MONEY retirement planning

Leave a Financial Legacy? Boomers and Millennials Slug It Out

Unlike older Americans, young adults want to leave an inheritance to future generations. Too bad they're investing in cash.

Baby Boomers like to point out that our famously self-absorbed generation advocated for many good causes as youngsters and turned the corner to greater giving in retirement. Much of it is true. But younger generations are way ahead of us, new research suggests.

Maybe it’s a case of our kids doing as we say, not as we do. Boomers are the least likely generation to say it is important to leave a financial legacy—even though they have benefited from an enormous wealth transfer from their own parents, according to a new U.S. Trust survey of high net worth individuals. How’s that for self-absorbed?

More boomers have received an inheritance (57%) than say it is important to leave one (53%). The opposite holds true for younger generations. Some 36% of Gen X and 48% of Millennials have received some type of inheritance while 59% of Gen X and a whopping 65% of Millennials say it is important to leave one.

Circumstances may account for the difference in mindset. The Great Recession struck just as boomers were preparing to call it quits. With more to lose, and little time to make it back, boomers suffered the worst of the crisis from a savings point of view. A financial legacy seems less important when you are downsizing your retirement dreams.

For younger generations, the crisis created an employment nightmare. But it drove home the need to begin saving early, and those that did have seen stock prices double from the bottom and house prices begin to rebound as well. Millennials’ problem may be that they still don’t trust the stock market enough.

Well more than half in the survey remain on the sidelines with 10% or more of their portfolio in cash. Millennials are the most likely to be tilting that direction. Two-thirds of Millennials, the most of any cohort, say they are fine carrying a lot of cash and just 13%, the least of any cohort, have plans to invest some of their sideline cash in the next 12 months. This conservative nature threatens to work against their desire to leave a financial legacy—or even retire comfortably.

Millennials are the youngest adult generation and have the most time to absorb bumps in the stock market and benefit from its long-term superior gains. Intuitively, they know that. In the survey, those holding the most cash, regardless of age, were the most likely to say they missed the market rally the past few years and are not on track to meet their goals.

In our younger days, boomers rallied around things like civil rights and workplace equality for women, among other grand moral battles. But we didn’t necessarily put our money where our mouth was. Today’s young adults are quieter about how to fix the world. But they are willing to invest for change. One-third of all high net worth individuals invest in a socially conscious way while two-thirds of Millennials do so, U.S. Trust found.

By a wide margin, more Millennials say that investment decisions are a way to express social, political or environmental values (67%). Most (73%) believe it is possible to achieve market-rate returns investing in companies based on their social or environmental impact, and that private capital from socially motivated investors can help hold public companies and governments accountable (79%). I’d say the kids are alright.

MONEY Saving

WATCH: Tips From the Pros: The Secret to Financial Success

Financial experts reveal the one thing you must do to build wealth.

MONEY stocks

WATCH: Insider Trading is More Widespread Than You Thought

According to a new study, nearly 25 percent of all public company deals involve some insider trading.

MONEY Retirement

Eco Disaster: Lessons from Greenpeace’s Currency Bet Gone Bad

The global peace and sustainability nonprofit lost a bundle betting on currencies. Here's what you can learn from the mistake.

Superstars from Tiger Woods to Warren Buffett tell us the secret to their success is keeping it simple. So why would a donor-dependent, globally recognized nonprofit take a macro-economic flyer on which way currencies will move?

More important: What can the disastrous Greenpeace International bet on the direction of the euro tell us about how we handle our own financial matters? Greenpeace, which is quite good at promoting peace and sustainability, is really bad at macro analysis. Sometime last year the organization lost $5.2 million—more than 6% of its annual budget—when it bet wrongly against a rising euro.

This large loss came to light only this week, and it’s too soon to know its full effect. The organization says a financial pro on its staff overstepped and has been fired, and that the loss will not lead to a penny being cut from its causes. Still, it’s hard to believe that at least some donors won’t bristle and hold back donations. The consequences promise to go beyond simple embarrassment.

One lesson here is that currency speculation is a tricky business and best left to hedge fund managers like George Soros. If you must engage in currency bets alone, do so with only a small fraction of your savings and through straightforward international government bond funds. These pay interest in local currency and thus represent a foreign exchange bet. You might also consider a currency ETF from leaders CurrencyShares and WisdomTree.

