MONEY Greece

Here’s How Greece Could Affect Your Retirement Savings

Reaction As Greece Imposes Capital Control
Bloomberg—Bloomberg via Getty Images A customer places her daily cash machine withdrawal limit of 60 euros into her purse after using an automated teller machines (ATM) outside a closed Eurobank Ergasias SA bank branch in Athens, Greece, on Monday, June 29, 2015.

Your 401(k) or IRA will probably be fine

Greek leaders are scrambling to nail down a new bailout deal before July 20, when the country would otherwise default on a €3.5 billion bond repayment to European creditors and might be forced to abandon the Euro currency altogether.

As recent stock performance in the U.S. suggests, fears of what a so-called “Grexit” could do to Europe’s economy has spread to American shores. Indeed, U.S. markets may very well be choppy for at least the next several weeks until there’s more certainty about the future.

But there are many reasons to believe that any impact on your 401(k) or IRA investments would be short-lived.

For one, Greece comprises only 0.3% of the global economy. And a typical target date mutual fund, used by many retirement plans, has an even smaller sliver of exposure to the country.

Even if the worse case scenario happens and the Greek crisis affects Europe—or even causes a slowdown among U.S. companies that rely on European demand—history has shown that people who keep investing through recessions make their money back more quickly than one might expect. For example, if you had been so unlucky as to start investing $1,000 per year in the stock market right before the most recent recession, you would have made your money back after only two years post-recession.

That’s a good reason to stay calm and not do anything rash.

Certainly, investing in today’s globalized markets comes with risks. While Greece is relatively tiny, for example, China is a top global trader—and its current market crash could potentially affect economies across the world. But the fact that it’s hard to predict how market forces will play out on a global level is a reason to stay diversified, with portfolios exposed to many different countries and their economies.

Watch the video below to learn more about why foreign stocks are important to your portfolio:

TIME China

Will the Communist Party Save China’s Volatile Stock Market?

An investor holds onto prayer beads as he watches a board showing stock prices at a brokerage office in Beijing
Kim Kyung Hoon—Reuters An investor holds onto prayer beads as he watches a board showing stock prices at a brokerage office in Beijing, China, July 6, 2015

China’s top brokerages have pledged almost $20 billion to arrest a calamitous slide

Rain, like the downpours that have inundated Shanghai in recent weeks, doesn’t buoy the spirits. But don’t despair, counseled the People’s Daily, the Chinese Communist Party’s mouthpiece, on Monday: “Rainbows always appear after rains.”

That upbeat message coursed through China’s state media on Monday, referring to the dismal performance of the nation’s bourses, including the Shanghai Composite Index, which has lost nearly 30% over the past three weeks.

The chief rainbowmaker is, no surprise, the ruling Communist Party. “The Chinese government unveiled an unprecedented string of emergency and supportive measures to stabilize market sentiment,” announced state news agency Xinhua on Monday, with the nation’s central bank called in to increase liquidity.

Over the weekend, China’s top brokerages, surely encouraged by officialdom, vowed to spend nearly $20 billion to shore up the stock market. By government fiat, new stock listings are being curtailed. Foreigners have been admonished not to sell China short — as if they were the ones chiefly responsible for the stock market’s nosedive. On July 5, Beijing police arrested a man they say spread rumors that a despondent punter jumped to his death because of the stock-market plunge.

The result so far of this massive government intervention: after an 8% surge in the morning, the Shanghai index ended up 2.4% on July 6, following a 12% loss the previous week. State-owned giants led the weak recovery. In meteorological news, the plum rains are forecast to last all week in China’s commercial capital. (At close on Monday, Shenzhen’s more erratic index was down 1.39%.)

The past three weeks have seen the market shed more than $2 trillion. Still, the percentage of the Chinese population that dabbles in the stock market is comparatively low. And as brutal as the summer sell-off has seemed, shares are still up this year, with the Shanghai Composite having expanded by nearly 80% compared with roughly a year ago.

Chinese social-media users have debated whether the central government’s efforts were enough to prevent a further market nosedive. There was less discussion, however, of whether the government should be doing battle in the first place — especially given that some of the recent market frenzy has derived from risky margin trades that may be testing banks. Critics have noted that this generation of Chinese leadership, in place since late 2012, has called for market forces to gain more power, not less. The government’s latest intervention runs counter to talk of reform.

“Fragile market sentiment will be reversed,” the People’s Daily has stated. That’s about as clear a signal of official policy as the ruling Communist Party can give. Beijing, which is already facing a slowing economy, is tying part of its legitimacy to returning confidence to the nation’s stock market. When will the rainbow appear?

