People on the streets of New York City tell George Mannes what they would do if extra money fell into their lap.+ READ ARTICLE
Q: Bull markets don’t last forever. How can I protect my 401(k) if there’s another big downturn soon?
A: After a five-year tear, the bull market is starting to look a bit tired, so it’s understandable that you may be be nervous about a possible downturn. But any changes in your 401(k) should be geared mainly to the years you have until retirement rather than potential stock market moves.
The current bull market may indeed be in its last phase and returns going forward are likely to be more modest. Still, occasional stomach-churning downturns are just the nature of the investing game, says Tim Golas, a partner at Spurstone Executive Wealth Solutions. “I don’t see anything like the 2008 crisis on the horizon, but it wouldn’t surprise me to see a lot more volatility in the markets,” says Golas.
That may feel uncomfortable. But don’t look at an increase in market risk as a key reason to cut back your exposure to stocks. “If you leave the market during tough times and get really conservative with long-term investments, you can miss a lot of gains,” says Golas.
A better way to determine the size of your stock allocation is to use your age, projected retirement date, as well as your risk tolerance as a guide. If you are in your 20s and 30s and have many years till retirement, the long-term growth potential of stocks will outweigh their risks, so your retirement assets should be concentrated in stocks, not bonds. If you have 30 or 40 years till retirement you can keep as much as 80% of your 401(k) in equities and 20% in bonds, financial advisers say.
If you’re uncomfortable with big market swings, you can do fine with a smaller allocation to stocks. But for most investors, it’s best to keep at least a 50% to 60% equities, since you’ll need that growth in your nest egg. As you get older and closer to retirement, it makes sense to trade some of that potential growth in stocks for stability. After all, you want to be sure that money is available when you need it. So over time you should reduce the percentage of your assets invested in stocks and boost the amount in bonds to help preserve your portfolio.
To determine how much you should have in stocks vs. bonds, financial planners recommend this standard rule of thumb: Subtract your age from 110. Using this measure, a 40-year old would keep 70% of their retirement funds in stocks. Of course, you can fine-tune the percentage to suit your strategy.
When you’re within five or 10 years of retirement, you should focus on reducing risk in your portfolio. An asset allocation of 50% stocks and 50% stocks should provide the stability you need while still providing enough growth to outpace inflation during your retirement years.
Once you have your strategy set, try to ignore daily market moves and stay on course. “You shouldn’t apply short-term thinking to long-term assets,” says Golas.
For more on retirement investing:
Perhaps unsurprisingly, young Americans are the least prepared
More than a third of people in the United States have no retirement savings at all, according to a new survey.
The survey, commissioned by Bankrate.com, found that 14% of Americans ages 65 and older are without a nest egg, USA Today reports. For the 50-to-64 age group, the proportion is 26%, while 33% of those aged 30 to 49 have nothing put aside. In total, 36% of Americans haven’t put aside a dime for retirement.
Perhaps unsurprisingly, young Americans are the least prepared, with 69% of the 18-to-29 age group having no retirement savings.
“The key to a successful retirement is to save early and aggressively,” Greg McBride, chief financial analyst for Bankrate.com, told USA Today.
Some Americans are heeding that advice. The same survey found that 32% of people ages 30 to 49 began saving for retirement in their 20s, while 16% started in their 30s.
Dave Dardis worked for over 39 years at IBM in management roles in sales, marketing and business development. He retired about six years ago, spending his newfound free time volunteering at nonprofits in Silicon Valley. He found the volunteering work deeply unsatisfying.
“They were along the lines of ‘Can you help us for several weeks and then we’ll wave goodbye,’” Dardis, 68, recalls.
But in a parking lot conversation following a nonprofit event, Dardis learned about The Encore Fellowships Network. He was intrigued.
What The Encore Fellowship Is
The program was created by Encore.org (whose slogan is “purpose and passion in your second act”) to serve as a matchmaker for private-sector professionals and nonprofits. It typically lasts six to 12 months and comes with a stipend.
