Experts say nest eggs are more fragile than in the good old days, but a new withdrawal rate can prolong their lifespan
How much can you safely withdraw from your retirement account each year without running out?
Well, in the good old days, you could withdraw 4% per year from your nest egg and it would last 30 years. Or at least that's what financial planner Bill Bengen famously wrote some 22 years ago. But now, in a world where interest rates float around 0% and where investment returns are likely to be low for some time to come, blindly withdrawing 4% per year would be a disaster for your nest egg and ultimately your standard of living.
So how might you determine a safe percentage of savings to spend in today's world?
THE 'FEEL-FREE' RETIREMENT SPENDING STRATEGY. The latest in a long history of research on the subject comes from Evan Inglis, a senior vice president at Nuveen Asset Management and a fellow of the Society of Actuaries. Inglis' recommendation: Simply divide your age by 20 (for couples, use the younger spouse's age).
So, for example, someone who is 70 could safely spend 3.5% (70 divided by 20 equals 3.5) of their savings, while someone who is 80 could withdraw 4% (80 divided by 20 equals 4) and someone 65 could withdraw 3.25%.
"That is the amount one can spend over and above the amount of Social Security, pension, employment or other annuity-type income," Ingalls wrote in his paper. "I call this the 'feel-free' spending level because one can feel free to spend at this level with little worry about significantly depleting one's savings."
What's so great about this strategy? According to Inglis, it's "an easy-to-determine and remember guideline for those who do not have the time, expertise or inclination to do a lot of analysis."
Other strategies, by contrast, require too much thinking. For instance, the original 4% rule of thumb had you adjusting the amount you withdrew each year for inflation. (Good luck with that.) And the income-replacement ratio rule of thumb, where you try to replace 70% to 80% of pre-retirement income from a variety of sources, was an exercise in futility as well.
THE 3% RULE. Truth be told, there's an even easier strategy to use to make sure you don't outlive your assets. Simply withdraw 3% year in and year out.
"Three percent could be viewed as a more conservative and simpler version of the wellknown 4% rule," Inglis wrote.
NOT ALL AGREE. Some experts take issue with Inglis' age-divided-by-20 strategy.
"I agree that the proposed guidelines are a simple and conservative rule of thumb," says Dirk Cotton, a financial planner and author of the Retirement Cafe blog. "As with all rules of thumb, this one has issues."
While 3% is probably a good conservative starting point at age 65, age divided by 20 becomes far too conservative in late retirement, Cotton says.
Moshe Milevsky, a York University professor, suggests 5% is a more reasonable withdrawal for a man age 80 than 4% and that 10% is more reasonable than 4.5% at age 90.
"So (Inglis') approach is likely to result in a lower standard of living than might be achievable," Cotton says.
Inglis doesn't disagree that a higher withdrawal rate might be more appropriate later in life. But he says his strategy balances the need for simplicity with the need to be accurate. Plus, he says, it's unlikely that people will want to spend more as they age.
OTHER CONSIDERATIONS. Of course there are all sorts of things to consider before you just adopt the age-divided-by-20 strategy. Here are some of the questions Inglis suggests asking when applying this rule (or other similar rules):
Do you have long-term care insurance? If you do, you can spend a little more. If you don't, you may want to reduce your spending a bit.
Will you lose a significant amount of annuity income when your spouse dies?
Will you pay significant income taxes?
What if interest rates go up? First of all, you can't expect that they will. You can probably spend a little more if they do, but if rates go up by 2 percentage points, you can't increase your feel-free rate by 2% of your savings. The best advice is to stick to the divide-by-20 rule for the foreseeable future.
Do you want to pass on a certain amount to your kids or charity? Adjust your spending accordingly.
Truth be told, there's an even easier strategy to use to make sure you don't outlive your assets. Simply withdraw 3% year in and year out.
We loathe calculators in our household -- because we only use them when we have to figure out what large sum of money we need to save to accomplish a goal. And when we recently decided to calculate how much we'd need to save for retirement, we thought our trusty electronic device was broken when it spit out a seven-digit number. We ran the numbers a second time and sure enough, the result still topped $1 million.
After collecting ourselves and analyzing the numbers a little more closely, reality began to set in. Living for 25 years with only your only outside income being a small stipend from Social Security requires a huge chunk of savings.
When it comes to understanding why retirement is so costly, my husband and I like to think of it this way: How much money do we need to get by in a month? Then we take that number and multiply it by 12, which is how much we'll need over a year. Finally, we multiply that number by 25 (supposing our retirement lasts from age 65 to age 90), and that's roughly how much we'll need for retirement -- without factoring in inflation on the one hand, or investment growth on the other.
Some Expenses Will Decline
While there's no question we'll need a large nest egg to survive (let alone thrive) in retirement, some of the expenses we have today may no longer be a factor once age 65 rolls around for us. It's important to keep these in mind so we don't overestimate how much we'll need come retirement age.
Mortgage: Most Americans have paid off their mortgages by age 65. If you haven't kissed your mortgage goodbye and don't own your home outright, then you'll want to factor in more money to help you get to that point. But if your countdown until tear-up-the-mortgage day is on track to arrive before your retirement date, that's a big monthly bill you can cross off your planned expense list.
Child-related expenses: From the cost of back-to-school shopping to keeping a growing teenager clothed and fed, the costs of raising children will likely no longer be a part of your budget.
Food and entertainment: Although you'll still be out and about, the rate at which you go and do is likely to slow down some as your retirement progresses. You'll have fewer mouths to feed, and extravagant nights out may also lessen. And if you're still living on a budget, this is an easy category to put on the chopping block when times get tight.
Taxes: Because of your retirement status, your tax bill could dip significantly. While a large chunk of your earnings go to taxes right now, you'll probably be giving substantially less to Uncle Sam once you leave the workforce, especially if you've been putting money into investments that have tax-free disbursements in retirement, such as a Roth IRA or Roth 401(k).
Other Expenses Will Go Up
Overall, your day-to-day lifestyle will likely cost less than it currently does. Your life should be more settled and simplified, and fewer unexpected expenses should pop up. And while most of your spending will continue going to everyday living expenses, as mentioned above, there are a few new things you'll want to save for in retirement.
Health care: One major expense worth factoring into your budget is the possibility you'll need long-term care in-home care, or assisted living. At some point in retirement, those possibilities have a strong likelihood of becoming your expensive reality. According to a recent study, half of all people who buy a long-term care policy at age 60 (of the type that pays out immediately for eligible claims) will at some point use that policy.
Adult children needing financial help: You'll want to decide in advance what to do in the case that your adult offspring need help financially. If you do have some extra retirement savings, you may have opportunities to help them when they're in a financial pinch.
Retirement is no small expense, and it's important to start saving now, and investing that money in ways that will grow our money over time -- hopefully, faster than inflation eats away at it. When it comes down to it, we can't know the exact number we're going to need for retirement. But we do know that we're going to try to save as much as we can.
The rich, it bears repeating, are different from you and me. They, for instance, get to learn about little-known, but highly effective ways to boost their savings for retirement from high-end financial advisers.
But that information isn't necessarily a secret; it's just hard to find. Or at least it was. We asked advisers who are familiar with these little-known tactics and strategies to share what average (and not-so average) Americans should consider when saving for or living in retirement. Here's what they had to say.
Deposit and withdraw
Are you over age 591/2 and able to contribute to a 401(k) or similar retirement plan where your employer matches your contribution, say 50 cents on the dollar up to 6%? Are you contributing enough to get the employer's full match? If so, great.
If not, you might be missing out an "unexploited arbitrage opportunity," according to a recent paper by James Choi, a Yale University professor.
Because employees over 591/2 can often withdraw their 401(k) balances without restrictions or penalties, it makes sense to contribute enough to get the company match and then immediately withdraw some of that money if you need it, Choi wrote in his paper, "Contributions to Defined Contribution Pension Plans." You'll pay taxes on the withdrawal, but you've increased your after-tax current income courtesy of your company's match.
