Tag Archives: Retirement Planning For Women

Could Social Security Really Go Away?

1 Apr

shutterstock_226983016 copy 2As we continue to hear warnings that Americans are not adequately saving for retirement, we hear similarly dire news about the future of Social Security funds. But will Social Security actually run out of money in the 2030s? The reality is that the extreme versions of the warnings assume that no action will be taken to address Social Security’s financial challenges.

So what’s causing the problem?

Social Security is being strained by a giant demographic shift. In 2030, more than 20% of the U.S. population will be 65 or older. In 2010, only 13% of the nation was that old. In 1970, less than 10% of Americans were in that age group.1

Demand for Social Security benefits has increased, and the ratio of retirees to working-age adults has changed. In 2010, the Census Bureau determined that there were about 21 seniors (people aged 65 or older) for every 100 workers. By 2030, the Bureau projects that there will be 35 seniors for every 100 workers.1

As payroll taxes fund Social Security, the program faces a major dilemma. Actually, it faces two.

Social Security maintains two trust funds. When you read a sentence stating that “Social Security could run out of money by 2035,” that statement refers to the projected shortfall of the Old Age, Survivors, and Disability Insurance (OASDI) Trust. The OASDI is the main reservoir of Social Security benefits, from which monthly payments are made to seniors. The latest Social Security Trustees report indeed concludes that the OASDI Trust could be exhausted by 2035 from years of cash outflows exceeding cash inflows.2,3

Congress just put a patch on Social Security’s other, arguably more pressing problem. Social Security’s Disability Insurance (SSDI) Trust Fund risked being unable to pay out 100% of scheduled benefits to SSDI recipients this year, but the Bipartisan Budget Act of 2015 directed a slightly greater proportion of payroll taxes funding Social Security into the DI trust for the short term. This should give the DI Trust enough revenue to pay out 100% of benefits through 2022. Funding it adequately after 2022 remains an issue.4

If the OASDI Trust is exhausted in 2035, what would happen to retirement benefits? They would decrease. Imagine Social Security payments shrinking 21%. If Congress does not act to remedy Social Security’s cash flow situation before then, Social Security Trustees forecast that a 21% cut may be necessary in 2035 to ensure payment of benefits through 2087.3

No one wants to see that happen, so what might Congress do to address the crisis? Three ideas in particular have gathered support.

*Raise the cap on Social Security taxes. Currently, employers and employees each pay a 6.2% payroll tax to fund Social Security (the self-employed pay 12.4% of their earnings into the program). The earnings cap on the tax in 2016 is $118,500, so any earned income above that level is not subject to payroll tax. Lifting (or even abolishing) that cap would bring Social Security more payroll tax revenue, specifically from higher-income Americans.3

*Adjust the full retirement age. Should it be raised to 68? How about 70? Some people see merit in this, as many baby boomers may work and live longer than their parents did. In theory, it could promote longer careers and shorter retirements, and thereby lessen demand for Social Security benefits. Healthier and wealthier baby boomers might find the idea acceptable, but poorer and less healthy boomers might not.3

*Calculate COLAs differently. Social Security uses the Consumer Price Index for Urban Wage Workers and Clerical Workers (CPI-W) in figuring cost-of-living adjustments. Many senior advocates argue that the Consumer Price Index for the Elderly (CPI-E) should be used instead. The CPI-E often gives more weight to health care expenses and housing costs than the CPI-W. Not only that, the CPI-E only considers the cost of living for people 62 and older. That last feature may also be its biggest drawback. Since it only includes some of the American population in its calculations, its detractors argue that it may not measure inflation as well as the broader CPI-W.3

Social Security could still face a shortfall even if all of these ideas were adopted. The Center for Retirement Research at Boston College estimates that if all of these “fixes” were put into play today, the OASDI Trust would still face a revenue shortage in 2035.3

In future decades, Social Security may not be able to offer retirees what it does now, unless dramatic moves are made on Capitol Hill. In the worst-case scenario, monthly benefits would be cut to keep the program solvent. A depressing thought, but one worth remembering as you plan for the future.

Julie Newcomb, a Certified Financial Planner™ in Orange County, CA, specializes in financial planning for women.  As a wife, mom and business owner, Julie understands the pressures and challenges most women feel on a daily basis as they juggle many important priorities. Julie’s favorite thing about her job is the ability to give women peace of mind when they entrust her with their finances. To learn more about Julie Newcomb Financial, go to julienewcomb.com.

Sources:

1 – money.usnews.com/money/retirement/articles/2014/06/16/the-youngest-baby-boomers-turn-50 [6/16/14]

2 – fool.com/retirement/general/2016/03/20/the-most-important-social-security-chart-youll-eve.aspx [3/20/16]

3 – fool.com/retirement/general/2016/03/19/1-big-problem-with-the-3-most-popular-social-secur.aspx [3/19/16]

4 – marketwatch.com/story/crisis-in-social-security-disability-insurance-averted-but-not-gone-2015-11-30 [11/30/15]

The 5 Chapters of Retirement

27 Feb

Julie Newcomb 1

Even if you still have 30 years left until retirement, you’ve probably already started imagining what your retirement might look like. Whether those thoughts are filled with dreams or dread, it’s natural to wonder about the next chapter in your journey.

