Posts tagged ‘Retirement’

What’s Important? Moving on Beyond Politics…

On a daily basis we turn on the TV or read about Democrats screaming at Republicans, or vice versa. Despite screams from the opposition, a Democratically-led Congress was able to successfully push Obamacare through the House and Senate in 2010 in a partisan fashion. The Republicans, however, were unable to jam repeal Obamacare legislation seven years later – at least on their first attempt.

While many Americans who sit at the opposite end of the political spectrum continue to scream at each other until they’re purple in the face, data indicates it is the Independents who are controlling the outcomes of elections. More specifically, a recent Gallup poll shows that 43% of voters identify as political independents, while over the last decade the percentage of voters identifying themselves with the traditional parties of Democrats and Republicans have declined to 30% and 26%, respectively.

It is true, President Trump potentially has a very limited party majority window before next year’s midterm elections. While Republicans do currently have an advantage over Democrats, as I’ve stated before, there are more important issues than these political ones, especially when it relates to your finances.

Whether the discussion revolves around healthcare, tax reform, defense spending, or immigration, the amount of influence you as a voter have on the political outcomes pales in comparison to the amount of control you ultimately have over your personal financial situation. As I’ve written in the past (see also Getting to Your Number), creating a secure financial plan will impact your long-term monetary success much more than senseless cheering or screaming for Obamacare’s long-run success or failure.

More critical than focusing on politics, the importance of calculating your budget, income sources, time horizon, and risk tolerance should be higher priorities. Everybody’s personal situation is different, therefore it is essential to explore a variety of other essential questions, including the following:

  • How many more years do you plan to work?
  • How much income will you need in retirement?
  • What is your expected return on investments, given your asset allocation?
  • How much debt do you presently have, and what are your plans to reduce it?
  • What are the probabilities of you gaining an inheritance, and at what estimated value?
  • Do you have an estate plan in place?
  • Do you have children, and if so, what are your educational goals, and what type of inheritance or financial support are you looking to provide your children?

Since every investor’s situation is unique, there are plenty of other items to investigate. Politics is a state of mind, so don’t let the vicissitudes of Washington DC affect your long-term financial well-being.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

March 27, 2017 at 12:13 am Leave a comment

March Madness or Retirement Sadness?

bball

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (March 1, 2017). Subscribe on the right side of the page for the complete text.

“March Madness” begins in a few weeks with a start of the 68-team NCAA college basketball tournament, but there has also been plenty of other economic and political madness going on in the background. As it relates to the stock market, the Dow Jones Industrial Average index reached a new, all-time record high last month, exceeding the psychologically prominent level of 20,000 (closing the month at 20,812). For the month, the Dow rose an impressive +4.8%, and since November’s presidential election it catapulted an even more remarkable +13.5%.

Despite our 45th president just completing his first State of the Union address to the nation, American voters remain sharply divided across political lines, and that bias is not likely to change any time soon. Fortunately, as I’ve written on numerous occasions (see Politics & Your Money), politics have no long-term impact on your finances and retirement. Sure, in the short-run, legislative policies can create winners and losers across particular companies and industries, but history is firmly on your side if you consider the positive track record of stocks over the last couple of centuries. As the chart below demonstrates, over the last 150 years or so, stock performance is roughly the same across parties (up +11% annually), whether you identify with a red elephant or a blue donkey.

dem-v-rep

Nevertheless, political rants flooding our Facebook news feeds can confuse investors and scare people into inaction. Pervasive fake news stories regarding the supposed policy benefits and shortcomings of immigration, tax reform, terrorism, entitlements, foreign policy, and economic issues often result in heightened misperception and anxiety.

