MONEY Planning

When Conventional Wisdom About Retirement is Good Enough

Retirement investing isn't an exact a science. Rather than worrying whether the rules need to be tweaked, just start saving.

What keeps you up at night?

As a money manager, I recently polled my clients on several questions, and that was one of them. Replies ranged from “my bladder” to worries about the Federal Reserve printing too much money.

The most common answer, though, was fear of outliving one’s savings.

For decades, people have confronted the issue of how much they need to retire. Today the topic hits with special force. People are living longer, and the financial crisis of 2007-2009 set millions of people back twenty squares on the economic game board of life.

Now, there’s much debate about whether traditional retirement planning advice needs to be tweaked.

The traditional advice on income, for instance, is that people in retirement need about 60% to 70% of their old annual income to keep roughly the same standard of living. Remember, when you retire, your taxes may be lower, your children may be grown, your commuting and clothing expenses may shrink, and you may move out of a big house into a smaller house or apartment.

If savings and investments were your sole source of income, you would need – again, by conventional wisdom – about 25 times that sum in hand when you start your retirement. That is based on the traditional assumption that you can safely withdraw 4% of your initial nest egg each year and still have it last at least 30 years, regardless of market conditions.

That means if you earned $100,000 a year at the peak of your career, you would need about $65,000 a year in retirement, and 25 times that amount is $1,625,000.

Of course, inflation may increase your costs as years pass. If inflation runs at a 3% clip, a loaf of bread that costs $2.50 today will cost $4.50 in 2034. At 5% inflation, the same loaf would cost you $6.62.

You can offset some of the effects of inflation by your savings and investments, post-retirement. My father retired at 77 but invested in the stock market, logging prices and trends on charts he kept by hand. When he died at 98, his net worth had increased 75% from the day he retired.

Social Security can help, too. Despite doomsayers’ screeds, I believe the Social Security system will be around in 30 years. But benefits may be a little less generous than they are today.

These days, I see a lot of articles by financial planners questioning the guideline that it’s prudent to withdraw 4% a year.

I’ve seen planners argue for anything from a 2.8% withdrawal rate to a 5% one.

Those arguing for a smaller withdrawal rate — which implies the need for a bigger nest egg — say it’s hard to earn 4% a year after taxes without wading into risky investments. Savings accounts are paying a paltry 1% to 2%, and that’s before taxes.

But I think that’s a short-term view. Savings rates probably won’t stay as paltry as they are – just as inflation didn’t stay sky-high, as it was in the early 1980s.

For the long run, I think the 4% rule provides a decent, if crude, approximation.

Let’s be realistic here. Accumulating a pre-retirement hoard of 25 times the expected annual need is an ambitious target to start with.

But it’s something to strive for.

TIME

China’s Culture of Compliance Is Crippling the Country

Demonstration at Tiananmen Square in Beijing, China on June 01st, 1989.
Standing tall A Chinese youth at a demonstration in Beijing’s Tiananmen Square on June 1, 1989 Eric Bouvet—Gamma-Rapho/Getty Images

Next week will be the 25th anniversary of Tiananmen Square. It was a turning point not only for China, but also for the world, in the sense that it heralded a new era in which growing wealth and growing political freedom in emerging markets didn’t necessary go hand in hand. This year, China will very likely overtake the U.S. as the world’s largest economy. It has certainly become wealthy. But it has also become less free–as have so many of the world’s largest developing nations–think Russia, Turkey, many parts of Africa and Latin America, etc.

The question is, that can juxtaposition last another 25 years—or even another five? It’s something I’ve been thinking about a lot lately, particularly as I delve into New Yorker writer Evan Osnos’ very interesting new book on China, “Age of Ambition: Chasing Fortune, Truth and Faith in the New China” (FSG). The core premise of the book is that individual ambition and authoritarianism in countries like China will inevitably come into conflict with one another. As people get richer, they want more freedom, and they put pressure on their governments to deliver it. The problem is that these governments are often much better at delivering wealth than they are at delivering anything close to liberal democracy.

I think we may be reaching a tipping point in the next few years around that juxtaposition between growth and choice in the emerging world. China is, as always, the most dramatic example of this. The recent cyber-hacking scandal, for example, was portrayed by many pundits as yet another example of how the Middle Kingdom is leaping ahead of U.S. government and business interests, stealing American intellectual property and using it to gain a competitive edge. But as I argued, China’s IP theft actually underscores what a “me too” economy the Middle Kingdom still is. China is good, very good, at copycatting other people’s ideas (Osnos’ stories of various Chinese entrepreneurs, like the village woman behind the Chinese version of match.com, are fascinating on this score), but it has yet to create many global brands–aside from Lenovo’s computers and the college mini-fridges made by the low-end white goods producer Haier.