But many older plan participants don't take advantage this arbitrage opportunity, Choi wrote.
Consider: According to one study, some 36% of match-eligible employees over 591/2 left arbitrage profits on the table, often because they fail to contribute anything at all to the 401(k), wrote Choi. And another study found that practically none of the customers in their experiment executed a similar "deposit-and-immediately-withdraw" strategy.
Of course, clients of advisers are aware of this strategy and are using it. "That one is on my checklist," said Joseph Clark, a managing partner with the Financial Enhancement Group, which has offices in Anderson and Lafayette, Ind. "Most of my clients are astute enough to always take the match. The key is knowing the plan document to find out when you are eligible for in-service non-hardship distributions. It is usually at 60 but can be as early as 50."
Use the 60-day rollover strategy
Most advisers typically don't recommend using what's called the 60-day IRA rollover strategy. Usually, when moving money from a 401(k) to an IRA or from one IRA to another you would use a direct trustee-to-trustee transfer.
But you can take the money out of your IRA and, in some cases, your 401(k). And if you put the money back into the account by the 60th day following the day on which you received the distribution you won't have to pay a tax or penalty on the distribution.
When might you do this? When you need a short-term loan. "There are weird times when a person can transfer from the 401(k) to an IRA and then use the 60-day provision," says Clark. "It is a workaround when the 401(k) plan doesn't allow for loans."
To make this tactic work, first read your plan's "Summary Plan Descriptions" or SPD. That document should detail what's allowed and not allowed in your plan. "People presume that if the Labor Department says it can be in a plan that it is, and that is far from the case," says Clark. "The Labor Department provides the big picture, and the plan has to exist inside the lines."
The rich and even not-so rich would benefit greatly from having many different types of retirement accounts in place, including a traditional IRA and Roth IRA, a traditional 401(k) and Roth 401(k) and taxable accounts.
But not everyone can open a Roth IRA. For instance, high-income taxpayers â€” those married filing jointly with modified adjusted gross income (MAGI) of $193,000 or more and individuals with MAGI of $131,000 or more - can't contribute to a Roth IRA.
But they can contribute after-tax money into non-deductible IRA. "And then, with the stroke of a pen, they can convert the (non-deductible) IRA to a Roth IRA," says Hal Rogers, a senior adviser with Gold Tree Financial in Jacksonville. "Since the original contribution was non-deductible and there have been no earnings yet, there is no tax on the conversion. They have 'in effect' contributed to their Roth IRA, all perfectly legal, no raised eyebrows at the IRS."
Others like this strategy, too, especially if taxpayers might find themselves in a higher tax bracket in retirement. "I am really concerned that taxes will be going up in the future, so I am a big proponent of tax-efficient investment strategies," says Phillis Sax Pilvinis, president of PSP Financial Services in Surprise, Ariz.
A version of the backdoor Roth IRA is the mega-backdoor Roth IRA. Instead of funding a non-deductible IRA, contribute after-tax money to your 401(k). Then transfer that money (the after-tax money) into a Roth IRA and any earnings on that money into a traditional IRA.
For this to work, three conditions must be met, according to Christian Koch, the founder and owner of KAM South in Atlanta. One, your plan must allow you to make after-tax contributions to the plan; two, you must have enough disposable income to make an after-tax contribution to your plan; and three, your plan must allow for periodic in-service distributions for your after-tax money and your earnings.
"All these pieces have to fall into place for this strategy to work," says Koch, who added one note of a caution to this tactic. Some plans won't let you make after-tax contributions or won't let you take in-service distributions.
Fund a no-lapse last-to-die insurance policy
Another trick of the trade is for those who own an IRA and are required to take minimum distributions (RMD), but don't need that income. Take the RMD and pay the taxes due as you would anyway. Then, take the after-tax amount and systematically fund a no-lapse last-to-die life insurance policy. You would do this even if you don't need a traditional "widows and orphans" life insurance policy, says Rogers.
"Then, at second death of the two spouses, the life insurance will pay the (beneficiaries) the death benefit, tax-free, no probate, guaranteed," he says.
When it comes to retirement in the U.S., there's no shortage of problems. People haven't saved enough money for their golden years. They're going to outlive their assets. They won't be able to afford health care in retirement. And the list goes on and on and on.
But these problems are not without solutions. Here's a look at what experts say are the biggest problems facing those saving for and/or living in retirement, and how to solve those problems.
Social Security needs fixing. "The first pillar of old-age support, namely our national Social Security system, is running into the red," says Olivia Mitchell, a professor at The Wharton School at the University of Pennsylvania and executive director of the Pension Research Council. "This represents big trouble."
Mitchell says "serious reform must be implemented ASAP to ensure that those workers in the bottom half of the wage distribution will receive Social Security benefits that will be critical to them in retirement."
Her solution: Reduce the growth rate of benefits by pegging it to price inflation, not wages. When you're working, the Social Security Administration calculates your future benefit based how fast wages rise. But your actual benefit, when you claim it, is based on inflation (CPI). Wages tend to grow faster than inflation, so switching from wages to inflation would reduce the overall benefits to be paid out.
"This in and of itself will return the system to balance, albeit with some transition financing," says Mitchell.
No one thinks thoughtfully about when to claim Social Security. "The biggest problem is that (Americans) don't consider the importance of choosing the age at which they retire," says Alicia Munnell, director of the Center for Retirement Research at Boston College. "If they can postpone retirement from 62 to 70, their monthly Social Security benefit goes up by 76%, their 401(k) assets nearly double, and they reduce by eight years the length of the period over which they need to stretch their retirement nest egg."
Longevity risk is real. Most Americans face the real possibility of longevity risk, the risk of living longer than they can afford given their assets, says Mitchell. Her solution: New insurance products are needed to help convert retirement savings into lifetime income, ideally with deferred participating annuity products, which pool longevity risk. At the moment, investors can purchase such products as deferred-income annuities, single-premium immediate annuities as well as qualified longevity annuity contracts (QLACs) to manage longevity risk.
Others share that point of view. "Couples beginning retirement have a problem previous generations would have envied," said John Laitner, a professor at the University of Michigan and director of the Michigan Retirement Research Center. "Individuals of retirement age can now expect to live many years."
And to cope with such longevity, Laitner says individuals should think about annuitizing at least part of their pension equity, which would provide protection against outliving their resources.
Access to employer-sponsored retirement plans. Experts say that only one-half of American workers have retirement plans, such as a 401(k), at work. And that lack of access is a problem, particularly for part-time workers and those at small employers, says Jeffrey Brown, a professor at the University of Illinois at Urbana-Champaign.
No retirement plan equals no retirement savings, according to research from the Employee Benefit Research Institute.
To address this problem, Brown wants the Labor Department to 1) make it simple and low-cost for small employers to offer plans, 2) make sure that non-discrimination testing is not accidentally leading employers to leave part-timers out of the plan, 3) promote multiple-employer plans, and 4) establish auto-IRAs at the federal level.
Not enough annuity options in 401(k) plans. Workers who have access to an employer-sponsored retirement plan have plenty of investment options, but hardly any annuity options, say Brown. Having annuity options could help workers convert some of their retirement assets into guaranteed lifetime income.
To address this, Brown says the Labor Department must go "much further in providing fiduciary comfort to plan sponsors so that they feel comfortable offering lifetime income products inside 401(k) plans."
What's more, Brown says he liked to see the lifetime income-disclosure rules become finalized "so that we can start to change the conversation from a focus on wealth accumulation and toward a focus on income."
Don't forget your home equity. Home equity can help solve retirement problems as well. "Maintaining equity in one's primary residence provides a place to live and a degree of hedging against inflation," says Laitner. "Equity in one's residence tends to be protected against some government means-tested assistance. And, the equity can provide cash in the event of a surviving spouse's illness."
