As I’ve mentioned before, asset allocation is essential for both investment returns and your peace of mind and I’ll explain how it relates to your finances. Asset Allocation is 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. So, by investing in more than one category, you’ll reduce the risk of losing money in any one type of market.
So how do you decide how much money to devote to each asset type?
- Get an idea of your risk tolerance – How much risk can you handle? Do you have time to let your money grow and discipline to leave it alone through market downturns?
- Figure out if you need income from your investments or cash on hand for large expenses – Use this risk tolerance assessment to help you get started.
- Choose an asset allocation – Once you decide how much risk you’re comfortable with, you’re ready to choose an asset allocation. Use this asset allocation key as an example of a portfolio that would be appropriate for your risk tolerance.
In the 60’s we fought the establishment, in the 70’s we educated ourselves, in the 80’s we raised kids, in the 90’s we were going to change the world, but instead tried to accumulate wealth. Then, the 2000’s hit and we found out things don’t always go as planned.
If we look at investment returns for the last decade, we’re certainly disappointed at best. We thought that equities would continue to return their historical average of 10%, when in fact they had a return of approximately zero! Needless to say… it’s put a crimp in our projections. The big question for not just our generation, but all investors is what will happen over the next ten years?
Will Baby Boomers that are approaching retirement retreat to bonds, which had a total return of almost 6% over that same decade? It’s possible and it may be a mistake given that interest rates are currently at very low levels. Investments are critical to our retirement. The issue of preservation of principal has entered into the equation. Remember that your asset allocation is essential not only for returns but your peace of mind. What should we be doing with our money? Stop by next week to find out.
In the meantime, what are you doing to save? Share your tips with all our readers.
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Let’s get back to discussing the retirement issues that Baby Boomers, the almost 80 million individuals that range in age from 46-64, are currently facing. One question that anyone on the brink of retirement needs to ask is:
How ready am I for retirement and is this going to be a problem?
Statistics tell us that the average baby boomer has approximately $50,000 in retirement accounts. By retirement accounts, I’m talking about profit sharing, 401(k)s, IRAs, and similar instruments. I’m not including pension plans where the employee receives a stated monthly benefit and not a lump sum.
Let’s think about this; if you have $50,000 in retirement and you receive the average social security payment of $1,200 per month, will you be able to maintain your current lifestyle? This is largely dependant on how well you have prepared for your retirement. Have you been reviewing your finances regularly? If not, why? Social security will be around, but it is only one aspect of a secure retirement plan. If you have delayed in reviewing your finances, please do not put it off any longer. These 2 steps are a great way to get started:
- Look at your numbers, how much money do you have to meet your retirement needs
- Begin to define what your retirements needs are
What other steps are you taking to prepare for your retirement? Share here to help your fellow Boomers.
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Once you get your estate plan in order and have your 3 key documents in place, how do you decide who will carry out this plan? Whether you have a will or trust-based plan, you will need someone to make sure your plan is followed. Responsibilities of those people may include collecting your assets, paying final bills, filing tax returns, and distributing your assets to the beneficiaries.
When making your decision here are three things to consider:
- Experience. Managing assets in a trust or settling an estate may require specialized knowledge in areas like investing, taxes, and recordkeeping.
- Time. Make sure the person you choose will have the time to devote to carrying out your plan. Don’t choose someone who may get busy and let things “slip through the cracks”.
- Peace of mind. Whomever you select should be committed to impartially carrying out your plan and able to properly execute your plan. This can help avoid additional stress during a time that is already very stressful for your loved ones.
You can choose a child, sibling, or friend to carry out your plan. Another alternative is to choose a corporate trustee or executor, like a bank’s trust department or trust company. A corporate trustee has the necessary experience to administer your estate properly, and plenty of time to dedicate to carrying out your plan, even if your plan is multi-generational. You and your loved ones also gain peace of mind by having someone in charge of your plan who will not get sick, go on vacation, or become distracted as an individual might.
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There’s a common misconception that estate planning is only for the wealthy. But, don’t be fooled… it’s for anyone who doesn’t 
want to leave behind a legacy of heartache and headache! Everyone needs to develop a plan, because if you don’t the state you live in will be responsible for determining how your assets are dispersed. So, save your loved ones the hassle of dealing with the government after you are gone, and ensure that your own wishes are followed.
Although plans vary depending on each particular situation, an estate plan should consist of 3 essential documents to ensure the plan is carried out, both while you are living and after your death. These documents are a Will or Trust, Durable Power of Attorney for Finances and Power of Attorney for Health Care.
- A Will or a Trust is needed as the foundation of your plan to dictate how you want your assets distributed after you are gone. A will is also needed to name guardians for minor children.
- A Durable Power of Attorney for Finances is needed to give authority for another person, called your Agent, to carry out your financial plan while you are living and unable to make financial decisions on your own.
- A Health Care Power of Attorney is needed to authorize your Agent to make medical decisions for you when you are unable to do so.
Choosing who will help carry out your plan can be a difficult decision. You need to choose people you know and trust, and who will be able to properly execute the plan you have put in place. I recommend reviewing your existing plan, or if you have never created a plan, start the planning process today.
