After 35 Years, the 401(k) Dominates Retirement Savings

The people who helped start the 401(k) revolution in 1981 lament what has become of it. At the time, the hope was just to help supplement a traditional pension program. The reality is that 401(k)s have replaced pension plans as the main retirement savings vehicle.

Herbert Whitehouse, a Human Resources executive for Johnson & Johnson, was one of the first to recommend his executives use a 401(k) as a tax-free way to defer compensation. “We weren’t social visionaries,” he says. They were looking for ways to cut expenses and retain top workers. However, because many companies have jumped on the bandwagon, pensions are becoming a thing of the past.

Traditional pension plans do have their weaknesses: bankruptcies could weaken or wipe out the plan, and it is difficult for employees to transfer the plan to a new company.

Enter the 401(k) with the promise that an employee could have enough savings for retirement. Teresa Ghilarducci, who directed the Schwartz Center for Economic Policy Analysis offered assurances to Union Boards and even to Congress that 3 percent savings would be enough. She now admits the first calculations were a little “too rosy.”

There were other issues policy makers didn’t take into account, such as workers yanking the money out of the 401(k) or choosing investments unsuitable for their ages.

Only 61 percent of eligible workers are currently saving. A whopping 52 percent of households are at risk of running low on money during retirement.4 These are scary numbers. It is no wonder people fear running out of money more than they fear death.5

The nation’s policy makers and some states have made proposals or started initiatives to help change the behaviors of savers and companies. One proposal would mandate retirement savings and the system would be run by the Social Security Administration. However, we are a ways off from having a solution to a societal problem that could be compounded by the Social Security trust fund running dry by 2034.6

The onus is on each one of us to save for retirement and implore our parents, children, friends, and even neighbors to help patch the holes in a sinking ship by saving for retirement.

The bright spots are the people that have benefited from the 401(k). For example, Robert Reynolds could retire comfortably at age 64 after saving for 3 decades. He says the formula is very simple, “If you save at 10 percent plus a year and participate in your plan, you will have more than 100 percent of your annual income for retirement.”7

Like it or not, we live in a world where 401(k) accounts have nearly eliminated pensions. Your financial future is your responsibility. So, make a personal commitment to save for your future.

 

1. The Champions of the 401(k) Lament the Revolution They Started, Wall Street Journal, Jan 2, 2017
2. The Champions of the 401(k) Lament the Revolution They Started, Wall Street Journal, Jan 2, 2017
3. The Champions of the 401(k) Lament the Revolution They Started, Wall Street Journal, Jan 2, 2017
4. The Champions of the 401(k) Lament the Revolution They Started, Wall Street Journal, Jan 2, 2017
5. http://www.marketwatch.com/story/older-people-fear-this-more-than-death-2016-07-18
6. http://money.cnn.com/2016/06/22/pf/social-security-medicare/
7. The Champions of the 401(k) Lament the Revolution They Started, Wall Street Journal, Jan 2, 2017

Gambling – with Your Retirement?

To encourage better investment behavior, the Nasdaq stock exchange plans to reward investors willing to commit. In 2016, the exchange introduced plans for an “Extended Life Order.” In today’s fast-paced world, how long a commitment does the Nasdaq want for an extended life trade? One second!

Information travels fast in 2017 and the stock market seems to hit highs every week. Nevertheless, I believe it is the patient, long-term investors that should benefit the most.

It’s hard to define long-term perfectly, but it is a lot more than one second–possibly somewhere above 315 million seconds, which is around ten years.

With this in mind, I think it is a good time to consider what kind of investor we want to be and what attributes we need to be successful.

Speculator/Gambler
Investing is different than gambling in many fundamental ways. However, it is still possible for investors to speculate with their savings. A speculator trades often based on short-term events hoping that a price will continue to rise or fall—anticipating a quick exit in a couple months, weeks, days, or less.

Investor
An investor purchases ownership in a company to help it raise money for profitable projects. As an owner, investors may even receive dividends.

Attributes for Success
To help determine what kind of investor you are, ask yourself, “How much would you accept in a year instead of $1,000 right now?”

Let’s hope your answer isn’t too far off one thousand dollars. The greater your number, the less financial patience you have—and patience is crucial to gaining wealth. It impacts spending, savings, and investing.

