The disaster that is my (your) coming retirement

I plan to write more about this as time goes on, but I recently realized that at the rate things are going, I’ll be able to retire a few years after I’m dead.

I’ve never been a money-guy.  Don’t get me wrong; I like money. It’s just that while I’m generally good with numbers, I even took calculus in high school, once you add a dollar sign in front of those digits, my brain kinda glazes over.

I remember when I worked at the Children’s Defense Fund oh so many years ago, Marian Wright Edelman, our larger-than-life president, whenever it came time to figuring out some budget pickle, would simply raise her arms, in that distinct commanding voice of hers, and say “the Lord will provide.”

And while God has done me pretty well in life, I’ve been able to finally buy my own condo (though I had to delay it a few decades due to all the student loans), have done some exciting things over the years, and while some months my angst does rise a bit when it comes time to pay the mortgage, I know I’ve done better than a lot of Americans, and I’m thankful for that.

But I still have nowhere near the money I should have at this point in life in order to be able to some day retire. And that scares me.

I started really thinking about all of this the other day, though I’ve thought about it for a while. I’d read the articles talking about how at the time you retire you need 20 times the salary you want to retire on.  Meaning, if you want to pull in $50,000 a year when you retire, you need to have at least a million bucks in your IRA, or whatever (and apparently, you can really only drawn down 5% a year, or the money will run out, assuming you don’t die early).  And I can only think of one person I know, my age, who might have that kind of money.  Okay, maybe two.

Back in dad’s day, you got a pension. He still gets his. I think it’s like 80% of his highest salary, which isn’t shabby. Of course, if he dies before mom, the amount drops to 40% until she dies. And it’s not like dad is 50% of the annual debt in the house (though, he’s been sick of late, so I might just eat my words).  Which raises another point. I was just talking about an annual salary. I wasn’t even talking about having enough put away for long-term care.

godzillaI’ve only recently become more fluent in medicalese (again, because of dad), and long-term care is, among other things, nursing homes.  And I learned recently that nursing homes aren’t just for people who can no longer fully take care of themselves. They’re also for people who are well enough to leave the hospital but not well enough to be home. So they send you to a nursing home to rehabilitate. And if your insurance is good enough, and you time the recuperation just right, Medicare might – might – just pay for it. But if you’re so sick that you can’t get out in a few weeks, then you’re in (money) trouble.  And that 1 million you maybe (in a dream) have socked away in your 401k or your IRA may not be nearly enough, depending when during your retirement you need the nursing care, and how long you’re able to stay alive after you enter the facility.

Ironically, sadly, creepily, most of us can’t afford to stay alive too long in a nursing home.

As I said, I plan to write a lot more about this as I delve through my own finances. My cousin, who’s a bit of a financial guru, along with his wife (she’s one too), and a good friend (who isn’t no slouch either), have given me lots to read about IRAs and index funds.  And what I’ve learned has not just scared me, but it’s kind of ticked me off too.  In two ways, for starters.

1) I’m starting to appreciate on a personal level that at this point I’m actually going to need my Social Security benefits when I retire.

I’d always thought they’d be gone, but I’d have good job, would sock my money away, and wouldn’t need ‘em. Well. Looks like I’m gonna need ‘em. (From what I’ve read, the max monthly benefit is only in the upper $2k region per month, just fyi — and that depends on how much you made, and when you decide to start taking the money out.) And I say “only” because I live in a town where a mortgage, property tax and condo fee on a one-bedroom condo can easily cost you $2,800 per month (or more).

So when I hear people in Washington talking about cutting Social Security or Medicare benefits, or about moving the retirement age back a few years (because so many people out there are happy to give you a job at 66 years of age), I get increasingly annoyed.

2) My guru-cuz told me to check my financial statements from my IRA, and maybe over the last five years or so, see how it’s fared vs the S&P500.

I was able to find my statements, and over the last four years, my IRA went up a very small amount. Nowhere near the stock market itself, which went up around 70%. And the flatlined nature of my retirement account doesn’t even take into account the not-small amount of contributions I made to it each year at tax time. So basically, I lost a lot of money, when simply putting my money in an S&P500 low-cost index fund would have nearly doubled his assets. (Case in point, I had forgotten about some money I had in an 403b I had from job at CDF. That small amount of money doubled in the last few years, based on some goofy investment I picked nearly 20 years ago, not even knowing what I was doing.)

As to what happened next, let’s just say I had a very interesting conversation with my now-fired financial guy, who informed me that he didn’t know who was looking at my financial statements but I was WRONG – my IRA grew 2% in the last two years!  And guess how much the S&P500 grew during those same two years: 45%.

Yeah, you get the picture.

(And while, of course it’s true that you shouldn’t just pick 2 or 4 years out of a portfolio and judge how it’s done, every single person who looked at my portfolio (and who knows more than I about such things) was shocked when they read how it fared.)

I’ve been doing a ton of reading, and am having a long phone call with cuz this weekend. I’ll be taking over my own retirement fund, and per cuz’s advice, be investing in low-cost index funds, though I’m going to pick his brain a bit more about what percentage of stocks to own vs bonds, and how much international exposure I should have (I suspect we’re heading towards 85% stocks and 10% international exposure overall).

But overall, from what I’ve read, it seems that financial advisers don’t beat the market 80% of the time. That if you simply put your money in a low-risk, low-cost fund that tracks the market overall, an index fun, you’ll beat the financial gurus 80% of the time.  I like those numbers. A lot more than the ones I’ve got at the moment.

PS Check your retirement plan. Look at the year end statements for the last 4 or 5 years, and see if your savings have increased 70% or not. If, like mine, they basically flatlined (or in fact, in my case, they dropped), you might want to find a financially-savvy friend and have them look at it for you.


Follow me on Twitter: @aravosis | @americablog | @americabloggay | Facebook | Google+ | LinkedIn. John Aravosis is the editor of AMERICAblog, which he founded in 2004. He has a joint law degree (JD) and masters in Foreign Service from Georgetown (1989); and worked in the US Senate, World Bank, Children's Defense Fund, and as a stringer for the Economist. Frequent TV pundit: O'Reilly Factor, Hardball, World News Tonight, Nightline & Reliable Sources. Bio, .

