I told the story elsewhere of how my wife and I woke up in our late 40s to the fact that our investment cupboard was bare. We were not alone, millions of Americans in their 40s or 50s don’t have nearly enough money saved to retire.
So what can you do if you find yourself in that position? After you shake off the scorn of the self-righteous around you and stop beating yourself up, it is time to get to work because the good news is that there is hope. We managed it. You can do it, too.
The first step is you have to cut your expenses to the bone. The key number you’re looking to improve is the difference between your income and your expenses, and the quickest and easiest way to do something about it is to focus on reducing your expenses.
If you are serious about getting caught up, Step 1 is to put together a budget, listing income and expenses. Then you need to put the knife to the expenses, sparing no holy cows: vacations, eating out, movies, hobbies, smartphone, car(s), everything has to come under the knife.
The good news is that you are usually at or close to your peak earning years, so creating a surplus is usually a lot easier than for a 20-something. But still, it isn’t going to be easy. Expect pain. Saving and living on a budget is not pleasant, especially if you are not used to it. Doing it to catch up is even less so.
2. Earn more
Set a target, starting small, like $200 a month. Find things to do like moonlighting, selling off collections, or monetizing a hobby — the list of possibilities is limited only by your determination to catch up.
Here is an interesting thing many people discover: Once you start pursuing opportunities for extra income, more present themselves. It’s almost as if they crawl out of the woodwork. Then you can begin to set your target higher.
Many discover that once they begin to turn their hobby into an income, they do better than they expected and it becomes a natural segue into a fulfilling and profitable retirement. But you rarely get there without taking that first uncomfortable step.
3. Save aggressively
Rather than save what is left over between your income and expenses, save first — and force your expenses to match what is left over. If you don’t pay yourself first, chances are you will not get caught up.
Make maximum use of the tax-advantaged funds available to you. My wife and I made our first priority maxing out both our IRA and 401(k) contributions. Easy, it wasn’t; but desperate times call for desperate measures and results trump easy when you are in the position of playing catch-up.
On top of the retirement accounts, pay down as much on your home mortgage as possible. That’s most everyone’s largest expense, and once that is gone, your monthly nut drops significantly.
4. Research social security
I heard from a financial planner that there are 587 ways for married people to file for Social Security. How and when you do it can affect your payout significantly. This is something we didn’t do, and we still haven’t figured out how to do it without involving financial planners who want to sell you annuities.
5. Plan to work past 62
Many people fixate on 62 because it is the youngest age at which one can begin to collect social security. However, if you have a job and can hold on to it, it will be worth your while to plan on staying past 62. The good news is that life expectancy is increasing and improved health means many more people are capable of working well beyond 62.
However, increased health and longevity can be a double-edged sword. It means we all will probably live longer than the generation which preceded us. In turn, that means that whatever funds you have set aside for your retirement will need to last longer than you anticipated.
Working past 62 not only adds to the fund, it postpones the day you begin to draw against it.
6. Change your lifestyle
This might sound the same as cutting expenses, but it is meant to cover a lot more. Think of it as Phase 2. This is where you would explore options like going from two cars to one, scaling down your home to the minimum you can live in.
If you are looking at an underfunded retirement, you know at some point you will have to make drastic changes to your lifestyle. The earlier you do that, the less likely a change like this will be traumatic for you.
7. Stop supporting dependents
It may sound callous or cruel; but if your retirement fund is short, it makes no sense to put the needs of children, their families, or other people who should be taking care of themselves before your own needs if that would result in your ending up unable to support yourself.
Once your finances come into line, you can always resume doing nice things for others. However, continuing to support dependents when you are at financial risk is short-sighted.
8. Become knowledgeable about investing
Warren Buffett’s famous rule for investing is: “Don’t lose it.” That, of course, refers to avoiding unnecessary risk. However, when you are 50 with no retirement fund, you have forfeited to a large extent the luxury of picking investments with modest earnings but high security that you would have enjoyed in your younger years.
There are investments with higher returns than safe index funds, but reaping those requires more than a passing knowledge. You might think of it as another career, and in a way it is. The only way to “not lose it” is to know more than most other people, and that takes time and effort.
If this sounds like an uncomfortable topic and strategy, it is. “No pain, no gain” is not just true with exercise. But if you know it up front, you can knuckle down and get where you want to be.
What got my wife and I through the serious sucking-it-up part of getting ready for retirement in a hurry was our view that this was a challenge, a project. We never had a woe-is-me attitude. Instead, we looked at it as a challenge — not easy, but not impossible, either.
Admittedly, we didn’t have to make emotionally tough choices like cutting back on things for kids or grandkids, and we didn’t have health issues, which can wreak havoc with any plan, normal or catch-up.
We also had a few investments work out unexpectedly well for us. Although there is no guarantee that will happen, I suspect it happens to many people; but when it does, they react like I did when I was younger: they celebrate by spending it. When you are in project-mode, those windfalls don’t disappear. They become crucial building blocks.
Is it easy to catch up building your nest egg when you wait till it looks too late? No. But it is possible — and, in balance, that is at least some good news.