Combine patience with a little courage and then an investor truly has a chance at participating in the long-term opportunities that the markets have to offer.

Warren Buffett is one of the wealthiest individuals in the world. He built his fortune by being greedy when others were fearful and fearful when others were greedy. He purchased stocks in some of the most frightening times like during the Great Recession of 2008-2009.

Is Buffett a speculator or an investor? He certainly has patience and courage. When asked about his ideal time frame for holding an investment, Warren Buffett replied: “Forever!” Now that is an “extended life” commitment!

 

Sources: “Enhancing Long-Term Liquidity-Nasdaq Introduces the Extended Life Order” Nelson Griggs, Nasdaq.com, August 18, 2016
“Investor or Speculator: Which One Are You?” Jason Zweig, WSJ, December 10, 2016

Research by SFS. The Dow Jones index is often considered to represent the U.S. stock markets. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

Retirement is Full of Surprises

Retirement was only a few years away for Dan and Patti, and they knew it was time to get everything in order. Living in sunny southern California was wonderful, but they felt it was not the best place for them to retire. It was crowded, the cost of living was high, the traffic deplorable, and it would not allow them to be debt-free at retirement. All things pointed to finding a new city to retire to.

Five years ago, Dan and Patti started their search. Resources, such as Forbes 10 best places to retire, helped them create a list of potential cities. Some cities were easy to check off–they didn’t meet Dan and Patti’s list of must haves:

  • Small but with services including a hospital and modern medical facilities
  • Home price that allowed them to retire debt-free
  • Outdoor activities
  • Favorable tax structure
  • Growing economy
  • Community activities like continuing education

By 2015 they had created a short-list and began visiting the cities to get a feel for the local culture and people.

One year from their proposed retirement date they started planting the seeds in their new city. They purchased a home that could be rented until they were ready to move. They started preparing their home in California to go on the market. The wheels were in motion.

Throughout this five-year process they planned, reviewed, and updated their retirement and income distribution plans. This helped them feel financially confident about this exciting, but unnerving, life transition. It also gave them the financial framework to make their important decisions.

Today, Dan and Patti are living their retirement dream. They are excited about building their new network of friends, doctors, and social connections in their new community. Their new favorite saying is “We don’t have to if we don’t want to because we are retired!”

Some of the challenges they faced throughout the transition into retirement:
Timing the sale of their home
Continuation of medical coverage for a younger spouse
Slow response from employer’s human resource department regarding retirement benefits
Keeping important papers close at hand during the move
Finding temporary place to live until their new home was ready
Small things such as getting a library card while temporarily living outside of the city

Controlling your own time
Less stress and more fun is how Rolayne describes retirement. After a long and rewarding career she decided it was time to turn in her walking papers and she hasn’t looked back. Rolayne says she is busier now than she was before, but now she sets the pace.

Retiring gave Rolayne more time to help care for her aging father before he passed away; something she is thankful she was able do.
She lives an active lifestyle and as an outdoor enthusiast, regardless of the season, she can be found taking a hike or snow shoeing in the mountains. She also enjoys the flexibility retirement offers so she can spend more of her time volunteering for her church. Basically, she is doing what she wants, when she wants and loving every minute.

Retirement is delightful; however, there was some trepidation getting to this point. Navigating health care in retirement was a big concern. Rolayne found that putting the various pieces of Medicare and supplemental coverage together was frustrating and overwhelming.

While there are numerous resources available, it was still difficult to make sure she had the right coverage for her situation. Rolayne sought help from a health insurance professional who could review her options and help her find the right coverage.

Without a pension to provide a stable monthly income, Rolayne knew she needed a plan for using the nest egg she had created. Longevity runs in her family; her income distribution plan is designed with the goal of helping her nest egg provide income throughout her retirement years.

Looking forward to retirement
Retirement should be an exciting phase of life. While transitioning from a career into retirement can be stressful, a plan can help relieve some of that stress and provide a better understanding and framework for this chapter of life.

Using years of experience, we have helped clients navigate the many obstacles of this transition. Let us help you.

How Much Should You Save For Retirement?

Research shows that we, as Americans, are saving far too little to support retirement lifestyles similar to our current lifestyles. There are three major headwinds that make things worse: people are living longer and will need more money, companies are doing away with pension programs, and Social Security benefits may be reduced if action isn’t taken to shore up the Social Security trust fund.