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  • benb

    The biggest threat to retirement is government—at all levels–serving private interests. The Tech bubble, Enron, the deregulation of banks (honestly, why give FDIC insurance to any bank that’s involved in credit default swaps)…. not to mention the nutty Tea Party that has driven the GOP (and the country) right to the brink. No elected official can serve the public because there is so much money out there ready to fight to bring him down.

  • Charon

    And some people feel target date funds are too aggressive, at least initially (Vanguard is still 90% stocks for people in their mid 30s). Everyone has their own level of risk tolerance. You should pick a target date fund based on your risk tolerance as well as your proposed retirement date. Say you want to retire in 2030. If you have a higher risk tolerance, you could pick a 2035 or 2040 target date fund, and if you have a lower risk tolerance you could pick a 2020 or 2025 fund.

    The LifeStrategy funds (or similar funds at other companies) do the rebalancing for you, but don’t taper like a target date fund, if that’s preferrable. I just want to stress that rebalancing can be psychologically hard, so it _may_ be worth trying to avoid it at least on a yearly basis by choosing one of these funds.

  • TheOriginalLiz

    I’m seeing that a lot now. Employers want someone with 20 years experience, but they want it in a 24 year old who will work for peanuts. Very frustrating.

  • TomTO

    I was doing really well in the 90′s. My 401K retirement account looked pretty awesome. Then the economic collapse in the early 2000s nearly destroyed my retirement fund. I have never worked for a company that offers a pension and I hate having my retirement tied in with the stock market.

  • CorinaGingerovo

    my co-worker’s mother-in-law makes $69 /hour on the
    laptop . She has been laid off for 9 months but last month her pay check was
    $13409 just working on the laptop for a few hours. see this here R­e­x­1­0­.­C­O­M­

  • Julien Pierre

    Yes, it’s good to do it that way if you can, but you will find that when your assets get to 6 or 7 figures, your next payroll contribution won’t be nearly enough to rebalance the account.

    If you have assets in multiple accounts – say IRA, 401k and taxable, you can have some portion in domestic stocks, international bonds, and stocks, in each of them. Then when the time comes to rebalance, do most of the selling in 401k or IRA as that form of rebalancing will be tax-free. Don’t do any-selling in the taxable account unless the portfolio overall still has too much of one asset class . The only exception to that rule is if you have losses, then it’s OK to sell in taxable so you can “harvest your losses” – but only up to $3,000 per year.

  • http://AMERICAblog.com/ John Aravosis

    And yeah, though I’d read some folks feel those funds level out too quickly – meaning, if you don’t have enough money you might not want as large a percentage of bonds as the retirement fund might give you.

  • http://AMERICAblog.com/ John Aravosis

    Oh that’s a good point, about the swings being larger.

  • judybrowni

    Don’t blame the Boomers.

    My Greatest Generation dad, 90, is set for the rest of his life: he retired at 62 with a paid uphouse, savings, Social Security and a pension, from a middle class job.

    No pensions for us Boomers, even my brother who survived 17 years with his last company.

  • judybrowni

    Join the club, I’ll be able to retire like, never.

    My brother at 61 has another year of training in his second career of ultra sound tech, which he’ll need to work at for at least a decade before he can retire, IF he can find full-time work, that is.

  • hoplite_i

    I understand how you can assume such a scenario doesn’t exist if you’ve not availed yourself of it. But now that I’ve explained it you, in detail, you should at least consider that it does. As for your belief you’ve made a convincing case against it, I’ll leave to the readers to decide.

    Of course there is risk in everything, most of all having all your wealth in binary code that represents value in cash or a wall street investment in a computer, but in THIS case it can be minimized way below the risk level of depending on Wall Street robber barons… if you do it right.

  • hoplite_i

    Yep. All those places you named are BAD markets to make this work. SF is way too expensive, and in Vegas and Phoenix the supply is way out of whack with the demand. Plus, those last two places are the desert. I would never, ever buy in a desert. Water is important ;-)

  • http://musephotos.wordpress.com/ GarySFBCN

    I have friends who bought places to rent in pretty good cities and neighborhoods in the SF Bay Area. And when the economy tanked, the only way they could get renters was to lower the rent, way below ‘break-even.’ Ditto for two friends in Las Vegas, ditto for a friend in Reno and ditto for a friend who owned a place in Phoenix. They tried to hang onto their properties but they all bailed with tremendous losses.

    Anyone who does not have a financial cushion to float all of the expenses of ownership for at least 2-3 years is assuming a lot of risk.

    And then there is the issue of renters from hell. I’m not saying it’s a bad idea. I’m saying that it is far from a sure bet that you depict in your posts.

  • hoplite_i

    Well, hell, why not buy in Compton. No, look. You need to have the right market. You need to buy in a market where not only do the numbers (price vs rent) work, but it needs to be a good rental market. Good rental markets are places where there are good companies, good (big) public universities, adjacent to or in good school districts, near good public transportation to strong job markets, near highways to good job markets, etc, etc.

  • Charon

    Whatever works for you, mate. But I’ve already explained why this is not a sensible strategy for most people, and not a _possible_ strategy for most people.

    If you really have a personal need to sell your strategy, stop talking like you’re in 2005. I know people who invested in real estate because it “isn’t subject to the stock market, keeps the principal safe”… then they lived through the Great Recession. You are actually lying when you say the principal stays safe and isn’t subject to the market. I nearly busted a gut laughing when you talked about credit default swaps as if they were entirely unrelated to real estate :)

    Some investments are better than others, but risk and return really are tightly correlated. There is no magical perfectly safe investment with high return. If you think you’ve found one, you are either lucky (maybe temporarily) or wrong.

    Being invested 100% in cash with high fees in a massive bull market is what gets you where John is now, as he explained in great detail.

  • http://musephotos.wordpress.com/ GarySFBCN

    Not always. See Detriot.

