Adjusting Your Portfolio as You Age

As you approach retirement, it may be time to pay more attention to investment risk.

If you are an experienced investor, you have probably fine-tuned your portfolio through the years in response to market cycles or in pursuit of a better return. As you approach or enter retirement, is another adjustment necessary?

Some investors may think they can approach retirement without looking at their portfolios. Their investment allocations may be little changed from what they were 10 or 15 years ago. Because of that inattention (and this long bull market), their invested assets may be exposed to more risk than they would like.

Rebalancing your portfolio with your time horizon in mind is only practical. Consider the nature of equity investments: they lose or gain value according to the market climate, which at times may be fear driven. The larger your equities position, the larger your losses could be in a bear market or market disruption. If this kind of calamity happens when you are newly retired or two or three years away from retiring, your portfolio could be hit hard if you are holding too much stock. What if it takes you several years to recoup your losses? Would those losses force you to compromise your retirement dreams?

As certain asset classes outperform others over time, a portfolio can veer off course. The asset classes achieving the better returns come to represent a greater percentage of the portfolio assets. The intended asset allocations are thrown out of alignment.1

Just how much of your portfolio is held in equities today? Could the amount be 70%, 75%, 80%? It might be, given the way stocks have performed in this decade. As a StreetAuthority comparison notes, a hypothetical portfolio weighted 50/50 in equities and fixed-income investments at the end of February 2009 would have been weighted 74/26 in favor of stocks by the end of February 2018.1

Ideally, you reduce your risk exposure with time. With that objective in mind, you regularly rebalance your portfolio to maintain or revise its allocations. You also may want to apportion your portfolio, so that you have some cash for distributions once you are retired.

Rebalancing could be a good idea for other reasons. Perhaps you want to try and stay away from market sectors that seem overvalued. Or, perhaps you want to find opportunities. Maybe an asset class or sector is doing well and is underrepresented in your investment mix. Alternately, you may want to revise your portfolio in view of income or capital gains taxes.

Rebalancing is not about chasing the return, but reducing volatility. The goal is to manage risk exposure, and with less risk, there may be less potential for a great return. When you reach a certain age, though, “playing defense” with your invested assets becomes a priority.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - nasdaq.com/article/how-to-prepare-your-income-portfolio-for-volatility-cm939499 [3/26/18]

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RIDING OUT THIS VOLATILITY

How should you respond to volatility? When considering this question, you may want to think about the bigger picture before making any decisions.

In 2017, Wall Street saw very little pronounced volatility. The absolute daily percentage change for the S&P 500 in 2017 was approximately 3%, the smallest seen since 1964. The market climate is rarely so favorable.1

In 2018, the story is different. In the first quarter alone, the S&P saw nearly two dozen trading days with a 1% swing; there were eight such trading sessions in all of 2017. We have had a correction, and plunges of several hundred points in the Dow (which no doubt brought back memories of 2008 for some investors).2

So why should you stay in equities when the market rollercoasters like this? Well, you can point to two good reasons.

One, the economy is in excellent shape. The jobless rate is 4.1%. The economy’s yearly growth rate is now at an encouraging 2.6%. Inflation is at 2.2%.3,4

Two, the first-quarter earnings season is just ahead, and it could be great. FactSet, the respected investment analytics company, thinks S&P 500 firms may report their best annual growth since 2010 (to be specific, they forecast an 18% increase in earnings for fiscal 2018.)5

The events of this year remind us that the market faces constant challenges. Some come from left field and some gradually emerge. These setbacks take time to overcome, but they are often overcome in the near-term. Since World War II, even the average bear market has lasted just 22 months.6

Even with all this turbulence, the market is still 20% higher today than it was a year-and-a-half ago. Take this volatility for what it is – pronounced, but also representative of the way the stock market normally works. You could say that the “old normal” has come back after a comparatively placid 2017. Accept it as part of the course of investing. Stay invested, ride it out, and stay in the market for the long run.7

1 - marketwatch.com/story/the-last-time-stocks-were-this-quiet-was-the-year-the-beatles-went-on-ed-sullivan-2017-12-14 [12/14/17]

2 - marketwatch.com/story/the-dow-and-sp-500-have-already-doubled-the-number-of-1-moves-seen-in-all-of-2017-2018-03-26/ [3/26/18]

3 - tradingeconomics.com/united-states/indicators [4/3/18]

4 - money.cnn.com/interactive/pf/taxes/tax-cuts-by-state/index.html [4/2/18]

5 - cnbc.com/2018/03/30/stocks-should-see-a-spring-boost-in-april-says-lpls-ryan-detrick.html [3/30/18]

6 - cnbc.com/2018/02/08/the-stock-market-is-officially-in-a-correction--heres-what-usually-happens-next.html [2/8/18]

7 - nytimes.com/2018/04/03/business/stock-markets.html [4/3/18]

This material was prepared by MarketingPro, Inc. for use

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The Dow Dropped. Do Not Drop Out of the Market.

