4/29/2014 4:00 PM ET|
5 excuses that can wreck your retirement
Ensure your golden years are happy ones by avoiding these retirement traps.
With more than half of workers reporting less than $25,000 in savings, according to 2013 data from the Employee Benefit Research Institute, the reality of retirement saving is unpleasant for many Americans today. Worse yet, some of these savers may be compounding the problem by deluding themselves.
Kenneth N. Bickford Jr., a certified financial planner at Bickford, Angier & Associates in Reno, Nev., says that some get discouraged because they misunderstand the nature of retirement saving.
“People think they need to save large amounts for retirement,” Bickford says. “What they don’t understand is that it’s about being consistent. Small amounts, when gathered consistently, can amount to a lot over time.”
But the misapprehensions don’t end there. Savers may hold a number of questionable assumptions about their finances, and these can lead to them making faulty excuses for neglecting their retirement savings.
Here are five excuses to avoid when planning your retirement.
1. 'I’ve got plenty of time to save'
In a sense, young people are right when they say that they still have years to save for retirement. But those years will only benefit them if they use them to build savings, says Bickford.
“One of the biggest assets young people have is time,” Bickford says. “But most of them aren’t using it.”
According to the MoneyRates.com Retirement Savings Calculator, a worker who saves $100 per month in a tax-deferred account from age 35 until retiring at 65 will have amassed $83,225, assuming an average annual return of 5 percent. But if that worker started saving at age 20, that sum would be $202,644 – more than double the amount of the shorter savings period despite being only 1.5 times the duration.
Remember, however, that neither of those sums is adjusted for price increases. When adjusted by inflation, even the larger sum only amounts to $52,622.
2. 'I’ve earned the right to splurge'
While there’s nothing necessarily wrong with an occasional financial extravagance, Bickford says that some consumers today make extravagances the rule instead of the exception.
“Many build a habit of spending instead of saving,” Bickford says. “In the long run that just doesn’t work out.”
In 2012, consumer spending per household eclipsed its previous peak set in 2008 and increased by 3.5 percent over 2011, according to the Bureau of Labor Statistics. Consumers who can’t resist the temptation to spend put themselves in a poor position to build savings.
3. 'I have too much debt to save now'
This excuse is a logical follow-up to No. 2. Bickford says that this is the most common excuse he sees when discussing retirement planning with clients.
“I think it all goes back to debt,” Bickford says. “The spending is definitely a problem. The attitude seems to be ‘live for today, to heck with tomorrow.’”
While consumers may need to address their debt before building meaningful retirement savings, if debt becomes a perpetual excuse for not saving, it’s time for a plan that can reduce that debt to a level that will enable real savings.
4. 'It makes sense to borrow from my 401k now'
Some savers justify a 401k loan because the interest they pay on the loan goes back into their savings, which can make these loans seem more appealing than other borrowing options.
The problem, Bickford says, comes when the borrowers give up on paying these loans back.
“Borrowing from a 401k is a common problem,” says Bickford. “The borrowers often neglect to pay that money back, which classifies it as a distribution, and that can lead to taxes and penalties.”
401k distributions are usually taxed as ordinary income, but there may also be a 10 percent early withdrawal penalty if you're withdrawing before you’re 59 and a half years old. That, along with costs such as loan origination fees, can make these loans an expensive form of borrowing that also hurts your retirement funds.
5. 'I don’t trust banks or markets with my money'
There is a small but vocal contingent of retirement savers who feel that keeping their savings in cash is somehow the safest option. Bickford says that the recurring budget battles in Washington may be playing a role in fostering these savers’ nervousness toward the U.S. financial system.
“People are sitting on cash because of fear,” Bickford says. “There is a lot of fear because of the budget situation in Washington, and that fear carries over to consumers, who don’t know what to do with their money, so they keep it in cash.”
To say nothing of the dangers from theft, fires and other physical calamities, cash is highly vulnerable to another type of threat when it’s stored over the course of 30 years or more: inflation.
Remember the scenario in item No. 1 in which the saver put away $100 per month over the course of 45 years? Had he not invested it for the 5 percent return, resulting in an inflation-adjusted sum of $52,622, all those savings would be worth only $14,023 when adjusted for inflation.
Even savers who are highly averse to risk could choose FDIC-insured certificates of deposit (CDs) to mitigate the effects of inflation. Even though the best CD rates are only about 2 percent today – a historic low for that type of account – that rate would still beat the rate of inflation in 2013 (1.5 percent) and add more than $8,000 in inflation-adjusted interest income to the saver’s nest egg in the scenario above.
