Category Archives: Saving money

The Fate of Social Security for Younger Workers – And Three Things You Should Do Right Now

We constantly hear people wonder whether Social Security will still be there when they retire.  The question comes not just from people in their 20’s, but also from people in their 40’s and 50’s as they begin to think more about retirement.  It’s a fair question.

Some estimates show that the Social Security Trust Fund will run out of money by 2034.  Medicare is in even worse shape, projected to run out of money by 2029.  That’s not all that far down the road.

So how do we plan for this?

The reality is that Social Security and Medicare benefits have been paid out of the U.S. Treasury’s “general fund” for decades.  The taxes collected for Social Security and Medicare all go into the general fund.  The idea that there is a special, separate fund for those programs is accounting fiction.  What is true is that the taxes collected for Social Security and Medicare are less than the amount being paid out.

What this inevitably means is that at some point the government may be forced to choose between increasing taxes for Social Security and Medicaid, reducing or altering benefits payments, or going broke.

Another question is whether the benefits provided to retirees under these programs will cover the cost living.  Older people spend much more on medical expenses than the young, and medical costs are increasing much faster than the cost of living adjustments in Social Security payments.  If a larger percentage of a retiree’s income from Social Security is spent on medical expenses, they will obviously have to make cuts in other expenses – be they food, clothing, or shelter – negatively impacting the lifestyle they envisioned for retirement.

The wise response to these issues is to save as much of your own money for retirement as possible while you are working.  There is little you can do about Social Security or Medicare benefits – outside of voting or running for public office – but you are in control over the amount you save and how you invest those savings.

As we face an uncertain future, we advocate that you take these three steps:

  1. Increase your savings rate.
  2. Prepare a retirement plan.
  3. Invest your retirement assets wisely.

If you need help with these steps, give us a call.  It’s what we do.

Tagged , , , , , ,

Three Ways to Stay Financially Healthy Well into Your 90s

Image result for living to old age picture

According to government statistics, the average 65-year-old American is reasonably expected to live another 19 years.  However, that’s just an average.  The Social Security administration estimates that about 25% of those 65-year-olds will live past their 90th birthday.  We were reminded of these statistics when we recently received the unfortunate notice that a long-time client had passed away.  He and his wife were both in their 90s and living independently.

People often guesstimate their own life expectancy based on the age that their parents passed.  Genetics obviously has a bearing on longevity.  Modern medicine has also become a big factor in how long we can expect to live.  Diseases that were considered fatal 50 years ago are treatable or curable today.  For many people facing retirement and the end of a paycheck, the thought of someday running out of money is their biggest fear.  And there is no question that living longer increases the risk to your financial well-being.

The elderly typically incur costs that the young do not.  As we get older, visits to the doctor – or the hospital – become more frequent.  There’s also the onset of dementia or Alzheimer’s that so many suffer from.  And, as our bodies and minds age, we may not be able to continue living independently and may have to move to a long-term care facility.

As we approach retirement, we should face these issues squarely.  Too many people refuse to face these possibilities, and instead just hope things will work out.  As a wise man once said, hope is not a plan.

So here is a three step plan to help you remain financially healthy even if you live to be 100:

  1. Create a formal retirement plan. Most Financial Planners will prepare a comprehensive retirement plan for you for a modest fee.  We recommend that you choose to work with an independent Registered Investment Advisor who is also a Certified Financial Planner™ (CFP®).  Registered Investment Advisors are individuals are fiduciaries who are legally bound to put your interests ahead of their own and work solely for their clients, not a large Wall Street firm. CFP® practitioners have had to pass a strenuous series of examinations to obtain their credentials and must complete continuing education courses in order to maintain them.
  2. Save. Save as much of your income as possible, creating a retirement nest-egg.  Some accounts may be tax exempt (Roth IRA) or tax deferred (regular IRA, 401k, etc.), but you should also try to save and invest in taxable accounts once you have reached the annual savings limit in tax advantaged accounts.
  3. Invest wisely. This means diversifying your investments to take advantage of the superior long-term returns of stocks as well as the lower risk provided by bonds.  While it’s possible to do this on your own, most people don’t have the education, training or discipline to create, monitor and periodically adjust an investment strategy that has the appropriate risk profile to last a lifetime.  We suggest finding a fee-only independent Registered Investment Advisor to manage your investments.  They will, for a modest fee, create and manage a diversified portfolio of stocks, bonds, mutual funds and/or exchange traded funds designed to meet your objectives.

The idea of saving for long retirement should not be avoided or feared.  With the proper planning and preparation, retirement gives us the opportunity to enjoy the things that we never had time for while we were working, and, can indeed be your Golden Years.

Tagged , , , ,

What is the difference between a 401(k) and a pension plan?

Both plans are designed to provide income for retirement.  There are some very important differences.

