MONEY retirement planning

Get These 4 Big Things Right to Retire in Comfort

Senior woman relaxing in hammock
OJO Images—Getty Images

By focusing on a few essentials, you can keep your retirement strategy on track—and reduce stress too.

Take a look at financial websites or switch on a cable TV program and you get the impression that smart retirement planning requires you to stay constantly attuned to every wiggle in the economy and the stock market—and act on it: dump one investment, buy another, re-jigger your entire portfolio…do something, anything, to react to the latest buzz. This, of course, is nonsense.

In a constantly shifting global economy, there are far too many things going on for any person—any organization for that matter—to keep tabs on, evaluate and integrate into a master retirement plan. And then do it over and over again as conditions inevitably shift. It’s just not realistic.

Even if you could stay on top of the overwhelming amount of financial information, it’s still not always clear how best to react to news. For example, a good GDP report can be a plus for stocks if investors take it as a sign that a recovery is gaining traction—or bad if it stirs fears that interest rates will rise causing stock prices to soften.

So given the complexity of today’s financial world, what can you do to better assure you’ll have a secure and comfortable retirement? My advice: Focus on getting these four Big Things right.

1. Set a target—but make sure it’s the correct one. Generally, you’ll do better at any activity—career, health, sports—if you have a goal. Retirement is no exception. The Employee Benefit Research Institute’s latest Retirement Confidence Survey notes that people who’ve tried to calculate their retirement savings needs are more likely to feel very confident about affording a comfortable retirement than those who don’t.

Over the years, however, the target of choice seems to have become Your Number—or the specific amount of money you’ll need to fund a comfortable retirement. But Your Number isn’t a very good benchmark. It gives a false sense of precision, and can often be so big and daunting that it discourages people from saving at all. (What’s the point if I have zero saved and need $1,378,050?)

A better barometer: Keep track of the percentage of your pre-retirement income you’re on pace to replace both from Social Security and draws from your retirement savings. Granted, this figure isn’t exact either. Experts generally say that to maintain your standard of living you should try to replace anywhere from 70% to 90% of your income just prior to retirement. But it’s a number you can more easily get your head around, and more easily translate to an actual lifestyle. Many 401(k) plans include tools that allow you to see how you’re doing on this metric. If yours doesn’t, try the Retirement Income Calculator in RDR’s Retirement Toolbox.

2. Save at a reasonable rate. If you’re still in career mode, setting aside a sufficient amount each year in a 401(k) or other retirement accounts is the single most important thing you can do to improve your retirement prospects. What’s sufficient? I’d say 15% of salary is a good target. But if you can’t manage that, try starting at 10% and working your way up. Employer matching funds count toward that savings figure, so be sure to take full advantage of any employer largesse.

Once you reach retirement, tending your nest egg and managing the amount you spend is key. You don’t want to spend so much that you delete your savings early on; nor do you want to be so miserly that you leave this mortal coil with a big pile of cash behind you.

3. Invest like a smart layman, not a dumb pro. I’m being a bit facetious here to make a point. Professional investors and money managers are not dumb. But many of them do things that I consider dumb, like jumping from one market sector to another in a vain attempt to outguess the market or trading so often that they rack up transaction costs that depress returns.

The smart layman, on the other hand, knows that the two best ways to invest retirement savings are to set an overall mix of stocks and bonds that best reflects your appetite for risk, and then stick to low-cost investments that allow you to pocket more of the returns your savings earn. For guidance on creating a stocks-bonds blend that will generate the returns you’ll need without subjecting you to more downside risk than you can handle, you can check out this Investor Questionnaire.

4. Monitor how you’re doing, but don’t obsess about it. Retirement planning is a long-term proposition. So while you definitely want to be sure you’re making progress toward accumulating the savings you’ll need—or, if you’ve already retired, that you’ll be able to maintain your standard of living—don’t over do it. Re-assessing your progress once or twice a year by going to a retirement income calculator like the one highlighted in RDR’s Retirement Toolbox is probably sufficient.

