| Home | My photos | Forex | My trading | Contacts |
|
|
You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
|
Most financial planners agree that investing in insurance products is not the best way to save for retirementSaving, Investing, and the Mistakes We Make. A National Savings Dilemma One day in 1984 my wife, Claudia, told me, The government gets a third and we can spend a third, but we need to save a third. Thats the smartest advice anyone ever gave me. Were rich now. Lee Trevino, golf great RETIREMENT. Most people who are in it seem to enjoy it and those who are not think about it often. If you ask a working person what separates him or her from retirement, the first thing that comes to mind is moneyor rather the lack of it. Technically, people can retire when they have accumulated enough sources of income from pensions, investments, and eventually Social Security so they do not have to work any longer. Financial security means having enough income to pay the household bills, travel, buy gifts, take care of medical concerns, and enjoy the rest of your life without running out of money. Retirement becomes an option when you attain financial security. Thats what this book is all about. It lays the ground rules for accumulating and investing money prior to retirement and explains how to conserve and distribute your wealth during your retirement years. The main objective in is to reach a point in life when you work only if you want to and, if you stop working, when you do not fear outliving your money. Retirees are living longer and healthier, traveling more, enjoy better housing, better automobiles, better communications, and generally spending more money than prior generations. As life expectancy extends and lifestyles rise, future retirees will need more income and will rely more on their personal savings for that income than past generations. Traditional sources of retirement income Social Security and employer pension plansare on the decline. As a result, the nest egg people accumulate during their working years will dictate their quality of life in retirement. That is why it is important for you to protect your wealth from simple, yet costly mistakes. Every penny counts. Through proper planning, prudence, and perseverance, you can accumulate the wealth you need to enjoy your Golden Years. The State of Retirement Savings A secure retirement means having enough sources of income to maintain your standard of living after a regular paycheck stops. Unfortunately, traditional sources of retirement income from an employer pension and Social Security have diminished and will continue to fall in the future. At the same time the cost of retirement will continue to rise. This will be a dilemma for many people. Neither employers nor the government are as generous as they used to be. Most employers are cutting back benefits for retirees. The Social Security system will not survive in its current form when 50 million baby boomers retire over the next 25 years. Several large companies have already dropped employer-funded defined benefit pension plans (DB plans) in favor of employeefunded 401(k) and other types of defined contribution plans (DC plans). (See Figure 1-1 for details.) By shifting the responsibility for retirement savings to an employee-funded plan, employers can save a significant amount of money and reduce their incredibly large regulatory burden. Several large employers continue to fund retirement plans, but have shifted to the more liberal cash balance plans, in which retirement benefits vary with market conditions and there is no liability on the employer to make up the difference. In addition to changes at large firms, hundreds of thousands of small businesses offer no retirement plan at all to their employees. Consequently, millions of workers must set up their own individual retirement accounts and fund them on a regular basis. The reduction in the number of employer-funded DB plans is occurring for several reasons. First, since a DB plan guarantees monthly retirement checks for all eligible employees and since the rate of return on the investments in a pension account is uncertain, the plan can become very expensive to the company in the years ahead if there is not enough money in the fund to pay benefits. Second, DB plans are expensive to administer and maintain. The record-keeping cost and regulatory burden increase as the plan grows. Third, DB plans do not work well for employees in todays dynamic business environment, where people shift jobs and careers more frequently than in the past. Due to legal uncertainties and escalating costs, several companies have converted defined benefit plans into cash balance plans. A cash balance plan is a hybrid of a defined benefit and a defined contribution plan (such as a 401(k) plan). Like DB plans, employers make contributions to cash balance plans based on a percentage of a workers pay and monthly benefits are guaranteed at retirement. However, unlike a DB plan, the benefit amount at retirement is unknown while a person is still employed. The amount of monthly pay at retirement will be ultimately determined by an employees account balance at retirement, rather than by a preset formula based on pay grade. This protects the employer from escalating pension costs and adverse market conditions. There are benefits to the changes in workplace retirement plans. Working in America today means changing careers at least once during your lifetime, either by choice or by circumstance. Technological innovation and employer cost control programs have reduced job security. In addition, mergers, acquisitions, and bankruptcies lead directly to cutbacks in the labor force. The dynamics of the workplace have made it difficult for most people to accumulate large retirement benefits from one employer and expensive