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.
Or if you are looking for more information on planning for your retirement, Click Here>>
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!
Greece is in trouble. The European Union recently agreed on a $146 billion bailout for the county to keep it from defaulting on its government debt. The 16 countries that share the euro currency agreed there was no other option but to rescue Greece from defaulting to keep the euro out of trouble. Other countries like Portugal and Spain are debt strapped as well.
How did Greece get into this mess? The short answer is years of unrestrained spending, cheap lending, and failure to implement financial reforms. The country held on to government programs that it couldn't afford, like a pension program that allowed workers to retire on a lifetime pension equivalent to 80% of their final salary. Also, tax evasion had become commonplace. The country had been hiding the severity of its mounting debt problems until the new Prime Minister was faced with a crop of government debt coming due and was forced to come clean.
Greece's national debt was reported at $415 billion. That's 115% of GDP. The Greek government initiated austerity measures that cut spending and government benefits, but current debts still remain. Investors feared a default that would threaten other eurozone countries.
The IMF, the world's lender of last resort, negotiated a nearly $1 trillion global emergency rescue package of standby funds and loan guarantees that could be tapped by eurozone governments in peril. This should help calm investors bring confidence back to the euro.
Is the United States far behind? Stop by next week and you will find out.
Last week I discussed some money management tips that are relevant in your 20's and 30's. This week we'll talk about tips for your 40's and 50's.
In your forties, you're probably pretty comfortable handling your finances, but it may be difficult with so many expenses. You are most likely dealing with homeownership, your children and their education, debts, and possibly even your parents' finances. But despite all of this, now's the time to get serious about retirement. 60% of people have workplace retirement plans or individual retirement accounts; which is good, but not good enough. The 40's is a crucial decade for building wealth. Make retirement a real goal. At the very least, take advantage of workplace retirement accounts and contribute enough to get the full match your employer offers. You need this money because the average monthly Social Security benefit received by retired workers is $1,160.
If you're in your 50's, you can't afford to waste any time. You are probably at the highest income level of your career. If you know you haven't saved enough for retirement, take advantage of catch-up contributions to your 401k, 403b, or IRA. The IRS allows individuals who are age 50 and over to make annual catch-up contributions of up to $5,500.
Another thing you can do is get rid of any remaining debt; start freeing up cash flow and reducing expenses. Also, consider your estate plan. You probably drafted a will back when you had children and haven't reviewed it since. Now's the time to update it and make sure it's complete.
Managing money is a life-long commitment. Make sure you are on track. If you are interested in more information on saving and investments click here>> Thanks for reading.
As we age, our relationship with money changes. And so does the way we should handle our money. Here are some tips for managing your money in your 20's and 30's.
In your twenties, you are becoming independent and whether you know it or not, you are laying the foundation for your financial future. You should:
- 1. Live within your means. If you can't afford it, don't buy it. Only borrow for things that have long-term value, like a home or an education.
- 2. Get in the habit of saving. Even when money is tight and it seems like you're living paycheck-to-paycheck, automatically divert part of your paycheck into a savings account or to your workplace retirement plan. Chances are you won't even miss the money. And the emergency fund you've created or your head start on retirement will pay off big down the line.
In your thirties, you have gotten to know more about your finances. Now is the time to start securing your financial future.
- 1. Pay off your debt and don't take on anymore. Get rid of as much of your non-mortgage debt as possible. Try to pay down your student-loans and car-loans. And save for larger purchases that you would normally borrow for.
- 2. Get serious about retirement. Try to figure out when you want to retire and how much you might need. And then figure out how much you need to save each year to get there.
- 3. Get a life insurance policy. If you have dependent children, a life insurance policy is a must. Rates for people in their 30's are reasonable, and if something were to happen to you, your children would be financially secure.
Click here for more advice on managing your money. Next week we'll talk about tips for your 40's and 50's. Thanks for reading.
A couple of weeks ago I mentioned there was a Retirement Confidence survey that was completed by the Employee Benefits Research Institute. This survey found that only 16% of workers feel very confident they will have enough money for a comfortable retirement. And, only 29% of workers are very confident they will have enough money to pay for just their basic expenses during retirement.
After reading through this national study, my curiosity was aroused and I wondered what the feelings were of people in our area. So, for the past couple of weeks, I ran a Retirement Survey of my own to survey retirees in the Illinois/Wisconsin Stateline area and this is what I learned:
- Average age of survey responders: 70 yrs
- Average age responders retired: 60 yrs
- When asked why they retired, the most common answers were: being tired of working, feeling worn out, and just not wanting to work anymore
I find this to be a big issue. If you haven't saved enough to retire, then you shouldn't retire. Keep working. If you are burned out at your current job, then find another job. You shouldn't choose to retire unless you're financially ready. In my opinion, age sixty is too young to retire. Most of us (me being included) boomers don't get full social security until age 66 and 6 months! I understand there are some unfortunate circumstances that don't allow some people to continue working, however, if you can work until age 66 ½, I would highly recommend it.
- 60% of responders performed retirement projections prior to retiring
- What percent is your retirement income compared to your pre-retirement income? Average response was 72%
- 94% of responders have health insurance other than Medicare
- Two-thirds of people surveyed adjusted their life-style and spending habits after retirement.
- Responders were asked to provide advice to people who are still in the workforce regarding retirement: the number one piece of advice was to save. Save more, start saving earlier, and learn to live with less.
If you're afraid you won't have enough saved, then start adjusting your spending habits now. Putting aside enough for retirement is a daunting task that takes planning and discipline. Save as much as you can. And take advantage of employee retirement plans and matches.
- Greatest monetary concern of those surveyed was the cost of healthcare
As these costs continue to rise, many are worried about having enough money to pay for insurance premiums.
If you are interested in viewing the complete results of the survey click here. Thanks to those of you who took the time to complete my survey.
We've been talking about retirement a lot lately. This week, I'm asking for your input on the subject. In a recent study, the Employee Benefits Research Institute found that only 16% of consumers feel very confident they will have enough money for a comfortable retirement. Only 29% of workers are very confident that they will have enough money to pay for even their basic expenses during retirement. So I want to know, how does the Stateline area compare? Are we more or less prepared?
I can talk about what experts say workers should do to prepare for retirement, but I also want to know, what are people in the real world saying? Do you wish you had worked a few more years? Are pre-retirement projections really that important, or accurate? How are your savings being managed?
Health insurance is a very big issue these days. Retired people are the largest users of health coverage. Their use of the health system will continue to increase as we baby boomers continue to age. For more information on the healthcare reform please click here>>
Each day, 7,000 people retire, with this number peaking at around 11,000! Tell me what you think and I will report the results in two weeks.
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.
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.