TIME

This Is a Horrible Realization About Retirement

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This might make you lose hope entirely

Retire at 65? Yeah, right.

Multiple surveys reveal that Americans are getting increasingly jaded about their prospects for enjoying a relaxing retirement, so much so that many are throwing in the towel and not even bothering to plan for it at all.

According to a survey of 2,000 Americans conducted for Allianz Life, 84% of them characterize the idea of a retirement where they can do what they want as a “fantasy.”

A second study, this one from the TransAmerica Center for Retirement Studies, also finds that one in five Americans thinks they’ll have to keep punching the clock until they literally can’t work anymore, and 37% expect wages earned from working to be part of their “retirement” income. More than 80% of workers who have already hit the 60-year milestone expect to work past 65, already are or don’t plan to retire at all.

“Retirement has become a transition,” Catherine Collinson, president of the TransAmerica Center, said in a statement.

About two-thirds of Gen X’ers and half of Baby Boomers responding to the Allianz survey think the amount they’re expected to save will be impossible to reach.

Of the two groups, Generation X is the more cynical by far, even though they’re the ones with more time to plan for their retirements. (They’re also the group likely to have higher expenses, though, with obligations like mortgages like kids’ college funds and mortgages that aren’t on Boomers’ radar anymore.)

Only 10% of TransAmerica survey respondents who are in their 40s are “very” confident in their ability to live comfortably in retirement, and more than half of those in their 50s admitted to just guessing how much money they’ll need in retirement. More than two-thirds of Gen X’ers responding to the Allianz survey say they’ll never have enough money to retire, and more than 40% say it’s “useless to plan for retirement when everything is so uncertain.” More than half say they “just don’t think about putting money away for the future”

“Their hands-off approach to planning and preparation is alarming,” Allianz Life vice president of Consumer Insights Katie Libbe said in a statement accompanying the release of the survey.

That’s bad news. Gen X’s reputation for pessimism and angst is on full display in this survey, Libbe points out, and these character traits threaten to undermine their financial future.

Generation Y is more engaged, but they’re not doing so hot, either. The TransAmerica survey finds that young adults don’t have great expectations for retirement, either. More than 80% are worried that Social Security might not be there for them, and more than half aren’t counting on it to provide retirement income for them at all.

The good news is about two-thirds of twenty-somethings are already saving for retirement, but they might not be going about it in the most effective way, given that 37% say they know “nothing” about how they should be allocating their assets.

Still, their longer time horizon gives millennials the best shot at saving for a comfortable retirement, Collinson points out. “They can grow their nest eggs over four to five decades and enjoy the compounding of their investments over time,” she points out.

 

 

MONEY retirement planning

1 out of 3 of Workers Expect Their Living Standard to Fall in Retirement

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But you don't have to be among the disappointed. Here's how to get retirement saving right.

One third of workers expect their standard of living to decline in retirement—and the closer you are to retiring, the more likely you are to feel that way, new research shows.

That’s not too surprising, given the relatively modest amounts savers have stashed away. The median household savings for workers of all ages is just $63,000, according to the 16th Annual Transamerica Retirement Survey of Workers. The savings breakdown by age looks like this: for workers in their 20s, a median $16,000; 30s, $45,000; 40s, $63,000; 50s, $117,000; and 60s, $172,000.

Those on the cusp of retirement, workers ages 50 and older, have the most reason to feel dour—after all, they took the biggest hits to their account balances and have less time to make up for it. If you managed to hang on, you probably at least recovered your losses. But many had to sell, or were scared into doing so, while asset prices were depressed. And even you did not sell, you gave up half a decade of growth at a critical moment.

Despite holding student loans and having the least amount of faith in Social Security, workers under 40 are most optimistic, according to the survey. That’s probably because they began saving early. Among those in their 20s, 67% have begun saving—at a median age of 22. Among those in their 30s, 76% have begun saving at a median age of 25. Nearly a third are saving more than 10% of their income.

Workers in their 50s and 60s are also saving aggressively, the survey found. But they started later—at age 35. And with such a short period before retiring they are also more likely to say they will rely on Social Security and expect to work past age 65 or never stop working.

Interestingly, the younger you are the more likely you are to believe that you will need to support a family member (other than your spouse) in retirement. You are also more likely to believe you will require such financial support yourself. Some 40% of workers in their 20s expect to provide such support.

By contrast, that expectation was shared by only 34% of those in their 30s, 21% of those in their 40s, 16% of those in their 50s and 14% of those in their 60s. A similar pattern exists for those who expect to need support themselves—19% of workers in their 20s, but only 5% of those in their 60s.

Workers are also looking beyond the traditional three-legged stool of retirement security, which was based on the combination of Social Security, pension and personal savings. Those three resources are still ranked as the most important sources of retirement income, but workers now are also counting on continued employment (37%), home equity (13%), and an inheritance (11%), the survey found.

Asked how much they need save to retire comfortably, the median response was $1 million—a goal that’s out of reach for most, given current savings levels. Strikingly, though, more than half said that $1 million figure was just a guess. About a third said they’d need $2 million. Just one in 10 said they used a retirement calculator to come up with their number.