  • What will life without the demands of a job look and feel like?
  • What type of lifestyle will I be able to afford?
  • Will I be healthy & wealthy enough to travel?

The journey to and through retirement occurs gradually, like successive chapters in a book. Each chapter has its own things to consider. While the journey is different for everyone, here’s a preview.

Chapter 1: The Fifties

At this stage of life, retirement becomes less like a far-off dream and more like a forthcoming reality. You begin to think about when you can retire, and about taking the right steps to retire comfortably.

By one measure, men have their peak earning years in their mid-fifties. Data from the Federal Reserve Bank of New York shows the median male worker earning 127% of his initial salary at that time. The peak earning years for women are harder to statistically gauge, as some women leave the paid workforce for years-long intervals. In inflation-adjusted terms, earnings actually peak earlier in life. PayScale estimates that on average, pay growth for women flattens at age 39 (at a median salary of $60,000), and at age 48 for men (at a median salary of $95,000). So by the fifties, many people are receiving raises to keep up with the cost of living, but essentially earning the equivalent of what they made a decade or more ago.1,2

During your fifties, you may contend with “lifestyle creep” – the phenomenon of your household expenses growing along with your pay raises. These increased expenses may include housing costs, education costs, healthcare costs, even eldercare costs. Despite these financial strains, the inflow of new money into retirement accounts must not cease; your retirement plan assets should not be drawn down through loans or withdrawn too early.

Chapter 2: The Early Sixties

The anticipation builds at this point; you start to think about the process of retiring and the precise financial and lifestyle steps involved. You also begin to think about the near future – not only what you will do next, but how you will do it.

According to the Center for Retirement Research at Boston College, the average American man now retires at age 64, the average American woman at age 62. So the reality is that the early sixties coincide with retirement for many people. This reality is worth noting in light of the difference between Americans’ envisioned and actual retirement ages. Last April, a Gallup poll asked pre-retirees when they expected to leave the workforce: 37% saw themselves working past 65, 32% before 65, and 24% at 65. The same poll asked older, retired Americans when they had stopped working full-time, and 67% of those respondents said they had done so before 65.3,4

You may have to act on your plans to volunteer or start an encore career earlier than you think. If you do not have a set plan for the next chapter, a phased retirement may give you more of an opportunity to determine one.

This is also a time to dial down risk in your portfolio, especially if a bear market occurs right before you retire. You have little time to recover from a downturn.

Chapter 3: The Start of Retired Life

The first year or so of retirement is akin to a “honeymoon phase” – you have the time and perhaps the money to pursue all kinds of dreams. The key is not to spend wildly. Lifestyle creep also affects new retirees; free time often means more chances to spend money.

The good news is that you may spend less than you think. Transportation, insurance, housing, clothing and food costs may all decline. The common view is that you will need to live on 80% of your end salary for a comfortable retirement, but in a 2014 T. Rowe Price survey of retirees, the average respondent was living on 66% of his or her pre-retirement income. Eighty-five percent of those retirees said they were maintaining their standard of living with less money.5

Chapter 4: The Mid-Sixties thru Late Seventies

This is when some people get a little restless. It is also when some people find their retirement savings growing disturbingly smaller. You may get bored with all-leisure, all-the-time and want to volunteer or work on your own terms, health permitting. You may want to adjust your retirement income strategy or see if new streams of income can be arranged.

Chapter 5: Eight & Afterward

The last chapter of retirement is one frequently characterized by the sharing of legacies and life lessons, a new perspective on the process of living and aging, and deeper engagement (or reengagement) with children and grandchildren. This is also the time when you should think about your financial legacy, and review or update your estate plan so that when you leave this world, things are in good order and your wishes are followed.

Before and during your retirement, it is wise to keep in touch with a financial professional who can guide and consult you when questions about income, investments, wealth protection, and wealth transfer arise.

Julie Newcomb, a Certified Financial Planner™ in Orange County, CA, specializes in financial planning for women.  As a wife, mom and business owner, Julie understands the pressures and challenges most women feel on a daily basis as they juggle many important priorities. Julie’s favorite thing about her job is the ability to give women peace of mind when they entrust her with their finances. To learn more about Julie Newcomb Financial, go to julienewcomb.com. 

Sources:

1 – marketwatch.com/story/peak-earnings-for-men-come-in-their-early-50s-2015-06-18 [6/18/15]

2 – fastcompany.com/3025564/how-to-be-a-success-at-everything/when-are-your-high-earning-years-how-much-you-should-make- [1/30/14]

3 – crr.bc.edu/briefs/the-average-retirement-age-an-update/ [3/15]

4 – gallup.com/poll/182939/americans-settling-older-retirement-age.aspx [4/29/15]

5 – news.investors.com/investing/073014-711065-people-adjust-to-lower-income-in-retirement.htm [7/30/14]

Are You a Victim of the Retirement Savings Gender Gap?

