Retirement Calculator

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Of course the AARP is the Mecca of retirement data. But if you do nothing other than utilize this one tool of theirs to calculate your retirement readiness you will have done yourself a fantastic service. Clicking the link will open a new browser window and take you to the AARP Retirement Calculator. The process is very simple but also very powerful in that it allows you to manipulate variables like Social Security, Salary, Age of Retirement and desired lifestyle during retirement. Play with it and let us know what you think.

Retirement Analysis

The Four Stages of Retirement Leisure

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The tens of millions of baby boomers retiring over the next 20 years are changing the meaning of leisure in retirement. A recent study by AgeWave and Bank of America Merrill Lynch has determined that retirees move through four distinct stages of retirement leisure.

Stage 1. Winding down & Gearing Up: 5 years or less before retirement:

Many in this stage feel highly stressed because they are so busy and 74% identify work as the biggest barrier to them having more fulfilling leisure time. At this stage leisure travel is about escape and recharging one’s batteries. And in the 2 years before retirement most soon-to-be retirees don’t travel as much and spend less also. They feel optimistic about retirement leisure and are focusing on gearing up for the next stage.

Stage 2. Liberation & Self-Discovery: 0-2 years into retirement:

Once people do retire, they finally feel they have enough free time to do all the things they want. There’s an enormous sense of liberation and relief as nearly all say retirement provides them the freedom to finally do what they want on their own terms.

In this stage, many retirees seek personal growth and adventure, including biking, hiking, and enjoying trips that offer learning and even home sharing. 72% want to try new leisure activities. Leisure is clearly a priority for retirees at this stage, but 24% continue to work with 68% of those retirees working part time. Also 22% of retirees in this stage of retirement leisure enjoy regularly volunteering their time.

Some early retirees feel unsettled, anxious and even bored after spending most of their life in a work-centered identity. Over a third of them say it’s harder to structure their time than before they retired and almost half feel guilty about not using leisure productively.

Stage 3. Greater Freedom & New Choices: 3-15 years into retirement:

Once retirees settle into retirement and successfully move through the transition away from work they appreciate and enjoy their leisure even more. As retirees embrace their new leisure identity, feelings of happiness, contentment and confidence are high, spontaneity peaks; anxiety wanes.  They find comfort with their post-work identity. Guilt dissipates and the structuring of free time improves significantly. Retirees are now most likely to exercise, shop, read for pleasure, volunteer, take classes and socialize with friends.

Spending on leisure travel and frequency of travel both increase. Travelers seek to see, feel, and learn new things. They want to make special new memories – particularly ones shared with loved ones. ‘Voluntourism’, cruises, adventure travel, international sightseeing, RV travel and overnight spa trips are common. Only 9% continue working at this stage.

Stage 4. Contentment & Accommodation: More than 15 years into retirement:

Maintaining health and independence is even more important to these retirees. Most of their leisure time is spent relaxing or connecting with family and friends. Life becomes even more simplified. Instead of discovering new activities, familiar ones are enjoyed. Retirees at this stage can be less energetic, more financially constrained and more physically limited than earlier in retirement. They seek to connect with family and friends in all types of leisure including multi-generational travel with grandchildren and heritage trips.

At this stage health conditions are more pervasive and can limit leisure experiences. Also the majority of retirees are dealing with an increase in doctor visits and medical care. Some are involved with care-giving for a spouse or partner.

A Note to Young Entrepreneurs:

“As the age wave grows, this leisure economy will diversify and multiply, reaching a cumulative total of $4.6 trillion which will likely create an unprecedented opportunity for the leisure industry.” This sector of business will boom over the next 20 years and will offer prime opportunities for employment and investment.

The full article in the Huffington Post by Ken Dychtwald can be found here.

Best Practices, Social Security

Maximizing Social Security as a Married Couple

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NOTE: You receive about 8 percent less for every year you file early (starting at age 62), and the same increase for every year you wait until age 70 — the last year for which additional credits are available.

Higher-income people tend to live longer, so they stand to benefit from delayed filing.

Most often, couples will benefit if the higher-benefit spouse delays filing to earn delayed credits.

According to Jim Blankenship, a financial planner based in New Berlin, Ill., and author of “A Social Security Owner’s Manual.” “The idea is to get some income coming in early but also look at the cumulative lifetime cash flow,”

In situations where one spouse’s income is much lower — less than half of his or her mate’s — Blankenship suggests that the lower earner file at 62 (the earliest claiming age). At a later point, when the higher-benefit spouse files, the lower earner could be entitled to an increase from a spousal credit.