As those answers suggest, most workers (67%) say they don’t know as much as they should about investing. Indeed, only 26% have a basic understanding and 30% have no understanding of asset allocation principles—the right mix of stocks and bonds that will give you diversification across countries and industry sectors. Meanwhile, the youngest workers are the most likely to invest in conservative securities like bonds and money market accounts, even though they have the most time to ride out the bumps of the stock market and capture better long-term gains.

Across age groups, the most frequently cited retirement aspiration by a wide margin is travel, followed by spending time with family and pursuing hobbies. Among older workers, one in 10 say they love their work so much that their dream is to be able stay with it even in their retirement years. That’s twice the rate of younger workers who feel that way. Among workers of all ages, the most frequently cited fear is outliving savings, followed closely by declining health that requires expensive long-term care.

To boost your chances of retiring comfortably and achieving your goals, Transamerica suggests:

  • Start saving as early as possible and save consistently over time. Avoid taking loans and early withdrawals from retirement accounts.
  • In choosing a job, consider retirement benefits as part of total compensation.
  • Enroll in your employer-sponsored retirement plan. Take full advantage of the match and defer as much as possible.
  • Calculate retirement savings needs. Factor in living expenses, healthcare, government benefits and long-term care.
  • Make catch-up contributions to your 401(k) or IRA if you are past 50

Read next: Answer These 10 Questions to See If You’re on Track for Retirement

MONEY retirement planning

Answer These 10 Questions to See If You’re on Track to Retirement

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More Americans are confident about retirement—maybe too confident. Here's how to give your expectations a timely reality check.

The good news: The Employee Benefit Research Institute’s 2015 Retirement Confidence Survey says workers and retirees are more confident about affording retirement. The bad news: The survey also says there’s little sign they’re doing enough to achieve that goal. To see whether you’re taking the necessary steps for a secure retirement, answer the 10 questions below.

1. Have you set a savings target? No, I don’t mean a long-term goal like have a $1 million nest egg by age 65. I mean a short-term target like saving a specific dollar amount or percentage of your salary each year. You’ll be more likely to save if you have such a goal and you’ll have a better sense of whether you’re making progress toward a secure retirement. Saving 15% of salary—the figure cited in a recent Boston College Center for Retirement Research Study—is a good target. If you can’t manage that, start at 10% and increase your savings level by one percentage point a year, or go to the Will You Have Enough To Retire tool to see how you’ll fare with different rates.

2. Are you making the most of tax-advantaged savings plans? At the very least, you should be contributing enough to take full advantage of any matching funds your 401(k) or other workplace plan offers. If you’re maxing out your plan at work and have still more money you can save, you may also be able to save in other tax-advantaged plans, like a traditional IRA or Roth IRA. (Morningstar’s IRA calculator can tell you whether you’re eligible and, if so, how much you can contribute.) Able to sock away even more? Consider tax-efficient options like broad index funds, ETFs and tax-managed funds within taxable accounts.

3. Have you gauged your risk tolerance? You can’t set an effective retirement investing strategy unless you’ve done a gut check—that is, assessed your true risk tolerance. Otherwise, you run the risk of doing what what many investors do—investing too aggressively when the market’s doing well (and selling in a panic when it drops) and too conservatively after stock prices have plummeted (and missing the big gains when the market inevitably rebounds). You can get a good sense of your true appetite for risk within a few minutes by completing this Risk Tolerance Questionnaire-Asset Allocation tool.

4. Do you have the right stocks-bonds mix? Most investors focus their attention on picking specific investments—the top-performing fund or ETF, a high-flying stock, etc. Big mistake. The real driver of long-term investing success is your asset allocation, or how you divvy up your savings between stocks and bonds. Generally, the younger you are and the more risk you’re willing to handle, the more of your savings you want to devote to stocks. The older you are and the less willing you are to see your savings suffer setbacks during market downturns, the more of your savings you want to stash in bonds. The risk tolerance questionnaire mentioned above will suggest a stocks-bonds mix based on your appetite for risk and time horizon (how long you plan to keep your money invested). You can also get an idea of how you should be allocating your portfolio between stocks and bonds by checking out the Vanguard Target Retirement Fund for someone your age.

5. Do you have the right investments? You can easily get the impression you’re some sort of slacker if you’re not loading up your retirement portfolio with all manner of funds, ETFs and other investments that cover every obscure corner of the financial markets. Nonsense. Diversification is important, but you can go too far. You can “di-worse-ify” and end up with an expensive, unwieldy and unworkable smorgasbord of investments. A better strategy: focus on plain-vanilla index funds and ETFs that give you broad exposure to stocks and bonds at a low cost. That approach always makes sense, but it’s especially important to diversify broadly and hold costs down given the projections for lower-than-normal investment returns in the years ahead.