  • hoplite_i

    Well, his concern is about his retirement. He can either put his money into 0′s and 1′s in a computer bank somewhere, subject to the whims of the robber barons and their underlings who will credit default swap your 401k in half on their way to their next vacation home, or he can put it in an investment that’s a tangible asset that returns double what the REITS are returning at the moment, isn’t subject to the stock market, keeps the principal safe, let’s somebody else fund 60% of it, is it a triple hedge against inflation, and will build real wealth. His choice.

    As for housing prices in Salem, yes, the market has gone up a bit in the last year or so, so check Independence and Kaiser for the prices and the returns I am telling your about. Or maybe I’m just hallucinating through the houses I’ve been buying and renting for exactly the numbers I’m telling you. The last one was January THIS YEAR.

    I’m telling you. Being a passive sheep dog and investing in mutual funds, etc wont get it done. It will get you, well, exactly where John appears to be.

  • hoplite_i

    Downturns cause more renters, not less.

  • http://parkandbark.wordpress.com/ Houndentenor

    I just heard an interesting story on Planet Money explaining why there isn’t much inflation. The thesis was that so many people are getting squeezed with stagnant or even declining wages that there is no increase in demand for goods. If the price starts to go up they just switch brands or products which corrects the supply/demand ratio.

  • Steven

    ” I don’t know why the political, chattering and financial elites don’t get this.”

    This has puzzled me for years too. Why don’t the Koch’s understand that it doesn’t matter how little you are taxed on the products you make when there is no one left to buy them? Do they not have any connection to history?

    I’m afraid we will see a very unstable time in this country over the next couple of decades. I’m convinced we’ll sort it out to the benefit of the vast majority of us, but it’s going to be really messy.

  • LasloPratt

    Here’s another fun fact – the de facto retirement age is around 50. After that you won’t get hired. And that savings that may or may not have been sufficient for retirement will be eaten up just hanging on til you can get that next job that isn’t coming.

    My son’s generation will be treated to the no-doubt entertaining spectacle of watching their parents and their teen-age children compete for the same low-paying McJobs. But it’s okay, because the Waltons and the Kochs are set for the next few generations.

  • Charon

    Because it’s always 2005 for some people :) Housing prices in Salem, OR dropped about 26% in the last downturn. I love your confidence that this will never happen again. Also, the median house in Salem is roughly $210k right now. Either you have stupid renters who don’t know how to use craigslist, or you’re not renting a $140k house for $1100-1200/mo ($1100 is about median SFR rent).

    But also
    1) This advice is irrelevant to the original question, because John was talking about retirement investments. In particular, a SEP IRA. You can’t put physical real estate in an IRA, 401(k), 403(b), etc.
    2) Down payment requirements for investment properties are much, much more stringent than for a personal residence. In this economy, many people can hardly afford the latter. I love your advice to just “borrow from your dad” if someone can’t afford it on their own :) Mitt Romney told me the same thing, but he still hasn’t adopted me yet. Sigh.
    3) If the rental market does collapse, you’re now on the hook for the full mortgage without that revenue stream, as GarySFBCN points out. That could easily crush the investor.
    4) This is an _extremely_ illiquid asset. Particularly if there’s a downturn and you can no longer pay for all the properties you own, suddenly it’s also extremely difficult to sell those properties too.
    5) The goal is to resell at some point, even if not right away. But owning property is known to not be a very good investment on average, just keeping up with inflation. Thus you crucially rely on unusually high cost of rental / cost of owning ratios. Sounds risky long term.

    This may be working very well for you (for now). Bully for you. As an actual investment, it’s neither possible nor advisable for most people.

  • Charon

    Yes, that’s a great idea if you can do it. As your assets get larger, the swings may be big enough that you can’t quite accomplish this.

    The other method, as I mentioned below, is buying into funds that automatically rebalance. Examples include target date retirement funds (which slowly evolve to a more conservative mix as you get older) or balanced funds like Vanguard’s LifeStrategy (which keep a constant mix of assets that you never need to rebalance). I think these are useful methods for most people, because it takes a lot of stomach to _sell_ the assets that are doing well and _buy_ the ones that are plummeting (that is, to rebalance).

  • http://AMERICAblog.com/ John Aravosis

    I always get confused by the terminology. But one thing I read was to do the rebalancing by adding your next deposit to the acct that needs beefing up. That way you’re not buying and selling stuff, you’re only buying stuff with the new deposit – if it’s enough to rebalance.

  • http://musephotos.wordpress.com/ GarySFBCN

    Thanks!

  • http://musephotos.wordpress.com/ GarySFBCN

    You are not considering the risk of a regional/global downturn in the economy that results in you have no renters.

    And sorry, the last 2 or 3 economic downturns in the hottest real estate market in the country (San Francisco Bay Area) had homes values plummeting.

  • Bill_Perdue

    Say goodbye to Whigs.

    Below the Whig vote in 1848, 1852, 1856 and in 1860.

  • Bill_Perdue

    Welcome to the wonderful world of paupers created by Carter, Reagan, Thatcher, the Bushes, Obama, the IMF, Merkel and especially by the Clintons and Wal-Mart. (1) (2) Dickensian England with it’s Corn Laws and the forced pauperization of small farmers and city workers has nothing on what’s happening here.

    It’s a global phenomena that’s driving workers ever deeper into poverty here, in the EU and across the Arab and muslim world, where it’s made even worse by the imperial depredations of the US and NATO. ‘Poverty in Portugal has risen to levels that were unimaginable a year ago…According to figures from the National Statistics Institute, in 2012 a fifth of all Portuguese were living on less than 478 dollars a month…” (3) “Three million people are living in severe poverty in Spain… This is double the figure reported in 2008, when the economic crisis began.” (4) “23.1 percent of Greeks were at risk of falling into poverty in 2012, up from 19.7 percent in 2009.” (5) http://www.ibtimes.com/greeks-most-risk-poverty-european-union-1494816

    “The number of U.S. residents living in poverty edged up to 46.5 million last year, the latest sign that an economic recovery marked by a stock market boom has not trickled down to ordinary Americans. The figures from the Census Bureau on Tuesday highlighted the lingering scars from the 2007-2009 recession and added fresh fuel to debates over government austerity and widening income inequality. It could also renew calls to raise the minimum wage.” (6) That’s exactly what’s happening. http://www.reuters.com/article/2013/09/17/us-usa-economy-poverty-idUSBRE98G0PN20130917