If you are old enough, you will remember 1973, when OPEC caused the price of oil to quadruple. (If you’re too young, simply Google “1973 oil crisis images” to see an endless parade of people stranded at gas stations with hand-written signs like the one in the picture.)
That crisis changed life in America forever, starting with an almost instantaneous recession, as businesses couldn’t absorb such a dramatic hike in one of the most pervasive costs in the economy. The malaise brought on by the oil shock lasted more than a decade. Inflation became a part of daily life, while the economy stagnated, giving rise to a new term: “stagflation.”
It got worse in 1979, just when ordinary people had become used to higher oil prices, and it precipitated the worst recession since the Great Depression. Home mortgage rates spiked to over 18 percent before the economy recovered (as it always does).
Since then, we’ve all adjusted to an environment which includes high oil prices.
Our high-oil-price world
New home appliances continue to use less energy. When our furnace went out recently after 30 years of service, even the cheapest model we could buy was way more energy efficient than the dinosaur headed for the landfill. The biggest users of oil — namely, automobiles — continue to use less fuel every year too. It wasn’t much more than a year ago when manufacturers tried to outdo each other with their 40 mpg mainstream models — unthinkable even 10 years ago. We don’t bat an eyelid at electric cars anymore, even luxury electrics like Tesla.
The adjustment is due, in part, to Government regulation; but it also reflects a shift in our culture and values. Despite the culture of conservation, however, the development of other countries and general population growth across the world have led to a consistent rise in the demand for oil. Production has kept pace; but, as Jigar Shah, founder of SunEdison pointed out recently, about 3.8 million barrels per day’s worth of low-cost production is lost each year as older, low-cost wells run dry. Adding capacity to replace that supply requires higher-cost sources. If those sources are not developed, demand will outstrip supply and the oil price will rise again.
In 2008, the price of oil spiked above $100 for the first time, but the financial crisis saw worldwide demand decline and, with it, the price of oil. As the world’s economies recovered, though, so did demand and the oil price, until the world seems to have become accustomed to oil prices north of $100.
That environment brought us things like fuel surcharges on just about every bill we pay, and hybrid and electric cars. It even caused a bit of a renaissance in the railroad industry as long-distance freight shifted from trucks to more efficient intermodal rail transport, causing the illustrious Warren Buffett to start buying up the nation’s railroads one by one.
As high prices tend to do, it also created a “new” industry: American and Canadian oil production from shale and tar sands. Those technologies only work when oil prices are high, though; but when they work, they seem to work extremely well — so much so that the United States in 2014 was poised to become the world’s largest oil producer.
That’s when things changed, however, in rather quick and dramatic fashion. According to Abdullah al-Badri, its Secretary General, OPEC decided in November not to cut its production to compensate for the additional American production, thus creating an oil glut of about 1.5 million barrels a day.
Consequently, 2014 saw one of the most dramatic drops in the oil price since those first two oil shocks, as this chart from the Federal Reserve shows:
So, did this drop bring joy and happiness to all who have suffered for the past 40 years? Not nearly as much as you would expect.
Airlines have reaped a windfall, naturally, but have come out declaring publicly that they are not passing the savings on to consumers. UPS started imposing fuel surcharges back when oil prices were high, but have not made any significant reductions since the price of oil started falling. I’ve seen no reports of utilities dropping their rates as natural gas and oil prices have reached historic lows either.
The list goes on. Knowing how businesses live to make profits, I guess that is not surprising. In time, if oil prices remain low, competition will soon create cracks in the dam and those costs will start to drop, too. But…
Will oil prices stay low?
My guess is not, and I base that on the the comments referred to above, of OPEC’s Secretary General. A recent Reuters report quotes him as saying, “Now the prices are around $45-$50 and I think maybe they reached the bottom and will see some rebound very soon… It will take some time,” he said. “It will take another four-five months and we will not see some concrete efforts before the end of the first half of the year due to the reason that we will see how the market behaves at the end of the first half of 2015.”
So, now we have two independent factors tracking for significant changes this summer:
- OPEC revisiting its oil pricing strategy
- The Federal Reserve revisiting its intention to raise interest rates
Should those two events coincide, it is not beyond the realm of reason to expect the economy to react negatively.
Moral(s) of the story
1. Don’t buy that gas-guzzler on the assumption that oil will stay low. (Conversely, if you have one, it will fetch a good price now.)
2. If you considered getting into energy stocks or mutual funds, now may be a good time.
3. Be prepared for disproportionate price increases as the same businesses who didn’t drop prices with low oil prices use the rising oil price as justification.
I ran into my old buddy Jake at the local outpost of a well-known, high-priced donut chain. I had just spent the better part of a sawbuck on a powdered donut hole and thimble of java when I noticed Jake seemed to be lacking his usual Christmas spirit.
His brow was furrowed, and he looked worried and perplexed. I wasted no time asking him what in the name of sugarplum fairies was wrong. Didn’t he know this was the holly-jolly time of year for chestnuts roasting on open fires, one-horse open sleighs and stoplights blinking a bright red and green?
“That’s it: It’s the holidays, man,” he sighed.
The holidays? How had the holidays depressed him? Had he gone into a store for a flat-screen TV sale, and been steam-rolled in a customer stampede?
