Good News: Housing’s Down, Market’s Off, Oil’s Up

This article was originally at The New York Times. A REALLY good article, and I think I should read some more by David Leonhardt!

Until yesterday’s rally on Wall Street, the news on the business pages has sounded pretty grim lately. Stocks are still down 6 percent from their peak this year, and oil is near a record high. The dollar, incredibly, is worth only 96 Canadian cents. And house prices will be falling for a long time to come.

So in an effort to cheer everyone up before Thanksgiving, this column is going to focus today on some good news. Here it is:

Stocks are still down 6 percent from their peak, and oil is near a record high. The dollar, incredibly, is worth only 96 Canadian cents. And house prices will be falling for a long time to come.

Seriously.

As long as the financial system doesn’t have a major meltdown, none of these developments will turn out to be as bad as you think. Some of them are downright welcome.

Too often, we think about the economy without nuance. We treat it as a local sports team that is either winning or losing, up or down. We’re always supposed to be rooting for stocks and homes to become more valuable and for oil and overseas vacations to become more affordable.

But that’s not quite right. There are real downsides to an economy full of expensive assets and inexpensive resources. There are also a lot of people who are better off because of the recent turmoil. You may well be one of them.

The best place to start is the stock market, because it’s the most counterintuitive. The notion that anybody but a sophisticated Wall Street short-seller should be hoping that stocks fall sounds, frankly, bizarre. But it’s true: a huge chunk of the population — including most people under the age of 50 — has benefited from this year’s market drop.

My favorite explanation of this idea is still a column that Peter Coy of Business Week wrote in 1999, during the dot-com mania. He said he was thinking of forming a club called Stockholders Who Wish the Stock Market Would Stop Going Up So Fast. It would be meant for people who were at least two decades from retirement and who weren’t active investors. They instead owned 401(k)’s and individual retirement accounts.

They were, in other words, typical. Only 21 percent of families owned stocks outright in 2004, the most recent year for which the Federal Reserve has released data. Almost 50 percent of families owned a retirement account, by contrast. The typical retirement account (median value of $35,200) was also a lot bigger than the typical stock holding ($15,000).

These long-term, buy-and-hold investors, as Mr. Coy pointed out, are actually hurt by a market that rises too quickly. When stocks get so expensive, returns over the next few decades are usually mediocre. And only a small chunk of a typical person’s investments will have been made before the run-up.

It would be much better — tens or even hundreds of thousands of dollars better — if the market rose more steadily and the bulk of the 401(k) contributions could then rise along with it. Buy low and sell high, right?

A true crash would take care of this problem. But the market’s big fall from 2000 through 2002 doesn’t fit the definition, because it didn’t come close to erasing the effects of the bubble. Stocks are still more expensive today, relative to corporate earnings over the previous decade, than at any time besides the late 1920s and the dot-com boom.

So unless you’re about to retire or sell stock for some other reason, you shouldn’t get too upset about the market’s fall. As long as you are planning on more buying than selling over the next decade or two, a market correction is your friend.

It’s also likely to improve the nation’s long-term economic prospects. The bull market of 1990s, combined with the housing boom, fooled many people into thinking they didn’t need to save money. They evidently figured that their existing assets would continue to soar in value and could serve as their nest egg. Last year, Americans saved only 0.4 percent of their disposable income, down from 7 percent in 1990.

This decline in personal savings has set the stage for all kinds of problems. The biggest may be that less savings, by definition, equals a smaller pool of capital available for overall investment. Less investment — be it in medical technology or software — will mean slower economic growth and lower standards of living down the road.

Fortunately, the savings rate has begun to climb, especially since the housing market turned. So far this year, Americans have saved 0.8 percent of their income, and the number should continue to rise. As Joe Davis, an economist at the Vanguard Group, the investment company, said, “This will be a slow-moving and ongoing process, but I think a welcome one.”

The other ostensible pieces of bad news have their own silver linings. As the cost of gas has soared to $3 a gallon, from an inflation-adjusted low of about $1.20 in 1999, Americans have finally started buying more efficient cars and trucks. For the first time since the mid-1980s, the fuel economy of new vehicles has increased for two straight years, the Environment Protection Agency recently reported. This will slow global warming and make life a little less comfortable for oil-rich autocrats (though not nearly as much as a carbon tax would).

The fall of the dollar, meanwhile, may be precisely what the world economy needs right now, as James Paulsen of Wells Capital Management points out. It provides a lift to the sagging American economy, by allowing companies in the United States to export more, while encouraging consumers to spend less on imports and save more.

It’s not even clear that falling house prices are such a bad thing. They don’t really matter for families who aren’t planning to move. They don’t even matter much for families moving to a similar house in a similar market. The house they are buying will have gotten cheaper, too.

Families hoping to buy their first house, on the other hand, clearly benefit. (Easy for me to say, though. As my boss pointed out when he heard about this column, I’m a renter and still decades from retirement.)

There is no question that people have gotten hurt this year. Many families have struggled to pay their bills. Others have had to delay retirement, and thousands have lost their homes to foreclosure. In an ideal world, the imbalances in the economy would never have become so extreme.

But once they did, what, really, was the alternative to the recent turmoil? An ever-higher stock market, ever-cheaper oil or an ever more insane mortgage market wouldn’t have solved the problems of the American economy. It would have made them worse.

Your First Million Is the Toughest

The old saying that the rich get richer is very true. As long as you manage your money well, it's far easier to make money if you've already got some cash socked away than it is to start from scratch. The reason is simple: compounding.

When you've already got money working on your behalf, each percentage point of return simply adds that many more dollars to your account balances. After all, if a stock you own goes up in value, it's far better to own 10,000 shares than it is to own 100.

Start small
Fortunately, anyone with even a little cash to invest can take advantage of the power of compounding. It just takes a little while longer for the rest of us to get to the point where it can really work its magic.

To show how it works, here are a few charts that showcase how many years it takes to reach each $1 million threshold given that you regularly invest and earn a decent rate of return.

To go from $0 to $1 million, in years:
Monthly
Contribution 8% 9% 10% 11%
$100 52.9 48.3 44.5 41.4
$250 41.6 38.3 35.5 33.1
$500 33.4 30.9 28.8 27.0
$1,000 25.5 23.9 22.4 21.2
$1,291.66 22.8 21.4 20.2 19.1

To go from $1 million to $2 million, in years:
Monthly
Contribution 8% 9% 10% 11%
$100 8.6 7.7 6.9 6.3
$250 8.5 7.5 6.8 6.2
$500 8.2 7.4 6.7 6.1
$1,000 7.8 7.1 6.4 5.9
$1,291.66 7.6 6.9 6.3 5.7

To go from $2 million to $3 million, in years:
Monthly
Contribution 8% 9% 10% 11%
$100 5.1 4.5 4.1 3.7
$250 5.0 4.5 4.0 3.7
$500 4.9 4.4 4.0 3.6
$1,000 4.8 4.3 3.9 3.5
$1,291.66 4.7 4.2 3.8 3.5

That $1,291.66 number didn't come out of thin air -- it represents the current maximum monthly contributions available in a 401(k) or 403(b) account for most people. What these charts mean is that you can go from $0 to $3 million in as few as 28 years with a little bit of determination to take advantage of the opportunities you have available. Most of that time is spent getting to that first million. Once you hit that milestone, compounding really takes over to help you reach your ultimate goal.