    As Annie Lowery explained in the NY Times “The more important driver of the still-high poverty rate, researchers said, is the poor state of the labor market for low-wage workers and spiraling
    inequality. Over the last 30 years, growth has generally failed to translate into income gains for workers — even as the American labor force has become better educated and more skilled. About 40 percent of low-wage workers have attended or completed college, and 80 percent have completed high school.”
    NY Times Jan 4, 2014

    None of that is an accident. For the last forty years US presidents have pressed measures to bust unions, lower the standard of living for working people and make the rich richer and in the process they’ve repeatedly destabilized the global economy. Bush and Obama did nothing real to reinstate the regulations gutted by Clinton and so we’re in for a repeat of the bursting bubbles of 2007. (7)

    (1) http://www.huffingtonpost.com/robert-scheer/bill-clintons-legacy-of-d_b_881916.html

    (2) http://www.theatlantic.com/past/docs/issues/97mar/edelman/edelman.htm

    (3) http://www.ipsnews.net/2013/01/portugals-disappearing-middle-class/

    (4) http://www.euronews.com/2013/10/11/number-of-spanish-in-severe-poverty-doubles/

    (5) http://www.ibtimes.com/greeks-most-risk-poverty-european-union-1494816

    (6) /i>http://www.reuters.com/article/2013/09/17/us-usa-economy-poverty-idUSBRE98G0PN20130917

    (7) http://www.counterpunch.org/2013/12/04/the-stock-market-bubble/

  • hoplite_i

    and oh yeah, right now REIT’s are so overpriced you’ll be lucky to get 4%. With my scenario above you get between 6-8%

  • hoplite_i

    On residential real estate your comments are flat out wrong.

    1) the property manager spends the time. That’s why you have a property manager. 2) there are markets today (Atlanta, Salem OR, Memphis to name a few), where you can get a fairly new house (2003-2006) for 140,000 that rents on the first day for 1100-1200/mo. The only risk is some kind of destruction of the house (for which you have insurance anyway) IT DOESN’T MATTER if the value of the house goes down to 120,000 (which isn’t going to happen anyway). You’re holding the house and renting it out. This isn’t flipping real estate, it’s building a real estate investment portfolio. This is primarily an income investment and any decrease in the value of the cheap house you buy will be more than offset by the fact your renters are buying more than half the house for you.

  • Julien Pierre

    Once a year or less. And you should do it based on the overall portfolio, and try to do most of the rebalancing in the tax-advantage accounts, so there are no taxes due when rebalancing. Rebalancing taxable accounts can get expensive quickly.

  • Julien Pierre

    Vanguard has ETFs for most of its index funds. I am sure you can buy them at TDAM for much less than $49.99 . It will be the cost of a standard stock commission.

  • http://musephotos.wordpress.com/ GarySFBCN

    Great advice! What’s ironic is that in the 1980s and 1990s, the conservative view was to expect 6%-8% returns on investment to live on in retirement. I always used 4% in my planning because I didn’t think 8% was realistic.

    Also, I bought gold (American eagles) in 1988 but only to be used in case of global economic calamity. I was very frightened reading books by Dr. Ravi Batra and the like. I’m actually selling them now to help pay for remodeling my home.

    Can you recommend index funds outside of Vanguard? TDAM wants to charge a fee of $49.99 to buy a Vanguard index fund.

  • just_AC

    Unfortunately, I haven’t seen any thing from the sheeples out there. And whatever happened to “Occupy Wallstreet”? It just fizzled away.

  • http://buddybest.tripod.com/index.html BuddyNovinski

    John, you and I are essentially in the same boat, although you are at the end of the boomers. There is no coincidence that there is a brewing French revolution out there over the privileged nobles of Reaganomics. I expect that we boomers will finally revolt and destroy the nobles of Reaganomics.

  • mwdavis

    And, walking out in traffic . . . you just traumatize somebody else. God, I want to go in my sleep tonight.

  • mwdavis

    I can’t do this. I’m sixty-one and already failing. All I can do is die.

  • http://AMERICAblog.com/ John Aravosis

    And even long-term care, I hear they can just keep jackng up the rates until you can’t afford to pay for it any more, and poof, you’re lost your coverage before you need it. Honestly, the day I need to live in a nursing home is the day I swallow a lot of pills. I’ve seen these nursing, and even the “good” ones (which seem to be few and far between), are pretty scary places. I wouldn’t want to live like that. I pray for a heart attack in my sleep (with no one sleeping next to me, or that might be creepy for them in the morning ;-)

  • http://AMERICAblog.com/ John Aravosis

    I thought this was particularly interesting, as it’s obvious, but I hadn’t thought about it, in terms of how it forces you to buy more stocks when they’re a better deal, and sell them when you’ve made some money. How often would you recommend rebalancing? I was thinking every six months. Mine is a SEP IRA.

  • emjayay

    Just a guess, but if a complete removal of the cap doesn’t fly, merely raising it a bunch and indexing the amount to inflation might be enough. I don’t know why there are no proposals or analysis on this that I’ve ever run across. Just one of the simple to fix problems that I suppose no one bothers even bringing up because of obstructionist Republicans who won’t pass anything beyond a Post Office name change. They would rather scream about it and talk about raising the age instead of the obvious solution.

    Well guess what Republicans, the average person might live longer than in 1935, but 65 is the same 65 as it always was. And in a high unemployment economy guess who can’t get a job, age discrimination laws or not.

