Showing posts with label financial planning. Show all posts
Showing posts with label financial planning. Show all posts
Friday, February 28, 2020
Coronavirus and the Perils of Pricing Stocks for Perfection
The past week's tailspin of stocks into a correction is a reminder that the law of gravity has not been repealed in the financial world. Until just recently, the high flying stock market, having steadily risen since 2009, was priced for perfection: everything had to go well or gravity would assert itself. In such circumstances, bad news can have an outsized effect.
Not surprisingly, the trigger for the downturn was a black swan--a stock market term for an unexpected event that is very bad for the market. Typically, black swans are the triggering events for sudden market nosedives. The 2008 bear market that coincided with the beginning of the Great Recession was triggered by losses hitting a poorly understood cobweb of linkages between and among the real estate, mortgage, bond and derivatives markets that concentrated real estate lending risks into the heart of the financial system. Large mortgage losses were magnified into a tsunami of financial pain by daisy chains of supposedly offsetting derivatives contracts that wound up consolidating risk instead of dispersing it.
Coronavirus (or COVID-19) is today's black bird. It calamitously began in the world's factory, China. This meant that it would spread quickly because so much global commerce--and therefore global travel--would circulate through China. Its high rate of transmission was not fully appreciated at first, and those giving early warning were treated as Cassandras instead of being taken seriously. So the disease spread quickly and a massive shutdown of major parts of China was imposed. Commerce slowed precipitously and corporate losses are piling up fast. The World Health Organization has warned that the disease has become a very high risk. In short, coronavirus is on the verge of becoming a pandemic, and the prognosis is guarded.
The stock market finally got the message, and had a hissy fit, dropping into a correction in five trading days. More losses are likely in the near term future. Opinion is divided on whether the current market is a buying opportunity or a septic facility to be avoided. If you're set on putting money into this market, make sure it's money you won't need for at least ten years. Medical science is getting a better understanding of COVID-19 by the day, and chances seem good that eventually we will learn to cope with the disease and contain its impact. But when that day will be remains speculative, and you should speculate only with long term money that you can afford to lose.
Sunday, November 11, 2018
The Best Asset in a Time of Volatility
All markets are volatile these days. Stocks are gyrating, bonds are falling as interest rates increase, oil is bouncing up and then down, bitcoin has fallen all year, and even the real estate market seems to be going wobbly. Gold and silver have been slipping away. And foreign markets look even gloomier.
Investors naturally look for opportunities when prices fluctuate. Whether you're a buyer or a short seller, price movements create the potential for profit. Volatility is gut wrenching if you're taking losses, and can stimulate panicky selling when prices are low. But it can be exhilarating if it looks like a lucky break.
That's why cash is often the best asset to hold in a time of volatility. It gives you the means to take advantage of fortuitous price movements, while its stability insulates you from the emotional roller coaster that often drives people to sell when prices are dropping. Don't think that you have to remain fully invested all the time. What you have to do is remain unemotional, as emotion is the enemy of careful investing. A nice, comforting cushion of cash can prevent an unwanted flood of adrenaline.
Cash may appear to have a low rate of return, with greedy banks still paying miserly rates of interest on deposits even though interest rates have been rising. But cash also offers the potential to profit from price volatility. You can dive into an asset when its price is low and make a bundle when it rebounds. That potential makes the effective return from cash much higher. So don't be afraid to hold a lot of cash in a time of volatility. That's when it's an investor's best friend.
Investors naturally look for opportunities when prices fluctuate. Whether you're a buyer or a short seller, price movements create the potential for profit. Volatility is gut wrenching if you're taking losses, and can stimulate panicky selling when prices are low. But it can be exhilarating if it looks like a lucky break.
That's why cash is often the best asset to hold in a time of volatility. It gives you the means to take advantage of fortuitous price movements, while its stability insulates you from the emotional roller coaster that often drives people to sell when prices are dropping. Don't think that you have to remain fully invested all the time. What you have to do is remain unemotional, as emotion is the enemy of careful investing. A nice, comforting cushion of cash can prevent an unwanted flood of adrenaline.
Cash may appear to have a low rate of return, with greedy banks still paying miserly rates of interest on deposits even though interest rates have been rising. But cash also offers the potential to profit from price volatility. You can dive into an asset when its price is low and make a bundle when it rebounds. That potential makes the effective return from cash much higher. So don't be afraid to hold a lot of cash in a time of volatility. That's when it's an investor's best friend.
Sunday, August 5, 2018
To Manage Your Money, Manage Your Emotions
Building up your wealth is simple: spend less than you get. But it's hard for many people even though it's simple. Put a little money in their hands and it's gone as quick as a flash. Put a lot of money in their hands and it's gone quicker than a flash. This is no way to get rich. If you spend everything you get, how will you put together a down payment for a house, college costs for your kid(s), or retirement? Sometimes, you can borrow. But loans have to be repaid, so you'll enrich banks, not yourself. Retirement on just Social Security can be okay--if you move to Panama or Cambodia, places where your only option may be McDonald's if you want a taste of America.
Controlling your spending is the first and most important step to building wealth. Don't begin by reading the vast array of materials that discuss how to invest. It doesn't matter how you make money investing in ETFs, mutual funds, S&P 500 futures contracts, or covered stock options if you don't have any capital to invest.
First, learn how to save. This means getting control over your emotions. Learn how to deny yourself immediate gratification. Learn how to value long term rewards. Learn how to ignore the latest trends. Learn that keeping up with the neighbors could mean you're just as foolish as the neighbors. Aside from basic spending for food, shelter, clothing and transportation, essentially all spending decisions are driven by emotion. The latest smart phone? Designer clothes and accessories? The trendiest restaurant? A luxury nameplate on your car? An extra 500 square feet in your house? These things are marketed to people with impulse control problems. Status won't give you a comfortable retirement. You need money for that.
You've probably seen the news stories reporting that half of all Americans have no retirement savings and most of the rest don't have very much. How could this be when America is one of the wealthiest nations in the world? The hard truth is most people don't have the emotional composition to get rich. And they don't have the willpower to get control over their emotions enough to begin the process of saving. Sure, an illness or layoff can wreck your financial plans. But they're not an excuse not to try. If you don't try, you'll fail for sure. Those who try actually succeed in many cases. Give yourself a chance. Get control over your spending impulses and save. The only people who laugh all the way to the bank are people who have money to deposit in the bank.
For more, see (a) http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html; (b) http://blogger.uncleleosden.com/2010/07/how-to-think-about-saving.html; (c) http://blogger.uncleleosden.com/2011/01/hope-for-financially-lost.html; (d) http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html; (e) http://blogger.uncleleosden.com/2011/03/how-to-avoid-running-out-of-money-in.html; and (f) http://blogger.uncleleosden.com/2010/11/how-much-do-you-need-for-retirement.html.
Monday, February 5, 2018
Where Is the Stock Market Headed?
With the Dow Jones Industrial Average having dropped over 2,000 points since its peak a week and a half ago, this is the $64,000 (or more) question. The recent market surge resulted to a large degree from too much optimism. Market players have selectively focused on the good news (strengthening economy, big corporate tax cut, rising employment levels), while shrugging off the bad news (growing signs of inflation, rising interest rates, and increasing political discord). Life is like a rose--pretty petals, but thorns as well. If you ignore the thorns, you'll get an ouchie sooner or later.
So what happens after today's ouchie (1175 points off the Dow)? The recent market surge seems similar to the valuation-driven bull markets of 1987 and 2000, which resulted in sizable drops of 25% to 30% in the Dow followed by gradual recoveries that took two to three years. But we should bear in mind an earlier drop off. In 1973, the stock market (measured by the S&P 500) peaked after a long run up, not unlike the one we've had since 2009. Then, it declined some 40% or more and didn't recover until some seven years later. The 1970s were also a time of rising inflation and political scandal (Watergate), with the only resignation of a President. Political turmoil affects economies and stock markets (look at Venezuela, where a lot of folks can't even get a square meal because of political strife).
Expect more market turmoil tomorrow, the next week, the next month, and maybe the next year. The market could easily drop some more. We're running out of good news. There may be little major legislation coming out of Washington, given the political quagmire. The Fed may go easy on the tightening, but it's not going to cut interest rates simply to support stock prices. It's already done that, perhaps too much--and today's drop was likely a consequence. The economy seems to be slowly gaining altitude. But there's nothing going on that will provide it a quick major boost. The federal government can't increase the deficit, given its recent deficit-funded splurge with the tax cut bill. Corporations seem not to be rushing to increase reinvestment of their tax savings. The Trump administration may spark a trade war with China and other nations. And the stability of the federal government cannot, in these times that try our souls, be taken for granted.
History teaches that it's not a great idea to sell your stocks in an effort to staunch losses. People who try to time the market generally fail to get back in and enjoy the resurge that will likely come (although the resurge could be a long time coming). Instead, try to spend less and save more. Keep your investments diversified. And don't stop knocking on wood.
Thursday, April 27, 2017
The Truth About Getting Rich
Wealth is relative. That is, people tend to consider themselves wealthy by comparing themselves to those around them. The fact that most people today live healthier, longer and more comfortable lives than King Henry the Eighth is irrelevant to them. They care more about where they stand compared to the people next door or the colleague across the hall or the persons featured in today's news.
This means you can feel rich only if you have more wealth than others around you. That, in turn, means you have to be different from most people. You can't be just like everyone else and yet be wealthier than everyone else. But if you see yourself as just an ordinary, middle class person, does that mean you haven't got a chance to be wealthy?
