TIME Retirement

Even More Proof Americans Think It’s a Great Time to Retire

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A new survey by the Employee Benefit Research Institute finds that 18 percent of Americans are "very confident" they'll live comfortably when they retire, up 5 percent from last year, thanks to planning like a 401(k) plan or IRA

The evidence keeps pouring in: last year’s torrid stock gains have revitalized the retirement dreams of many Americans. After five years of rock-bottom readings, new data show that confidence in a secure retirement has lifted for workers and retirees alike.

Among workers, 18% now say they are “very confident” they will live comfortably in retirement, up from 13% last year and similar readings each previous year since the recession, according to the 2014 Retirement Confidence Survey from the Employee Benefit Research Institute. Some 37% of workers are “somewhat confident”—also a post-recession high-water mark.

Among retirees, 28% now say they are very confident about maintaining their lifestyle, up from 18% last year; 39% say they are somewhat confident. For both workers and retirees, confidence remains short of peak levels reached before 2007. For example, 79% of retirees were very or somewhat confident about their future just before the crisis—a difference of 12 percentage points.

The reversal is heartening news and ads heft to recent reports showing that retirees, especially, are feeling better than they have in years. Fewer are postponing retirement and more say they believe the stock market will continue to rise and that interest rates will rise as well, providing a higher level of secure income.

But let’s not declare victory over hard times just yet. Two distinct sets of savers seem to be driving the gains in confidence: those with high household income and those who participate in a formal retirement plan like a 401(k) or IRA, EBRI found. This uneven advance may help explain why the percentage of the most forlorn workers and retirees–those saying they are “not at all confident” about retirement security–remains stuck at recession levels.

Nearly 50% of workers without a retirement plan are not at all confident about their financial security, compared with about 10% of those with a plan. Workers in a formal plan are more than twice as likely to be very confident (24%, vs. 9%) about retirement, EBRI found.

The biggest impediments to saving seem to be the high cost of day-to-day living and accumulated debt, the survey found. More than half of workers say daily expenses consume all their income. Meanwhile, only 3% of workers that describe debt as a major problem feel comfortable about retiring while 29% of those who have few debt issues say they are confident in their ability to retire comfortably. That’s hardly a surprise. But it drives home the importance of getting control of your debts before retiring.


Turns Out Now Is a Brilliant Time to Stop Working

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Retirees are feeling better about their finances than they have in years. The rising stock market is one reason. But seniors also have a sense that interest rates will finally move higher and make income easier to secure.

Retirees are feeling more confident about their future than they have in years, new data show. Much of the optimism flows from last year’s heady stock market gains. But the prospect of higher bond yields, a popular source of income, is also part of the cheerier outlook.

Investors of all stripes are feeling more upbeat. A Wells Fargo and Gallup index measuring investor confidence jumped 48% in the first quarter, approaching levels last seen before the budget fiasco and partial government shutdown last summer. Most of the gain is attributed to a seven-fold surge in retiree confidence. Non-retiree optimism rose less than 10%.

Some 74% of retirees and pre-retirees say they feel positive or very positive about stocks, up from 62% a year ago, according to a survey by Ignites Retirement Research. Retirees in this survey also registered more optimism than those still at work.

The surge in hope follows a year in which the S&P 500 returned 32%, one of the best calendar-year gains in modern history. That gain repaired a lot of portfolio damage from the recession; it also lifted the spirits of retirees relying on dividend-paying stocks for income. It was the first reading of the Wells Fargo/Gallup index in nearly two years where retirees expressed more hope than non-retirees.

In another sign of retiree confidence, a study from CareerBuilder.com found that the percentage of seniors opting to postpone retirement is declining. Among workers 60 and older, 58% now say they will delay retirement—down from 61% who planned to delay retirement a year earlier. A greater percentage of workers also expect to retire within four years and a smaller percentage now say they will never be able to retire.

Some of the new optimism owes to the prospect of higher bond yields, pollsters say. Retirees have a growing feeling that interest rates will rise this year, and with that they will find it easier to secure income from short-term bonds, bank CDs, annuities and other fixed-income vehicles. That’s a surprising development because so far interest rates have not risen. In fact, after a short, sharp burst higher last spring rates have declined again, making income more difficult—not easier—to find.

One dollar of guaranteed retirement income at age 65, purchased today by someone who is 60, would cost $16.65, according BlackRock’s Cori index. That’s up from a cost of $15.50 for $1 of income last August. Put another way: Last August, $1 million would have secured $64,516 of annual income for a 60-year-old retiring in five years. Today, it secures just $$60,060 of annual income.

Interest rate moves are the biggest factor in this calculation. Retirees are putting a lot of faith in something that has yet to materialize. Still, as the Fed winds down its stimulus package and the economy continues to recover, counting on higher rates and easier income would seem to make sense.

TIME Financial Planning

Retirement Planning’s “Conventional Wisdom” Needs Rethinking

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TIME Personal Finance

Knowing Your Net Worth Can Help You Plan

Calculating your net value will help you plan your future more productively.
David Emmite—Getty Images Calculating your net value will help you plan your future more productively.

Calculating your net worth is easy, and a valuable exercise. Here's how.

Your boss doesn’t know your value, right? But do you even know it? Most people have never taken the time to figure their net worth even though it’s a fairly simple calculation. Why not take stock now? The New Year is still full of promise.

Your net worth is what you’d have left after selling everything, paying the bills and settling all debts. Think of it as your liquidation value. The number is of keen interest to heirs trying to understand what will be theirs. But it’s useful for you as well. Calculated annually, your net worth provides the clearest picture of whether you are getting ahead. It helps gauge when you might retire and gives a roadmap to where you are losing or gaining value. That makes it easier to adjust and meet your goals.

Say, for example, your goal is to retire with $1 million. But during the worst two years of the recession your net worth—your total liquid value—went from $380,000 to $250,000. You’d understand right away that you need to adjust. Net worth hits home in a more visceral way than, say, looking only at a 401(k) statement that provides only part of the picture.

To figure your net worth you need two sheets of paper, one of them labeled assets and the other labeled liabilities. You want to add all assets and subtract all liabilities, reducing your life thus far to a single number. You can find online calculators to help. You can also see how you stack up against people your age and at your income level. For example, the median 55-year-old has a net worth of $180,125; the median net worth of households earning $75,000 a year is $301,475, according to Nielsen Claritas.

Start with assets, including retirement savings, checking and savings account balances, bonds or annuities, the total value of any stock holdings, your home and automobiles. To really fine-tune the figure include artwork, jewelry, furniture and other possessions that for most people do not move the needle a great deal. Put a value on each of these things and add them.

On the liabilities sheet, list all credit card balances, personal loans, student loans, auto loans and mortgages. Then add those and subtract it from the figure you got on the assets sheet. Voila. You now know what you are worth on paper. Watching this number from year to year shows how new debts and all spending subtract from your net worth, while general thrift, retired debts, and investments that rise pad your net worth.

The figure is not perfect. Figuring your net worth is especially difficult if you own a small business, which may be difficult to value. If you are young and in a great career your net worth might be negative—but that’s okay. Once those college loans are paid off and you get a few raises that can turn around quickly. Likewise, if your net worth takes a dip because the stock market or housing market fell, that’s not so terrible assuming you can hold on for the recovery. But it’s always good to know where you stand.

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