More important than reading Facebook political rants, watching March Madness basketball, or drinking green beer on St. Patrick’s Day, is saving money for retirement. While some of these diversions can be temporarily satisfying and entertaining, lost in the daily shuffle is the retirement epidemic quietly lurking in the background. Managing money makes people nervous even though it is an essential part of life. Retirement planning is critical because a mountain of the 76 million Baby Boomers born between 1946 – 1964 have already reached retirement age and are not ready (see chart below).

eld-pop-growth

The critical problem is most Americans are ill-prepared financially for retirement, and many of them run the risk of outliving their savings. A recent study conducted by the Economic Policy Institute (EPI) shows that nearly half of families have no retirement account savings at all. The findings go on to highlight that the median U.S. family only has $5,000 in savings (see also Getting to Your Number). Even after considering my tight-fisted habits, that kind of money wouldn’t be enough cash for me to survive on.

Saving and investing have never been more important. It doesn’t take a genius to understand that government entitlements like Social Security and Medicare are at risk for millions of Americans. While I am definitely not sounding the alarm for current retirees who have secure benefits, there are millions of others whose retirement benefits are in jeopardy.

Missing the 20,000 Point Boat? Dow 100,000

Making matters worse, saving and investing has never been more challenging. If you thought handling all of life’s responsibilities was tough enough already, try the impossible task of interpreting the avalanche of instantaneous political and economic headlines pouring over our electronic devices at lighting speed.

Knee-jerk reactions to headlines might give investors a false sense of security, but the near-impossibility of consistently timing the stock market has not stopped people from attempting to do so. For example, recently I have been bombarded with the same question, “Wade, don’t you think the stock market is overpriced now that we have eclipsed 20,000?” The short answer is “no,” given the current factors (see Don’t Be a Fool). Thankfully, I’m not alone in this response. Warren Buffett, the wealthiest billionaire investor on the planet, answered the same question this week after investing $20,000,000,000 more in stocks post the election:

“People talk about 20,000 being high. Well, I remember when it hit 200 and that was supposedly high….You know, you’re going to see a Dow [in your lifetime] that certainly approaches 100,000 and that doesn’t require any miracles, that just requires the American system continuing to function pretty much as it has.”

Like a deer in headlights, many Americans have been scared into complacency. To their detriment, many savers have sat silently on the sidelines earning near-0% returns on their savings, while the stock market has reached new all-time record highs. While Dow 20,000 might be new news for some, the reality is new all-time record highs have repeatedly been achieved in 2013, 2014, 2015, 2016, and now 2017 (see chart below).

record-highs

While I am not advocating for all people to throw their entire savings into stocks, it is vitally important for individuals to construct diversified portfolios across a wide range of asset classes, subject to each person’s unique objectives, constraints, risk tolerance, and time horizon. The risk of outliving your savings is real, so if you need assistance, seek out an experienced professional. March Madness may be here, but don’t get distracted. Make investing a priority, so your daily madness doesn’t turn into retirement sadness.

investment-questions-border

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in FB and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

March 4, 2017 at 11:04 am 1 comment

Dow 20,000 – Braking News or Breaking News?

Signature:2a0f6d0366f291694bd9cc422bff24b12e1d3afd88bc0ed09c9a8814df3c0837

Investors from around the globe excitedly witnessed the Dow Jones Industrial Average index break the much-anticipated 20,000 level and set a new all-time record high this week. The question now becomes, is this new threshold braking news (time to be concerned) or breaking news (time to be enthused)? The true answer is neither. While the record 20,000 achievement is a beautifully round number and is responsible for a bevy of headlines splashing around the world, the reality is this artificial 20,000 level is completely arbitrary.

Time will tell whether this random numeric value will trigger the animal spirits of dispirited investors, but given all the attention, it is likely to jolt the attention span of distracted, ill-prepared savers. Unfortunately, the median family has only saved a meager $5,000 for retirement. For some years now, I have highlighted that this is the most hated bull market (see The Most Hated Bull Market Ever), and Gallup’s 2016 survey shows record low stock ownership, which also supports my view (chart below). Trillions of dollars coming out of stock funds is additional evidence of investors’ sour mood (see fund outflow data).

gallup-poll-2016

While investors have been selling stocks for years, record corporate profits, trillions in share buybacks, and trillions of mergers and acquisitions (in the face of a weak IPO market) have continually grinded stock prices to new record highs.