No. You can be wealthy. While some wealthy people inherit their riches, most millionaires get there on their own by saving more. It helps if you earn more. You'll have more money to work with. But earning more helps only if you save more. If you spend all your above average earnings, expect to dine on dog food in your retirement.
You have to resist temptation to spend. An 856 inch big-screen TV and a 4,300 horsepower SUV won't make you wealthy. The same goes for $700 shoes and $1,200 handbags. You have to be comfortable with fewer European vacations and plenty of home cooking. When people laugh at your frugal ways, you have to focus on getting the last laugh.
Most people won't make it. They won't become wealthy. That's inherent in the definition of wealth as a relative concept, and it's also a result of the human tendency toward conformity and group think. But plenty of middle class people end up having comfortable retirements or better. In part, that's because of social welfare programs like Social Security and Medicare. But these programs alone don't provide a good retirement. You must be responsible and save.
What to do? It's not complicated. The main thing is save early, often and in significant amounts, like 15% to 20% of your income. Invest in a diversified portfolio to increase your chances for good long term returns. (See http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html.) There are a variety of ways to build up your wealth: http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html. Look at each dollar you receive as a saving opportunity. Remember that no matter how much money you make, in the end you will have a finite income (we all do), and what you spend can't be retrieved. It's gone. So don't waste that opportunity to save (see http://blogger.uncleleosden.com/2010/07/how-to-think-about-saving.html). Avoid debt as much as possible (see http://blogger.uncleleosden.com/2010/07/why-you-should-avoid-debt.html). Don't give up, even if you have financial setbacks. Like so many other things in life, quitters aren't winners when it comes to building wealth.
You can have a somewhat decent retirement even if you don't save much, by building up your benefits and eliminating debt. (See http://blogger.uncleleosden.com/2011/01/hope-for-financially-lost.html). But if you want to climb into the ranks of the wealthy, be different.
This means you can feel rich only if you have more wealth than others around you. That, in turn, means you have to be different from most people. You can't be just like everyone else and yet be wealthier than everyone else. But if you see yourself as just an ordinary, middle class person, does that mean you haven't got a chance to be wealthy?
No. You can be wealthy. While some wealthy people inherit their riches, most millionaires get there on their own by saving more. It helps if you earn more. You'll have more money to work with. But earning more helps only if you save more. If you spend all your above average earnings, expect to dine on dog food in your retirement.
You have to resist temptation to spend. An 856 inch big-screen TV and a 4,300 horsepower SUV won't make you wealthy. The same goes for $700 shoes and $1,200 handbags. You have to be comfortable with fewer European vacations and plenty of home cooking. When people laugh at your frugal ways, you have to focus on getting the last laugh.
Most people won't make it. They won't become wealthy. That's inherent in the definition of wealth as a relative concept, and it's also a result of the human tendency toward conformity and group think. But plenty of middle class people end up having comfortable retirements or better. In part, that's because of social welfare programs like Social Security and Medicare. But these programs alone don't provide a good retirement. You must be responsible and save.
What to do? It's not complicated. The main thing is save early, often and in significant amounts, like 15% to 20% of your income. Invest in a diversified portfolio to increase your chances for good long term returns. (See http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html.) There are a variety of ways to build up your wealth: http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html. Look at each dollar you receive as a saving opportunity. Remember that no matter how much money you make, in the end you will have a finite income (we all do), and what you spend can't be retrieved. It's gone. So don't waste that opportunity to save (see http://blogger.uncleleosden.com/2010/07/how-to-think-about-saving.html). Avoid debt as much as possible (see http://blogger.uncleleosden.com/2010/07/why-you-should-avoid-debt.html). Don't give up, even if you have financial setbacks. Like so many other things in life, quitters aren't winners when it comes to building wealth.
You can have a somewhat decent retirement even if you don't save much, by building up your benefits and eliminating debt. (See http://blogger.uncleleosden.com/2011/01/hope-for-financially-lost.html). But if you want to climb into the ranks of the wealthy, be different.
Thursday, May 7, 2015
The Zen of Investing
How do you allocate your investment funds in times like these? Stocks bound upwards for a couple of days when statistical data indicates the economy is slowing or a Fed governor smiles. Then, the market nose dives crazily the next couple of days when oil prices rise or unemployment falls or another Fed governor frowns. Bonds slump and then surge, or surge and then slump when inflation expectations rise or fall. One constant in the financial markets is volatility. Another is unpredictability. And a third is no net gains--as in, for all the hysteria, stocks have hardly done squat this year.
The financial media is full of conflicting predictions--the market will boom, the market will crash--and conflicting advice--buy this, sell that, short the world and stock up on survivalist gear. To paraphrase former Fed Chairman Ben Bernanke, things are unusually uncertain.
At times like this, the best option may be to step back from the chaos and cleanse your mind of desire. At least, of desire for short term gains and avoidance of losses. It's impossible to make money all the time, or to avoid all loss. With entropy seemingly on the increase, any effort to make every day a good market day will have you believing six impossible things before breakfast and doing battle with windmills.
There's nothing wrong with holding cash, maybe even a lot of it. Cash is beautiful. A goodly amount in a federally insured bank account or U.S. Treasury debt promotes equanimity and sound sleep. You will smile more. There may be some who would argue that a fully invested, well-diversified, periodically rebalanced portfolio will provide better returns than a partially invested portfolio with a lot of cash. This may be true in theory, but an awful lot of investors don't have the nerve to stay the course with a fully invested portfolio through the periodic mania of the markets. They sell and freeze up, never again to invest, and potentially lose a great deal of future gains. All the nice theory in the world doesn't amount to diddly if you're too stressed to implement the theory. To maximize returns in real life, you have to be calm and unemotional. And if doing that takes having bundle of greenbacks under the mattress, then so be it. Don't feel the need to allocate every last dollar to something or other right away. Hold off on betting your last buck until you feel comfortable. Be zen, and increase your chances of becoming rich.
The financial media is full of conflicting predictions--the market will boom, the market will crash--and conflicting advice--buy this, sell that, short the world and stock up on survivalist gear. To paraphrase former Fed Chairman Ben Bernanke, things are unusually uncertain.
At times like this, the best option may be to step back from the chaos and cleanse your mind of desire. At least, of desire for short term gains and avoidance of losses. It's impossible to make money all the time, or to avoid all loss. With entropy seemingly on the increase, any effort to make every day a good market day will have you believing six impossible things before breakfast and doing battle with windmills.
There's nothing wrong with holding cash, maybe even a lot of it. Cash is beautiful. A goodly amount in a federally insured bank account or U.S. Treasury debt promotes equanimity and sound sleep. You will smile more. There may be some who would argue that a fully invested, well-diversified, periodically rebalanced portfolio will provide better returns than a partially invested portfolio with a lot of cash. This may be true in theory, but an awful lot of investors don't have the nerve to stay the course with a fully invested portfolio through the periodic mania of the markets. They sell and freeze up, never again to invest, and potentially lose a great deal of future gains. All the nice theory in the world doesn't amount to diddly if you're too stressed to implement the theory. To maximize returns in real life, you have to be calm and unemotional. And if doing that takes having bundle of greenbacks under the mattress, then so be it. Don't feel the need to allocate every last dollar to something or other right away. Hold off on betting your last buck until you feel comfortable. Be zen, and increase your chances of becoming rich.
Wednesday, June 29, 2011
Defensive Financial Planning
One aspect of financial planning that receives little attention is avoiding an unexpected depletion of your assets. It involves dull, boring stuff like insurance and taking care of yourself. Far more exciting are graphs showing the exponential growth of compounded savings and glossy magazines featuring lifestyles of those retirees who planned well. But in financial planning, a good defense can preserve the wealth you took so much effort to build. Consider the following.
INSURANCE. Okay, few things in life are as nauseating as insurance. Most of us would rather see the dentist than review our insurance coverage. But insurance protects our finances when bad things happen.
Health insurance provides the means to get medical care. Health problems, not credit card craziness, are the number one reason why people end up in bankruptcy. Insurance doesn't necessarily prevent bankruptcy, but it makes it much less likely. A good health insurance policy also opens doors at the emergency room, and ensures that you get good care. Your recovery may be faster and you suffer less stress over availability and quality of care.
Disability insurance provides income when you can't work. More often than you might think, people suffer from disabilities. Social Security disability isn't easy to qualify for, and the process takes a long time. Private disability coverage is often easier to qualify for and more generous.
Life insurance protects your family if you're no longer around to provide for them. Not everyone lives to 75, 80 or older. Life insurance feels like the biggest waste of money imaginable, unless your family needs it. Term life is usually the best choice. Permanent, whole, or universal life typically involve high commissions and other costs. Most people are better off buying term coverage and saving for retirement in other financial vehicles.
Auto insurance is required by law, but the amount of coverage you have to buy is often pretty low. Boosting your liability coverage will make sense as soon as you have any sort of respectable net worth. Without good liability coverage, a single accident can wipe out a lifetime of saving.
Homeowners/renters insurance provides liability coverage, and in the case of homeowners coverage, the funds to rebuild if your house burns down. Get a flood rider if there's any significant chance of flooding (and not just from a river, but also from sewer backups and the drainage ditch in the back yard). Buy earthquake coverage if you're in a high risk zone.
Umbrella policy. An umbrella policy provides liability coverage above and beyond your auto and homeowners policies. You can buy protection up to $10 million and perhaps even more. Umbrella coverage becomes a good idea once your net worth reaches a level you wouldn't be embarrassed for others to know about. Remember, a single car accident can wipe out a net worth of $500,000, $1 million or more, even if you have $300,000 of liability coverage from your auto policy. The umbrella policy puts a lot more protection over your head, and is worth thinking about if you start to get attached to your six or seven figure net worth.