Get from here to there
The most difficult part is getting started. After all, if you're not already saving money now, going from $0 to nearly $1,300 a month may seem an impossible task.

For instance, any money you contribute to your traditional 401(k) or 403(b) plan to help you earn your millions will most likely come with an immediate tax reduction. Thanks to that tax break, it's as if Uncle Sam will kick in a significant chunk of that cash on your behalf, reducing the total out-of-pocket cost of your contribution. For folks in the 25% tax bracket, it works out to an out-of-pocket cost of only $75 per $100 of contributions -- a significant savings.

You really can get rich
Once you get started investing, though, the rest is largely a matter of owning solid companies and letting compounding work its magic.

A Challenge for Your Retirement Plan

(The original version of this article is located here.)

Summer is over, the kids are in school, and the rest of us are back at the office.

With only a few pages left on the calendar, September is the perfect time to make sure you're on track to fully fund your retirement plan at work. Maxing it out should be your goal.

A Challenge to the Underfunded

The truth is, people simply aren't saving enough right now to support themselves in retirement. In fact, last month the Center for Retirement Research showed that almost 45 percent of American households will fall short of meeting their expected retirement income needs.

What's worse is that the 2007 Retirement Confidence Survey from the Employment Benefit Research Institute (EBRI) reports more than half of Americans have less than $25,000 in their retirement accounts.

With these shocking statistics in mind, I challenge you to change your future in a big way beginning this month. Saving a bundle for retirement really doesn't have to be that difficult. All you have to do is make the decision to do something most people don't do -- pay yourself first.

Fortunately, hundreds of thousands of companies in the United States offer employees the perfect way to pay themselves first automatically through an employer-sponsored 401(k) plan.

Slow and Steady Wins the Race

Other recent news about 401(k) plans is more encouraging. Just last week, EBRI and the Investment Company Institute (ICI) released the results of their latest study on 401(k) participation.

Employees who contributed to their 401(k) plans on a regular, long-term basis with the same employer between 1999 and 2006 saw their account balances grow from $67,760 to $121,202 on average. That's an annual compounded growth rate of almost 9 percent.

In a recent MarketWatch article, Jack VanDerhei, a Temple University professor and EBRI fellow, said, "If you focus on consistent participants, you can see how people who stay in the system tend to build significant account balances. With the discipline of saving little by little through 401(k) plans, workers can successfully build a nest egg for retirement."

How Are You Doing?

If you're under age 50, the IRS limit for pretax 401(k) contributions is $15,500 for this year. If you're over 50, there's a $5,000 catch-up provision that increases that limit to $20,500.

Of course, you'll need to know what your employer's maximum allowable contribution for the plan is as well. It could be lower -- some plans won't allow you to save more than 15 percent of your gross income, and certain "highly compensated" employees may be limited even more. So be sure to check with your HR department.

In any case, your goal should be to max out your plan. If you're currently on track to do so, congratulations -- you're accomplishing something the vast majority of Americans can't or won't do. If you're not on track, follow these simple steps to finish strong in 2007 and be on your way to finishing rich when you retire:

1. Save at least one hour's worth of your daily income.

Even if you've been contributing consistently to your savings plan, you may not be on target to max it out. Most people who sign up for 401(k) plans contribute around 4 percent of their income. Most people also retire poor, dependent on Social Security or family to survive. So you should actually be contributing a lot more.

In fact, at the very least you should be contributing one hour's worth of income each day; on a percentage basis, that's about 12-1/2 percent of your gross income. If you feel you're getting a late start with your saving, aim to contribute two hour's worth of income per day, or 25 percent of your gross pay.

I realize this is ambitious, but it's your future we're discussing. Keep in mind that most of us tend to underestimate how much we think we can manage in payroll deductions. As a result, we wind up low-balling ourselves -- and our future.

2. Determine how much money you'll need.

The traditional rule of thumb for retirement savings is that you'll need to replace at least 70 percent of your current income in order to live comfortably after you retire. In my experience as a financial advisor for almost a decade, however, I've found that most people need 100 percent of their pre-retirement income or even more due to their desire to enjoy their golden years.

So my recommendation is to create a plan that replaces 100 percent of your current income, unless you truly plan to live on less. And the only way you'll be able to do that is to save more now.

3. Increase your contributions today.

Most employees are paid twice a month. So if you have six pay periods left in 2007, calculate how much you'll need to increase your contributions from now until the end of the year to meet your plan's maximum. Doing so now could amount to literally hundreds of thousands of dollars over the long term.

If you're skeptical about being able to afford the temporary increase, determine how you can turbo charge your Latte Factor in order to make this happen. Dig deep to come up with an amount that will bring you as close as possible to maxing out your plan.

You can find the money, and you'll be excited at how fast it will pile up -- especially if you're one of the millions of Americans whose employers contribute matching funds to their retirement accounts.

Once you've made the necessary calculations, contact your HR department to make the change to your plan. Don't put this off -- delaying your savings increase even another week may require you to bump up your contributions even more in the future to reach your goal. Do it today.

Are You a Better Investor?

Over the past 35 years, investing has become simple, cheap and convenient. Now it's a snap to build your wealth - or destroy it.

(This was originally published on Money.CNN.com. Feel free to read the original article here.)

It is Oct. 26, 1972. You turn on your transistor radio and the newscaster reads the closing-bell report from the New York Stock Exchange: The Dow Jones industrial average - led by stocks like Bethlehem Steel, International Harvester, Johns-Manville and Union Carbide - closed at 950.56 on an extremely heavy volume of 20.8 million shares.

The next morning you drive over to see George, your stockbroker. He recommends the Fidelity Trend Fund, which charges a sales commission, or load, of only 8.5 percent; most of the 400 or so load funds in existence charge 8.75 percent. Whenever you buy and sell a stock, George's commission will average about 1.3 percent of the transaction. But so would any other broker's.

In 1972 "the investing world was much easier to comprehend," says Joel Seligman, a financial historian and president of the University of Rochester. You knew your broker, and he sold stocks, not funds of hedge funds. Your bank took deposits, not mutual-fund commissions. Your insurance agent didn't come at you swinging a variable annuity like a meat ax. During a typical week in 1972, the total of all trades on the New York Stock Exchange was less than the trading volume of Microsoft shares on a typical day in 2007.

But the investing world of 1972 was also low in choice, high in cost and short on convenience and information. Nasdaq and money-market funds were less than a year old. There was no such thing as a discount broker, an index fund or a municipal bond fund, not to mention an IRA or a 401(k).

If you wanted a no-load fund, "first you had to find it," recalls fund expert Michael Lipper of Lipper Advisory Services. That meant watching for an ad, making a toll call, waiting for the prospectus, then mailing in the check - a process that could take weeks.

And 7 percent of all stock trades in 1972 "failed to deliver," meaning that the paper certificates for the shares did not change hands within five days, potentially voiding the transaction. To check on your investments, you waited for tomorrow's newspaper, or next week's - or the maiden issue of Money Magazine that October, which many charter subscribers signed up for as the only convenient way to track their mutual funds.