6. Have you assessed where you stand? Once you’ve answered the previous questions, it’s important that you establish a baseline—that is, see whether you’ll be on track toward a secure retirement if you continue along the saving and investing path you’ve set. Fortunately, it’s relatively easy to do this sort of evaluation. Just go to a retirement income calculator that uses Monte Carlo analysis to do its projections, enter such information as your age, salary, savings rate, how much you already have tucked away in retirement accounts, your stocks-bonds mix and the percentage of pre-retirement income you’ll need after you retire retirement (70% to 80% is a good starting estimate) and the calculator will estimate the probability that you’ll be able to retire given how much you’re saving and how you’re investing. If you’re already retired, the calculator will give you the probability that Social Security, your savings and any other resources will be able to generate the retirement income you’ll need. Ideally, you want a probability of 80% or higher. But if it comes in lower, you can make adjustments such as saving more, spending less, retiring later, etc. to improve your chances. And, in fact, you should go through this assessment every year or so just to see if you do need to tweak your planning.

7. Have you done any “lifestyle planning”? Finances are important, but planning for retirement isn’t just about the bucks. You also want to take time to think seriously about how you’ll actually live in retirement. Among the questions: Will you stay in your current home, downsize or perhaps even relocate to an area with lower living costs? Do you have enough activities—hobbies, volunteering, perhaps a part-time job—to keep you busy and engaged once you no longer have the nine-to-five routine to provide a framework for most days? Do you have plenty of friends, relatives and former co-workers you can turn to for companionship and support. Research shows that people who have a solid social network tend to be happier in retirement (the same, by the way, is true for retirees who have more frequent sex). Obviously, this is an area where your personal preferences are paramount. But seminars for pre-retirees like the Paths To Creative Retirement workshops at the University of North Carolina at Asheville and tools like Ready-2-Retire can help you better focus on lifestyle issues so can ultimately integrate them into your financial planning.

8. Have you checked out your Social Security options? Although many retirees may not think of it that way, the inflation-adjusted lifetime payments Social Security provides are one of their biggest financial assets, if not the biggest. Which is why it’s crucial that a good five to 10 years before you retire, you seriously consider when to claim Social Security and, if you’re married, how best to coordinate benefits with your spouse. Advance planning can make a big difference. For each year you delay taking benefits between age 62 and 70, you can boost your monthly payment by roughly 7% to 8%. And by taking advantage of different claiming strategies, married couples may be able to increase their lifetime benefit by several hundred thousand dollars. You’ll find more tips on how to get the most out of Social Security in Boston University economist and Social Security expert Larry Kotlikoff’s new Social Security Q&A column on RealDealRetirement.com.

9. Do you have a Plan B? Sometimes even the best planning can go awry. Indeed, two-thirds of Americans said their retirement planning has been disrupted by such things as major health bills, spates of unemployment, business setbacks or divorce, according to a a recent TD Ameritrade survey. Which is why it’s crucial that you consider what might go wrong ahead of time, and come up with ways to respond so you can mitigate the damage and recover from setbacks more quickly. Along the same lines, it’s also a good idea to periodically crash-test your retirement plan. Knowing how your nest egg might fare during a severe market downturn and what that mean for your retirement prospects can help prevent you from freaking out during periods of financial stress and better formulate a way to get back on track.

10. Do You Need Help? If you’re comfortable flying solo with your retirement planning, that’s great. But if you think you could do with some assistance—whether on an ongoing basis or with a specific issue—then it makes sense to seek guidance. The key, though, is finding an adviser who’s competent, honest and willing to provide that advice at a reasonable price. The Department of Labor recently released a proposal designed to better protect investors from advisers’ conflicts of interest. We’ll have to see how that works out. In the meantime, though, you can increase your chances of getting good affordable advice by following these four tips and asking these five questions.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

More From RealDealRetirement.com

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MONEY Ask the Expert

Are Robo-Advisers Worth It?

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Robert A. Di Ieso, Jr.

Q: I downloaded the app from Personal Capital to get a better look at my finances. Is it worth the money to use their advisory service? I had a free discussion with one of their advisers and liked what they had to say, but I have a complex portfolio inherited from my parents. — Dan in Gillette, Wyo.

A: Over the last several years a new breed of technology-based financial advisory services — sometimes referred to as robo-advisers — have come on the scene in an attempt to serve investors who otherwise wouldn’t seek or couldn’t afford professional advice. Many investors don’t meet the minimum required by traditional advisers, while others are, understandably, reluctant to pay the typical 1% management fee for hands-on financial advice.

Enter the likes of Personal Capital, Wealthfront, Betterment and other services that help investors allocate, invest, monitor and rebalance their assets.

Personal Capital offers a free app that aggregates financial information on a single dashboard, and in turn uses that information to call on clients who may benefit from their advisory service, which melds technology with traditional human advice; clients and advisers communicate via phone, text, instant message and Skype.

Here’s the catch: At 0.89% for the first $1 million, the fee for Personal Capital is nearly as high as what you’d pay for a traditional advisory relationship.