Divorce can be hazardous to your financial health.
Splitting up is expensive, and your cost of living is likely to go up when it is
Experts say anecdotal evidence suggests an improving economy and long-running bull
market in U.S. stocks are making the costs of getting divorced look more manageable
to many couples who might have tried to stick it out in leaner years.
"People have a greater sense of freedom. They gain more confidence that they could
live an independent life," says John Slowiaczek, vice president of the American
Academy of Matrimonial Lawyers.
Still, you should understand the risks, which can be considerable-whether you are
a stay-at-home parent, the main breadwinner or in a marriage of financial equals.
The stakes can be high, particularly for homeowners in some of the nation's hottest
"Divorce generally results in a significant financial setback for all those involved,"
says Mark Zandi, chief economist at Moody's Analytics in West Chester, Pa., who
has researched divorce and other demographic trends.
If you are considering seeking a divorce, plan carefully in advance so that you
can make rational decisions at a time when emotions may be running high. Here are
six common mistakes to avoid.
Many happy couples maintain a division of labor in which one spouse keeps an eye
on the finances.
But when the marriage falters, the importance of being able to see the whole picture
It is crucial to know what your family's assets and liabilities are, financial advisers
say. Make sure you have access to tax returns, statements from investment and retirement
accounts, household bills and any other important records, Mr. Slowiaczek says.
Make sure you also have an inventory of valuable property. You probably know about
any shared real estate, but don't overlook collectibles, furniture and the like.
Make sure you obtain a qualified domestic relations order, or QDRO, a legal document
that spells out how you and your spouse have decided to divide certain retirement
assets such as 401(k) accounts, says Page Harty, a financial planner at SignatureFD,
a wealth-management firm in Atlanta.
If there are any hard-to-value assets in the family, such as a privately held business,
a share of a professional partnership or stock options, you may need the assistance
of a valuation expert or a forensic accountant. The help can be costly, but if the
assets are valuable enough, it could be money well spent.
If you overlook something valuable, you may end up getting less than your fair share
when the time comes to divide the assets. In extreme cases, your spouse may even
try to hide from you something that should be considered joint property.
Keep track of shared debts, too. If you and your spouse have joint loans or credit
cards, you still are responsible for paying them off when you are single again,
says Ben Barzideh, a financial adviser in Crystal Lake, Ill.
"Lenders don't let you off the hook just because your divorce settlement states
that your ex-spouse will pay them off," he says. "The best thing to do is pay off
all shared debts before the divorce becomes final."
Keeping the house
Fighting for your fair share makes financial sense. Fighting to keep the family
home, on the other hand, could cost you money in the long run.
Staying put is tempting, particularly if it seems like the easiest way to make sure
that school-age children remain in the same school district. A house also may stir
fond memories or symbolize a lifestyle that is difficult to let go.
But a household that took two people to run may be far too expensive for one. Trying
to maintain the illusion that nothing has changed can drain your cash flow and eat
into your savings, and may end up merely postponing an inevitable move.
The smarter strategy may be to sell the house and split the proceeds in the course
of the divorce proceedings, when both parties would be sharing in the risk and cost
associated with selling the home, says Matt Mikula, a financial planner in Itasca,
Mr. Mikula worked with a mother of four who got the family's $1.5 million home as
part of a divorce settlement, as well as $500,000 in other assets. The woman wanted
to keep the house because she had custody of the couple's four children and didn't
want to disrupt their lifestyle.
But taxes, utilities, maintenance and other expenses amounted to about $50,000 a
year, and the client had little in the way of other assets or income to cover those
costs in the long run, Mr. Mikula says. "She was going to run out of money," he
His client ended up selling the house six years after the divorce and received about
20% less than it was valued at around the time of the divorce, he says.
It also is key to get a firm handle on your other expenses, beyond housing.
Take careful note of how much your family spends on food, clothes and other essentials,
as well as discretionary purchases that can be cut back in a pinch. Figure out how
a divorce may change the cost of health insurance, which can be steep, financial
Make sure you can cover the postdivorce expenses on your own, without relying on
your ex. "Always plan for the 'what ifs.' What if someone loses a job, doesn't pay
off debts as promised, disappears off your radar?" says Lili Vasileff, a financial
planner in Greenwich, Conn., who works with divorcing clients.
Expect the unexpected. After Shelly Church got divorced, her daughter was invited
to play on a volleyball team that traveled extensively. Ms. Church, a financial
adviser at Raymond James Financial in Naples, Fla., suddenly needed to come up with
about $400 to $500 a month to cover hotel rooms, meals and other expenses.
Ms. Church advises clients to be aggressive when they project their postdivorce
cost of living, especially if they have children. Be sure to include the impact
of inflation, she says.
One thing is almost certain: "There will be unforeseen expenses," Ms. Church says.
The less you spend, the more you keep.
That is the financially savvy principle behind investing in a low-cost mutual fund
and waiting for a sale at your favorite store-and it applies to negotiations with
your soon-to-be-ex, as well.
Think carefully before hiring costly experts who advocate aggressive tactics in
an effort to boost your share of the settlement-and try to curb your own impulse
to do the same if the aim is to punish the other person. Even if the strategy works,
you could merely end up with a larger slice of a smaller pie.
A woman who was married for more than 20 years to a surgeon sought advice from Rose
Swanger, a financial planner in Knoxville, Tenn. Her husband had cheated on her
and they were getting divorced.
The surgeon earned a seven-figure income, and the woman wanted to get at least $300,000
a year in alimony. But that turned out to be unrealistic because the couple owned
two houses that were in affluent neighborhoods and heavily mortgaged, and they were
paying private-school tuition for their children, according to Ms. Swanger.
The woman already had gone through two lawyers and run up tens of thousands of dollars
in legal fees by the time she consulted Ms. Swanger, and her husband had done the
same. As the woman's legal bills grew, her credit score suffered, says Ms. Swanger,
who ultimately dropped her as a client.
"I don't blame her for trying to retaliate, but I warned her that a calm divorce
is the best divorce," Ms. Swanger says.
Keep in mind that every dollar you or your spouse spends on winning the divorce
is a dollar you can't agree to split 50-50. Couples are better off approaching divorce
as an opportunity to strike a favorable business deal rather than a chance to settle
Forgetting about taxes
Be careful not to divide assets in a way that looks fair on the surface-but which
sticks one spouse with a larger tax bill.
Before you complete the divorce papers, for example, consider how different accounts
might be treated by the tax collector.
Monica Garver, a financial planner in Johnstown, Pa., says she worked on a case
where the husband proposed a division of assets that amounted to a nearly even split
of their face value. He proposed keeping $2 million that was in an after-tax investment
account and giving his wife $2 million that was in tax-deferred retirement accounts.
"Each and every dollar [in the retirement accounts] had to pass through the hands
of the taxman before the spouse could put it in her pocket," says Ms. Garver, who
pushed to increase her client's share of the couple's assets to compensate.
Similarly, Ms. Garver worked on a case where the husband wanted to give his wife-Ms.
Garver's clientâ€”investments worth $500,000 that had cost $150,000 to purchase and
to keep $500,000 in investments that had cost $480,000.
That would have left the wife facing a much bigger tax bill on $350,000 in capital
gains, while the husband would have owed taxes on only $20,000 in gains.
Thinking the work is done
Divorcing couples often put so much time and energy into dividing up assets that
they believe everything is taken care of when the papers are signed.
But there are other important financial matters that former spouses should attend
to on their own.
For example, be sure to update your will, says Ms. Vasileff, the Connecticut financial
planner. Many people make the mistake of forgetting to do that, which can put your
intended heirs in a difficult situation, she says.
If you have a health-care proxy or a power of attorney that names your former spouse,
you may need to update that document as well, Ms. Vasileff says.