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To be honest I thought I would always have to work. I started working on weekends when I was 14... when I was 16 I started working after school & weekends. Did not go to college...had a hard time getting out of high school. Always seemed to never have much of anything...so items #1-4 really never mattered. When I was a young adult I never listened to my elders when it came to money. My grandfather gave me 3-4 good talks about money...basically financial fundamentals. I always thought that old man has no clue about money...boy was I wrong! It wasn't until my late 30's...after I had been divorced, downsized & broke that I realized that old man knew what he was talking about.
Rule #1...Have six months cash reserves in the bank.
Rule #2...Save 20% of your income for the future...only invest in guaranteed returns.
Rule #3...Only borrow money to buy a house.
Rule #4...Pay cash for everything else...if you don't have the cash you can't afford it.
My wife & I have tried to pass this on to our children. Sometimes they listen...sometimes they don't.
Year 2000 - the man inherited a budget surplus and strong economy.
Year 2008 - unemployment up and rising; house values down and decreasing; stock market down and falling; 401k values down and falling; war raging in Iraq costing billions per day; foreclosures and bankruptcies up and increasing.
Makes you wonder: "Conservative" in what way?
Fisher Investments, Incorporated manages over $41 billion in assets for some 40,000 accounts for primarily individual investors and is run by the Forbes magazine columnist Kenneth Fisher. The firm was ordered to pay a retiree $376,075 in compensatory damages for breaching its fiduciary duties, according to a release by Bloomberg. The case was arbitrated through JAMS in Dallas, TX. JAMS is a private forum for arbitration and mediation, which is based out of Irvine, CA. Apparently, Fisher Investments had a clause in its agreement with the customer that required any disputes between the parties to be resolved through private arbitration, since it is a an adviser firm and not a brokerage firm registered with the Financial Industry Regulatory Authority (FINRA).
Interestingly, Sharyn Silverstein the Claimant, who was a 64 year old retiree, had called up Fisher’s firm simply to get a free copy of his book that was advertised in USA Today, with no intention whatsoever of doing business with the firm. After multiple calls and visits from a Fisher representative, she was pressured into turning over all of her fixed income investments to be invested into equities. This occurred despite vigorous objection from Ms. Silverstein and her husband, Seth. According to the recommendation of the arbitrator, the Claimant is entitled to her losses she incurred as a result of Fisher Investments liquidating her bond portfolio and putting her proceeds 100% into equities. According to testimony at the hearing by Fisher Vice Chairman Andrew Teufel, 80% of the Fisher investors are invested 100% in equities.
Ms. Silverstein placed $876,357 in bonds with Fisher in September 2007. After liquidating the bonds and investing her 100% in equities, her initial investment lost $376,075 by October 2008. According to the award recommendations, the retiree and her husband made it clear that they were going to be taking withdrawals out after he retired at the end of 2007. However, the investment adviser for Fisher used the “Suitability Wizard” to determine her recommended portfolio stating that she had no income needs from the portfolio and her only investment objective was growth until her death. The arbitrator said that the Silversteins had no children and “therefore have no need to leave an inheritance”; that Fisher failed to make reasonable inquiry into the financial situation, investment experience and investment objectives of the Claimant or ignored that information and rubber stamped her for the “one shoe fits all” recommendation of all other Fisher clients: 100% equities benchmarked to the MSCI World (MXWO) Index. Over the time frame she was invested, the MSCI World Index lost about 35% and the Merrill Lynch U.S. Broad Market Index of bonds, which mirrored her investments prior to liquidation, made 2.4%.
When the Silversteins saw they were 100% in equities, they expressed their concern and unhappiness only to be told they would have to pay a fee if they quit, so they stayed. In the summer of 2008, after registering their complaints and concerns of not owning any bonds they were assured that Fisher knew how to predict the market and would take appropriate steps to protect their investments. The arbitrator wrote a 25 page award going over the facts and concluding that Ms. Silverstein is entitled to all of her losses sustained because of the actions of Fisher Investments.
Geese, the Republicans didn't even change the tax code so that I could deduct ALL OF THAT $$$$ I PAID in to Social Security and Medicare over my WORKING life ("entitlement"), and will NEVER SEE.
Want to work full time until 70? VOTE GOP !
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