“No, that’s not it,” he moped.
Had one of his zero percent APR credit cards been targeted in a major discounter’s massive data breach, leaving him to discover his number was being peddled around the globe by black market privateers?
“You’re not even close,” he lamented.
Had he bivouacked for days and nights outside a mall in freezing temperatures prior to Black Friday, only to be rushed by ambulance to a hospital with a case of pneumonia mere minutes before crowds stormed the opening doors?
“Don’t make me laugh,” he moaned.
Well, what is it then? What would make a normally cheerful dude look grimmer than Bob Cratchit trudging in to work Christmas morning at the corporate campus of Scrooge & Marley, Inc., LLC?
Hydra-headed holiday harangue
“It’s these conflicting messages we’re always being fed by the media,” he said. “On the one hand, they tell us that we’re not saving enough money for college and retirement and medical expenses and everything else.”
“And then they tell us that retailers are not enjoying the kind of Christmas shopping season they had anticipated, that sales are off, that customers are being too tight-fisted with their dollars and that they’re so used to sales that they don’t shop anywhere but where they can score the best deals. They’re saying some huge retailers might not make it if they don’t rack up big profits this holiday season. And you know who’s to blame? We are!”
I see what you mean. You feel kind of guilty?
“You bet I do,” he continued. “The other day I went out to the mall, and I was going to load up the car with tons of presents and holiday ornaments and boxes of candy for all my friends, relatives, co-workers and neighbors. I flipped on the radio just before I got there and heard an announcer saying that millions of people are going to have to depend almost entirely on Social Security in retirement.”
So what’d you do?
“Well, I jammed on the brakes, pulled a U-ey and went right back home. That’s going to be me if I don’t start conserving the cash, y’know. If I don’t get going, I might spend my 65th birthday feasting on Whiskas for Kittens.”
Damned if you do — and don’t
“Don’t you get it? This dismal shopping season could be a signal that the economy is weaker than expected, sending us spiraling into another recession and making it even harder for me to save. I might not even be able to afford Whiskas for Kittens on my 65th. It could turn out to be 9 Lives.”
Well, you’ll just have to head back to the mall, then.
“I did, but when I got out to the mall, I heard another radio report about Americans’ awful saving rates. So I turned around and was almost home when I got another earful about how stingy we shoppers are. I just kept on driving back and forth to the shopping center all day. Didn’t buy a thing.”
Later, I ran into Jake at the tire store, picking up a couple steel-belted radials.
“Turns out the left-side tires on my car are bald,” he explained, “from all the U-turns I made this holiday season.”
Happy holidays, Everyone!
An acquaintance of ours returned from a missionary trip to Tanzania recently. As these cross-cultural encounters go, each side had plenty to share with the other about their lives. Toward the end the trip, she asked one of the locals what stood out from everything the Americans related. It was that there are people on this earth who actually spend money to walk. (He was referring to Americans either buying treadmills or paying gym memberships to walk on them.) They (everyday folk in Tanzania) have no choice but to walk miles every day, and they simply have a hard time imagining walking as a luxury for which one would pay serious money.
That story illustrates, for me at least, that almost everyone living in America is among the top 1 percent of the world’s wealthy. This topic of the 1 percent drew a lot of headlines and attention earlier this year, highlighted by the publication of Thomas Piketty’s book, “Capital in the Twenty-First Century.” (Even before the book’s publication, I even had this to say about the topic.)
The outcome of the recent mid-term elections has been dissected and analyzed by hundreds, all striving to put a fresh spin on the events. Not surprisingly, one of the streams of comment has focused on the campaign contributions of the super-rich, questioning whether inequality is allowing a handful of people to dictate your life and mine by buying legislation, if not just buying the legislators themselves. One of the more interesting books on that subject was published a few weeks before the elections: “Billionaires, Reflections on the Upper Crust,” by Darrell West, a big shot at the Brookings Institution, who took a look at the lives and politics of the richest thousand or so Americans.
I haven’t read the book yet, but I saw an extract which lists the richest Americans and what they are doing to influence politics. I also came across two well-written reviews. One, by one of the most popular business authors of our time, Michael Lewis, was on the “Billionaire” book, and the other one was by one of the “extreme inequals,” Bill Gates, of the Piketty book.
Mr. Gates posted a long article on his personal blog, in which he reviewed “Capital in the Twenty-First Century.” In it, he agrees with a few of Mr. Piketty’s general points:
- “High levels of inequality are a problem — messing up economic incentives, tilting democracies in favor of powerful interests, and undercutting the ideal that all people are created equal.
- “Capitalism does not self-correct toward greater equality — that is, excess wealth concentration can have a snowball effect if left unchecked.
- “Governments can play a constructive role in offsetting the snowballing tendencies if and when they choose to do so.”