The bigger lesson, though, is that it really does pay to keep things simple when investing. As Buffett writes in this year’s annual letter to shareholders:

You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”

Complexity is all around us. Exotic mortgages sunk millions of homeowners in the Great Recession. Unimaginably arcane financial derivatives contributed to the demise of Lehman Bros. and downfall of Bear Stearns, among other investment banks, during the financial collapse. Even bankers didn’t know quite what they were doing—not unlike the hapless, rogue finance staffer making a wrong-way bet on the euro for Greenpeace.

Individuals can make things as difficult or as easy as they want when they save and invest. Annuities are especially hot right now. Many people shy away from them because they believe all of them to be complex, and many others end up in the wrong type of annuity (and many other insurance products) because so many truly are complex. Yet for most people just looking to lock up guaranteed lifetime income, the venerable immediate or deferred immediate annuity are a sound and simple option.

Likewise, you can prospect for the hottest stock funds, only to be disappointed once you plunk down your dollars and see them eaten away by lackluster returns and high expenses—or you can choose low-fee diversified stock index funds, or maybe a target-date mutual fund, sleep well, and check back in just once a year to rebalance. Why layer chance on top of investment risk? You are good at something else, not macroeconomic analysis.

Reports suggest that the wayward Greenpeace employee was not nest feathering but trying to do the right thing for the future of the organization. Still, it went bad—even for someone in finance. As with many endeavors, when it comes to money, better to do as Buffett says and just keep it simple.

MONEY 401(k)s

Do I Really Need Foreign Stocks in My 401(k)?

Foreign stocks are supposed be a great way to diversify and get better returns. But these days? Not so much.

It’s long been a basic rule of retirement planning—allocate a portion of your 401(k) or IRA to international stocks for better diversification and long-term growth. But I’m not really sure those reasons hold up any more.

Better diversification? Take a look at the top holdings of your domestic large-cap or index stock fund. You’ll find huge multinationals that do tons of business overseas—Apple, Exxon, General Electric. Investing abroad and at home are close to being the same thing, as we saw during the financial crisis in 2008, when all our developed global markets fell together.

As for growth, we’ve been told to look to the booming emerging markets—only they don’t seem to be emerging much lately. Even as the U.S. stock indexes have been reaching all-time highs, the MSCI emerging markets benchmark has had three consecutive sell-offs in 2012, 2013 and 2014, missing out on a huge recovery. That’s diversification, but not in the direction I want for my SEP-IRA that I’m trying to figure out how to invest. (See “My 6 % Mistake: When You’ve Saved Too Little For Retirement.”)

Some market watchers have pointed out that after two decades, the countries that were once defined as emerging—China, Brazil, Turkey, South Korea—are now in fact mature, middle-income economies. If you’re looking for high-octane growth, you should really be considering “frontier” markets, funds that invest in tiny countries like Nigeria and Qatar.

That’s all well and good. But when it comes to Nigeria, I don’t really feel confident investing in a country where 200 schoolgirls get kidnapped and can’t be found. As for Qatar, it’s awfully exposed to unrest in the Middle East. (Dubai shares just tumbled, triggered by escalating violence in the Iraq.)

Twenty years ago, I was more than game for emerging markets and loved getting the prospectus statements for funds listing then exotic-sounding companies like Telefonas de Mexico and Petrobras. But I just don’t think I have the stomach, or the long time horizon, for it anymore.

My new skittishness around international stocks may be signaling a bigger shift in my investing style from growth to value, the gist of which is this: since you can’t always predict which stocks will grow, the best thing you can do is to focus on price. Quite simply, value investors don’t want to pay more for a stock than it is intrinsically worth. (Growth investors, by contrast, are willing to spend up for what they expect will be larger earnings increases.) By acquiring stocks at a discount to their value, investors hope profit when Wall Street eventually recognizes their worth and avoid overpriced stocks that are doomed to fall.

As Benjamin Graham, the father of value investing, wrote in his 1949 classic, “The Intelligent Investor,” “The habit of relating what is paid to what is being offered is an invaluable trait in an investment.” (Warren Buffett, among many others, consider “The Intelligent Investor” to be the investing bible. ) “For 99 issues out of 100 we could say that at some price they are cheap enough to buy and some other price they would be so dear that they should be sold,” Graham also wrote. And he famously advised that people should buy stocks the way they buy their groceries, not the way they buy their perfume, a lesson in price sensitivity that I immediately understand and agree with.

