MONEY 401(k)s

The Three Things Gen X’ers Should Be Doing In Their 401(k)s

Generation X woman in coffee shop on laptop
Make that a double-shot latte. Now's the time to focus. Tim Robberts—Getty Images

It's too early to give up and too late to delay. If ever there was a time to get your 401(k) in order, it's now.

The big things you have to get right in your 401(k) don’t vary by age: Pick a diversified mix of stock and bond funds. Keep costs as low as you can, using index funds if that’s an option. Don’t chase hot performance. But there is some advice that will matter more to you if you instantly know who’s a brain, an athlete, a basketcase, a princess, or a criminal.

1. It’s go time

Yes, you should ideally save a lot over your entire career. The truth is a lot people aren’t great about this in their 20s and early 30s. Young people have school debts to pay off and households to set up. And, let’s be honest, they have lots of free time to do fun stuff, but not such big paychecks to fund it. Maybe that sounds like you. (It certainly sounds like me.) The feeling that you are already behind can be paralyzing.

But here’s the thing: You still have time to make up lost ground. And you’ve entered your peak earning years. If you save a given percentage of your income today, that may be a bigger chunk of money than it was when your career was just getting going.

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Source: Bureau of Labor Statistics

Let this be a spur to you as well. As you can see above, at your age, you likely don’t have any lifestyle-changing raises in your future. (Sorry.) There’s not going to be a better time than now to save money.

2. Think 17%

How much you really need to save for retirement at this point depends on how much you already have. But about 17% is a good mental anchor if you want to get your savings at least roughly right now and do the math later. The amount is far more than the average 401(k) contribution of around 6% or 7%. But take a deep breath. That number includes the contributions from your employer.

Where’s the number come from? Wade Pfau of the American College of Financial Services calculated the savings rate required to safely fund a typical retirement goal. About 17% is the number he came up with for people who start from scratch with no savings at age 35, with a 60% stock/40% bond portfolio. You might do okay saving less than that if stock and bond markets go your way, but Pfau’s number is what it takes to get there even with poor returns.

Don’t delay. Wait until 45 to start, and the from-scratch required safe savings rate goes to 36%.

3. Review your risk

For young savers, market risk can be a bit of an abstraction. The amount you saved by your early 30s is probably on the low side, so even a steep market slide means losing fairly modest pile of actual dollars.

Around age 40, though, the numbers involved change. The average retirement account, according to a survey by Fidelity, crosses over the psychologically important six-figure line. Big losses feel real.

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Source: Fidelity Investments

So if you haven’t thought much about your portfolio lately, try this exercise. Figure out how much, in dollar terms, of your retirement accounts are in invested stocks. (If you have a fund, such as a target date fund, that combines stocks and bonds, be sure to include the stock portion of that fund in your total.) So imagine losing half those dollars. The S&P 500 fell by roughly 50% from top to bottom during the 2007-2009 crash, before rebounding. It could happen again. If you count up the possible losses and they feel like too much for you to stomach, meaning not just that you’d hate it but that you’d be tempted to sell, then trim back now.

That having been said, don’t be too afraid of market volatility. You have a lot of good earnings years ahead of you, and can likely bear some risk to get a better return.

TIME Financial Planning

This Reality TV Show Can Save Your Retirement

Getty Images

Can a reality TV show fix your troubled family finances?

What does it mean that a reality TV show is in the works, aiming to help couples sort through their money woes? Yes, a major cable station is working up a “family finance” pilot that amounts to a Biggest Loser for folks who have never seen a credit offer they didn’t like.

Have producers of this popular genre simply run out of material? I mean after Here Comes Honey Boo Boo, what’s left? Or is it that Americans’ inability to manage money has become so big and obvious, and economically debilitating, that there is now an appetite for a tough-love TV program that puts struggling families on a debt diet?

Think Real Housewives, only everyone is broke. Or maybe Hell’s Kitchen, only the host has a heart. No one will get voted off this island, or hear the words “you’re fired.” But there might be some Jersey Shore sniping when couples confront their ridiculous spending and credit practices.

The show in development may never get to air. I only know about it because I played a small role in casting. From what I could see anecdotally, young families in the U.S. have issues that appear far worse than any data points or averages suggest.

One young Texas couple took a big hit when the husband lost his job and found work at half the pay. The wife went to work. She hates her job and not being a full-time mother. The arrangement is causing all kinds of stress in the relationship. Yet they haven’t taken the time to do some simple math: They are spending more on childcare than she makes each month. Quitting her job would solve a few big problems right away.