Make sure you transfer the titles for any real estate, cars, investment accounts
or other assets that were held jointly into your name, says Ms. Harty, of SignatureFD.
Change the passwords on your accounts, too, she says.
Don't forget about the future. If a divorce settlement requires your former spouse
to purchase a life-insurance policy and name you as the beneficiary, for example,
you should make sure that the premiums are being paid and that you remain the beneficiary,
Ms. Harty says. One option: Ask for periodic confirmation from the insurance company.
Investors who are millionaires-in-the-making are different in several ways from
people who are already millionaires, a new study reveals.
The millionaires-in-the-making include more women and minorities than today's millionaires,
according to the survey of 1,064 investors with $50,000 to more than $10 million
in total investable assets. The survey was conducted by Bellomy Research for Fidelity
Investments to try to pinpoint affluent investors' attitudes and behaviors.
"More women are on track to become millionaires in the future," says Fidelity Executive
Vice President John Sweeney.
The survey divides affluent investors into four categories: emerging affluent investors
(the millionaires-in-the-making) with a median of $250,000 in investable and retirement
assets; mass affluent, with a median of $800,000 in investable assets; millionaires,
$2.5 million; deca-millionaires, $11.75 million.
The findings show that:
68% of the emerging affluent investors are women, vs. 40% of those who are currently
75% of the emerging affluent are white, vs. 91% of current millionaires.
The emerging affluent are an average of 40 years old; millionaires, 62.
Only 1% of the emerging affluent are retired, compared with 51% of current millionaires.
Emerging affluent investors have a median annual household income of $125,000, which
is 21/2 times the median household income in the USA. Millionaires who are employed
have a median annual household income of $200,000.
The emerging affluent have similar careers, such as information technology, medical
fields, finance and accounting, to many of today's millionaires.
48% of the emerging affluent use a financial adviser; 70% of millionaires do.
56% of emerging affluent feel confident that their investment strategies are aligned
with their long-term financial goals; 88% of millionaires feel that way.
To be a millionaire-in-the-making, investors should get in the game early and have
a plan that will enable them to achieve their goals, Sweeney says.
He points out that about 43% of emerging affluent investors own individual domestic
stocks, compared with 75% of current millionaires.
Many people aren't millionaires-in-the making and haven't saved enough for retirement.
About 36% of workers have less than $1,000 in savings and investments that could
be used for retirement, not counting their primary residence or defined benefits
plans such as traditional pensions, and 60% of workers have less than $25,000, according
to a study from the non-profit Employee Benefit Research Institute.
If you're worried about your retirement savings, Sweeney says it's never too late
to get started. "There are always steps you can take," he says.
Some folks who are behind may need to save more and "they may not be investing in
equities, so their money isn't working hard for them. You should have a substantial
portion of your portfolio in stocks. You really need that earnings growth to have
a substantial nest egg over time."
Some people make a smooth transition to retirement, jumping into their new lifestyles
with gusto, but others have more trouble adjusting.
There are several steps you can take to make it easier, and one of them is to consider
retiring in phases, says gerontologist Ken Dychtwald, 64, the CEO of Age Wave, a
research think tank on aging issues.
"Most people assume that in retirement they have to go from working full time for
40 years to stopping cold turkey one day, but there is some benefit to doing it
in phases," he says.
Some companies are letting people cut back to three or four days a week, says Dychtwald,
who is a psychologist and the author of 16 books on aging, health and retirement
issues. That makes the transition "kind of a glide path instead of a hard stop."
Norman Abeles, professor emeritus of psychology at Michigan State University in
East Lansing, suggests discussing retirement plans with people who care about you
to get their perspective.
And begin planning for the transition a year or two in advance, says psychologist
Kris Ludwigsen, 69, of Martinez, Calif. "Start thinking about what activities are
important to you â€” hiking, traveling, cultural events, family events. This could
include what you've been doing and/or what you've always wanted to do."
Here are some other suggestions for making the transition easier:
Do some homework. Don't just think of this time as the end of your work career,
but think of it as the beginning of your retirement life, Dychtwald says. Read articles
about it, and visit websites. Talk to people who are retired. Talk to your partner.
Sign up for classes, workshops or volunteer work. "It's really a new beginning.
With our longer lives, there are ample opportunities for both new activities and
Make a list of things you have always wanted to do. Select those activities that
rank highest on your list and assess which ones are possible, Abeles says
Work on replacing your social network. Retirees often say what they miss the most
is the social interactions from work, Dychtwald says. Before retiring, it's helpful
to get some replacement social networks through classes, workshops, your fitness
center, church, volunteering. If you don't, you may spend a lot of time sitting
around at home watching TV, which the average retiree does for 48 hours a week,
Abeles also suggests maintaining contact with friends and with people who are involved
in the activities that you value. Invite them to lunch.
You have to keep making new friends, because there are "inevitable losses" as some
friends move and others pass away, Ludwigsen says.
Consider volunteering. Many people get a sense of personal pride from being productive
at work, Dychtwald says. "Pulling the plug on that and going dark for the rest of
your life and not feeling useful can be stressful," he says. Volunteer activities
can help fill that void and make the transition "more comfortable and nourishing."
Retirees have a lot of knowledge, skills and ability, and there are many activities
in communities that could use their wisdom and perspective, he says. Volunteer activities
help fill your day and give you a sense of self-worth, he says. "Giving back is
good for the soul, and it's good for the mind."
Come up with a new structure for your days and be prepared to revise it. This could
include church and volunteer activities that fit your values, Ludwigsen says. Identify
your top five priorities and then allocate 95% of your time to them, she says. "It
simplifies the decisions you have to make and is more satisfying in the long run."
Do things you've put off doing. This might include medical tests, home remodeling
or visiting family or friends in different parts of the country, Ludwigsen says.
Contemplate getting a new job. "It might be part time, or it might be something
you've never done before," Dychtwald says. "It might be less about the money and
more about the chance to keep your mind active and your life productive. Retirement
doesn't have to mean a complete full stop from work."
He says some people find that after a year or two of not working, they want a job
but they don't want to work full time or the pressure of their old job. Some people
decide to sit on a board or help someone start a business. Or they might think,
"I am going to work at Home Depot and have some fun helping people get the supplies
Get fit. Make your health a priority, Dychtwald says. "Retirement can be a great
time to focus on your own well-being."
Stay mentally alert by keeping up with the news and sports, Abeles says. If you
can afford it, travel for short periods to see places that you might enjoy. And
challenge your memory by reading, doing puzzles and reminiscing.
Consider retirement as a period of trial and error. You may not get it right on
your first try, Dychtwald says. You have time to try out different activities, different
social activities, different ways to organize your day. "There's a whole world of
opportunities sitting in front of you and now you have the time to poke around,"
he says. "What is particularly traumatic is thinking that everything is final, and
all your decisions are permanent. They need not be."
Think of your retirement as "an adventure. It is an exploration."
Saving aggressively for retirement doesn't mean you have to live on canned beans
It's easy to make small changes that will make a big difference in your retirement
savings, say financial experts Lynnette Khalfani-Cox, founder of AskTheMoneyCoach.com
and author of Zero Debt: The Ultimate Guide to Financial Freedom, and Elli Dai,
director of participant services for Wells Fargo Institutional Retirement and Trust.
Recent statistics highlight the need for some changes: Middle-class people in the
USA have a median of $20,000 saved for retirement, far short of the $250,000 they
think they'll need during that time of their lives, according to a new Wells Fargo
survey of 1,001 adults, ages 25 to 75, with a median household income of $63,000.
(Median means half earn more, half less.)
Khalfani-Cox and Dai offer these suggestions for boosting your savings:
> Create a budget. Most people think creating a budget means they'll be in a
"financial straitjacket. They think a budget means deprivation," says Khalfani-Cox
says. "But instead of thinking of a budget as a list of what they can't buy, they
should look at it as a spending plan of action."