2007: A simpler time

Fast-forward to 2007. Your stockbroker and your banker are a swirl of electrons. Adjusted for inflation, the average commission on a retail stock trade comes to about 3 percent of what it cost in 1972. You can choose from among more than 8,000 mutual funds and over 500 exchange-traded funds, or ETFs. You can buy a stock without getting out of your pajamas, and you've never had a trade fail to deliver. And you can watch the prices of your stocks change in real time from your office computer or your iPhone.

Less cost, more choice and greater convenience: Investing has never been simpler. The birth of the index fund in 1976 enabled anybody with a couple thousand dollars to own every major U.S. stock for less than 0.2 percent in annual expenses. Critics scoffed when Vanguard rolled out the first index fund - "The name of the game is to be the best," said Fidelity chairman Ned Johnson, "and I can't conceive of investment managers not even trying to do better than average" - but year in and year out, indexing has beaten roughly three-quarters of all funds. The investor who minimizes costs maximizes returns. Period.

More recently, indexing has spread to other markets - bonds, foreign stocks, real estate - so you can minimize your costs and maximize your opportunities for profit by covering every base. Meanwhile, the electronic ease of dollar-cost averaging (automatically routing a fixed amount from your bank to your index funds once a month, every month) means you can be a committed investor without ever lifting a finger, second-guessing yourself or timing the market.

Combine the two strategies of indexing and dollar-cost averaging and you can hold the entire planet in a single portfolio on permanent autopilot. Nothing could be simpler.

One thing, however, hasn't changed over the past 35 years: human nature. In 1972, Benjamin Graham was finishing the revise of his seminal work, "The Intelligent Investor," in which he reminded readers that "the investor's chief obstacle - indeed, his worst enemy - is likely to be himself."

Then, as now, investors got in trouble by acting on impulse: either getting carried away by greed or being paralyzed by fear. And solutions like indexing have always seemed a little unsatisfying. You want investing to be more complex so you can feel special when you figure it out. And Wall Street wants it to be more complex so it can make more money off your attempts to figure it out.

Thus in the first seven months of 2007, more than 130 ETFs were created to invest in commodities, foreign currencies and single-industry sectors. You can bet on the Swedish krona, buy a basket of carbon-emissions trading credits or attempt to gain twice as much as mid-size stocks lose when they go down. There's now a fund for every conceivable need - and for plenty of inconceivable needs too.

Three rules to invest by

So how do you put all the innovations of the past 35 years to the best use for you, not Wall Street? Follow these rules:
* If there's a cheap way and an expensive way to solve an investing problem, stick with the cheap one. The typical hedge fund gouges clients but produces mediocre returns. As for mutual funds, a recent study found that each 1 percent increase in annual expenses reduces performance by 1.6 percent; managers may be taking on more risk to overcome the drag of higher costs.
* High returns and low risks don't come in the same package. As Milton Friedman said, "There's no such thing as a free lunch." Just this summer, bank-loan and long-short funds became the latest "low risk, high return" products to flame out.
* If you are presented with too many choices, you'll end up afraid to choose at all. Psychologists have shown that having to pick among dozens of options not only makes it much harder for us to make up our minds, but it also fills us with regret. No matter what we choose, we worry that another choice must have been better. So don't bother scouring among thousands of mutual funds and packing your 401(k) and other accounts with 78 of them. Instead, own a handful of low-cost, diversified index funds, add to them every month and do nothing else.

The bottom line

Despite Wall Street's unrelenting efforts to complicate it, investing can be simple. But it isn't easy. In 2007 as in 1972, building wealth is very much like losing weight. Eat less, exercise more: That's simple! But it's not easy, because the world is teeming with chocolate cake and Cheetos. Likewise, buy a diversified basket of index funds and do nothing: That's simple! But it's not easy because the world is full of TV touts, cold-calling brokers and (temporarily) hot funds.

Realize that what's good about the difference between 1972 and 2007 is also what's bad. Lower cost is great if you trade rarely and wisely, but not if it tempts you into buying and selling constantly. More choice is great if you add a few selected good things to your portfolio in moderation, but not if you end up with an unplanned jumble of investments. More convenience is great if you use it to make your life easier, but not if you take time away from family and friends to update your stock portfolio.

Lower cost, more choice and greater convenience are not means to an end, they are the end. Use them to achieve some other result, and you will fritter away the advantages the past 35 years have brought. You might as well be back in 1972, wearing plaid bell-bottoms and driving a Dodge Dart.

Working Longer: Boomers Staying On

Curse you, baby boomers! Will you never die?!

Joking...anyway, here's an interesting article...


As the baby boomers begin to ease into their 60s, most expect to delay retirement longer than their parents or grandparents.

That's good, because many can't afford to stop working anytime soon.

Two new reports portray aging boomers as better educated, with higher incomes and longer life expectancies than the generations that preceded them. They also have fewer children and are less likely to be married, leaving them with fewer options if they need help in their old age.

"That one child they had will be very valuable," said William Frey, a demographer at the Brookings Institution, a Washington think tank.

Frey is releasing a report Tuesday that says higher rates of divorce and separation could result in greater financial hardship for aging baby boomers. In 1980, about two-thirds of Americans age 55 to 64 lived in married-couple households. That percentage fell to less than 58 percent in 2005.

Americans had been retiring at ever-younger ages since the growth of private pensions and Social Security began more than 50 years ago. However, the retirement trend appears to be reversing.

In 1950, nearly half of men 65 and older were still in the labor force, according to the Census Bureau. That percentage bottomed out in the 1980s at less than 16 percent. It has since edged up to about 19 percent, and experts believe it will increase even more as the oldest baby boomers reach 65.

Women work in much larger numbers earlier in life, but among those 65 and older, their participation in the labor force has remained steady at about 10 percent since 1950.

There are about 78 million baby boomers, those born from 1946 to 1964. The oldest will turn 62 next year, the age at which they become eligible for Social Security benefits.

Some will continue working by choice -- a government survey shows that most U.S. workers nearing retirement age want to gradually reduce their workload rather than abruptly stop.

Others will have to stay on the job as fewer companies offer health insurance to retirees and an alarming number of private pensions fail.

William Zinke had plenty of resources to retire when he reached his early 60s. He didn't want to stop working but did want to get away from the hectic pace of New York, where he ran a human resources firm. So Zinke moved his firm to Boulder, Colo., where the pace is more relaxed. Seventeen years later, at age 80, he continues to put in full work days.

"I've had a very good life," Zinke said. "I'm proud of what I've accomplished, but I'm not done."

Zinke said he is fortunate to own his business and to be able to set his work schedule. He has formed a nonprofit organization, the Center for Productive Longevity, that is working to encourage other employers to help older workers with flexible schedules and other accommodations.

"We need to change the way we think about retirement," Zinke said.

There are more than 37 million Americans 65 and older, a number that is expected to nearly double by 2030, according to the Census Bureau.

"I think there will be significant accommodations and incentives to get people to stay and work longer, and not lose that human capital," said Richard Suzman of the National Institute on Aging, a government research agency.

The agency is releasing a compilation of data Tuesday from the national Health and Retirement Study, an ongoing survey of older people by researchers at the University of Michigan.

The data paint a picture of aging baby boomers facing longer, more active lives, coupled with rising costs for health care and other services.

