Whether you’re 25 or 50, dedicating some time now to planning for retirement finances will do you a world of good.
In fact, it could be the most prudent thing you could ever do.
Set goals for how much you will need: don’t put it off!
The first question you need to ask yourself is, what do I already have?
First and foremost, you should assess the size of any savings you’ve collected up until now, hopefully through 401(k) plans and IRA’s, or other types of saving accounts.
A recent Time article claimed that one in three Americans had nothing saved for their retirement.
Though low earnings undoubtedly make up a big proportion, the number is too high for it not to include those that could have comfortably saved sizeable amounts for retirement.
A recent study by the Fidelity Research Institute showed that most over 55’s have enough in personal savings, projected social security payments, and pension income to cover that same percentage of their current salary.
This means effectively needing to slash their spending by a half once they reach retirement.
Which leads us on to our next point.
Don’t assume you won’t need as much as you do now
This is where your personal lifestyle and situation is the most relevant to considerations about retirement saving.
Many assume that retirement will be a spend-free heaven.
The graph below shows otherwise:
As you can see, the median change in income is actually around 0% and even goes up for those in the lowest income group.
While overall, yes, spending decreases, it is dangerous to assume this, and many do.
In fact, Fidelity tell us they found that 39% of retirees said they made this very mistake and underestimated their retirement spending needs.
They may have missed the following significant, yet often unpredictable spending needs:
- Healthcare costs increasing as health deteriorates
- Providing emergency financial support for children and grandchildren: with a wider extended family, there is more likelihood of financial emergencies falling upon the grandparents’ shoulders
- Many find that spending more time at home necessitates spending more money on refurbishment and home improvement endeavor
There is also just the reluctance to downsize, even if none of the above throw a spanner in the works.
People may become used to a certain level of spending, and it’s not that rare to find oneself spending more in retirement than less.
Take into account unexpected medical costs, even if you’ll still have health insurance in retirement.
Unfortunately, many companies are reducing their lifetime health coverage for retired former employees, as much as 10% according to a study by Kaiser Permanente in 2006.
Fidelity tell us that a couple in their mid-60s will spend, out-of-pocket, around $200k on prescriptions over their life until 84.
This isn’t even taking into account possible costs of treating deteriorating hearing, sight and motor skills, afflictions that affect many elderly people.
Not to mention nursing homes, which are renowned for milking their patients dry.
The average cost is a staggering $75k a year and rising annually.
Long-term health insurance is an option, especially those including assisted living and nursing, but these can be rip-roaringly expensive.
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Hire a financial advisor
Knowing that retirement spending needs can be unpredictable is one thing.
Knowing what to do about it is another.
For this reason, it’s a good idea to go to the professionals.
Hiring a financial advisor is something every salaried individual should do, and it’s never too early to do so.
In fact, a poll by Employee Benefits Research shows that most respondents found hiring a financial advisor to be the greatest thing they did when it came to saving successfully.
But if possible, take time to learn about retirement investment opportunities yourself
The myriad of options for investing your money can seem daunting.
But so did learning to ride a bike or learning your multiplication-times-tables once, yet you managed those alright?
Many people spend more time looking for vintage car bumper stickers on Amazon or watching re-runs of their favorite TV shows than planning for retirement.
While there’s nothing wrong with either of those things, doing them at the expense of shrewd retirement planning is probably not the best move.
And complacency can come to bite you in the butt.
The better you plan, the more time (and money) you’ll have to do both those things later!
401(k)? Milk that cash cow
The table below shows the earning potential of a 401(k), at both the low and high ends.
Once you’ve got the advice from the professional, you’ll have come out of the meeting with a mantra of ‘save save save’ ringing in your ears.
401(k)’s and IRA’s are a great way to do this.
Dee Lee is the author of Women & Money, and a certified financial planner.
He gives the following example to demonstrate the benefits of a 401(k):
A couple, both contributing $10,000 a year to a 401(k) plan would each have around $90,000 after ten years.
This is assuming a growth rate of seven percent a year, a common and presumable one for 401(k)-type plans.
Be prepared to take on some risk
However, to get that beautiful 7% growth, they’ve decided it necessary to take on risk.
Rather than stick with bonds which are safe bets and trot along at a tidy 5%, they decided to introduce some market risk and allow a portion of the savings to stocks.
Looking back, historically, stocks tend to earn around 10% a year, but this is with all the market fluctuations and volatility that comes with it.
Should you be willing to stick with it you could come out strongly.
For some, they won’t reach their goals if they aren’t prepared to take any risk.
On the other hand, some people cannot tolerate the risk involved with market trading and investments in stock.
The important thing is to sit down with your financial advisor and formulate a strategy that works for you.
