This week, I want to cover the topic of, what happens if I'm forced into retirement early? Early or unexpected retirement can happen to any of us. According to a recent survey done by the Employee Benefit Research Institute, about 4 in 10 retirees leave the work force earlier than they had planned. It might be the result of health circumstances for yourself or your spouse, corporate cutbacks, retirement packages or even your own choice where you just don't want to work anymore. What do you do when and if this happens? First you need to take a deep breath and do your homework. Questions that you need to ask yourself include:
1. Can I continue to work at another job?
2. What are my skills as well as what do I like doing?
3. Can I afford not to work? And an even bigger question these days,
4. What about health insurance?
After that take a deep breath, understand what your options are and get moving. Don't sit too long. Action will help you in many ways. Unemployment is usually available and sometimes even Social Security. Unless health is your issue, I almost always recommend another job, even if it's part time. Remember that managing your investments closely, while you are employed, can ensure that you are more prepared for an unexpected, early retirement.
Stay healthy and thanks for reading.
Yes, it is.
I covered asset allocation last week, so I want to cover diversification as it pertains to equity investments only.
If we look at equity investments over a long time horizon, we see that generally, if we invest in higher risk categories, we will see a higher return. Small cap and mid cap stocks outperform large cap. International stocks also outperform large cap. We also need to look at the variable of value vs. growth for these categories. There is a lot of information and choices. I suggest that you go to our website and see some of the returns that you can achieve and the risk associated with those returns.
Let's bring this topic to our main focus, which is retirement. I generally recommend three things to everyone who is planning for retirement and, really, aren't we all doing that?
1. Do your homework. Work at numbers that you can realistically achieve and put a plan together to get there. Homework is very important.
2. Diversify. History tells us that a well thought out investment plan that diversifies your investments will weather the storm better that just chasing returns, and finally
3. Save, save, save. Social Security is not enough and even company pensions may not get you there. Nothing will help you more than a savings plan that will help you when you reach that magic date. Next week, we will discuss what if retirement comes unexpectedly. Thanks for reading.
Today I'm going to discuss what many financial experts believe to be the most important decision a person will make about his or her investments. It's even more important than the individual investments a person buys. And it's called Asset Allocation: the process of dividing an investment portfolio among different asset categories, like stocks, bonds, and cash.
Using different asset categories is important because historically, the returns of each category have not moved up and down at the same time. By investing in more than one category, you'll reduce the risk that you'll lose money in any one type of market.
Asset allocation has a major impact on whether you'll meet your financial goals. For example, if you are saving for retirement, you can allocate more stocks to your portfolio while retirement is further away. As retirement nears, you can reduce stock exposure and add more bonds and cash equivalents. Asset allocation is important because a person invested 100% in the stock market in 2008 would have lost a lot of their acquired savings, whereas a person who allocated more of their portfolio to bonds and cash would have shielded themselves from a large portion of that downfall.
Stocks play the important role of returning more money when the goal of retirement is far away, but as it nears and the risk of losing money becomes more important than return, stocks become less appropriate.
And that's really what asset allocation is all about. A balancing act of how much time you have until you need your money and how much you are willing to risk to get to your goal. This is something that can be difficult for individuals to determine, so you may want to ask a financial professional for help. Just remember, before you hire anyone, be sure to do a thorough check of his or her credentials and history.
We are in the midst of discussing retirement needs. Accurate forecasting can be difficult due to the potentially long time frame we are dealing with. But there are ways to predict how much you can start saving now.
Retirement calculators are designed to crunch the numbers for you and give you a ball park figure of what you need to save and for how long. There are a number of websites you can go to help you get started. Click here to use our retirement calculator>>
Your annual income is a significant factor in saving for retirement. Generally, the more you earn during your career, the larger the nest egg you'll need in retirement to maintain something close to your standard of living. The percentage of salary you need to save increases as your income rises. Why? There are two reasons:
- 1. Social Security was designed to replace a smaller portion of your pre-retirement income as your salary rises, which means the more you earn during your career, the more you'll have to kick in from your own savings to maintain your lifestyle.
- 2. The other reason relates to the amount of money you have already saved. For example: $20,000 is a relatively large amount if you are in your 30's, and earning $30,000 annually, it is not as impressive if you are earning $100,000. The more you have tucked away in savings relative to your annual earnings, the better off you will be.
I hope this helps. Just remember the importance of starting to save as early as you can. Tune in next week as I begin talking about how to diversify the money you are investing in your savings. Thanks for reading.
Last week I covered social security and how it impacts your retirement. Now I would like to review the process of saving for retirement and how to determine how much you will need to save for your "Golden Years".
Today, only 43 percent of Americans have calculated how much they need to save for retirement. With that being said, everyone knows they need to save for retirement, but most of us don't really know which magic number to shoot for. Our goal should be to meet our financial needs in retirement and not run out of money. The most obvious question is "How much do I save?" But the answer is a bit more complicated. The amount you need to save each year depends on so many factors: your income, how you invest your savings, what your investments earn, how much spending you'll need in retirement, and how much assurance you want that you won't outlive your savings.
If you want a higher confidence level of not running out of money during retirement, there are a few things you can do:
- 1. Spend less. This goes without saying.
- 2. Save more. The more you save now, the better off you will be later.
- 3. Increase your income by working part time during retirement.
- 4. Increase your income by having a more aggressive investment portfolio. As this is more risky, I don't recommend it for those close to retirement.