"People are living longer, and the extra years of life, which I think have been one of the crowning achievements of the last century, have to be financed somehow," Suzman said.

New Analysis Sees Men Failing To Reach Income Levels Of Previous Generation

(This is from the Pew Charitable Trusts)


American men have less income than their fathers’ generation did at the same age, according to a new analysis released today by the Economic Mobility Project, an initiative of The Pew Charitable Trusts. Comprised of a Principals’ Group of experts from The American Enterprise Institute, The Brookings Institution, The Heritage Foundation, and The Urban Institute, the project seeks to investigate the health and status of economic mobility in America.

Today’s report, Economic Mobility: Is the American Dream Alive and Well?, was co-written by John E. Morton, managing director of Pew’s Economic Policy Initiatives and director of the Economic Mobility Project and Isabel V. Sawhill, Senior Fellow at the Brookings Institution and a Principal of the Economic Mobility Project. It includes analysis led by a research team at Brookings and outlines what economic mobility is, why it matters in today’s economy, and why it is important for policy makers to focus on mobility as part of the ongoing national economic debate.

According to the report, men who were in their thirties in 1974 had median incomes of about $40,000, while men of the same age in 2004 had median incomes of about $35,000 (adjusted for inflation). Thus, as a group, income for this generation of men is, on average, 12 percent lower than those of their fathers’ generation. While factors other than cash income also contribute to economic mobility, these data challenge the two-century-old presumption that each successive generation will be better off than the one that came before. The findings rely on new analysis of U.S. Census Bureau data.

In addition to the Principals’ Group, the project is also guided by a nonpartisan Advisory Board of nationally recognized economists, social scientists and policy experts. The initiative was launched in February and comes at a period of intense scrutiny of such issues as executive pay, the minimum wage and the quality of America’s public school system – the latter being of particular concern because education is widely agreed to be a key driver of mobility.

The expectation that each generation will do better than their parents has become a fundamental part of what we call ‘The American Dream’, but this new analysis suggests this bedrock belief may be shifting under our feet,” said Morton. “Income is not the only factor in overall economic mobility, but it is clearly a key component and today’s data suggest that during a thirty-year period of economic expansion, a rising tide did not lift all boats.”

"In modern America, mobility is increasingly a family enterprise,” said Sawhill. “While male incomes have decreased from that of the generation that came before, family incomes have risen slightly because more women have gone to work, adding a second earner to the family.”

The broader mobility story is complex with data challenges and many important questions left to be answered. Over the next year and a half, the Economic Mobility Project and its partners will research, analyze and present data to the broader public about the status of economic mobility in the United States. Future releases will include; a comprehensive fact book containing key data and trends about mobility, featuring chapters on race, gender, immigration and cross-national comparisons; a report on the leading factors or indicators behind economic mobility; and an analysis of shifting federal investments in education and other policies that may impact mobility.

Ignore Most Financial News

I just read an interesting article over at SmartMoney.com called Traders Profit Best by Ignoring Most Financial News.

The focus was on how there are thousands of different sources telling you the latest financial news and how you should react to it. The result is a confusing mess.

I wholeheartedly agree. This is why I have not and will not write about particular stocks or the market in general. It's a losers game, people. It is also why I dislike certain magazines that play that game (see What are some good magazines for personal finance?).

Feel free to go beyond the basics (401(k), IRA, etc) but acting because a talking head on TV told you to do so is a not the smartest move, especially when someone on another channel is saying something different.

What Will Retirement Be Like for Gens X and Y?

If you're between your 20s and 40s today, you'll likely live to be 100.

This probably conjures up happy thoughts of dancing at your great-granddaughter's wedding or going for a light jog in the park at age 85. But there's a dark side to this scenario: How does one fund a retirement that could span 40 or more years? Most talk today centers on baby boomers and their preparedness for retirement. But what about the folks who come after the baby boomers: Generation X, born between 1964 and 1980, and Generation Y, born between 1980 and 2000?

Should the Social Security and Medicare systems remain unchanged, Gens X and Y will have the baby boomers to thank when there's nothing left in those coffers for themselves. On the flip side, thanks to medical advances and technological innovations, these generations will likely have a more active and healthy retirement than even the generation before them. Living to 100 might mean they'll one day sleep in beds that track their vitals or have robots that do their "dirty" work as they pursue jobs they truly enjoy.

To find out what the future might look like, we turned to so-called futurists. Futurists study today's social, demographic and technological trends and assess how they will affect folks in the future. Despite the hokey name, many are business professors or full-time consultants, advising large corporations on new trends and future developments. Here's what they told us retirement will look like for today's younger generations:

Challenging Starts
The youngest members of Gen X — today's college grads — are entering their adult lives with some trends working against them.

They kick off their financial lives more than $20,000 in debt. Despite soaring college costs — a 28% and 38% increase for private and public colleges, respectively, over the past 10 years — average annual earnings have barely budged. (Men with a Bachelor's degree today earn only 5.45% more than they did 10 years ago; women: 10.4%.)

Meanwhile, pensions are disappearing. Today's young employees are expected to invest in 401(k)s, while carrying entitlement programs like Social Security that benefit their parents. "In addition to shouldering our own burden as a generation — which is heavier than that of our parents — we're expected to shoulder the burden of our parents as well," says Patrick Tucker, a Gen X-er and associate editor of The Futurist, the magazine of the World Future Society.

The 80-Year Career
Having a greater obligation to fund retirement on one's own — plus living longer — means people will pursue second, even third careers. "When you start to extend life that far, the concept of re-careering is going to become prominent," says Michael Zey, a business professor at Montclair State University and author of the book "Ageless Nation" (coming out this summer). "The college-training-career-retirement model is going to go away and you'll start to see training, career, maybe a hiatus and then retraining, and moving into a different career."

Glen Hiemstra, a futurist and author of the book "Turning the Future into Revenue," goes as far as suggesting a national policy on midlife sabbatical that gives people in their 50s several years off from work: a time "to figure out what to do with the rest of your life," he explains.

And Gio Van Remortel, a futurist with Social Technologies, predicts an increasing reliance on entrepreneurship — running a small business from your home, for example — while pursuing one's "regular" career. "Thirty years from now, people are going to be looking for creative ways to make money off the payroll scales," she says. Why? To support expensive lifestyles they'll have. Those little luxuries that Generations X and Y are growing up with will be hard to shake off, she says. This includes the "maintenance" of bodies that will live longer and longer: Plastic surgery isn't getting cheaper, and Van Remortel predicts it'll be as common in the future as facial cream is today.

Future "retirees" will head back to school — not just to keep up with new skills and technological advancements, but to pursue their passions as well, says Dan Vito, a senior vice president at Age Wave, a consulting firm that specializes in aging and retirement issues. That could be learning Italian in your 60s or taking a paragliding class, but it could also be going back to school to refresh your computer skills so you can start your own business. "If you're a Gen X-er or Y-er, you should plan on living a long time and creating a retirement plan that's not just financially-based, but also passion-based," Vito says.