for employers to track benefits for former workers. As a result, employers have opted to fund portable plans. That means cash balance plans and worker-funded plans that people can take with them when they leave. With such plans, when an employee is released or retires, he or she simply takes the retirement money. The employer is no longer liable for the assets or responsible for administering the assets throughout that persons life. The former employee is no longer tied to the fate of the employer. It is a much simpler approach. Sources of Retirement Income President George W. Bush forecast a steep reduction in Social Security benefits during a speech at the National Summit on Retirement Savings in 2002. He acknowledged that future retirees could expect Social Security benefits of less than 30% of what they earned before retirement. This is well below the current figure, near 50%. President Bush acknowledged the expected shortfall in Social Security income must be replaced by a combination of personal savings and part-time work. Financial planners estimate that retirees need, on average, 75% of their pre-tax working income to maintain the same standard of living in retirement. Current retirees derive about 70% of their income from Social Security and traditional employer pension plans, according to the 2002 Retirement Confidence Survey results in Table 1-1. As President Bush explained, that number will change dramatically in the future. While baby boomers should expect only about 30% of their retirement income to come from Social Security and an employer pension, younger workers should expect less than 20%. Several Savings Plans Available Saving for retirement is in the national interest and a priority on Capitol Hill. The more Americans save today, the healthier the countrys economy will be in the future. Government and corporate leaders have implemented many retirement programs that offer citizens the opportunity to save on a tax-advantaged basis. This means money that goes into a retirement account grows without being taxed on an annual basis and the contribution is either a tax deduction from current income or tax-free when withdrawn. According to the Department of Labor, nearly 400,000 employers offer employees a 401(k) tax-deferred savings plan and tens of thousands of nonprofit and government employers offer plans to hospital workers, teachers, and government workers. In addition, small businesses also have their own version of employee-funded retirement plans. Contributions to these plans are made through regular payroll deductions and many employers match a portion of those savings each year. There are about 71 million people eligible for retirement savings plans where they work and over 80% of workers participate. All totaled, these plans held over $1.6 trillion in assets by the end of 2001. While the number of people participating in employer-sponsored retirement savings plans is impressive, about 50% of American workers are not offered any kind of retirement plan at work. Those people must save for retirement on their own, which is often very difficult because many of those people are working in low-paying jobs . A second popular savings vehicle set up by Congress is the Individual Retirement Account (IRA). There are several types of IRAs to choose from, including traditional IRAs, Roth IRAs, and educational IRAs. One popular type of IRA account is a rollover. When a person leaves an employer, he or she can transfer his or her portion of the pension plan into an IRA rollover account and avoid paying income tax on that money until it is withdrawn during retirement. The increase in job turnover has resulted in tens of millions of IRA rollover accounts. Some people have four, five, or more IRA rollovers scattered everywhere. All totaled, there are over 200 million IRAs of all types across the nation. These holdings account for over $2.6 trillion in investors assets. A third way to save for retirement is in insurance-related products. Many investors place their after-tax dollars in fixed and variable annuities, whole-life insurance, and other tax-deferred insurance policies. The money invested in insurance products grows tax-free until a withdrawal is made from the policy. Most financial planners agree that investing in insurance products is not the best way to save for retirement. The costs in these products are generally high compared with the alternatives. As a result, the added expense wipes out any tax advantage. Nevertheless, through marketing, the insurance industry has done a good job of educating people about their responsibility to save for retirement and, as a result, the insurance industry has gathered over a trillion dollars in retirement assets. For more information, see Chapter 7, Types of Retirement Accounts. Not Nearly Enough Social Security benefits have already been cut twice, once in 1977 and again in 1983. The program will likely be sliced severely over the next 20 years as members of the baby boomer generation retire. If it is not fixed, there will be no money left for those born after 1960. The answer to the Social Security problem is twofold. The retirement age must be raised and the amount of benefits must be cut. Neither solution is politically correct, so little is done to fix the problem. Nevertheless, to get the system in line with the life expectancy of the typical baby boomer, the retirement age for full Social Security benefits should be age 70 and overall benefits should be cut by about 30%. If this is done, the program has a chance of remaining in the black. Some people claim that the Social Security trust fund should be turned over to participants so they can invest in private IRA-type accounts. I believe this is a bad idea for two reasons. First, there is no money to turn over. The government takes all