5 Jan

shutterstock_108591956You may or may not be surprised to hear that there is a gender gap when it comes to retirement savings between men and women.

 In fact

  • The median IRA/workplace retirement savings balance for a 45-year-old woman is $43,446.
  • The median IRA/workplace retirement savings balance for a 45-year-old man is $63,875.

Obviously, you cannot retire on that. The 2015 edition of Financial Finesse’s annual survey, The Gender Gap in Financial Literacy, gauged the additional amount of savings that the median 45-year-old male employee and the median 45-year-old female employee would need to replace 70% of pre-retirement income and pay for estimated medical expenses (long term care not included.) It found a 26% disparity:

  • The median male employee saver needed $212,256 to reach that goal
  • The median female employee needed $268,404.1

A gap in some aspects of financial literacy was also notable.

  • Just 67% of pre-retiree women responded that they had a general knowledge of investment classes compared to 84% of their male peers.
  • While 78% of men surveyed said that they had an emergency fund, merely 67% of women did.
  • Just 34% of women were confident about the way their portfolios were allocated, versus 48% of men.2

Is the solution to simply work longer?

Some women hope to keep working into their seventies, but that may not happen. Earlier in this decade, MetLife studied “leading edge” baby boomers born in 1946 as they turned 66 in 2012. It found that 52% were already retired, and 43% had claimed Social Security earlier than they anticipated.3

How can women plan to address this?

  1. Find out where you stand in terms of savings now. A simple retirement planning calculator (there are many available online) can help you see how much more you need to save, per year and over the course of your career.
  2. Save enough to get the match. If your employer will match a percentage of your retirement plan contributions per paycheck, strive to contribute enough to your plan each paycheck so that the match occurs.
  3. Ask about automatic escalation. Some workplace retirement plans have this option, through which you can boost your retirement contributions by 1% a year. This is a nice “autopilot” way to promote larger retirement nest eggs.
  4. Make tax efficiency one of your goals. Consult a financial professional about this, for there are potential advantages to having your money in taxable, tax-deferred, and tax-exempt accounts. For example, when you contribute to a traditional IRA or a typical employer-sponsored retirement plan, you make tax-deferred contributions. This lowers your taxable income today, although the distributions from those accounts will be taxable in retirement. You defer after-tax dollars into Roth IRAs; those dollars are taxable today, but you will eventually get tax-free growth and tax-free withdrawals if you follow IRS rules. Taxable investment accounts may seem less preferable, but they too can potentially help you pursue financial goals.4
  5. Determine an appropriate “glide path.” Many financial professionals caution retirement savers to gradually reduce the risk in their portfolio as they age – to “glide” from a portfolio mainly invested in equities to one less invested in them. (Some retirement plan accounts will actually adjust your investment mix for you as you age.) Glide paths are different for everyone, however. If you really need to accelerate your retirement savings effort, then you may need to accept more risk in your portfolio in exchange for the possibility of greater returns. (Again, this is a good topic for a conversation with a financial professional.)   

In some ways, women are narrowing the retirement saving gender gap. Financial Finesse found that 4.2% more women had adopted an investment strategy in the 2015 survey compared to the 2012 edition, and 2% more had done a basic retirement savings projection.  In passing, it also noted that the percentage of women who said they were on track to meet their retirement savings goal rose 4.2% from 2012 to 2014.2

Julie Newcomb, a Certified Financial Planner™ in Orange County, CA, specializes in financial planning for women.  As a wife, mom and business owner, Julie understands the pressures and challenges most women feel on a daily basis as they juggle many important priorities. Julie’s favorite thing about her job is the ability to give women peace of mind when they entrust her with their finances. To learn more about Julie Newcomb Financial, go to julienewcomb.com. 

Sources:.

1 – 2015_Gender_Gap_report_final_brief_v2.pdf [12/3/15]

2 – forbes.com/sites/nextavenue/2015/09/17/the-unexpected-news-about-women-men-and-retirement/ [9/17/15]

3 – metlife.com/mmi/research/oldest-boomers.html#graphic [12/3/15]

4 – nerdwallet.com/blog/advisorvoices/prioritize-key-retirement-savings-steps/ [12/1/15]

 

Are You Prepared for Long Term Care Costs?

30 Oct

Long-term CareAs the average life span increases, so do your odds that you’ll need to utilize long term care in the future. But, how can you plan for it? How do you pay for it?  