Looking at the international question through a value vs. growth lens, my choice is seems more clear—at least on one level. If emerging markets are down, now is probably a good time to buy. But the biggest single country exposure in the MSCI Emerging Markets Index is China, at 17%, and it might be on the brink of a major bubble.

It seems a bargain-hunting investing approach isn’t always that much safer, and I’m wondering if it might be worth paying more at times to avoid obvious trouble. Still, I’ve only just discovered my inner value investor. I’m going to keep reading Benjamin Graham and will let you know.

Ruth Davis Konigsberg, a fortysomething journalist and consultant to Arden Asset Management, writes weekly about retirement planning.

MONEY retirement income

To Invest for Retirement Safely, Know When to Get Out of Stocks

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Bill Bernstein Joe Pugliese

Investment adviser William Bernstein says there's no point in taking unnecessary risks. When you near retirement, shift your portfolio to safe assets.

A former neurologist turned investment adviser turned writer, William Bernstein has won respect for his ability to distill complex topics into accessible ideas. After launching a journal at his website, EfficientFrontier.com, he began writing numerous books, including “The Four Pillars of Investing” and “If You Can: How Millennials Can Get Rich Slowly.” (“If You Can,” normally $0.99 on Kindle, is free to MONEY.com readers on June 16.) His latest, “Rational Expectations: Asset Allocation for Investing Adults,” is written for advanced investors. But Bernstein, who manages money from his office in Portland, Oregon, is happy to break down the basics.

Q. Retirement investors have traditionally aimed to build the biggest nest egg possible by age 65. You recommend a different approach: figuring out how much you’ll need to spend in retirement, then choosing investments that will deliver that income. Why is this strategy a better one than the famous rule of withdrawing 4% of your portfolio?

There’s really nothing wrong with the 4% rule. But given the lower expected portfolio returns ahead, starting out with a 3.5% withdrawal, or even 3.0%, might be more appropriate.

It also makes a big difference whether you start out withdrawing 4% of your nest egg and increasing that amount by inflation annually, or withdrawing 4% of whatever you’ve got in your portfolio each year. The 4%-of-current-portfolio-value strategy may mean lower income in some years. But it is a lot safer than automatically increasing the initial withdrawal amount with inflation.

I also think that it makes sense to divide your portfolio into two separate buckets. The first one should be designed to safely meet your living expenses, above and beyond your Social Security and pension checks. In the second portfolio you can take investing risk in stocks. This approach is certainly a more psychologically sound way of doing things. Investing is first and foremost a game of psychology and discipline. If you lose that game, you’re toast.

Q. What are the best investments for a safe portfolio?

There are two ways to do it: a TIPS (Treasury Inflation-Protected Securities) bond ladder or by buying an inflation-adjusted immediate annuity. Neither is perfect. You might outlive your TIPS ladder, and/or your insurer could go bankrupt. But they are among the most reliable sources of income right now.

One other income source to consider: Social Security. Unless both you and your spouse have a low life expectancy, the best version of an inflation-adjusted annuity out there is bought by spending down your nest egg before age 70 so you can defer Social Security until then. That way, you, or your spouse, will receive the maximum benefit.

Q. Fixed-income returns are hard to live on these days.

Yes, the yields on both TIPS and annuities are low. The good news is that those yields are the result of central bank policy, and that policy has caused the value of a balanced portfolio of stocks and bonds to grow larger than it would have in a normal economic cycle—so you have more money to buy those annuities and TIPS. That said, there’s nothing wrong with delaying those purchases for now and sticking with short-term bonds or intermediate bonds.

Q. How much do people need to save to ensure success?

Your target should be to save 25 years of residual living expenses, which is the amount that isn’t covered by Social Security and a pension, if you get one. Say you need $70,000 to live on, and your Social Security and pension amount to $30,000. You’ll have to come up with $40,000 to pay your remaining expenses. To produce that income, you’ll need a safe portfolio of $1 million, assuming a 4% withdrawal rate.

Q. Given today’s high market valuations, should older investors move money out of stocks now for safety? How about Millennial or Gen X investors?