A Technological Boost
If all this seems rather gloomy, it's worth noting that technological advances will likely offer amazing perks that make the whole living longer and working harder proposition more appetizing. Our futurists point to two areas:

Cheaper Health Care Through Smart Homes
Information technology will move out of computers and PDAs and into our bedrooms, bathrooms and kitchens. By 2020, our beds will read our heart rate and blood pressure as we wake up, predicts Tucker. The bathroom mirror will tell us how the nutrient levels in our bodies have changed over the past month. Biosensors embedded in our clothes will monitor our caloric intake. Sound far-fetched? Take a look1 at Microsoft Home, the software company's prototype of a smart home2 that could conceivably be reality within years. The good news? All this could not only help us live longer, it could help lower health-care costs as individuals take better care of themselves, Tucker says.

Better Work Life Through Artificial Intelligence
To many, artificial intelligence may sound like "something that involves humanoid machines that carry guns and possibly run for governor of California," Tucker says. But really, it's no joke. "Computer intelligence is going to vastly exceed human intelligence by 2040," he says. "That means, conceivably, that computers will be able to interact with humans in a way that's indistinguishable from a human." In other words, robots will be able to do manual labor or tasks we don't enjoy, whereas humans can focus on the fun stuff. "That points to a very bright future for young people today," Tucker says.

The Gen X Guide To Stretching Your Dollar

Gen Xers get a bad rap. They’re often portrayed as slackers and runaway spenders who don’t know how to work or save.

Not so, says new research sponsored by Charles Schwab Corp., one of several financial services companies trying to draw a bead on this age 27-to-42 demographic. Today’s 30-somethings are hard workers who have more bills than cash. They also have a healthy distrust of the very financial services industry that wants their cash. Perhaps for good reason.

“They aren’t being well served,” says Jonathan Craig, who’s heading up Schwab’s effort to capture Gen X clients.

The new 30-somethings do face some challenges that others didn’t. They’re making less than their parents were at the same age. According to U.S. Census estimates, the median income for men between 25 and 34 in 2005 was $31,161. In 1975, adjusted for inflation, it was $35,296. The comparable data for female workers was $22,815 in 2005 and $16,247 in 1975.

And, they have much bigger bills. It’s not just the school loans, it’s the generally bigger lifestyle that hurts their bottom line. Think about the computer, cell phone, broadband service and more that are a necessary part of life now.

Gen Xers have some unique strengths, too. They are technologically savvy and unafraid to put their finances online or talk about their financial problems and solutions, says Marc Hedlund of Wesabe (http://www.wesabe.com), a social networking/financial planning Web site that is attracting users in their 20s and 30s. And they have that vaunted cynicism to keep them from trusting strangers -- or employers -- with their money too easily. Most are wise to not count on retirement benefits that are loosely promised to be there decades into the future.

So, too little money, too many expenses, nobody to trust.

What’s a savvy 30-something to do with that scenario? Here are some tips.

-- Watch your fees. Hedlund contends that huge fees are a trap for this generation: Bank overdraft fees, which can pile up on debit card exchanges, as well as credit card late and over-limit fees. “These people blame themselves,” assuming they deserve the fees they rack up because they’ve behaved badly. But those myriad fees have been ratcheting up faster than bad financial behavior has.

Make sure you keep a cushion in your checking account. Make an automatic payment to your credit card every month so you’re never late, and complain if the fees seem to pile up too fast. Just by getting control of the fees you pay for financial services, you can put extra spending money in your pocket.

-- Create an electronics/communications budget and stick to it. Consider cable TV, movie rentals, cell phone service, Internet service, extra wireless fees, and downloaded music, movies and television shows all as one category of expense. Assign a reasonable number to it and apportion it according to your priorities.

-- Save for retirement, but don’t beat yourself up if you can’t do as much as you’d like. You’ve seen all the sales pitches aimed at how powerful it is to start saving early. All true. But it’s especially hard when you’re also trying to buy your first house, build your career (and your working wardrobe) and buy shoes for the kids. So make putting a maximum contribution into your 401(k) at the top of the list. Then look at adding a Roth IRA. Once you’ve had your Roth up and running for five years, you can break the emergency glass and get at some of the money for other non-retirement reasons if you need to.

-- Take advantage of all the attention. Those banks and brokers are just starting to roll out products aimed at your generation, and it’s going to get better. Schwab’s latest is a free, no-fee checking account paying 4.25 percent interest. That’s a nice deal, even if the rate doesn’t last. Bank of America has a new no-fee mortgage, and a policy of feeding customer savings accounts with change from their debit card transactions. Both require careful small-print reading to see if they make sense for you, but are worth looking at. Upromise (http://www.upromise.com) has a constellation of savings deals that can help you build up a college fund for junior painlessly.

-- Learn about financial products that can help with savings, as well as investing. If you’re trying to accumulate a downpayment for a new car, you don’t want to put all of that money into stocks, but you don’t want to leave it all in your checking account either. Learn how to use money market mutual funds, short-term bond funds, certificates of deposit, zero-interest credit card deals, and more.

-- Get more educated. Almost everyone thinks they are bad with money, but they’re not any worse than anybody else, observes Hedlund. This generation knows how to access information and use it for their own benefit. Choose a subject: credit cards, mutual funds, retirement savings, college loans or whatever, and start doing your homework -- via educational Internet sites or books, advice from experts and elders, or all of the above. By the time you’re 40, you’ll know enough to make you, if not rich, than at least put you comfortably ahead of where you are now.

Young Workers Not Saving Enough in Tax-Advantaged Plans

Several recent studies show that the vast majority of young workers are failing to sign up for myriad tax-advantaged accounts, potentially leaving hundreds if not thousands of dollars of benefits on the table.

While the vast majority of eligible baby boomers participate in their 401(k)’s, fewer than a third of workers under 25 are contributing to these employer-sponsored retirement plans. Even worse, only 4 percent of young workers are maxing out on their workplace retirement plans, according to a recent survey by the tax information service CCH.

Ironically, these accounts are more important to young workers than to older Americans. That’s because the majority of younger workers aren’t covered by an old-fashioned guaranteed pension. Moreover, every dollar that 20-somethings save will be more valuable over the course of their lives than the same dollar will be for older workers. That’s because young workers have more time to invest their savings and then let that money grow, tax deferred.

Sadly, there seems to be little urgency among young Americans to remedy this situation. For instance, even though there’s still time to put money into an individual retirement account for the 2006 tax year–you have until the April 17 filing deadline this year–a paltry 19 percent of young workers say they plan to fund a traditional or Roth IRA this year. In fact, the majority of 18-to-24-year-olds don’t even know whether they qualify to fund various types of IRAs, according to CCH.

The good news is, as workers get older, their financial awareness improves. But there’s some bad news, too: Even among 25-to-40-year-olds, only around 2 in 5 are contributing to a tax-advantaged IRA, according to a survey by the brokerage Charles Schwab.

Why? Many cite a lack of money or awareness to take advantage of these plans. Yet “with a few minor adjustments, younger investors can make the necessary changes to ensure they are doing everything they can to save for the future,” says Rande Spiegelman, vice president of financial planning for the Schwab Center for Investment Research.

Young workers aren’t simply turning their backs on tax-sheltered retirement plans. They’re failing to utilize other benefits as well. For example, only 10 percent of 18-to-24-year-olds are taking advantage of healthcare flexible spending accounts (FSAs) at work. These accounts allow workers to set aside money on a pretax basis from their paychecks to cover various out-of-pocket healthcare costs throughout the year.