I think the lack of a top-shelf innovation culture has a lot to do with the lack of choice in Chinese society. I once spoke to a Wal-Mart executive in China who told me that he had trouble getting employees in one department to address basic problems in another–picking up boxes that had fallen off a shelf, or order new supplies, for example–because they were afraid of stepping out of their silos. That’s not about work ethic–the Chinese have that in spades–but a culture of compliance. In China, it’s important, sometimes deadly important, to swim in your own lane.

Another issue with the growth of higher end Chinese business is that entrepreneurs don’t trust the stability of the government. I’ve heard time and time again from wealthy people in China (many of whom are looking to get their money out – witness the percentage of high end property purchases in luxury real estate markets worldwide that are made by the Chinese) is that it doesn’t pay to develop businesses for the long haul here, because uncertainly and political risk is so high. People tend to get in, get out, and become serial entrepreneurs, rather than spending decades working on innovation, a la developed countries like the U.S., Japan, or Germany.

How will all this affect China? If the Middle Kingdom can’t make the leap to the “middle income” stage of development, which history shows is the trickiest one (only a handful of developing countries globally have made it), then unemployment will rise and social stability will fall. How will that affect Americans? In a sense, it already is. Trade tensions mean many U.S. companies are rethinking how, or if, they’ll do business in China, with myriad ramifications for us all. For more on all of that, as well as the economic legacy of the Tiananmen event, listen to my radio show, Money Talking, on WNYC this week.

TIME Financial Planning

Retirement Planning’s “Conventional Wisdom” Needs Rethinking

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Projecting how much money you’ll need in retirement isn’t as easy as it used to be. Longer lifespans, the rising cost of healthcare and a market pushing investors into more lucrative but riskier investments all combine to throw the old stalwarts out the window.

Here are some “common sense” retirement-planning beliefs that experts say you shouldn’t rely on, along with what you should be looking at instead.
The 20-year, 70% rule: “The longer life expectancies we now enjoy have basically made any traditional retirement models obsolete,” says Mitchell Goldberg, an investment professional with ClientFirst Strategy, Inc. People planning for retirement today should plan on making their nest eggs last for 30 years rather than 20. Even with a million-dollar portfolio, Goldberg says, dividing that into a 30-year rather than a 20-year horizon means cutting your annual income from $50,000 to $30,000 — a big drop.

And with retirees living more active lives, assumption that you’ll need 70% percent of your pre-retirement income in your golden years is both outdated and based on a flawed metric, to boot, says Rich Arzaga, founder and CEO Cornerstone Wealth Management, Inc.

“Most retirees actually spend 117% of their current expenses, not 70% of their income. This is a sizable gap, and can have a dramatic impact on financial independence goals,” he says.

“Income and expenses are two different metrics,” Arzaga points out. “And there can be a big difference between the two.” Especially early on, new retirees might overspend on travel, hobbies or other pursuits they finally have the time to undertake. “When you take [assets] out upfront, you start to draw capital very quickly,” he says. A better alternative is looking at your current and projected spending, factoring in your preferred retirement lifestyle and goals.

The linear-growth, steady rate-of-return model: A lot of plug-and-play retirement calculators assume linear growth. But in real life, things don’t always work out like that (as anyone nearing retirement when the 2008 financial crisis hit can attest).

Models that assume a year-over-year 8% or 10% rate-of-return might be simple, but they hide the truth, Goldberg says. “I’ve seen many models from various constituencies in the financial services industry with their models and their expected rates of return. These might work well for the financial services salesmen, but I think the models I see put in front of consumers are overly optimistic. I can’t stand it.”

“One cannot assume that there won’t be market corrections and negative returns,” says Debra A. Neiman, principal and founder of Neiman & Associates Financial Services, LLC. “It is better to incorporate negative market returns into the mix to give people a better sense of the parameters in the form of average case and worst case scenarios,” she says. Neiman says Monte Carlo simulations, which take both good and bad market swings into account, come closer to approximating what a retiree can expect (although even they can’t predict the future).

Personal finance expert Peter Dunn has a table on his blog that shows the difference between a 12% annual return and a 12% average return over 10 years. They might sound like they’d be the same, but a steady rate of return — which is much less likely to happen, given the typical market volatility — yields 7% more at the end of a decade.

And long-term bonds aren’t a panacea. Today, they’re attractive because cash equivalents earn so little interest, but when interest rates go up — as they inevitably will — that dynamic is going to change.”With a 1% increase in the prime rate, a 30-year bond can go down by as much as 17%,” Arzaga says. Intermediate bonds with 20-year terms will be impacted about half as much, he says. “The longer the hold, the bigger the drop.”