Pessimism Sells

The maligned press (deservedly so in many instances) has been quick to highlight a perpetual list of dread du jour. The daily panic-related topics do however actually change. Some days it’s geopolitical concerns in the Middle East, Russia, South China Sea, North Korea, and Iran and other days there are economic cries of demise in China, Brazil, Venezuela, or collapse in the Euro. And even when the economy is doing fine (unemployment rate chopped in half from 10%, near full employment), the media and talking heads often supply plenty of airtime to impending spikes of crippling inflation or Fed-induced string of choking interest rate increases.

I fondly look back on my articles from 2009, and 2010 when I profiled schlocks like Peter Schiff (see Emperor Schiff Has No Clothes) who recklessly peddled catastrophe to the masses. I guess Schiff didn’t do so well when he called for the NASDAQ to collapse to 500 (5,660 today) and the Dow to reach 2,000 (20,000 today).

Or how about the great forecaster John Mauldin who also piled onto death and destruction near the bottom in 2009 (see The Man Who Cries Wolf ). Here’s what Mauldin had to say:

“All in all, the next few years are going to be a very difficult environment for corporate earnings. To think we are headed back to the halcyon years of 2004-06 is not very realistic. And if you expect a major bull market to develop in this climate, you are not paying attention.” … “We are going to pay for that with a likely dip back into a recession.”

 

At S&P 856 (2,295 today) Mauldin added:

“This rally has all the earmarks of a major short squeeze…When the short squeeze is over, the buying will stop and the market will drop. Remember, it takes buying and lot of it to move a market up but only a lack of buying to create a bear market.”

 

Nouriel Roubini a.k.a. “Dr Doom” was another talking head who plastered the airwaves with negativity after the 2008-2009 financial crisis that I also profiled (see Pinning Down Roubini). For example, in early 2009, here’s what Roubini said:

“We are still only in the early stages of this crisis. My predictions for the coming year, unfortunately, are even more dire: The bubbles, and there were many, have only begun to burst.”

 

For long-term investors, they understand the never-ending doom and gloom headlines are meaningless noise. Legendary investor Peter Lynch pointed on on numerous occasions:

“If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.”

 

(see also Peter Lynch video)

The good news is all the media pessimism and investor skepticism creates opportunities for shrewd investors focusing on key drivers of stock price appreciation (corporate earnings, interest rates, valuations, and sentiment).

While the eternally, half-glass full media is quick to highlight the negatives, it’s interesting that it takes an irrelevant, arbitrary level to finally create a positive headline for a new all-time record high of Dow 20,000. Frustratingly, the new all-time record highs reached by the Dow in 2013, 2014, 2015, and 2016 were almost completely ignored (see chart below):

Source: Barchart.com

Source: Barchart.com

What happens next? Nobody knows for certain. What is certain however is that using the breaking news headlines of Dow 20,000 to make critical investment decisions is not an intelligent long-term strategy. If you, like many investors, have difficulty in sticking to a long-term strategy, then find a trusted professional to help you create a systematic, disciplined investment strategy. Now, that is some real breaking news.

investment-questions-border

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

January 29, 2017 at 2:34 am Leave a comment

Politics & Your Money

Congress - Capitol Building

Will you be able to retire, and what impact will the elections have on your financial future? Answering these questions can be a scary endeavor. And unless you have been living in a cave, you may have noticed we are in the middle of a heated U.S. presidential election campaign between Donald Trump and Hillary Clinton. Regardless of which side of the political fence you stand on, the prospects of your retirement are much more likely to be impacted by your personal actions than by the actions of Washington politicians.

Even if you despise politics and were living in a cave (with WiFi access), there’s a high probability you would be overloaded with detailed and dogmatic online editorials from overconfident Facebook friends. Besides offering self-assured predictions, these impassioned political pleas generally itemize the top 10 reasons your favorite candidate is a moron, and another 10 reasons why their candidate is the greatest.