the money out of the Social Security Trust Fund and issues IOUs. These IOUs are special bonds purchased from the Treasury Department. The money from those bonds is then used by the government for day-to-day operations, which makes the federal deficit look smaller than it actually is. In a few years, the government will have to start paying back those bonds and our federal deficit will swell. The second problem with turning Social Security funds over to individuals is investment mismanagement. After reading Chapters 2 through 6, you will agree that the average person has done a poor job of managing his or her retirement money. Few individual investors educate themselves about the markets by reading books and by attending relevant and unbiased investment classes. Another problem facing the workforce is that private employers are cutting retirement benefits, including contributions to 401(k) plans. As the economy slows and regulations increase, the practice of matching employee contributions to employee finance savings has slowed. After the Enron bankruptcy in 2002, there was a congressional investigation into the amount of Enron stock employees held in 401 (k) accounts. This led to more restrictions on the use of company stock in retirement plans, which increased the cost to employers of funding the plans and gave employers more reasons to question the wisdom of having retirement plans. In addition to regulatory issues, there are increasing legal concerns. Trustees of pension plans are finding themselves the targets of employee lawsuits over investment decisions, lawsuits that increase insurance costs for the employer. While Congress strongly encourages employers to set up retirement plans for employees, more business owners will opt out in the future, due to increased costs, regulatory burden, and legal concerns. The decline in traditional sources of retirement income means that people must save more in personal accounts. Unfortunately, there is not much evidence that personal savings rise as employer benefits drop. The average 42-year-old 401(k) participant puts just 6.5% of his or her compensation into the plan and lower-paid participants tend to select the default contribution rate of 2%-3%. This savings rate is much too low and it will not lead to a secure retirement. Table 1-2 shows the results of historically low savings rates across the broad population. Close to 40% of middle-aged workers have saved less than $50,000 for retirement. If you add to that category half of the people who did not answer the question or did not know, then about 50% of middle-aged workers have saved less than $50,000. The average amount saved by a middle-aged worker should be double that amount. Some people say that having $100,000 at age 50 is an unrealistic target. I disagree. If a 22-year-old started saving $50 per week and generated a 7% return on that money, he or she would have $93,690 by age 40. The lack of savings at an early age can place people well below the amount they should have accumulated by middle age, a deficit that is nearly impossible to make up. Lets look at an example. Using a benchmark of 75% of pre-retirement income, a 50-year-old worker who makes $43,000 per year will need approximately $32,000 per year at retirement at age 65 in order to live the lifestyle he or she has grown accustomed to. About $12,000 will likely come from Social Security, so the other $20,000 must come from savings and part-time work. To avoid the necessity for working part time by withdrawing $20,000 per year from savings at age 65, the 50-year-old would need about 20 times $20,000 in a retirement nest egg. That is $400,000 in savingsbefore factoring in inflation. According to Table 1-2, the amount a typical 50-year-old has saved is $50,000. That means the typical 50-year-old will have to save about $10,000 per year and earn a 7% rate of return on that money to get near the $400,000 target by age 65. Lets face the facts. Saving $10,000 per year for someone making $43,000 is very difficult and earning 7% per year is not easy either, considering the mistakes people make investing their money. In addition, the $400,000 target does not even take into consideration the inflation rate over the next 15 years. We have a big problem in America. Unless we start saving more money for retirement, and investing that money wisely, most workers will be required to work full or part time well beyond age 65, and well beyond the age at which their parents retired. The popular visions of travel, relaxation, and recreation during retirement will be only for those who have saved enough. Most retirees will not have the resources or the time. The numbers do not add up any other way. Where Do You Start? Saving for retirement is difficult. If you are like most Americans, after paying house bills, putting gas in the car, taking care of the family, and going out to dinner and a movie once in a while, there is nothing left to save. So, what is the answer? The best way to save for retirement is to do it before the money gets into your pocket. Over 50 million people are covered under a salary reduction employer savings plan of some sort. People should strive to save 10% of their pre-tax salary in an employer plan, if available. That way, saving increases and you get a tax break on those savings. If your employer does not have a savings plan, then have money automatically withdrawn from your checking account each month and transferred to a personal retirement savings account such as an Individual Retirement Account (IRA). Chapter 7 explains various types of employer and personal savings accounts in more detail. If you cannot afford to give up a full 10% of your pre-tax paycheck, then start by putting what you can into an account. Increase the percentage every time you get a raise or a bonus. Keep increasing