Business liability coverage may make sense for those who are self-employed and work in circumstances where a customer or other person might be injured. For example, if you operate a catering business out of your kitchen, buy some insurance that covers the possibility of customers getting food-borne illness from your products. Accidents happen.
MAINTAIN YOUR HEALTH. As mentioned above, the single most common reason for personal bankruptcy is a health problem. Health insurance doesn't cover all expenses, and significant health problems can prevent you from working. Even if your uninsured health care expenses are modest, you still confront the mortgage, grocery bills, gas expenses, etc. So exercise, eat a balanced diet and avoid/quit smoking. Keeping your health as good as possible can make a real difference in your financial well-being.
INSURANCE. Okay, few things in life are as nauseating as insurance. Most of us would rather see the dentist than review our insurance coverage. But insurance protects our finances when bad things happen.
Health insurance provides the means to get medical care. Health problems, not credit card craziness, are the number one reason why people end up in bankruptcy. Insurance doesn't necessarily prevent bankruptcy, but it makes it much less likely. A good health insurance policy also opens doors at the emergency room, and ensures that you get good care. Your recovery may be faster and you suffer less stress over availability and quality of care.
Disability insurance provides income when you can't work. More often than you might think, people suffer from disabilities. Social Security disability isn't easy to qualify for, and the process takes a long time. Private disability coverage is often easier to qualify for and more generous.
Life insurance protects your family if you're no longer around to provide for them. Not everyone lives to 75, 80 or older. Life insurance feels like the biggest waste of money imaginable, unless your family needs it. Term life is usually the best choice. Permanent, whole, or universal life typically involve high commissions and other costs. Most people are better off buying term coverage and saving for retirement in other financial vehicles.
Auto insurance is required by law, but the amount of coverage you have to buy is often pretty low. Boosting your liability coverage will make sense as soon as you have any sort of respectable net worth. Without good liability coverage, a single accident can wipe out a lifetime of saving.
Homeowners/renters insurance provides liability coverage, and in the case of homeowners coverage, the funds to rebuild if your house burns down. Get a flood rider if there's any significant chance of flooding (and not just from a river, but also from sewer backups and the drainage ditch in the back yard). Buy earthquake coverage if you're in a high risk zone.
Umbrella policy. An umbrella policy provides liability coverage above and beyond your auto and homeowners policies. You can buy protection up to $10 million and perhaps even more. Umbrella coverage becomes a good idea once your net worth reaches a level you wouldn't be embarrassed for others to know about. Remember, a single car accident can wipe out a net worth of $500,000, $1 million or more, even if you have $300,000 of liability coverage from your auto policy. The umbrella policy puts a lot more protection over your head, and is worth thinking about if you start to get attached to your six or seven figure net worth.
Business liability coverage may make sense for those who are self-employed and work in circumstances where a customer or other person might be injured. For example, if you operate a catering business out of your kitchen, buy some insurance that covers the possibility of customers getting food-borne illness from your products. Accidents happen.
MAINTAIN YOUR HEALTH. As mentioned above, the single most common reason for personal bankruptcy is a health problem. Health insurance doesn't cover all expenses, and significant health problems can prevent you from working. Even if your uninsured health care expenses are modest, you still confront the mortgage, grocery bills, gas expenses, etc. So exercise, eat a balanced diet and avoid/quit smoking. Keeping your health as good as possible can make a real difference in your financial well-being.
Wednesday, June 22, 2011
Avoid Vanishing Along With the Rest of the Middle Class
Statistics show that the richer are getting richer while middle class incomes stagnate. Income and net worth are increasing, sometimes dramatically, for the top 1% and 10% in America, while median incomes barely keep up with inflation (or don't). Mathematically, this means that the middle class are getting poorer relative to the well-off. But most middle class people don't need to see the math--they already know from their end of the month checkbook balancing frenzy that they're getting poorer. Add the strident calls from conservatives to slash Social Security, Medicare, unemployment compensation and other elements of the social safety net, and the middle class is starting to understand how the bison felt when hunters with breech loading rifles invaded the Great Plains 140 years ago.
But people--at least those who aren't herd animals--may have a way out. Let's assume you live in a household with $50,000 in annual income, which is about the median. Put $5,000, or 10%, annually into a 401(k) account that has a 4% employer match ($2,000 per year) over 40 years of work, invest in a diversified portfolio that generates a 6% return compounded annually (a modest amount by historical standards), and you'll have $1,080,000.
If you adjust this $1,080,000 for inflation of 3% per year, you'll find that it's worth the equivalent of $320,355 in today's dollars. But you can get around the inflation problem by increasing the amount you save each year by the inflation rate. Since most people's incomes tend to keep pace with inflation--even middle class incomes, although just barely--you can bump your retirement savings up pretty much in line with inflation. (And note that salary increases would also increase the dollar amount of the 4% employer match.) By increasing your contributions for inflation, you'll end up with the inflation adjusted equivalent of about $1,000,000 after 40 years. If you have a 401(k) without an employer match, or one with a smaller match, save more in some other account to make up the difference.
But people--at least those who aren't herd animals--may have a way out. Let's assume you live in a household with $50,000 in annual income, which is about the median. Put $5,000, or 10%, annually into a 401(k) account that has a 4% employer match ($2,000 per year) over 40 years of work, invest in a diversified portfolio that generates a 6% return compounded annually (a modest amount by historical standards), and you'll have $1,080,000.
If you adjust this $1,080,000 for inflation of 3% per year, you'll find that it's worth the equivalent of $320,355 in today's dollars. But you can get around the inflation problem by increasing the amount you save each year by the inflation rate. Since most people's incomes tend to keep pace with inflation--even middle class incomes, although just barely--you can bump your retirement savings up pretty much in line with inflation. (And note that salary increases would also increase the dollar amount of the 4% employer match.) By increasing your contributions for inflation, you'll end up with the inflation adjusted equivalent of about $1,000,000 after 40 years. If you have a 401(k) without an employer match, or one with a smaller match, save more in some other account to make up the difference.
If you don’t have access to a 401(k) or similar plan, then this plan for a 25-year old could consist of saving the $5000 permitted per year in an IRA account until age 50 and then the $6,000 permitted per year for older folks until age 65. Increase your savings for inflation. Assuming a 6% return compounded annually, you’d have $797,084 after 40 years (or the inflation adjusted equivalent if you increase your saving in line with inflation). The amount is smaller because there is no employer match in an IRA. But if you save a bit more each year in another account or work a few years longer, you'll probably be a millionaire.
Only some 2.5% of the U.S. population has $1,000,000 in investable assets. But at least half the population, including many middle class households, have the potential to become millionaires. You have to be scrupulous about saving, and luck is a factor. Serious illness, disability, or other medical problems, aged parents who are unprepared for retirement, divorce, and other difficulties can blow up a financial plan. But a lot of folks who have the potential to be well-off in their golden years throw that chance away on big houses, cars, and TVs, nice vacations, frequent restaurant meals, fine clothes and other lifestyle enhancements. There's nothing inherently wrong with living large now, if you understand the consequences. But if you want to escape the multitude of middle class people being driven over a cliff by economic inequality, then think for yourself, act on your own, and separate yourself from the herd.
For more on how to build wealth, see the following: (a) http://blogger.uncleleosden.com/2007/05/how-to-become-millionaire.html, (b) http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html, (c) http://blogger.uncleleosden.com/2010/07/how-to-think-about-saving.html, (d) http://blogger.uncleleosden.com/2010/11/how-much-do-you-need-for-retirement.html, and (e) http://blogger.uncleleosden.com/2011/03/how-to-avoid-running-out-of-money-in.html.
If you think you really can't save, then take a look at http://blogger.uncleleosden.com/2011/01/hope-for-financially-lost.html.
Thursday, June 2, 2011
When the Future Looks Grim, Invest in the Future
With economic growth slowing, unemployment levels persistently high, earnings stagnant, the stock market falling, and the housing market falling harder, it's no wonder people think the future looks grim. That, however, offers no reason to turn away from the future. Investing in the future is crucial to success and prosperity later on. Take a page from Ford, the car company that didn't want a federal bailout. CNNMoney reports that Ford will build a 3-cylinder, 1.0 liter engine, with performance comparable to today's 4 cylinder, 1.6 liter engines, to be offered a couple of years from now. http://money.cnn.com/2011/06/02/autos/ford_three_cylinder_engine/index.htm. That's a major investment at a time when auto sales are slowing. But it makes sense to build a more fuel-efficient gasoline engine, since true national infrastructure for electric cars remains decades away.
People, too, can benefit from investing in the future. Here are some ways.
Higher Education. The earning ability of people with college degrees compared to those with just high school diplomas remains highly favorable to the better educated. Of course, there are exceptions, and for people who have the inclination and ability to go into a trade like plumbing or being an electrician, vocational training may be a better choice. But no education beyond high school is a bad idea. Lots of analysis is available today indicating that the earning potential between an internationally known Ivy League school and a less well-known state university may well not be worth the cost differential. Going to a less expensive state school, or two years of community college and then two years in a four-year college, may be financially more astute than taking on the mega debt required for an expensive private school. A lower profile school that offers a nice scholarship/grant package instead of the bigger name, bigger tuition Ivy or equivalent, may pave the way for you to accumulate a higher net worth by middle age. What doesn't make sense is not continuing with your education beyond high school. Continuing education may be a good idea throughout your life. Our advanced economy rewards those with current knowledge and specialized training.