By utilizing these FSAs, you are in essence getting the government to help you pay for an assortment of routine expenses, including copayments for doctor visits, eyeglasses, over-the-counter medicines, and other uninsured healthcare costs. Think of it this way: If you were to spend $100 in over-the-counter drugs using an FSA account, it might cost you only around $70, depending on your tax bracket. That’s because this account is funded with a portion of your paycheck before it’s taxed.

Unfortunately, only around 4 percent are contributing the maximum amount allowed into these tax-advantaged FSAs.

401(k) Participation Rates Among Those Eligible
Generation Y 31.3%
Generation X 63.1%
Baby Boomers 72.0%

Average 401(k) Contribution Rates
Generation Y 5.6%
Generation X 7.2%
Baby Boomers 8.3%

401(k) Account Balances
Average
Generation Y $3,200
Generation X $31,240
Baby Boomers $93,190

As of the time of writing (2007), Generation Y are 18-25, Generation X are 26-41, and Baby Boomers are 42-59.


So what should young workers do?

Make sure you’re aware of all your tax-related benefits. A simple way to do that is to visit your company’s human resources department to learn whether you’re eligible for a 401(k), FSA, or other tax-deferred savings vehicle. Also, visit the websites of major investment firms like Fidelity, Charles Schwab, or T. Rowe Price to see if you qualify for various types of individual retirement accounts.

If you’re getting a tax refund this year, use the money to fund an IRA. It’s tempting to spend tax refunds, especially since households often consider this “found money.” But in reality, it’s not found–you earned it throughout the year. So why not take your hard-earned tax refund and invest it for your future? Many financial services firms now make it extremely simple to open and fund an IRA. In fact, Schwab has created what it calls its “15-minute IRA,” which you can open online in minutes.

Take full advantage of your company-sponsored 401(k). In this age of do-it-yourself retirement savings, 401(k) plans have become a worker’s primary savings and investment vehicle. Yet the average generation Y worker (ages 18 to 25) has saved only around $3,200 in an account. The good news is, the government is gradually increasing the maximum amount that workers can contribute. This year, the federal limit for annual contributions to a 401(k) stands at $15,500, up from $15,000 last year.

Think about using a so-called target-date retirement fund in your 401(k). Many workers aren’t contributing to a 401(k) because they haven’t a clue how to invest money. But the majority of 401(k) plans now offer workers access to a so-called target-date fund. These are single-fund solutions that will make sure you’re always invested in the proper mix of stocks and bonds. These ready-made investment packages aren’t just easy to use–they’re also quite effective. According to a recent study by Hewitt Associates, workers who utilize these investment options–instead of managing their own collection of mutual funds–end up earning bigger returns than do-it-yourselfers.

At the very least, take full advantage of any company matching contributions. Many companies give workers a match on their retirement savings. Often, for every $1 you put in, your employer will kick in 50 cents up to around 3 to 6 percent of your salary deferrals. That’s an immediate 50 percent return on your investment, with no risk.

Use any annual raises to increase your contributions to your 401(k). It’s not enough to simply participate in a 401(k). You have to save adequately inside it. According to the Schwab Center for Investment Research, workers in their 20s should be setting aside at least 10 percent to 15 percent of their paychecks for retirement savings. Yet the majority of young workers don’t save anywhere near that amount. Among Gen Y workers who are participating in a 401(k), the average savings rate is just 5.6 percent, according to Hewitt. A simple–and somewhat painless–solution is to increase your savings rate every time you get a raise. That way, you never have a chance to see the raise in your take-home pay. And if you never see the extra income, you probably won’t miss it.

Why I Love To Hate BestBuy's Customer Service

Overall, I really like BestBuy. What drives me crazy is when I have to return merchandise. However, I’ve come to love the challenge of returning something, the contest of wills and the matching of wits.

The last two times have been entertaining:

* I bought a $9.99 computer game for my kids – the program said it worked on both Windows and Mac. It didn’t work on our Macintosh, as there were no Mac files. So the next time I’m there, I take it to the Return desk and explain the situation. The Return desk guy says I can’t return it – if software is opened, you can’t return it, period. I say that they should take it back since it doesn’t work on a Mac. This goes back and forth for a while, until the manager comes over. Same situation. Eventually I have 2 Return desk guys, a Geek Squad guy, and the Store Manager saying that I can’t get store credit. Now, this is all for a game that cost less than $10.

I get to the point where I say "I will pay anyone here $100 if you can install this on a Macintosh. You can’t, because the file isn’t on the CD, even though it says it works on both Windows and Mac." Eventually I did get $9.99 in store credit, which I spent immediately on a new game for the kids. Oy vey!

* I bought a super-cool remote control, you know, “one remote to rule them all.” It was an "open-box" item, but it was $50 off normal price, and with a $25 store credit on top of that. So I take the plunge, and give the $25 store credit to my wife since she was buying some stuff. I take it home, and, lo and behold, there is no rechargeable battery in the box (there should have been). I go back to BestBuy and explain the situation – they think I want to exchange it and the guy seems perturbed that I’ve already spent the $25 store credit. I say no, I don’t want to exchange it, I want the battery that should have been in the box. This goes on for roughly 10 minutes…eventually, he says he’ll give me a smokin’ deal on a new one, and all I have to pay is $8.50. Sigh…ok, it is still a good deal, so I do it. The funny thing is that when I exchanged it, it didn’t have the CD, USB cable, instructions, or battery re-charger – those were at my house since I didn’t intend to exchange it.

Will I continue shopping at BestBuy? Yes – I love a good fight, and look forward to the time I have to return something!

Are You Patient Enough to Become Rich?

So you want to be rich? I can tell you how right here and now.

There is a very simple three-step formula that will create wealth. It’s a formula that has been proven to work over the years. Best of all, it’s so common that you likely already know it.

1. Start saving money as early as possible.

2. Always spend a minimum of 10% less than you make.

3. Invest the money that you don’t spend.

I’m guessing you’re disappointed. You were hoping to learn some new secret that would teach you how to create wealth quickly and easily. Even though you already know how to create wealth, you’re probably not actively building it. The reason that you aren’t is because you lack an extremely important skill: patience.

Patience is one of the most important traits a person can posses in helping to build a substantial nest egg for their retirement years. When it comes to personal finances, patience usually isn’t considered critical, but it should be.

Here are five ways that patience can help you achieve riches:

1. It helps forgo instant gratification: Being patient allows you to wait until you have the money to purchase the things that you want. But it’s not easy to show patience in a society where instant gratification is advertised as being the norm and credit is easy to obtain. If you aren’t patient, however, it means that you will likely use a credit card to pay for things you don’t have the money to pay for. This is how people get into credit card debt, which will deteriorate savings and hinder your ability to become wealthy.

2. It helps you save: Part of being able to save 10% of your take-home pay is making sure that you spend your money wisely. Having the patience to wait until a product’s price comes down will go a long way toward helping you build wealth. People who have to have the latest gadgets the instant that they appear end up paying a premium. When the technology becomes more mainstream, its price becomes more reasonable. Having the patience to wait before you buy often is the difference between having 10% to invest and not having it.