A 401(k) is a type of retirement plan known as a “defined contribution plans.”  That means that you know how much you are saving but not how much it is worth when you are ready to retire.  That depends on your ability to invest your savings wisely.  The benefit is that your savings grow tax deferred.  Many employers match your contribution with a contribution of their own, encouraging you to participate.

A pension plan is known as a “defined benefit plan.”  That means that you are guaranteed a certain amount of income by the plan when you retire.  The responsibility of funding the plan and investing the plan assets are your employer’s.

Because your employer is liable for anything that goes wrong with the pension they have promised their employees, many employers have discontinued pension plans and replace them with 401(k) type plans.  This shift the responsibility for your retirement income from the company to you.

If you have a 401(k) for your retirement and are unsure about the best investment options available to you, get the advice of a financial planner who is experienced in this field.

For more information, contact us.

Tagged , , , , ,

The Retirement Dilemma Facing American Workers

illustrated-financial-roadmap-750

The way Americans fund their retirement has undergone a fundamental transformation in the last 30 years. According to the Bureau of Labor Statistics, the percentage of private-sector employees with a traditional defined benefit pension plan has dropped from about 45% in 1980 to a little over 20% in 2011. A defined benefit pension plan is one that provides the retiree with a guaranteed income for the rest of his or her life.

The guaranteed pension has been replaced by a defined contribution plan. Today, about 50% of the private workforce participates in one of these plans, which include 401(k) plans and 403(b) plans and allow the worker to set money from their paycheck aside to grow tax-deferred until they retire, at which point they can start pulling from it to fund their retirement. However, there is no guarantee that the amount saved will be adequate to meet their income needs once they retire.

Most government workers still have access to traditional defined benefit pension plans. However, most of these plans are severely underfunded and questions are being raised about cities and states being able to pay the benefits that were promised. A recent poll of people 25 years and older concluded that “Americans are united in their anxiety about their economic security in retirement.” Over 75% of those surveyed worry that economic conditions might hurt their chances for a secure retirement. (For related reading from this author, see: How Retirees Should Think About Retirement Income.)

Social Security and Medicare Concerns

The federal government provides a basic level of retirement income via Social Security, and provides a basic level of health insurance via Medicare and Medicaid. However, these programs are on shaky ground according to most actuaries. The Social Security Trust Fund will run out of money around 2034 unless it is reformed. That does not mean that checks will not go out to retirees, but it does mean that the amount going out will decrease.

Medicare is in even worse shape and, with the continued rapid rise in medical costs, may face a crisis even sooner. The costs of health care and increasing life spans are major issues for retirees, which explains the reason that so many Americans think they are facing a retirement crisis in the first place. Given the level of debt at the federal level and the rhetoric of the current administration, we do not see the government jumping in to fund the American worker’s retirement at levels above what it does now.

Even Denmark, an icon of the Welfare State, is proposing tax cuts, reducing welfare benefits and raising the retirement age.

“We want to promote a society in which it is easier to support yourself and your family before you hand over a large share of your income to fund the costs of society.”

Funding Your Own Retirement

If the government is not going to come to the rescue, and if corporations are going to continue to unload the financial risks and burdens associated with pension plans, what is the answer? Look to the old saying, “If you want something done, do it yourself.” Going forward, it’s increasingly going to be up to the individual American worker to fund his or her own retirement.

If people begin saving early, a large part of the retirement problem will be solved. The most valuable asset that people have when they are young is time. If workers begin putting money aside at an early age, it will grow and compound for 40 to 50 years until retirement, solving a large part of the problem. The compounding of returns is what makes so much of the difference.

Here is a little math exercise: assume you begin by saving $25 per month—much less than the cost of having one decent dinner at a restaurant—and invest it conservatively so that it grows at 5% per year. At the end of 45 years you will have $50,000. Now assume that you increase your savings by 10% each year—so that in year two you save $27.50 per month (still far less than the cost of just one dinner out)—at the end of 45 years you have $400,000 to use in retirement. These examples go to show that saving a modest sum for retirement does not require much cost or effort, just discipline, time and patience.

Financial Education is Key

The greatest asset that young workers have is time. Unfortunately, people rarely enter the workforce knowing much about saving or investing. That is one reason so many people live paycheck to paycheck. The solution to the retirement crisis is achievable by educating young people and raising awareness. Until schools and colleges begin having mandatory courses for our young people about managing money, parents should be doing this. If they are unsure, they can put their children in touch with a financial planner who will spend time to provide the education. Many financial planners are beginning to offer hourly rates to help people learn to plan and budget.

For most people, the retirement problem is the result of a lack of information. The solution is right in front of us, if we realize that times have changed and people must change with it.

(For more from this author, see: Are You Ready for the Retirement Challenge?)

Tagged , , , , , ,

Retirement Lessons from Gene Wilder

Gene Wilder

Gene Wilder

Unlike many movie stars, Gene Wilder did retirement right.

Gene Wilder’s glory years came too late for the Golden Age of Hollywood and too early for the modern era of $50 million superstars, but he did well enough to walk away after a couple of decades.