Constant check-ups may make you more likely to tinker with (or, worse yet, dramatically overhaul) your investments or your plans. This urge to make changes is especially strong during periods of upheaval in the economy and the markets. And changes made on the fly or precipitated by an emotional reaction to duress often do more harm than good.

That said, there can be times when adjustments are called for. But when they are, you’ll typically do better by making small changes and then later re-assessing whether you need to do more rather than going with a dramatic move that could knock you even farther off course.

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MONEY retirement planning

The One Retirement Question You Must Get Right

Man slamming his head into chalkboard of theorems in frustration
Getty Images

Figuring out how big a nest egg you need is a huge financial planning challenge. Here are some helpful tips from an expert who retired at 50.

How much money do you need to retire? This is one of the most difficult questions in all of financial planning. Countless words are written, endless fees are charged, and plenty of sleep is lost, just trying to answer it!

But I’ll tell you a secret—a truth that none in financial services and few in the financial media will admit. We don’t know how much you need to retire! Beyond some broad ranges that have worked in the past, it’s practically impossible to calculate the precise amount of money needed to carry you through a retirement lasting decades or more into the future.

Why? Because, in addition to predicting a host of smaller factors, computing how much you need to retire requires pinning down two huge and essentially unknowable variables: the length of your life, and the real return on your investments. (That’s the actual return, after inflation.)

If you misjudge your life expectancy by even a few years, you could potentially die broke, or with tens of thousands of unspent dollars on the table. If you misgauge your real rate of return by just 1% (and the pros miss it by more than that, all the time), the error in a half-million dollar portfolio over a 30-year retirement will be about $175,000—one-third of the starting value, and a lot of money to go missing!

So there can be no precise answer to this question. And, yet, you must answer it, in some fashion, if you don’t want to go on working forever. So where do you begin?

As I’ve written before, knowing your expenses is an essential first step to retirement planning. You simply must know what it costs you to live each month, in order to get any sense for what you must save to retire.

From that monthly expense number you can subtract any guaranteed, inflation-adjusted income that you are certain to receive in retirement: Social Security for many of us, pensions for a fortunate few, and annuities for those who buy them.

Your remaining expenses must be funded from your investment portfolio. The traditional approach has been the 4% Rule, which states that you can withdraw 4% of your portfolio in the first year, then adjust that withdrawal amount for inflation each year, without fear of running out over the course of a 30-year retirement. However, some experts say this rule is too optimistic for the current difficult economic times, with low interest rates and high market valuations. On the other hand, if you retire in better economic times, or if you choose to annuitize your assets, the rule might be too conservative. (You can find online tools that will let you see the impact of using different economic assumptions—I mention three of the best retirement calculators in this article.)

Boiling down all the research papers, case studies, and opinions that I have read on this topic—and I read about it nearly every day—I can tell you this: The safe withdrawal rates from your retirement savings probably range from about 5% on the optimistic side to about 3% on the conservative side.

That means, for example, if your living expenses not covered by guaranteed inflation-adjusted income were $3,000 a month in retirement, then you would need between $720,000 in savings on the optimistic side, to $1.2 million on the conservative side, to provide for your lifestyle over a several-decade retirement.

Thus if your savings were in that range you could consider retiring. But there is more to it than that, especially for an early retiree. You would also need to factor in the risk that you would run low, and your ability to do something about it. That risk would be a function of the economic environment you retire into, and the longevity factors in your family. The ability to do something about it would be a function of your age and health at retirement, your professional skills, and your lifestyle flexibility.

In the end, there is no simple answer to the question “Do I have enough to retire?” But, there is a range of possibilities, based on historical data and your own risks and capabilities. And, even after you’ve made the retirement decision, you still need to assess and drive your retirement, especially in the early years. So, once you’ve started on the retirement journey, don’t fall asleep at the wheel!

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. He writes regularly about saving, investing and retiring on his blog CanIRetireYet.com. This column appears monthly.

MONEY 401(k)s

Ignore This Savings Plan at Your Peril

Workers often think signing up for their 401(k) is all they need to do. But millions fail to enroll right away or raise their contributions, and they'll pay a heavy price.

Call them victims of inertia. These are folks who are slow to sign up for their employer-sponsored savings plan or who, once enrolled, don’t check back for years. Their numbers are legion, and new research paints a grim picture for their financial future.