A Chicago couple in their early 40s has household income of $200,000 and zero savings. They have a big mortgage that’s killing them, some unusual ongoing healthcare expenses that will be with them for years, and they are sending two kids to costly private elementary and high schools. Again, stress is driving them apart. But doing a little math, it seems clear they could fix it all just by choosing the decent public schools in their affluent neighborhood and putting the savings toward retirement, mortgage payments and healthcare. Even they wonder about the private school sacrifice. But they haven’t made the tough decision because of appearances.

These are the kinds of choices that undermine the financial security of millions of families all the time. I’m rooting for this show to get to air, and if it does I hope it won’t devolve into tears, arguments and an ornery host with a whip. A lot of troubled family finances really are easily fixed through simple math and not-so-simple discipline. If a reality TV show can illustrate that, it will have been worth more than all the silly Kardashian episodes ever aired.

 

 

MONEY working in retirement

It’s Never Too Late For A Second Act

Baby boomer entrepreneurs in bakery
Small business owners working in bakery together. John Lund/Marc Romanelli—Getty Images/Blend Images

Do you have what it takes to be a boomer entrepreneur? Get ready: you're likely to change gears in unexpected ways.

Heading toward retirement, but you want to keep working? The best move is to find another job in your field, perhaps part-time or or as a consultant—right?

Maybe not. Sure, you’ve amassed tons of expertise in your industry after working in it for the past decade or two. But there’s a wider world out there. Many older Americans are opting for a completely different career after they leave their former jobs, according to a new Merrill Lynch survey on work and retirement.

Nearly 50% of retirees say they either have, or intend to, stay employed during their retirement, according to the survey. Not a surprise, given today’s meager 401(k) balances. But what’s striking is how many people ended up with brand new careers.Nearly 60% of working retirees are in jobs that are completely different from their pre-retirement work, with many in education and white-collar jobs, according to demographers Age Wave, who contributed to the study.

Working retirees also tend to be entrepreneurs. They are three times more likely than other workers age 50 and older to own their own business or be self-employed, according to the study, which gathered data on nearly 7,000 pre-retirees and retirees, both working and non-working. “Retirees often make for the best entrepreneurs. Many have decades of experience, business contacts and the financial means to start a successful business,” says Bill Hunter, director of personal retirement strategy at Bank of America Merrill Lynch.

While some retirees are working primarily for the income, more report doing it to stay busy and involved: 62% of working retirees say they work to stay mentally active, compared with 31% who say money is the top reason.

Busting another myth, most older entrepreneurs say age discrimination didn’t drive them to work for themselves: 82% of these “retire-preneurs” as Merrill Lynch is branding them, say they started their own business because they wanted to work on their own terms. Only 14% reported that they had to start their own company because they otherwise couldn’t find work.

“Working in retirement is often a chance to try something new or pursue a dream,” says Mary Beth Izard, a start-up consultant and author of BoomerPreneurs. If a brand-new second act appeals to you, start developing your plans now. Taking on a new career challenge in your retirement years isn’t easy, and a start-up venture can drain your nest egg fast.

Lay the groundwork in the five years before you plan to retire, says Izard. If you want to go into a new career, begin by taking classes, as well as working part-time or or as a volunteer for an organization involved in the field you are interested in. And if you go the entrepreneur route, starting researching the costs and income potential of that new business well before you start sinking money into it.

For more tips on embarking on an entreprenurial second act, click here.

 

MONEY Investing

If You Live in Vegas, You Might Want to Buy More Bonds

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Las Vegas' more volatile home prices suggest residents should invest their portfolios more conservatively, a new report says. Glenn Pinkerton—Las Vegas News Bureau

Where you live, and how much home equity you have, should impact how you invest for retirement, argue Morningstar experts.

The collapse of housing prices five years ago made a lot of people question whether owning a home was a good investment. But you probably never connected where you live with how you invest.

That’s a mistake, says David Blanchett, head of retirement research at Morningstar. Blanchett argues in a recent paper that investors’ strategy for building retirement wealth should look beyond typical portfolio considerations — stocks versus bonds, growth versus value — and take into account the health of your real estate market.

“Real estate is the largest physical asset most households have,” Blanchett says. And it can be an important financial asset: Home equity could be tapped to help fund retirement, or a paid-off home passed along to heirs.

But, as the housing bust taught us the hard way, a downturn in home prices can wipe out equity in a flash. Especially if you own a home in a market where prices are volatile, such as Las Vegas, Miami, or Washington D.C.