  • robertvax

    I strongly encourage everyone here to purchase and read Andrew Tobias’ _The Only Investment Guide You’ll Ever Need_, which will set you back a whopping $11 and will provide the basic parameters of what a middle-class investment portfolio should look like. If you don’t even want to do that, you can at least read Scott Adams’ “Dilbert guide to personal finance”, which will take all of 60 seconds:
    https://retirementplans.vanguard.com/VGApp/pe/PubVgiNews?ArticleName=DilbertGuidetoPersonalFinance

    Bogleheads also has a Getting Started guide here:
    http://www.bogleheads.org/wiki/Getting_started

    Some basic ground rules to consider:

    - The financial services industry sucks a lot of value out of investors through fees, commissions, and steering people to investments that aren’t in the best interest of the investor. This is one area where for the vast majority of people, self-managing your investments is almost always the right choice as long as you have the discipline to avoid market timing and stick with low-cost index funds. The opportunities to be misled by “advisors” are infinite – even brand-name banks are often quite happy to take grandma’s assets under their management, for a mere 5% off the top as a front-loaded fee, plus 2% per year of assets under management, plus they’ll steer her into investments on which the advisor is receiving a commission. We had a situation like this turn up on an internal financial discussion mailing list at my employer, and the peer advice there was that the bank’s offer was horrendous and that grandma should flee that bank’s financial services division as quickly as she could. If you do need advice, choose a CFP who is not on commission and who charges a simple hourly or one-shot fee, i.e. NOT a percentage of your total assets.

    - The vast majority of your investments should be in a diverse portfolio of no-load INDEX mutual funds. It’s a statistical fact that the vast majority of managed (i.e. NON-index) mutual funds perform worse than index funds. Stay away from load funds, funds with an expense ratio of above perhaps 0.3% (yes, zero point three percent), individual stocks, and novelty investments like precious metals, commodities, and real estate. All of Vanguard’s entry-level index mutual funds appear to have expense ratios under 0.3%. Nearly all of my own assets are with Vanguard, spread across various index funds. The fees for these are extremely low, there are no trading fees, and most of them have excellent tax efficiency (i.e. you don’t pay a lot of tax on what you earn from the funds).

    - You shouldn’t be reading Motley Fool or other stock-nonsense web sites or stock newsletters to attempt to pick individual stocks. That’s a sucker’s game where you’re playing against high-speed traders, and against people with access to information much earlier and much more detailed than you’ll ever have. Get your money into index funds and stop trying to beat the pros at the game.

    - The article’s suggestion of a drawdown rate of 5% per year from a retirement portfolio is arguably too high – see the Safe Withdrawal Rates article at Bogleheads:

    http://www.bogleheads.org/wiki/Safe_withdrawal_rates

    in which the data tables imply that it would be significantly safer to assume only a 3% to 4% drawdown rate in retirement.

    - Some commenters here have advocated residential real estate or gold. Playing with individual housing properties is a good way to get burned, as well as a huge time sink. If housing prices are going up, everything is happy, but housing prices can also crash, leaving you with huge amounts of debt. If you want to dabble in real estate, Vanguard has a REIT index fund VGSIX, which by the way should only be put into a tax-advantaged account such as an IRA, due to the taxable nature of the REIT payouts. Gold and other precious metals are similarly a great way to get burned – stay away and go for a diversified portfolio of stock and bond funds.

    - Buy low, sell high. This sounds so pithy, yet so many people panic during a market downturn and start selling their stock funds, converting into cash out of a psychological need to “feel safe”. That’s exactly what you DON’T want to do. The basic rule is you pick a target asset allocation percentage and stick with it, rebalancing as necessary. If stocks have crashed, having a target asset allocation percentage forces you to BUY stock funds when you rebalance, which means you’ll get the wins when the market recovers.

    - Do Not Try To Time The Market. Nobody can predict with any reliable degree of certainty whether stocks/bonds/whatever will go up short term, or go down long term. Attempting to forge an investment strategy based on doom scenarios such as “the coming crash!” or optimistic scenarios like “Dow 36K!” ( en.wikipedia.org/wiki/Dow_36,000 ) simply doesn’t work. What works is picking a target asset allocation that works for your preferred level of risk, doing it at very low expense ratios, and sticking with it over many years.

    – RV

  • TheOriginalLiz

    I’m already tapping into my IRA while I job hunt. At 57 – I’m a dinosaur.

  • UncleBucky

    All I could read below was “the coming correction”.

    So what am I s’posed to do? Find a rope, a tree and a ladder? Dammit.

  • cole3244

    this is what you get when capitalism and conservatism are the economic and political modes in running a nation, when the ignorant citizens finally realize just like climate change they have been lied to the dye will have been cast and no solution will be available.

  • http://parkandbark.wordpress.com/ Houndentenor

    Of course. Why do you think they got rid of the pensions. And the news media demonizes people who gave up pay increases in lieu of pension benefits. Boy did they get screwed.

  • http://parkandbark.wordpress.com/ Houndentenor

    I have a friend who did this. I was amazed at how cheap homes are in much of the country and how quickly the rent paid off what he borrowed to buy the houses. He even makes enough to have a full time person manage the properties for him (since he lives halfway across the country). How he only buys new property with profits so he has no debt on any of it.

  • http://parkandbark.wordpress.com/ Houndentenor

    If they did, they’d lose seniors which is their most reliable voting bloc.

  • http://parkandbark.wordpress.com/ Houndentenor

    Because Democrats take money from the same financial crooks that fund the Republicans. Yes, I’m a Democrat (mostly by default) but they don’t look out for the lower 99% of income earners much better than the GOP does. We can’t line their pockets like the Wall St Banksters can.

  • http://parkandbark.wordpress.com/ Houndentenor

    Yes. And I don’t think either party is ready for the inevitable backlash. When too much of the population has this much financial insecurity, political stability is not possible. People with nothing have nothing to lose. I don’t know why the political, chattering and financial elites don’t get this. Oh wait, I do. Because they don’t even talk to middle class much less low income people (in spite of having them in their employ every day). If you’ve ever seen an executive hold court telling the lower level employees about their weekend and then walking away not even pretending to have any interest in their lives, you know what I mean. (It is a regular Monday morning occurrence in lower Manhattan and Midtown office buildings.) The 1% is completely out of touch. The rude awakening is coming. Perhaps soon.

  • http://parkandbark.wordpress.com/ Houndentenor

    Does anyone think that the people who overleveraged us to near financial ruin last time have learned anything? The too big to fail banks are now bigger and failier than ever.