“Is it worth it? We think there are several other options available that may be a better fit,” says Mel Lindauer, co-author of “The Bogleheads’ Guide to Investing” (Wiley) and a founder of the Bogleheads Forum, which focuses on low-cost, do-it-yourself investing à la Vanguard Group founder Jack Bogle.

If you’re primarily interested in help with asset allocation, he says, there are more affordable services worth checking out. Vanguard Personal Advisor Services, for example, charges 0.3% for its service. On a $1 million portfolio, that’s the difference between $8,900 a year and $3,000 a year, says Lindauer. An even cheaper option yet: target date funds, which peg their portfolios to investors’ retirement date.

Of course, asset allocation is only one piece of the financial puzzle. A good adviser can help you with everything from budgeting and taxes to estate planning.

Personal Capital advisors do work with clients on broader issues, but if your situation is truly complex, you may be better served sitting down with a traditional fee-only adviser.

MONEY stocks

10 Smart Ways to Boost Your Investing Results

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You don't have to be an investing genius to improve your returns. Just follow a few simple steps.

Recent research shows that people who know their way around investing and finance racked up higher annual returns (9.5% vs. 8.2%) than those who don’t. Here are 10 tips that will help make you a savvier investor and better able to achieve your financial goals.

1. Slash investing fees. You can’t control the gains the financial markets deliver. But by sticking to investments like low-cost index funds and ETFs that charge as little as 0.05% a year, you can keep a bigger portion of the returns you earn. And the advantage to doing so can be substantial. Over the course of a career, reducing annual fees by just one percentage point can boost the size of your nest egg more than 25%. Another less commonly cited benefit of lowering investment costs: downsizing fees effectively allows you to save more for retirement without actually putting aside another cent.

2. Beware conflicted advice. Many investors end up in poor-performing investments not because of outright cons and scams but because they fall for a pitch from an adviser who’s really a glorified salesman. The current push by the White House, Department of Labor and Securities and Exchange Commission to hold advisers to a more rigorous standard may do away with some abuses. But the onus is still on you to gauge the competence and trustworthiness of any adviser you deal with. Asking these five questions can help you do that.

3. Gauge your risk tolerance. Before you can invest properly, you’ve got to know your true appetite for risk. Otherwise, you could end up bailing out of investments during market downturns, turning paper losses into real ones. Completing a risk tolerance questionnaire like this one from RealDealRetirement’s Retirement Toolbox can help you assess how much risk you can reasonably handle.

4. Don’t be a “bull market genius.” When the market is doing well and stock prices are surging, it’s understandable if you assume your incredible investing acumen is responsible for those outsize returns. Guess what? It’s not. You’re really just along for the ride. Unfortunately, many investors lose sight of this basic fact, become overconfident, take on too much risk—and then pay dearly when the market inevitably takes a dive. You can avoid such a come-down, and the losses that accompany it, by leavening your investing strategy with a little humility.

5. Focus on asset allocation, not fund picking. Many people think savvy investing consists of trying to identify in advance the investments that will top the performance charts in the coming year. But that’s a fool’s errand. It’s virtually impossible to predict which stocks or funds will outperform year to year, and trying to do so often means you’ll end up chasing hot investments that may be more prone to fizzle than sizzle in the year ahead. The better strategy: create a diversified mix of stock and bond funds that jibes with your risk tolerance and makes sense given the length of time you plan to keep your money invested. That will give you a better shot at getting the long-term returns you need to achieve a secure retirement and reach other goals while maintaining reasonable protection against market downturns.

6. Limit the IRS’s take. You should never let the desire to avoid taxes drive your investing strategy. That policy has led many investors to plow their savings into all sorts of dubious investments ranging from cattle-breeding operations to jojoba-bean plantations. That said, there are reasonable steps you can take to prevent Uncle Sam from claiming too big a share of your investment gains. One is doing as much of your saving as possible in tax-advantaged accounts like traditional and Roth 401(k)s and IRAs. You may also be able to lower the tab on gains from investments held in taxable accounts by investing in stock index funds and tax-managed funds that that generate much of their return in the form of unrealized long-term capital gains, which go untaxed until you sell and then are taxed at generally lower long-term capital gains rates.

7. Go broad, not narrow. In search of bigger gains, many investors tend to look for niches to exploit. Instead of investing in a broad selection of energy or technology firms, they’ll drill down into solar producers, wind power, robotics, or cloud-computing firms. That approach might work, but it can also leave you vulnerable to being in the wrong place at the wrong time—or the right place but the wrong company. Going broader is better for two reasons: it’s less of a guessing game, and the broader you go the lower your investing costs are likely to be. So if you’re buying energy, tech or whatever, buy the entire sector. Better get, go even broader still. By investing in a total U.S. stock market and total U.S. bond market index fund, you’ll own a piece of virtually all publicly traded U.S. companies and a share of the entire investment-grade bond market. Throw in a total international stock index fund and you’ll have foreign exposure as well. In short, you’ll tie your portfolio’s success to that of the broad market, not just a slice of it.