The pendulum has swung from the World War II generation of savers to the Baby Boom generation of spenders. Inertia has a way of making the pendulum swing back to where we will become savers again.

A perfect example is the Millennial generation. Their first financial experience is the “Great Recession” of 2008 and now they are outpacing the other generations for retirement savings. Rather than wait for outside forces to compel you, start to supersize your savings to make sure your retirement will be everything you dream.

Reference the infographic to see how you stack up to other people in your age group. The infographic shows how many times of your salary you should have saved, an example of how much that is, and what the median savings amount is per age.

Notice how the people in their 20s and 30s are on track for retirement savings. It is really in 40s, 50s, and 60s where people fall behind. This is due to a myriad of reasons such as not saving enough, losing a job, or a major medical expense.

If you are on track for retirement, congratulations. Keep up the good work. If you feel like you are behind, don’t despair. The best thing you can do is to get your ship sailing in the right direction: Get out of debt, pay down your mortgage, and start socking away money.

You should be saving 10-15 percent of your own money towards retirement. If that doesn’t seem possible, try to increase your retirement savings by 2 percent now and then increase it 1 percent each year.

Saving for the future is not always easy, but it is worth it. If you want a personalized analysis to see if you are on track for retirement, please contact one of our private wealth managers.

Unexpected Retirement Expenses

Preparing for a successful retirement takes years of planning, saving, and dreaming about the years when you will no longer be working. When planning for retirement we recommend you think about the amount of monthly income you need to maintain your lifestyle.

However, there are some expenses you may not think of before retiring.

1. Home Repairs: Before retiring take inventory of the age of your house. What are some of the items that may need to be updated? Then come up with a plan for how to have cash on hand to pay for each of those repairs.

Some of the most expensive items include your home’s: HVAC, roof, pipes, septic system, deck, siding, and plumbing.

Planning for home repairs can alleviate a lot of financial burden by either repairing items before retirement or by creating a reserve home repair fund, in addition to an emergency fund.

2. Healthcare Costs: Did you know the average couple will spend about $250,000 on healthcare during their retirement? Even if you believe you will not spend that much on healthcare, it is a good idea to plan for the unexpected, especially with the rising cost of healthcare.

Although Medicare is available at the age of 65, it does not cover all medical expenses. There are additional premiums and expenses for prescription coverage. Dental and vision insurance is not covered by Medicare, so private insurance will be needed if you would like this coverage.

If you are planning to retire before the age of 65, be sure to know how much the cost of private healthcare will be. The premiums are a lot more than individuals think.

3. Purchasing Power: The average price of a movie ticket in 1974 was $2.00. Fast-forward to 2015, the average price was $8.50! That is a 3.4 percent increase in cost per year and a good example of the power of inflation.

Inflation is hard to see as it happens slowly over time, yet it is crucial to plan for in retirement.

• If you retired today with a monthly income of $3,000 and an inflation rate of 3 percent, in the year 2040 you would need about $6,000 per month to maintain the same standard of living.

• Outpacing inflation with a risk appropriate, diversified portfolio can help to minimize the risk of purchasing power.

4. Spending too much early on in retirement: Yay! You made it to retirement. You’ll have more free time, which often means spending more money. It might be spent on visiting loved ones, traveling, golfing, lunching, or starting new hobbies.

Before you retire, make sure to have a realistic amount of money you will spend each month. Make sure to include your day to day expenses, healthcare costs, taxes, home repairs, utilities, travel expenses, and any other items that may be important to you.

5. Longevity: If you know the exact day you will pass away, planning for retirement is easy. That’s not the way life goes. If we plan based solely on previous generations’ life spans, we may not plan for a long enough lifespan.

Planning beyond age 90 is a more conservative plan. Although you may need to reduce your monthly income, you will have a well-rounded plan that will help your income last for your lifetime.

Planning for retirement can be a daunting task, yet with the right team on your side you can be set up for success and live out the retirement of your dreams.

Get Your Social Portfolio Together

When juggling work and family, your idea of retirement may be fewer responsibilities and unlimited time to do the things you want. The reality is too many people get to retirement and find that their social connections revolved around work. They lose daily connections with co-workers as well as clients and customers.