In that case, you might want to adjust your investment strategy, according to Morningstar. Here are some ways your housing situation could impact your investing style:

If you live in a one-company town: Invest more conservatively. A city dominated by one industry or one company leaves you vulnerable. “If that company went out of business, or had a significant layoff, lots of people might all want to move at the same time,” Blanchett says. Even if you don’t work for the company, you’re still exposed.

If you have a lot of equity in your home: Invest more aggressively. The more equity you have in your home, the less affected you are by pricing changes. For example, if you’ve just purchased your home with 10% down, a 10% decline in home prices would completely erase the value of your investment. That same decline for someone who has paid off the mortgage would represent a much less significant loss. “You can afford to take on more risk in other parts of your portfolio,” Blanchett says.

If you rent: Increase your allocation to REITs. Stashing a 5%-10% chunk of your portfolio in real estate investment trusts is a common diversification tactic. But owning a home also exposes you to real estate. If you have a lot of home equity, or live in a riskier market, you want to stay at the low end of that allocation. If you rent, on the other hand, you could put closer to 10% of your nest egg in REITs, Blanchett says.

 

MONEY financial advisers

A 90-Year-Old Woman’s Tough Decision

Is it in someone's best interests to give up control over her own money? A financial adviser struggles with the question.

How do you ask a 90-year-old client to give up total control of her assets?

Recently I had a meeting with a long-term client (let’s call her Susan) and her out-of-state nephew in which the nephew and I asked her to resign as the trustee of her own revocable trust.

This is a tough conversation to have. In effect, we were asking her to transfer control of all of her money to her nephew. Susan agreed to do this, but only because she trusts my advice. Talk about responsibility.

Let me provide a little background. Susan hired me as her financial adviser just after the dot-com bust. She was recently widowed. Her husband had put their investments 100% in stocks. Her stocks were dropping in value a lot, she was scared, and she didn’t know what to do. She has no children and wanted most of her money to go to charity when she passed. (Susan was one of the inspirations for a book I wrote: RINKs — Retired, Independent, No Kids.)

We created charitable remainder trusts for Susan, which established annuities for her and helped diversify her portfolio tax-efficiently. We set up a revocable trust for the rest of her assets. With no children, she made one of her nephews a successor trustee for her trusts.

Susan’s investments have grown nicely over the years, and running out of money was never an issue. The issue was her declining health. She moved to a very nice assisted living residence, and we made sure most of her bills were automatically paid because she was becoming confused about money and forgetting to pay some bills. Her tax attorney had been suggesting to me and her nephew that it was time Susan stepped down and let someone else control her finances. I was resistant. I pushed back. My biggest concern: Would Susan be taken advantage of?

Yes, we financial planners go to seminars and meetings discussing estate planning and asset transfers. But nothing can actually prepare you for helping a client make such an important, irreversible decision. How can you advise a client to trust a distant relative when you don’t understand that relative’s own history or motivations about money? How can you explain this to someone, who may not really understand why this will be for her own benefit?

I think you have to rely on your best judgment of the individuals involved. You have to ask a lot of questions. And you have to respect the reasoning why the client, when originally creating the estate documents, would choose this individual over all other possible candidates to be the successor trustee. And that’s what I did in Susan’s case.

Yes, we make the big bucks managing money, and that’s what most people see. But the emotionally hard and more important work is helping clients make the really tough life decisions.

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Raymond Mignone has been a certified financial planner and fee-only investment adviser since 1989, with offices in Boynton Beach, Fla., and Little Neck, N.Y. He is the author of the book RINKs – Retired, Independent, No Kids. His website is www.RayMignone.com.

TIME Retirement

Workers to Bosses: Take Twice as Much of My Pay

Here's the savings crisis in a nutshell: workers want to save twice as much but won't do it for themselves.

The retirement savings crisis in America can be reduced to one statistic: workers say they would like the default contribution rate in 401(k) plans with automatic enrollment to be doubled.

That is telling new research from the nonprofit Transamerica Center for Retirement Studies and global asset manager Aegon. It suggests the typical worker wants someone else to make the tough decisions for them. After all, these workers could double their contribution rate quite on their own by filling out a little paperwork at the office.

What stops them? Inertia plays a big role. The easiest thing to do is nothing. But too many workers also do not appreciate the extent of their personal savings crisis and that, through compound growth, a little more saved today would make a big difference tomorrow. They also may suffer from a chilling lack of confidence in their ability to make the right financial choices.

This isn’t just a U.S. phenomenon. Globally, workers say the appropriate default rate for contributions to a 401(k) plan with automatic enrollment should be 6% of pay. The desired figure is 7% in the U.S., where the typical default rate is 3%, Transamerica found. Perhaps the biggest problem with that low default rate is that workers may assume it is sufficient, when it clearly is not.