Ellen Rinaldi, a head honcho at mutual fund management group Vanguard, says that at 50 you should not wimp out and go to cash instruments (bonds, securities, loans, etc.), but rather look to stocks for growth.
Consider the timing of your retirement
Some people decide to delay retirement, but again this will be entirely down to your personal circumstances.
What if savings and investments alone won’t adequately fund your retirement?
You will need to be prepared to make those important decisions.
It is increasingly common nowadays for people to slow down into retirement rather than make a full stop.
For example, many will work part-time rather than stop completely.
Or, switch fields into one less stressful but still remunerative enough.
This isn’t just for financial purposes either.
Many retirees find themselves unable to cope with the amount of free time that retirement opens up.
This is evidenced by a study carried out by Putnam Investments.
They found that a whopping seven million retirees return to work after 18 months of post-work life.
Only around a third were for financial reasons, though 40% said that they would have put more into company retirement plans if they could do things differently.
Evidently, those who returned with their new perspective on the financial implications of retirement made shrewder decisions.
They saved 11% of their income.
And their average income was around one-third higher than the average income for those retirees who didn’t continue working.
Financial matters aside, returning to work can also help personal growth (yep, that doesn’t ever stop!).
Retiring early isn’t just about earning more
The obvious benefits to retiring early include not only earnings potential, but the social security earnings you will receive.
The later you start to tap into them, the better.
When you were born affects how much later.
For example, born in 1938 or earlier?
You qualify for all benefits by 65.
Born after 1960, you will wait ‘til 67, and 66 for those in between the two dates.
Many people are tempted to jump the gun and retire earlier, but this is risky as you’ll see reduced benefits over your entire lifetime.
This penalty for retiring early is even harsher when it comes to the retirement saving vehicles we mentioned earlier, the 401(k) and the IRA.
In their contracts is written an early withdrawal penalty, which is currently at around 10%.
10% of your work life savings is an enormous amount, and it’s shrewd advice to tell you not to do this.
Luckily, the cash-out age for these is earlier than social security, currently standing at 59 and a half.
Also, don’t assume working will become harder as you will get older. Many find that the experience that comes with years in the industry means they don’t need to work as hard to get the same amount of work done.
Wisdom trumps energy and makes up for lack of the latter.
Tim Driver is CEO of Retirementjobs.com.
He explains that older workers are also filling up the gap of younger employees starting which is evident in many industries, mainly due to low birth rates in developed countries over the last 30-40 years.
He explains that increasingly, work is being seen as a fundamental part of retirement, which might seem paradoxical.
However, with an aging population, our approach to retirement is inevitably going to change, and the evidence cited so far goes some way to showing the seeds being sown for this work revolution.
The infamous ‘D’ you will have to grapple with, and it ain’t Dad
Debt is obviously a big part of the equation, particularly mortgages.
Gone are the days of everyone paying them off early in life.
Harvard Research shows that 6 out of 10 homeowners aged in the 55-64 age bracket (those approaching retirement) still owe on a mortgage.
Experts cross swords on whether you should pay your mortgage off as quickly as possible.
Rather, you could earn more putting that money into the stock market.
However, most who quit, find it too difficult to continue mortgage payments without work.
And Putnam Investments research cited earlier found that retirees returning to work had, on average, only about half of the equity in their homes.
You could look at your home as an investment vehicle, but it is unwise to go into retirement with a large mortgage.
Don’t become one of those horror stories of a poor old person being kicked out of their house for failing to keep up with mortgage payments.
Stocks Post Its Worst Day in A Month
Wall Street took a beating Monday as stocks posted its worst day in a month. Rising coronavirus cases and a fading stimulus relief led investors to sell-off.
The Dow Jones Industrial Average closed 2.3% lower. It fell down 935 points during the day before settling 650 points lower. All Dow stocks closed in the red except Apple, which eked out a .01% gain. It was the Dow’s worst day since September 3.
Meanwhile, the S&P 500 closed for the day at 1.9%, marking its worst day since late September. The tech-heavy Nasdaq Composite, which bounced back from its lows in the morning, finished lower at 1.6%.
While all sectors across the board experienced losses, some got crushed more. These include energy, industrials, and financials.
Higher Cases of Coronavirus
With eight days remaining before the elections, investors are starting to get jittery. Despite lots of talks, Congress has yet to approve a stimulus package. Cases of coronavirus are jumping in all states, and it recently hit a daily high average of 68,767 last Sunday.
Meanwhile, big tech companies are set to report earnings later this week. This lot includes Microsoft, Apple, Google, Facebook, and Twitter. Fawad Razaqzada of Think Markets noted that the reports can inject further volatility. In the note, Think Markets believed that “on a more macro level, ongoing US stalemate over US fiscal stimulus and the rapidly spreading Covid-19 is going to determine the direction for the wider markets.”