  • http://parkandbark.wordpress.com/ Houndentenor

    I am not going to be able to retire the way my parents have. I don’t have the savings/investments to do so and there’s no way to make that up before I turn 70. I will be saving and investing but that is in preparation for the day when my health does not allow me to work any longer. At least I know that. I don’t think most people my age do (or have even thought much about it). Add to that the fact that people younger than me (probably rightly so) are going to resent the two previous generations that ran up huge deficits and passed the bill on to them. They are going to vote for cuts to benefits because they will never receive them and aren’t going to want to pay for them. I could be wrong but it seems inevitable. Retirement was a modern creation and one that’s going to seem like a relic in a very short time except for the very rich.

  • just_AC

    LOL. John I’ve been telling people the same thing for the last few years. This year, it is “well, I crunched the numbers on my retirement and it’s worse this year than last. This year, I gotta work 6 years after I am dead, last year it was only 5 I figure my expenses should go down after I’m dead.

    Sad thing is, it is probably true.

    I HAVE looked at having my IRA in physical gold

    From Here http://www.blanchardonline.com/beru/gold_vs_stock.php

    “Had you invested $10,000 in gold bullion in 2001, your initial
    investment would have grown to $62,484 by 12/31/12 – an amazing 524%
    percent increase.
    That same $10,000 investment in stocks of the S & P index would have gained $2,294. That’s only a 22.9% increase.”

    One thing to DEFINITELY look at is long term care insurance, but you have to weigh a lot of decisions. From NPR http://www.npr.org/blogs/health/2014/05/28/316328410/how-to-shop-for-long-term-care-insurance.

    I know when my mother-in-law went into long term care, they sucked her dry – she had worked her ass all of her life and they took all of her savings, etc

  • Julien Pierre

    Actually it’s something to do long before. A good 401k plan with low fees, passive index funds with low expensive ratios, and a match, is a very important part of the total compensation package, IMO, and for me it factors a great deal into who I choose to work for.

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  • bkmn

    When it comes time to retire, if not before, check your 401k/403b plans to see what fees they charge. If they are nailing you on fees roll your accounts over to a plan that won’t suck all your retirement income away.

  • bkmn

    10% is way too high. Most millionaires earn their income on investments not wages, so they pay in next to nothing.

  • lynchie

    John I feel for you as I am in the same boat so to speak. When the market crashed in the 80′s I moved my money to an account with a brokerage house. It since became an IRA. It is directed by a broker and we talk once a week. Sure I lost when the market crashed under Bush but he has worked to get most of that back. My suggestion is get to a broker, sure you pay him to buy and sell, but what you are really paying for is his expertise. Go to a few and ask them for their recommendations and pick the person/plan you are most comfortable with. You still get to call the shots but you have some advice. Set up a time for a weekly call. All our problem is that we don’t have enough put aside but how do you do that when mortgage, food, etc. is constantly rising.
    The end of company pensions really spelled doom for a large segment of Americans and with the Romney slash and burn program of buying companies and raping their pension plans and leaving people with nothing we have thousands who survive on just SS.

  • SkySailor

    For the best chance to retire on your terms you should start planning and investing early in life and do it consistently (with every paycheck). If at all possible develop multiple streams of income for retirement (pensions, dividends, part time work, etc.) and not depend on government benefits as the sole source of income. I found that the site Retirement And Good Living provides good information on planning and finances as well as many other topics including health, retirement locations, part time jobs, volunteering and more. And it has a great blog of posts by guests from around the globe.

  • http://musephotos.wordpress.com/ GarySFBCN

    Thanks! The truth is that I’m really not too concerned about inflation. My pension has a 2% annual increase based-up some COLA index and a ‘catch-up’ provision if it get’s too far behind. And the pension is actually well funded, which is seems to be rare these days.

    I plan on paying-off my mortgage within 10 years and after that, I won’t have much for expenses and a great cash flow from the pension, social security and interest/investment returns. I also have some assets that I bought a long time ago with the intention of selling later in life (mostly art, some of which is highly desirable and saleable), and most importantly, a husband who is 16 years younger than I am, and who has a good job, although falling for each other was not part of a retirement strategy. We both live well “beneath our means”, which is the most important financial advice I could give to anyone.

    What makes me feel vulnerable is the currency exchange rates (I’m in SF and Barcelona but my income is in dollars), the variable-rate mortgage (no fixed rates available in Spain), and potential pension/social security reforms that may penalize someone like me. And that’s why I’m in a hurry to pay-off my mortgage.

  • Charon

    The mid-to-late 80s were the heyday of CDs, late enough that inflation had fallen dramatically but early enough that rates were still high. I wouldn’t expect that to come back. Also, CDs are not an inflation hedge – they’ve been yielding less than inflation for years now (as they would in any low-rate environment). Secure inflation-protected investments are things like TIPS or I-bonds.

    The return on that tripled investment is about 6.7%, which is roughly what you’d expect long term for stocks. Perfectly good, not extraordinary.

  • Hue-Man

    Australia’s right-wing federal government earlier this month: “Australians born after 1965 will have to work until they are 70 before
    they are eligible for the age pension, Treasurer Joe Hockey has
    announced, as he warned there was “no such thing” as a free visit to a
    doctor or free welfare.” http://www.smh.com.au/federal-politics/political-news/retirement-age-rise-to-70-by-2035-joe-hockey-announces-20140502-zr318.html

  • Charon

    Sure, but there are also people proposing raising the Social Security full retirement age. Those in touch with reality are proposing raising it from 67 to 70 or something, but there are some proposing raising it to 67… People you’d think would know better aren’t always in touch with reality. E.g., http://www.huffingtonpost.com/2011/05/06/alan-simpson-aarp-social-security-retirement-program_n_858738.html (although this isn’t about the raising to 67 issue).

  • http://musephotos.wordpress.com/ GarySFBCN

    PS: We are in an unsustainable economic bubble right now. Fasten your seatbelts for the next correction.

  • http://musephotos.wordpress.com/ GarySFBCN

    Regarding investments, I’ve had was were considered ‘secure’ investments over the years. And I’ve lost almost everything in each of the following years: 1987, 1990, 1994, 1997 and 2000. This left me with little trust of the financial services industry highlighted my own ignorance. I left one small investment intact since 1997 and it has almost tripled, but not without a lot of contractions. But I’m not sure if this is a good return or not, considering 17 years have passed.