Most financial planners advise setting aside 10% to 15% of pay for retirement. A worker who believes their employer has set the right savings rate for them, and then does nothing more, will be sorely disappointed. Unfortunately, such workers are legion. The average 50-year-old American has saved just $44,000.

Some workers are taking action. Since 2009, seven in 10 401(k) plan participants have increased their contributions by an average of 14%, reports Principal Financial Group. With the help of a bull market account balances have roughly doubled in that span. But that just gets savers back to where they were before the recession. It’s not nearly enough to close the savings gap.

Most workers seem to understand the need to save more. Yet they continue to do little or nothing about it, which is why automatic enrollment and higher default contribution rates are so important. Globally, 63% of workers favor automatic enrollment, Transamerica found. The share is 69% in the U.S. So automatic features, which have been found to be highly effective in boosting participation rates, have broad appeal.

Retirement experts look at auto enrollment and escalating contribution rates like motherhood and apple pie. Who can argue against it? But we need to expand the features to ensure that more employees defer more of their pay—which they would do on their own if not for inertia and failing confidence.

The Principal recommends auto enrollment with a 6% employee deferral rate, and raising the deferral one percentage point each year until it reaches 10% of income. It further recommends that companies sweep all existing employees into the automatic plan—not just new hires. They could opt out, but most wouldn’t. That’s inertia working for them, not against them.

This is the approach we are left with, and there is nothing wrong with it. Given our low levels of financial understanding and the lackluster national effort to raise our financial I.Q., it is unlikely that most workers will choose to save a great deal more. That’s a shame because even a 6% deferral rate gets you only about halfway home to retirement security. At some point individuals must step up to the retirement savings challenge on their own.

 

MONEY

Closing Out Your Old 401(k)

Q: I got a check closing out my old 401(k). Can I add it to my new 401(k) without penalty? — Matt Gould, New Cumberland, Pa.

A: Yes, and act fast.

Unless you put the money in another retirement account within 60 days of receiving the check, you’ll owe taxes on the sum, plus a 10% early-withdrawal penalty if you’re not yet 59½, says John Piershale, a financial planner in Crystal Lake, III.

Related: Will you have enough to retire?

One hitch: The old plan usually withholds 20% of your account for taxes, so when you make the deposit you’ll have to use other cash to cover that 20% shortfall.

Assuming you get this done within 60 days, you’ll get the withheld money back at tax time.

If your new 401(k) plan doesn’t accept rollovers or will make you wait too long to deposit the funds, put the money in an IRA, advises Lancaster, Pa., planner Rick Rodgers. You can always move it into a 401(k) later.

TIME Photos

Barbara Walters: A Career in Pictures

It’s hard to imagine a world where Barbara Walters isn’t on television. After all, this is a woman who entered the news business (as a segment producer on NBC’s Today Show) in 1962 and has been on the air longer than many of her fans have been alive.

But, as she announced nearly a year ago, the groundbreaking journalist will retire from the small screen today after hosting one last episode of The View.

To celebrate her 50 years in television, we’ve assembled a gallery of images from her long and storied career.

 

 

TIME Retirement

We’ve Been Asking All the Wrong Questions About Retirement

Jay Myrdal—Getty Images

Merrill Lynch is making a big bet on a new retirement planning approach based on 'life priorities.'

Imagine planning a getaway for your family. You’d probably start with a few basic questions. Where will you go? What’s the best time of year? How much should you spend? These are natural considerations. They are also a terrible way to start the process.

Better to ask: What emotions do I want to experience? What’s the purpose of this trip? What feelings do I want to have when the travel is over? Once you decide that the trip is mostly about fitness, or family bonding, or culture, or just idle relaxation, you can more easily move on to the practical questions and enjoy some certainty about the outcome you desire.

Retirement planning is like that too. No longer is it purely a math game, where you choose a retirement date and an arbitrary goal like $1 million and then try to maximize returns to get there by age 65 or 67. Not quite a decade ago, author Lee Eisenberg tried to divine The Number and created a stir over how much individuals would need to save to reach financial security. But post-recession, the retirement industry is moving to a different model. Relationships and experiences come first. Financial planning, including how long to work, plays a supporting role.

This new approach is driven partly by what’s known as the new normal, an economic climate where growth, pay raises and stock market returns promise to run slow for decades. Yet the population continues to age; folks continue to retire, having hit The Number or not. It’s time to focus on what you have and how to achieve the goals that really matter.