He also agrees with the fundamental point that taxation of labor is disproportionately high, compared to tax on capital. Not only is income by wage earners (ordinary people from the 99 percent) taxed more highly than income from capital, corporations paying out those wages are taxed on those wage expenses as well, while they pay no taxes on interest or dividend payments. He then goes on to propose a system of taxes not on wealth (as Mr. Piketty advocates) but on expenses. In his defense for the tax structure he proposes, Mr. Gates touches on three things people can do with their wealth:
- Invest it into their businesses to grow
- Give it away through philanthropy
- Spend it
That brings us to the Michael Lewis review of “Billionaires.” In it, he tells the story of a tennis coach who held a tennis camp in New Hampshire for Eastern kids of wealth. Every morning, there would be one box of cereal for every kid, some nice and some boring. The kids would rush and jostle to get the good stuff, and the losers were left with the stuff nobody wanted. By the third morning, the coach held a meeting and told the kids, “When I’m in the big city, I never understand the faces of the people, especially the people who want to be successful. They look so worried! So unsatisfied!” Here his eyes closed shut and his hands became lobster claws, pinching and grasping the air in front of him. “In the city you see people grasping, grasping, grasping. Taking, taking, taking. And it must be so hard! To be always grasping-grasping, and taking-taking. But no matter how much they have, they never have enough. They’re still worried. About what they don’t have. They’re always empty.”
Mr. Lewis then lists numerous studies which all show the same thing: People with way more money than they need are perpetually unhappy. But, worse, not realizing that having so much more than others leaves them unfulfilled and unhappy, they keep looking to more money as the answer to that emptiness. It’s like someone adrift at sea, drinking sea water when they’re thirsty, only to discover that it leaves them even thirstier. After that, they keep thinking if they only drink even more sea water their thirst will go away.
The truth, as Michael Lewis pointed out, as corroborated by numerous studies, is that the money given away brings more happiness than the money strived for. “A … study, by a coalition of nonprofits called the Independent Sector, revealed that people with incomes below twenty-five grand give away, on average, 4.2 percent of their income, while those earning more than 150 grand a year give away only 2.7 percent.”
How about you? Money-wise, what brings you the most happiness?
From the Declaration of Independence to the space program, optimism was traditionally something of a core American value; however, it is one that has taken quite a beating in recent years.
Not too long ago, an NBC-Wall Street Journal poll found that 76 percent of Americans lack confidence that their children will have a better life than they do. That is a stunning reversal from the onward-and-upward America in which baby boomers were reared. Then again, the optimism of the baby boom generation atrophied into a dangerous complacence which has been bad for the economy in general and for household finances in particular. The following are some examples of how this complacence has led to trouble, and why the new mood of pessimism might actually be constructive:
- Consumer confidence is the key to economic growth. To this day, consumer confidence figures are closely watched for signs of where the economy is heading. There are two flaws with this. The first is that there is something of a chicken-or-the-egg relationship between consumer confidence and the economy. Does confidence really help boost the economy, or do people simply feel more confident when they are experiencing stronger growth? The more damaging flaw is that the emphasis on consumer confidence presumes that the only problem with household finances is people’s attitudes. This ignores the reality that non-mortgage consumer debt is at an all-time high. People not only do not have the means to back up their confidence, but too much optimism right now might actually make the problem worse by encouraging people to borrow.
- Investing for the long term will fund retirement nest eggs. Faith in the hefty market returns of the 1980s and 1990s led professionals such as pension consultants and personal financial planners to plug overly-optimistic assumptions into their retirement funding projections. These high assumptions created the illusion that retirement plans were on track toward being fully funded, which allowed people to skimp on their contributions to those plans. All concerned were slow to revise their methods, reassuring themselves that future returns would make up for a disappointing year or two. Now, nearly 15 years into a century of unreliable stock market returns and low single-digit interest rates, reality is starting to seep into those retirement assumptions. People may not like it, but it will force them to fund their retirement plans more realistically.
- Next year will be better. The annual raise and possibility of a bonus were long staples of the American worker’s career. It was okay to overextend the credit card, sign up for a mortgage they couldn’t quite afford, or put off saving for retirement because rising salaries would soon ease those problems. Now people are considered lucky if their wages keep up with inflation; many had to take a step back in pay as a result of the last recession. This harsh reality should encourage people to make their financial commitments based on resources they know they have, not on those they hope they will have in the future.
- Housing is an asset that appreciates over time. Banks and home buyers alike thought it was perfectly fine to forego down payments and borrow heavily against home equity because rising home prices would soon build up a healthy equity cushion. When it turned out that prices could in fact go down — and stay down — banks and homeowners alike found themselves over-leveraged and under water. A more conservative approach to mortgage borrowing should lead to a more stable housing market.
- Education is the answer. Yes, education can open doors, but it cannot perform miracles. Frustrated with the recessionary job market, Americans borrowed in record amounts to go back to school. Student loan debt jumped by over 50 percent in just five years, and now tops $1.3 trillion. Too much of this money went to programs students were unsuited for, or degrees with no career value. A more consumerist approach to education would better help people get their careers on track without wasting so much money.
- Don’t let the market leave you behind. Bandwagon markets in stocks, housing, oil, and gold have led to spectacular busts. When getting rich quickly is the promise, it is amazing how many people become blind optimists. The rush into these markets is every bit as much of a panic as the scramble to get out when things go sour. People start out desperately afraid they will be left behind and end up desperately afraid they will be ruined. Perhaps by now they’ve been burned often enough to be hunting for investment bargains rather than the next bandwagon.