Save More. As the returns on your investments start or continue to look shaky, the best response is to save more. Saving less may be tempting. Why save more only to lose the money when you could have a big blowout of a weekend instead? Because come Monday, you'll have a nasty hangover and the same problem of financing your retirement. Saving more strengthens the foundation for your retirement. Investment returns ebb and flow--after bad times come good times. If you don't persist in expanding your pool of savings, you'll get less in returns when the financial markets go positive.
Maintain What You Have. It's important to maintain your major property items, like cars and houses. Making big ticket items last can eventually save you a lot of money. Do the routine maintenance recommended by the manufacturer of your car (but not necessarily the maintenance recommended by dealers, which often involves a lot of unnecessary b.s. meant primarily to lighten your wallet). Maintain your house--change the filters on the HVAC and have the equipment cleaned regularly, repaint as needed, repair bad roofs and defective plumbing, do battle with the crab grass, and deal with potential homewreckers like mold, termites, etc. The expensive upgrade of the kitchen and bathrooms may look good, but won't do that much to enhance the value of the house. Not doing maintenance can detract from the value of the house and force you to sell below market when you move.
Remember, there will be a future. It may be good, or not so good. You'll either be part of the future, or face an alternative that's worse. If you're going to get the most out of the future, you should invest in it. Otherwise, you aren't likely to have much of a future.
People, too, can benefit from investing in the future. Here are some ways.
Higher Education. The earning ability of people with college degrees compared to those with just high school diplomas remains highly favorable to the better educated. Of course, there are exceptions, and for people who have the inclination and ability to go into a trade like plumbing or being an electrician, vocational training may be a better choice. But no education beyond high school is a bad idea. Lots of analysis is available today indicating that the earning potential between an internationally known Ivy League school and a less well-known state university may well not be worth the cost differential. Going to a less expensive state school, or two years of community college and then two years in a four-year college, may be financially more astute than taking on the mega debt required for an expensive private school. A lower profile school that offers a nice scholarship/grant package instead of the bigger name, bigger tuition Ivy or equivalent, may pave the way for you to accumulate a higher net worth by middle age. What doesn't make sense is not continuing with your education beyond high school. Continuing education may be a good idea throughout your life. Our advanced economy rewards those with current knowledge and specialized training.
Save More. As the returns on your investments start or continue to look shaky, the best response is to save more. Saving less may be tempting. Why save more only to lose the money when you could have a big blowout of a weekend instead? Because come Monday, you'll have a nasty hangover and the same problem of financing your retirement. Saving more strengthens the foundation for your retirement. Investment returns ebb and flow--after bad times come good times. If you don't persist in expanding your pool of savings, you'll get less in returns when the financial markets go positive.
Maintain What You Have. It's important to maintain your major property items, like cars and houses. Making big ticket items last can eventually save you a lot of money. Do the routine maintenance recommended by the manufacturer of your car (but not necessarily the maintenance recommended by dealers, which often involves a lot of unnecessary b.s. meant primarily to lighten your wallet). Maintain your house--change the filters on the HVAC and have the equipment cleaned regularly, repaint as needed, repair bad roofs and defective plumbing, do battle with the crab grass, and deal with potential homewreckers like mold, termites, etc. The expensive upgrade of the kitchen and bathrooms may look good, but won't do that much to enhance the value of the house. Not doing maintenance can detract from the value of the house and force you to sell below market when you move.
Remember, there will be a future. It may be good, or not so good. You'll either be part of the future, or face an alternative that's worse. If you're going to get the most out of the future, you should invest in it. Otherwise, you aren't likely to have much of a future.
Sunday, December 19, 2010
Year End Financial Checkup
Before you become too friendly with the nearest bowl of eggnog, give your finances a quick year end checkup. That way, you can roll into the new year hungover, perhaps, but with some idea of where you are financially and where you want to go. Admittedly, money issues bring less cheer than the bubbly stuff that makes the cork pop. Ignoring one's finances, though, won't lead to wealth.
A lot of year end financial advice focuses on tax planning or prognostications for next year. Like many things, though, a solid foundation in financial basics is more important than doing some transactions that invite an IRS audit or believing in the latest self-appointed soothsayer. Get the basics right and other things become easier.
Calculate your net worth. This is the where sound financial planning begins. If you don't know where you stand, you can't tell if you're making progress (or losing ground). If things are going well, you can give yourself a pat on the back. If not, save more and perhaps change what you're doing. Calculate your net worth every three months. For more, see http://blogger.uncleleosden.com/2007/04/secret-to-building-wealth.html.
Ensure adequate cash reserves. Make sure you have at least six months worth of living expenses set aside in an emergency cash fund that you never tap except during a crisis. Better yet, considering today's continuing albeit not-officially-recognized recession, have nine or twelve months of living expenses set aside. Unemployment remains a serious problem. Even though high ranking government officials are quick to tout even a tiny smidgen of improvement in employment levels, lots of people are still being laid off. Thrifty squirrels are the ones that survive winter.
Review portfolio diversification. Your portfolio's asset allocation may have changed as a result of market shifts. Most recently, bonds have been falling (contrary to every effort of the Federal Reserve to push them higher), while stocks have been rising. Consider whether you should adjust your allocations.
You may have different asset allocations for different pools of assets. The way you diversify a college fund for your kid(s) could be different from the ideal asset allocation for retirement savings. Keep these differences in mind.
Go over your benefits. Make sure you understand where you stand with Social Security and, if you have a pension, with your pension benefits. Maybe you don't believe either will be around by the time you retire. Well, people thought the same thing 30 and 40 years ago, and they're now retiring with Social Security and, sometimes, pension benefits. Figure out how to maximize your benefits. Then, maximize them as much as possible.
Review privacy. The Internet, by all indications, is becoming less private by the day. In an implicit but sharp rebuke to the private sector for its failure to display even a modicum of propriety, U.S. government regulators are now talking about setting federal standards for online privacy. Think about limiting your use of the Internet for financial matters (this includes banking, stock trading, online shopping and other online use of credit cards, debit cards, bank account numbers, and other financial transactions). The less often you do financial transactions on the Internet, the fewer opportunities you give bad guys to steal your money and/or identity. The Internet is unquestionably a convenience, but being robbed by cybercrooks can be highly inconvenient. If you must do transactions online, use the best security measures available.
A report in this weekend's Wall Street Journal (P. C1) indicates that smart phones (like the iPhone and Android) may be significantly less secure than computers. Apparently, some apps may sneak off with your name and other highly personal information without telling you or getting your permission. Avoid doing financial transactions on a smart phone, at least until security is greatly improved. If you must do financial transactions on your smart phone, check account balances and activity often. This means at least weekly and perhaps even daily for your bank accounts, credit card accounts and whatever accounts you use through your smart phone.
A cyberthief can make off with savings you took years to accumulate. Protect yourself.
Think about saving more. One of the best protections you have against an uncertain future is a nice, warm, fuzzy and large pool of savings. The more you save, the sooner you'll be able to retire and the nicer your retirement lifestyle will be. See http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html and http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html.
A lot of year end financial advice focuses on tax planning or prognostications for next year. Like many things, though, a solid foundation in financial basics is more important than doing some transactions that invite an IRS audit or believing in the latest self-appointed soothsayer. Get the basics right and other things become easier.
Calculate your net worth. This is the where sound financial planning begins. If you don't know where you stand, you can't tell if you're making progress (or losing ground). If things are going well, you can give yourself a pat on the back. If not, save more and perhaps change what you're doing. Calculate your net worth every three months. For more, see http://blogger.uncleleosden.com/2007/04/secret-to-building-wealth.html.
Ensure adequate cash reserves. Make sure you have at least six months worth of living expenses set aside in an emergency cash fund that you never tap except during a crisis. Better yet, considering today's continuing albeit not-officially-recognized recession, have nine or twelve months of living expenses set aside. Unemployment remains a serious problem. Even though high ranking government officials are quick to tout even a tiny smidgen of improvement in employment levels, lots of people are still being laid off. Thrifty squirrels are the ones that survive winter.
Review portfolio diversification. Your portfolio's asset allocation may have changed as a result of market shifts. Most recently, bonds have been falling (contrary to every effort of the Federal Reserve to push them higher), while stocks have been rising. Consider whether you should adjust your allocations.
You may have different asset allocations for different pools of assets. The way you diversify a college fund for your kid(s) could be different from the ideal asset allocation for retirement savings. Keep these differences in mind.
Go over your benefits. Make sure you understand where you stand with Social Security and, if you have a pension, with your pension benefits. Maybe you don't believe either will be around by the time you retire. Well, people thought the same thing 30 and 40 years ago, and they're now retiring with Social Security and, sometimes, pension benefits. Figure out how to maximize your benefits. Then, maximize them as much as possible.
Review privacy. The Internet, by all indications, is becoming less private by the day. In an implicit but sharp rebuke to the private sector for its failure to display even a modicum of propriety, U.S. government regulators are now talking about setting federal standards for online privacy. Think about limiting your use of the Internet for financial matters (this includes banking, stock trading, online shopping and other online use of credit cards, debit cards, bank account numbers, and other financial transactions). The less often you do financial transactions on the Internet, the fewer opportunities you give bad guys to steal your money and/or identity. The Internet is unquestionably a convenience, but being robbed by cybercrooks can be highly inconvenient. If you must do transactions online, use the best security measures available.
A report in this weekend's Wall Street Journal (P. C1) indicates that smart phones (like the iPhone and Android) may be significantly less secure than computers. Apparently, some apps may sneak off with your name and other highly personal information without telling you or getting your permission. Avoid doing financial transactions on a smart phone, at least until security is greatly improved. If you must do financial transactions on your smart phone, check account balances and activity often. This means at least weekly and perhaps even daily for your bank accounts, credit card accounts and whatever accounts you use through your smart phone.