8. Consider the downside. Investors are by and large an optimistic lot, otherwise they wouldn’t put their money where their convictions are. But a little skepticism is good too. So before putting your money into an investment or embarking on a strategy, challenge yourself. Come up with reasons your view might be all wrong. Think about what might happen if you are. Crash-test your investing strategy to see how you’ll do if your investments don’t perform as well as you hope. Better to know the potential downside before it occurs than after.

9. Keep it simple. You can easily get the impression that you’re some kind of slacker if you’re not filling your portfolio with every new fund or ETF that comes out. In fact, you’re better off exercising restraint. By loading up on every Next Big Thing investment the Wall Street marketing machine churns out you run the risk of di-worse-ifying rather than diversifying. All you really need is a portfolio that mirrors the broad U.S. stock and bond markets, and maybe some international exposure. If you want to go for more investing gusto, you can consider some inflation protection, say, a real estate, natural resources, or TIPS fund. But I’d be wary about adding much more than that.

10. Tune out the noise. With so many investing pundits weighing in on virtually every aspect of the financial markets nearly 24/7, it’s easy to get overwhelmed with advice. It might make sense to sift through this cacophony if it were full of investing gems, but much of the advice, predictions, and observations are trite, if not downright harmful. If you want to watch or listen to the parade of pundits just to keep abreast of the investing scuttlebutt, fine. Just don’t let the hype, the hoopla, and the hyperbole distract you from your investing strategy.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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MONEY portfolio

5 Ways to Invest Smarter at Any Age

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The key is settling on the right stock/bond mix and sticking to your guns. Here's how.

Welcome to Day 4 of MONEY’s 10-day Financial Fitness program. So far, you’ve seen what shape you’re in, gotten yourself motivated, and checked your credit. Today, tackle your investment mix.

The key to lifetime fitness is a powerful core—strong and flexible abdominal and back muscles that help with everything else you do and protect against aches and injuries as you age. In your financial life, your core is your long-term savings, and strengthening it is simple: Settle on the right stock/bond mix, favor index funds to keep costs low, fine-tune your approach periodically, and steer clear of gimmicks such as “nontransparent ETFs” or “hedge funds for small investors”—Wall Street’s equivalent of workout fads like muscle-toning shoes.

Here’s the simple program:

1. Know Your Target

If you don’t already have a target allocation for your age and risk tolerance, steal one from the pie charts at T. Rowe Price’s Asset Allocation Planner. Or take one minute to fill out Vanguard’s mutual fund recommendation tool. You’ll get a list of Vanguard index funds, but you can use the categories to shop anywhere.

2. Push Yourself When You’re Young

Investors 35 and under seem to be so concerned about a market meltdown that they have almost half their portfolios in cash, a 2014 UBS report found. Being too conservative early on—putting 50% in stocks vs. 80%—reduces the likely value of your portfolio at age 65 by 30%, according to Vanguard research. For starting savers, 90% is a commonly recommended stock stake.

3. Do a U-turn at Retirement

According to Wade Pfau of the American College and Michael Kitces of the Pinnacle Advisory Group, you have a better shot at a secure retirement if you hold lots of stocks when you’re young, lots of bonds at retirement, and then gradually shift back to stocks. Their studies found that starting retirement with 20% to 30% in stocks and raising that by two percentage points a year for 15 years helps your money last, especially if you run into a bear market early on.

4. Be Alert for Hidden Risks

Once you’ve been investing for several years and have multiple accounts, perfecting your investment mix gets trickier. Here’s a simple way to get the full picture of your portfolio.

Dig out statements for all your investment accounts—401(k), IRA, spouse’s 401(k), old 401(k), any brokerage accounts. At Morningstar.com, find “Instant X-Ray” under Portfolio Tools. Enter the ticker symbol of each fund you own, along with the dollar value. (Oops. Your 401(k) has separately managed funds that lack tickers? Use the index fund that’s most similar to your fund’s benchmark.)

Clicking “Show Instant X-Ray” will give you a full analysis, including a detailed stock/bond allocation, a geographic breakdown of your holdings, and your portfolio’s overall dividend yield and price/earnings ratio. Look deeper to see how concentrated you are in cyclical stocks, say, or tech companies—a sign you might not be as diversified as you think or taking risks you didn’t even know about.

5. Don’t Weigh Yourself Every Day

Closely monitoring your progress may help with an actual fitness plan. For financial fitness, it’s better to lay off looking at how you’re doing. A growing body of research finds that well-diversified investors who check their balances infrequently are more likely to end up with bigger portfolios, says Michaela Pagel, a finance professor at Columbia Business School. One reason: Pagel says savers who train themselves not to peek are more likely to invest in stocks. And research by Dalbar finds that investors’ tendency to panic sell in bear markets has cut their average annual returns to 5% over the past 20 years, while the S&P 500 earned 9.2%.

When you have the urge to sell, remind yourself that your time horizon is at least 20 years, says Eric Toya, a financial planner in Redondo Beach, Calif. “Outcome-oriented investors agonize over every up-and-down whim of the market and make poor timing decisions,” he says. “If your process is sound, you don’t need to panic.”

