Tag Archives: Saving

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.

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FIVE FACTS THAT PROVE AMERICANS ARE TERRIBLE AT MANAGING MONEY

I read this headline recently and wanted to share it with you.  Here’s the short version.

  1. About 1 in 4 literally have no emergency savings.
  2. We are more worried about paying for our next vacation than about saving enough for retirement.
  3. Millions of us hide money from our spouses and partners.
  4. We prioritize paying the wrong bills first.
  5. We’ve racked up $1 trillion in credit card debt — and that’s just a fraction of what we owe.

That’s troubling.

Very few of our clients suffer from these five issues, but we have had people coming through our doors who are searching for help to get out of debt and on the path to financial stability.

But even people who save and invest and have given serious though to retirement are not necessarily good at making investment decisions.

Having the right instincts and putting money in an investment account doesn’t mean that you are making the best decisions.  Navigating the complex world of modern investing is both a skill and an art that most people do not have the time or patience to learn.

That’s why more and more people are turning from brokers to independent Registered Investment Advisors (RIAs), fiduciaries who manage portfolios for a fee.  Turning the selection of investments over to an RIA, receiving regular reports of progress toward their financial goals, makes sense to people who understand the benefits of using professionals to accomplish complex tasks.

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Would You Prefer to Have $1 Million Cash Right Now or a Penny that Doubles Every Day for 30 Days?

Albert Einstein is credited with saying “compound interest is the eighth wonder of the world.”

To get back to the original question, would you prefer to have $1 million today or one cent that will double every day for 30 days?  If you chose the million dollars, you would leave millions on the table.

If you chose the penny and passed up the million dollars, on the second day your penny would be worth two cents, on day three it would be four cents, on the fourth day it would be 8 cents.  By day 18 the penny will have grown to $1,310.72.  By day 28 it will be worth over a million dollars:  $1,342,177.  On the 30th day it would be worth an astounding $5,368,709!

If the penny were to be allowed to double for another 30 days, the penny would grow to over $5 quadrillion (five thousand trillion!) dollars.

One of the things this illustrates is that compound growth takes time to make a dramatic difference.  For the person who wants to have enough money to retire in comfort, starting early is the key to success, even if the starting amount is small.

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Planning to Retire Someday? Start Planning Today!

Americans want help with financial planning.

A recent survey showed that most Americans don’t want to do their own financial planning but they don’t know where to go for help.  60% of adults say that managing their finances is a chore and many of them lack the skills or time to do a proper job.

The need for financial planning has never been greater.  For most of history, retirement was a dream that few lived long enough to achieve.  In a society where most people lived on farms, people relied on family for support.  Financial planning meant having enough children so that when you could no longer work, if you were fortunate enough to reach old age,  you could live with them.

The industrial revolution took people away from the farm and into cities.  Life expectancy increased.  In the beginning of the 20th century life expectancy at birth was about 48 years.  Government and industry began offering pensions to their employees.  Social Security, which was signed into law in 1935, was not designed to provide a full post-retirement income but to increase income for those over 65.

For decades afterward, retirement planning for many Americans meant getting a lifetime job with a company so that you could retire with a pension.  The responsibility to adequately fund the pension fell on the employer.  Over time, as more benefits were added, many companies incurred pension and retirement benefit obligations that became unsustainable.  General Motors went bankrupt partially because of the amount of money it owed to retired workers via pension and health obligations.

As a result, companies are abandoning traditional pension plans (known as “defined benefit plans”) in favor of 401(k) plans (known as “defined contribution plans.”) This shifts the burden of post-retirement income from the employer to the worker.   Instead of knowing what your pension income will be, employees are responsible for investing their money wisely so that they will have enough saved to allow them to retire.

In years past, people who invested some of their money in stocks, bonds and mutual funds viewed this as extra savings for their retirement years.  With the end of defined benefit pension plans, investing for retirement has become much more serious.  The kind of lifestyle people will have in retirement depends entirely on how well they manage their 401(k) plans, their IRAs and other investments.

Fortunately, the people who are beginning their careers are recognizing that there will probably not be pensions for them when they retire.  Even public employees like teachers, municipal and state employees are going to get squeezed.  Stockton, California declared bankruptcy over it’s pension obligations.  The State of Illinois’ pension obligations are only 24% funded.  Other states are facing a similar problem.

In fact, many Millennials we talk to question whether Social Security will even be there for them.  They also realize that they need help planning.  Traditional brokerage firms provide some guidance, but the average stock broker may not have the training, skills or tools to create a financial plan.  Mutual fund organizations can offer some guidance but getting personal financial guidance via a 800 number is not the kind of inpersonal relationship that most people want.

But there is an answer.  The rapidly growing independent RIA (Registered Investment Advisor) industry offers the kind of personal guidance that people want to help them create and execute a successful financial plan that will take them from work through retirement.  Many RIAs are also Certified Financial Planners (CFP™).  Many are fiduciaries who put their clients’ interests ahead of their own.  Dealing with a local RIA is like dealing with a family friend who’s can act as your personal financial guide.

For more information, and a copy of our book Before I Go, contact us.

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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.

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This Simple Tip Could Make a Big Difference in Your Retirement Account

You can make a 2016 contribution to your IRA or Roth IRA as early as January 1, 2016 and as late as April 15, 2017.  It would seem obvious that the sooner you contribute to your retirement account and invest the money, the more money you’ll have by the time you retire.

However, according to research from Vanguard, people are more than twice as likely to fund their IRAs at the last minute as opposed to the first opportunity!  When Vanguard looked back at the IRA contributions of its clients from 2007 to 2012, only 10% of the contributions were made at the optimum point in January, and over 20% were made at the very last month possible.