Your friends’ opinions may have pure intentions, but unfortunately, rarely, if ever, do their thoughts alter your views.  A reference from a recent Legal Watercooler article summed it up best:

“Political Facebook rants changed my mind…said nobody, ever.”

 

Nearly as ineffectual as political Facebook opinions on your politics is the ineffectual influence of presidential elections on your finances. For example, over the last four decades, stock prices have gone up and down during both Republican and Democrat presidential terms. The picture looks much the same, if you analyze the fiscal performance of conservatives and liberals since 1970 – debt burdens as a percentage of economic output have risen and fallen under both political parties. No matter who wins the presidency, many investors forget the ability of that individual to affect change is highly dependent upon the political balance of power in Congress. If Congress holds a split majority in the House and Senate, or the opposition party commands the entire Congress, then the winning presidential candidate will be largely neutered.

Rather than panic over a political loss or celebrate a candidate’s victory, here are some tangible actions to improve your finances:

  • Organize. Typically individuals have investment and saving accounts scattered with no cohesive accounting or strategy. Get your financial house in order by gathering and organizing all your accounts.
  • Budget. Spend less than you take in. Or in other words…save. You can achieve this goal in one of two ways – cut your spending, or increase your income.
  • Create a Plan. When do you plan to retire? How much money do you need for retirement? What asset allocation and risk profile should you adopt to meet your financial goals?

If you have difficulty with any of these actions, then meet with an experienced financial professional to assist you.

Politics can trigger very emotional responses. However, realizing your actions have a much more direct impact on your finances than political Facebook rants and temporary elections will benefit you in achieving your long-term financial goals.

investment-questions-border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds and FB, but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

July 23, 2016 at 10:41 pm 4 comments

Flat Pancakes & Dividends

pancakes-1320121

Over the last 18 months, stock prices have been flat as a pancake. Absent a few brief China and recessionary scares, the Dow Jones Industrial Average index has spent most of 2015 and 2016 trading between the relatively tight levels of 17,000 – 18,000. Record corporate profits and faster growth than other developed and developing markets have created a tug-of-war with countervailing factors. A strong dollar, reversal in monetary policy, geopolitical turmoil, and volatile commodity markets have produced a neutralizing struggle among corporate executives with deep financial pockets and short arms. In this environment, share buybacks, stable profit margins, and growing dividends have taken precedence over accelerated capital investments and expensive new-hires.

With flat stock prices and interest rates at unprecedented low levels, it’s during times like these that stock investors really appreciate the appetizing flavor of stable, growing dividends. To this day, I still find it almost impossible to fathom how investors are burning money by irrationally speculating in $7 trillion in negative interest rate bonds (see Retire at Age 90).

Historically there are very few periods in which stock dividend yields have exceeded bond yields (2.1% S&P yield vs. 1.8% 10-Year Treasury yield). As I showed in my Dividend Floodgates article, for roughly 50 years (1960 – 2010), the yield on the 10-Year Treasury Notes have exceeded the dividend yield on stocks (S&P 500) – that longstanding trend does not hold today.

In the face of the competitive stock market, several trends are contributing to the upward trajectory in dividend payments (see chart below).

#1.) Corporate profits (ex-Energy) are growing and at/near record levels. Earnings are critical in providing fertile ground for dividend growth.

#2.) Demographics, plain and simple. As 76 million Baby Boomers transition into retirement, their income needs escalate. These shareholders whine and complain to corporate executives to share the spoils and increase dividends.

#3.) Low interest rates and disinflation are shrinking the available pool of income generating assets. As I pointed out above, when trillions of dollars are getting thrown into negative yielding investments, many investors are flocking to alternative income-generating assets…like dividend paying stocks.

Source: FactSet

Source: FactSet

The Power of Dividends (Case Studies)

Most people don’t realize it, but over the last 100 years, dividends have accounted for approximately 40% of stocks’ total return as measured by the S&P 500. In other words, using history as a guide, if you initially invested in a stock XYZ at $100 that appreciated in value to $160 (+60%) 10 years later, that stock on average would have supplied an incremental $40 in dividends (40%) over that period, creating a total return of 100%.