the percentage of savings until it reaches 10%. If you are behind on saving for retirement, try to put away 15%. The more you save now, the better off you will be later in life. The second step is self-education. is just one book in a series of books you should read and learn from. John Hancock Financial conducted a survey of 801 participants in various 401(k) plans. One of the questions asked in the survey was how many hours each person devoted to investment research. Half of all Americans spend less than six hours each year reading about investment topics. Compare that with the amount of time spent watching television. On average, adults watch more than three hours of television per day, or 1380 hours per year. The best investment books on the market this year may sell 10,000 copies each, but the top romance novels will sell millions of copies. I am absolutely convinced that the average American would greatly increase his or her personal wealth remarkably by devoting just a small amount of television watching time or romance novel reading time to learning about personal finance. Saving Is One Piece of the Puzzle Accumulating and maintaining a nest egg for retirement takes time and patience. There are lots of pieces to the puzzle that you need to fit together. Youll get a good idea of the complexity of the puzzle by asking yourself a few questions. Depending on your age, you may not be able to answer all of the questions. For example, a 60-year-old should be able to answer most of the questions, but a 24-year-old does not yet know how much he or she will need each year in retirement or will want to leave to heirs. Nevertheless, it is a good idea to think about these questions, because they will help you decide when you have enough to retire and how well you will live in retirement: 1. How much have you already saved for retirement? 2. How much will you save each year while working? 3. How many years until you retire? 4. What reasonable rate of return are you forecasting on your savings? 5. At what rate will you withdraw from savings in retirement? 6. How much are you planning to leave to your heirs? Depending on your age, this book will help you answer each of those questions. Lets go over them in a little more detail now. More precise information on these issues will be discussed in Part Three, A Lifelong Saving and Investing Guide. 1. How much have you already saved? This one is easy. Simply gather all your statements from your bank, brokers, mutual fund companies, and work-related plans. 2. How much will you save each year while working? Hopefully, you are able to set aside 10% of your income or more each year. Take full advantage of tax-sheltered employer 401(k) plans and other taxadvantaged retirement accounts. 3. How many years until you retire? A better question may be How many years until you can retire? That depends on your age, health, and wealth accumulation. Social Security starts paying full benefits between ages 65 and 67, depending on when you were born. . What rate of return will you earn on your savings? The high returns of the 1980s and 1990s were an anomaly and may never happen again in your lifetime. Expect no more than a 7% rate of return on your investments; conservative investors should expect less. Why 7%? See Chapter 11, Realistic Market Expectations. 5. At what rate will you withdraw from savings in retirement? Take no more than 5% of your savings as annual income at retirement; conservative investors should use 4% as a maximum This withdrawal rate should still allow the account to grow nominally over time, counteracting inflation to some extent. 6. How much are you planning to leave to your heirs? That is an easy question for many people. The kids deserve nothing! Realistically, this is not what will happen. We all leave money behind. Later in life, the question becomes whether to gift the money while you are alive or leave it as an inheritance. The amount you give while you are alive should not lower your standard of living. The number-one financial concern that most people have is to not run out of money while retired. As a result, the amount you can safely withdraw from a retirement account will be driven by the size of your account. That means saving and investing properly during all stages of adulthood. Chapter Summary People are living longer and spending more in retirement. At the same time, the traditional sources of retirement income from Social Security and employer-funded pensions are diminishing. Retirees in the future will rely more on their personal savings than in past generations. This creates a problem, since there is a large shortfall in retirement savings accounts across America. The level of personal retirement savings is no higher today than it was 20 years ago, despite several new tax-advantaged retirement programs offered in and out of the workplace. The new programs simply shifted money from one type of savings plan to another without adding to the pot. As a nation, we need to save more for retirement and we need to invest our retirement savings more effectively to close this gap. Few people have taken the time to figure out how much they should save for retirement and how to best invest those savings while accumulating money prior to retirement. is a guidebook designed to help you make those critical decisions. Key Points 1. As a nation, we are not saving enough in retirement accounts to make up for diminishing Social Security benefits and other traditional sources of income. . Future retirees should create and follow a disciplined savings plan. A 10% target on pre-tax income is good for most people. 3. Education is a critical first step toward building and maintaining a secure nest egg. |
|
|||||||||||||||
Previous Issues
|
| ©2007 Olesia | Home • My photos • Forex • News • My trading • Contacts |