Pessimists are less fun at parties than optimists. They sweat the details, worry about what-ifs, build emergency savings, and never take their jobs for granted. In the wake of the banking crisis, poor financial market returns, and an extended stretch of high unemployment, that kind of pessimism might actually be healthy and lead to a sunnier future.
Have you ever wondered why your next-door neighbor must have a new car in his driveway every model year?
And not just a new car, but a new car with all the bells and whistles, like that 18-valve, turbo-charged, dyno-flex, hydroponic 4000 engine, 57-speaker audio system with Sistine Chapel acoustics and the buttery soft leathers imported from recently-discovered islands off the Madagascar coast?
It turns out he is just giving in to the inclinations that characterize too many American big spenders, who gain their greatest joy from acts of overspending.
That’s right, many humans are simply pre-programmed to overspend, an action that illuminates the pleasure centers of their brains. To these people, saving lacks sex appeal. It is spending, not saving, that is sexy.
This is among the groundbreaking and revealing factoids presented in “Thinking Money,” a new documentary released to the nation’s public television stations October 16.
Check your local listings for time and channels in your neck of the woods — or contact your local Public Television Station about “Thinking Money.”
What a concept
For generations, commercial television programs have manipulated viewers into stupid financial tricks using a variety of carefully-crafted stratagems.
Take, for instance, a sitcom portraying a group of struggling young people who live together. Rather than a hovel, they reside in a big city apartment Bill and Melinda Gates would find unjustifiably luxe. Their clothes and hair styles would require a $10,000 weekly budget, wardrobe assistant and makeup artist.
When the laughs are interrupted for commercial breaks, the air is larded with 30-second spots for luxury SUVs and lavish cruise vacations. The viewer comes away from the experience entertained — and also convinced that the only way to be happy is to remain perennially in debt indulging her consumerist instincts.
But “Thinking Money” actually takes the 180-degree opposite approach.
It shows us why we are so susceptible to hucksters peddling everything from 32-carat diamond broaches to candy-apple-red sports coupes, why we go on overspending when we know our futures depend on over-saving, why we are sitting ducks for slick-talking Madoff-esque serpents peddling risky or ultimately fraudulent investments and why we spend too little time searching for best credit cards. These, the documentary tells us, are all natural biases common to a huge swath of the human population, and they tend most to impact us when we are dealing with complex, long-term decisions.
“Thinking Money: The Psychology Behind Our Best and Worst Financial Decisions, uses a mix of humor, on-the-street interviews and provocative insights from innovative thinkers to explore why we spend, save (or don’t) and how we think about money,” a press release for the show proclaims.
“Host Dave Coyne travels from Wall Street to Main Street, and from Yale to Santa Barbara wine country, to find out how our brains — and the marketplace — maneuver to get us to spend money we shouldn’t.”
Emotional trumps rational
As any used car salesman could tell us, people are given toward making spending decisions with their emotional brains. “Thinking Money” explains how this works. Having reached decisions emotionally, we use our brains’ rational side to justify the decision. “The only long-term solution for this is to make saving more sexy … for the brain,” reports Stanford neuroeconomist Dr. Baba Shiv.
That objective better be realized pretty quickly. The documentary shows us how bad financial decision-making is wreaking havoc upon us and our society.
As Americans increasingly live paycheck to paycheck, the number of predatory credit sources has ballooned. It was once fairly difficult to find a payday loan establishment. Today, we learn, that there are more payday loan stores in America than there are McDonald’s, Starbucks and Targets — combined.
Then there is confirmation bias, a seemingly growing hindrance to effective saving. Confirmation bias is our tendency to be drawn to information that reflects what we already believe, and shun evidence that contradicts our convictions.
If, for instance, you feel the odds of saving enough to retire are stacked insurmountably against you, you are likely to seek that kind of messaging and ignore evidence of the many people who actually do bank enough bucks for retirement. The result? You give up before you even try to save.
If, in the depths of 2008, you believe the stock market is a rigged game that can only leave you busted, you will seek folks telling you never to even dream of investing in equities. And over the next six years, you’ll miss out on one of the greatest bull markets ever to stampede the financial markets.
Finally, there is the exploding information overload about college planning, retirement preparedness, and the bonds, stocks, mutual funds and ETFs that can help you line your ducks in a row.
So overwhelming is the information avalanche that some Americans wind up paralyzed when it comes to making both the small and big decisions, and head into their 65th year with $27 in retirement savings.
An oasis of insight
So if you would like to avoid the financial trap in which all too many of your neighbors find themselves, track down “Thinking Money” and consider the time you watch a shrewd investment in your own financial futures.
American television was once famously termed “the vast wasteland.” If that is true, “Thinking Money” just might be a little buried treasure tucked amid all the sagebrush and dirt.
- More than two-thirds (68.1 percent) of the elderly poor are women.
- An October 2012 study by the American Association of University Women found that over the course of a 35-year career, an American woman with a college degree will make about $1.2 million less than a man with the same education.
- More than 70 percent of nursing home residents are women, whose average age at admission was 80. In 2006, the average annual cost of a private room in a nursing home was $75,000 and a shared room almost $67,000.