Rather than using a hypothetical example, here are a few stock specific illustrations that highlight the amazing power of compounding dividend growth rates. Here are two “Dividend Aristocrats” (stocks that have increased dividends for at least 25 consecutive years):

  • PepsiCo Inc (PEP): PepsiCo has increased its dividend for an astonishing 44 consecutive years. Today, the dividend yield is 2.9% based on the current share price. But had you purchased the stock in June 1972 for $1.60 per share (split-adjusted), you would currently be earning a +188% dividend yield ($3.01 dividend / $1.60 purchase price), which doesn’t even account for the +6,460% increase in the share price ($104.96 per share today from $1.60 in 1972). Over that 44 year period, the split-adjusted dividend has increased from about $0.02 per share to an annualized $3.01 dividend per share today, which equates to a mind-blowing +16,153% increase. On top of the $103 price appreciation, assuming a conservative 5% dividend reinvestment rate, my estimates show investors would have received more than $60 in reinvested dividends, making the total return that much more gargantuan.

 

  • Emerson Electric Co (EMR): Emerson Electric too has had an even more incredible streak of dividend increases, which has now extended for 59 consecutive years. Emerson currently yields a respectable 3.6% rate, but if you purchased the stock in June 1972 for $3.73 per share (split-adjusted), you would currently be earning a +51% dividend yield ($1.92 dividend / $3.73 purchase price), which doesn’t even consider the +1,423% increase in the share price ($53.31 per share today from $3.73 in 1972).

There is never a shortage of FUD (Fear, Uncertainty, and Doubt), which has kept stock prices flat as a pancake over the last couple of years, but market leading franchise companies with stable/increasing dividends do not disappear during challenging times. Record profits (ex-energy), demographics, and a scarcity of income-generating investment alternatives are all contributing factors to the increased appetite for dividends. If you want to sweeten those flat pancakes, do yourself a favor and pour some quality dividend syrup over your investment portfolio.

investment-questions-border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) and PEP, but at the time of publishing had no direct position in EMR or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

 

May 7, 2016 at 3:45 pm Leave a comment

Want to Retire at Age 90?

sleep sit 90

Do you love working 40-50+ hour weeks? Do you want to be a Wal-Mart (WMT) greeter after you get laid off from your longstanding corporate job?  Do you love relying on underfunded government entitlements that you hope won’t be insolvent 10, 20, or 30 years from now? Are you banking on winning the lottery to fund your retirement? Do you enjoy eating cat food?

If you answered “Yes” to one or all of these questions, then do I have a sure-fire investment program for you that will make your dreams of retiring at age 90 a reality! Just follow these three simple rules:

  • Buy Low Yielding, Long-Term Bonds: There are approximately $7 trillion in negative yielding government bonds outstanding (see chart below), which as you may understand means investors are paying to give someone else money – insanity. Bank of America recently completed a study showing about two-thirds of the $26 trillion government bond market was yielding less than 1%. Not only are investors opening themselves up to interest rate risk and credit risk, if they sell before maturity, but they are also susceptible to the evil forces of inflation, which will destroy the paltry yield. If you don’t like this strategy of investing near 0% securities, getting a match and gasoline to burn your money has about the same effect.