More than a third of 401(k) plan participants have never raised the percentage of their salary that they contribute to their plan, and another 26% have not made such a change in more than a year, asset manager TIAA-CREF found. The typical saver stashes away just 8% of income—about half what financial planners recommend. Without escalating contributions, these workers will never save enough.

More than half of plan participants have not changed the way their money is invested in more than a year—including a quarter that have never changed investments, the research shows. This suggests many are not rebalancing yearly, as is generally advised, and that many others are not paying attention to their changing risk profile as they age.

At companies without automatic enrollment, a quarter of workers fail to enroll in their 401(k) for at least a year and a third wait at least six months, TIAA-CREF found. These delays may not seem like a big deal. But the lost returns over a lifetime of growth add up. Based on annual average returns of 6% and a like contribution rate over 30 years, a worker who enrolls immediately will accumulate nearly double that of a worker who starts two years later. Even a mere six-month delay is the difference between, say, $100,000 and $94,000, according to the research.

Employer-sponsored 401(k) and similar plans have emerged as most people’s primary retirement savings accounts: 42% of workers say it is their only savings pool and a similar percentage say the plans are so critical they would take a pay cut to get a higher company match, according to a Fidelity survey. So any level of mismanagement is troublesome.

There is a bright spot, however—younger workers have been quicker to catch on. Millennials are the most likely group to boost their percentage contribution after each pay raise, and among millennials who do not boost the percentage, 23% say it is because they already contribute the maximum. Millennials are also most likely to check back in and adjust their investment mix.

That’s not entirely good news. In general, millennials are not investing enough in stocks, which have the highest long-term growth potential. But it reinforces the emerging picture of a generation that understands what Baby Boomers and Gen Xers were slow to grasp: financial security is not a birthright. Millennials will need to save early and often—on their own—and pay attention for 30 or 40 years to enjoy a happy ending.

MONEY retirement planning

3 Easy Moves That Can Boost Your Nest Egg By 60%

201412_RET_NESTEGG
Brad Wilson—Getty Images

These relatively painless investing tweaks can put you on the path to a secure retirement, even if you just do one or two of them.

Think you’ve got to come up with a big score or magnificent coup to boost the size of your nest egg and dramatically improve your retirement prospects? You don’t. A few simple tweaks can often make the difference between scraping by and living large after you retire.

In fact, you can put yourself on the path to a much more enjoyable and secure retirement with just three relatively easy moves: saving a little more, paring investment expenses and delaying retirement a bit. Here’s an example.

Let’s say you’re 30 years old, earn $45,000 a year, get annual raises of 2% and contribute 10% of your pay to a 401(k) or similar plan. And let’s further assume that your retirement savings earn a 7% annual return before expenses, for a net return of 5.5% after investment fees of 1.5% a year. Based on that scenario, by age 65 you would have a nest egg valued at just under $600,000.

Not bad, and certainly more than what most people age 65 have accumulated today. But you can put yourself in a much better position at retirement time if you make the three adjustments I mentioned.

First, let’s see how much saving more can help. If you increase your savings rate from 10% a year to 12%, that move alone would boost the age-65 value of your nest egg from just under $600,000 to nearly $715,000. That’s a gain of roughly $115,000, or almost 20%, right there.

Next up: investment fees. With the multitude of index funds, ETFs and other low-cost choices that are around these days, paring annual investment expenses is eminently doable. So, for the sake of this example, let’s assume you cut annual fees by just 0.5% a year from 1.5% to 1%, for an after-expense return of 6% instead of 5.5%. That reduction in expenses alone would add another 10% or so to the age-65 401(k) balance, pushing it from a little under $715,000 to nearly $790,000.

Now for the third move: delaying retirement a few years. This single adjustment has a two-barreled effect on your nest egg. Postponing gives you a chance to throw more savings into your retirement accounts and it gives the money in those accounts more time to grow before you start drawing on it. Waiting three more years to exit the workforce in the scenario above would bump the age-65 value of your nest egg from just under $790,000 to just over $975,000, just short of seven-figure territory.