3. Patience helps avoid “get rich quick” schemes: Whether it is the lottery or some hot stock pick, the urge to try to get rich quick is glorified in the media. The problem is, most people who are rich don’t get there the quick way. Most have built their wealth over time. While the media glamorizes the few who do get rich quick, most people who try that route don’t end up wealthy.

4. It helps you stay on your wealth-building plan: Wealth doesn’t usually appear instantly and doesn’t present itself unexpectedly. It usually takes a well-thought-out plan over a long period of time. Taking the time to build a solid plan and then sticking to it will ensure that you have a much greater chance of creating and keeping your wealth than if you try to make your fortune instantly.

5. Patience helps you look long term: Even if you create a solid wealth-building plan, there will still be bumps in the road. When these bumps occur, it’s important that you have the patience to stick to your plan instead of panicking. If you end up abandoning your plan at the first sign of trouble, you will likely end up much less wealthy than if you have the patience to stick to your plan the entire time. Stocks fluctuate over short periods of time, but they usually go up over a long period of time. It’s important to take a patient, long-term view in wealth creation.

You now have the secret to wealth creation. You have a simple plan to building wealth that works. You know exactly what you have to do. There is nothing stopping you from becoming wealthy, except for your lack of patience.

4 Decades To Prepare For Your Retirement

As you grow older, your waist measurement probably will change, and your financial priorities definitely will. But whether you’re 25 or 55, you should be saving for retirement.

In this, we look at financial steps you should take according to your age and the appropriate allocations in your investment portfolio for that time in your life.

(Yes, I realize that there are non-Gen-X ages in this. I'm just givin' a little love to people born in the wrong decades.)

20 to 29
You’re young; you’re starting your career; you’re broke.
1. Start your 401(k) at work. Contribute at least up to the company match, if any.
2. Start a Roth IRA if you don’t have a 401(k) — or if you have a 401(k) and can afford a Roth, too. You can tap your Roth for a first-time home purchase, if needed. And you can withdraw principal penalty-free.
3. Start an emergency fund, says Kurt Brouwer, financial planner in Tiburon, Calif. If you don’t have a bit saved for a rainy day, you’ll have to go into debt for emergencies — or tap your retirement fund.
4. Make a living will, so your family will know your wishes in case of a health emergency. You’ll need one when you retire, but you never know what will happen in the meantime.

Your Portfolio
Standard & Poor’s 500 stock index fund, 50%
Small-cap core stock fund, 25%
International stock fund, 25%


30 to 39
You’re still young; you’re starting a family; you’re in debt up to your eyeballs.
1. Don’t reduce your retirement savings for college savings. You can finance college; you can’t finance retirement.
2. Use your 401(k) to help you save. A 401(k) lets you save money before taxes. Suppose you’re in the 25% tax bracket, earn $50,000 a year, and want to save $3,000 a year. Because of the tax savings, that $3,000 would reduce your take-home pay just $2,225.
3. Don’t confuse whole life insurance with a retirement plan, says Peggy Ruhlin, a Columbus, Ohio, financial planner. “Life insurance is good, and you need it to protect your family. But it’s not for retirement savings.”
4. Write your will. You never know.

Your Portfolio
Standard & Poor’s 500 stock index fund, 50%
International stock fund, 20%
Small-cap core stock fund, 15%
Mid-cap growth stock fund, 15%

40 to 49
You’re middle-aged; you’re doing OK; you’re starting to get worried.
1. If you’re not contributing the maximum to your 401(k), this is the time to do it.
2. Your rainy-day fund should equal two to three months’ expenses.
3. If you plan to remain in your home, refinance to make sure your mortgage will end when you stop working.
4. If you can fund a Roth IRA, do so. Otherwise, look at alternatives for retirement savings plans, such as tax-efficient mutual funds.
5. Update your living will and make sure someone has power of attorney. You never know.

Your Portfolio
Standard & Poor’s 500 stock index fund, 40%
International stock fund, 15%
Small-cap value stock fund, 15%
Mid-cap growth stock fund, 15%
Bond funds, 15%


50 to 59
You’re nearing retirement; you’re at the peak of your career; you’re terrified.
1. If the kids are out of college, consider reducing your life insurance and increasing your savings.
2. Take advantage of the catch-up provisions for 401(k)s and IRAs, which let you contribute more each year.
3. At 55, start reviewing your Social Security benefits estimate every year and get estimates for any pensions you might receive. See how much your savings will have to be tapped to meet your expenses.
4. Update your will. You never know.

Your Portfolio
Standard & Poor’s 500 stock index fund, 30%
Bond funds, 30%
Small-cap value stock fund, 10%
Mid-cap growth stock fund, 15%
Mid-cap blend stock fund, 10%
International stock fund, 10%

Do You Have Money Problems?

If you’re having money problems, you probably have good reasons.

Maybe you’re getting less overtime or your expenses have unexpectedly climbed. Perhaps your ex left you with big debts. Maybe your parents never taught you about money.

You might blame the economy for the fix you’re in. Then there’s the whole credit industry, which hands out credit cards like confetti before slapping you with interest rates that would make a loan shark blush. Or maybe you’re just not good with numbers.

You may comfort yourself with the idea that your money fix isn’t entirely your fault.

Here’s the thing, though: Reasons have expiration dates. Rely on them too long and they harden into excuses.

Now is a challenging time for many Americans. Median incomes have stagnated, globalization and technology are wiping out whole industries, wealth is increasingly concentrated in fewer hands, and too many people -- 44.8 million, by the Census Bureau’s most recent account -- have no health insurance.

Meanwhile, lenders are lavishing credit on people who can’t handle it, and mortgages that should never have been made are proving unpayable, causing people to lose their homes.

There’s certainly plenty of blame to go around. But if that’s as far as you get, you’ll never get ahead.

Part of maturity is taking responsibility for ourselves. We need to see and acknowledge our role in the problems that befall us. Even if we’re entirely blameless, which is rare, we still need to figure out how to play the cards we’ve been dealt -- to find solutions instead of just complaining. That’s what maturity is all about.

When it comes to money, though, a lot of people want to remain financial adolescents. How much easier it is to point fingers at other people, the government, the economy or lenders for our money woes than to acknowledge we’re at least somewhat -- and sometimes a lot more than somewhat -- responsible for the fixes we’re in.

Let’s take a gut check right now. Are you nodding and saying, “Amen!”? Then you need read no further. If steam is coming out your ears, then hang in a bit longer. Because the madder you are, the more likely I’ve just hit home.

I’ll give you some examples of what people say. Let’s start with a common one:

“My parents never taught me about money.” The statute of limitations on that excuse expired when you turned 18 and could be held responsible for a legal contract, like a loan or a credit card agreement.

Besides, how many families do you know in which one child is good with money and another is seemingly hopeless? The parents may have imparted financial wisdom, but one child heard while the other tuned out. Or maybe the parents were terrible with money, and one child decided to avoid their fate by educating himself or herself while the other followed in the folks’ spendthrift footsteps.

The good news is that the past doesn’t have to dictate the future. If you’re smart enough to have read this far, you can teach yourself to handle money, too.

“My credit card company jacked up the rate/changed my terms/piled on fees.” Were you carrying a balance? Then you left yourself open for all manner of abuse from your credit card company.