negative bonds apr 16

Source: Financial Times

  • Speculate on the Timing of Future Fed Rate Hikes/Cuts: When the economy is improving, talking heads and so-called pundits try to guess the precise timing of the next rate hike. When the economy is deteriorating, aimless speculation swirls around the timing of interest rate cuts. Unfortunately, the smartest economists, strategists, and media mavens have no consistent predicting abilities. For example, in 1998 Nobel Prize winning economists Robert Merton and Myron Scholes toppled Long Term Capital Management. Similarly, in 1996 Federal Reserve Chairman Alan Greenspan noted the presence of “irrational exuberance” in the stock market when the NASDAQ was trading at 1,350. The tech bubble eventually burst, but not before the NASDAQ tripled to over 5,000. More recently, during 2005-2007, Fed Chairman Ben Bernanke whiffed on the housing bubble – he repeatedly denied the existence of a housing problem until it was too late. These examples, and many others show that if the smartest financial minds in the room (or planet) miserably fail at predicting the direction of financial markets, then you too should not attempt this speculative feat.
  • Trade on Rumors, Headlines & Opinions: Wall Street analysts, proprietary software with squiggly lines, and your hot shot day-trader neighbor (see Thank You Volatility) all promise the Holy Grail of outsized financial returns, but regrettably there is no easy path to consistent, long-term outperformance. The recipe for success requires patience, discipline, and the emotional wherewithal to filter out the endless streams of financial noise. Continually chasing or reacting to opinions, headlines, or guaranteed software trading programs will only earn you taxes, transaction costs, bid-ask spread costs, impact costs, high frequency trading manipulation and underperformance.

Saving for your future is no easy task, but there are plenty of easy ways to destroy your savings. If you want to retire at age 90, just follow my three simple rules.

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in WMT or any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

April 16, 2016 at 11:00 am 1 comment

Can You Retire? Getting to Your Number

Nest Egg Cage

What’s “your number?” The catchy phrase has been tried on 30-second television commercials before, but the fact remains, most Americans have no clue how much they need to save for retirement. The ever-shifting and imprecise variables needed to compute the size of your needed nest egg can seem overwhelming: lifespan; career span; inflation; college tuition; healthcare expenses; rising insurance costs; social security; employer benefits; inheritance; child support; parental support; etc. The list goes on and with near-zero interest rates, and stock prices at record highs, the retirement challenge has only gotten riskier and more difficult.

I understand this task may not be easy and could eat into your House of Cards viewing, Candy Crush playing, or football watching. However, if you can spend two weeks planning a family vacation, you certainly can afford devoting a few hours to scribbling down some numbers as it relates to the lifeblood of your financial future. The project is definitely doable.

Here are some key steps to finding “your number.” If you’re not single, then calculate the figures for your household:

1). Calculate Your Budget: Where to start? A good place to begin is with is a boring budget (or your monthly expenses). The budget does not need to be down to the penny, but you should be able to estimate your monthly spend with the help of your bank and credit card statements. Make sure to include estimates for periodic unforeseen potential expenses like annual auto repairs, home repairs, or emergency hospital visits. Once you determine your monthly spend, extrapolating your annual spend shouldn’t be too difficult.

2). Compute Your Income: Your sources of income should be fairly straightforward. For most people this includes your salary and potential bonus. Some people will also generate income from investments, a business, and/or real estate. Before getting too excited about all the income you are raking in, don’t forget to subtract out taxes collected by Uncle Sam, and include a possible scenario of rising tax rates during your working years. Obviously, the economy can also have a positive or negative impact on your income projections, nevertheless, if you conservatively plan for some potential future setbacks, you will be in a much better position in forecasting the amount of savings needed to reach “your number.”

3). Planned Retirement Date: The date you pick may or may not be realistic, but by choosing a specific date, you can now evaluate how much savings will be necessary to reach your required nest egg number. The difference between your annual income (#2) and annual budget (#1) is your annual savings, which you can multiply by the number of years you plan to work until retirement. For example, assume you wanted to retire 15 years from now and were able to save/invest $20,000 each year while earning a 6% annualized return. By the year 2030 these savings would equate to about $465,000 and could be added to any other savings and other retirement income (pension, 401(k), Social Security, inheritance, etc.) to meet your retirement needs.