By the way, postponing your job-exit date can also improve your retirement outlook in another way: Each year between the ages of 62 and 70 that you delay claiming benefits, the size of your Social Security check increases roughly 7% to 8%, and that’s before annual adjustments for inflation. To see how different claiming ages might affect your Social Security benefit (and your spouse’s, if you’re married), check out the calculators in RealDealRetirement’s Retirement Toolbox.

In short, making these three moves combined would have boosted the value of your nest egg in this scenario from a little less than $600,000 to almost $1 million, an increase of some 60%. That’s pretty impressive.

Of course, you may not be able to replicate these results exactly. If you’re getting a late start in your savings regimen, increasing your savings rate may not translate to as sizeable an increase in your eventual balance. Similarly, if you do most of your saving through a 401(k) plan that doesn’t include low-cost index funds and such–although most plans do these days—you may not be able to cut investment expenses as much as you’d like. Even if you’re able to pare expenses, there’s no guarantee that each percentage point reduction will mean a percentage-point increase in return, although there’s plenty of evidence that funds with lower costs do generally perform better.

And while many people may want to work a few extra years to fatten retirement accounts, health problems or company downsizing efforts may not allow you the choice of staying on the job a few extra years.

Still, the point is that these three moves, individually or combined, can likely improve your retirement outlook at least to some extent. And they’re much more effective at enhancing your retirement prospects than the move that many mistakenly gravitate to: investing more aggressively, which is a tactic that can backfire and leave you worse off.

So re-assess your retirement planning to see which of these moves makes the most sense for you. If doing just one gives you the boost you need to assure a secure retirement, fine. But if just one won’t do it, try to do two, or all three. Come retirement time, you’ll be glad you made these tweaks.

Walter Updegrave is the editor of RealDealRetirement.com. He previously wrote the Ask the Expert column for MONEY and CNNMoney. You can reach him at walter@realdealretirement.com.

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MONEY 401(k)s

Why Workers Would Take a Pay Cut for This Retirement Benefit

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A 401(k) employer match is so valuable that many workers would be willing to lower their pay to get a bigger one, a survey finds.

Would you willingly take a pay cut? A surprising number of workers say yes—if it means getting a richer 401(k) match.

That’s one of the findings from a Fidelity Investments survey released today. When workers were asked if they’d prefer to have lower compensation in return for a higher 401(k) employer contribution, 43% chose the pay cut. As the responses show, many workers realize that it would be worthwhile to accept “a short-term pay cut for a long-term payoff,” says Fidelity vice president Jeanne Thompson.

The results also show that more people are worried about achieving a financially secure retirement, which seems increasingly out of reach. For many workers, a 401(k) plan is their sole means for saving for retirement, while an employer match is the closest thing to a free lunch that you can get. But a 401(k) match is more than a nice fringe benefit—depending on your ability to save, it may even make or break your retirement.

Why is a 401(k) match so crucial to retirement success? Consider that most workers need to put away 10% to 15% of salary in their plan to be on track to a comfortable retirement, financial advisers say. But the typical saver stashes away only 8%. So to get to that 10% or higher savings rate, the average worker needs a boost from a company match. Overall, employer matches account for more than 35% of total contributions to the average worker’s 401(k) account.

That brings up one bright spot in the survey: The typical employer match is now 4.3% of pay, which comes to an average of $3,450 per worker a year. That’s a jump of more than $1,000 compared with the average employer contribution 10 years ago.

There are good reasons for employers to offer tempting 401(k) matches. Companies can deduct the contributions from their corporate taxes, and the benefit is a valuable tool for attracting talent and retaining employees, especially as the job market improves. Only 13% of workers surveyed said they’d take a job with no company match, even if it came with higher pay.

Of course, the fact that Fidelity is asking workers to choose between a match and pay cut is another stark reminder that Americans are largely on their own when it comes to saving for retirement. “Many people used to have a pension plan. That’s not true for younger workers today, and even many Baby Boomers who had pension plans have had them frozen,” says Thompson.