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MONEY retirement planning

Why Women Are Less Prepared Than Men for Retirement

Women outpace men when it comes to saving, but they need to be more aggressive in their investing.

Part of me hates investment advice specifically geared towards women. I’ve looked at enough studies on sex differences—and the studies of the studies on sex differences—to know that making generalizations about human behavior based on sex chromosomes is bad science and that much of what we attribute to hardwired differences is probably culturally determined by the reinforcement of stereotype.

So I’m going to stick to the numbers to try and figure out if, as is usually portrayed, women are actually less prepared for retirement—and why. One helpful metric is the data collected from IRA plan administrators across the country by the Employment Benefit Research Institute (EBRI.) The study found that although men and women contribute almost the same to their IRAs on average—$3,995 for women and $4,023 for men in 2012—men wind up with much larger nest eggs over time. The average IRA balance for men in 2012, the latest year for which data is available, was $136,718 for men and only $75,140 for women.

And when it comes to 401(k)s, women are even more diligent savers than men, despite earning lower incomes on average. Data from Vanguard’s 2014 How America Saves study, a report on the 401(k) plans it administers, shows that women are more likely to enroll when sign up is voluntary, and at all salary levels they tend to contribute a higher percentage of their income to their plans. But among women earning higher salaries, their account balances lag those of their male counterparts.

It seems women are often falling short when it comes to the way they invest. At a recent conference on women and wealth, Sue Thompson, a managing director at Black Rock, cited results from their 2013 Global Investor Pulse survey that showed that only 26% of female respondents felt comfortable investing in the stock market compared to 44% of male respondents. Women are less likely to take on risk to increase returns, Thompson suggested. Considering women’s increased longevity, this caution can leave them unprepared for retirement.

Women historically have tended to outlive men by several years, and life expectancies are increasing. A man reaching age 65 today can expect to live, on average, until age 84.3 while a woman can expect to live until 86.6, according to the Social Security Administration. Better-educated people typically live longer than the averages. For upper-middle-class couples age 65 today, there’s a 43% chance that one or both will survive to at least age 95, according to the Society of Actuaries. And that surviving spouse is usually the woman.

To build the portfolio necessary to last through two or three decades of retirement, women should be putting more into stocks, not less, since equities offer the best shot at delivering inflation-beating growth. The goal is to learn to balance the risks and rewards of equities—and that’s something female professional money managers seem to excel at. Some surveys have shown that hedge fund managers who are women outperform their male counterparts because they don’t take on excessive risk. They also tend to trade less often; frequent trading has been shown to drag down performance, in part because of higher costs.

Given that the biggest risk facing women retirees is outliving their savings, they need to grow their investments as much as possible in the first few decades of savings. If it makes women uncomfortable to allocate the vast majority, if not all, of their portfolio to equities in those critical early years, they should remind themselves that even more so than men they have the benefit of a longer time horizon in which to ride out market ups and downs. And we should take inspiration from the female professional money managers in how to take calculated risks in order to reap the full benefits of higher returns.

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

Read next: How to Boost Returns When Interest Rates Totally Stink

MONEY IRAs

The Extreme IRA Mistake You May Be Making

A new study reveals that many savers have crazy retirement portfolios. This four-step plan will keep you from going to extremes with your IRA.

When did you last pay attention to how your IRA is invested? It’s time to take a close look. Nearly two out of three IRA owners have extreme stock and bond allocations, a new study by the Employee Benefit Research Institute (EBRI) found. In 2010 and 2012, 33% of IRA savers had no money in stocks, while 23% were 100% in equities.

Many young savers and pre-retirees have portfolios that are either too cautious or too risky: 41% of 25- to 44-year-olds have 0% of their IRAs in stocks, while 21% of 55- to 65-year-olds are 100% in stocks.

An all-bond or all-stock IRA may be just what you want, of course. Perhaps you can’t tolerate the ups and downs of the stock market or you think you can handle 100% equities (more on that later). Or maybe your IRA is part of a larger portfolio.

But chances are, you ended up with an out-of-whack allocation because you left your IRA alone. “It seems likely many investors aren’t investing the right way for their goals, whether out of inertia or procrastination,” says EBRI senior research associate Craig Copeland. An earlier study by the Investment Company Institute found that less than 11% of traditional IRA investors moved money in their accounts in any of the five years ending in 2012.

To keep a closer tab on how your retirement funds are invested, take these four steps.

See where you stand. Looking at everything you have stashed in your IRA, 401(k), and taxable accounts (don’t forget your spouse’s plans), tally up your holdings by asset class—large-company stocks, short-term bonds, and the like. You’ll probably find that the bull market of the past five years has shifted your allocation dramatically. If you held 60% stocks and 40% bonds in 2009 and let your money ride, your current mix may be closer to 75% stocks and 25% bonds.

Get a grip on your risks. An extreme allocation—or a more extreme one than you planned—can put your retirement at risk. Hunkering down in fixed income means missing out on years of growth. Putting 100% in stocks could backfire if equities plunge just as you retire—what happened to many older 401(k) investors during the 2008–09 market crash.