The Social Security Administration typically would bump up his or her payments automatically when the spouse files, although Blankenship advises contacting the SSA to make sure it happens.

Blankenship also advises couples to think about maximizing monthly benefits for the spouse most likely to live longest.

See Mark Miller’s full article here for more information.

Best Places to Retire, Pensions - A Dying Breed

Companies That Still Offer Traditional Pension Plans

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If you’re in the precarious position of determining where you want to make or continue your career, one of your primary considerations has to be what retirement offering the company has for its employees. Of the large U.S. companies only 17% still offer defined benefit plans to their employees. A Towers Watson study found that from 1998 to 2013, the number of Fortune 500 companies offering traditional defined benefit plans dropped 86 percent, from 251 to 34. As stated numerous times on this site most companies have transitioned to 401(k) or hybrid plans to defer the significant cost of defined benefit plans. Below is a non-comprehensive list of companies that still offer traditional pension plans:

  1. Exxon Mobil
  2. United Parcel Service (UPS)
  3. Johnson & Johnson
  4. 3M
  5. Bank of America
  6. Coca Cola
  7. Accenture
  8. Nestle
  9. Chesapeake Energy
  10. Devon Energy
  11. Genentech
  12. Aflac
  13. USAA
  14. Colgate-Palmolive

Of course many federal and state government agencies as well as municipalities still offer defined benefit pension plans however; there is major controversy in this space due to what is estimated to be over a $1 Trillion dollar state pension fund shortfall. Simply put it means that state employees promised retirement benefits could be left holding the bag. If you’re a state employee, once again, don’t wait, INVESTIGATE.

For more information on the transition of defined benefit plans to employee managed investments read this U.S. News and World Report article by Lou Carlozo.

Numbers Don't Lie, Social Security

The Social Security Crisis

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Social Security is currently fully funded through 2032. And after the trust fund runs out the program faces automatic 25% benefit cuts for EVERY recipient.  Please read that again so we’re clear.  Those of you looking to rely on Social Security as a PRIMARY or even as a secondary means of retirement income need to seriously reevaluate that decision TODAY.

According to the SSA, Social Security has been running a deficit since 2010 and owes $11.3 Trillion more in benefits over the next 75 years than it will receive in payroll taxes. For more read this article by David C. John of the Roe Institute for Economic Policy Studies.

Some proposed fixes to the Social Security deficit are as follow:

  • Fix the annual cost of living adjustment to accurately reflect the best available inflation index. Using a ‘chained’ index would reduce the inflation amount by about 0.3% per year.
  • Increase Full Retirement age. People are living longer now. Full retirement age is now 67. It is suggested that full retirement age be increased to between 68 and 70 years old.
  • Focus Social Security benefits on those who most need them. This is a sore spot for some but the program was originally designed to protect seniors from poverty and economic hardship. It has been suggested that Social Security focus benefits on lower income workers by paying lower benefits to those with high levels of non-Social Security retirement income. Or even more drastic: Completely eliminate benefits for those with the highest amounts of non-Social Security income.
  • Increase Social Security taxes. We currently pay 6.2% of our earning into the Social Security system up to $117,000 of earned income. If that tax is increased to 7.2% by 2036 it would eliminate over half of the deficit.
  • Lift the payroll tax cap. The rich don’t pay Social Security tax on anything more than $117,000 of their incomes. If this cap was gradually eliminated  it would reduce the deficit by 71%.

This crisis is real. And if you live past 2032  you will be affected. I won’t even be 67 yet. So the legislation that passes on this subject is EXTREMELY important to me and YOU. We have to pay attention to this conversation and engage our lawmakers so the necessary changes are made to fix the Social Security crisis. DO NOT keep your head in the sand on this my friends. It’s too important. And it CAN BE FIXED if we stay engaged!

Late Starters, Pensions - A Dying Breed, Saving

It’s Never Too Late

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I was 40 years old when I first started thinking about retirement. I was married with two children but within a few short years my life changed dramatically. I was divorced and a single parent. My oldest son had graduated from the university and my younger son was in his last year of high school when he received a partial scholarship to college. I felt like I had hit the lottery.

With all that happening I had not lost sight of my desire to retire at 55. My employer offered a non-contributory retirement plan allowing you to retire at 55 years of age, with 30 years of service. If you met that criteria you would receive 50% of your salary for the rest of your life, but I knew I’d only have 25 years and therefore receive only 35% of my yearly salary.