If your 401(k) lacks a generous match, it’s crucial to step up your own savings. One relatively painless way to do it is start with a 1% increase in your savings rate. For each $33 reduction in your take-home pay, you will add $220 to $330 to your future retirement income. (To see how different savings rates will boost your nest egg, try this retirement income calculator.) At the very least, save enough to get your full 401(k) match.

MONEY retirement planning

How Today’s Workers Can Dodge the Retirement Crisis

For Millennials and Gen X-ers, it all depends on whether we can rein in spending after we stop working.

Trying to figure our whether mid-career folks like myself are adequately preparing for retirement can get a bit confusing. If you look at Boston College’s National Retirement Risk Index (NRRI), as of 2013 as many as 52% of households aged 30-59 are at risk of falling at least 10% short of being able to produce an adequate “replacement rate” of income.

That doesn’t sound too good, does it? But a discussion of the methodology of this survey and others at a recent meeting of the Retirement Research Consortium in Washington D.C., shows that things might not be so dire after all.

It turns out that the NRRI might be setting an unrealistically high bar for retirement income. The index’s replacement rate assumes that a household’s goal is to maintain a spending level in retirement that is equal to their pre-retirement living standard. It also includes investment returns on 401(k)s and IRAs in its calculation of pre-retirement income, even though those earnings are specifically earmarked for post-retirement. By including those investment gains, the NRRI may be targeting a replacement rate that is too high, causing more households to fall short, as Sarah Holden, director of retirement and investment research at the Investment Company Institute, pointed out in the meeting.

It’s already hard for someone in their 30s or 40s to figure out how much they need to be contributing today to replace the income they will have right before they retire. Adding to this guessing game is the debate over whether spending really goes down in retirement. You’ll pay less for work lunches, commuting expenses, and so on, but you might spend more for travel in the early years of retirement and, later on, more for health care costs.

In contrast to the NRRI calculations, many financial planners assume that would-be retirees will automatically cut spending when their children turn 21, and therefore only need to replace about 70% to 80% of their pre-retirement income. But as Frederick Miller of Sensible Financial Planning explained at the consortium’s meeting, that’s simply not the case anymore. He sees many clients continuing to support their adult children, helping them to pay for health insurance, rent, graduate school or a down payment on a home. While generous, this support obviously detracts from retirement savings.

So which assumption is correct? Should we be saving with the expectation of spending less in retirement or not? In reality, we should certainly prepare for eventually reducing consumption since, in the long run, we may have no choice about doing so. When spending does decline after retirement, it is almost twice as likely due to inadequate financial resources rather than voluntary belt-tightening, as Anthony Webb of Boston College discovered in a small survey of households.

The question of how much is enough will vary greatly by household. But it’s clear that my generation, and those that follow, face stiff headwinds—longer life expectancy, a likely reduction in Social Security benefits, and low interest rates, which greatly reduce the ability to generate income. Cutting back on spending during retirement, as well as during our working years, may be the single greatest contributor to our financial security that we can control.

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

MONEY Investing

Do You Really Need Stocks When Investing For Retirement?

Senior man on rollercoaster
Joe McBride—Getty Images

You may want to skip the thrills and chills of equities. But if you stick with bonds, be ready to do serious saving to reach your goals.

Even when stocks are doing well—and they’ve been on an incredible run the past five years with 17% annualized gains—there’s always a looming threat that the bottom could fall out of the market as it did when stock values plummeted more than 50% from the market’s high in 2007 to its trough in 2009. So it’s understandable, especially now when doubts abound about the longevity of this bull market, that you might ask yourself: Should I just skip stocks altogether when investing for retirement?

But if you’re inclined to give stocks a pass—or even just considering that option—you should be aware of the drawbacks of that choice. And, yes, there are substantial drawbacks.

Despite their gut-wrenching volatility—or, more accurately, because of it—stocks tend to generate higher returns than other financial assets like bonds, CDs and Treasury bills by a wide margin over the long term. That superior performance isn’t guaranteed, but it’s been pretty persistent over the last 100 years or longer.

Those higher long-term gains give you a practical advantage when it comes to saving for retirement. For a given amount of savings, you are likely to end up with a much larger nest egg by investing in stocks than had you shunned them. Another way to look at it is that by investing in stocks you can build a large nest egg without having to devote as much of your current income to savings.

