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
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.
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.
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%
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.