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We started a series focused on Baby Boomers, who are people between the ages of 46-64. As many of you know, these are the sixties flower children who did not trust the establishment. Now, we are the establishment and zeroing in on retirement. And the question is…”Have we planned well enough?” Statistics tell us “No”.
Retirement is a lifestyle you have to plan for well in advance. History tells us that we need between 70-100% of our pre-retirement income to support our lifestyles in retirement. 100%...is that possible? Well, if you haven’t lowered your monthly expenses by doing things like paying off your mortgage, you may need 100%! You will continue to eat, need health insurance, travel, and your utility bills will not decrease just because you no longer work.
So what do I recommend? Take a hard look at your expenses ten years before you stop working and see if you can cut any of these before you retire. Your mortgage is generally around 25% of your income. So, the most realistic way to cut your expenses by 25% prior to retirement is by paying off your mortgage. Put a plan in place that allows you to do this and you’ll be happy you did!
It would be impossible to discuss consumerism and the economy without also discussing the Baby Boomers and the effect that they have had on the economy. We will be looking at who these people are, their financial future and what kind of an economic impact they not only currently have, but will have as time marches on.
Baby boomers are people who were born between 1946 and 1964. There are 79 million in total. Let’s see, that puts them between the ages of 46 and 64. Are you perhaps in that group? This group is now past the having-babies age and is now looking at retirement. From my research, I’ve learned that 1,000 baby boomers are retiring per day and this trend is expected to continue at least until the 46 year olds reach age 60, which is another 14 years or approximately the year 2024. A thousand a day, that’s 365,000 per year, the trend actually picks up and peaks around 2,200 in the year 2016 and starts to tail off around 2020.
So this is our first look at the Woodstock generation, the people that were going to change the world. Change was our mantra; we were going to make the world a better place to live. Next week we’ll talk about what kind of planning you can do now to so that you don’t leave behind a legacy of heartache and headache for your family. If you’re interested in more information on the baby boomers check out this
blog, it offers a lot of interesting information.
The last of the economic fault lines is the international economy, so we will finish up with a discussion on that today. The strength and pace of the U.S. economic recovery is affected by international economies. And many countries across the globe are facing difficulties that may make recovery difficult. Let’s look at Europe. Greece’s debt equals 115% of its gross domestic product. Its government initiated austerity measures that cut spending and government benefits, but current debts still remain. Investors fear a default or a crisis of confidence that would threaten other eurozone countries.
The euro isn't stretching as far as it used to. The currency has fallen substantially as Portugal, Italy, Greece and Spain deal with huge sovereign debt problems. So why should we care? Depreciation of the euro will hamper U. S. exports. The European Union was the biggest market for U.S. goods last year and a stronger dollar makes U.S. exports more expensive and less competitive across the globe.
Besides Europe, other countries are having their own recovery issues that will affect how strong our recovery will be. Take China for example. China relied heavily on government stimulus to keep itself afloat during the recession. Now China will struggle with the transition from a stimulus-driven rebound to a self-sustaining expansion. Growth in the global economy needs to become more consumption-driven. Thanks for reading.
Let’s continue our discussion of economic fault lines. This week’s topic is government spending. Last year, the economy was infused with a nearly $800 billion stimulus package. This gave help to state and local governments, funded public work projects, and helped troubled industries. Much of that money is due to run out just as state and local governments are nearing the end of their fiscal years and faced with budget-balancing. Lawmakers in several states are considering raising sales tax and property tax, and cutting government programs. At the same time, jobless benefits are starting to run out for some of the long-term unemployed, who are hitting the 99-week maximum. A million unemployed could have their benefits run out by the end of this year. This will not help our economy.
Congress has delayed approving more money to cover Medicaid costs for states. Medicaid, which covers more than 60 million people nationwide, is one of the costliest services states provide. And with the severe recession, more Americans have turned to Medicaid for assistance. State tax revenues were lower last year as well, so deep budget cuts will have to be made. The federal share of Medicaid was increased last year as part of the stimulus program, but this funding will run out at the end of December.
This could mean trouble for the economic recovery. Thousands of state, county and local government workers could be laid off in the name of budget-balancing. More unemployed workers will do nothing to help the economy. Thanks for reading.
Our discussion on economic fault lines will now cover the housing market.
During the first quarter, the housing market showed signs of improvement, thanks to government assistance like the $8,000 first-time-homebuyer tax credit and the Federal Reserve's purchase of more than $1 trillion in mortgages. Now that those programs have come to an end, what will happen to the housing market?
Already we have seen a drop in construction. Last month, home construction dropped 10%, to the lowest level since December. Applications for new building permits, an indicator for future activity, have also fallen to the lowest level in a year.
Foreclosures are still on the rise. A record 14.7% of mortgage loans in the 1st quarter were either delinquent or in foreclosure. Which means that people are still struggling to make payments. Locally we had 300 homes placed in foreclosure in Winnebago County last month, which puts us on pace for a yearly record, if this trend continues. Let's hope that this is a short-term trend.
We have entered into a difficult cycle where we need jobs to spend money, pay bills, and buy houses. With the job outlook being bleak, it may be some time before we turn around. It could take years before we see a turn in housing. However, the good news is that real estate is as cheap as it has been in years! Who would have ever thought that real estate which increased in value for 40 consecutive years would drop in value for now 3 years in a row?