Just how much of an advantage can stocks bestow? Here’s an example based on some scenarios I ran using T. Rowe Price’s Retirement Income Calculator, which you can find in Real Deal Retirement’s Retirement Toolbox.

Let’s assume you’re 30, earn $40,000 a year and are just beginning to save for retirement. The calculator assumes you’ll want to retire on 75% of your salary, so the target retirement income you’re shooting for is $30,000 (This is in today’s dollars; the calculator takes into account that your income will be much higher 35 years from now.)

First, let’s see how much you would have to save if you invest in, say, a mix of 70% stocks and 30% bonds, certainly nothing too racy for a 30-year-old with 35 years until retirement. To have at least a 70% chance of retiring on 75% of your pre-retirement salary at age 65 from a combination of Social Security payments and draws from your nest egg, you would have to set aside roughly 15% of your salary each year. (Or, if you have an employer generous enough to match, say, 6% of your salary, you’d have to kick in only 9% to reach 15%.)

You could improve that 70% probability by saving more or homing in on low-cost investment options, but let’s stick with the scenario above as a baseline for comparison.

So how would you fare if you decide to skip stocks altogether and invest solely in bonds? Well, if you stick with a 15% savings rate, your chances of being able to generate 75% of your pre-retirement income would drop to less than 20%. Not very comforting. You can boost the odds in your favor by saving more. But to get your chances of generating 75% of pre-retirement income back up to the 70% level, you would have to save almost 25% of your income each year. That’s a standard most people would have trouble meeting.

And the percentage of salary you would have to save would be even higher if you decide to hunker down in cash equivalents like money funds and CDs: just under 30%, or almost a third of your income.

Even if you had the iron will and perseverance to meet such lofty savings targets, diverting so much income from current spending to saving could seriously diminish the standard of living you and your family could enjoy during your career.

Just to be clear, I’m not suggesting anyone should just load up on stocks willy-nilly. That would be foolish, especially as you near or enter retirement, when a stock-market meltdown could derail your retirement plans. Indeed, in another column, I specifically warn against relying too much on outsize returns (whether from stocks or any other investment) to build a nest egg. Smart investing can’t replace diligent saving.

The point, though, is that stocks should be part of your investing strategy prior to and even during retirement. The percentage of your savings that you devote to equities can vary depending on such factors as your age, how upset get when the market goes into a steep funk and how much you’re willing to entertain the possibility of not having enough money to retire comfortably or running short of dough during retirement. Some of the links in my Retirement Toolbox section can help you settle on a stocks-bonds mix that makes sense for you.

But if after considering the pros and cons, you decide stocks just aren’t for you, fine. You’d just better be prepared to save your you-know-what off during your career, and keep especially close tabs on withdrawals from your nest egg after you retire.

Walter Updegrave is the editor of RealDealRetirement.com. He previously wrote the Ask the Expert column for MONEY and CNNMoney. You can reach him at walter@realdealretirement.com.

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MONEY financial literacy

Why Workers and Retirees Missed the Roaring Bull Market

Glass half Empty
Jupiterimages—Getty Images

Investor optimism dips, especially among retirees, a new survey finds. Maybe it's because 1 in 10 investors haven't noticed the huge gains in the market.

Quick, how much did the stock market gain last year? Tough question, right? Okay, let’s try a multiple choice: Based on the S&P 500 index, did the market rise 10%, 20%, or 30%? Evidently, that’s a tough question too because the vast majority of investors haven’t a clue.

Only 11% of adults with at least $10,000 in savings and investments got it right in a Wells Fargo/Gallup poll. This stands in stark contrast to the 67% that rate themselves somewhat or highly knowledgeable about investing and underscores the extent to which so many people simply don’t know what they don’t know.

For the record, the S&P 500 rose 30% in 2013—you received a total return of 32% if you reinvested dividends. This is the 13th biggest gain in a calendar year since 1926. Forget about getting the percentage right. Anyone paying attention should at least know that last year was a huge winner. Yet only 64% of investors even knew the market was up. Of those who did, 57% thought the gain was just 10% while 27% thought the gain was 20%. About 1% was looking through rose-colored glasses and thought the market rose 40% or more.