TIME Greece

Dow Plunges 350 Points as Possible Greek Default Looms

Eric Thayer A trader on the floor of the New York Stock Exchange.

Uncertainty rattles global markets

The uncertainty surrounding Greece’s ongoing debt crisis choked global markets on Monday, extending recent losses for the world’s stock exchanges.

The Dow Jones Industrial Average closed the day down 350 points, or 2%. The S&P 500 dropped 2.1%, ending the day at 2,058 points. Meanwhile, the tech-heavy Nasdaq composite was hit hardest, falling 122 points (or 2.4%) to end the day under the 5,000-point mark for the first time since early-May.

It was the worst day of the year for U.S. stocks.

Earlier, volatility struck markets around the world, as global markets felt the impact of the uncertainty in Greece, where banks are closed and ATM withdrawal limits have been imposed. The Chicago Board Options Exchange Volatility Index (VIX) — also referred to as the “fear index” — soared on Monday, rising by nearly 5 points, or 35%, to reach its highest levels in about four months.

Greek citizens will vote this weekend on a new bailout proposal that could bring billions of dollars in additional aid into the troubled country while installing strict austerity measures. A “no” vote on the bailout extension, meanwhile, would likely pave the way for Greece’s withdrawal from the euro zone.

Also, on Monday, ratings agency Standard & Poor’s once again downgraded Greece’s credit rating — to CCC- — in an assessment that predicted a Greek default within six months.

S&P said there’s now a 50% chance Greece will leave the euro.

In addition to fears about Greece, investors are concerned about Puerto Rico’s ability to pay its debts and continued weakness in China.

MONEY retirement income

3 Retirement-Crushing Unforeseen Circumstances

thunderstorm on golf course
Derris Lanier

And what do about them.

Planning for retirement is a challenge for everyone because you have to find money to set aside in savings, invest that money well, and then figure out how to make ends meet once you stop working. Even when everything goes right, retirement planning isn’t easy, but the real test comes when unforeseen circumstances might ruin all of your plans.

Fortunately, you can deal with the unexpected rather than letting it crush your retirement hopes. Let’s take a closer look at three of the most common problems that people have trouble foreseeing and what you can do to avoid them or handle them when they come up.

1. Having to retire before you expected.
There’s a big gap between how long most people expect to work and how long they actually do work. The reason is simple: Unforeseen circumstances come up that prevent you from working into your 60s or beyond. In some cases, a health condition stands in the way of being able to stay in your job. For others, corporate moves lead your employer to cut back on staffing, and high-priced older employees often find themselves the first to go. Even if you’re fortunate enough to get a severance package, it might not last long enough to get you to the age you expected to retire.

The first thing to do when you have to retire unexpectedly is to look at your actual and potential income and expenses, working to maximize money coming in and cutting unnecessary costs. Getting part-time work is sometimes an option to help supplement income from investments or other sources, and looking at whether Social Security or other pension income might be available to you before full retirement age is worth the effort.

After you have a handle on what you’re taking in and what you’re spending, the next step is to figure out a longer-term strategy to make ends meet on your new budget. If you have enough, you’re good to go. If not, you can look at some of the resources for retirees on limited incomes can use to help make ends meet until more typical retirement benefits become available.

2. Dealing with a badly timed stock market drop.
Everyone understands the stock market rises and falls in cycles over the years. Yet when it comes time to plan for retirement, this basic fact can be very hard to deal with. If the market drops right after you retire, you could find yourself with a far smaller retirement nest egg than you had expected.

There are several ways you can address this risk. One is to use specialized financial instruments designed to provide money later in your retirement, ensuring a basic income even if your money doesn’t go as far as you had expected. For instance, a deferred income annuity allows you to pay a premium now in exchange for a guarantee of future payments from an insurance company once you reach a certain age.

Also, easing back on your stock market exposure as you age can help insulate your assets from a falling market. As you’ll see below, though, there are sometimes reasons for keeping the portion of your money in stocks higher than you might think. Still, if you’re willing to give up some potential future growth — and you have the assets to do so — then being slightly more conservative can offer a good solution to any unforeseen market moves that could put you in dire straits.

3. Not having the income you’d expected to get from your investments.
Recently, many retirees have found that they can’t generate the income they need from their savings. Bank products pay almost no interest, and it’s hard to do much better in traditional fixed-income investments like bonds.

There are ways to get more income from your investments, but you have to be careful about how much you rely on them. In recent years, many investors have shifted into dividend-paying stocks, with superior yields compared to bonds, bank CDs, and savings accounts. After six years of a bull market, though, some investors have forgotten just how hard stocks can fall. For that reason, shifting entirely into risky investments just to get more income isn’t a smart way to go. Nevertheless, a diversified mix of income investments that includes not just bonds, but also dividend-paying stocks, real-estate investment trusts, royalty trusts, and other niche investment assets can limit your risk while giving you the income you need.