- It is a well known fact that women live longer than men.
- A 2010 survey by Transamerica Center for Retirement Studies shows that just 8 percent of women feel they are already educated enough to successfully reach their retirement savings goals.
Where am I going with listing all these statistics? Women need to take their retirement planning seriously. Women will be much better off if they acknowledge this problem and take action now instead of waiting for their retirement years to address it. So what can women do to better prepare for a long retirement?
Start planning now
Whether you are a working woman, a stay-at-home mom, a mom with a son or daughter in college or just starting out in college, you have to think about your retirement now. As mentioned earlier, statistically, women live longer than men; they also tend to retire earlier than men. Put together, women have a much longer retirement than men. If you are going to be retiring early, you won’t have the entire 35 to 40 years to save. So you will probably need to put away more money than an average man to have the same income in your retirement. If you have not done so already, take stock of what you have already saved; calculate exactly how much you will need for your retirement and how much money you have to set aside every month to reach that goal.
Put your money to work even if you take a break from your career
Women tend to take the role of a caregiver more than men, which means they are more likely to take a break from their career for a few years or work part time. Just because you are taking a break doesn’t mean your retirement savings has to take a break as well. If you are stay-at-home mom, open a spousal IRA and set aside the maximum amount allowed. If you work part time, take retirement benefits into consideration when you are choosing a job. If you are interested, create a small business in an area that you like and that won’t interfere with your care-giving duties. Then set aside as much as possible in a solo 401k plan.
Don’t quit your career
You can take a break from your job; but if you had a career before you decided to quit, don’t completely quit your career. Keep in touch with your colleagues, keep your knowledge fresh by reading journals in your field; if you have any time to spare, pick up volunteering or an open-source project that can be done from home. Take a certification course to update your skills. When you do rejoin the workforce, double up your effort to save and catch up on savings. If you are over 50, don’t forget to take advantage of the higher catch-up contribution limits.
Be involved with the family finances
If you are one of those women who doesn’t take much interest in finances other than the basic home budget, please set aside some time and study your entire finances — your tax returns, bank accounts, assets, debts, insurance and your investments. (What investments do you and your spouse own? How are they doing? Do they match your goals? Do they match your risk tolerance as well as your spouse’s?) I am not saying you should not trust your spouse, but make sure you and your spouse are on the same page when it comes to goals and planning. If you are not confident about investments, take time to learn more about them or meet with a financial adviser who can guide you.
Put your retirement savings first – before your kids’ braces and college savings
It is natural to put your kids first in everything you do; but in this case, you will be doing your kids a favor by putting your retirement at the front of the queue. Otherwise, you might end up in a situation where your kids will have to support you. They can take a student loan for college education, but you can’t borrow for your retirement.
Understand how divorce and remarriage affect Social Security benefits
Divorce and remarriage is not uncommon. There are plenty of horror stories on stay-at-home moms sacrificing their career to raise the kids only to find themselves single, without any retirement savings or job prospects once the children are grown up. In a divorce, you will most likely be entitled to half of your spouse’s retirement assets. You are also entitled to Social Security payments equal to 50 percent of your ex-husband’s benefits, if you were married for at least 10 years. If you remarry, you will lose those benefits but you will be entitled to collect payments based on your new husband’s benefits. If you are a widow, you can receive full benefits at full retirement age for survivors or reduced benefits as early as age 60.
The path to retirement is a little more challenging for women than for men. But by planning early, saving diligently and investing wisely, women can overcome any obstacle and take charge of their retirement.
If you didn’t hear it on the news, you probably noticed it the last time you filled up your car: gasoline prices have been dropping lately after holding fairly steady for a year or so, following world oil prices.
After clicking your heels at the gas station when nobody was looking, you probably got in your car and started wondering: Is this for real? How long can it last? Is this just one of those blips you can clearly see on the chart, or are we seeing a fundamental shift toward lower energy prices? If lower energy prices sound like a dream, that’s because, in our lifetimes, we’ve only see them go up. However, the notion of a long-term drop in energy prices may not be so totally far-fetched.
Three mega-trends could account for the drop:
1. Natural gas
America has been the world’s largest producer of natural gas for a while now, and at record low prices. Common sense says the natural (no pun intended) thing to do is to switch to natural gas usage from liquid petroleum wherever possible. Doing that, though, is not quite as simple, because natural gas usage is limited by infrastructure: You need pipelines to bring the gas to where it is needed. The nation’s major railways are considering a wholesale switch from diesel fuel to natural gas … but they can’t until pipelines are installed to bring the gas to their refueling points.
There is one area where the switch has been happening, and that is home heating energy sources are shifting away from heating oil to natural gas.
For more than a decade, we’ve seen a myriad of initiatives, plans and efforts to reduce our use of oil in general, and imported oil in particular. This chart, produced by the White House from Energy Information Administration (EIA) data shows that we are currently importing less than 50 percent of our petroleum needs these days:
One of the biggest reasons for importing less oil is we are using less of it, regardless of where it comes from. This chart drawn from EIA data shows just how dramatic that drop is:
One of the biggest reasons we use less oil is the increasing fuel efficiency of automobiles sold in America. According to the EIA, average fuel efficiency has almost doubled from just over 15 miles per gallon (mpg) in 1977 to almost 30 mpg in 2013. What is remarkable about that is that the average horsepower per vehicle has gone up over the same period, not down — increased efficiency, indeed.