Tom Lee, head of research at Fundstrat Global Advisors, thinks Covid is a big influence over the market. He said “It’s almost as important as the Fed right now. Covid is suppressing the economy, and it’s essentially offsetting easy money. If we didn’t have Covid, people would be going out and spending money. It’s acting as a huge headwind.”
No Relief in Sight
Brad McMillan, CIO of Commonwealth Financial Network, thinks the reality hit investors hard. He told CNN business: “I think a big difference this time around [is]…there’s been a tremendous amount of hope baked into the market for quite a while, and we saw some things over this weekend that hit those assumptions hard.” The negotiations for a new relief package is gone at least until after the elections. Senate Majority Leader Mitch McConnel adjourned the Senate after confirming new Chief Justice Amy Coney Barrett. They will resume their session on November 9, or six days after the elections.
Without a clear stimulus plan, the US economy could start to double-dip. And if the rise in coronavirus cases continues, the business will shut down again. This nightmare scenario is haunting the market at present. Steven Wieting, the chief strategist at Citi Private Bank, sees dimmer prospects. “The ability to fight the virus further right now is very much in question, and it’s a political question.” Wieting believes that Washington could take months before anything gets done. This made investors tentative.
Tom Lee added that “We have a lot of things to be anxious about in the next couple of weeks. That’s why this is a pre-election market. But post-election, I think a lot of things that make people nervous turn into a tailwind. The post-election stimulus is a when not an if. Even if it’s a mixed Congress, I think there’s still some common ground. It’s just the scope that’s different. It would be a smaller package.”
Eight Days Remaining
The final eight days before the elections usually brings good vibes for Wall Street. This year, the bulls will need some extra running following Monday’s selloff spree.
Sam Stovall, chief investment strategist history, observed this bull phenomenon. Since 1944, the S&P 500 rose on average 2.5% in the eight days before elections. The index is up 17 out of 19 times, or 89%. The biggest rise came during the recent financial crisis, with the S&P 500 roaring back 18.5% in a bear market rally. That year, Democrat Barack Obama won over the GOP’s John McCain. The market sunk back to new lows after the election. It bottomed out four months later. The first decline in 1968 (-0.8%), happened as Richard Nixon won over Democrat Hubert Humphrey. The other was in 1988 when Republican George H.W. Bush won against the Dems’ Michael Dukakis.
Wall Street needs to get its act together with eight days remaining. A short, decisive victory by either party can help uplift America’s image. And with all the drama removed, maybe the market can go back to its winning ways.
Watch this as Stocks fall sharply at open amid Covid-19 resurgence:
Stock investors of The Capitalist, are you selling off right now, or are you holding off for a bigger payday? Do you think the market will rally in the next few days, or do you foresee better days after the elections? Share with us your stock scenarios as we count down to the elections. Leave your thoughts in the comment section below.
US Housing Sales Boom Will Last Until 2021
Redfin CEO Glenn Kelman told CNBC on Thursday that he sees the US housing sales boom will last until 2021. Total US Home sales increased 9.4% in September, surpassing estimates. Meanwhile, median prices went up 15% year over year. This is according to data provided by the National Association of Realtors.
Shares of Redfin, a real estate brokerage firm, were higher by 1% Thursday to $45.60. The stock more than doubled during this year. It now has a market cap of $4.5 billion.
Why do people buy houses during a recession?
During this time when the economy is reeling and jobs are tight, people buy homes. Why? There are a couple of reasons.
The bigger acceptance for remote work freed many people from living in the city. The opportunity to leave cramped apartments and expensive city living. The pandemic gave enough reason for workers to pack up and head for greener pastures. Next, interest rates are going down hard. From 3.7%, 30-year mortgage rates are now 2.9%, the lowest rates ever. Despite higher prices, people know this is the best time to buy on the cheap.
The intent is there. The pandemic allowed you to work anywhere. And interest rates allow you to pay the lowest interest rates. People are taking the plunge and buying. So what’s the problem? We’re running out of houses to buy.
Demand coming from the rich
Rich professionals who can work from home are the reason for the uptick in housing demand. Kelman said that many remote workers moved from major cities to distant suburbs. Kelman said these workers began “taking a permanent vacation where they’re working from those homes.”
People are taking advantage of low-interest rates to snap up homes. Kelman noted that “part of what is fueling this boom is that the economy has just split into two and rich people are able to access capital almost for free.” The opportunity to buy homes for cheap may be too much to resist. “Of course, they’re going to use that money to buy homes,” he added.
Meanwhile, there’s another group of people who would like to buy but can’t. Kleman said: “There’s just another group of Americans who are still struggling, who can’t access the credit because we’ve raised credit standards, and you have high unemployment. I just think those two trends, at some point, have to collide.”