A cyberthief can make off with savings you took years to accumulate. Protect yourself.
Think about saving more. One of the best protections you have against an uncertain future is a nice, warm, fuzzy and large pool of savings. The more you save, the sooner you'll be able to retire and the nicer your retirement lifestyle will be. See http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html and http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html.
Wednesday, November 17, 2010
Stress Test Your Retirement
With stocks going nowhere for the past ten years or more, we now understand that retirement planning involves more than seeking the highest returns. Risk has to be managed. Savings must be protected. This is especially so as one grows older. With fewer working years left, those who have living memories of seeing or wearing leisure suits should think about downside risk as well as upside potential. It's a good idea to stress test your retirement.
A stress test would estimate how well your finances would look in adverse circumstances. There are different ways to do this, and some can become quite complex. There is no magical formula or golden number(s). Much depends on your appetite for risk, your life expectancy and your retirement goals. Let's start with individual factors.
1. Stocks. Assume a 50% drop in the stock market. That's not an unrealistic assumption since stocks dropped a bit more than that at their worst point in the 2008-09 financial crisis. They could drop like that again, notwithstanding every assurance from Wall Street and high ranking government officials. What impact would that have on your finances? If the answer is too much for your comfort level, then reduce your exposure to stocks until you feel comfortable.
2. Bonds. Assume a 20% loss of your taxable bond portfolio. This would be a very large loss for bond holdings, but could happen if the Fed has to raise interest rates sharply in order to combat inflation. (Indeed, the Fed's ongoing quantitative easing program--the purchase of Treasury securities with printed money in order to lower interest rates--has anomalously resulted in increased interest rates, suggesting bond investors expect inflation from the QE.) What impact would a 20% drop in your taxable bond holdings have on your equanimity? If the answer isn't conducive to equanimity, dial back your bond exposure.
3. Municipal Bonds. Assume a 20% loss in the value of your muni bond portfolio. This, too, would unusually large. But the growing crisis over state and municipal deficits, and the possibility that interest rates may rise because of or in spite of the Fed, could produce significant muni bond losses. How would this affect your sense of financial security? If you don't like the answer, trim your muni holdings.
4. Money Market Funds and Similar Products. As we know from the 2008-09 financial crisis, money market funds can go under. Less well-known similar products, most notoriously auction rate securities, may be less safe than money markets. Assume a liquidity crisis for your holdings of money market funds and other short term investments. What would you do if you couldn't get to these assets? If the answer is ugly, transfer your liquid assets to money market funds that invest only in U.S. Treasury securities, or to bank or credit union accounts and CDs that are fully insured by the federal government. Don't mess around searching for incremental increases in yield. Make sure your liquid assets are truly safe (because they may not be liquid otherwise).
5. Insurance Products. Insurance products are subject to the creditworthiness of the insurance company. Insurance companies make mistakes. If, like AIG, they make big enough mistakes and put the international financial system at the edge of the abyss, they will be bailed out by the government. But most insurance companies can't put the touch on taxpayers like that. Try to figure out how much you could salvage from your annuity or other insurance products if the insurer goes belly up. You might have to research the law of the state where the insurance company is chartered for the coverage provided by its guaranty association for life insurance. (One place to start is the website for the national umbrella organization for these associations, called the National Organization of Life & Health Insurance Guaranty Associations,
http://www.nolhga.com/.) The amount of coverage may be between a maximum of $100,000 to $500,000, depending on the state. If that limit spurs major heartburn, either avoid making a big investment in insurance products, or look to boost the non-insurance portion of your portfolio. Be cautious about exiting insurance products you've already bought, because the insurance companies may whack you with painful termination fees. But pay those fees if your exposure to insurance products makes you queasy.
6. Pension. Let's say your employer goes bankrupt and ditches its pension plan. Can you live with the reduced payments you might end up with? Figuring out how much your pension might be reduced in such a circumstance could be difficult and the stress test might have to be done with just an approximation (factoring in the limitations in coverage from the Pension Benefit Guaranty Corp., if applicable; see http://www.pbgc.gov/workers-retirees/benefits-information/content/page789.html). You could try assuming your pension payments turn out to be half of what you expected. Then, increase your current savings a lot because the loss of half a pension would be painful for just about anyone.
7. Social Security and Medicare. Social Security and Medicare will not disappear. They will be here as long as the Stars and Stripes fly. Of course, some modifications will surely be made, particularly in light of the recent mid-term elections. These modifications won't give you a warm glow. Assume your benefits are reduced by 15%. If that would increase your antacid budget, save more.
8. Health Insurance. If you're under 65, consider the impact of losing your health insurance. (Just about everyone 65 or older has Medicare coverage.) If you're in a group plan, research the cost of buying replacement coverage (which would be an expensive individual policy for most people). Then save more. If the health care reform of 2010 survives Republican attack in 2011 largely intact, you'll probably be able to get good coverage. If the 2010 health insurance reform is significantly cut back, you could be in a tight spot.
9. House. If your home is part of your retirement finances, consider the impact of a 25% drop in its value. Many homes have dropped more than that in the past few years. Don't think it can't happen again. Factor in the mortgage, home equity loan(s) and other liens on the house. If a 25% loss would ruin your day, save more.
We all know that, in a financial crisis, more than one asset class may go sour at the same time. Estimate the combined impact of such a morass. One thing that is certain is we will have another financial crisis like 2008-09. When is anyone's guess. But an enduring lesson of 2008 is that there are no new paradigms in the world of investments and finance. Sooner or later there will be another financial crisis. Those that prepare for it will probably do okay. Crisis deniers surely won't.
Where is there safety? Money market funds that invest solely in U.S. Treasury securities for one. Bank and credit union accounts and CDs that are fully insured by the federal government are another. See http://blogger.uncleleosden.com/2010/07/safe-investments.html. Longer term U.S. Treasury securities will be paid in full upon maturity, but are subject to interest rate risk during their terms. Gold and silver may look attractive at the moment, but their values have historically been extremely volatile. Invest in commodities at your peril.
If you don't like the results of your personal stress test, save more. That, more than anything else, will strengthen your finances. A diversified portfolio is prudent (stocks and bonds can help with your long term financial needs). But diversified doesn't necessarily mean high risk. Having 20% in stocks and 30% in bonds, with the rest in safe assets, may be as diversified as some people want to get, especially those over 70. All the nice looking statistics and charts that financial planners can generate about long term gains don't mean diddly if we're stuck in one of the decade long or longer time periods when financial assets sag. Allocate your assets in the way that facilitates sleep. You'll sleep better for it.
A stress test would estimate how well your finances would look in adverse circumstances. There are different ways to do this, and some can become quite complex. There is no magical formula or golden number(s). Much depends on your appetite for risk, your life expectancy and your retirement goals. Let's start with individual factors.
1. Stocks. Assume a 50% drop in the stock market. That's not an unrealistic assumption since stocks dropped a bit more than that at their worst point in the 2008-09 financial crisis. They could drop like that again, notwithstanding every assurance from Wall Street and high ranking government officials. What impact would that have on your finances? If the answer is too much for your comfort level, then reduce your exposure to stocks until you feel comfortable.
2. Bonds. Assume a 20% loss of your taxable bond portfolio. This would be a very large loss for bond holdings, but could happen if the Fed has to raise interest rates sharply in order to combat inflation. (Indeed, the Fed's ongoing quantitative easing program--the purchase of Treasury securities with printed money in order to lower interest rates--has anomalously resulted in increased interest rates, suggesting bond investors expect inflation from the QE.) What impact would a 20% drop in your taxable bond holdings have on your equanimity? If the answer isn't conducive to equanimity, dial back your bond exposure.
3. Municipal Bonds. Assume a 20% loss in the value of your muni bond portfolio. This, too, would unusually large. But the growing crisis over state and municipal deficits, and the possibility that interest rates may rise because of or in spite of the Fed, could produce significant muni bond losses. How would this affect your sense of financial security? If you don't like the answer, trim your muni holdings.
4. Money Market Funds and Similar Products. As we know from the 2008-09 financial crisis, money market funds can go under. Less well-known similar products, most notoriously auction rate securities, may be less safe than money markets. Assume a liquidity crisis for your holdings of money market funds and other short term investments. What would you do if you couldn't get to these assets? If the answer is ugly, transfer your liquid assets to money market funds that invest only in U.S. Treasury securities, or to bank or credit union accounts and CDs that are fully insured by the federal government. Don't mess around searching for incremental increases in yield. Make sure your liquid assets are truly safe (because they may not be liquid otherwise).
5. Insurance Products. Insurance products are subject to the creditworthiness of the insurance company. Insurance companies make mistakes. If, like AIG, they make big enough mistakes and put the international financial system at the edge of the abyss, they will be bailed out by the government. But most insurance companies can't put the touch on taxpayers like that. Try to figure out how much you could salvage from your annuity or other insurance products if the insurer goes belly up. You might have to research the law of the state where the insurance company is chartered for the coverage provided by its guaranty association for life insurance. (One place to start is the website for the national umbrella organization for these associations, called the National Organization of Life & Health Insurance Guaranty Associations,
http://www.nolhga.com/.) The amount of coverage may be between a maximum of $100,000 to $500,000, depending on the state. If that limit spurs major heartburn, either avoid making a big investment in insurance products, or look to boost the non-insurance portion of your portfolio. Be cautious about exiting insurance products you've already bought, because the insurance companies may whack you with painful termination fees. But pay those fees if your exposure to insurance products makes you queasy.