The poll also found that retirees were feeling much less optimistic in the second quarter. The Wells Fargo/Gallup Investor and Retirement Optimism index declined modestly overall but the portion looking only at retirees plunged 41%. This too seems incongruous. Second-quarter GDP surged 4%, one of the sharpest quarterly gains since the Great Recession.

One reason for this gloom is that about half of both retirees and workers are worried they will outlive their money, the poll found. Sadly, this may be a self-fulfilling prophecy. Playing it safe and earning 1% in a money market account won’t amount to much over time. Meanwhile, those who stayed true to a diversified portfolio of stocks through the downturn are doing better than ever. They were present for that 32% market gain—even if they have no idea how great last year was for them.

As a whole, the findings suggest that many people remain fixated on the past. The recession was a harrowing and humbling experience. But it is over. Real estate prices have turned up and the job picture is better. The stock market has more than doubled from the bottom. Yet when asked what they would do with a $10,000 gift, 56% in the poll said they would hold it as cash or stash it in an ultra-safe bank CD—not invest for growth. At this rate, expect more declines in optimism, especially as retirees stuck in cash see further declines in income.

Related stories:

 

MONEY Savings

Here’s the Magic Amount You Need to Retire Happy

Numbers from American paper currency
George Adamson—Getty Images/The Bridgeman Art Library

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.

MONEY Kids and Money

Go Figure, Grandkids Want to Hear About Your Money Memories

Having seen tough times already, young adults crave money conversations with grandparents who have seen it all before.

What young person doesn’t enjoy a good story? And it doesn’t have to be about vampires or super heroes. The top thing young adults want to hear from grandparents is about experiences and decisions that shaped their life, new research shows.

This is especially true of events having to do with money, according to a survey from TIAA-CREF, a financial firm with $613 billion under management. The finding suggests that grandparents who are willing to talk about their financial follies can play an important role in helping their grandkids learn early to save, manage debt and stick to a budget.

Only 8% of grandparents say they are willing to start a conversation with their grandkids about money, the survey found. Yet 85% of grandkids aged 18 to 24 say they are open to such a conversation. In a further sign of this divide: only 30% of grandparents believe they could have an influence over their grandkids’ money habits; but 73% of young adults say their grandparents already have such influence.

How can perceptions be so different? For one thing, young adults have got the message and are intensely interested in understanding how to manage their money. In the survey, 97% said they were concerned about saving for their future. They see their grandparents as a role model: 59% rated their grandparents as very good or excellent savers.

Grandparents may be missing their influence due to cultural differences, the survey authors say. Many grandparents today are Baby Boomers, the generation that once upon a time didn’t trust anyone over 30. They wonder why young people would listen to them about anything.

But Millennials are coming of age in different times. They embrace the new multi-generational workplace and family. Through the Great Recession, they have seen first hand how tough life can be and they tend to respect elders who have muddled through despite life’s many ups and downs, says Joe Coughlin, director of the Massachusetts Institute of Technology AgeLab, which collaborated with TIAA-CREF on the study.

Coughlin suggests initiating the money conversation with grandkids when they are teens or earlier. Saving for college is a great starting topic. This may require crossing another divide, however. Grandparents are largely in the dark as to how expensive college has become. Four-year university costs easily run to $100,000 and can shoot to $160,00 or more at a private school. Yet one in five grandparents believe the total to be under $50,000 and a quarter believe it to be $50,000 to $75,000, TIAA-CREF found.

In speaking to grandkids about money, the trick is framing the discussion as a personal experience. Kids love to hear stories about rituals, big decisions, frugality and home life, he says. Grandparents can find ideas and conversation starters for teens here and for younger kids here and here.

Taking on this subject can be a fun and rewarding way to get to know a grandchild better—and it may be a huge help to parents. “Life has gotten very busy for dual income households,” Coughlin says. “Grandparents can fill in the gaps. They have the time and the stories to tell.” They just need to understand that, unlike themselves in younger days, the kids will listen.

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