Kelman foresees demand to continue until 2021 at least. Many undecided buyers will buckle down next year and take the plunge. He said: “There’s no way it can last forever. This level of demand is absolutely insane. I would expect it to last into 2021, at least.” Why 2021? “There are so many people now who have decided they’re not going to be able to buy a home by year-end,” he said. Kelman expects them to buy next year, “as their kids shift school districts. I do think we’re going to see this for some time.”
Shrinking inventory of houses for sale
With homes fast disappearing from the market, higher purchase prices are coming back. Based on data from the National Association of Realtors data, only 2.7 months’ supply of houses is available last month. This represents the lowest level since 1982 when the NAR began tracking data.
Kleman expects supply to increase after the elections. Uncertainty will decrease after voters elect a new president. Listing and selling a home can take months to process. That’s why sellers have a lower risk tolerance than buyers. “Buyers, when they see a house they love, they pounce,” he said. “I think the sellers are just looking long term in the economy and still feeling some anxiety. Many of them are going to put their homes on the market in January and February.”
Demand won’t last forever
The Wall Street Journal’s Justin Lahart thinks not everybody can live outside the big cities. A remote job in a vacation spot may pose difficulties for some. Winter conditions may also make some remote workers rethink their strategy. He also believes that the housing boom now made people buy houses sooner than later. He thinks many of the workers who moved to the suburbs would’ve done so in a few years. When the pandemic subsides, a smaller group might follow the exodus out of big cities.
The number of people who can afford houses will shrink as well. Many workers’ careers derailed during the year. Many millennials got burned during the financial crisis in the early 2000s. Now, a new career-threatening crisis is in full swing. The post-coronavirus landscape may depend on how well the economy rebounds. We’ll have next year to find out.
Watch this as CNBC reports on the US housing sales boom. Redfin CEO Says “people are buying vacation homes, then taking a permanent vacation:
Are you house hunting right now, or have you already bought a house this year? Why are you doing so? Let us know why buying a home is a good idea right now. Share your thoughts in the comments section below.
Market Volatility Rises As Election Polls Show Tightening Race
The relatively calm markets earlier this month are giving way to more volatility as we approach the election. This is according to a team of strategists at JPMorgan.
“While it is perhaps true that during the first two weeks of October risk markets were supported by a widening of US presidential odds, which by itself implied a lower probability of a close or contested US election result, over the past week or so these odds have started narrowing again,” said a team of strategists at JPMorgan Chase, led by Nikolaos Panigirtzoglou.
According to recent polls by RealClearPolitics, in key battleground states, Democratic nominee Joe Biden leads President Trump by 3.9 percentage points, 49.1 vs. 45.2. That lead has shrunk from a 5 percentage point advantage for Biden about a week ago.
A general election nationwide poll by RCP shows a wider 8.6 percentage-point lead for Biden. However, there are many who feel those polls are not correcting for sampling bias.
MarketWatch recently interviewed Phil Orlando, the chief equities strategist at Federated Hermes. There, he said he doesn’t believe the polls accurately reflect how close the race is. In relation to this, he pointed to the surprise win by Trump against Democrat Hillary Clinton in 2016.
“Our base case is that the polls are wrong, there’s an oversampling biased error that a lot of polls aren’t correcting for,” Orlando said.
With a tightening race for the White House, volatility has returned to the market. It will also likely increase in the final two weeks leading up to the election.
A report put out yesterday by SentimenTrader showed that the CBOE Volatility Index or VIX, jumped to levels last seen during the Great Financial Crisis, and tends to rise as stocks fall as it is typically used as a hedge against market downturns.
Market analysts use the ratio to measure how speculative traders are getting. A rise in the put/call ratio means that investors are expecting plenty of volatility between now and November 3.
The VIX, which measures investor bullish or bearishness on the S&P 500 for the next 30 days, is currently near 29, well above its historical average between 19 and 20. This week alone the VIX jumped 6.3%.
Source of Volatility
Jeffrey Mills, the chief investment officer at Bryn Mawr Trust, said some of the volatility likely comes from investors trying to position their portfolios based on who they perceive will win the election. “There could be some front-loaded selling but I do feel like that’s a near-term phenomenon,” he said. But he says no matter who wins, there’s really only one place to invest, and that’s the stock market.
“There is going to be this continued pull toward equity markets — where else are you going to go when you need to earn a certain percentage to fund retirement, fund education?”
If investors are moving money today based on who they think will win the election, Daniel Clifton, head of policy research at Strategas Securities said each candidate will likely benefit different sectors.
A Biden victory will be good for stocks in the infrastructure, renewable energy and technology sectors, said Clifton.
If President Donald Trump is reelected, Clifton said there’s “huge upside” in some sectors. These include defense, financials and even the for-profits like prisons, education and student loan lenders.
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