Posts Tagged Nest Egg
Are Your Savings on Track for Retirement?
Posted by enrique s in Money, Retirement on August 3rd, 2009
Photo by aussiegall
A Business Week article by Amy Feldman helps you evaluate your retirement savings. You can read the original article by clicking here: Sizing Up Your Nest Egg
The article offers data points for your retirement savings, in order for you to gauge if you’re on the right path. The formula is based on multiples of your current salary.. According to Brett Hammond, TIAA-CREF’s chief investment strategist, you should have saved:
- 2.1 times your salary by age 35;
- 3.6 times your salary by age 45;
- 5.4 times your salary by age 55;
- 7.7 times your salary when you retire at age 65.
There are certain assumptions made, such as a 4% annual salary growth, a 6% return on investments, and a 25-year retirement period to finance. That would put me at the ripe old age of 90. I should live so long. His lips to God’s ears. So how are we doing based on Hammond’s parameters?
When Hammond looked at the retirement readiness of a sample of TIAA-CREF’s more than 3.2 million participants, he found the vast majority were on track. But their average savings rate of nearly 17%-including both employee contributions and those from their employers-is far higher than that of the typical 401(k) participant, which is in the single digits. Among those participants whose total contributions are less than 10% of their pay, their average assets about equal their salaries-nowhere near enough.
The last sentence should serve as a wake up call to workers who have neglected their retirement planning. Obviously, we’ve all taken a big hit over the last year to our 401(k)s. My savings aren’t where I’d like them to be, but I don’t see any buzzards circling. I still have time to recover.
So, how will I ensure that I have enough? My first step is to increase my income. I hope to accomplish this through the development of multiple income streams, so that I’m not reliant on just my salary. My current avenues of interest are online income generation and dividend-producing stocks. I may also look into purchasing tax liens. There’s a good book on the subject called The 16% Solution. You can buy it by clicking on the following link:
How are you doing with your retirement savings? Do you come close to the parameters set forth in the article, or do you have a ways to go?
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Getting Rich in America Book Review and Summary, Part 1
Posted by enrique s in Book & Product Reviews on June 23rd, 2009
This is Part 1 of my review and chapter summary of Getting Rich in America: 8 Simple Rules for Building a Fortune and a Satisfying Life by Dwight R. Lee and Richard B. McKenzie. I won’t turn this into a Cliffs Notes version, but I’ll hit the high points, and provide my take on the rule at the end of each chapter summary.
Rule #1. Think of America as the Land of Choices
The focus is on how ordinary people have “made it”, based on the principles that they were taught as children. The recurring theme is that hard work pays off. The people who have succeeded have been able to recognize the opportunities that have been made available to them. There are no get-rich-quick schemes, but a whole-life approach to building a fortune. All that’s needed is the adherence to a few rules (the 8 Simple Rules in the book’s subtitle). The $1 million net worth figure as a benchmark of having “made it” is explained, as fewer than 4 percent of all Americans have a net worth greater than $1 million. This standard is more easily achievable than most Americans would believe. While the million would not provide for a luxurious retirement, the interest income would match the median family income. The traits of the “typical” American millionaire are given as:
- A male that has been married for a long time;
- Became a millionaire in his fifties;
- A median net worth of $1.6 million;
- Built his fortune through running his own business;
- Live a modest, frugal lifestyle;
- 85% of the millionaires still clip coupons;
- Drive older domestic cars;
- Don’t live in upscale neighborhoods;
- Have a median income of $131,000;
- Are first-generation millionaires.
My Take
The first thing that struck me was the income level. This happens to be an achievable number for me, if I play my cards right. The other thing that jumps out: these are frugal millionaires, who drive older cars, and even cut coupons! It’s the old spend-less-than-you-earn mentality put into practice. Well, it looks like it works.
Rule #2. Take the Power of Compound Interest Seriously - and Then Save
Compound interest is no trade secret. Many immigrants have come to America with nothing, and have amassed small fortunes by working hard and investing their savings. They’ve followed these three steps:
- Save and invest something of what you earn persistently.
- Achieve a reasonable rate of return each year on your investment, which requires that you take some risks.
- Be patient, allowing your savings and investments to grow for a long stretch of time.
An example shows that a college graduate who invests $2,000 at age 22 can achieve, at a rate of return of 15%, a nest egg of $814,774 at age sixty-five. Granted, getting your money to earn 15% may seem far fetched these days, but the method holds true. At a 10% rate of return, the graduate would yield about $120,480 at age sixty-five. That’s almost $700K less than the 15% return. Obviously, the amount of risk tolerance is key to future growth of an investment. Still, growing $2,000 into $120,480 is nothing to sneeze at.
Saving at an early age is the key to building a nice nest egg. Time is on your side. Starting at age 40 compared to age 50 will yield twice as much at age 65. But what do you do if you’ve missed the boat on saving early on? Several strategies are presented, such as:
- Save more of a percentage of your income.
- Extend the years of work and saving.
- Increase the rate of return.
Life expectancy has risen over the years, allowing people to take more risks for a longer period of time. So the shift from equities into bonds can take place later, allowing for a greater investment in stocks, and a potentially greater return.
Each chapter has a bullet summary, and also shows the basis of their calculations that you can follow on a Texas Instruments calculator.
My Take
I’m not sure if I would expect a 15% return anymore. That would require a shift in my risk tolerance. But the point of investing when you’re young is a valid one. Time is on your side, so why not get started early? What I would add is to make the savings automatic - have a fixed amount deducted from each paycheck and don’t touch it!
Click here for Part 2, where I’ll discuss Rules #3 and #4.
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Buy High, Sell Low?