Reset your target. If you also have a 401(k), your plan likely has an asset-allocation tool that can help you settle on a new mix, and you may find that you need to make big changes. That’s especially true for pre-retirees, who should be gradually reducing stocks, says George Papadopoulos, a financial planner in Novi, Mich.  A typical allocation for that age group is 60% stocks and 40% bonds. As you actually move into retirement, it could be 50/50.

Make the shift now. If moving a large amount of money in or out of stocks or bonds leaves you nervous, you may be tempted to do it gradually. But especially in tax-sheltered accounts, it’s best to fix your mistake quickly. (In taxable accounts you may want to add new money instead to avoid incurring taxable gains.) “If you’re someone who’s a procrastinator, you may never get around to rebalancing,” says Boca Raton, Fla., financial planner Mari Adam. And you don’t want a market downturn to do your rebalancing for you.

Get more IRA answers in the Ultimate Retirement Guide:
What’s the Difference Between a Traditional and a Roth IRA?
How Should I Invest My IRA Money?
How Will My IRA Withdrawals Be Taxed in Retirement?

MONEY retirement income

The Single Biggest Retirement Mistake

faucet pouring money into bottomless bucket
C.J. Burton—Corbis

Don't think of your retirement savings as one big bucket of money. Instead, divide up your assets.

The single biggest retirement mistake I see is that retirees don’t set aside funds for income during the early years of their retirement. They go directly from accumulating retirement funds to withdrawing them. And that can be a big problem.

Let me explain. The usual approach to retirement savings is to treat the client’s funds as if they are all in one pile. Under this method, the account is divvied up between stocks, bonds, and cash. A systematic monthly withdrawal begins to provide income, typically starting out at 4% of the client’s portfolio value for the first year. Each year afterward, the withdrawal amount is adjusted upward to match inflation.

This rate is considered by many advisers to be safe in terms of generating sustainable income over a two- or three-decade retirement. Unfortunately, it leaves many clients concerned about outliving their money. Let’s use 2008 as an example. At the time, I saw recent retirees who had $1,000,000 in their 401(k)s and who thought, based on the 4% formula, that they were set with $40,000 of annual income. Within the first year or two of their actual retirement, however, the market crashed and they were then drawing on a balance of $600,000. Most could not decrease their expenses, so they continued to withdraw $40,000 through the downturn, which was an actual withdrawal rate of almost 7%.Worse yet, the market crash caused retirees to lose confidence in their original plans. They pulled most, if not all, of their retirement funds out of the market, thus missing the ensuing recovery.

The compounding errors of higher-than-anticipated withdrawal rates and bad market-timing decisions doomed many to outliving their funds. This syndrome actually has a name: “sequence risk.” Academics are well aware of this risk, but few planners properly address the issue with clients and almost no individual investors are aware of the concept.

The problem can be alleviated by setting aside up to ten years’ worth of income at the inception of retirement. I address this problem with an approach called the Bucket Plan, which segments a retiree’s investible assets into three categories, or buckets.

Here is the breakdown:

  • The “Now” bucket is where the client’s operating cash, emergency funds and first-year retirement income reside. It will typically be a safe and liquid account such as a bank savings account, money market fund, or CD. These are the funds on which the client is willing to forgo a rate of return, in order to keep them safe and liquid. The amount allocated to the Now bucket will vary based on the clients assets and sources of income, but typically you would want to see no less than 12 months of living expenses here.
  • The “Soon” bucket has enough assets to cover up to ten years’ worth of income for the retiree. The Soon bucket is invested conservatively with little or no market risk. That way, we know we have ten years covered going into the plan regardless of what the stock market does.
  • The “Later” bucket funds income, and hopefully an increase in income, when the Soon bucket is exhausted. By then, the Later bucket has been invested uninterruptedly for at least 10 years. We reload another round of income into the Soon bucket, and the process starts all over again. The Later bucket is the appropriate place for capital market participation.

Financial planners have long used the analogies of an emergency fund and an accumulation/distribution fund. The real innovations here are the addition of the Soon bucket for near-term income and the method for communicating the concept to clients.

A client who was recently referred to me had the 4% systematic withdrawal that most financial advisers recommend. This did not seem to make him happy, though, since he could not see how his finances would last in the long run. He was not confident about what might happen if he needed more than the 4% income because of an emergency. He wondered whether there would be anything left over for his children to inherit. He was losing sleep and not enjoying his retirement at all.

I explained our Bucket Plan method. The Later bucket funding the Soon bucket made perfect sense to him. He also loved the idea of the Now bucket for emergencies and unexpected expenses. The real beauty of this approach is it gives retirees great peace of mind. They are much less likely to make bad market-timing decisions because a market correction will have no effect on their current income.

The bucket concept is simple to explain, and clients always understand the role their money is playing and why. Most importantly, they have the confidence to ride out market volatility because they know where their income is coming from. Sometimes simplicity can be quite sophisticated.