In 2011, Dardis applied to become an Encore Fellow and, after being selected, was asked to choose among three nonprofits. He picked the Hispanic Foundation of Silicon Valley (HFSV), which spearheads local educational initiatives. Its draw? Dardis’s parents were both teachers; so is his wife.
The part-time Fellowship paid $25 an hour for 1,000 hours. When it ended, Dardis was hired as HFSV’s chief operating officer where he works three days a week on fundraising in his “unretirement.”
Says Dardis: “I am doing things that leverage my skills from IBM. I am having fun. This is a gas.”
The 20-hours-a-week schedule gives Dardis time to run errands, cook dinner for his wife and spend relaxing weekends watching his grandchildren play soccer. Financially, he’s doing fine with a pension from IBM, Social Security and two checks a month from HFSV (earning close to what he made during the Encore Fellowship).
From Creating Ads to Helping Ex-Cons
Beth Kempner worked in New York City for Saatchi & Saatchi Advertising for 25 years, where she became a Senior Vice President. When Kempner’s kids were in high school, she decided it was time to “retire” and spend more time with them before they left for college.
In her “retirement,” she did a project for the Taproot Foundation, a pro bono consulting firm, and got a certificate in the Funder and Grantmaking Program at New York University. Then, while browsing the Internet, Kempner chanced upon the Encore Fellowship program. She applied and became an Encore Fellow in 2011, working in public affairs for the Center for Employment Opportunities (CEO), a nonprofit that helps ex-cons get and stay in jobs.
Like Dardis, Kempner (now 55) stayed on when the Fellowship finished. She was hired as CEO’s part-time Director of Public Affairs, leveraging her advertising and marketing skills. “It’s a wonderful job,” she says.
Kempner has been with the organization for three years, working three three days a week. She’s passionate about the work, but loves the free time that has let her rediscover tennis, revive friendships and take classes.
The Encore Career Gap
Many others in their 50s and 60s are inspired by the fledgling encore career movement where Durdis and Kempner are foot soldiers. But some are unsure about which encore career to pursue, how to find a good opportunity and whether the finances will work out.
That may explain why a new Encore.org survey of Americans age 50 to 70 found that although 55 percent believe it’s important to take their skills to help others, only 28 percent said they are ready to make the leap into an encore job.
Structure and Support
It’s also why a structured, focused program like the Encore Fellowship Network can ease the transition. There are now Encore Fellowships in 15 cities in the U.S. and England, with more in the works. Each is run slightly differently, with its own application season and process.
“Not only did they [the Fellowship management] help direct me to this new ‘life’ but the support system in place in fantastic,” says Kempner. “Over the year of the Fellowship, we had speakers from every part of the nonprofit world come to speak to us and share their transitions and experiences.”
Adds Dardis: “The Fellowship isn’t a once and done kind of experience.”
Dardis and Kempner said the Encore Fellowship’s application process forced them to think about their skill sets and what they wanted out of their next chapter. Although Kempner said she had doubts whether she was qualified to assist a nonprofit for ex-cons, a meeting with the group’s former head convinced her to take a risk.
Both have found their “unretirement” work extremely fulfilling. That’s often true for people who transition from full-time professional jobs into encore careers.
Nicole Maestros, a Rand Corporation economist and author of the study, “Back to Work: Expectations and Realizations of Work After Retirement” found that 26 percent of full-time employees who retired reversed their decision and returned to work (either full time or part time) within a few years. They did so mostly because they found retirement less satisfying than they had expected, Maestros says.
The Evolving Fellowships
The Encore Fellowship model is evolving in interesting ways. For the past two years, Intel has been offering its U.S. employees who are eligible to retire the opportunity to apply for Intel Encore Career Fellowships. So far, more than 200 Intel employees have become Fellows.
More nonprofits are learning about the Encore Fellowships and snagging its talented men and women. But too few people who could become Fellows know about the program. Dardis learned about it through a chance parking lot conversation and Kempner by browsing the Internet.
The Encore Fellowship is also only one piece of a much bigger unretirement and encore career infrastructure puzzle. There are many more on-ramps to be built. Still, the Fellowship is a practical path for some boomers to thoughtfully transition from one career to another.