I knew I needed a plan to reach my goal. The obvious answer was to save as much money as possible in the next 10 years. So I changed my lifestyle and put myself on a budget. Looking at where my money was going I realized the majority of it was being spent eating out. So I starting charging everything I bought. I didn’t care how small the purchase. I charged it on my American Express card. This way I could itemize how much I was spending and where it was being spent. With this knowledge, I then started to rein in the unnecessary spending.

Being a fan of Suze Orman, a financial adviser I saw on the Oprah show, I began following her advice regarding delayed gratification, and I joined my company’s 401(k) savings plan that had a 2% company match. In 1994 I increased my savings from 4% to 18% of my yearly wages. No matter how sensible with money you think you are there are times when your budget is at risk of getting hijacked. Putting my money in a less accessible place made it less likely I would use it in an emotional situations.

Saving for the future is difficult but it can be done. You should replace shopping and eating out with other joyful (FREE) activities like walking, doing yoga or listening to music. These activities will help you find your way toward your road to early retirement. I retired in 2004 at the age of 55 and I’ve enjoyed every minute of it!

-Jamie  S., Los Angeles, CA.

Best Practices, Saving

Starting LATE!

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First off, it’s okay.

No it’s not good. But there is hope.  This post is for all you late bloomers out there who are just now getting started saving for your retirement. And yes, we know it’s scary when you realize late in life that you haven’t prioritized your golden years but the key to dealing with the situation is to ACT! and act NOW!

  • If your employer offers any type of funds matching then you MUST at the bare minimum, contribute the amount required to receive the company match otherwise you’re leaving money on the table.
  • Next, you have to analyze your budget. You don’t have to hire a financial planner, but you do have to sit down and look at all the money that goes in and out of your bank account in a typical one month period.
  • Then you have to trim the fat. Anything that can be cut should be cut in order to free up money for your retirement savings.
  • Depending on your age you may be eligible to contribute ‘catch-up’ funds to your retirement account specifically to address the issue you’re facing.

PART 2

 

 

Numbers Don't Lie

Are YOU Ready?

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road-sign-1274312_1280The following post might scare you. But that is by design.

In July of 2013 the National institute on Retirement Security (NIRS) released “The Retirement Savings Crisis: Is it Worse Than We Think?” The study found that private sector retirement access is near its lowest point since 1979 with only 52% of employees in jobs that offer retirement benefits.  So half of America isn’t even in the position to take advantage of employer-sponsored retirement planning.

A critical finding of the report is that while households face a growing retirement savings burden, the typical US working-age household (age 25-64) has only $3,000 saved in retirement accounts while the typical household nearing retirement has only $12,000.

People of color are less likely than whites to have access to a pension or 401(k) at work. Nearly two-thirds of households of color have no savings in a 401(k) or IRA type account, compared to slightly over one-third of white households. Three out of four households of color (75%) have retirement savings less than $10,000. Among households of color with retirement account assets, the median balance is $30,000 for near-retirees — grossly insufficient as an income source.

If you’re not scared yet, you’re not paying attention…

PART 2

Best Practices, Saving

Best Practices (If you don’t get a Pension)

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This post is all about the saving behaviors that one should integrate into one’s lifestyle with the intention of living well after working. If you have a guaranteed Pension coming after so many years of service then your savings approach will likely differ. If not, read on.

  • Pay Yourself First
  • Start Early
  • Employer Match
  • Stay Employed
  • Max Out Your Contribution
  • Index Funds
  • Dollar Cost Averaging

It is important to note that I am writing from the perspective of a 46 year old black male who works for a major airline that offers a 401k as it’s only retirement savings option.  I have been with the company I work for for 16 years. And plan to retire in anywhere from 10 to 14 years. Please chime in with alternate experiences i.e. self-employed, military, state workers, non-profits etc. All of us have a unique perspective on what the best practices are for achieving our goal of living well after working. Please don’t discount the importance of your experience. Remember that there are young people reading this who will benefit by not having to make the mistakes that many of us have made on this journey.

Disclaimer:

This is not legal advice. This is not investment advice. These are the sharings of individuals who have either achieved the goal of retirement or who are well on their way to that goal.

I read a book about a hundred years ago (I’m ashamed I don’t recall the title) that repeated the catchy phrase “Pay Yourself First” as its mantra. It might have been the Millionaire Next Door. (which I highly recommend).  It pushed the idea that part of the recipe for financial freedom after working is to move the concept of saving to the forefront of your financial agenda. The general idea is that by prioritizing your debts you include YOURSELF at the top of the list as the primary debtor. In other words, you pay YOU before you pay anybody else.