 Strategic insurance choices should always play a role when you’re planning for retirement. Having the right insurance to cover unforeseen, and often large, expenses can really take the stress off. However, as medical costs skyrocket the price of long term care insurance is really going up as well. If you are a baby boomer and you have kept your eye on it for a few years, chances are you have noticed much costlier premiums for LTC coverage today compared to several years ago. For example, in 2015 the American Association for Long-Term Care Insurance found that married 60-year-olds would pay $2,170 annually to get a total of $328,000 of coverage.1

As CNBC notes, about three-quarters of the insurers that sold LTC policies ten years ago have stopped doing so. Demand for LTC coverage will only grow as more baby boomers retire – and in light of that, insurance providers have introduced new options for those who want to LTC coverage.1

Hybrid LTC products have emerged. Some insurers are structuring “cash rich” whole life insurance policies so you can tap part of the death benefit while living to pay for long term care. You can use up to $330 a day of the death benefit under such policies, with no reduction to the cash value. Other insurance products are being marketed featuring similar potential benefits.2

This option often costs a few hundred dollars more per year – not bad given that level annual premiums on a whole life policy with a half-million or million-dollar payout often come to several thousand dollars. The policyholder becomes eligible for the LTC coverage when he or she is judged to require assistance with two or more of six daily living activities (dressing, bathing, eating, etc.) or is diagnosed with Alzheimer’s disease or some other kind of cognitive deficiency.2

This way, you can get what you want from one insurance policy rather than having to pay for two. Contrast that with a situation in which you buy a discrete LTC policy but die without requiring any long term care, with the premiums on that policy paid for nothing.

The basics of securing LTC coverage applies to these policies. As with a standard LTC policy, the earlier you start paying premiums for one of these hybrid insurance products, the lower the premiums will likely be. You must pass medical underwriting to qualify for coverage. The encouraging news here is that some people who are not healthy enough to qualify for a standalone LTC insurance policy may qualify for a hybrid policy.3

These hybrid LTC products usually require lump sum funding. An initial premium payment of $50,000 is common. Sometimes installment payments can be arranged in smaller lump sums over the course of a few years or a decade. For a high net worth individual or couple, this is no major hurdle, especially since appreciated assets from other life insurance products can be transferred into a hybrid product through a 1035 exchange.1,3

Are these hybrid policies just mediocre compromises? They have detractors as well as fans, and the detractors cite the fact that a stand alone LTC policy generally offers greater LTC coverage per premium dollar paid than a hybrid policy. They also cite their two sets of fees, per their two forms of insurance coverage. While it is possible to deduct the cost of premiums paid on a conventional LTC policy, hybrid policies allow no such opportunity.3

Paying a lump sum premium at the inauguration of the policy has both an upside and a downside. You will not contend with potential premium increases over time, as owners of stock LTC policies often do; on the other hand, the return on the insurance product may be locked into today’s (minimal) interest rates.

Another reality is that many middle-class seniors have little or no need to go out and buy a life insurance policy. Their heirs will not face inheritance taxes, because their estates aren’t large enough to exceed the federal estate tax exemption. Moreover, their children may be adults and financially stable themselves; a large death benefit for these heirs is nice, but the opportunity cost of paying the life insurance premiums may be significant.4

Cash value life insurance can be a crucial element in estate planning for those with large or complex estates, however – and if some of its death benefit can be directed toward long term care for the policyholder, it may prove even more useful than commonly assumed.

Julie Newcomb, a Certified Financial Planner™ in Orange County, CA, specializes in financial planning for women.  As a wife, mom and business owner, Julie understands the pressures and challenges most women feel on a daily basis as they juggle many important priorities. Julie’s favorite thing about her job is the ability to give women peace of mind when they entrust her with their finances. To learn more about Julie Newcomb Financial, go to julienewcomb.com.

Sources:

1 – cnbc.com/2015/08/07/fer-more-products-that-cover-long-term-care-costs.html [8/7/15]

2 – consumerreports.org/cro/news/2015/04/get-long-term-care-from-whole-life-insurance/index.htm [4/16/15]

3 – tinyurl.com/o3ty2j3 [5/4/14]

4 – marketwatch.com/story/hedging-your-bets-on-long-term-care-2013-11-06 [11/6/13]

 

6 Keys Lessons for Long-Term Investing

30 Sep

Stock MarketInvesting your hard-earned dollars can be complicated and feel scary at times. The safest and most liquid options, say, putting it in the bank, offer such little return that it feels like you’re actually losing money. The truth is, it’s important to keep the long-term in perspective when investing for financial growth and take to heart tried and true lessons.

Lesson #1: Shut out most of the “noise.” News outlets take the temperature of global markets five days a week (and even on the weekends), and fundamental indicators serve as barometers of the economy each month. The longer you invest, the more you learn to ride through the turbulence caused by all the breaking news alerts and short-term statistical variations. While the day trader sells or buys in reaction to immediate economic or market news, the buy-and-hold investor waits for selloffs, corrections and bear markets to pass.