6. Pension. Let's say your employer goes bankrupt and ditches its pension plan. Can you live with the reduced payments you might end up with? Figuring out how much your pension might be reduced in such a circumstance could be difficult and the stress test might have to be done with just an approximation (factoring in the limitations in coverage from the Pension Benefit Guaranty Corp., if applicable; see http://www.pbgc.gov/workers-retirees/benefits-information/content/page789.html). You could try assuming your pension payments turn out to be half of what you expected. Then, increase your current savings a lot because the loss of half a pension would be painful for just about anyone.
7. Social Security and Medicare. Social Security and Medicare will not disappear. They will be here as long as the Stars and Stripes fly. Of course, some modifications will surely be made, particularly in light of the recent mid-term elections. These modifications won't give you a warm glow. Assume your benefits are reduced by 15%. If that would increase your antacid budget, save more.
8. Health Insurance. If you're under 65, consider the impact of losing your health insurance. (Just about everyone 65 or older has Medicare coverage.) If you're in a group plan, research the cost of buying replacement coverage (which would be an expensive individual policy for most people). Then save more. If the health care reform of 2010 survives Republican attack in 2011 largely intact, you'll probably be able to get good coverage. If the 2010 health insurance reform is significantly cut back, you could be in a tight spot.
9. House. If your home is part of your retirement finances, consider the impact of a 25% drop in its value. Many homes have dropped more than that in the past few years. Don't think it can't happen again. Factor in the mortgage, home equity loan(s) and other liens on the house. If a 25% loss would ruin your day, save more.
We all know that, in a financial crisis, more than one asset class may go sour at the same time. Estimate the combined impact of such a morass. One thing that is certain is we will have another financial crisis like 2008-09. When is anyone's guess. But an enduring lesson of 2008 is that there are no new paradigms in the world of investments and finance. Sooner or later there will be another financial crisis. Those that prepare for it will probably do okay. Crisis deniers surely won't.
Where is there safety? Money market funds that invest solely in U.S. Treasury securities for one. Bank and credit union accounts and CDs that are fully insured by the federal government are another. See http://blogger.uncleleosden.com/2010/07/safe-investments.html. Longer term U.S. Treasury securities will be paid in full upon maturity, but are subject to interest rate risk during their terms. Gold and silver may look attractive at the moment, but their values have historically been extremely volatile. Invest in commodities at your peril.
If you don't like the results of your personal stress test, save more. That, more than anything else, will strengthen your finances. A diversified portfolio is prudent (stocks and bonds can help with your long term financial needs). But diversified doesn't necessarily mean high risk. Having 20% in stocks and 30% in bonds, with the rest in safe assets, may be as diversified as some people want to get, especially those over 70. All the nice looking statistics and charts that financial planners can generate about long term gains don't mean diddly if we're stuck in one of the decade long or longer time periods when financial assets sag. Allocate your assets in the way that facilitates sleep. You'll sleep better for it.
Thursday, October 28, 2010
The Cash Balance Pension: a Retirement Plan for the Future?
It's hardly a secret that retirement plans and retirement planning are a mess. Traditional defined benefit pensions can be costly to fund properly and all too often have proven to be underfunded. Employers battered by the recession sometimes abandon their plans, leaving beneficiaries with only the payments guaranteed by the federal Pension Benefit Guaranty Corp. These plans are going the way of the dinosaurs.
Newer defined contribution plans like 401(k)s are much less risky for employers. But the risks are dumped on beneficiaries, who are at the mercy of high expenses, Wall Street induced economic crises, flash crashes and other financial market volatility, and limited numbers of often unattractive investment options. It's almost impossible to predict the benefits one will receive from a defined contribution plan, and funding an account is more an act of faith than planning for retirement. The average defined contribution plan account is worth somewhere near $70,000. When you think about it, that's a lot of money to put in a black hole.
Both employers and employees want something better. Oddly, a runt of the retirement planning litter called the cash balance pension may provide an answer. It's an amalgam of not entirely attractive features. But it may prove workable in an uncertain world.
The cash balance plan annually credits a dollar value to each employee's account. The amount credited is usually a percentage of the employee's compensation. The accumulated balance in each employee's account is paid interest (at a fixed or variable rate, as specified by the plan), which is compounded annually. Employee accounts gain value over time from annual credits and the compounding of interest. Upon retirement, the employee generally has a choice between receiving the account value as a lump sum, or using it to buy an annuity (which would provide monthly payments). If an employee leaves the employer before retiring, he or she retains the accrued value of his or her cash balance account and can remove the money from account.
The cash balance plan is a compromise. The employer guarantees the growth of account balances up to the point of retirement or termination of employment. Then, the employee is responsible for deciding what to do with the account after retirement: either withdraw a lump sum and personally invest it at market risk, or take an annuity that provides monthly payments. The employer can fund the annuity through a contract with an insurance company, largely relieving the employer of the burdens of guaranteeing years and perhaps decades of retirement benefits. (However, the employer remains legally liable for the annuity payments and bears the risk of the creditworthiness of the insurance company.) Cash balance pensions are guaranteed by the Pension Benefit Guaranty Corp., so there is federal backing for employees' benefits.
The advantage to employees is that the employer takes on the costs and risks of funding the cash balance plan until the employee retires. The formulaic nature of the cash balance plan makes it easier for employees to predict how much they'll have upon reaching retirement age, and thereby facilitates financial planning. Employers benefit from the same predictability, making it easier to fund and manage the plan. Small businesses also get large tax deductions from cash balance plans.
Are cash balance plans a win-win? Not necessarily. They have a poor reputation stemming from litigation over early iterations of these plans, when employers converted from traditional defined benefit pensions to cash balance plans in ways that left longtime employees feeling shafted. Some cash balance plans have been attacked in court for alleged unlawful discrimination against older workers. Because cash balance plans can be structured to give older employees lower benefits than traditional defined benefit plans, they are disfavored by many workers.
But pension plans are voluntary, and an employer doesn't need to offer any kind of pension. Many don't, substituting 401(k) plans and all the risks they present to workers. Other employers offer nothing, leaving employees to limited self-help measures such as IRAs. A cash balance plan has the somewhat dissatisfying quality of a compromise. But it offers a degree of certainty and predictability to both employers and employees. Many employers want to offer pensions plans as a means of recruiting and retaining employees, yet don't want the burdens of traditional defined benefit pensions. The cash balance plan may be a way for employers to have such a recruiting tool, and for employees to predictably accumulate retirement benefits in amounts they'd never save on their own.
Newer defined contribution plans like 401(k)s are much less risky for employers. But the risks are dumped on beneficiaries, who are at the mercy of high expenses, Wall Street induced economic crises, flash crashes and other financial market volatility, and limited numbers of often unattractive investment options. It's almost impossible to predict the benefits one will receive from a defined contribution plan, and funding an account is more an act of faith than planning for retirement. The average defined contribution plan account is worth somewhere near $70,000. When you think about it, that's a lot of money to put in a black hole.
Both employers and employees want something better. Oddly, a runt of the retirement planning litter called the cash balance pension may provide an answer. It's an amalgam of not entirely attractive features. But it may prove workable in an uncertain world.
The cash balance plan annually credits a dollar value to each employee's account. The amount credited is usually a percentage of the employee's compensation. The accumulated balance in each employee's account is paid interest (at a fixed or variable rate, as specified by the plan), which is compounded annually. Employee accounts gain value over time from annual credits and the compounding of interest. Upon retirement, the employee generally has a choice between receiving the account value as a lump sum, or using it to buy an annuity (which would provide monthly payments). If an employee leaves the employer before retiring, he or she retains the accrued value of his or her cash balance account and can remove the money from account.
The cash balance plan is a compromise. The employer guarantees the growth of account balances up to the point of retirement or termination of employment. Then, the employee is responsible for deciding what to do with the account after retirement: either withdraw a lump sum and personally invest it at market risk, or take an annuity that provides monthly payments. The employer can fund the annuity through a contract with an insurance company, largely relieving the employer of the burdens of guaranteeing years and perhaps decades of retirement benefits. (However, the employer remains legally liable for the annuity payments and bears the risk of the creditworthiness of the insurance company.) Cash balance pensions are guaranteed by the Pension Benefit Guaranty Corp., so there is federal backing for employees' benefits.
The advantage to employees is that the employer takes on the costs and risks of funding the cash balance plan until the employee retires. The formulaic nature of the cash balance plan makes it easier for employees to predict how much they'll have upon reaching retirement age, and thereby facilitates financial planning. Employers benefit from the same predictability, making it easier to fund and manage the plan. Small businesses also get large tax deductions from cash balance plans.
Are cash balance plans a win-win? Not necessarily. They have a poor reputation stemming from litigation over early iterations of these plans, when employers converted from traditional defined benefit pensions to cash balance plans in ways that left longtime employees feeling shafted. Some cash balance plans have been attacked in court for alleged unlawful discrimination against older workers. Because cash balance plans can be structured to give older employees lower benefits than traditional defined benefit plans, they are disfavored by many workers.
But pension plans are voluntary, and an employer doesn't need to offer any kind of pension. Many don't, substituting 401(k) plans and all the risks they present to workers. Other employers offer nothing, leaving employees to limited self-help measures such as IRAs. A cash balance plan has the somewhat dissatisfying quality of a compromise. But it offers a degree of certainty and predictability to both employers and employees. Many employers want to offer pensions plans as a means of recruiting and retaining employees, yet don't want the burdens of traditional defined benefit pensions. The cash balance plan may be a way for employers to have such a recruiting tool, and for employees to predictably accumulate retirement benefits in amounts they'd never save on their own.