Of course this can be a daunting prospect if you’re just getting started but one of the magic keys to the entire game is recognizing when you first enter the workforce that your first priority is to establish a savings plan for the money you are now earning. Not a SPENDING plan, but a SAVINGS plan.  Why this isn’t a senior year high school mandated message I have no idea.  Notice I did NOT say college. I said high school. And I said it because saving is a concept that ANYONE entering the workforce needs to engage in. It is NOT earnings-dependent!

So no matter how much money you make you should be setting aside a part of it (preferably) in a tax deferred, interest-earning account to be used when you decide you’re tired of working. Many companies offer what is knows as an employer match where if the employee contributes up to a certain percentage the company will match that amount (typically as a lump sum cash deposit into your retirement savings account) up to a specified limit. If your company offers such a program and you don’t take full advantage of it then you are effectively walking away from free money.  It’s as simple as that. And if you’re not sure if such a program exists at your company call your HR rep and ask. TODAY.

The next point is significant from the standpoint of the article on this site that discusses the dilemma which is black retirement. The numbers are scary and have to be addressed. NOW. Blacks and Latinos earn less over our lifetimes than whites.  Consequently, we have less ‘left over’ to save. But I’m here to tell you that that excuse is unacceptable.  And it’s unacceptable because it does not matter how much money you make if you PAY YOURSELF FIRST.  5 dollars an hour? Put 50 cents aside for yourself for every hour you work. That’s 10% of your salary. 2 years from now you’re a supervisor and you’re making 13 dollars an hour and you’re putting away a dollar and 30 cents an hour. 3 years later you’re a manager and you’re making $20 bucks an hour, putting away $16 dollars a day. It adds up.  (If you only put the money in a Bond Fund earning 0% a year, after 5 years you’d have 10 grand. Working at Bob’s Mega Burger.)

BUT THIS IS THE SECRET…

If you start from the beginning of your fledgling career you will never MISS the money you save. You will have ALWAYS put away 15% of your pre-tax earnings. And therefore never know what it’s like to have that additional 15% available to spend (WASTE).

The studies show that one of the reasons Blacks and Latinos fall so far behind whites in the earnings category is due to the unproportional rate at which Blacks and Latinos are incarcerated in this country. SO, stay employed.  Stay working. As simple as this rule is it is very very significant. 5 years of unemployment can mean the difference between retiring at 62 and not being able to retire until you’re 75 years old.

Why? All due to the laws of compounding. I will add a link here that details how it works but the bottom line is that over time and as your money grows a snowball effect occurs. Growth is slow in the beginning and possibly even dauntingly so. But over time speed picks up exponentially and once your nest egg has grown over time it begins to grow significantly faster than it did in the early phase of your career. And that is when thing begin to get very, very exciting.

The key is to never stop putting money in the pot. And as my mother taught me… every time you get a raise increase your contribution to your retirement savings account. Until eventually they tell you sorry ma’am you’re maxed out. You cannot contribute any more. Once you hit this point you will have joined an elite club of people who typically retire comfortably (if the market is kind).

I know this post is long. But I will close with a brief bit on dollar cost averaging. The concept is very simple. If you invest a set percentage of your salary every month then when the market is down you will buy more and when the market is up you will buy less. Consequently, the shares you buy more of when the market is down will increase the value of your portfolio when the market gains. This method allows you to always buy more when stocks are cheaper. No timing the market. No trying to figure out the winners. Always buying more when it’s cheap and less when it’s expensive.

My early studies revealed that index funds are the way to go (we will discuss this topic in much more detail as we go). Especially, for the lazy under-educated, disinterested investor like myself. I just want the money taken out of my check and handed off to the investment gods who will deliver me returns that will send me to Puerto Vallarta as soon as earthly possible! SO, I invest in index funds which match the S&P 500 or the NASDAQ. I own one fund. And all it does is chase the S&P 500. Whatever the market does, it does. And if you’ve done your research you know that 9 times out of 10 that’s better than what all the actively manged funds do. But here’s the FINAL secret of this post: Index funds are the CHEAPEST of them all because they’re NOT actively managed. So the fees you pay to own them are significantly less than other managed funds. They’re the BEST DEAL OUT THERE!!

Please let me know what you think about my formula. I started late (at almost 30). But I can see the light at the end of the tunnel. Thanks for reading!