    Since 2000, I’ve used mostly VERY secure investments. So I have a lot of money that is mostly money, and I am getting close to 3% returns. When “Quantitative Easing” ends and interest goes up, I will convert a lot of the cash to CDs. That is one of my inflation hedges. Please note that in 1984, my father’s CDs were paying 16%, not that I have any desire to see us return to those difficult inflationary times.

    Remember, if a stock or mutual fund goes down 50%, it has to go up 100% to break even.

  • Hue-Man

    I understand the GOP talking point to be to raise Medicare eligibility age to 67. http://www.bloomberg.com/news/2011-09-14/medicare-eligibility-age-needs-to-rise-to-67-health-ceos-say.html

    The CBO report from last year goes through the impact on the federal budget of the proposal and commentary on some of the negative effects, including: “Other effects of this option would add to budget deficits, but by
    smaller amounts. Federal spending for Medicaid would increase for two
    groups of people whose age was between 65 and the new eligibility age
    for Medicare…” http://www.cbo.gov/publication/44661

  • Hue-Man

    I have no employer pension despite decades of employment. Canada Pension Plan MAXIMUM monthly pension is just over $1,000 while the average is about $500/month. (Contribution rates are lower than U.S. FICA tax; you get what you pay for.) The health of my RRSP – tax-deferred savings similar to IRA – is therefore of more than passing interest to me.

    Question the equity/debt percentages from your advisers. The 1987 and the 2008/9 “corrections” were disastrous on pension plans of individuals nearing retirement around those dates because a 50 year old planning for retirement at 65 likely doesn’t have enough time to catch up a 20% drop in the value of his portfolio. I have been similarly cautious with funds based on stock market; if you’re investing in the S&P at record high levels what is the downside risk of a crash before you can switch to bonds?

    Don’t be afraid to put together some simple spreadsheets to work out what rate of return you need to earn over the remaining years to retirement – your adviser should be able to help with this. Work with the figures to see what the difference is between 4% and 9% or -3% for one year, etc. (If this is “too complicated” or “takes too much time”, what’s more important than understanding and feeling comfortable about your retirement assets?)

    Challenge your financial advisers – their companies caused the 2008/9 crash and not because they were smarter than you or me. Their remuneration is not based on how much income you will earn through your retirement years. They are employees of large organizations who have certain goals, financial motivations, and “industry think” that may not always be in your best interest.

    I am ever more convinced that IRA contributions as well as additional voluntary contributions to a public investment fund would avoid the high fees from the brokers and advisers, spread investment return and risk across industries and countries, and lower the 1929 crash risk. This from the Canada Pension Plan Investment Board’s most recent press release:

    “TORONTO, ON (May 23, 2014): The CPP Fund ended its fiscal year on
    March 31, 2014 with net assets of $219.1 billion, compared to $183.3
    billion at the end of fiscal 2013. The $35.8 billion increase in assets
    for the year consisted of $30.1 billion in net investment income after
    operating costs and $5.7 billion in net CPP contributions. The portfolio
    delivered a gross investment return of 16.5% for fiscal 2014.” http://www.cppib.com/en/public-media/news-releases/2014/cppib-fye2014.html

    BTW, my “gross investment return” for 2013/4 was nowhere near 16.5%!
    BTW2, from the same press release: “… the Chief Actuary of Canada reaffirmed that, as at December 31, 2012,
    the CPP remains sustainable at the current contribution rate of 9.9%
    throughout the 75-year period of his report.”

  • Charon

    The vast majority of investors should never invest directly in a company, via DRIP or otherwise. They are nearly always going to lose out to the pros who spend all their time figuring out which stocks to buy (and even the pros don’t do that well on average). As John says, low-cost index funds (Vanguard’s fees are typically 0.1-0.2%) are the best bet for the average investor. And thanks for 401(k)’s and the like, we’re nearly all investors now… most of us with zero training! No surprise that’s been a disaster.

  • Charon

    I just wanted to point out that the Social Security full retirement age has _already_ been pushed back. It’s now 67 for anyone born after 1960. It confuses me when people still propose pushing it to 67 as a solution… And yes, we really need Social Security. More than half the population gets more than half their retirement money from it.

    Also, your money your choice, but 85% stocks is a very aggressive portfolio for someone your age. Index funds are definitely the way to go, though. If you want to never worry about rebalancing, a target retirement fund can be a very easy way to go. Most of us would do best to set and forget – pick a low-cost fund taking our risk tolerance into account, and then never screw with it, regardless of market highs or lows.

  • MyrddinWilt

    The idea that Social Security could be eliminated is nonsense. Even the GOP doesn’t really want to do it. They want to talk about doing it just enough to get the cash to flow from the bankers and they would really like Democrats to do it for them. But they are as likely to privatize social security by themselves as drink strychnine.

    The size of the trust fund isn’t all that important either. If the money runs out, taxes will rise or the deficit will increase to adjust. When we get to retirement age we will have just as much leverage as the Fox News generation do today.

    Nobody is going to touch benefits for the over 55s until after they have been killed off for the under 55s. If they ever succeeded in doing that then granny’s social security would be easy to grab because the younger generation would have no incentive to pay into a program they won’t benefit from. But that’s not going to happen.

    That said, the maximum Social Security payout today is roughly $40K before tax which is enough to live on if you have paid off the mortgage etc. But you have to be earning the equivalent of $110K for 35 years to get that. And its not exactly a princely sum to live off…

  • Mike_in_the_Tundra

    I really feel that the 1% needs to beat retirees down into the bottom 10%. I have been on disability since 1999. Basically it is treated like regular social security. I was told that we must have other income than social security. Alright, I did that. Now the IRS has raised the amount of social security benefits that can be taxed. It has changed by leaps and bounds even though my other income has remained about the same. Last year, between social security and my other source of income, my income went up about $1200. In total, my federal and state taxes went up $2500. Thus I realized a cut in income of $1300.