4). Life Expectancy: After you have determined when you want to retire, now comes the tricky part. How long are you going to live? Assuming you are currently healthy, you can use actuarial tables for life expectancy. According to a new report on American mortality from the Centers for Disease Control and Prevention’s National Center for Health Statistics, the average life expectancy is 81 for females and 76 for males (see graphic below). The estimates are a little rosier, if you have lived to age 65, in which case females are expected to live past 85 years old and males to about 83 years. You can adjust these figures higher or lower based on personal information and family history, but if you consider yourself “average,” then you better plan to have at least 15 years of fire power in your savings nest egg (see example at bottom of article).

Life Expectancy

Source: USA Today

Empty Retirement Wallets & Purses

The harsh realities are Americans are not saving enough. It‘s true, you can survive off a smaller nest egg, if you plan to live off of cat food and vacation in Tijuana, but most Americans and retirees have become accustomed to a higher standard of living. A New York Times article highlighted that 75% percent of Americans nearing retirement age had less than $30,000 in their retirement accounts – that’s not going to buy you that winter home on Maui or leave enough to cover your golf dues at the local country club.

Control the things that make a difference.

  • Save. Pay yourself first by tucking money away each month. If you haven’t established an IRA (Individual Retirement Account) or savings account, make sure you contribute to your employer’s matching 401(k) plan to the fullest extent possible, if available. This is free money your employer is offering you and by not participation you are shooting yourself in the foot.
  • Spend prudently. Review your monthly / annual budgets and determine where there is room to cut expenses. Every budget has fat in it, so it’s just a matter of cutting excessive and less important items, without sacrificing dramatic changes to your standard of living.
  • Manage your career. Invest in yourself with education, apply for that promotion, or look for other employment alternatives if you are unhappy or not being paid your proper value.
  • Push Retirement Out: If you are healthy and enjoy your work, extending your working years can have profoundly positive benefits to your retirement. Not only will you have more money saved up for retirement, but you will also receive higher Social Security benefits by delaying retirement (see Social Security benefit estimator).

The bottom-line is if you are like most working Americans, you will need to save more and invest more prudently (e.g., in a low-cost, tax-efficient manner like strategies offered by Sidoxia).

Use Your Thumb to Get Started

Rules of thumb are never perfect, but are not a bad place to start before fine-tuning your estimates. Some retirement pundits begin by using an 80% “income replacement ratio” rule as a retirement guide. In other words, you should not need 100% of your pre-retirement income during retirement because a number of your major living expenses should be reduced. For example, during retirement your tax expenses should decrease (because you are not working); your mortgage payment should be lower (i.e., house is paid off); your kids should be independent and off the family payroll; and you may be in the position to downsize your home (e.g., empty-nesters often decide to move to a lower square footage residence).

Another rule of thumb is the “15x Rule,” which says you will need an investment account equivalent to at least 15-times your pre-retirement income. Therefore, if your after-tax income is $100,000 before retirement and you need to replace $80,000 during retirement (80% replacement ratio), this means you actually only need to replace about $60,000 per year. We arrive at the lower $60,000 figure by further assuming the $80,000 can be reduced by about $20,000 flowing in annually from Social Security. Through the mighty powers of division, we can then apply the 4% Sustainable Withdrawal Rate rule (SWR) to reverse engineer the estimate of “our number.” In this example, our ultimate nest egg needed is $1,500,000 (equal to $60,000 / 4% or $60,000 x 25 years), which is estimated to last for 25 years of retirement. As you can see, there are quite a few assumptions baked into this scenario, including a retirement investment portfolio that beats inflation by 4%, but nevertheless this line of thinking creates an understandable framework to operate under.

Of course, for all the non-math Investing Caffeine readers, life could have been made easier by simply multiplying the $100,000 pre-retirement income by 15x to arrive at our $1.5 million nest egg. More elegant, but less fun for this nerdy math author.

We’ve covered a lot of ground, but I’m absolutely confident if you have read this far, you can definitely come up with “your number.” If this all seems too overwhelming, there is no need to worry, just find an experienced investment advisor or financial planner…I’m sure I could help you find one 🙂 .

Investment Questions Border

 

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

February 22, 2015 at 10:13 am Leave a comment

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