Posts Tagged ‘Income’

Here Are 3 Questions (and answers) About Your Retirement

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October 23rd, 2011

Question 1: How long will you live?

Bingo! This is the key question to retirement. Laura Carstensen, Ph.D., director of Stanford University’s Center on Longevity says, "You could plan your money really well if you knew exactly when you were going to die. Unfortunately, it doesn’t work that way. None of us has a guarantee."

What to do?

But you can buy another kind of guarantee, an assurance that, however long you live your money will not run out. It’s sold by life insurance companies, and it’s called an ‘immediate annuity’. Annuities have gotten a bad name, largely because of the abusive sales of "deferred" annuities, a kind of fee-heavy investment. But ‘immediate annuities’ are different.

Question 2: How much will I earn on my investments?

It used to be that any college freshman who hadn’t dozed through Economics 101 could tell you what investments will earn in the long run. Drawing on 85 years of market data compiled by the Chicago research firm Ibbotson Associates, everyone assumed U.S. stocks would earn about 10 percent a year on average; bonds, around 5.5 percent; and a half-stock and half-bond portfolio, around 8 percent.

Answer

Suppose you had saved $500,000 by age 60. If all went well, you’d have a bit more than $1 million in the bank by age 70. At today’s annuity rates, that would buy you an annual income of $87,000 for the rest of your life. Not bad. But if you’d had the misfortune of turning 60 in 2000, the dawn of the ‘lost decade’, you’d have reached retirement 10 years later with barely the same $500,000 you started with. Your annual annuity income from that sum today: just $39,000.

What to do?

You can build in a margin of safety by plugging very low returns into your retirement calculators.

Question 3: How much income will I need?

Now you’re ready to adjust your plan based on shifting market realities. But what, exactly, are you supposed to adjust? It’s not as though you can decide to live longer or choose what your investments will return. There is, however, one big question over which you do have some power, says Alicia Munnell, Ph.D., director of the Boston College Center for Retirement Research: how much income you will need to be comfortable.

What to do?

Save. Regularly. The benefit of saving more each month is obvious. If markets perform well, a dollar saved today could grow to two dollars or five dollars at retirement. Even if the markets produce one lost decade after another between now and your retirement, a dollar saved is still a dollar you wouldn’t otherwise have in the future. That’s why planners who once advised saving 10 percent of your salary now recommend 15 percent. It’s all about the margin of safety.

Maybe you shouldn’t retire after all. Good health and employer willing, you can also choose when to retire. "Retiring later is a very powerful lever," says Munnell. "It completely changes the arithmetic."

How?

It raises your monthly Social Security benefits.

It allows your retirement savings to accumulate for more years, possibly helping you regain lost ground.

It shaves the number of years you’ll need to live off your savings. Remember, just because you work longer doesn’t guarantee you’ll live longer.

Finally, you can choose to live on less income than you may have initially aimed for.

Tags: Immediate annuities, Income, Longevity, Retirement
Posted in Business, Economy, Employment, Finance, Personal / Internet, Retirement | No Comments »

Retirement Planning: Avoid Mistakes

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August 27th, 2011

One bad decision can ruin a lifetime of good ones

Actions have consequences, and this is more than true in the final third of life. If you are at or near retirement, the decisions you’re about to make will have consequences for decades to come. Unfortunately, it only takes one bad decision to ruin a lifetime of good ones. So what are the biggest mistakes to avoid?

Link your retirement to your bank account

If asked when you’ll retire, your answer should be a dollar amount, not a year. Retirement is about independence, not simply age, and money is critical to independence. You need to know exactly how much you need to save to fund the retirement you want.

Managing your risk

Risk is a necessary companion to investing. When you’re in your 20s and 30s, you can afford to take greater risks in hopes of receiving greater returns. If you lose money, you have decades to recover. Not so as you approach retirement. You can’t afford to operate at the same risk level. As you age, you need to progressively shift out of potentially volatile investments. During retirement, large losses in your portfolio are extinction-level events. The bigger the loss, the worse the recovery. If markets have taught us anything during the last 10 years, it’s that you need a plan to manage your risks and avoid large losses.