Thursday, July 9, 2009
The Simplest Financial Plan of All
A very simple financial plan--the simplest of all, in fact--is to save a significant percentage of your income. If you save about 15% to 20% of your pretax earnings, work for 30 or more years, and invest in a reasonably well-diversified portfolio, you'll have a good chance of maintaining your pre-retirement standard of living during your golden years. It's not easy to save this much. But if you can, you'll probably build a good-sized portfolio while keeping your standard of living under control and sustainable in your golden years. If you save a smaller percentage of your pretax earnings, like 5% or 10%, you'll have to make some cutbacks in retirement (although you'd still be better off than most Americans).
One advantage of the percentage of earnings approach is that you won't need to fuss around with calculators that give you seemingly impossible retirement targets in the millions of dollars and which need to be revised every year or two to account for inflation. Any reasonable estimation of your needed retirement savings will result in a figure in the high hundreds of thousands or in the millions. These numbers seem so intimidating and impossible that many people don't even bother to start saving. That's a mistake. Forget about the seemingly impossible dollar amount and instead focus on saving a percentage of this year's income, then next year's income, and so on. After a few years, saving becomes easier and your wealth will grow visibly.
Another advantage of using a percentage of your earnings as a saving target is that you won't have to budget specific expenses. You can spend as much as you like on lattes, clothes, cars and whatever, so long as you save the requisite percentage of your earnings. You can still indulge and spoil yourself in some ways, even excessively, provided you feed the retirement savings. No need to input each day's expenditures into your PC, or debate whether chocolate is an extravagance or a necessity. Anything goes, as long as you fund your retirement adequately.
Saving isn't easy. But a simple financial plan will make it easier.
If you want a more detailed explanation of why the percentage of earnings method works, keep reading. But . . .
Warning, Alert, Danger: Math lurks below.
The simplest financial plan of all is based on a straightforward idea: the more you save, the less you spend today and the less extravagant your current lifestyle. Because you have a less expensive lifestyle, you’ll need less money to maintain that lifestyle in retirement, yet will have more resources today to save for a nice retirement. In other words, by controlling your spending today, you leverage your ability to save for a comfortable retirement. If you’re a really good saver, you’ll have the means to provide for a retirement that involves little or no reduction of lifestyle.
Look at the numbers. If you’re spending 100% of your current income, you’ll save nothing for retirement, and have just Social Security benefits. Get used to eating dog food.
If you spend 95% of your pre-tax earned income (we count taxes as spending because you don't save the taxes you pay), and save 5% in a 401(k) account—adjusting your contributions upward annually for inflation--you’ll have a decent sized nest egg after 30 years. If we assume annual investment gains of 7% compounded, you'll have enough at age 65 to start withdrawing an amount equal to about 19% of your average annual pre-retirement income. (This assumes you're drawing down 4% of the initial value of your retirement assets per year in retirement, which is about as much as you'd want to withdraw if you don't want to outlive your money.) You can use an Internet financial calculator like Money.cnn.com's (http://cgi.money.cnn.com/tools/savingscalc/savingscalc.html) to do these calculations. Adding 19% of your working years' annual income to your Social Security benefits may not sound like a lot, but it’s a damn sight better than zero.
If you're middle class, Social Security could amount to about 30% of your pre-retirement income. With another 19%, you'd retire on a total of 50% or so of your average annual pre-retirement income.
If you save 10% of your earned income in a 401(k) account for 30 years and get 7% returns compounded annually—again adjusting your contributions annually for inflation—you’ll end up with enough in retirement assets to provide about 38% of your average annual pre-retirement earned income, starting at age 65 (assuming a similar 4% annual drawdown). But your standard of living will be based on 90% of your earned income, so you’d be withdrawing enough for 42% of your average annual pre-retirement living expenses. (This is because 38% of 90% is 42%.) In other words, a little restraint in your lifestyle today leverages your ability to save and to maintain your current lifestyle in retirement. Add the 30% or so that Social Security would provide if you're middle class, and you'd retire on about two-thirds of your average annual pre-retirement income.
Using the same assumptions, if you save 15% of your earnings each year, then you'd be able to withdraw about 57% of your average annual pre-retirement income during your golden years. Because you'd have been living on 85% of your income, the withdrawal would approximate 67% of your average annual pre-retirement spending. If you're middle class, add 30% or so for Social Security, and you would be able to spend about as much each year in retirement as you did, on average, before retiring.
If you can save 20% or 25% of your earned income per year, you could actually end up with more lifestyle in retirement than you had while working. Let the good times roll.
It’s important to note that these numbers are for your average annual earnings over the course of your life. Your average annual income for your entire working life will probably be lower than the income levels you enjoy in your 40’s and 50’s, since many people start off with lower incomes early in their careers and see their incomes rise over time. If this has been true for you and you want to maintain the lifestyle to which you’ve become accustomed in your 40’s and 50’s, save a higher rather than lower percentage. At least 20% of your earned income would be a good idea. We also don't count investment earnings saved, since that is embodied in the compounding of earnings that leverages the growth of your savings.
What’s the right level of saving? That’s for you to decide. Each of us has a point where the trade-off between saving and current spending feels right. It won’t be the same for everyone. Pick a point along the continuum that makes you comfortable, and stick to the savings plan. Some people want or need to spend a lot now, and are willing to accept a modest retirement as the price. Others want to be prepared for the future as much as possible, and their personal sweet spot would be farther along the continuum toward a modest lifestyle now and a higher level of savings. If you want to avoid a drop in your lifestyle in retirement, and you have 30 years to build a retirement portfolio, save 20% or more of your current earnings. While 15% has a good chance of getting you there, 20% is a safer number in case investment gains are lower than historical averages during the next 30 years (which is quite possible since go-go years in the stock market--like the 1990s and 2000s up to 2007--are often followed by long periods of below average performance). Also, if you have fewer than 30 years to go before retiring, save more, like 20%, if you want to avoid a drop in lifestyle during your shuffleboard years.
One advantage of the percentage of earnings approach is that you won't need to fuss around with calculators that give you seemingly impossible retirement targets in the millions of dollars and which need to be revised every year or two to account for inflation. Any reasonable estimation of your needed retirement savings will result in a figure in the high hundreds of thousands or in the millions. These numbers seem so intimidating and impossible that many people don't even bother to start saving. That's a mistake. Forget about the seemingly impossible dollar amount and instead focus on saving a percentage of this year's income, then next year's income, and so on. After a few years, saving becomes easier and your wealth will grow visibly.
Another advantage of using a percentage of your earnings as a saving target is that you won't have to budget specific expenses. You can spend as much as you like on lattes, clothes, cars and whatever, so long as you save the requisite percentage of your earnings. You can still indulge and spoil yourself in some ways, even excessively, provided you feed the retirement savings. No need to input each day's expenditures into your PC, or debate whether chocolate is an extravagance or a necessity. Anything goes, as long as you fund your retirement adequately.
Saving isn't easy. But a simple financial plan will make it easier.
If you want a more detailed explanation of why the percentage of earnings method works, keep reading. But . . .
Warning, Alert, Danger: Math lurks below.
The simplest financial plan of all is based on a straightforward idea: the more you save, the less you spend today and the less extravagant your current lifestyle. Because you have a less expensive lifestyle, you’ll need less money to maintain that lifestyle in retirement, yet will have more resources today to save for a nice retirement. In other words, by controlling your spending today, you leverage your ability to save for a comfortable retirement. If you’re a really good saver, you’ll have the means to provide for a retirement that involves little or no reduction of lifestyle.
Look at the numbers. If you’re spending 100% of your current income, you’ll save nothing for retirement, and have just Social Security benefits. Get used to eating dog food.
If you spend 95% of your pre-tax earned income (we count taxes as spending because you don't save the taxes you pay), and save 5% in a 401(k) account—adjusting your contributions upward annually for inflation--you’ll have a decent sized nest egg after 30 years. If we assume annual investment gains of 7% compounded, you'll have enough at age 65 to start withdrawing an amount equal to about 19% of your average annual pre-retirement income. (This assumes you're drawing down 4% of the initial value of your retirement assets per year in retirement, which is about as much as you'd want to withdraw if you don't want to outlive your money.) You can use an Internet financial calculator like Money.cnn.com's (http://cgi.money.cnn.com/tools/savingscalc/savingscalc.html) to do these calculations. Adding 19% of your working years' annual income to your Social Security benefits may not sound like a lot, but it’s a damn sight better than zero.
If you're middle class, Social Security could amount to about 30% of your pre-retirement income. With another 19%, you'd retire on a total of 50% or so of your average annual pre-retirement income.
If you save 10% of your earned income in a 401(k) account for 30 years and get 7% returns compounded annually—again adjusting your contributions annually for inflation—you’ll end up with enough in retirement assets to provide about 38% of your average annual pre-retirement earned income, starting at age 65 (assuming a similar 4% annual drawdown). But your standard of living will be based on 90% of your earned income, so you’d be withdrawing enough for 42% of your average annual pre-retirement living expenses. (This is because 38% of 90% is 42%.) In other words, a little restraint in your lifestyle today leverages your ability to save and to maintain your current lifestyle in retirement. Add the 30% or so that Social Security would provide if you're middle class, and you'd retire on about two-thirds of your average annual pre-retirement income.
Using the same assumptions, if you save 15% of your earnings each year, then you'd be able to withdraw about 57% of your average annual pre-retirement income during your golden years. Because you'd have been living on 85% of your income, the withdrawal would approximate 67% of your average annual pre-retirement spending. If you're middle class, add 30% or so for Social Security, and you would be able to spend about as much each year in retirement as you did, on average, before retiring.