Check it out.
Chris Farrell is senior economics contributor for American Public Media’s Marketplace and author of the forthcoming Unretirement: How Baby Boomers Are Changing the Way We Think About Work, Community, and The Good Life. He writes about Unretirement twice a month, focusing on the personal finance and entrepreneurial start-up implications and the lessons people learn as they search for meaning and income. Tell him about your experiences so he can address your questions in future columns. Send your queries to him firstname.lastname@example.org. His twitter address is @cfarrellecon.
More workers have retired early than late since the Great Recession, new Fed Data show. But it's not a happy story.
It seems counter intuitive: Of all Americans who retired since the Great Recession, more retired earlier than expected than later than expected, a new Fed report shows.
This finding appears to be at odds with everything we’ve heard about the growing need to delay retirement and — my all-time favorite oxymoron — work in retirement.
Yet the numbers don’t lie: 15% of those who have retired since 2008 did so earlier than planned; only 4% did so later than planned. This is according to the latest Fed data, which goes to September 2013.
The data clearly show what we all know: In order to make ends meet, workers intend to stay on the job longer, not shorter. Two in five workers 45 or older plan to delay retirement. Among pre-retirees 55 to 64 years old, only 18% expect to retire on time and stop working altogether. A quarter expects to work as long as they can and another quarter expects to work part-time or become self-employed in retirement.
Taken as a whole, this can only mean that we’ve seen a lot of forced retirements. In the lousy job market of the past few years, millions of older workers downsized out of employment couldn’t find suitable work. They retired rather than keep up the search or work for significantly less. That’s not good, and it helps explain other sobering statistics in the report.
Nearly 40% of households say they are just getting by or struggling to make ends meet, underscoring the uneven recovery. The rebound in stocks has mostly benefited the investing class. Home prices have improved, and that has helped a wider swath of the population—but not as much as you might expect. Of those who have owned their home for at least five years, about half say the value is lower than in 2008.
Meanwhile, many households are suffering from tight credit, student loans and poor retirement savings. Some of these pressures have eased in the past 12 months. The economy grew at a healthy 4% pace last quarter and mortgage lending has loosened up.
But a quarter of households have some form of student debt with an average balance of $27,840. One in five has fallen behind in payments on this debt. At the same time, 31% of workers say they have no retirement savings or pension, including 19% of those aged 55 to 64. Almost half of adults aren’t even thinking about planning for retirement. And yet, as the report shows, retirement may be coming sooner than they expect.
With overall health-care costs in check, Medicare didn't hike the premiums seniors pay again this year. But once economic growth picks up, rising prices could come back too.
Medicare turned 49 years old last week, and the program celebrated with some good financial news for seniors: Premiums will not rise in 2015 for the third consecutive year.
The question now: How long can the good news persist? Worries about Medicare’s long-range financial health persist, but for now persistent low healthcare cost inflation will translate into a monthly premium of $104.90 next year for Part B (outpatient services), according to the Medicare trustees. Meanwhile, the Centers for Medicare & Medicaid Services (CMS) says the average premium for a basic Part D prescription drug plan will rise by about $1, to $32 per month.
The Part B premium has been $104.90 since 2012—except for 2011, when it actually dropped by about $15, to $99.90. The moderation is good news for seniors, since premiums are deducted from Social Security checks. Beneficiaries will keep all of next year’s Social Security cost-of-living adjustment, which likely will be about 1.7%.
Meanwhile, the average Part D premium has been $30 or $31 since 2011. That’s because of a dramatic shift to cheap generic drugs, and innovation by plan providers competing for customers.
“Seniors can expect to see more of what they’ve been getting over the last few years, which is increasing effort by Part D insurers to offer very-low-premium plans,” says Matthew Eyles, executive vice president of Avalere Health, a consulting firm specializing in healthcare.
As in recent years, Eyles says, the best deals will be found in plans that require enrollment in preferred pharmacy networks. Those plans offer lower premiums and co-pays. “We’ll also see plans limiting or eliminating deductibles, and encouraging the use of generics by offering them free or at nominal prices,” says Eyles.