Oil is being pumped from more locations at more places around the globe. Even more important, though, is non-OPEC production sources are growing, giving OPEC less control over capricious price-setting. The USA, in particular, has seen its share of world oil production increase dramatically in the past few years, and it shows no sign of slowing down anytime soon.
However, even though America is the largest oil user in the world and its demand has been dropping, China, India and other developing nations are increasing their demand for oil, and that has kept prices from dropping.
But this year, that seems to have changed. For some reason, prices started plummeting during the summer months. What could the reason be? Could it be that demand somewhere suddenly started increasing?
In a word, no.
If you dig a little deeper, it becomes apparent that we are witnessing a power struggle of enormous proportions. America’s oil production is increasing as it’s usage is dropping, and a lot of American oil is hitting international markets because the mix of oil we produce doesn’t suit our refineries. Saudi Arabia, concerned that crude oil production in the USA and other countries could be cutting into its revenues at a time when the Arab Spring is causing it to increase its domestic spending, is putting on an old-fashioned monopoly play. It is pumping out more oil to drive prices down, ignoring distressed calls from fellow-OPEC members to back off. As prices drop, the Saudis seem to hope the nouveau-riche oil producers will start losing money and be forced to quit. Their production cost is around $27 a barrel, while the US shale oil costs over $60 a barrel.
In the long run, those oil princes in Saudi Arabia, to cope with their post-Arab-Spring world, need or want oil prices of $100 a barrel or more. From all accounts, it seems they are content to push the price down for a short while just in order to flush out some of their producing competitors; but as soon as that mission is accomplished, this dip will be nothing more than a dip in a chart.
In other words, this is a high-stakes poker game, with billions of dollars at stake … and that includes what you pay at the pump. Will the Saudis succeed? They did before, as the first chart shows, and they have always managed to secure their billion dollar income stream from competitors. Time will tell, but, in the meantime …
What does this mean to you?
The general public has demonstrated a tendency to make long-term decisions based on the assumption that immediate circumstances will continue forever. In past years, when gas prices dipped, sales of gas-guzzling SUVs soared, and sales of energy-efficient smaller cars slumped. If that history were to repeat itself, you can expect to see sales of smaller cars, hybrids, and electrics to slump yet again. Along with that, you can expect those used car prices to drop too.
Therefore, you are entering a window where, if you haven’t done so yet, you will be handed a golden opportunity to fetch a good price for that SUV that keeps growling at your wallet whenever you pull into a gas station. Conversely, you can expect to see better and better deals on the gas sippers.
However, don’t make the mistake of thinking lower gas prices are the new normal. A few oil princes in Saudi Arabia are playing a game, which will end soon.
As they say in show business: “Stay tuned.”
It’s a good thing that I am a planner by nature because, dealing with personal finance as I do involves a lot of long-term planning. So it might seem a little odd for me to take this position, but there are times when your finances might be better for not having made a plan — or at least for not being completely ruled by your plans.
Don’t take this too literally because planning has its place, but planning can also become tyrannical. It intimidates people from undertaking projects. Once a project is undertaken, too much reliance on planning can make people blind to better alternatives.
So the message here is don’t let planning become obsessive. The following are some examples of when freedom from planning can come in handy:
- An opportunist’s career. I have benefited greatly from not having a career plan. I went to college with the intention of becoming a journalist, but the job market was so tight when I graduated that I basically took the first non-fast food job I could find, which was in the operations department of an investment firm. One thing led to another: I got promoted, the firm grew, and I started to learn about the business. It turned out to be a very rewarding career, financially and psychologically. Then, when I got older and wanted to slow down a little, I decided to quit, take some time off, and see what happened. I gradually got into freelance writing, and that has snowballed into a legitimate second career. So, I am back to my first love — writing — but with more money in the bank and more marketable skills because of my investment experience. Not only didn’t I plan this, I’m certain I couldn’t have. Instead, not having a career plan made me more open to seizing the opportunities that presented themselves to me.
- The intimidation of big goals. So, let’s talk retirement savings. Suppose you are just starting your career, making about $30,000 a year, and I tell you you’re going to need to save $2 million to retire. From the point of view of someone making $30,000 a year, that may seem impossible — so intimidating a goal that it does not seem worth starting. I know someone who actually says he doesn’t save for retirement because he’ll never be able to afford to retire anyway. He’s just joking — I think. Anyway, suppose instead we look at your budget. We find a way to carve a couple hundred a month out of that $30,000 a year for retirement savings. For now, we don’t worry about how far that will get you in the long run. The important thing is that you have made a start, and when you get a little closer to the destination, starting to fill in the details will make more sense.
- Analysis paralysis. The other thing about retirement planning is that you can get caught up in the details involved. How do you figure out what you will be earning in ten years, or what inflation will be over the next 30 years? There are several similarly difficult assumptions to make in order to put together a retirement plan, and the problem is some people get so caught up in trying to formulate the perfect plan that they delay getting started. You are better off just making some big-picture guesses and then adjusting your assumptions as the answers become clearer.