The 4% withdrawal and 3% inflation assumptions: “Advisors tend to use a 4% draw rate to achieve success, but studies show it could be as low as 2.75% for the calculation to work,” Argaza says. “We don’t know what’s going to happen in the future, which is why that 4% assumption can fail.”

How the market performs overall, especially early in your retirement, has a greater impact on your nest egg over the long term. If you have the bad luck reach retirement age in a downturn, consider reining in your spending, withdrawing less or just putting off retirement for a few years.

And although the core Consumer Price Index is a widely-used metric for inflation, Goldberg says it’s a flawed barometer because it doesn’t include volatile food and energy costs. “The issues is food and energy are very big components” of many retirees’ budgets, he says. Healthcare costs — which seniors tend to incur to a disproportionate degree — are also rising faster than the overall rate of inflation.

“$50,000 today with even a little bit of inflation is going to be like $40,000 in the next seven or eight years,” Goldberg says.

The other mistake is in using net work, rather than liquid assets, as your baseline for withdrawal, Arzaga says. Yes, you may have equity in your home, but unless you get a reverse mortgage — a step that isn’t a good idea for everybody — there’s no way to tap that equity without finding another place to live.

TIME Financial Education

The Economy is Big News–So Why not Teach it?

School
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With the economy on the front page most days the past six years, you might think economics and personal finance would be a prominent subject in our schools. Yet less than half of states require an economics course in high school and little more than a third require one in personal finance, according to a new survey.

The long trend is mildly positive. For the first time, all 50 states and the District of Columbia include economics in their K-12 education standards, meaning they have guidelines for those schools that want to offer such a course. Meanwhile, more states are offering and requiring personal finance courses.

These are the chief findings in the Council for Economic Education’s 2014 Survey of the States report, out today. The CEE, which surveys each state every two years, is a strong advocate for financial education and believes that requiring school courses in economics and personal finance is an important path to progress.

“A more financially capable population can result in a larger and more efficient market for financial products, greater participation in asset building and greater financial stability,” Richard Ketchum, Chairman of the FINRA Investor Education Foundation, states in the report. “It is therefore in everyone’s interest that action be taken to improve the financial capability of all Americans.”

Ketchum notes that young people are entering adulthood saddled with debt: 36% of Millennials have student loans outstanding and 55% say they might not be able to repay this debt. Only a third have emergency savings while about the same share have unpaid medical bills. Nearly half carry a balance on their credit cards.

Financial education in schools is seen as one way to bring such numbers down over time. But first we have to bring up the numbers of states and schools that offer or require such coursework. The sobering numbers related to economic education are especially troubling because virtually every family in America was touched by economic troubles during and since the Great Recession.

While every state is on board with economic standards, just 24 require that an economic course be offered. That’s down one since the last survey. The number of states requiring that an economics course be taken in high school remains constant at 22. These numbers argue that the states are taking a pass on the mother of all teachable moments.

The news is a little better on the personal finance front. Now 18 states require that high schools offer a course, up from 14; and 16 states require personal finance instruction, up from 13 in the last survey. It’s not clear why there’s been more progress in personal finance. In part, the states that have embraced economic education are now picking up on the need for personal finance too. Another explanation is that while the hardships of the past half-decade may be better understood through an economics course, it’s better understanding of personal finance that will allow families to manage their way through tough times.

Despite the progress, these courses remain a tough sell at the state level—and that is where the battle lines are drawn. Unlike in the U.K. and other regions with a federal mandate for financial education, state authorities call the shots in America. They must be convinced one at a time, and they have been slow to respond.

TIME Career Strategies

Global Internships: The New Key to Getting a Job

Job seekers on their way to meet employers at the 25th Annual CUNY big Apple Job and Internship Fair at the Jacob Javits Convention Center on April 26, 2013 in New York City.
Spencer Platt / Getty Images

As if paying for college wasn't enough, now students are paying to get a high-value internship that will give them an edge in the job market.

The debate over the value of college that billionaire Peter Thiel sparked three years ago hasn’t gone away. Yet most adults continue to place a high priority on saving for college, and a growing number of families are doubling down on education—paying for high-value internships on top of a degree.

Youth unemployment remains high—about 13% globally. Thiel and others argue that it’s foolish to go into debt for a diploma when so few appropriate jobs are available for graduates. Better to start a small business or learn a trade.