Suddenly they are out of the loop with day-to-day happenings at the office. They miss hearing from friends and lose the camaraderie of lunch conversations.

The Stanford Center on Longevity found that traditional social engagement is waning. Today’s 55-64 year olds are less engaged with family, friends, neighbors, community, and religious activities than their predecessors 20 years prior (Sightlines report).

Building a social portfolio for retirement is just as important as building an investment portfolio. Meaningful relationships and participation in communities do not just happen once you retire. Building strong social connections before retirement is a key to increasing social connectivity in retirement. As a matter of fact, it is directly linked to wellbeing and a long life. The hurdle is knowing when and how to build new connections. Here are a few suggestions to get you thinking:

Family
If you value spending time with family, find ways to connect regularly. Get your family together a few times per month for a dinner. Rotate from house to house so everyone has a chance to host the group and you have the opportunity to get out of the house.

Make it a point to get together for an activity once per month. Play a game that involves family members at all age levels, or go to the pool, bowling alley, or park.
Plan a family vacation annually or bi-annually so that you can get others away from the day-to-day demands of life and create a backdrop for building memories together.

Friends
Too often we talk with friends about getting together only to find months later that nothing has happened. This is a common experience for most people. Scheduling time to get together with friends regularly may seem excessive but it’s not. Getting your activities scheduled and on the calendar increases the chances that you will actually spend time with your friends.

Your friends are also looking for ways to make connections and get out of the house. Plan regular activities, such as meeting for lunch or taking tours of the city or surrounding areas that interest your group. If you enjoy being outdoors, find a new trail to hike each week or join an off-road riding club.

Group Involvement
Volunteerism is a great way to share your time with purpose and find fulfillment in retirement. But just like relationships, it is better to look for opportunities with charities before you retire. Understanding the needs within your community or religious group will help you gauge your time and availability. The Sightlines report states that while people want to volunteer their time, they feel like they don’t have enough information or nobody asks them.

Lining up opportunities and building a social portfolio before retirement will lead to a smooth transition and more enjoyment during your golden years.

Women Should Save 2 Percent More Than Men

In an age where women have an increased influence in the workforce, it doesn’t seem right that women have to save more than men for retirement. However, that is what the research from Hewitt Associates suggests.

There are several contributing factors to this need, some inherent and some that can be corrected. An inherent factor for women is a longer lifespan—living an average of three years longer than men after retirement. The extra 2 percent is needed for the additional insurance cost for a longer life. The lower average yearly salary for women ($57,000) compared to a man’s ($84,000) indicates that a woman should save a higher percentage to match the dollar amount men save. Some correctable factors include: waiting longer to start saving for retirement, investing more conservatively, and not taking advantage of the company match in a 401(k).

Women are able to close the retirement gap by taking a few simple steps.

• Invest early and increase contribution rates. One goal should be to contribute 10-20 percent of gross income into a retirement account. This doesn’t have to be done at once; contributions can be marginally increased each year.

• Ask for advice. Many women feel insecure about managing finances. A wealth management professional can help determine personal risk tolerance and how aggressively to invest money.

• Leave a 401(k) invested. If suspending work due to family reasons, don’t cash out a 401(k)—this avoids taxes and hefty penalties. A 401(k) can be rolled-over into an IRA or professionally managed account.

• Put off retirement for a few years. This may be painful but could mean a great deal down the road. Don’t sacrifice the future for the present.

Women have several challenges that make retirement preparation more difficult. Recognizing these issues and making small changes in their saving and investing habits can have a significant impact.

Aging in Your Home

One of the great debates for people who are entering retirement is “Should we move or remodel our current home?”

Here are three resources that can help with this decision.

1. Harvard University wrote “Housing America’s Older Adults: Meeting the Needs of an Aging Population.”
Harvard came up with a list to help identify the safest accessible homes.

The top four on the list are:
A no-step entry
Single floor living
Switches and outlets reachable at any height
Lever-style door and faucet handles

Ninety percent of all existing homes have at least one of these. Only 57 percent have more than one. For more information you can visit their site www.jchs.harvard.edu and highlight “Research.”

2. The National Association of Home Builders has a checklist with 100 suggestions to help homeowners live safely, independently, and comfortably in their own home.