Lesson #2: Decide how much volatility you can stomach. Volatility (also known as market risk) is measured in shorthand as the standard deviation for the S&P 500. Across 1926-2014, the yearly total return for the S&P averaged 10.2%. If you want to be very casual about it, you could simply say that stocks go up about 10% a year – but that discounts some pronounced volatility. The S&P had a standard deviation of 20.2 from its mean total return in this time frame, which means that if you add or subtract 20.2 from 10.2, you get the range of the index’s yearly total return that could be expected 67% of the time. So in any given year from 1926-2014, there was a 67% chance that the yearly total return of the S&P might vary from +30.4% to -10.0%. Some investors dislike putting up with that kind of volatility, others more or less embrace it.1

Lesson #3: Take liquidity into consideration. The older you get, the more you appreciate being able to quickly access your money. A family emergency might require you to tap into your investment accounts. An early retirement might prompt you to withdraw from retirement funds sooner than you anticipate. If you have a fair amount of your savings in illiquid investments, you have a problem – those dollars are “locked up” and you cannot access those assets without paying penalties. In a similar vein, there are some investments that are harder to sell than others.

Lesson #4: Rebalance your portfolio. To the novice investor, rebalancing when the market is hot may seem illogical. If your portfolio is disproportionately weighted in equities, is that a problem? It could be.

Across a sustained bull market, it is common to see your level of risk rise parallel to your return. When equities return more than other asset classes, they end up representing an increasingly large percentage of your portfolio’s total assets. Correspondingly, your cash allocation shrinks as well.

The closer you get to retirement, the less risk you will likely want to assume. Even if you are strongly committed to growth investing, approaching retirement while taking on more risk than you feel comfortable with is problematic, as is approaching retirement with an inadequate cash position. Rebalancing a portfolio restores the original asset allocation, realigning it with your long-term risk tolerance and investment strategy. It may seem counterproductive to sell “winners” and buy “losers” as an effect of rebalancing, but as you do so, remember that you are also saying goodbye to some assets that may have peaked while saying hello to others that you may be buying at the right time.

Lesson #5: Learn not to get too attached to certain types of investments. Sometimes an investor will succumb to familiarity bias, which is the rejection of diversification for familiar investments. Why does he or she have 13% of the portfolio invested in just two Dow components? The investor just likes what those firms stand for, or has worked for them. The inherent problem is that the performance of those companies exerts a measurable influence on the overall portfolio performance.

Sometimes you see people invest heavily in sectors that include their own industry or career field. An investor works for an oil company, so he or she gets heavily into the energy sector. When energy companies go through a rough patch, that investor’s portfolio may be in for a rough ride.

Lesson #6: Practice patience. Even if you prefer a tactical asset allocation strategy over the standard buy-and-hold approach, time teaches you how quickly the markets rebound from downturns and why you should stay invested even through systemic shocks. The pursuit of your long-term financial objectives should not falter – your future and your quality of life may depend on realizing them.

Sources:
1 -fc.standardandpoors.com/sites/client/generic/axa/axa4/Article.vm?topic=5991&siteContent=8088 [6/4/15]

What’s Your Saving Psychology?

14 Aug

shutterstock_103929902How much you (and your household) save may depend more on psychological tendencies than on cash flow. It’s why the customer service representative making $40,000/year can save more than the engineer making $85,000/year even when they have a similar cost of living. It comes down to their outlook. With a positive outlook, saving becomes a commitment. With a less positive outlook, it becomes a task – and tasks and chores are often postponed.

Financially speaking, saving is winning. Sometimes that lesson is lost, however. To some people, saving feels like losing – “losing” money that could be spent. So assert Ellen Rogin and Lisa Kueng, authors of a recently published book entitled Picture Your Prosperity: Smart Money Moves to Turn Your Vision into Reality. They cite a perceptual difference. If people are asked if they can save 20% of their income, the answer may be a resounding “no” – but if they are asked if they can live on 80% of their income, that may seem reasonable.1

There may be a gap between perception & behavior. Since 2001, Gallup has asked Americans a poll question: “Thinking about money for a moment, are you the type of person who more enjoys spending money or more enjoys saving money?”2

While more respondents have chosen “saving money” over “spending money” in every year the poll has been conducted, the difference in the responses never exceeded 5% from 2001-06. It hit 9% in 2009, and has been 18% or greater ever since. In 2014, 62% of respondents indicated they preferred to save instead of spend, with only 34% of respondents preferring spending.2

So are we a nation of good savers? Not to the degree that these poll results might suggest. The most recently available Commerce Department data (January 2015) shows the average personal savings rate at 5.5% – a percentage point higher than two years ago, but subpar historically. During the 1970s, the personal savings rate averaged 11.8%; in the 1990s, it averaged 6.7%.2,3

Tricks to help you save more

  • Automated retirement plan contributions can assist the growth of savings, and are a means of paying oneself first.
  • There is the envelope system, wherein a household divides its paycheck into figurative (or literal) envelopes, assigning X dollars per month to different packets representing different budget categories. When the envelopes are empty, you can spend no more. The psychology is never to empty the envelopes, of course – leaving a little aside each month that can be saved.
  • Households take an incremental approach: they start by saving one or two cents of every dollar they make, then gradually increase that percentage, household expenses permitting.
  • Frugality may help as well. A decision to live on 70% or 80% of household income frees up some dollars for saving.
  • Invest (or at least save) the accumulated consumer savings you realize at the mall, the supermarket, the recycling center – even pocket change amassed over time. Take it line item by line item: spending $20 less each week at the supermarket translates to $1,040 saved annually.