So given all this, how can you determine how much you should put away each year to give yourself a decent shot at a secure retirement? Tune in next week...I will give you some useful tools and help you calculate what will work for you. Thanks for reading.
We've been discussing retirement and investing, something that all of us baby boomers have some real interest in. This week I'm going to tackle a related subject...social security.
Social security started in the 1930's as a supplement to your retirement. It was never meant to be your sole source of income when you retire. President Johnson added Medicare to the mix in the 1960's.
If you want information on social security regarding eligibility, benefits, tax ramifications, and even your own account, log in to their website http://www.socialsecurity.gov/ and you can get some answers, or visit our website and you can see all this information about how to contact the Social Security Administration. You can also call them at 1-800-772-1213. Social security tax is currently 6.2% of your salary up to $106,800.00. If you earn more than that you will still pay the 1.45% Medicare tax, but for now, you will not have to pay social security tax.
The Medicare component has no income limit, so the maximum social security that you would have paid last year was $6,621.60. Your employer matches both your social security payment as well as your Medicare payment. Should you take social security at the earliest available age or wait, the longer you delay the payment, the higher payout you will receive. The answer is usually dependent on whether or not you are still working. Generally, if you are still working at age 62, it is usually better to delay receiving social security. However, you must sign up for Medicare at age 65.
Confusing? Not really. As with all things in retirement, start planning early and if you have questions consult a professional.
Here is part 2 in our series on investing for retirement. Today's topic is: How much money do I need to retire? The simple answer is generally more than you think. Lots of factors come into play here: spending habits, lifestyle, investment strategy, health, age of retirement and even your stress level. Let's look at some numbers first.
If you start setting aside $1000 per year, or about $19 per week when you are 25 and let's say you can achieve a return of 8% per year, which is achievable using historic stock market returns. If you continue this until you reach age 65, you will have almost $300,000.00. A lot of money! Get started. If you invest $3000 for ten years, age 25 to 35, and stop investing at 35, you will have approximately $367,000 at age 65, using the same 8% return level! The key here is to start early and put aside as much as you reasonably can in those early years.
I understand there will be other factors, like saving for college, health coverage and even mortgage payments. Start with something. And another key-review your progress annually. I always suggest more aggressive investing when you are younger and then get a little more conservative as you age. Compounding pays off.
I will further discuss this topic of How much will I need? in future programs Get started, do some homework, and thanks for reading.
I'm starting a series of messages on investing and retirement. I'm doing this because there are a lot of us baby boomers out there that will be dealing with retirement. We should have been planning on this event for years , but as is the case with most of us, we haven't. These messages will also apply to younger people because the earlier you start this process, the better off you will be in retirement. I hope that you will find this information useful.
Let's get started with topic #1: Four simple steps to savvy investing.
Step #1: Cable TV. You might find all of these programs interesting, funny and even somewhat informing, but I've seen too many of the next big thing turn into the next big letdown. Do your own research and know what you are investing in.
Step #2: Diversification. Sounds boring, but it's definitely for the long term investor. Gambling should stay in Las Vegas. Prudent investing requires diversification.
Step #3: Know the costs. Understand expense ratios, commissions, sales charges, and other costs. Just like shopping for a car, understand the costs.
Step #4: Keep your emotions out of your investment strategy. This is harder than it looks as moving in and out can cause more problems. Establish your investment risk tolerance and invest accordingly.
Our first step is investing. Next week we will look at: How much money do I need to retire?
I recently read an article on the foolish things that you do with your money. There are nine, so let's get going!
- 1) Falling in love with your investments. Don't do it.
- 2) Chasing a fantasy- past performance is not an indication of future returns.
- 3) Equating "on sale" with good deal: do your homework. Know what you are investing in.
- 4) Retaliatory spending. Let's not discuss this one, as it may cause relationship problems.
- 5) Hanging on to debt, especially debt other than for the purchase of your home.
- 6) Parental Martyrdom. This is parents bailing out their children. If you do it once, it's hard to stop. Be careful. Make sure you protect your own future first.
- 7) Cyber insecurity. You probably have a higher chance of having your mailbox raided than your bank account.
- 8) State of denial. Don't abandon your investment strategy. Measure it, but keep it unless some major life event occurs to cause a change.
- 9) Hoarding Money. Children of the Depression are guilty of this. Keep a reasonable amount of cash available. Don't hoard!
There they are, be sure to avoid these mistakes to ensure that your hard earned money is never wasted.
2010. It's finally here. Let's hope that it's better than 2009 or at least as good. New Year's resolutions are always tossed about at the beginning of the year. I read an article that said that 95% of the resolutions that we make, we never achieve during the year. Here are a few financial resolutions that we all should make:
- 1) Credit card debt. Eliminate it! It is a financial hole you will never get out of without some help. At least put a plan together to climb out of the hole and stop buying things that you cannot afford.
- 2) Home mortgage. If you haven't refinanced in the last two years and you have an adjustable rate mortgage, get to it. We may not see rates this low for quite some time.
- 3) Your estate. Take some time to go over your will, trust, or entire estate plan. Death is inevitable. Let's make sure we've covered our bases here. Statistics tell us that 70% of you don't even have a will. Get going!
- 4) Retirement. Yes, even those of you in your 20's and 30's will have to look the grey-haired monster in the eyes at some time. Put a long or short-term plan together depending on your age. You may need some outside help here, so don't be afraid to seek it. You will retire someday; make it as comfortable as possible.
There they are. Resolutions. Let's follow through this time. Happy New Year!