A budget helps you set priorities so you can become more focused and save for your
goals, she says. Some people are overwhelmed by the idea of trying to save more
because they have so many bills and other expenses, Khalfani-Cox says. "Sometimes
people tell me they can't afford to save, and I say, 'You can't afford not to save.'
> Cut spending without feeling deprived. Eliminate the things you won't really
miss so you don't feel like you're going into "severe restriction mode," Khalfani-Cox
says. You might stop eating lunch out daily or cancel some cable TV channels that
you don't watch.
Dai adds that if you make one change in how you spend your money today, however
small it may seem, you can make a difference in your retirement savings. "When you
combine several seemingly small changes, they can add up to make a big difference
in your retirement savings over time."
> Don't make minimum payments on credit card debt. "It's a complete financial
trap," says Khalfani-Cox, who once had $100,000 in credit card debt and paid it
off in three years. "Minimum payments in the short run mean maximum payments in
the long run. It means so much more money in interest." Instead, double and triple
the minimum payments.
> Negotiate better interest rates on your credit cards. Don't be afraid to
call your credit card company, she says. It's a competitive market, which means
you have leverage.
> Don't dig yourself deeper into debt. Change whatever financial behavior
got you into debt in the first place, Khalfani-Cox says. This is something to keep
in mind during the holidays. If you spent too much last year and had to dig out
of a hole, try not to do it this year.
Many people end up in debt through no fault of their own, but they have been hit
by what she calls "the dreaded D's â€” downsizing, divorce, death of the main breadwinner,
disability and disease. These are five personal pitfalls that can throw people into
debt and limit their ability to save money."
In this case, it may take time and patience to dig out of debt, she says.
> Turbocharge your savings. Contribute to your 401(k) plan or other type
of employer-sponsored savings plan, especially if you are getting a match, which
is essentially free money, Khalfani-Cox says. "You are getting Uncle Sam's help,
too, because you're not getting taxed on those contributions."
> Consider another turbocharged option. Look into getting an Individual Development
Account (cfed.org/ida), Khalfani-Cox says. This program is available to low- to
moderate-income people who want to save toward a specific goal, such as a down payment
on a home, college costs or job training. These accounts are supported by non-profit
groups, companies and government agencies and provide matching funds. The savings
may be matched 2-to-1, 3-to-1 or even more.
> Sell things you aren't using. Take a look in your basement, attic, garage
and drawers and get rid of things you're not using. Sell them on websites or have
a yard sale. This money should be earmarked for savings.
> Adjust your withholding. If you think you're going to get a tax refund,
you may want to adjust your withholding now so your tax refund isn't as large in
the spring, says Dai of Wells Fargo. Be sure to increase your savings at the same
time so you don't end up spending the extra money in your paycheck.
> Take advantage of pretax savings accounts through your employer. These
may include flexible savings accounts, health savings accounts, dependent day care
flex savings accounts and transportation flexible spending accounts, Dai says. If
you're going to pay for those things, anyway, you might as well use pretax dollars.
> Plan for the unexpected. Have an emergency savings account so that if you
have an unexpected house or car repair or medical expense, you don't have to stop
saving for retirement or dip into your retirement savings, Dai says.
> Learn to cook. "One of my favorite non-traditional savings tips for people
is to learn to cook," Dai says. The savings come in many ways: less eating out,
buying fewer packaged (more expensive) groceries and possibly eating a healthier
diet, which could lead to lower long-term health care costs, she says.
Knowing your credit score and knowing how to improve it are two of the most important
things consumers can do ensure they reach their long-term goals. The three major
credit rating agencies -- Experian (EXPN), TransUnion and Equifax -- collect information
on all of us, looking at how we spend our money, pay our debts and mess up. They
use that boatload of data to create your FICO score, which in turn is used by lenders
to determine your credit risk. And that credit score can determine whether you will
be turned down for a car loan -- or if you'll get the 0 percent interest incentive
rate or if you'll have pay 18 percent.
Here are 11 steps you can take -- and they may take a few months -- to repair any
damage you've done.
1. Get Going
The first thing is to review your credit report for accuracy. Mistakes can and do
happen. Sometimes the information given to the credit agencies is simply wrong,
and they don't fact-check unless you request it. Sometimes you're a victim of misidentification;
perhaps someone with the same name fell behind on payments, and it ends up on your
record. Each of the three credit agencies is obligated to provide you with a free
report once a year. It's best to cycle through them every four months so you can
regularly monitor the accuracy of the information.
If you find an error on your credit report, immediately file a free dispute form
with the credit agency. It is then required by federal law to attempt to validate
the information by checking with the creditor who reported it in the first place.
That creditor has 30 days to respond, and if it cannot do so, the matter should
be resolved in your favor. And while you can remove wrong items from your credit
report, don't expect to game the system and erase mistakes that you really did make.
3. Be Responsible
This one is a no-brainer, but it may be the most important thing you can do: pay
your bills on time. Greg McBride, chief financial analyst at Bankrate.com, calls
it "the low-hanging fruit." Paying your bills on time and demonstrating responsible
debt management over time accounts for two-thirds of your credit score. "If you're
not doing that, it doesn't matter what else you do," said McBride. If you can't
do that, at least make the minimum payment and preferably pay as much as you can.
Missing a payment is a real black mark.
4. Avoid Deadly Sins
Some mistakes will ding your credit score -- but others will demolish it. Bankruptcies,
defaults on a mortgage, some unpaid tax liens and defaults on student loans stay
on your record for 10 years or longer. Most other mistakes get erased in seven years,
and they tend to fade in importance over time. McBride says "the passage of time
works to your benefit. Recent events count more and carry more weight than the missteps"
you made in years past. He adds that "a credit rating is like a reputation: it takes
a long to build, but it's easy to destroy."
5. Manage Credit Cards
If you are doing everything else right, think about card management. "Don't focus
on the number of cards you have," says John Ulzheimer, credit expert at CreditSesame.com.
"Focus on how you manage them." Your credit score is partly determined by what's
known as the utilization rate. That's determined by dividing your outstanding balance
by your credit limit. Ideally if you can keep that below 10 percent, it can boost
your credit score, but letting it rise above 30 percent can work against you. Above
all, don't max out on any cards. That is, don't spend 90 percent or more of your
credit limit. Lenders tend to view this as irresponsible spending.
6. Get More Than One
Lenders like to see two or more cards on your credit report. It shows that you are
able to manage your spending responsibly. Ulzheimer says having multiple cards is
like having credit score insurance because it can help to lower your utilization
ratio -- but only if you're still able to pay them off in full each month. However,
"if you use credit cards as a supplement to your income," he says "then you're not
doing yourself any favors." If you have cards that you're no longer using, don't
cancel them; just shred them. Closing an account reduces your utilization rate.
7. Ignore Store Come-Ons
Chain stores lure you on with discounts (like 20 percent off your first purchase)
if you apply for their store credit cards. Don't do it. It temporarily lowers your
credit score each time you apply to open a new account. However, you're not punished
for shopping around for a mortgage or car loan. McBride says the credit agencies
assume that you're buying one home or one car if you submit more than one application
within a 30-day period.