Senior risks

The same is true for a whole host of new risks that come with growing older. A serious medical condition, the death of a spouse, getting laid off, entering a long-term care facility or getting divorced could all significantly impact your emotional and financial well-being. The goal is to consistently identify and manage your risks in order to increase your odds of a rewarding retirement.

Minimize debt

An increasing number of people are entering retirement age with no pension, inadequate savings, a big mortgage, an average of about six credit cards, and debt on one or more cars. Work is not a choice at that point any more than it’s a choice for a 30-year-old with all the same obligations and a growing family to feed. Debt adds risk and reduces cash flow. Your primary goal should be to retire debt-free and have your income at your disposal. If you retire with debt, you will spend a long period paying for the purchases of yesteryear instead of using your income to live the life you’ve dreamed of. Get professional advice. Preparing for retirement is all about accumulation, saving and investment performance are your primary concerns. But in retirement, your primary goal becomes much more complex: to continue to grow the pie while simultaneously eating it. Going without a competent adviser at this stage could be a big mistake.

Distribution strategy

When you retire, your portfolio takes over the job that the payroll department handled during your working years, namely to send you a paycheck every month. If you retire when you’re 65 and live until you’re 85, it needs to cut you 240 monthly checks. There are a host of variables that will affect its ability to do that, such as the distribution rate you choose, investment returns, inflation, how long you live, and good old-fashioned luck. Some things you can control and others you can’t, but having a well-conceived, sustainable distribution strategy will help ensure that your money lasts as long as you do.

Tags: Income, Investments, Portfolios, Retirement, Seniors
Posted in Economy, Employment, Finance, Money, Retirement | No Comments »

Why Is My Retirement Different from My Dad’s?

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August 14th, 2011

How much do you need to invest to live off your money?

It’s a long time ago and I don’t have the details, but I remember that my Dad quit working when he was 65 and spent the next 18 years pruning the roses, tearing up the golf course and reading the papers.

I’m 73 and still working and trying to stretch my salary from one end of the month to the other. Somehow, my retirement is different and it’s not me that’s to blame. Other things have changed and left me out in the cold. So I work and the truth is, I enjoy it. I like waking up in the morning knowing that I have something to do.

On the other hand…

I often think about stopping work, especially on the days when things don’t go so well. I find myself making mistakes and I find myself not understanding a conversation or argument as I used to. Perhaps it’s time to quit…

Question: How much money do I need?

Answer: How much longer do you intend living?

Many people think there’s some magic number of how much they need to have to be set for life financially. And I suppose there is a number that’s big enough that it would cover the financial needs of most people. But the amount of money we must have to get us by in life depends on how much we spend or need each year. And there’s just no way to give a pat answer that will be appropriate for all investors.

I’d also like to maintain my standard of living

Let’s say I want $50,000 a year. Inflation is about 3.5% a year and income returns about 5% a year. Using these numbers as a guide shows that I have to put away $1.2 million dollars at the beginning of the 30 year period. No good for me. In any case where can you get a 5% return? That’s a key to the puzzle. With U.S. Treasury rates so low, you’ll need to take some risk to achieve 5% yields in the current environment.

A portfolio

One example portfolio that might get you there could be a mix like IFA.com Portfolio 10, which is the safest one the investment firm offers. This portfolio holds 8% in U.S. large company stocks, 4% in small company stocks, 2% in real estate, 4% in international, 2% in emerging markets and 80% in bonds. Historically, which isn’t a predictor of future success, over time this portfolio generated a long-term average return of 5.6% on average a year. But with the added risk, including the exposure to stocks, investors need to be aware that a few bad years in the market could curtail your gains.

Do the exercise

Again, the above scenario may not be right for you or for most people. However, the exercise of backing into how much money an investor needs to reach a goal, and understanding what risk must be taken to get that return, is a valuable exercise for all. Guess I’ll just keep on working, mistakes and all.

Tags: Income, inflation, interest rates, Investments, Retirement
Posted in Business, Economy, Employment, Finance, Retirement | No Comments »