But the average figures mask a more complicated story. Part D enrollees will find significant regional variations in premiums around the country. CMS data shows average premiums will be as low as $21.19 in New Mexico, and $25.83 in Florida—but as high as $39.74 in Idaho and Utah.
Eyles says it is not entirely clear why premiums will vary so extensively, although the prices tend to track the overall cost of healthcare, and are related to the overall healthiness of seniors by state.
“The plan providers have to submit bids for regions that take into account differences in the enrolled populations, including prescribing and utilization patterns,” he says. “It could be that one state tends to have more people using statins, or a diabetes medication.”
Another complication in Part D is the “doughnut hole,” the gap in coverage for Part D enrollees with high drug costs. Higher-cost plans are available to provide gap coverage, but the hole’s size is being shrunk under a provision of the Affordable Care Act (ACA), and the gap is set to disappear in 2020.
The coverage gap begins after you and your drug plan have spent a certain amount for covered drugs. Next year the gap starts at $2,960 (up from $2,850 this year) and ends after you’ve spent $4,700 (up from $4,550 this year).
Seniors who enter the gap also get discounts on brand-name and generic drugs, and those breaks will be larger next year. Enrollees will pay 45% of the cost of brand-name drugs in 2015 (down from 47.5% this year) and 65% of the cost of generic drugs (down from 72% this year).
Can the recent good news on lower healthcare costs continue indefinitely? Medicare spending reflects our overall health economy, and the big picture is that the United States does not have effective controls on spending growth. Healthcare outlays have quadrupled since the 1950s as a percentage of gross domestic product, to 17.7% in 2011. What’s more, our spending is more than double any other major industrialized nation, according to the Organization for Economic Cooperation and Development.
Still, our per capita Medicare spending growth averaged 2% from 2009 to 2012, and it was nearly zero last year.
The Obama administration often points to the ACA, but outside experts are more skeptical. Research published this month by Health Affairs, a leading health policy and research and journal, credited 70% of the recent spending slowdown to the slack economy. Absent further changes in the structure of our healthcare system, the researchers expect higher healthcare inflation to resume as the economy improves.
“A significant amount of it is due to the economic slowdown,” says Eyles, “although we know that changes in the way providers deliver care, and how providers are being paid are also making a difference in the overall rate of growth.”
A financial planner estimates how much money you need to save — and shares 5 keys to a successful retirement.
Most people would say money can buy you happiness in retirement, but financial planner Wes Moss wanted the details: Just how much money does it take to retire happily? And is there a point of diminishing happiness returns on the size of a nest egg?
Moss surveyed 1,350 retirees about net worth and income, assets and home equity. But he wasn’t hunting for the number of dollars it takes to live — rather, he wanted to understand how money correlates to retirees’ levels of happiness. To that end, he posed a series of detailed questions about their lives: where they shop, what kinds of cars they drive, how many vacations they take annually, their family lives and the activities they pursue. Then he associated their levels of reported happiness with their financial condition.
Here’s what he found: Most people can be happy in retirement with savings of about $500,000. A higher number can buy more happiness, but only to a point.
“There is a plateau-ing effect above that number, and the higher you get the rate of increase gets smaller,” Moss says. “I call it diminishing marginal happiness.”
Moss, managing partner and chief investment strategist at Capital Investment Advisors in Atlanta, explores the correlation of wealth and retirement happiness in his new book, You Can Retire Sooner Than You Think: The 5 Money Secrets of the Happiest Retirees. Moss is a registered investment adviser who previously worked for a big Wall Street firm.
His five secrets include a careful determination of what you actually want to spend money on in retirement and how you’ll save to meet your goals; paying off your mortgage early; developing diverse sources of income in retirement; and learning how to invest for income.
Here’s an edited transcript of five questions I asked Moss about his findings in a recent interview.
Q. Who are the happy retirees, and what makes them happy?
It’s not how much you save but how much you save in relation to what you need. When I worked on Wall Street, what we always were trying to breed is an expectation with clients that they need to spend more and more — you need an infinite amount because you will need to spend just as much or more in retirement. That’s what the mutual fund industry and Wall Street preach.