Working with financial professionals may encourage greater savings. A 2014 study on workplace retirement plan participation from Natixis Global Asset Management had a couple of details affirming this. While employees who chose to go without input from a financial professional contributed an average of 7.8% of their incomes to their retirement plan accounts, employees who sought such input contributed an average of 9.5%. The study also learned that 74% of the employees who had turned to financial professionals understood how much money their accounts needed to amass for retirement, compared to 54% of employees not seeking such help.4

Saving money should make anyone feel great. It means effectively “paying yourself” or at least building up cash on hand. A household with a save-first financial approach may find itself making progress toward near-term and long-term money goals.

Sources:

1 – businessinsider.com/mental-trick-save-money-2015-1 [1/27/15]

2 – gallup.com/poll/168587/americans-continue-enjoy-saving-spending.aspx [4/21/14]

3 – bea.gov/newsreleases/national/pi/pinewsrelease.htm [3/2/15]

4 – bostonglobe.com/business/2014/09/06/advice-seekers-save-more-study-finds/dJmUUXz78twO9OxLcRTqdN/story.html [9/6/14]

 Julie Newcomb, a Certified Financial Planner™ in Orange County, CA, specializes in financial planning for women.  As a wife, mom and business owner, Julie understands the pressures and challenges most women feel on a daily basis as they juggle many important priorities. Julie’s favorite thing about her job is the ability to give women peace of mind when they entrust her with their finances. To learn more about Julie Newcomb Financial, go to julienewcomb.com.

When is the Ideal Time to Retire?

26 Jun

Older Couple on BenchWhen it comes to planning your retirement, no one has the luxury of “knowing what tomorrow holds,” so we’re left to dream and work toward our ideal retirement scenario. But, do we (YOU) really want to retire at 65? Is there a new “normal”?

According to the latest annual retirement survey from the Transamerica Center for Retirement Studies, which gauges the outlook of American workers, 51% of us plan to work part-time once retired. Moreover, 64% of workers 60 and older wanted to work at least a little after 65 and 18% had no intention of retiring.1

Are financial needs shaping these responses? Not entirely. While 61% of all those polled in the Transamerica survey cited income and employer-sponsored health benefits as major reasons to stay employed in the “third act” of life, 34% of respondents said they wanted to keep working because they enjoy their occupation or like the social and mental engagement of the workplace.1

It seems “retirement” and “work” are no longer mutually exclusive. Not all of us have sufficiently large retirement nest eggs, so we strive to stay employed – to let our savings compound a little more, and to leave us with fewer years of retirement to fund.

We want to keep working into our mid-sixties because of two other realities as well. If you are a baby boomer and you retire before age 66 (or 67, in the case of those born 1960 and later), your monthly Social Security benefits will be smaller than if you had worked until full retirement age. Additionally, we can qualify for Medicare at age 65.2,3

We are sometimes cautioned that working too much in retirement may result in our Social Security benefits being taxed – but is there really such a thing as “too much” retirement income?

Income aside, there is another question we all face as retirement approaches.

How much control will we have over our retirement transition? In the Transamerica survey, 41% of respondents saw themselves making a gradual entry into retirement, shifting from full-time employment to part-time employment or another kind of work in their sixties.1

Is that thinking realistic? It may or may not be. A recent Gallup survey of retirees found that 67% had left the workforce before age 65; just 18% had managed to work longer. Recent research from the Employee Benefit Retirement Institute fielded roughly the same results: 14% of retirees kept working after 65 and about half had been forced to stop working earlier than they planned due to layoffs, health issues or eldercare responsibilities.3

If you do want to make a gradual retirement transition, what might help you do it?

  1. Work on maintaining your health.
  2. Maintain and enhance your skill set, so that your prospects for employment in your sixties are not reduced by separation from the latest technologies.
  3. Keep networking.
  4. Think about Plan B: if you are unable to continue working in your chosen career even part-time, what prospects might you have for creating income through financial decisions, self-employment or in other lines of work? How can you reduce your monthly expenses?

Easing out of work & into retirement may be the new normal. Pessimistic analysts contend that many baby boomers will not be able to keep working past 65, no matter their aspirations. They may be wrong – just as this active, ambitious generation has changed America, it may also change the definition of retirement.

Sources:

1 – forbes.com/sites/laurashin/2015/05/05/why-the-new-retirement-involves-working-past-65/ [5/5/15]

2 – ssa.gov/retire2/agereduction.htm [6/11/15]

3 – money.usnews.com/money/blogs/planning-to-retire/2015/05/22/how-to-pick-the-optimal-retirement-age [5/22/15]

Julie Newcomb, a Certified Financial Planner™ in Orange County, CA, specializes in financial planning for women.  As a wife, mom and business owner, Julie understands the pressures and challenges most women feel on a daily basis as they juggle many important priorities. Julie’s favorite thing about her job is the ability to give women peace of mind when they entrust her with their finances. To learn more about Julie Newcomb Financial, go to julienewcomb.com.