Posted by enrique s in Money, Retirement on May 20th, 2009
We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. - Warren Buffett
You did WHAT?
The bottoming out of the stock market led many to do what is clearly in contrast to conventional wisdom: they sold their newly-undervalued stock. This is never a good idea. What would lead them to follow this path?
Ima scared!
Well, one reason was panic. First, it was AIG and other financial firms. Next came the automakers on the brink of bankruptcy. People saw their mutual funds’ value going into the tank, and decided to bail before they lost everything. One 70-year-old retiree explained:
“My retired friends who had all CDs and gold, and they were still making money, and my investments just kept going and going,” she said. “I thought: I can’t afford to lose all this.”
She should have waited. The Dow has surged 26% since it bottomed out in early March. Like Axl Rose sang, “Just a little patience.” But some investors had bigger problems, like negative cash flow:
Josh Caucutt of Lakewood, Colo., cashed out his individual retirement account in early March to help pay the $1,200-a-month maintenance costs on his unsold home in Wisconsin. “I knew exactly what I was doing,” said the 34-year-old father of three. “By no means am I convinced I did the right thing. But we needed this money immediately. And there wasn’t much to indicate that things were going to change.”
Another victim of the housing bubble, no doubt. Tsk tsk. He missed out on some serious bargain shopping for stocks. So did anyone else who tried to time the market and miscalculated:
The Archambeaults…sold anyway, reducing their stock holdings to 20% from 85%. They sold in November, which hasn’t hurt them since the market is now roughly flat for 2009. Still, Mr. Archambeault said it is tough to watch the rally pass him by. He is thinking of putting half the money back into the stock market in coming months.
What’s the line from Dune, “Fear is the mind killer.” People that don’t understand the fluctuations of the stock market, and don’t have the stomach for it, can make some ill-informed decisions. But, not even financial advisers are immune from panic:
Not everybody who sold earlier this year considers it a mistake. Holly Hunter, a financial adviser in Portsmouth, N.H., advised many of her clients to sell, first in the summer of 2007, then again in February of this year. “My folks need income,” she said. “They need to know they can pay their bills….There is no waiting time for things to come back around.”
Two-thirds of her clients were retirees. She had them in stocks for 60%. Did she ever hear of asset allocation? And they pay this woman for financial advice? Here’s another pearl of wisdom:
Only two have since questioned whether selling was the right move. “The downside would have been horrific,” she said. “What if we were at 3000 now? Selling at 6500 would have been brilliant. And you don’t know that at the time of the decision.”
What if? Well, a financial adviser should know that the market will have wild swings. If you have enough years until retirement, you can just hang on and ride it out. To quote Warren Buffett again:
“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
But if you’re a retiree, you have no business trusting your nest egg to an unstable market. They should have gradually made the move out of equities long before the current crisis. February was the wrong time to sell. The horse was already out of the barn by then, or the corral. Whatever.
My point is: don’t do what these knuckleheads did. Read. Get all the information you can. Talk to someone who;s a successful investor, and set up a strategy that includes what you would do in a bear market. And by all means, don’t panic!
Read the original article: Many Bought Shares High, Sold Low
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5 Ways to Grow Your Shrinking Nest Egg
Posted by enrique s in Retirement on May 4th, 2009
Your 401k is looking more like a 201k. A pension is a relic from your parents’ time. Pretty soon, you may not even have a job to complain about. Maybe your dreams of early retirement will have to remain only dreams. SmartMoney recently had an article listing 5 ways to stretch your savings:
Wait a Bit
Each year that a person delays taking Social Security benefits, the value of the monthly check increases by about 8 percent. Also, a person who retired at 66 rather than 62 could increase their retirement income from investments by as much as 40 percent!
This is probably the path that I’ll take, and not just for the financial side of it. I actually like working, and having a reason to get up in the morning. I can’t help it; it’s been wired into my head since I was a teenager.
Rethink the Home
Many retirees opt for a change of scenery by moving to a cheaper location. For those staying local, selling a home and renting can sometimes cut costs, especially for those who invest the proceeds of the home sale.
This is definitely an option. Although I plan on working in my Golden Years, that doesn’t mean that I have to live where I currently live. I might even achieve my goal of becoming location-independent.
Ride in Style, Used
You don’t need a new car to enjoy retirement. A driver who buys a 2005 model Audi A4 sedan instead of a brand-new one, for example, chops more than $19,000 off the five-year cost of owning the vehicle; most of that comes from savings on the purchase price, but other factors help too.
While I don’t feel the need for a new car, I currently lease my vehicle. I could certainly end this cycle when my lease is up, and buy a used car. My commute is short, under 10 miles each way.
Tap the Right Cash
One tip: Spend money in regular IRAs before tapping Roth IRAs. Roth withdrawals aren’t taxed, so retirees can dodge that expense — and therefore take out less money each year — as they get older. Other advisers suggest that current retirees tap their Roth savings first, so that they can take smaller withdrawals now, while the markets are down, and avoid having to sell assets at a loss.
I’m a long way from having to tap my IRAs, so I’ll need to do more research on this one. Hopefully, I’ll have something to tap!
Postpone Some Pampering
Those who do splurge may as well get something in return: Web sites like BillShrink.com can help consumers find credit cards with rewards programs that best fit their spending habits.
We’ve really cut our spending down this year, our vacation notwithstanding. We’re cutting more coupons than ever, and dinners in restaurants are few and far between.
All of these strategies could help you get more out of your shrinking nest egg. What changes have you made in response to the economic crisis?
You can read the original article from SmartMoney by clicking this link: Nest Egg 2009: 5 Ways to Stretch Your Savings
Follow me on Twitter: CorpBarbarian
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