Their list includes:
Low-maintenance yard
Wide hallways and doors
Bright lighting

The complete list can be found at www.nahb.org

3. AARP has a report on how to create a “lifelong home.”

Regardless of your age or ability, these lists can be helpful as you consider a remodel or a move. Go online and find out how “HomeFit” your home is.

Control is the Operative Word!

Hello Valued Financial Partners and Friends,

Being in control of your own finances is one of the great blessings of living in America. But to make this a reality—and not just a dream—ultimately depends on you.

In life there are things you can control. A physician once explained, “When you are overweight, you can do something about it. Losing weight will enable you to discontinue most, if not all, of your prescriptions. You will have increased energy, greater mobility, and lower medical bills. You will live longer to see your grandchildren grow up. All of the benefits are good. There is no downside risk.”

Continuing, the doctor said, “By contrast, a person with a fatal disease has little or no control over his or her circumstances. There is nothing he or she can do about it. But you can do something, in fact everything, about weight loss.” Wow! Talk about a tipping point.

Again, quoting the physician, “While you may think your diet is determined by major decisions, it is actually made of hundreds of small decisions, basically your everyday decisions.”

Gaining control of your life, whether it is diet, time, or money gives you power! Getting in control of those things you can control is empowering!

For example, consider being free of debt. Being free of debt has at least three tangible benefits. You will have more money for your future days, you will have more money to spend, and you will have more money to give. All of the benefits are good. There is no downside risk.

Being in control of your retirement is crucial. You want your money to last as long as you do! (That, of course, includes your spouse as well.) What is your plan for living longer? Who will help take care of you?

Many vital decisions await you. Decisions about Social Security benefits, pension plan options, 401(k) plans versus IRA, health insurance, life insurance, long-term care insurance, and so on…

We can help you. You don’t have to go it alone. Call us. Your financial success is our passion!

Bullish Best Wishes,

Roger M. Smedley, CFP®
President

Why You Should Care About The Fiduciary Standard

There has been a great deal of media attention surrounding the Department of Labor’s (DOL) recent ruling regarding the “Fiduciary Standard,” and with good reason. Tony Robbins, self-help author and motivational speaker, recently asked random people walking down Wall Street, “What is a fiduciary?” With the exception of one individual, the answer was, “I don’t know.”

This made me wonder – Do our clients understand the benefits of working with a fiduciary?

When Smedley Financial Services, Inc.® began back in 1982 as a registered investment advisor, we became a fiduciary. We have always believed that putting our clients’ interests before our own is the best way to create a lasting partnership with the people we serve.

fiduciary standard

What is the Fiduciary Standard?
The Fiduciary Standard requires that we avoid conflicts of interest. Our recommendations must meet your needs and be in your best interest.

In contrast, financial professionals such as brokers, insurance salespersons, and other advisors operating under the “suitability standard” are merely required to ensure an investment is suitable for a client when purchased. There is little obligation to offer a better investment nor a requirement to monitor those investments in the future.

Why the big concern?
As company pension plans have diminished, Americans now must set aside more of their income to help supplement their own retirement income. This can be a daunting, time consuming task.

At the same time, the retirement investment landscape has only grown more complicated. Lack of investor savvy and awareness regarding retirement account types, not to mention the emerging number of investments available within those accounts, has led investors to rely on the counsel of professionals.

Unfortunately, not all professionals are alike. The new DOL rule seeks to level the playing field, requiring all financial professionals to follow the new Fiduciary Standard. Isn’t it sad that a law must be put in place forcing financial professionals to do the right thing?

Will the rule protect investors?
The new DOL rule will require more work for financial professionals, but hopefully it will also protect investors saving for retirement.

The DOL also states that cheaper is not always better. Price cannot be the only determining factor when making a decision, especially one as important as your financial future.

Consider what you are getting for the fee you are paying. Does your fee include an advisor that will help you determine your financial goals, prioritize those goals, and design a plan to help reach your goals? Will you get ongoing monitoring of your goals and the investments you are making? What if something changes? Who will be there to help address the changes in your life that may impact your financial destiny? What will happen during periods of increased market volatility and who will help you determine if your investments are too aggressive or too conservative?

These are just a few of the concerns that must be considered, but are often overlooked when the primary focus is having lower fees.

You are our primary concern. We invite you to call or come in and sit down with us anytime you have questions. We welcome your call.