IRA Contribution Month

To demonstrate the type of real, monetary impact this can have on someone’s retirement savings, take the following hypothetical example.  On January 1 each year, “Early Bird” contributes $5,500, while “Last Minute” makes their $5,500 contribution on April 1 of the following year.  Assume that each investor does this for 30 years and earns 4% annually, after inflation.  Early Bird ends up with $15,500 more than Last Minute.  Put another way, Last Minute has incurred a $15,500 “procrastination penalty” by waiting to make his contribution until the last possible month.

Procrastination Penalty

At the beginning of every year, make fully funding your IRA contributions a habit. (And if you’re the type of person who works better when things are automated, look into setting up an automatic savings & investment plan from your paycheck or bank account to your IRA to save on a monthly or per-paycheck basis.)

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Setting Realistic Goals

How realistic are your goals?  Some people work hard and exceeded the goals they had when they were young.  Others find their goals forever out of reach.  For example, most people want to retire in their mid-sixties.  That’s a goal, but is it realistic?  Are they going to have a pension when they retire and, if so, how much is it?  When are they going to apply for Social Security, and how much are they going to get?  Will they need a retirement nest egg, and how much will be in it?

Career choices will have a big impact on these answers.  A financial plan will also provide many of these answers.  But a plan is only as good as the assumptions we put into it.  As the old saying goes: “Garbage in, garbage out.”

The rate of return you get on the money you put aside has a huge impact on whether you reach your goals.  Studies have shown that many people have an unrealistic expectation of the returns they can expect on their savings and investments.  With interest rates near zero percent, putting your money in the bank is actually a losing proposition after taxes and inflation.  Investing in the stock and bond markets may lead to higher returns.  But the long-term returns that many people assume they can get often leads to taking unreasonable risks.

There is nothing wrong with having high goals.  The best way to check to see if your goals are high, but attainable, is to talk to a fee only financial advisor.  Preferably one that is a CERTIFIED FINANCIAL PLANNER™.  They have the experience and the expertise to let you know if your goals are reasonable and what you can do to reach them.

Contact us for a “reality check” today.

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8 Common Reasons for Retirement Failure

1. Overspending.

-You won’t spend less in retirement.  The old saw that retirees only spend 80% of their pre-retirement income is a myth.

2. Elder Fraud.

-Seniors are becoming the favored victims of swindlers.

3. Health care.

-As we age the cost of medical care goes up.  Medicare is covering less and premiums are going up.

4. Starting a business.

-Investing capital in a business that fails can devastate retirement finances.

5. Adult children.

-Helping your children through a “rough patch” can become is one of the most common ways of ending up broke.

6. Second homes.

-The cost of maintaining that vacation home when you’re no longer working can drain your resources when your income drops.

7. Divorce.

-Couples sometimes wait until the children leave home to divorce.  When assets are split 50/50, retirement becomes a problem for both parties.

8. Investment mistakes.

-Making poor investment choices is one of the most common ways of ruining your retirement lifestyle.

If you are nearing retirement, don’t enter into it without a plan.

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One in five Americans dies broke.

A University Michigan study on health and retirement indicates that 20% of Americans age 85 or older died without any assets other than a house.  One in eight (12%) didn’t even have a house and one in ten (10%) died owing money.

It’s the biggest financial worry for anyone saving for retirement: will I outlive my savings and die broke?  Based on surveys repeatedly pointing to dismally low levels of retirement savings, most American households have reason to be concerned.

While my opinion is not based on a survey, but on experience, I believe that this problem is not based on lack of earnings but on other factors.  I would like to highlight two of them.

One of those factors is that many people place saving for retirement low on their order of priority.  There are always other things that seem to be more interesting, or fulfilling, than putting money away for a far distant future.  Earlier generations had less of a social safety net and were more future oriented.  They knew that they had to take care of themselves as they got older or move in with their children.  The government programs that have been put in place over the last 85 years have made the specter of destitution at old age seem less dire.

A second factor is lack of knowledge.  Far too many middle-income income people are either unaware, or afraid, of the traditional ways people have accumulated money for retirement.  Many a family gathering will include a fair number of people who believe that an IRA is something you do with a bank.  Others will tell you that investing is gambling and are deathly afraid of anything having to do with stocks, bonds or mutual funds.

For many retirees, the end of life comes with major medical costs that can wipe out savings.  But others have little savings to begin with.  “Many more people who have very low financial assets at the end of life have been bumping along with low assets through most of their retirement,” he said.  “They just hadn’t saved very much.”

That brings us to Baby Boomers who are either retired or rapidly approaching retirement age.  Recent data shows that 40% have not saved anything and over 20% have less than $100,000 saved.

People in this situation need professional help.  They are not going to make it on their own.  They really need to seek out an advisor, preferably an RIA, who will take them under their wing, educate them, and be willing to work with them before it’s too late.

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A wise young couple

A wise young couple came to see us yesterday. They were wise because they took the advice of their wise grandmother who told them they needed the services of a financial planner.

Too often, couples starting out in life take a do-it-yourself approach. There are any number of reasons. But what this means is that they make all the mistakes that amateurs make. And while there is no bill attached, those mistakes are very expensive.

Young couples have lots of financial questions. Questions about spending and saving, about whether to rent or buy a home, how to invest their 401k, what kind of IRA is best, how to create a budget, and how to create a long-term financial plan.

The wise grandmother told the couple that they should find a fee-only financial planner; someone who did more than simply manage money but could help answer the questions that arise from day to day. A financial planner who they could call any time they had a question involving finances. One who would meet with them whenever they wanted. One who had experience in the issues that affected them as they begin building their future.

If you know a young couple like this, you can be like the wise grandmother and tell them to contact us at Korving & Company. We are just the kind advisor they need.

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