  • Indigo

    My plan was to die young and leave a handsome corpse behind. That didn’t work out. Now I’m settled into what I flatter myself is genteel poverty (no longer fashionable even among the retired professoriate) making my way on a fixed income that is pretty well fixed at the level of an income of modest comfort in 1996. The economy has moved on, into a staggering inflationary spiral called “growth” but my income has not. That’s your future too as long as there’s pundits working from the textbooks rather than the facts of life on the street. Not only do they steer you wrong, I suspect it’s deliberate. You can’t build a feudal social system without screwing over the public. And that’s the vile plan that’s working.

  • Steven

    I completely agree with you, and I simply don’t understand why this isn’t one of the most basic tenets of the Democratic platform. Something like:

    ‘Why should teachers and firemen and nurses and office managers pay Social Security taxes on every dime they earn, while millionaires pay Social Security taxes on just 10% of their income?’

  • heinleiners

    Some DRIP stocks are good investments because you don’t pay any broker or other fees as you buy directly from the company. A few bucks a months plus the dividends that get reinvested can get you a nice portfolio going after a few years

  • PeteWa

    Bush has been pushing that lie since 77.
    sad that you buy into it.

  • Sally

    That is true. My teacher friends have watched their pay decrease to pay for health care premiums that were covered under their contracts, and another decrease to help pay for retirement. On top of that, they lose 2% a year when the school system doesn’t meet attendance numbers. All the while, their classes get bigger, their vacations get shorter, and the classroom assistance they used to get is now gone, as well. And we wonder why depressed kids are shooting themselves?

  • Sally

    Oh please. When I was in college in the 70′s, we were fed the same nonsense…no SS for you guys! Guess what. I am now 60, and SS is fine. It will stay fine. We need to lift the earnings cap so we pay on all earnings, not just up to $107,000. Then it’s fine.

  • timncguy

    There is no reason at all that Social Security shouldn’t be there when you are ready to retire. As it stands, right now, with no changes at all, social security is fully funded until 2035. Then, again with no changes, after 2035 Social Security can continue to pay 75% of its obligations.

    All that needs to change in order to fix Social Security for it to continue to pay 100% of its obligations is to eliminate the cap on Social Security taxes. Right now, you only pay social security taxes on the first $112,000 you earn per year. Any income over that isn’t taxed. If you just eliminate that cap and collect taxes on all income over $112,000 per year, Social Security will be fully funded as far as the eye can see. Problem solved.

  • http://musephotos.wordpress.com/ GarySFBCN

    By luck and a little savvy, my retirement should be ok. I’m actually retired now, but ideally I will work part time about 5 months each year until I reach Social Security age. I still haven’t figured-out if I am going to draw SS at 62 or at 66.

    I was very lucky to obtain employment doing work that involved me with technology and social justice EVERY DAY, paid a good salary and has a great pension..

    I also put away a lot of money. Paying into my own pension, paying into social security and paying into Roth IRA and tax-deferred accounts made my paychecks smaller, but it was worth it.

    Social security is EASY to fix – we should be pushing our government to do just that.

    And everyone should have a pension. 401k and IRA accounts are really scams, to enrich people in the financial services industry.

  • hoplite_i

    In my experience, that’s the wrong way to look at it. Saving your money won’t get it done. Being at the whims of the robber barrons who loot your 401k’s wont get it done. You need to be more assertive. Exert more control. You need to MAKE SURE your money is working for you.

    You need to have to have your money in an inflation resistant investment, where your principal is safe, and that money is working for you. Again, my experience with buying single family homes and renting them out, is that if you buy in the right market, with the right property manager who helps you buy the right properties, you can take control of you own destiny and have a secure retirement. And you don’t have to make a lot of money to do it. 15 grand a year in savings and you can buy a property every 4 years. Once you get 3 or 4 under your belt it starts to run itself.

  • Elijah Shalis

    If someone crunches the numbers a 401k/403b program will never equal the same as a company pension. The conservatives have been very successful in killing off pensions. Now they are going after government pensions.

  • Tor

    Everyone tells me how lucky I am to have some sort of longevity gene, as my parents have lived into their late 90′s. I simply won’t be able to afford to live that long.

  • http://AMERICAblog.com/ John Aravosis

    My generation thought the same, but we figured if we worked hard, and saved our money, we’d have enough for retirement. So far, that hasn’t quite happened.

  • hoplite_i

    Buy single family homes and rent them out. There are places in the country where you can get a house for 140,000 and get 1100-1200/mo rent. So put 60,000 down on a 30 year loan (if you don’t have it, ask your dad for help, or go in with a friend or other family member). With 100.00/mo to the property manager, the mortgage, the insurance, and the property tax, that will end up positive cash flow of about 400-500/mo. That’s a solid 6-8% return, on an investment where your principal is not only safe, but presumably appreciating, and you will have the renters paying off the last 60% of the house for you. Do that every 4 years. And there you will have your retirement.

  • Steven

    I’m thankful that you wrote this post, because it touches on what I believe will be a sooner-rather-than-later reckoning for the country: we are *this close* to having no middle class at all. We are becoming the Have Everythings and the Have Nothings.

    You touched on the amount needed for retirement, as well as the fact that nursing homes will bankrupt you faster than you can possibly imagine. Add to this the huge burden of student loans; the lack of any sort of pensions, as you mentioned; enormous health care costs. It all seems so overwhelming.

    But…some good may come out of it. I don’t honestly believe, I truly don’t, that when push comes to shove that the country will choose tax breaks for billionaires over Social Security. I don’t think we will let our elderly population wither in Medicaid-funded nursing homes while we shovel even more money at the Kochs and Waltons.

    There is a breaking point, and we are nearing it. And once that point is reached, it will go one of two ways for the only people in this country who have anything left. We can peacefully become a more egalitarian society, meaning better pay and benefits for workers, more protections for the vulnerable, etc. Or we can go the non-peaceful route. In either case, it will happen. Like I said, I don’t think even the most misinformed of Americans is going to stand idly by as the multi-billionaires continue to accrue all of the wealth in the country, while the rest of us slide ever so slowly into an irreversible decline. We aren’t always the smartest country in the world, but we seem to get where we need to go at some point.

  • Elijah Shalis

    Welcome to my generation where we realize social security won’t be there when we are old.

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