If you can save 20% or 25% of your earned income per year, you could actually end up with more lifestyle in retirement than you had while working. Let the good times roll.
It’s important to note that these numbers are for your average annual earnings over the course of your life. Your average annual income for your entire working life will probably be lower than the income levels you enjoy in your 40’s and 50’s, since many people start off with lower incomes early in their careers and see their incomes rise over time. If this has been true for you and you want to maintain the lifestyle to which you’ve become accustomed in your 40’s and 50’s, save a higher rather than lower percentage. At least 20% of your earned income would be a good idea. We also don't count investment earnings saved, since that is embodied in the compounding of earnings that leverages the growth of your savings.
What’s the right level of saving? That’s for you to decide. Each of us has a point where the trade-off between saving and current spending feels right. It won’t be the same for everyone. Pick a point along the continuum that makes you comfortable, and stick to the savings plan. Some people want or need to spend a lot now, and are willing to accept a modest retirement as the price. Others want to be prepared for the future as much as possible, and their personal sweet spot would be farther along the continuum toward a modest lifestyle now and a higher level of savings. If you want to avoid a drop in your lifestyle in retirement, and you have 30 years to build a retirement portfolio, save 20% or more of your current earnings. While 15% has a good chance of getting you there, 20% is a safer number in case investment gains are lower than historical averages during the next 30 years (which is quite possible since go-go years in the stock market--like the 1990s and 2000s up to 2007--are often followed by long periods of below average performance). Also, if you have fewer than 30 years to go before retiring, save more, like 20%, if you want to avoid a drop in lifestyle during your shuffleboard years.
Good luck.
Wednesday, December 10, 2008
Financial Planning in a Time of Uncertainty
If there's one overriding problem with federal policies to deal with the ongoing financial and economic crises, it's that they've failed to reduce uncertainty. Banks are seeing a thaw in the credit crunch, but primarily because interbank loans are guaranteed by governments now. Why not make a loan if the government will ensure repayment? Consumers and nonfinancial corporations don't enjoy government backing. They are being squeezed ever more tightly by a vortex of credit cutbacks, reduced consumer spending, layoffs, flagging consumer confidence, business closings and failures, more layoffs, even less consumer spending, so on and so forth, etc., etc.
Federal economic policy to date has been aimed at stabilizing the banking system, not the real estate market. Falling real estate values, which show no signs of bottoming out, only exacerbate the problem. There won't be a significant rebound in real estate for years. That means no free flowing home equity loans, no easy refis, no quick exits from loan defaults by selling the property, and all the other tricks that worked so wonderfully when real estate values were rising at abnormally high rates. There won't be any magic elixir for the economy coming from real estate.
Where and when will it all end? Nobody knows. Even with Bush administration backing, a potential bridge loan for the American auto companies seems to be in trouble in the Senate, where the Republican old guard will make one final stand before the Obama administration takes office. The Republicans might, one last time, have their way momentarily. If they do, however, that means GM and Chrysler bankruptcies, and possibly Ford as well. (See the preceding blog for why.) What could ensue from those bankruptcies is unclear, but sure to be ugly. The only question is how ugly.
What's a person to do? In a time of national uncertainty, create some personal certainty. Don't wait for the government to stabilize things. Stabilize your personal finances. When financial storms are blowing, the most stable have the best chance of survival. Here are some things to think about.
Save more. During hard times, nothing provides financial stability and high quality sleep as well as a nice pile of cash. See http://blogger.uncleleosden.com/2008/12/how-to-build-wealth-in-recession.html.
Maintain health insurance coverage. Nothing can wreck your personal finances like a major health problem. Health problems are perhaps the most common reason for individuals to declare bankruptcy. If you're laid off, exercise your COBRA rights to stay with your employer's group policy. If you think COBRA is too expensive, exercise your rights anyway, to be sure you've coverage for at least the next 18 months. Then, shop around for a cheaper policy. But first make sure you're protected. If your employer goes out of business and terminates its health insurance coverage, look for alternative coverage (for more information, see http://blogger.uncleleosden.com/2007/06/how-to-find-health-insurance.html and http://blogger.uncleleosden.com/2007/09/health-insurance-update.html). But don't go uninsured.
Consider a job with a pension. Pensions still exist. Some large corporations offer them, and many government and educational jobs offer pensions. The same is true for military service and many law enforcement jobs. Not everyone is cut out for these jobs. But if you are, your golden years will be a lot rosier with a pension. See our discussion of hope for the financially lost at http://blogger.uncleleosden.com/2007/05/how-to-retire-without-saving.html.
Increase your Social Security payments by working longer. Social Security is actually a government sponsored pension program for almost all workers in America. Your payments increase if you work more years, and are adjusted for inflation. While Social Security itself provides only a modest income, it's a darn sight better than poverty. The longer you work the more Social Security you get, and the more stable your finances will be. See http://blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement.html.
Pay off your mortgage. With today's real estate crisis, this one's a no brainer. Don't think about how you might leverage your house to make money in other investments. What other investments are there today that could make you a higher return than the interest rate on your mortgage? And even if there might appear to be some, how would you cover the risk of the investment failing? (As we now know, it remains possible, even in the 21st century, for investments to fail.) Paying off a mortgage clears the roof over your head of a really big lien, which significantly reduces your risks. Reducing risk increases stability. And that's the name of the game today.
Marshal your assets. Get your finances organized and make sure you've got everything you're entitled to. Cash all checks you receive--believe it or not, large numbers of checks (including some IRS refunds) are not cashed or deposited. Close out small bank accounts you're not using. If you have a jar of change you're not using, take it to a bank and deposit it. Sell property you have no use for and no sentimental reason to keep. Find out if you have unclaimed property. If you do, claim it. See http://blogger.uncleleosden.com/2007/05/unclaimed-money.html and http://blogger.uncleleosden.com/2008/08/how-to-avoid-having-unclaimed-property.html.
Reduce and avoid debt. This one shouldn't need explanation these days.
Federal economic policy to date has been aimed at stabilizing the banking system, not the real estate market. Falling real estate values, which show no signs of bottoming out, only exacerbate the problem. There won't be a significant rebound in real estate for years. That means no free flowing home equity loans, no easy refis, no quick exits from loan defaults by selling the property, and all the other tricks that worked so wonderfully when real estate values were rising at abnormally high rates. There won't be any magic elixir for the economy coming from real estate.
Where and when will it all end? Nobody knows. Even with Bush administration backing, a potential bridge loan for the American auto companies seems to be in trouble in the Senate, where the Republican old guard will make one final stand before the Obama administration takes office. The Republicans might, one last time, have their way momentarily. If they do, however, that means GM and Chrysler bankruptcies, and possibly Ford as well. (See the preceding blog for why.) What could ensue from those bankruptcies is unclear, but sure to be ugly. The only question is how ugly.
What's a person to do? In a time of national uncertainty, create some personal certainty. Don't wait for the government to stabilize things. Stabilize your personal finances. When financial storms are blowing, the most stable have the best chance of survival. Here are some things to think about.
Save more. During hard times, nothing provides financial stability and high quality sleep as well as a nice pile of cash. See http://blogger.uncleleosden.com/2008/12/how-to-build-wealth-in-recession.html.
Maintain health insurance coverage. Nothing can wreck your personal finances like a major health problem. Health problems are perhaps the most common reason for individuals to declare bankruptcy. If you're laid off, exercise your COBRA rights to stay with your employer's group policy. If you think COBRA is too expensive, exercise your rights anyway, to be sure you've coverage for at least the next 18 months. Then, shop around for a cheaper policy. But first make sure you're protected. If your employer goes out of business and terminates its health insurance coverage, look for alternative coverage (for more information, see http://blogger.uncleleosden.com/2007/06/how-to-find-health-insurance.html and http://blogger.uncleleosden.com/2007/09/health-insurance-update.html). But don't go uninsured.
Consider a job with a pension. Pensions still exist. Some large corporations offer them, and many government and educational jobs offer pensions. The same is true for military service and many law enforcement jobs. Not everyone is cut out for these jobs. But if you are, your golden years will be a lot rosier with a pension. See our discussion of hope for the financially lost at http://blogger.uncleleosden.com/2007/05/how-to-retire-without-saving.html.
Increase your Social Security payments by working longer. Social Security is actually a government sponsored pension program for almost all workers in America. Your payments increase if you work more years, and are adjusted for inflation. While Social Security itself provides only a modest income, it's a darn sight better than poverty. The longer you work the more Social Security you get, and the more stable your finances will be. See http://blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement.html.
Pay off your mortgage. With today's real estate crisis, this one's a no brainer. Don't think about how you might leverage your house to make money in other investments. What other investments are there today that could make you a higher return than the interest rate on your mortgage? And even if there might appear to be some, how would you cover the risk of the investment failing? (As we now know, it remains possible, even in the 21st century, for investments to fail.) Paying off a mortgage clears the roof over your head of a really big lien, which significantly reduces your risks. Reducing risk increases stability. And that's the name of the game today.
Marshal your assets. Get your finances organized and make sure you've got everything you're entitled to. Cash all checks you receive--believe it or not, large numbers of checks (including some IRS refunds) are not cashed or deposited. Close out small bank accounts you're not using. If you have a jar of change you're not using, take it to a bank and deposit it. Sell property you have no use for and no sentimental reason to keep. Find out if you have unclaimed property. If you do, claim it. See http://blogger.uncleleosden.com/2007/05/unclaimed-money.html and http://blogger.uncleleosden.com/2008/08/how-to-avoid-having-unclaimed-property.html.
Reduce and avoid debt. This one shouldn't need explanation these days.
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