- The deception of long projections. One reason not to get too caught up in your assumptions up front is that any slight inaccuracy is going to become magnified over the time frame involved in retirement planning. And inaccuracies are often more than slight. Who knew that savings account rates were going to drop to nearly zero or that we would see two major bear markets within the first decade of this century? Those developments have made a mockery of some very well-thought-out retirement plans, so understand going in that this is largely an exercise in guesswork.
- Adapt and survive. Not obsessing about planning does not mean blithely going through your career unconcerned with retirement saving. Start early, do the best you can, and take stock of where you are now and again. Just don’t go into it thinking that a good plan will see you through the next 40 years. There will be surprises and, even if those surprises shoot holes in your original plan, don’t give up and think your efforts were for naught. Keep yourself open to adapting to survive.
Ultimately, none of the above should discourage you from making plans, but they are simply reasons not to get too attached to your plans. After all, any plan is just a vehicle to get you to your destination, so don’t mistake the plan itself for that destination. You should not wait for the perfect vehicle in order to get on your way, and neither should you refuse to dump your current vehicle if a better one becomes available.
For those investing for retirement, target-date funds sound like a great idea. Say you want to retire in 2030. Simply purchase a 2030 target-date fund, the wisdom holds, and the fund will do a lot of the heavy lifting for you when it comes to your investments.
But like that time you tried to pass your literature midterm by scanning the Cliff’s Notes of “Crime and Punishment,” taking the easy way out may not be your best strategy here either. As one expert says, target-date funds are “the one-stop shop for mutual fund investing.” In selecting the holdings comprising the fund, target-date fund managers choose a higher concentration of high-risk, high-return holdings in early stages, gradually converting to lower-risk holdings as the target date nears.
The result is that the target-date mutual fund investor is investing more aggressively at younger ages, when he or she can afford to take greater risks, and more conservatively at later stages, when lower risk is the order of the day and something to be avoided.
“A target-date fund is really a mutual fund of mutual funds, because instead of owning a basket of stocks or bonds, they own a basket of other mutual funds,” says Phillip R. Christenson, chartered financial analyst with Phillip James Financial in Plymouth, Minnesota. “Each fund has a ‘glide path’ that dictates how the fund will adjust its allocation over time.”
For example, he says, a 2030 target-date fund might start with a 75 percent allocation to stocks. By the time 2030 arrives, the fund’s allocation will have been adjusted down to perhaps 35 percent in stocks, reducing the risk.
The result is that one of the most challenging aspects of investing for retirement, asset allocation, is performed for the investor. The investor gains diversification across a variety of asset classes, and enjoys the sense of not having to wade even toe deep into the varying merits of different investment choices. That makes target-date funds a favored choice among many who recognize the need to invest for retirement but are new to the market and relatively unschooled in its nuances.
Not so fast
Unfortunately, like a lot of areas of life that promise an easy approach if you put on blinders to cost and just leave things to others, target-date mutual funds have a number of drawbacks. The first, and one of the biggest, is that they tend to suffer from above-average expense ratios.
And those higher expenses can nibble away at returns over a longer period of time, like between now and, say, the year 2030.
Another negative is that in an ideal world, a number of factors making up your individual investor profile would be taken into account in determining the right investments for you. They would include your financial goals, your investment time horizon, your income, your assets outside the stock market and your ability to sleep at night should the market cliff-dive. But target-date funds consider only one of those factors, investment time horizon, in their investment allocations.
An additional downside is that target-date funds operate as if you have no other assets in your portfolio. Again, in a perfect universe, when making investment choices you would choose stock market investments you don’t already hold. Doing so adds the attractive virtue of greater diversification to your portfolio.
But when choosing target-date funds, you may be investing again in stocks you already own, resulting in less, not more diversification.
In addition, says Christenson, “a [target-date] fund won’t know if you have other stocks in your portfolio, so the fund may have you at a 50 percent allocation to stocks, but when you look at your overall portfolio, that’s actually allocated 70 percent to stocks. Is that the right allocation for you?”
Under the hood
One of the most suspect issues about target-date funds is this: If you are retiring in 2030, you’ll want to know the target-date mutual fund is selecting underlying investments just right for that 16-year window.
But how can you be sure it will achieve that goal when different 2030 target-date funds have widely differing investments underpinning them? You’ll be taking on more risk in some 2030 funds, less in others, based on which you choose.
Christenson examined a number of target-date funds for the same year, finding that not only did the allocation differ, from say 80 to 70 percent in stocks, but the quality of the investments varied as well. “One fund might invest in very high-grade bonds, whereas another might invest in riskier junk bonds,” he says.
“You have to look under the hood to see exactly what they own.”
Hmm. And how many target-date mutual fund investors will even know how to open the hood?
Ultimately, what many tout as target-date funds’ greatest attribute, simplification, ends up as their undoing as a bull’s-eye of a great investment. These funds not only simplify, they oversimplify. That turns out to be a significant handicap in a world where every investor is different, and requires different investment strategies.
The ultimate takeaway on target-date funds: Aim higher.
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