Statistics say otherwise. The Pew Research Center found that a typical adult with a bachelor’s degree will earn $1.42 million over 40 years—$650,000 more than someone with only a high school degree. The cost of college and lost income while in school narrows the gap slightly, to $550,000. Pew also found that adults with a college degree fared better in the Great Recession.

There is no denying that crushing student loans may bear on graduates for years, and that those who go into debt but fail to graduate are especially hard pressed. But for most people education works, and the good news is that through online courses the price will come down markedly over the next decade, and may even become free.

So it’s no surprise to see parents and young people continuing to place a high priority on higher education and the pre- or post-graduate internships that boost employment prospects. Among families that have saved anything for college, 85% say it is one of their top three priorities and 60% will save more this year than they saved last year, according to a Fidelity Investments survey. They are saving monthly (81%), or earmarking their tax refund (37%) or a bonus or pay raise (36%), and redirecting funds that had been used for day care or another expiring expense (29%).

On top of this, families have begun budgeting for global internships, a trend that universities and a cottage industry of placement firms has furthered. “The data show that international internships are highly regarded by employers,” says David Lloyd, founder of the Intern Group, which has placed young adults from 80 countries in positions around the world. “The kids who will be successful today are those that take themselves out of their comfort zone and develop a global mindset.”

This means going beyond simple study abroad programs to employment in a foreign country that will build a young person’s contacts and context, Lloyd says. Such programs are especially popular in the U.S., where more than a third of Intern Group alumni reside. Lloyd says that 88% of those who take part in his firm’s programs find work at a graduate level job within three months and that 95% say the program was good for their career.

These internships start at around $3,500 for a six-week program. Some last six months and are more expensive. But, says Lloyd, “employers worldwide prize graduates with global experience and international cultural awareness.” The right internship gives graduates a decided edge.

Hilton Hotels is among companies that prize internships, and at the 2014 World Economic Forum in Davos announced an Open Doors campaign to help 1 million young people “reach their full potential” over the next five years through global apprenticeship and other programs. “These are a huge deal,” says Jennifer Silberman, vice president of corporate responsibility at Hilton Worldwide. “Young people are at a competitive disadvantage if they don’t get this kind of experience.”

Indeed, McKinsey found that half of college graduates are not sure that their education improved their job prospects and that 39% of employers say entry-level jobs go unfilled because young people don’t have the required job skills. An apprenticeship, says Silberman, “lets us identify high-potential workers and fast-track them.” The travel industry is projected to create 73 million jobs the next 10 years, and most of them have career potential, she says, adding that it’s not unusual for an apprentice to be offered a full-time job and then get their first promotion within six months.

You don’t necessarily need a college degree to become a concierge or housekeeping manager, which is kind of the argument Thiel and others make against going into debt to go to college. But even in the services-heavy travel industry there are lots of marketing, technology and management jobs that require higher education—and where a high-value internship really helps.

TIME Advertising

Save That $4 Million! 3 Smart Super Bowl Non-Advertisers

It’s debatable whether the $4 million spent to advertise during the Super Bowl is actually worth the money. This year, what with an awful, blowout of a game, it seemed like there were surely better, cleverer ways for brands to launch marketing campaigns.

Brands that had opted for an ad time slot in the second half of the Super Bowl had to be bummed. The Seattle Seahawks, who led by more than three touchdowns at halftime, scored on the second half’s opening kickoff, killing almost all hope that the Denver Broncos could make a game of it. “Eyeballs had to be disappearing – fast,” a (New York) Daily News columnist wrote. “Think how advertisers, spending a few million on 30-second spots, felt.”

They probably weren’t feeling anywhere near as good as the brands below, which skipped the $4 million Super Bowl commercial fee and wound up getting plenty of attention anyway:

Newcastle Brown Ale
Anheuser-Busch InBev, the world’s largest beer maker, is regularly among the biggest spenders on Super Bowl commercials. This year’s game was no exception, with the company offering viewers a handful of ads, including an overhyped “are you up for whatever” Bud Light commercial and a heartwarming puppy-horse ad for Budweiser.

(MORE: The Best and Worst Super Bowl Commercials of 2014)

The Newcastle brand (owned by Heineken) went in a very different direction, delivering a series of “If We Made It” Super Bowl commercials that basically mock the idea of making (and blowing money on) Super Bowl commercials. The “faux teasers” released online mentioned that the ad campaign—which again, was never actually made—would include party sharks, skateboarding cats, and girls in bikinis battling robots through the power of dance. Most memorably, the brand featured actress Anna Kendrick in a “behind the scenes” video that went viral, in which vents about not getting a big paycheck for promoting a beer she doesn’t drink, and also discussed whether or not she was truly “beer commercial babe hot”:

J.C. Penney
After the much-celebrated Tweet by Oreos during last year’s Super Bowl was pronounced a huge success, it was expected that tons of brands would be pushing quick-thinking real-time marketing efforts via social media this year. And of course they did, bringing the possibility of awkward, mock-worthy Tweets with them.