But we found that for most people, the amount of happiness correlates to median savings around $500,000. There are some increases above that number, but it’s a slower rate of incremental gains. So think of $500,000 as a financial bare minimum.
Q. Are the happy retirees making adjustments to their spending in order to be comfortable?
The survey data doesn’t tell me that, but my real-life experiences with clients suggest that people take a realistic look at how much income they’ll have — perhaps they have two or three thousand in Social Security income, and they can take another $3,000 monthly from their investments. They look at that and decide that they can live a good life on $6,000 a month.
Q. What makes retirees unhappy — and how can people avoid winding up there?
Many of the unhappy retirees are still paying mortgages, with no light at the end of the tunnel. Another thing I see a lot is people who don’t take care of big expenses before they retire – they wait to redo the kitchen until they retire because they think they’ll have time to deal with it then. But it’s much better to do these things while you’re working and still have cash flow.
Another mistake is people who don’t have enough core pursuits in retirement. They were too myopic and entrenched in making money and working before, and now they’re not as busy as they need to be. They are blindsided by free time.
Q. I’ve heard both sides of the mortgage-in-retirement argument — some argue it’s better to invest that money rather than use it to pay off a mortgage. Sounds like you’re a firm believer in getting rid of them.
If you have resources in a taxable account, I’d rather see a client use that to pay off the mortgage in one fell swoop — or, just accelerate your monthly payments by $200 to $400, which can shave a full decade off of a mortgage. I know people will argue that they can get a higher return putting that money in stocks, but I’ve seen a lot of periods in my career where all the market did was crash and then recover. Most Americans don’t get that average 9% stock market return over time, so a safer bet is to save that guaranteed 4% or 5% that a mortgage costs. Also, with older clients, what I see is an enormous level of contentment among people who have figured out how to get rid of their mortgages.
Q. Your book lays out a model for retiring early — or earlier than you think you could. That runs counter to much of the talk we hear today about longevity and the need for everyone to work longer. Why do you think people can retire earlier than planned — and how do you define the word “early”?
I define it as being in a position retire at 60 or 62. And there is a group of people where it’s obvious they have the financial means to retire — but the concept is foreign and they don’t have a handle on their finances. I’ve had many client meetings with couples where one spouse thinks they can retire, and the other doesn’t — but when you add up all their different accounts, you see that they have $750,000, along with pensions and Social Security. These are people who definitely could retire if they choose.
After toiling in the tech industry for over three decades, David Harris decided to buy an adventure travel company. Here's how he did it.
For 30 years, David Harris bounced around Silicon Valley, using his sales and marketing savvy to overhaul tech companies. But in 2011 he received a sizable payout from the sale of Tumbleweed Communications, where he had been vice president—and he was ready for a change. Though his work was highly compensated, it was also high pressure. “I wanted to continue to challenge myself,” he says. “But I needed to get out of high tech for my mental health.”
Around the same time Timberline Adventure Tours, a Lafayette, Colo., company offering hiking and biking trips across the U.S. and Canada, went up for sale. Harris and his wife, Kisa, had gone on many vacations with Timberline and had even become friendly with the owners.
For Harris, it was the perfect opportunity. He was looking to do something he felt passionate about, and Timberline filled that bill. Plus, he felt the business had potential beyond its current revenue: “I knew Timberline offered a great product. It was a matter of getting it out to the right people.” While details of the purchase were still being ironed out, Harris moved with Kisa (then an aerobics instructor) and his three daughters to Louisville, Colo., where they lived off investments until he settled into his new role.
Immediately after taking over in January 2012, Harris began boosting Timberline’s digital presence—revamping the website and developing strategies for social media and email marketing. He used skills he’d honed in Silicon Valley, only now “product overhaul” meant testing trails and putting together a “fun puzzle of trip itineraries.”
Today Timberline offers 84 tours to about 600 clients annually. Revenues hit $1.2 million in 2013, up from $850,000 in 2011. While Harris isn’t making the big bucks he used to, he’s enjoying going to a job that doesn’t feel like work. “At the end of a trip, when clients are beaming and thanking you for making their vacation,” Harris says, “it’s just such a pleasure.”
BY THE NUMBERS
$500,000: What the company cost
Harris, who bought the business with cash from the sale of Tumbleweed, drew on his sales experience to create a valuation. The owners still cared about the company, and Harris says that made it somewhat harder to negotiate them down to the price he wanted to pay.
84%: how much less Harris earns than he used to
While his family can live off the $100,000 he and Kisa bring in (she’s the VP), they’re still adjusting to the seasonality of the business, which requires intensive budgeting. Harris credits Kisa, who is “as organized as the day is long.”
240: Target number of new clients to add in 2014
Harris is proud of Timberline’s customer loyalty— 84% of travelers in 2012 were returning—but he’d like to grow the customer base so that 40% of clients are new. He plans to introduce more trip itineraries, and he’s working on building corporate partnerships, hoping that this will help raise revenues to $2 million by 2015.
Earning every penny you're worth when you join the workforce can pay off for the rest of your life. So don't hesitate to negotiate.
For many people, negotiating pay is not a welcome task. In fact, almost half of U.S. workers simply accept the first offer. And when you’ve just graduated from college and are interviewing for your first real job, your focus is probably on landing the job, not demanding top dollar.
I’m here to say that more often than not it’s worth asking for a little bit more. I’ve been there, and if I could sit down with my 22-year-old self, there are a few things I’d tell her about that first salary negotiation.
Employers Expect You to Negotiate
The greatest fear I’ve heard people express is that a job offer might be rescinded if they try to negotiate the pay. As long as you’re respectful and reasonable, that’s very unlikely.
The prospective employer has already expressed interest in hiring you. As in any negotiation, they expect you to do just that—negotiate. It’s okay to simply ask if the salary is negotiable or to suggest a number that is slightly higher than what’s proposed. Most employers will have a salary range in mind when they make you an offer, not a hard-and-fast number. If they are first to float a figure, they usually won’t start at the top of that range.
The best thing you can do for yourself is come to that discussion prepared so that you know what an appropriate counter-offer would be. Do your salary research ahead of time. You want to know the potential pay range based on the job title, city, company size, and industry, as well as what you bring to the table—your education and any relevant experience. Negotiating blindly is not a great plan. Proposing a salary number that’s too high or too low for the position just indicates that you haven’t done your homework.
Your Salary Will Level Out Around 40
Typically, your biggest opportunity for pay increases is in the first 20 years or so of your career, so keep negotiating well. When PayScale delved into the data, we found that pay essentially goes nowhere after age 40, once you account for inflation. Your early career is when you have the most opportunity to rise up in the ranks.
Once you’ve reached a certain level in your chosen career, meteoric growth just isn’t as possible as it was when you were starting out. Additionally, even if you continue to see pay increases in your later career, if your raises are not keeping pace with inflation, you may not be able to stretch your paycheck any further year after year. In fact, it could be shrinking.
Not Speaking Up Now Means Working Longer
I know retirement seems a long way off, but the earlier you start considering it, the happier you’ll be later in life. According to the 2013 Wells Fargo Retirement Study, 34% of the middle class expect to work until they are at least 80 years old because they will not have saved enough for retirement.
You don’t want to be one of those people, do you? You want to be in the group that planned early so you can retire in your sixties and travel the world.
Even a small difference in starting salary could mean some serious money over the course of a career, according to a recent study by researchers at George Mason University and Temple University. The study concluded that “a 25-year-old who negotiated a starting salary of $55,000 will earn $634,000 more than a non-negotiator who accepted an initial offer of $50,000” (assuming a 5% average annual pay increase over a 40-year career.)
Just remember to invest that extra $5,000 in a 401(k) plan or other retirement fund, especially if your employer offers a 401(k) match. Your 80-year-old self will thank you.
Lydia Frank is editorial director at PayScale.com, a site that provides on-demand compensation data and software to employees and employers.