 

6 Classic Investing Mistakes And How to Avoid Them

30 Jul

Financial MistakesYear after year, in bull and bear markets, investors make some all-too-common blunders. They have been written about, talked about, and critiqued at some length – and yet they are still made. You can chalk them up to psychology, human nature, perhaps even a degree of peer pressure. You just don’t want to find yourself making them more than once.

#1: Caving into emotion. The deVere Group, which consults high net worth investors around the world, recently surveyed 880 of its clients and found that even with their experience, some had made the equivalent of a rookie mistake – 20% had let fear or greed prompt them into emotional investment decisions.1

Investors use past performance to justify their greed – it did well recently, I better buy more of it – but past performance is merely history and represents a micro factor versus macroeconomic factors influencing sectors and markets. Fear prompts panic selling. How many investors draw on technical analysis or even stop-loss limits when shares suddenly decline? A stop-loss limit is handy for those who don’t want to watch the market every day – it instructs a brokerage to sell a stock if it drops below a specific value, often in the range of 8-10% of the purchase price.2

#2: Investing without a strategy. Some people invest with one idea in mind – making money. An outstanding goal to be sure, but it shouldn’t blind them to other priorities such as tax efficiency, managing risk and reviewing asset allocation. Even 22% of the investors in the deVere poll confessed to this.1

#3: Not diversifying enough. Have you ever heard the phrase “familiarity bias”? This is when investors develop a “home team” attachment to an investment. Just as sports fans stick by the Cubs through thick and thin, some investors stick with a few core investments for years. Maybe they work for XYZ Company or their mom did, or maybe they like what XYZ Company represents. If XYZ Company goes under, they won’t feel so good. You can hold too much of one investment, especially if a company rewards you with its stock.2

Conversely, some portfolios are over diversified and hold too many investments. This is seldom the fault of investors; over time, they may end up with some shares of all the major companies in an industry group with a little help from Wall Street money managers. The core problem here is that not all of these companies can be winners.

#4: Slipshod tax management of investments. Sometimes certain investments within a taxable account will lose money, yet because of past gains they have made, the investor is stuck with capital gains tax. Some investments are better held in taxable accounts and others in tax-deferred accounts, as various types of investments are taxed at varying rates. When you retire and tap into your savings, you can potentially improve tax efficiency by drawing down your taxable accounts first, so that you’ll face the capital gains tax rate (which may be 15% or even 0%) instead of the ordinary income tax rate.3

Also, when you pull money from your taxable accounts first, your tax-advantaged accounts get a little more time to grow and compound. If they are large, another year or two of growth and compounding could prove beneficial.

#5: Seldom reviewing portfolio allocations. A long-term asset allocation strategy starts with defined percentages. Over time – and it may not take much time – the percentage allocations go out of whack. A bull market may result in a greater percentage of your portfolio assets being held in stock, and while this overweighting may seem reasonable in the near term, it may not be what you want in the long term.

#6: Investing (or reinvesting) near a market peak. Many investors play the market in one direction, which is up – they buy with expectations that a sector or the broad market will keep climbing. Short selling stocks (i.e., seek to exploit falling stock prices) takes more skill than many investors have. A buy-and-hold philosophy may prove very rewarding, as long as you don’t hold too rigidly or too long in the event of a sustained, systemic shock to the markets.

An even keel promotes a steady course. Fear, greed, bias, randomness, inattention – these are the root causes of the classic investing blunders. We have all made them; patience and experience may help us avoid them in the future.

Sources:

1 – thestreet.com/story/12733263/1/5-investing-mistakes-millionaires-make–but-theyre-still-rich.html [6/4/14]

2 – abcnews.go.com/Business/avoiding-sins-investing/story?id=18969850#.UXBFuco7bAJ [4/16/13]

3 – tinyurl.com/l6lkrfu [2/12/14]

Julie Newcomb, a Certified Financial Planner™ in Orange County, CA, specializes in financial planning for women.  As a wife, mom and business owner, Julie understands the pressures and challenges most women feel on a daily basis as they juggle many important priorities. Julie’s favorite thing about her job is the ability to give women peace of mind when they entrust her with their finances. To learn more about Julie Newcomb Financial, go to julienewcomb.com.

The Retirement Reality…

30 May

Retirement Couple

It May Be Better Than You Think!

If you’re like most Americans, your dreams about retirement quickly give way to the question: Am I saving enough? There’s no “one-size-fits-all” number to answer this question, but recent studies give some interesting insight into the spending habits of seniors and how it affects their happiness during retirement years. So, here’s your reality check.

Few retirees actually outlive their money. If this was truly a crisis, we would see federal and state governments and social services agencies addressing it relentlessly. The vast majority of retirees are wise about their savings and income: they don’t spend recklessly, and if they need to live on less at a certain point, they live on less. It isn’t an ideal choice, but it is a prudent one. Health crises can and do impoverish retirees and leave them dependent on Medicaid, but that tends to occur toward the very end of retirement rather than the start.