Recent plunge was hardly the disaster that some media outlets claimed.

On February 5, 2018 the Dow Jones Industrial Average took an unprecedented fall. The benchmark dropped 1,175 points, and it was down 1,500 points at one moment during the trading day.1,2

Monday’s Dow loss was severe, but not as catastrophic as certain headlines trumpeted. The index fell 4.6%, which is today’s equivalent of a 652-point dive back in October 2007 when the Dow reached its pre-recession closing peak of 14,164.43. For some recent perspective, consider that the Dow took a 610-point dive the day after the United Kingdom voted for the Brexit in 2016 – and over the following 20 months, it ascended to record heights.1,2,3

The Dow actually witnessed an intraday correction Monday. At the bottom of the plunge late in the trading session, it was at 23,923.88, which was 10.1% beneath its last record close of 26,616.71 on January 26. It finished Monday’s trading day off 8.5% from that January peak.1,3

As for the S&P 500, it finished Monday at 2,648.94, about 7% below its last record close of 2,872.87.1,2,4

Corrections happen. It has been so long since the last one (early 2016), many investors have forgotten the frequency with which they normally occur. Corrections can counteract irrational exuberance, and bring some rationality back into the market, which can be good for Wall Street’s collective health.2

Fundamental economic data is still strong: as an example, the Institute for Supply Management’s service sector purchasing manager index just came in at 59.9 for January, a 13-year high. This was just one of many recent strong indicators.2

Pullbacks and corrections will always occur on Wall Street, and sometimes the bulls turn tail and run. It is part of the long-term story of the market. This Dow pullback was extraordinary in its four-digit depth, which was to be expected someday with the index above 26,000.

This was a moment in stock market history. Thankfully, it is not the norm in that long history, as any glance at stock market cycles will reveal. At times like these, it is a good idea to avoid making hasty decisions, keep the long term in perspective, and realize that corrections are part and parcel of stock market investing.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - cnbc.com/quotes/?symbol=.DJI [2/5/18]

2 - marketwatch.com/story/us-stocks-poised-for-fresh-selloff-as-dow-futures-slide-120-points-2018-02-05 [2/5/18]

3 - thebalance.com/dow-jones-closing-history-top-highs-and-lows-since-1929-3306174 [2/5/18]

4 - fedprimerate.com/s-and-p-500-index-history-chart.htm [1/31/18]

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Avoiding the Cybercrooks

How can you protect yourself against ransomware, phishing, and other tactics?

Imagine finding out that your computer has been hacked. The hackers leave you a message: if you want your data back, you must pay them $300 in bitcoin. This was what happened to hundreds of thousands of PC users in May 2017 when they were attacked by the WannaCry malware, which exploited security flaws in Windows.

How can you plan to avoid cyberattacks and other attempts to take your money over the Internet? Be wary, and if attacked, respond quickly.

Phishing. This is when a cybercriminal throws you a hook, line, and sinker in the form of a fake, but convincing, email from a bank, law enforcement agency, or corporation, complete with accurate logos and graphics. The goal is to get you to disclose your personal information – the crooks will either use it or sell it. The best way to avoid phishing emails: stick to a virtual private network (VPN) or extremely reliable Wi-Fi networks when you are online.1

Ransomware. In this scam, online thieves create a mock virus, with an announcement that freezes your monitor. Their message: your files have been kidnapped, and you will need a decryption key to get them back, which you will pay handsomely to receive. In 2016, the FBI fielded 2,673 ransomware attack complaints, by companies and individuals who lost a total of $2.4 million. How can you avoid joining their ranks? Keep your security software and operating system as state of the art as you can. Your anti-virus programs should have the latest set of virus definitions. Your Internet browser and its plug-ins should also be up to date.2

Advance fee scams. A crook contacts you via text message or email, posing as a charity, a handyman, an adult education provider, or even a tax preparer ready to serve you. Oh, wait – before any service can be provided, you need to pay an “authorization fee” or an “application fee.” The crook takes the money and disappears. Common sense is your friend here; avoid succumbing to something that seems too good to be true.