Younger investors should hold the largest stock allocations, since they have time to recover from market downturns—and a bear market would give them the opportunity to buy at bargain prices. Millennials should try to save 15% of their income, as I recommend in my book, “If You Can.”

But if you’re in or near retirement, it all depends on how close you are to having the right-sized safe portfolio and how much stock you hold. If you don’t have enough in safe assets, then your stock allocation should be well below 50% of your portfolio. If you have more than that in stocks, bad market returns at the start of your retirement, combined with withdrawals, could wipe you out within a decade. If you have enough saved in safe assets, then everything else can be invested in stocks.

If you’re somewhere in between, it’s tricky. You need to make the transition between the aggressive portfolio of your early years and the conservative portfolio of your later years, when stocks are potentially toxic. You should start lightening up on stocks and building up your safe assets five to 10 years before retirement. And if you haven’t saved enough, think about working another couple of years—if you can.

MONEY A Pick From A Pro

The Case for Hewlett-Packard in the Post-PC World

USAA Investment's Bob Landry thinks so. But to achieve a turnaround, Meg Whitman & Co. will have to develop new businesses.

The Pro: Robert Landry, portfolio manager, USAA Investment Management Co.

The Pick: Hewlett-Packard HEWLETT-PACKARD CO. HPQ 0.0263%

The Case: Last month Hewlett-Packard’s chief executive Meg Whitman announced that she’d be firing up to 16,000 employees. That’s on top of an additional 34,000 workers.

Revenues for HP, the elder statesman of Silicon Valley, have fallen for 11 consecutive quarters. In fact, the company’s trailing 12-month revenues are about the same as they were six years ago.

The company still earns a large portion of its revenue from older fare – think personal computers, and printers – at a time when cloud computing and mobile tablets are becoming the focal points of innovation. And Whitman is in the middle of a 5-year turnaround effort.

Nevertheless, investors have driven Hewlett-Packard stock up 37% over the past year.

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Why? Revenues may be down, but profits have been above $1 billion for the last six quarters. (Total expenses are also down over the last two quarters.)

Plus, USAA Investment’s Bob Landry thinks some investors don’t properly appreciate HP’s aptitude for change. “The biggest misconception is that people believe the company is an old dog that can’t be taught new tricks. That they can’t pivot from being a legacy hardware company to focusing more on enterprise services and software.”

It’s not as if Hewlett-Packard doesn’t have a hand in state-of-the-art technology, like “the Machine.” Cooked up in HP Labs, the Machine is sort of a post-cloud computing system that will be able to deal with huge amounts of data.

Whether Hewlett-Packard can actually evolve into the company Whitman, and her shareholders, want it to become remains to be seen.

Reinvestment

While reducing headcount by 50,000 cannot be good for morale (or perhaps for attracting top talent), the job losses from older parts of the company that have been struggling, says Landry.

“A lot of these people were tied to more legacy products that weren’t growing,” he says. “They’re trying to right size the company.”

This is part of the company’s larger to invest in growth areas, including tables, cloud computing, IT management software and big data.

And restructuring has helped operating margins, which have been positive for the last three quarters, after going negative for over a year.

Value

“Hewlett-Packard is a significant cash flow generator,” says Landry. In other words, after they meet all their obligations and make their capital investments, they still have cash left over that gives them financial flexibility. With a free cash flow yield of 12%, “management has pledged to return at least 50% to shareholders through buybacks and dividend increases,” Landry says.

For instance, last quarter Hewlett-Packard earned $3.0 billion in free cash flow, while returning $1.1 billion to shareholders.

Meanwhile, the stock is trading at a pretty reasonable valuation. With a price/earnings ratio of 8.8, based on estimated profits (per Bloomberg), Hewlett-Packard is a cheaper option than IBM INTERNATIONAL BUSINESS MACHINES CORP. IBM 0.1563% and Xerox XEROX CORP. XRX 0.3634% .

One reason why Landry likes Hewlett-Packard’s turn toward the software and networking aspects of its business is that those sectors are high margin business. Last quarter, operating margins on its software business was 19.2%, second only to printing. Enterprise (which includes networking) was third at 14.4%.

What if the plan doesn’t work?

While Landry is patient with Hewlett-Packard, and believes in its story, he says he eventually needs to see some revenue growth.