8. Ask, and You Shall Receive
If your account is in good standing for at least six consecutive months, you can
usually request a hike of $500 to $1,000 in your credit limit. This is a good way
for young people who are starting to establish a credit history by improving their
utilization ratio. Again, this comes with a warning: it only helps if you don't
use the extra credit as a signal to spend more -- but it's there if you really need
9. Do the Math
If your credit score is above 750, you're considered an elite borrower and usually
eligible for a lender's best deal. But if your score is in the 600s, you may get
the loan, but pay through the nose. Here's the difference: on a five-year car loan,
a elite borrower might get a 0 percent deal, while the lower-rated borrower could
pay as much as 18 percent. The difference adds up to thousands of dollars saved
or lost. On credit cards, people with solid credit scores usually pay about 16 percent,
while those with poor credit scores can be saddled with onerous annual percentage
rates in the high 20s. There's a colossal difference in how much you'll pay in the
10. Establish Credit
Young people are often in a Catch-22 situation: you need a credit history to get
a lender to extend you credit. But there are some things you can do. The first option
is to become an authorized user on the credit card of your parents or a really,
really good friend. This establishes a baseline credit history that will help when
you apply for your own credit card. The credit card company holds the other person
(parent or friend) responsible for the payment. If you mess this up by charging
too much, it can hurt their' score. On the other hand, if you're responsible, you
get the benefit of their good credit history. Another option is to get a secured
card. You deposit as little as $300 with a bank that issues a card that has that
much money available to spend. You can "refill" the card, and once you've established
that you can handle your money, you can apply for a real credit card.
If you're planning a big purchase -- a home or a car, for example -- work on these
points three to six months ahead. "Every basis point of interest that you pay is
real money," said Ulzheimer, suggesting that you also go on a credit hiatus by paying
down cards as much as possible and avoiding any new debt.
A third of people (36%) in the U.S. have nothing saved for retirement, a new survey
In fact, 14% of people ages 65 and older have no retirement savings; 26% of those
50 to 64; 33%, 30 to 49; and 69%,18 to 29, according to the survey of 1,003 adults,
conducted for Bankrate.com, a personal finance website.
"These numbers are very troubling because the burden for retirement savings is increasingly
on us as individuals with each passing day," says Greg McBride, chief financial
analyst for Bankrate.com. "Regardless of your age, there is no better time than
the present to start saving for your retirement. The key to a successful retirement
is to save early and aggressively."
Other recent research confirms that many people aren't saving enough for their golden
years. About 36% of workers have less than $1,000 in savings and investments that
could be used for retirement, not counting their primary residence or defined benefits
plans such as traditional pensions, and 60% of workers have less than $25,000, according
to a survey of 1,000 workers from the non-profit Employee Benefit Research Institute
and Greenwald & Associates.
Many people realize that they are not on track in saving for retirement, and the
two most important reasons they give are cost of living and day-to-day expenses,
says Jack VanDerhei, the institute's research director.
He advises people to join the 401(k) plan if their employer offers one and to make
sure to contribute at least enough to receive the maximum employer match. "Contributing
anything less than that is leaving free money on the table," he says.
Other findings from the Bankrate.com survey:
- Some people are starting to tuck away retirement savings at an earlier age. About
32% of people ages 30 to 49 started saving for retirement in their 20s compared
with 16% who began in their 30s. About 24% of people 50 to 64 started saving for
retirement in their 20s, vs. 21% who began in their 30s. About 16% of people 65
and older started saving for retirement in their 20s; 15% in their 30s; 17% in their
- 24% are less comfortable with their debt than they were a year ago; 23% are more
- Job security, net worth and overall financial situation are areas in which people
have seen improvement over one year ago.
- 32% of people are less comfortable with their overall savings now than they were
a year ago; 16% are more comfortable.
"Month in and month out, consumers sound a dour tone about how they feel about their
overall level of savings," McBride says. "Many people know they are undersaved whether
it's for emergencies, retirement or both."
By Christopher Doering - USA TODAY
WASHINGTON - New parents beware: Your little angel is going to cost you a bundle.
A middle-income family with a child born in 2013 can expect to spend about $245,340
for food, shelter and other expenses up to age 18, an increase of 1.8% from 2012,
the Agriculture Department said Monday.
The report, issued annually by the USDA since 1960, found housing was the single-biggest
expense, averaging about $73,600 or 30% of the total cost of raising a child, followed
by child care/education at 18%.
The remainder went to food, transportation, health care, clothing and miscellaneous
expenses during the same period.
"In today's economy, it's important to be prepared with as much information as possible
when planning for the future," Kevin Concannon, USDA's food, nutrition and consumer
services undersecretary, said in a statement.
The report found geographic variations in the cost of raising a child. They were
the highest in the urban Northeast at $282,480, followed by the urban West at $261,330
and the urban Midwest at $240,570, which includes Iowa and South Dakota. The urban
South came in the lowest at $230,610 for each child.
Child care costs have soared dramatically since the first report 53 years ago. Back
then, a middle-income family could have expected to spend $25,230 ($198,560 in 2013
dollars) to raise a child until the age of 18. Housing was the top cost for parents
back then, too.
The USDA report said that as families have more children, their costs decline.
A family with three or more children can spend 22% less per child than those with
two children, a result of kids sharing toys and clothes and parents purchasing food
in larger and more economical amounts.
The study noted that families can expect to spend more as their income increases.
A family earning less than $61,530 can expect to spend $176,550 on a child while
homes earning more than $106,540 can expect to spend $407,820. Households in the
lowest group spent 25% of their before-tax income on a child, the middle 16% and
those in the highest group 12%.
If you are woefully behind on saving for retirement, then try to delay gratification
on purchases, save your raises and pay off credit cards, financial experts say.
A national survey out Tuesday shows that about 36% of workers have less than $1,000
in savings and investments that could be used for retirement, not counting their
primary residence or defined benefits plans such as traditional pensions, and 60%
of workers have less than $25,000.
Like workers, many retirees are also short on funds, with 29% of them having less
than $1,000 in savings and investments, and 58% of them having less than $25,000,
according to a telephone survey of 1,000 workers and 501 retirees from the non-profit
Employee Benefit Research Institute and Greenwald and Associates.
USA TODAY asked financial experts for their five best tips for boosting savings
and income now and during retirement:
Â• Delay gratification. Don't buy everything you see, says Gary Schatsky,
a New York City financial planner and president of ObjectiveAdvice.com. People have
to take stock of their needs vs. their wants. "Needs must be met. Wants can be delayed.
One of the things you need is a good retirement plan, some savings for emergencies
and a plan for the future."
You have to make a priority list of what you need and want, he says. "You can enjoy
lattes, dinners out and vacations as long as you are saving. You have to decide
what's important to you and start saying no to the things that are not."
Â• Save 10% to 15% of your annual income. "While that may seem like a daunting
amount, if you set it up early, you can learn to live on the amount that's left,"
says Fidelity Investments Executive Vice President John Sweeney. "We recommend putting
10% to 15% right into retirement accounts, because a lot of our retirement savings
is going to be up to us."
By investing in a 401(k) or 403(b), or an Individual Retirement Account (IRA), you
can reduce your taxable income, he says. "You are saving money because you are paying
taxes on the lower income level."
Â• Take advantage of matching contributions. If your employer offers matching
contributions in your workplace savings plan, take it, Sweeney says. Many employers
offer a 3% match on an employee's first 3% contribution.
Â• Save your raise. "If you get a raise, bank it," Sweeney says. Consider
investing all or a portion of your raises each year, he says. You can do the same
with bonuses or tax refunds.
Â• Pay off high-interest-rate credit card debt. If you are paying 18% interest
on credit card debt, "that's eating a hole in your pocket," Sweeney says. It's important
to pay it off, if you can, or the second choice is to think about ways to reduce
the interest payment, such as getting a home equity loan that has a lower interest
Another option for some people is to continue working during their retirement years,
says Nick Ventura, CEO of Ventura Wealth Management in Ewing, N.J. "Many part-time
jobs exist in retail, health care and other businesses. Helping people and bringing
life experience to these jobs can be very rewarding for many retirees."
Exactly how much you will need for retirement is complicated because there are so
many variables, including your essential expenses (food, housing, health care) and
discretionary expenses (travel, clothes, entertainment, dining out), Sweeney says.
"Everybody's situation is going to be a little different."