In an industry where performers in their 80s and 90s outlive their savings and need to keep working into the grave to pay the bills, that’s an achievement.

While the details of his estate have not been made public, there are a number if things we do know.

Gene Wilder died somewhere between filthy rich and flat broke, spending down his cash while remaining comfortable to the end, which came last week from Alzheimer’s complications…

Wilder retired at 58 to do what he enjoyed, writing his memoirs while living in a relatively modest home in Connecticut with his wife.  While he was active in ovarian cancer charities, it’s unclear how much he gave to them other than lending his celebrity to the charities he favored.

After all, the spouse is the only estate planning goal retirees really need to consider. Everything else — from philanthropy to dynastic heirs — comes second.

The lessons here are simple, yet unusual in the entertainment business – whether we’re talking about movies or sports.  Too often highly paid entertainers adopt a lifestyle that absorbs all of their income.  That means that if their careers end after a few years they need to begin a new career.  The alternative is to end up broke.

Wilder put enough aside while he was working to allow him to live in the style he enjoyed for 25 years after retiring and leave his wife in comfort after he passed away.  It’s a lesson for all of us who are not movie stars.  Know what we want, save so that we can afford it, and retire when we’re ready to walk away and leave it all behind.

Pay No Commissions

time to invest

New clients to Korving & Company will pay no commissions on stock and ETF trades when they open an account with us between June 16th and December 31st 2016.

We use Charles Schwab as our custodian and Schwab has made this limited-time promotion to encourage new clients to open accounts with RIA’s like Korving & Company.

The promotion is called “Make the Move” and it’s designed to:
• Give you an opportunity to experience the value and benefits of working with us.
• Execute commission-free trades to offset the cost of realigning assets to one of our portfolios.

Contact us for more information.

Ending a bad habit

Did you ever hear about the famous feud between the Hatfield and the McCoys?  They lived in the mountains on the West Virginia/ Kentucky border in the late 1800s.  It all began in a dispute over a hog and led to the death of two dozen people over a 20 year period.  As time passed the original reasons were lost and the feud became a deadly habit.

Most people are creatures of habit.  Some habits are a good thing.  It’s a substitute for rethinking a lot of things we do automatically: we shower, brush our teeth and eat breakfast mostly out of habit rather than spending time wondering if we should.  It makes our lives easier.

The habit of saving money for retirement is also a good thing.  It’s a habit that leads to financial success.  But what we do with that money can lead to bad habits.  Getting into the habit of investing in the same thing year after year can lead to bad results.

For example, Microsoft (MSFT) has made some people – like its founder Bill Gates – one of the richest men in the world.  Adjusted for stock splits, it was $0.10 /share in 1986; today it’s about $54/ share, a gain of over 54000%.  However, if you had bought it in 1999 hoping to see that trend continue you could have paid $59/per share.  You would still be waiting to break even, having lost money over a 17 year period.

Unfortunately, this is the kind of habit that so many investors exhibit.   They may buy stock in a company they work for and develop the habit of sticking with it even if the company has problems.  General Electric (GE) has tens of thousands of employees who bought its stock.  They saw the price drop from $60/share to $6/share between 2000 and 2009.

They may read about a mutual fund in a magazine or on-line and buy it without doing the appropriate research and add to it out of habit.  Habits are a substitute for thinking about our actions.  Some habits, like exercise and punctuality are good.  But we should avoid falling into the trap of making investment choices out of habit.  To do so can lead us to the same fate of the investor who bought Microsoft 17 years ago or GE 16 years ago and is still waiting to get even.

One way to avoid the trap of using habits to make investment choices is to regularly re-examine your investments.  Ask yourself if you had cash, would you buy the same things you currently have in your portfolio?  If you don’t know the answer, this is the time to get professional guidance from an investment professional, a trusted fiduciary who has your best interests at heart.

Tagged , , , , , , , , , , ,

Four “Hidden” Ways We Help Our Clients Save Money

We often tell clients that our long term investment objective is to provide them with a fair rate of return over time while working to minimize the amount of risk they take.  Part of that objective is achieved by finding ways to save them money.

Buying the right mutual funds can save clients a lot of money.  Many mutual fund families offer the exact same fund in several different “share classes.”  The primary difference between each share class is the expenses the fund charges the client.  After deciding which fund we want to buy, we choose the least expensive version of that fund.  This means that our clients keep a bigger share of the fund’s returns.

We also pay attention to the tax consequences of our investment strategy and work to minimize the taxes that our clients pay at the end of the year.  Occasionally we will sell some losing investments to offset gains in other investments.  At the end of the day, this allows our clients to keep more of their money.

We help clients understand how much they need to save for retirement.

For example, we might tell them that buying the new luxury car that they really want every three years will mean they have to work for another five years to meet their stated retirement goals. This helps them with their decision making.

 Making sure our clients understand how much they can safely spend and where they should take the money for their goals is a key value-added service that we provide.

 

Tagged , ,
%d bloggers like this: