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.

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.

Americans Are Taking Control of Their Money

Do you remember what America was like in 2006? If we could give the year a financial theme, I would label it, “Borrow and Spend!” Buying a home was easy; no verification of employment and no down payment were necessary. An interest-only loan could be obtained without any reasonable expectation of one’s ability to repay the loan.

As a matter of fact, you could borrow up to one-hundred percent of a home’s value, skip a month’s payment, and even cash out any value that had come from the rising price of the home. Leverage was the hot financial fad! Many Americans borrowed as much as they could and bought whatever they wanted!

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What a difference ten years can make. Contrast 2006 with 2016; today people are taking control of their financial situations, putting themselves in the driver’s seat, and keeping their own hands on the steering wheel. Financial responsibility is much more prevalent.

Disposable income —the money we have left to spend after taxes have been paid—has increased at an average rate of just less than one percent per year over the past ten years. So income is up a little. This makes the fact that personal saving is up very impressive. We have seen the personal savings rate increase from 3 percent at the end of 2005 to 5.5 percent at the end of 2015.

This significant improvement demonstrates a shift for Americans towards greater financial strength. Here are some of the positive outcomes.Americans saving

Reduction in personal debt
Still smarting from the financial pinch of the last recession, cash flow is now king. For many of us the perception of acceptable levels of debt has changed significantly. Debt is financial fragility, which is why Americans again recognize the value of getting out of debt as quickly as possible. Many have taken advantage of low-interest rates and refinanced to shorter-term loans. Paying off short-term loans such as car loans and signature loans is now a priority, and the use of credit card debt has reduced significantly.

Spending less
Knowing what we should do and putting it into practice can be challenging. This is especially true when it comes to living within your means. However, it is possible and it is powerful. No other financial habit is more important!

We have had the opportunity to meet with many people that have adopted the philosophy of a simpler lifestyle. This allows them to enjoy what they have without the pressure to get more “stuff” and then live with the financial burden. Managing spending also impacts our future lifestyle. If we spend everything today…what will we live on in retirement?

Increased accessible savings
After experiencing financial instability, many people have gained a witness of the need for liquidity. Access to emergency money to cover needs for 3 to 6 months has been widely recommended for decades, but it has gained new favor in the last 10 years. The wisdom of this applies beyond those still working. Retirees are also paying attention to liquid savings to make sure they can cover the unexpected emergencies that will surely come.

Focus on planning for the future
A shift has taken place in young people as well. They are saving for their futures at the beginning of their careers. Company-sponsored retirement plans such as 401(k) or 403(b), as well as individual IRA or Roth IRA, are now common to this young generation and they are off to a strong start.

Financial Health

Those who see retirement on the horizon have a new goal. They want to maintain a comfortable lifestyle throughout their retirement years. With fewer pension plans providing retirement income, the burden to provide income during retirement has been shifted to them. Many have hit the ceiling on contributing to their retirement plans and are using additional savings to help them reach their goals.

It is clear that over time all things can change; the market, our spending and savings habits, even our perception of what’s important financially. We have learned many valuable lessons and have made significant strides to improve our financial situations. The next ten years will undoubtedly bring more changes; some will be good and some will be bad. Remember to prepare when times are good and don’t fall prey to the next financial fad. Keep in mind that you are in the driver’s seat.

The Ultimate Marathon: Retirement

Top notch athletes have something in common. Each possesses a strong commitment to endure to the end. Marathon runners spend countless hours working towards a single goal–completing the 26.2 mile run at marathon pace. When accomplished, many begin preparing for the next marathon.

Richard J. Carling personifies a top notch marathon competitor. He began running at age 39, for health reasons, and at age 75 he’s still going strong.  He runs four marathons every year.

In October, Richard will be running in the St. George Marathon, his 145th marathon. I asked Richard how he got started. He said, “Before I started running, I didn’t think I needed a plan to stay healthy, I thought I was fine.” After his health scare he was told he needed to do something and running was recommended. Now he has a plan and a strategy, which he follows to stay healthy and compete in marathons.

A runner’s journey begins with an assessment. Fitness level, personal needs, and race terrain become the basis on which their training program is built. If these areas are not addressed, the runner will have little chance of reaching the goal. For instance, someone with a physical ailment must take precautions to protect themselves from injury. Someone who will be competing at a high elevation, like the Colorado Rockies, must do more than train at sea level. The key is that each training plan is very personalized to the athlete and the goal.

Planning for retirement begins much the same way. First you must determine what it is you want to accomplish. Is your desire to retire at a certain age, or is it more important to maintain a certain standard of living throughout retirement? Once you’ve made your decisions, there must be a strong commitment to reach those goals.

Self-assessment is important when building your plan. If this step is missed, you may find that you are not able to stick to your long-term plan. Think about this, if you invest in something with considerable volatility when emotionally you can tolerate little risk, you are more likely to abandon your plan. On the other hand, you will be disappointed and fall short of your goal if you were expecting market returns over many years but were invested too conservatively.

If you want to run for a lifetime, as Richard has, he says, “You must stay within your limits. This will help keep you healthy and prevent injuries.” Consistency is important. Richard runs 8 miles each weekday and tries to get 20 miles in on Saturday. He says, “If you over train or push yourself too hard, you will have to make adjustments that can set you back in your training.”

Marathon runners, in general, train by running long distances to increase stamina and endurance. They are not running sprints to get ready for the race, nor will they be sprinting during the race. The distance of each run is carefully planned out so that they peak on the day of the marathon.

This same practice is applied to retirement planning. Your plan must be well thought out. What types of investments will best help you reach your goals? My guess is that there will be some investments that are more conservative to provide for your needs as you begin retirement. From there the investment risk may increase based on when the assets will be converted into income. While this may seem obvious, many miss this point entirely. Their plan becomes fluid and investments are made based on the heat of the moment; the well thought out plan is abandoned. Market timing becomes the basis of the investment plan.

Dalbar Inc. released a study on March 26, 2013, regarding investor behavior. The study reveals how emotional, short-term decisions have stunted the performance of equity investors.  In a nutshell, the study shows that over the past 20 years, investors have under performed the market by an average of 3.96 percent per year. When compounded over 20 years, the difference becomes a chasm separating you from your dreams.

The gap in returns can be attributed to bad investment habits. The most common error is chasing performance by purchasing the hottest investments. In other words, investors are often their own Achilles heel.

Endurance, both physical and mental, is essential to a marathon runner. Without it an athlete would fall victim to the overwhelming urge to quit. During the 26.2 miles, the runner’s courage and determination are tested. When asked how he’s able to run such long distances, Richard says, “Everyone hits a wall at around 20 miles. At that point it’s all mental. You don’t worry about the past or the future. You stick with your plan. If you get excited and try to push too hard you’ll crash.” In order to endure, the will must remain stronger than the body.

Along the path to retirement there will be many obstacles. The endurance test will be a matter of commitment and will. If your plan is well thought out, market volatility in the short-term should have little impact on the long-term results of the plan.

If you are committed to following your plan and have the will to succeed, you can protect yourself from financial elements that arise. If you understand that taking a large distribution at the wrong time will jeopardize your plan, you will be less likely to make bad loans to others.

After completing the St. George Marathon, Richard looks forward to running the Honolulu Marathon and then the Boston Marathon where he is 10th overall for running the most consecutive marathons. While he is always focused on the race at hand, when that race is completed, he is looking forward and mapping out a plan for his next race. Go Richard!

Getting to retirement is just one step in the long-term retirement plan. Making sure that your assets allow you to continue your lifestyle throughout your retirement years requires additional sophisticated planning. There will be a whole new set of financial elements, and adjustments may be necessary for this part of the race.

Your plan to access your income must address a different set of personal needs. Those that will require continued commitment in an effort to reach the ultimate goal– financial security in retirement.

 

*The S&P 500 is an index often used to represent the market. One cannot invest directly in an index. Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Data provided by Dalbar Inc.

College Education – A New Path

What’s happening to the college experience in America? It’s changing. Not because of the campus environment, but rather because of the financial burden that faces today’s students.

The cost of obtaining a college degree continues to grow at a rapid pace. So, does college still pay off? The answer is yes! However, the path taken to obtain a degree has changed from the traditional route.

Students are getting savvy about spending more for their degree. Reducing costs is a major concern. As a result, many high school graduates are starting their college experience at the local community college. They receive the same level of basic education at a fraction of the cost compared to a private institution. Once the basics are covered, they transfer to their college of choice.

Why pay more to go out of state or to attend an Ivy League? In-state colleges offer a wide variety of academic majors and activities to create a great campus experience. The in-state tuition advantage makes going to these colleges a great investment. In addition, cost conscious students are willing to live at home while going to college. This way they can save on room and board as well as the cost of food.

Technology has had a major impact on college education—not only in the classroom but also as an educational avenue. Some students are opting to take college courses online. Recorded lectures and study materials permit them to attend class at their convenience. This flexibility offers students the opportunity to work and attend college at the same time. For many, technology makes what used to seem impossible, possible.

Many have given up on the traditional college education and are looking for a trade specific education, something that requires less time, a lower financial outlay, and the opportunity to get started in a career while completing required courses.

It’s safe to say that when it comes to education, that students are making the rules based on their individual needs and financial resources.

The focus on various degrees is also changing. Choosing a degree has a significant impact on one’s lifetime earning ability. Those obtaining engineering degrees have the potential to secure higher paying jobs throughout their lifetime than those with literature or education degrees. This being said, it’s important to note that just having a four-year degree, regardless of the field of study, gives students an upper hand when it comes to lifetime earnings. Many employers are not fixated on a specific degree. They believe they can train an employee in the areas they need. However, employers view a college degree as a definite advantage. Typically, these employees know how to manage their time and resources, research information, and solve problems, making them valuable employees.

Regardless of the form of education, the payoff in lifetime earning ability is huge and increasing.

The American Dream (and the Cost of Procrastination)

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Most of us hold in our hearts the dream of someday spending our time doing things that bring only fulfillment to our lives and shrugging the requirements outlined by the careers we have chosen. This dream is better known as retirement. Unfortunately, there is a growing trend among Americans—the propensity to “do it tomorrow.”
It is hard to imagine that we unwittingly defeat our own dreams. Here are some insights and a few disturbing facts on how that happens.
Cost of Procrastination
The cost of procrastination
Every year that we fail to put money aside for the future has an impact on our future dreams. For example, let’s say Rich is 25 years old and saves $100 each month for retirement. By the time he is 67 he will have saved over $307,000 (assuming a 7 percent rate of return). Contrast that with Joe who saves the same amount each month and the same growth rate, but waits to start his plan until he is 40. When Joe reaches age 67, he will have saved just over $97,000. That’s a $200,000 difference.
In order for Joe to catch up to Rich by age 67, he would have to save $317 per month. The difference becomes even greater if Rich and Joe contribute to a 401(k) plan where the company matches contributions.
Every year that we delay saving for the future has a significant impact on our ability to reach our financial dream. This is true whether we are 25, 45, or 65. Lack of action thwarts any financial goals.
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The result of procrastination
Among U.S. workers, 57 percent said that they have less than $25,000 in total household savings
and investments, excluding the value of their home, according to the Employee Benefit Research Institute.
Since 1973, we have watched the savings rate in the United States drop steadily from its high of 11 percent. In February 2013, the personal saving rate was a paltry 2.6 percent. At this rate it’s no wonder that 28 percent of Americans said they are “not at all confident” that they have saved enough for retirement.
The decline in savings couldn’t come at a worse time. Today’s retirees are faced with longer life spans and higher retirement costs. All of this at a time when only 3 percent of us have a defined benefit plan (pension) through our employers. In addition, we face changes to Social Security benefits. The old three-legged-stool approach to saving for retirement is no longer a viable analogy. The stool has now changed to a pogo stick and we are at the center. The burden to plan and prepare for retirement has been shifted almost entirely to us.
With everyone sounding the alarm, why are we not heeding the call? Simply said, it’s our financial behaviors. Goals are not physically impossible to reach; we simply lack the self-discipline to stick to them.
The battle within
On a daily basis everyone faces the battle between our present self and our future self. We paint a picture of what we want the future to look like, whether it’s retirement, moving to a new home, or building a nest egg. We have a good feeling about the future we’ve projected. But to get to that future point we have to overcome our present self.
Our present self is in power today while our future self is nowhere to be seen. Sure, we want to be happy in retirement, but in order to make that happen we have to feel pain right now. There is only so much money in each paycheck. Saving will require us to give up something we want right now. There’s the pain! We see saving for the future as an immediate loss. It forces us to deviate from our desired lifestyle. We may have to give up something we want now—a bigger home, a new car, or a vacation—to have the lifestyle we want later. We are constantly forced to make decisions that deny us of immediate gratification and quite frankly, it’s hard.
The commitment device
Sticking to our goals first requires us to set goals. We are not generally driven or motivated by facts and figures. Decisions are strongly driven by our emotions.
How do we feel about the outcome of a decision? Incorporating the emotional side of planning with the facts, will help us to create a commitment device. The value of a commitment device is that we can attach a feeling, present and future, to the decisions we make.
What is most important to us today? How do we want the future to look? What lifestyle do we want to live during retirement? These are just a few of the ideas that must be considered when designing our future dreams. Our answers help direct us in creating a template that can be used in our financial plan.
In creating financial and retirement plans for our clients we begin with their personal values and goals. This helps us to match the present self with the future self in mapping out a plan to help reach those goals. By meeting with our clients regularly we help keep them focused on the end result.
The three legged stool approach to retirement savings is no longer a viable analogy.
The three legged stool approach to retirement savings is no longer a viable analogy.
Maybe it’s time for you to create a plan. Maybe it’s time for an update or review. Or perhaps you know someone else who could benefit from having a plan. Contact one of our wealth management consultants and find out how we can help. Your success is our goal.
Research by Smedley Financial Services, Inc.® For illustrative purposes only. Not intended as an actual situation or as a recommendation. Sources: Employee Benefit Research Institute and U.S. Department of Commerce.