In a sign of this thinking, Bank of America Merrill Lynch unveiled a goals-based retirement saving strategy called Merrill Lynch Clear. It will be at the center of all discussions with clients going forward, and later this year the strategy will be incorporated in Merrill-administered 401(k) plans with some $250 billion of assets. Financial advisers will begin with each client by assessing the relative importance of seven common “life priorities” that emerged during more than a year of research. Those priorities are health, home, family, finance, giving, work, and leisure. This assessment becomes the basis for a savings and investment plan.

Merrill has hired what may be Wall Street’s only a full-time gerontologist and partnered with leading experts in each life priority. Those include Marc Freedman, CEO of Encore.org, an authority on jobs and other productive engagement in later life; the luxury travel firm Virtuoso, which plans and books leisure travel around experiential goals; and Michael Liersch, an economist with a doctorate in cognitive psychology, who serves as behavioral finance director.

The basic idea of the Clear strategy is that life priorities are always shifting—your desire to start a hobby business might give way to college savings when your third grandchild arrives, or you might decide you want a ticket to go around the world three years from now. “It’s about monitoring life goals, not just account balances,” says David Tyrie, head of retirement and personal wealth solutions. As life goals shift, so should your portfolio.

That raises the troubling prospect of frequent portfolio moves, which can lead to excessive fees. But most people in or near retirement have a good idea of the direction they want to go; Tyrie says “course corrections” probably shouldn’t occur more than once or twice a year, if that. The nice thing is that they will be driven by life goals that you set and understand, not an arbitrary and potentially risky hunt for higher returns.

Merrill is making a big bet on Clear, which is part of a five-year strategic shift towards goals-based wealth management. If it works, the payoff could be huge. One of boomers’ biggest life priorities is their Gen Y offspring, now launching into careers and life in a tough climate and with little of the financial know-how they seem to crave. Helping boomers take care of what matters most to them—their kids—could help reel in the next generation of clients.

 

 

 

 

 

 

 

 

 

TIME Saving and Spending

This Is the Easiest City in America for Saving Money

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Aimin Tang—Getty Images/Vetta

Half of all households spend more than they make. Here are the easiest and hardest cities in which to turn that around.

We knew it was bad. But this bad? The typical American is saving nothing, a new analysis of government data shows. Perhaps most unsettling: this zero savings rate seems largely a spending problem—not one of too little income or unexpected hardship.

The U.S. savings rate has been in decline since the 1970s. Official readings from the Commerce Department put the current rate at 3.8%, down from more than 10% some 30 years ago—a lofty savings level that had held for decades. The downward spiral gathered momentum in the 1980s interrupted by just one significant reversal, which occurred during the Great Recession. It’s now clear that the recession-induced spike in savings was temporary.

Unofficially, things appear even worse for a nation battling an intractable retirement savings crisis. Looking at median savings—half save more, have save less—financial site Interest.com found that the typical American is saving zilch. In essence, half of America is spending more than it earns.

The higher official savings rate, which is an average, owes to the outsized savings of the wealthy. The median savings rate more closely approximates most Americans’ experience, and this finding could throw fuel on the roaring debate over rising income inequality recently furthered by Thomas Piketty, among others. After all, half of America isn’t saving a dime.

Yet researchers say the zero savings rate is at heart a discipline problem, not one of inability. Looking at data from the Bureau of Labor Statistics, Interest.com found that median household income exceeds the median monthly cost of running a household by $668. That amount is available for savings but is being lost to spending on all manner of goods and services beyond what is required to live a median lifestyle.

“The results suggest that many households are allowing expenses to grow, whether by moving to a bigger house or buying a more luxurious car, until their bills consume every dollar of disposable income,” Mike Sante, Interest.com managing editor, said in an email. “That’s actually encouraging. It means they aren’t caught in an unwinnable rat race, the powerless victims of economic forces beyond their control.”

The question is: can the median U.S. family, which is now saving nothing, find the resolve to live a median family lifestyle and bank the surplus? It would be easier in some places than in others. The research looked at 18 cities and suggests that the easiest city in which to save is Baltimore, where after-tax median income exceeds median household expenses (including discretionary spending on things like vacations and cars) by $2,021 a month. The toughest city in which to save: Phoenix, where income falls short of household expenses by $95 a month.

Rounding out the five easiest cities to save in are Washington, D.C, where income exceeds costs by $1,664 a month; Cleveland ($1,294); Chicago ($876); and Dallas ($772). Rounding out the five toughest cities to save in are Miami, where income exceeds costs by just $18 a month; Boston ($240); San Diego ($344); and Detroit ($349).

 

 

 

 

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