“If revenue growth doesn’t come throw, if it falls short of expectations, that would be a problem,” says Landry.

And last quarter proved problematic for some of Hewlett-Packard’s businesses, even its non-legacy ones. Software revenue was unchanged year-over-year, while the enterprise group fell by 2%.

One sector that did see gains (7%) was its personal systems section (which includes notebooks, desktops and workstations). Of course personal systems is a pretty low-margin business.

MONEY stocks

Friday the 13th Is a Lucky Day for Stocks, But Beware Next Friday

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History says it's unlikely that Jason will come after investors on Friday the 13th. Ronald Grant—Everett Collection

Historically, it’s so-called “Triple Witching” day, which comes next Friday, that really spooks the markets.

Calm down. Take a deep breath. Sure, the S&P 500 S&P 500 INDEX SPX 0.331% has suffered three straight down days. And today, Friday the 13th, is supposed to be the scariest day of the year.

But the stock market is by nature counterintuitive. Friday the 13th, as luck would have it, turns out to be a decent day to invest in equities: Since 1950, returns on Fridays the 13th have averaged 0.88%, more than twice the 0.34% average gain of trading days in general. And “the frequency of advance” is higher on Friday the 13th than on other days, says Sam Stovall, managing director for U.S. equity strategy at S&P Capital IQ. In other words, there’s a greater chance that the S&P 500 will post a positive gain on Friday the 13th (56%) than other days (52%).

That doesn’t mean today’s market performance will match the average, of course, or that the average will hold in the future. But the fact is, as Jeffrey Hirsch, editor in chief of The Stock Trader’s Almanac, has put it, “Friday the 13th has been erroneously associated with market crashes.”

In fact, there’s been only one significantly bad Friday the 13th in recent market history. That was October 13, 1989, the day of the so-called mini crash of ’89, when the S&P 500 lost around 6.1% of its value and the Dow Jones industrial average fell around 190 points (which back then amounted to a 6.9% drop). The losses were triggered in part by a crisis in the junk bond market.

On the other had, there’s actually good reason to be freaked out about next Friday, which is a so-called Triple Witching day on which contracts for stock options, index futures, and index options expire simultaneously. Four times a year, on the third Friday of March, June, September, and December, investors are forced to decide whether to roll over those contracts into new ones or to unwind their positions. As a result, on those days, and especially during the final hour of trading on those days, volatility tends to spike.

Even worse, in the week that follows each June’s Triple Witching Day, the Dow has lost ground in 21 of the past 24 years. Says Hirsh: “The weeks after Triple-Witching Day are horrendous.”

MONEY Ask the Expert

Should I Gift Stocks to My Heirs Now or Make Them Wait?

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Robert A. Di Ieso, Jr.

Q: Is it better to transfer stock to my children before my death or let it go into the estate?—Sandra, Kernersville, N.C.

A: If your children have no immediate need for the money and your estate is small enough to avoid estate taxes, your best move is to hold on to the shares, says Charlotte, N.C. financial planner Cheryl J. Sherrard. By letting your children inherit the stock later instead of transferring it now, you’re helping them reduce the potential tax hit when they sell.

The price you paid for your stock is known as your cost basis. That’s the number you use to determine your gain or loss on the investment and figure out how much you owe in capital gains taxes when you sell. When you pass stock to an heir as part of your estate, your heirs get a “stepped-up” basis. That means their cost basis becomes the value of the stock at the time of your death.

So if you bought the stock for $100 and the price has reached $250 when you die, your heirs’ cost basis will be $250. If and when they chose to sell that stock, they will owe taxes only on any capital gains over $250, not $100.

If you simply gift the stock to your children during your lifetime, you’ll also pass on your original cost basis. In this example, that means your heirs would owe taxes on any gains over $100. Any time you’re sitting on big profits, gifting that stock could cause your heirs to pay significantly more in taxes than they would if they’d received the shares via the estate.

There’s one more consideration: If you expect your estate to be worth more than $5.34 million, which is when the federal estate tax kicks in, you may want to gift the stocks during your lifetime to reduce the size of your estate, says Sherrard. As an individual, you can gift up to $14,000 a year per person in 2014 without incurring any gift tax. A married couple can give up to $28,000 a year.

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