———-

Jeff Warnkin, CPA and CFP, of the JL Smith Group, specializes in holistic financial planning for pre-retired and retired residents of Ohio. He incorporates investments, insurance, taxes, and estate planning when building financial plans for clients’ retirement years. Warnkin has more than 25 years of experience in the financial services industry, and is life- and health-insurance licensed.

Read next: Here’s a Smart Strategy for Reducing Social Security Taxes

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MONEY retirement planning

3 Simple Steps to Crash-Proof Your Retirement Plan

piggy bank surrounded by styrofoam peanuts
Thomas J. Peterson—Getty Images

The recent stock market slide is timely reminder to protect your retirement portfolio from outsized risks. Here's how.

At this point it’s anyone’s guess whether the recent turmoil in the market is just another a speed bump on the road to further gains or the start of a serious setback. But either way, now is an ideal time to ask: Would your retirement plans survive a crash?

The three-step crash-test below can give you a sense of how your retirement plans might fare during a major market downturn, and help you take steps to avert disaster. I recommend you do this stress-test now, while you can still make meaningful adjustments, rather than waiting until a crisis actually hits—and wishing you’d taken action beforehand.

1. Confirm your asset allocation. The idea here is to divide your portfolio into two broad categories: stocks and bonds. (You can create a third category, cash equivalents, if you wish, or throw cash into the bond category. For the purposes of this kind of review, either way is fine.)

For most of your holdings this exercise should be fairly simple. Stocks as well as mutual funds and ETFs that invest in stocks (dividend stocks, preferred shares, REITs and the like) go into the stock category. All bonds, bond funds and bond ETFs go into the bond category. If you own funds or ETFs that include both stocks and bonds—target-date funds, balanced funds, equity-income funds, etc.—plug their name or ticker symbol into Morningstar’s Instant X-Ray tool and you’ll get a stocks-bonds breakdown. Once you’ve divvied up your holdings this way, you can easily calculate the percentage of your nest egg that’s invested in stocks and in bonds.

2. Estimate the downside. It’s impossible to know exactly how your investments will perform in a major meltdown. But you can at least estimate the potential hit based on how your portfolio would have fared in past severe setbacks.

In the financial crisis year of 2008, for example, the Standard & Poor’s 500 index lost 37% of its value, while the broad bond market gained just over 5%. So if you’ve got 70% of your retirement portfolio in stocks and 30% in bonds, you can figure that in a comparable downturn your nest egg would lose roughly 25% of its value (70% of -37% plus 30% of 5% equals 24.4%—we’ll call it 25%). If your portfolio consists of a 50-50 mix of stocks and bonds, its value would drop about 15%.

Remember, you’re not trying to predict precisely how the market will perform during the next crash. You just want to make a reasonable estimate of what kind of hit your retirement savings might take so you can get an idea of what size nest egg you may end up with when things get ugly.

3. Assess the impact on your retirement. Go to a retirement income calculator that uses Monte Carlo simulations and enter your nest egg’s current value as well as such information as your age, income, when you plan retire, how your savings are invested and how much you’re saving each year (or spending, if you’re already retired). You’ll come away with the percentage chance that you’ll be able to generate the income you’ll need throughout retirement based on things as they stand now. Consider this your “before crash” estimate. Then, get an “after crash” estimate by plugging in the same info, but substituting your nest egg’s projected value after a downturn from step 2 above.

You’ll now be able to gauge the potential impact of a market crash on your retirement prospects. For example, if you’re 45, earn $80,000 a year, contribute 10% of pay to a 401(k) 70% in stocks and 30% in bonds that has a current balance of $350,000, you have roughly a 70% chance of being able to retire on 75% of pre-retirement salary, according to T. Rowe Price’s Retirement Income Calculator. Were your portfolio’s value were to drop 25% to $262,500 in a crash, your probability of retirement success would fall to 55% or so.

Once you see how a major setback might affect your retirement prospects, you can consider ways to protect yourself. For someone like our fictional 45-year-old above, switching to a more conservative portfolio probably isn’t the answer since doing so would also lower long-term returns, perhaps reducing the odds of success even more. Rather, a better course would be to consider saving more. And, in fact, by boosting the savings rate from 10% to 15%, the level recommended by many pros as a reasonable target, the post-crash probability of success rises almost to where it was originally.

If you’re closer to or already in retirement, however, the proper response to a precipitous drop in the odds of retirement success could be to invest more cautiously, perhaps by devoting a portion of your nest egg to an annuity that can generate steady, assured income. Or you may want to maintain your current investing strategy and focus instead on ways you can cut spending, should it become necessary, so you can withdraw less from your portfolio until the markets recover.

Truth is, there’s a whole range of actions you might take—or at least consider—that could put you in a better position to weather a market crash (or, for that matter, provide a measure of protection against other setbacks, such as job loss or health problems). But unless you go through this sort of stress test, you can’t really know what effect a big market setback might have on your retirement plans, or what steps might be most effective.

So run a scenario or two (or three) now to see how you fare, assuming different magnitudes of losses and different responses. Or you can just wait until the you know what hits the fan, and then scramble as best you can.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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