People often underestimate how long they are going to live, he says. "A quarter
of us will live into our early 90s, so we are really planning for a retirement that
could last 30 years."
All that said, Fidelity offers this rule of thumb: Save at least eight times your
final salary to help increase the odds that you won't outlive your savings during
30 years in retirement. This amount assumes that you'll get some money from Social
Security and that your expenses after you retire will be lower than when you were
working, Sweeney says. Higher net-worth folks usually need to save more than eight
times their final salary, he says.
Most people aren't trying to figure out how much they'll need in their golden years.
Most people have very little tucked away for retirement, and many aren't even trying
to figure out how much they'll need later in life, a new national survey reveals.
About 36% of workers have less than $1,000 in savings and investments that could
be used for retirement, not counting their primary residence or defined benefits
plans such as traditional pensions, and 60% of workers have less than $25,000, according
to a telephone survey of 1,000 workers and 501 retirees from the non-profit Employee
Benefit Research Institute and Greenwald and Associates.
Only 44% say they or their spouses have tried to calculate how much money they'll
need to save by the time they retire so that they can live comfortably in their
golden years, the survey shows. Workers who have done calculations on what they
need to save tend to have higher levels of savings than those who haven't crunched
"There's an incredible difference between those lucky enough to have a retirement
plan and those who don't," says Jack VanDerhei, the institute's research director
and co-author of the 2014 Retirement Confidence Survey. "What's really striking
is that 73% of those without a retirement plan, such as an IRA, 401(k) or 403(b),
have less than $1,000 in savings and investments."
The reason defined benefits weren't included in the total is most people don't know
how much those are worth, he says.
Many people realize that they are not on track in saving for retirement, and the
two most important reasons they give for not saving more are cost of living and
day-to-day expenses, VanDerhei says.
People's confidence that they'll have a comfortable retirement has risen slightly
after record lows of the last five years, with 18% of workers in 2014 saying they
are very confident they can retire comfortably, up from 13% who were very confident
in 2013. Meanwhile, 24% are not at all confident they have enough saved for a comfortable
retirement, about the same as 2013.
Retirement confidence is present mostly in people with higher incomes and in those
with retirement plans, VanDerhei says.
The survey "highlights the impending retirement crisis that we will face over the
next 20 years," says Mark Fried, president of TFG Wealth Management in Newtown,
Pa. "When I see these numbers I have ask the question: How did we get here? We need
more financial education in the schools, in the media, in the workplace."
If possible, people 40 and older should try to save up to 20% of their income, he
says. "If you can't afford to do that right now then set this as a target, and as
you get annual raises put aside part of each raise until you reach the 20% number,"
Invest in your company's retirement account up to the match. One of the best ways
to increase your retirement savings is to take advantage of your employer match
if you have one, he says.
John Piershale, a certified financial planner at Piershale Financial Group of Crystal
Lake, Ill., says: "Try to imagine how much you are going to need to have saved up
to last you 20 to 30 years during retirement. The only way you can figure that out
is do some retirement calculations. We help clients figure this out."
If people are way behind in saving for retirement, they may need to work longer
at their current job or get a second job to help fill the savings gap. Piershale
says. "If you had the idea that you were going to retire at 62 or 65, and you don't
have enough saved up, then you have to keep working."
Other survey findings:
Debt is weighing heavily on many people, with 58% of workers and 44% of retirees
saying they have a problem with their level of debt.
Like workers, many retirees are also short on funds, with 58% of them having less
than $25,000 in savings and investments, not counting their primary residence or
defined benefits plans (traditional pensions); and 29% having less than $1,000.
Although 65% of workers plan to work for pay in retirement, only 27% of retirees
say they are working for pay during their golden years.
Total savings and investments reported by workers, not including value of primary
residence or defined benefit plans such as a traditional pension.
Less than $1,000, 36%
$1,000 to $9,999, 16%
$10,000 to $24,999, 8%
$25,000 to $49,999, 9%
$50,000 to $99,999, 9%
$100,000 to $249,999, 11%
$250,000 or more, 11%
Total savings and investments reported by retirees, not including value of primary
residence or defined benefit plans such as traditional pensions:
There are few things in life that let you do a do-over. Retirement is not one of
So, if retirees had an opportunity to do something differently to prepare for their
golden years, which mistakes would they correct?
Financial advisers, asked about their clients' biggest regrets, had a bunch.
"Over the years I've certainly had to have difficult conversations with my own clients,"
says Tash Elwyn, president of Raymond James & Associates. "There are two or three
key mistakes Â— people planning for too early a retirement or too lavish a retirement.
"And, unless you have someone who can counsel you, they can get off track and live
to regret in years down the line," he says.
Elwyn says he sees living too lavishly most often among business executives.
"I've worked with many successful business executives and business owners," says
Elwyn. "Naturally, they envision a life in retirement that is just as lavish as
when they were employed Â— business trips that include five-star hotels Â— whereas,
in the real life of retirement, to fit their financial resources, retirement may
require that they change their standards and change expectations. That adjustment
can oftentimes be challenging for successful business people."
Elwyn says another key mistake people make is that they fail to make provisions
for catastrophic events. "Whether it's a major medical issue or a debilitating illness,
those that find they are not only financing their own retirement, but an adult child
who has returned after a job loss aren't accounting for real life. Planning can't
just be for best-case scenarios, and far too often it is."
"A well-constructed plan, whether with advice of a professional or not, needs to
account for success, as well as challenges and failures," he says.
Pete Lang, President of Lang Capital, in Hilton Head and Charlotte, N.C., says the
regrets he sees most among his well-to-do clients don't generally involve catastrophic
money mistakes. Lack of proper planning is generally the biggest issue, he says.
"The top one is, in general, the failure to have a financial plan," he says. "That
includes a tax plan, an income plan and an investment plan. I left out an estate
plan because you don't need an estate plan to retire. But I'm not saying you shouldn't
The top tax regrets are failure to use a tax-forward plan, such as whether to defer
Social Security to minimize taxes and increase annual payouts.
Other tax regrets:
Premature IRA withdrawals.
You want to take out the least amount possible,
because IRAs are tax deferred. Defer taxes as long as possible, unless you need
the money, Lang says.
Botched Roth roll-out strategy.
Biggest regret is when they failed to make
a Roth conversion in a down year. When the market tumbles, you pay less in taxes
to convert a traditional IRA to a Roth.
Not getting out of Dodge.
Not moving to a new city or state as a tax-reduction
strategy. "You have to consider state taxes, local taxes, property taxes and even
federal taxes," Lang says. "Clients say, 'I paid way too much in taxes on all these
different levels.' A move to a tax-friendly jurisdiction for retirees would have
Clarence Kehoe, executive partner in accounting firm Anchin, Block & Anchin, says
he sees six big regrets from clients.
1. I didn't save enough for retirement, and I spent more than I should have in my
peak years. "You should be saving significant amounts in those peak earning
years as you get closer to retirement. People see their salaries go up, and they
continue to spend instead of save. People have been living beyond their means, and
their retirement expectations are not realistic."
2. I leveraged myself too much during my peak earnings year. "People go out
and live on credit cards," says Kehoe. "It's a terrible way to spend and live."
Those who use home equity to buy a car or take a vacation often regret it, he says.
"People are losing focus in that they should be saving. They over-leverage themselves
and borrow too much. I teach this to all my kids. If you can't afford to pay a card
off at the end of the month, you can't afford to be buying on the credit card."
3. I retired too early. The two problems with retiring too early: "You have
less (time) to save, and you have a longer period of retirement that you have to
provide yourself for with an inflow of income," Kehoe says.
4. Why did I take that money out of my IRA or 401(k)? "To take money out
of your plan at an early age is a real killer, because that dollar you take out
in your 20s compounded over 30 or 40 years, could grow into a significant amount.
It's in your plan; leave it there."