You may not need to retire on 70-80% of your end salary. This is a common guideline for new retirees, but according to some analysts, you may not need to withdraw that much for long.

In the initial phase of retirement, you will probably want to travel, explore new pursuits and hobbies and get around to some things you may have put on the back burner. So in the first few years away from work, you might spend roughly as much as you did before you retired. After that, you could spend less.

Bureau of Labor Statistics data is very revealing about this. JP Morgan Asset Management recently studied U.S. household spending and found that it peaks at age 48. The average U.S. household headed by people aged 65-74 spends only 63% as much as a household headed by people aged 55-64. Additionally, the average household headed by people 75 and older spends only 72% as much as the average household headed by people aged 65-74.1

In the big picture, households run by those 75 and older typically spend about half as much per year as households headed by people in their late forties.1

Further interesting analysis of BLS statistics and retirement spending patterns comes from David Blanchett,thehead of retirement research at Morningstar Investment Management. He sees a correlation between career earnings and retirement spending, one contrary to many presumptions. Comparatively speaking, he notes that higher-earning retirees commonly have to replace less of their income once their careers conclude. As he commented to Money Magazine, “the household that makes $40,000 a year might have an 85% replacement rate, and the household making $100,000 a year might need 60%.”2

Why, exactly? The upper-income household is watching its costs fall away in retirement. The home loan, the private school tuition, dining out due to convenience, the professional wardrobe, the car payment, the workplace retirement plan contribution – this is where the money goes. When these costs are reduced or absent, you spend less to live. Blanchett believes that the whole 70-80% guideline may “overestimate the true cost of retirement for many people by as much as 20%.”2

Your annual withdrawal rate could vary notably. Anything from healthcare expenses to a dream vacation to a new entrepreneurial venture could affect it. So could the performance of the stock or bond market.

You could retire before you anticipate. You may want to work well into your sixties or beyond – and the longer you wait to claim Social Security benefits after age 62, the greater your monthly payout. Reality, on the other hand, shows that most people don’t retire at age 66, 67 or 70: according to Gallup, the average retirement age in this country is 61. The aforementioned JP Morgan Asset Management study determined that less than 2% of Americans wait until age 70 to claim Social Security benefits. So if your assumption is that you will work to full retirement age (or later), you should keep in mind that you may find yourself electing to claim Social Security earlier, if only to avert drawing down your retirement savings too quickly.1

You don’t have to be a millionaire to have a happy retirement. In a 2011 Consumer Reports poll of U.S. retirees, 68% of respondents were “highly satisfied” with their lives irrespective of their financial standing. Backing that up, JP Morgan Asset Management found that retiree satisfaction increased only incrementally the more retirement spending surpassed $40,000 a year.1

The retirement you live may be slightly different than the retirement you have imagined. Fortunately, retirement planning and retirement income strategies may be revised in response.

Julie Newcomb, a Certified Financial Planner in Orange County, CA, specializes in financial planning for women.  As a wife, mom and business owner, Julie understands the pressures and challenges most women feel on a daily basis as they juggle many important priorities. Julie’s favorite thing about her job is the ability to give women peace of mind when they entrust her with their finances. To learn more about Julie Newcomb Financial, go to julienewcomb.com.

Sources:

1 – http://www.reuters.com/article/2014/03/12/us-column-stern-advice-idUSBREA2B1R020140312 [3/12/14]

2 – http://www.money.cnn.com/2014/02/26/retirement/retirement-spending.moneymag/index.html [2/26/14]

An Award and Some Peace of Mind

11 May

I recently learned that I received the Five Star Wealth Manager Award for Orange County for the second consecutive year! Although it’s always nice to be recognized, what I particularly like about this award is that it’s unbiased (you don’t pay to be considered) and it’s based on important, objective criteria like high retention rates (clients are happy) and positive regulatory and complaint history (you are giving good service).

When it comes to working with a wealth manager, you want to make sure you choose someone you can trust. But selecting a CFP to manage your money is about as intimidating as choosing the right doctor.  For starters, how do you know if they’re any good? Will you feel comfortable with them? What are other people saying about them? Before you hand over thousands or more dollars to someone, you want to make sure they are qualified with a strong track record and a trail of happy clients behind them, right?

Although the Five Star Wealth Manager Award is not an exhaustive list for choosing someone to manage your money, it’s a good place to start because you know that the individuals listed have been reviewed by an independent company and are among the top 4% wealth managers in Orange County. Check out my press release for the award below to find out more details about the Five Star Wealth Manager program.

Julie Newcomb, a CERTIFIED FINANCIAL PLANNER™ in Orange County, CA, specializes in financial planning for women.  As a wife, mom and business owner, Julie understands the pressures and challenges most women feel on a daily basis as they juggle many important priorities. Julie’s favorite thing about her job is the ability to give women peace of mind when they entrust her with their finances. To learn more about Julie Newcomb Financial, go to julienewcomb.com.