Yet a series of company Tweets that was, in fact, mocked wound up being heralded for its cleverness once it was revealed to be a carefully planned-out ploy. During the game, J.C. Penney sent out several typo-riddled Tweets (“Toughdown Seadawks!!”), leading some to believe—and help spread the word—that the social media team was drunk or the account was hacked. Other brands responded to J.C. Penney’s odd messages: Doritos encouraged the department store team to slow down and (of course) have some Doritos, while Kia asked if @jcpenney needed a designated driver.

Turns out the “drunk Tweets” were purposefully sent out, typos and all. Eventually, it was revealed that the messages were the result of #TweetingWithMittens because the temperatures during the game were supposed to be much colder. In an event, the odd ploy earned J.C. Penney plenty of “free media,” as NPR put it, and also generated attention for the mittens it just so happened to be promoting on sale.

Esurance
In another effort tweaking the value of paying $4 million for a 30-second commercial, Esurance decided the more prudent move was to purchase the first post-game ad slot, featuring John Krasinki (Jim from “The Office”). “By doing so, we saved 30 percent, which added up to a whopping $1.5 million,” a company post explained.

(MORE: The 19 Best Super Bowl Ads of All Time)

It’s a cute concept that plays off the idea that using Esurance is supposed to help you save on insurance. And the company didn’t stop there. “Instead of just absorbing the savings,” the company explained,” why not use it to try to spread the word about how uber-efficient we are?”

Anyone who Tweets #EsuranceSave30 within 36 hours of when the original ad aired is entered to win the company’s $1.5 million savings, with the winner to be announced Wednesday on Jimmy Kimmel Live!

TIME Retirement

The Problem With President Obama’s ‘MyRA’ Savings Accounts

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Expanding savings opportunities makes sense. But a big issue is whether people have the means to use them.

To better enable Americans to save for retirement, President Obama said he would order a new “starter” savings plan called MyRA geared at low-income households. It’s a fine idea. But as with any personal savings account, you must be able to fund it for it to matter. That may be the biggest problem with the program.

Little is known about these new accounts. They would function like a Roth IRA, allowing savers to put in after-tax money that would then grow tax-free. They’d be available through your employer to anyone who does not have an individual retirement account or work for a company that offers a traditional pension or 401(k) plan. That comes to about 39 million households.

The big advantage is that you could open a MyRA with as little as $25 and make contributions of as little as $5, creating a regular savings opportunity that most low-income households have never had. Typically, plan administrators require $1,000 or more to open an account. MyRAs would also benefit from a no-fee structure that does not eat away at savings.

Your MyRA would also enjoy a government guarantee against loss of principal. The downside is that your money would be funneled into low-yielding Treasury securities and have little potential to grow enough to make a big dent in your personal retirement savings crisis—or that of the nation as a whole—until you have accumulated enough to roll it into a regular IRA where you might benefit from investments with greater growth potential.

Offering low-income households a place to save doesn’t really fix the big problem: they still must have the money and the discipline to take advantage. More than half of workers have less than $25,000 in savings and 28% has less than $1,000 in savings, reports the Employee Benefits Research Institute. And with the MyRA, you could take money out anytime without penalty. That would be awfully tempting the first time money gets tight.

The retirement savings plan represents an important first step,” says Ai-Jen Poo, director of the National Domestic Worker’s Alliance. Still, she says, “Most Americans are not able to plan for their futures because they are trying to deal with their most immediate needs, like paying their rent and keeping their lights on.”

The new accounts call to mind the so-called “catch-up” provision enabling savers past age 50 to put away an extra $5,500 in their 401(k) each year. That’s a fine idea too, but since its adoption in 2001 only the relatively well to do have used it. Let’s face it: Not many folks have an extra $5,500 lying around.

Only 13% of those eligible have made the extra contributions, according to an analysis of data provided by Fidelity Investments. That’s largely because regardless of age almost no one even contributes the maximum $17,500—already a lot of money to take out of your budget each year. For the vast majority, the extra $5,500 has proven to be irrelevant, concludes the Center for Retirement Research at Boston College.

So let’s not pretend that MyRAs will save our collective retirement dreams. They give more people more opportunity to save, and you cannot argue with that. But for these accounts to make a real difference, the folks they are meant to help most will need extraordinary willpower.

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