5. I thought Social Security was supposed to provide for me. "A lot of people
have the perception that Social Security would take care of them," Kehoe says. "It
was originally part of a three-legged stool Â— your pension, your own savings and
Social Security. People put their stock and faith in the Social Security system.
Even if you believe in the Social Security system, demographically it's a bad time.
When it was put in place, it was supposed to pay people at just about the expected
age of death. More and more people are counting on it more and more. Ten employees
were supporting every one retiree; now it's three employees supporting every one
retiree. There are more people on retirement and less people to pay for the system."
6. I was a picture of health in my middle age. "As we get older, the strain
on our bodies increases," Kehoe says. "You can't keep up with things. It surprises
a lot of people what the cost of good medical care can be. We do rely on government
to take care of us, but there are outside expenses the government won't pay for.
Consider long-term care insurance or some sort of supplementary insurance."
The first get-together is usually free. Make the most of it.
By APARNA NARAYANAN - The Wall Street Journal
Thinking of taking your muddled finances to a financial adviser for some professional
assistance? Many advisers offer prospective clients an initial free meeting. You
should consider meeting with two or three people to compare their approaches and
your comfort level with each of them.
Here are pointers from people in the business on preparing for these meetings and
then making the most of them:
BEFORE YOU GO
Decide what help you are seeking. "Do you want financial planning or investment
management?" asks Alan Moore, founder of Serenity Financial Consulting LLC in Milwaukee,
Wis. The former can involve advice and recommendations on one or two questions—or
comprehensive attention to your entire financial picture; the latter involves turning
over one's investment portfolio to a professional. Some advisers provide both services,
but others don't.
Your needs will help determine appropriate professionals to interview. Advisers'
websites should give you an idea if that provider is a potential fit for your needs.
"Good sites will explain what [planners] do, who their target client is, and how
much their services cost," says Frank Boucher, founder of Boucher Financial Planning
Services in Reston, Va.
Understand how each adviser is paid. You want to fully understand each person's
compensation arrangements and possible conflicts of interest. Some advisers get
paid only by their clients, in fees that are hourly or a flat sum or a percentage
of assets under management. Others get commissions from financial-services companies
for selling products, or a combination of fees and commissions.
An adviser whose compensation is strictly tied to the sale of products may be susceptible
to bias. Product sellers, unlike most fee-paid advisers, may not be operating as
fiduciaries who legally must put your interests first.
Lillian Meyers, president and founder of Meyers Financial in Sonoma, Calif., describes
commissions as an alternative form of payment. Ms. Meyers, a hybrid fee-and-commission
planner, says she may collect a commission for selling an annuity or life-insurance
policy in lieu of getting paid a fee for her time.
Get organized. Some advisers ask to see pay stubs, tax returns, investment
records, pension statements, even monthly budgets at an initial meeting. Others
seek to keep the first meeting as casual and painless as possible by not requiring
any documents at all. Still, reviewing key documents could make you better prepared
for your conversation and for subsequent meetings with the adviser you select.
Ms. Meyers insists on three years' tax forms at the first meeting. "When people
don't show me their tax returns, it really shows me that they are not serious,"
she says. She adds that the intended use of a tax refund—say, to clear credit-card
debt, or to pay property taxes—can shed light on how clients approach their
AT THE MEETING
Be realistic. Don't expect immediate answers to your financial-planning need
or concern, says Leslie Corcoran, founder of Family First Financial Planning in
Stuart, Fla. "We have just met you, and we have only glanced at your information."
A good planner tries to get to know a client and to read their documents in full
before making a personalized recommendation, she adds. "We don't have the answer
in the desk drawer ready for you in most cases."
Susan John, president of Financial Focus Inc., a firm based in Wolfeboro, N.H.,
and a past chair of the National Association of Personal Financial Advisors, describes
a pet peeve: clients who bring to the introductory meeting a copy of an online newsletter
or investment advisory that touts extraordinary returns without regard to risk,
and who ask "Can you do better than that for me?" On the flip side, experts say,
be wary of any adviser who promises to deliver superhigh returns; there are no guarantees
in financial markets.
Listen to your instincts. Relax, ask questions and get a sense of the adviser's
communication style, says John Belluardo, founder of Stewardship Financial Services
Inc. in Dobbs Ferry, N.Y. Clients "need to feel comfortable with the person because…they'll
be working through very personal financial issues."
Mr. Moore says that, as advisers, "we're asking clients to financially undress for
us." The first meeting is a chance for prospective clients to decide if they are
comfortable with an adviser. You are looking to have your questions answered in
simple, jargon-free terms, he adds.
Be aware that you are also being assessed. While the planners may be interviewing
to get your business, they are also trying to gauge whether you are the right fit
for them. An adviser may decide that your personality or your finances aren't right
for his or her practice.
From the first meeting, a good adviser is also trying to get a deeper understanding
of prospective clients, including issues or concerns that aren't stated.
In the case of spouses, many planners prefer—but don't require—that
both be present for the first meeting. "My preference is to see them both in the
room," says Mr. Moore. "My focus is always to find out what's going on underneath
Know that an initial meeting might turn into two. The first meeting with
a planner may not be enough to judge whether he or she is the right match, says
Ms. Meyers. If that is the case, she recommends that prospective clients give the
planner at least one more shot—even if it means paying for the second meeting.
"If they pay, they feel a lot freer to say, 'Now, give me something today that I
can walk home with and do something about.' "
Ms. Narayanan is a writer in London. Email her at firstname.lastname@example.org.
Finding a financial adviser you can trust is one of the most important financial
decisions you need to make. Before meeting with a new adviser you should make a
list of the questions you have, come prepared with details about your personal finances,
and be ready to talk about your life goals as well. Here are some tips for preparing
for a first meeting with a new financial adviser.
Brush up on the basics. You should enter the conversation with a basic understanding
of personal finance and investing. You don't need to be an expert or create an entire
retirement plan by yourself. But if you don't even know the difference between stocks
and bonds, it would be easy for someone to push financial products that are not
in your best interest.
Prepare to share your numbers. You should figure out how much money you have
and estimate how much you are spending. The more details you have on your numbers,
the better someone else can help. It's nearly impossible for an adviser to give
appropriate and specific advice if he or she doesn't know the total assets you have.
Find an adviser who works with people like you. Try to seek an adviser who
primarily works with individuals who are in the same financial situation as you.
There's no point working with an expert who is used to working with young families
with few assets when you are about to retire and already have a decent chunk of
retirement funds and vice versa.
Keep an open mind. You should have an open mind when you take advice from
someone. Having at least a vague idea of whether you would rather invest in funds
or individual stocks or bonds, for example, can help you choose an adviser more
Be prepared to talk about your goals. Sit down and have a heart to heart
talk with your family about your career, life, and retirement goals. In the investing
world, higher potential returns require taking on additional risks. But you don’t
always need to shoot for the maximum return on your investments. You need to accumulate
enough to meet your goals. If your life goals are rather modest compared to the
amount you regularly save every month, then you really don’t need to be too
aggressive with your investments.
Find out how the adviser is paid. Figure out whether you are more comfortable
with an adviser who charges you an hourly fee or a percentage of your overall assets.
Take notes. Bring a notebook and a pen so you can write down everything your
adviser is suggesting. Then you can go home and think about his or her suggestions
before you decide what to do. The financial industry is filled with conflicts of
interests and you need to do your due diligence. You have to make sure that you
understand how these investment choices affect you.
Prepare a list of questions. Unless you can remember everything you will
ever want to ask your adviser, I suggest taking the time to write it down. You are
paying a financial adviser to answer your questions in the detail that you think
is appropriate. When it comes to your own money, it's generally better to know more
than to know less.
David Ning runs MoneyNing, a personal finance site aimed at helping others change
their habits for a better financial future. He suggests that everyone to sign up
for an online savings account to get more out of our hard earned money.
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