I.R.S. impersonations. Cybergangs send out emails to households and small businesses with a warning: you owe money. That money must be paid now to the Internal Revenue Service through a pre-paid debit card or a money transfer. These scams often prey on immigrants, some of whom may not have a great understanding of U.S. tax law or the way the I.R.S. does business. The I.R.S. never emails a taxpayer out of the blue demanding payment; if unpaid taxes are a problem, the agency first sends a bill and an explanation of why the taxes need to be collected. It does not bully businesses or taxpayers with extortionist emails.1

Three statistics might convince you to obtain cyberinsurance for your business. One, roughly two-thirds of all cyberattacks target small and medium-sized companies. About 4,000 of these attacks occur per day, according to IBM. Two, the average cost of a cyberattack for a small business is around $690,000. This factoid comes from the Ponemon Institute, a research firm that conducted IBM’s 2017 Cost of Data Breach Study. That $690,000 encompasses not only lost business, but litigation, ransoms, and the money and time spent restoring data. Three, about 60% of small companies hit by an effective cyberattack are forced out of business within six months, notes the U.S. National Cyber Security Alliance.3

Most online money threats can be avoided with good security software, the latest operating system, and some healthy skepticism. Here is where a little suspicion may save you a lot of financial pain. If you do end up suffering that pain, the right insurance coverage may help to lessen it.

Citations.

1 - gobankingrates.com/personal-finance/avoid-12-scary-money-scams/ [8/28/17]

2 - eweek.com/security/the-true-cost-of-ransomware-is-much-more-than-just-the-ransom [8/18/17]

3 - sfchronicle.com/business/article/Interest-in-cyberinsurance-grows-as-cybercrime-12043082.php [8/28/17]

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Why You Should Stay Invested Through Tense Times

Crises pass, and markets eventually regain equilibrium.

We have seen some uneasy times lately. Uneasiness impacts the financial markets. When it does, we all need to keep some long-term perspective in mind. Those who race to the sidelines and exit equities may regret the choice when crises pass.

Wall Street loves calm. Traders literally want “business as usual,” every day. If breaking news disrupts that calm, it can rattle the market – but every investor must realize that these disruptive events are exceptions to the norm. (If the major Wall Street indices roller coastered dramatically every day, who would invest in stocks to begin with?)

History shows how the market has bounced back in the past. You probably know the old financial industry saying: past performance is no guarantee of future results. That is certainly true, but it is also true that the major indices have staged some impressive recoveries when confronted with turbulence.

We do not need to look back very far to see some of this resilience. In May, the S&P 500 posted a single-day loss of 1.8%. Just three market days later, 85% of that loss had been recovered. Remember the stunning Brexit vote in the United Kingdom? The S&P fell 5.3% in the two trading days after that news broke. It took about a week to gain all of that back.1

When China startlingly devalued the yuan in August 2015, there was a true correction in the S&P; it lost 11%. In roughly two months, it was back at its former level.

Looking back further, we can be encouraged by how stocks rebounded after the unthinkable shock of 9/11. Wall Street was closed for five calendar days after the attack; on September 17, 2001, the Dow slid 7.1% (684 points). It would eventually drop more than 14%. The S&P 500 retreated 11.6% during the week when the market reopened. Even so, one month later, the three major U.S. equity benchmarks had recouped their losses.2

Stock market corrections happen regularly. In fact, this current period is one of the calmest on record. As the summer of 2017 wraps up, the S&P 500 has gone more than a year without a 5% dip. The last stretch this long without a 5% pullback was in 1995, and this has happened only six times since 1950.3

Back on May 17, the Dow slipped 373 points. Yet with the index comfortably above 20,000, that single trading session saw only a 1.8% retreat. A 1,000-point, single-day fall for the Dow 30 is now a possibility. If the Dow drops 1,000 points in a day for the first time, investors will be shocked – but they should remember that the Dow also rises.4

Citations.

1 - businessinsider.com/stock-market-news-buy-the-dip-bulletproof-rebound-2017-8 [8/15/17]

2 - investopedia.com/financial-edge/0911/how-september-11-affected-the-u.s.-stock-market.aspx [9/11/17]

3 - investopedia.com/news/why-stock-market-correction-may-rattle-investors/ [7/18/17]

4 - latimes.com/business/hiltzik/la-fi-hiltzik-market-corrections-20170530-story.html [5/30/17]

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Insurance and Investments

A good financial strategy is not just about “making money;” it is also about protection.