Retiring well takes effort, and dealing with unforeseen circumstances makes it even harder. Nevertheless, with some forethought, you can put yourself in the best position possible to deal with unexpected surprises and come out on top.

Read next: 4 Ways to Bridge the Retirement Income Gap

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MONEY stock market

A Financial Planner’s Investment Advice for His Son — and Everyone Else

family on roller coaster
Joe McBride—Getty Images

Father's Day has a financial adviser thinking about important lessons to be passing along.

A friend recently asked me to recommend a book for his son on buying and selling stocks.

As I pondered his request, I started thinking about the various books I’ve read or skimmed over my 24-plus years of working in financial services. Initially, I was overwhelmed with titles. Then I started thinking about my own teenaged son and the difficulty I was having getting him to think differently about his money—that he won’t always be able to depend on his parents to help him out. Anyway, I thought if I couldn’t compel a 14-year-old to change his ways, what could I say to my friend’s son, who’s in his 20s?

Finally, I asked myself what would I say—not bark, I promise—to my own son if he were in his 20s and came to me for investing advice? This is what I came up with:

You can go to just about any investment site (e.g. Vanguard, Schwab, or Fidelity) to learn the fundamentals of investing. You need to know, however, that the process of buying and selling is not hard. The real challenge is knowing what to buy, when to buy, and when to sell. If you plan to make investing a career, there is a lot more you need to know than you can learn from a website or book. That would require another conversation.

For now, I would advise you to think long and hard about why you want to invest. In other words, take time to map out your life goals for the next three to five years and the financial resources you will need to achieve them.

Simply saying you want to invest “to make money” will not work when you are invested in a fluctuating market. Short-term volatility can be a bear (pun intended). You have to be willing to ask how much money you can withstand losing when the market goes down, as well as how much profit is enough. As the old Wall Street saying goes, bulls make money in up markets, bears in down markets, and pigs get slaughtered. You also have to be willing to ask yourself how long you plan to stay invested, no matter how much the market fluctuates or falls.

Why am I focusing on declining markets and roller-coaster, up-and-down markets? It’s because people tend to fixate on rising stocks and profits, but pay very little attention to the markets’ inevitable declines. Everyone loves bull markets, which are great for the average investor. But when the market heads south quickly or takes a long, slow journey to the cellar, someone who was looking to make a quick profit can suffer a lot of stress.

Finally, I hope this short note does not come across as too preachy. I congratulate you on your interest in investing, and I will end by saying you are way ahead of the game because you’re thinking about investing now instead of later. Good luck.

Read next: The 3 Most Important Money Lessons My Dad Taught Me

———-

Frank Paré is a certified financial planner in private practice in Oakland, California. He and his firm, PF Wealth Management Group, specialize in serving professional women in transition. Frank is currently on the board of the Financial Planning Association and was a recipient of the FPA’s 2011 Heart of Financial Planning award.

MONEY stocks

A Nobel Prize-Winning Economist Explains Why That’s Not a $10 Bill on the Sidewalk

Are markets efficient? Yes and no, says Robert Shiller.

The stock market goes through big swings, commonly known as bubbles. Nobel economist Robert Shiller says these swings are the normal cycle of the market, but they don’t necessarily mean the market is inefficient. If a $10 bill is lying on the sidewalk, you’re going to pick it up, but when is the last time you actually saw a $10 on the sidewalk? Which leads to the classic joke about the economist who’s walking down the street.

Read next: This Nobel Economist Spotted the Last Two Bubbles—Here’s What He Says About the Bond Boom

MONEY 401(k)s

The Big Mistake That Most 401(k) Savers Are Making

uneven balance with money on each side
iStock

The average 401(k) plan balance has risen to $100,000. But most workers fail to rebalance, so risks are rising too.

When it comes to saving in your 401(k), doing nothing can often work wonders.

As a recent survey by Aon Hewitt found, some 79% of workers who are eligible for a 401(k) or similar plan are participating, thanks in large part to the do-nothing magic of automatic enrollment. It’s the highest level since at least 2002, when the firm started tracking participation rates. This steady saving helped push account balances to a record high of $100,320 last year, up 10% from 2013.

Still, 401(k) inertia has a downside too. As the survey shows, most workers aren’t paying attention to the investments they hold, which increases the odds they will fall short of their retirement goals.

