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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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.
In continuing with our discussion of economic fault lines, let's talk about consumer credit in the U.S. According to the latest Fed figures, it has been falling for the last seven quarters. Americans are reluctant to take on more debt without improvement in the labor market.
This trend means consumer purchases, which account for 70% of the economy, will be limited until households become more optimistic about the recovery. Credit-fueled spending appears to be a thing of the past. Consumers are saving more and borrowing less and they see excess debt as risky.
Banks are also nervous about lending. This makes credit financing more difficult for consumers and restricts the amount of money consumers can spend. The question that this brings up is how long will this credit tightening last? Currently, it does not look like there is too much change in sight. Small businesses are also affected. The SBA has run out of funds to guarantee small business loans, which makes them riskier for banks to hold. A lot of job creation comes from small businesses in an expansion.
Credit is tied to many aspects of the recovery. If credit continues its current tight trend, the economic rebound may be slowed up even further. Or we may be looking at a significant change in our economy where there is less credit available to both individuals and business! On the positive side, consumers are saving more and spending less...why can't the government do this?
We started discussing economic fault lines last week, or areas of the economy that are still struggling. Last week I covered unemployment; this week I want to talk about the credit markets. Banks have struggled since late 2007 with several issues. Among those issues are: commercial real estate, bankruptcies, falling real estate values, and a very weak economy. These issues caused financial institutions to focus their energies on capital and asset quality.
Banks need capital to make loans to businesses. This refocusing of priorities from growth to capital and asset quality has caused lending to dry up. It does not appear as though this trend will change in the next 12 months. Remember, in order for the economy to grow, the credit markets must be in a growth mode. So it appears that our number two obstacle for growth will remain well into 2011. The good news here is that we are seeing some light at the end of this banking crisis tunnel. Problem loans, as defined by regulatory authorities, have peaked as of year-end and have shown further improvement at the end of the first quarter.
We must have a strong banking system that is dependent on not just making new loans but repaying existing loans! Let me assure you, the banking system is strong. Next week, we will delve into residential home sales and foreclosures and their effect on the economy. Thanks for reading.
This week we'll continue our discussion about Greece and its effect on the rest of the European Union.
Ireland and Spain have announced austerity plans of their own to reduce debt and cut budget deficits. The European Union has called on euro-member governments to crack down on debt, demanding tighter oversight to keep countries within tough deficit limits.
High unemployment and slow economic recovery are hindering the effectiveness of austerity measures. Governments will need to cut back on spending, raise tax revenues, or both.
You may be wondering how the United States compares. We hear about the national debt and budget deficit all the time in the news. So are we on the same path as Greece?
Probably not.
Greece's debt equals 115% of its gross domestic product. The United States' is 67%. And though the U.S. may be headed for financial problems of its own down the line if spending doesn't change, it is unlikely to get into the situation that Greece is in any time soon. One advantage of the United States is that it has control of its currency. If the United States needs to print more money, it has that ability. Greece is at the mercy of the European Union to make decisions about the money supply.
It seems in order for the global economy to recover, countries all over the world must make an effort to cut back on spending. Greece has about twice as much debt as the United States; it's not too late to turn this ship around, let's tighten our belts and improve our finances!