You might try the defense that you didn’t know any better. But I’ve yet to come across someone who didn’t know, at the core, that carrying a credit card balance was a bad idea.

There are also those who believe they had no choice. In some cases, such as when you’re uninsured and trying to get medical care, I have sympathy. It’s still not a good idea to put those balances on your cards, but sometimes it can seem the only way to get treatment.

Either way, it’s up to you to deal with this debt. Whining about it isn’t getting you anywhere.

“I should be able to live better than this.” The idea is that it’s the high cost of living, rather than your own spending, that’s causing your problems.

One person who made $75,000 a year and who lived in an expensive area huffed that his family “shouldn’t have to live like we’re on welfare” in order to make ends meet.

Another, a single woman who made $50,000, complains that her fixed expenses -- taxes, insurance, mortgage, etc. -- ate up more than half of her salary, leaving her “only” $22,000 a year for her other living costs. She was oblivious to the fact that 20% of American households live on less than $20,000, or that a total income of $22,000 would put her in the top 10% of wealth globally.

Both of these, and others like them, want to shift the blame for their financial problems to outside forces.

You can grouse all you want about “the high cost of living,” but it’s still your responsibility to figure out how to live on what you make. Trust me: There are almost certainly families bigger than yours living on less in your community, and doing it without going into debt.

Where you live, what you eat, what you wear, what you drive and what you do with your time are all choices that you make and which have a powerful impact on your financial situation.

Maybe you’re convinced, or maybe you still think you’re faultless. Either way, let me suggest an exercise that could prove enlightening:

First, write down your five biggest money problems. Are you struggling with credit card debt? Getting squeezed by a big mortgage payment? Constantly running out of cash before the end of the month? Not saving enough for retirement? Whatever your most pressing concerns, write them down.

Figure out your part in creating them. What choices did you make that put you in this position? Even if you’re not entirely to blame -- after all, things like bad health or bad luck can strike anybody -- what decisions or actions did you make that made matters worse? For example, did you:
* Spend more than you made?
* Fail to have a rainy-day fund?
* Try to get by with too little insurance?
* Fail to pay attention to the terms of the loan you were getting?
* Figure “something will work out” rather than having a plan?
* Procrastinate on dealing with an issue until it became a big problem?

These are just a few ideas. If you sit and examine the situation, you may find others.

Brainstorm some solutions. For now, remove the words “can’t,” “won’t” and “but” from your vocabulary -- as in “I can’t do that,” “That won’t work” and “Yeah, but . . .” Try to think of every possible solution you can, no matter how weird some of them might seem. If you’re stumped, post your money problems on the Your Money message board and tap into the expertise of hundreds of other readers who have faced and conquered similar dilemmas.

Make a plan -- and follow through. Pick some solutions and get to work on them. If you’ve fallen behind on your mortgage payments, for example, talk to a housing counselor. If you need a budget, create one. If you’re truly sinking under credit card debt, contact a legitimate credit counseling agency, a bankruptcy attorney or both.

By doing this, you don’t have to give governments, corporations and other institutions a pass. If you think taxes are too high or the health-care system’s a mess, or credit card companies are getting away with murder, go ahead and contact your lawmakers to agitate for change.

But first make sure your own house is in order. Don’t leave your financial well-being to the whims of others. Taking charge, taking responsibility and finding solutions is what empowers us and what ultimately lead to financial freedom.

Some Bad Advice, From Me To You

OK, I haven't given that much advice here that can't be gotten from many other sources. I'm ok with that. But let's look at the normal advice, and try to think of situations where it is wrong.

Investing In A 401(k) Is a Bad Idea
When would this be a bad idea? When you have something better to do with your money. A better investment, or an education, or a house down-payment.

Diversification Is a Bad Idea
When should you focus on diversification? When you don't know good investments from bad investments. Diversification is getting a little bit of everything, the good and the bad, because you are afraid of getting a lot of the bad and too ignorant to know what is good.

Asset-Allocation Percentages Is a Bad Idea
When should you focus on asset-allocation percentages? When you think what was bad in the past just has to become better in the future, and vice versa. Personally, I understand it, but hate the concept. For example, let's say I am investing in two mutual funds (large cap, and mid cap) and the ratio I want is 50/50 -- 50% in a large cap, 50% in a mid cap. At the end of the year, the percentages are now 60% large cap, 40% mid cap. I'm supposed to sell some of the large cap, and buy some mid cap, so that they are back to 50/50. I just don't like it -- it seems like punishing the winner, and rewarding the loser.

Other types of asset-allocation percentages are based on age (more stocks when young, more bonds and cash when young) or courage (more stocks if brave, more bonds and cash when young). Blah.

Automatic Periodic Investing Is a Bad Idea
When should you use automatic periodic investing? When you don't trust yourself to write a check in the future. The bottom line is that dollar cost averaging is a great idea, but it probably doesn't beat plunking down the whole amount to begin with. If you have the choice to 12 monthly investments, or 1 big payment at the beginning of the year, the 1 big payment is probably the way to go. However, this ignores fear and laziness, both of which automatic periodic investing (such as into a 401(k)) helps overcome.

Buying A House Is a Bad Idea
Outwardly, people assume that a home owner is mature and financially successful and stable. Inwardly, it means the same thing to the owners, and it means that they are providing for themselves and their family.

Of course, none of this is guaranteed. What it means is that you somehow scrapped together a down payment. Nothing wrong with that, it just doesn't mean that you are a great person.

However, the question for us is when would buying a house be stupid. Not being able to afford it for one. Thinking/hoping that the value will go up is risky -- that's gambling, not investing...nothing wrong with that, just know the difference.

Getting A Job Is a Bad Idea
There is no job security, and if they could pay you less, they would. The road to both security and money is to own your own company or cash flow.

And so, in conclusion...

we can see that in some situations normal advice is bad. Think for yourself, Gen X, as always, and you'll be doing just fine.

2007 Retirement Confidence Survey

I thought this was interesting...

The 17th annual Retirement Confidence Survey (RCS) was released today. It is the country's most established and comprehensive study of the attitudes and behavior of American workers and retirees toward all aspects of saving, retirement planning and long-term financial security.

Highlights from the 2007 RCS include:
* Pension-plan changes by employers have left nearly half of workers less confident about the benefits they will receive from a traditional pension plan, but that those experiencing a decline in retirement benefits often fail to react constructively. Among workers who have personally experienced reductions in the retirement benefits offered by their employer, nearly 2 in 5 indicate that they have done nothing in response to these reductions.

* Many workers are counting on employer-provided benefits in retirement that are increasingly unavailable. Forty-one percent of workers indicate they or their spouse currently have a defined benefit pension plan, while 62 percent say they are expecting to receive income from such a plan in retirement. Both numbers suggest unrealistic beliefs.

* Almost half of workers saving for retirement report total savings and investments (not including the value of their primary residence or any defined benefit plans) of less than $25,000. The majority of workers who have not put money aside for retirement have little in savings at all: 7 in 10 of these workers say their assets total less than $10,000.

	All					All
	Workers	25–34	35–44	45–54	55+	Retirees
< $10,000	35%	50%	36%	24%	26%	32%
$10-$24,999	13%	18%	16%	10%	5%	13%