Take those record balances. Truth is, that 10% growth rate is relatively sluggish, which suggests many participants are invested in an ultra-conservative manner. The S&P 500 stock index jumped 13.5% in 2014, while Treasury bonds produced a 10.75% return. Moreover, only 24% of participants increased the amount they save each pay period, Aon Hewitt found. So even with additional cash going in, the average balance did not keep pace with either the stock market or the bond market.

Granted, a portion of that slow growth can be explained by regular distributions and early withdrawals. Last year, 3.6% of participants took regular withdrawals, up slightly from 3.5% the previous year, the Investment Company Institute reports. Meanwhile, 1.7% took a hardship withdrawal and at year-end 17.9% had a plan loan outstanding, ICI says. But a bigger issue probably has to do with participants leaving too much money in short-term money market accounts. In a lot of plans with automatic enrollment, the money goes into cash accounts that yield well under 1%.

Looking beyond account balances, Aon Hewitt’s data highlights another worrisome trend—only 15% of 401(k) savers did any sort of rebalancing last year, one of the lowest trading rates on record. Rebalancing is a fundamental aspect of long-term investing. Say your target asset mix is 60% stocks, 30% bonds and 10% cash. Once a year you should sell just enough of the funds that grow fastest (lately, stocks)— and add enough to the laggards (cash and bonds)—to restore your target mix. This time-tested strategy ensures you will buy low and sell high over the long haul and maintain the right level of risk in your portfolio.

Two years ago, stocks rose 32% and bonds fell 9%. The prudent move would have been to sell some stocks and buy some bonds, which would have let you benefit from the bond market’s rally last year. Stocks also rose last year by 13.7%. So if you haven’t rebalanced in the past two years, you probably hold a lot more in stocks than you originally intended, which means you may suffer worse-than-expected losses when the next bear market arrives.

The low level of rebalancing activity is only partly explained by the stunning rise of target-date funds, which automatically adjust holdings as you age. About 70% of 401(k) plans offer target-date funds and 75% of plan participants invest in them, according to T. Rowe Price. Stripping those and similar funds out, Aon still found that only 19% of participants rebalanced.

Add it all up, and it’s clear that workers now realize that they must save, and they want to know more about managing their money. But many are held back by inertia and concerns that they don’t know what they are doing. That’s why most heartily embrace plan features like automatic enrollment and automatic escalation of contributions. Aon Hewitt says workers would also benefit from better access to online tools and advice, and a simplified lineup of investment options.

The Holy Grail, though, may be a guaranteed lifetime income product, such as a deferred fixed annuity (for a portion of your portfolio), inside all defined contribution plans. These reduce the risk of failing to rebalance while giving workers something most sorely lack—an income stream other than Social Security that will never run out. Slowly, these income products are coming, Aon Hewitt says, as leading-edge companies better understand the laws and their responsibilities for what is a fairly new investment option.

Read next: How the New-Model 401(k) Can Boost Your Retirement Savings

MONEY stocks

The Fed Chair Says Stocks Look Expensive. Here’s What She Means

Janet Yellen, chair of the U.S. Federal Reserve, speaks at the Institute for New Economic Thinking conference at the IMF headquarters in Washington, D.C., U.S., on Wednesday, May 6, 2015.
Andrew Harrer—Bloomberg via Getty Images Janet Yellen, chair of the U.S. Federal Reserve, speaks at the Institute for New Economic Thinking conference at the IMF headquarters in Washington, D.C., U.S., on Wednesday, May 6, 2015.

According to one respected measure, prices are high and the long-run prospects for returns aren't so hot.

On Wednesday, Federal Reserve chair Janet Yellen sparked some selling in the stock market when she remarked at conference that stock prices look “quite high.”

Yellen didn’t specify exactly how she was measuring stock valuations, but it’s easy enough to guess at what she means. A standard way to judge whether the market looks cheap or frothy is to look at the share price of companies on the blue-chip S&P 500 index, relative to their earnings—the P/E ratio.

To smooth out the effect of booms and busts in corporate profits, many market analysts today like to look at a version of P/E called the cyclically adjusted P/E (or CAPE). It uses the current S&P level compared with the average of the past 10 years of earnings. It’s also sometimes called the Shiller P/E, after Nobel Prize-winning Yale economist Robert Shiller, who popularized this method.

Right now, the Shiller P/E is about 27, up from about 15 in the immediate wake of the financial crisis.

Shiller recently dropped by MONEY’s offices, and he agrees with Yellen: Stocks look kind of pricey now. But, he adds, that doesn’t mean they couldn’t get even more expensive.

And why, you might ask, does the Fed care what investors pay for stocks? More on that here.

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