Some people mistake investing for financial planning. Their “financial strategy” is an investing strategy, in which they chase the return and focus on the yield of their portfolio. As they do so, they miss the big picture.

Investing represents but one facet of long-term financial planning. Trying to build wealth is one thing; trying to protect it is another. An effort must be made to manage risk.

Insurance can play a central role in wealth protection. That role is underappreciated – partlybecause some of the greatest risks to wealth go unnoticed in daily life. Five days a week, investors notice what happens on Wall Street; the market is constantly “top of mind.” What about those “back of mind” things investors may not readily acknowledge?

What if an individual suddenly cannot work? Without disability insurance, a seriously injured or ill person out of the workforce may have to dip into savings to replace income – i.e., reduce his or her net worth. As the Council for Disability Awareness notes, the average length of a long-term disability claim is nearly three years. Workers’ compensation insurance will only pay out if a disability directly relates to an incident that occurs at work, and most long-term disabilities are not workplace related. Disability insurance can commonly replace 40-70% of an individual’s income. Minus disability coverage, imagine the financial impact of going, for instance, three years without work and what that could do to a person’s net worth and retirement savings.1

What if an individual suddenly dies? If a household relies on that person’s income, how does it cope financially with that income abruptly disappearing? Does it spend down its savings or its invested assets? In such a crisis, life insurance can offer relief. The payout from a policy with a six-figure benefit can provide the equivalent of years of income. Optionally, that payout can be invested. Life insurance proceeds are usually exempt from income tax; although any interest received is taxable.2

Most people want a say in what happens to their wealth after they die. Again, insurance can play a role. At a basic level, those with larger estates may use life insurance to address potentially large liabilities, such as business loans, mortgage payments, and estate taxes. An ILIT may also shield the cash value of a life insurance policy from “predators and creditors.” Beyond that, a sizable life insurance policy can be creatively incorporated into an irrevocable life insurance trust (ILIT), through which an individual can plan to exclude life insurance proceeds from his or her taxable estate.3

Yes, the estate tax exemption is high right now: $5.49 million. Even so, if a person dies in 2017 while owning a $5 million life insurance policy and a $500,000 home, his or her estate would be taxed. An ILIT would be a useful estate-planning tool in such a circumstance.3

Why do people underinsure themselves as they strive to build wealth? Partly, it is because death and disability are uncomfortable conversation topics. Many people neglect estate planning due to this same discomfort and because they lack knowledge of just how insurance can be used to promote wealth preservation.

The bottom line? Insurance is a vital, necessary aspect of a long-term financial plan. Insurance may not be as exciting to the average person as investments, but it can certainly help a household maintain some financial equilibrium in a crisis, and it also can become a crucial part of estate planning.

Citations.

1 - nerdwallet.com/blog/insurance/disability-insurance-explained/ [6/27/16]

2 - tinyurl.com/knroq9u [3/27/17]

3 - thebalance.com/irrevocable-life-insurance-trust-ilit-estate-planning-3505379 [3/21/17]

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The Importance of Financial Literacy

Too few Americans understand personal finance fundamentals.

If only money came with instructions. If it did, the route toward wealth would be clear and direct. Unfortunately, many people have inadequate financial knowledge, and for them, the path is more obscure.

Are most people clueless about financial matters? That depends on what gauge you want to use to measure financial knowledge. The U.S. ranked fourteenth in Standard & Poor’s 2015 Global Financial Literacy Study, with just 57% of the country’s population estimated as financially literate.1

Obviously, the other 43% of Americans have some degree of financial understanding – but it is mixed with a degree of incomprehension. Witness some examples:

*A recent LendU survey found that nearly half of college students carrying student loans thought those debts would eventually be forgiven if left unpaid.

*This year, Fidelity Investments asked Americans the following question in a multiple-choice quiz: “If you were able to set aside $50 each month for retirement, how much could that end up becoming 25 years from now, including interest, if it grew at the historical stock market average?” The correct answer was $40,000, but just 16% of respondents got it right. Another 27% guessed $15,000 (i.e., 50 x 12 x 25, as if interest was not a factor).

*Only 42% of those quizzed by Fidelity knew that withdrawing 4-5% a year from retirement savings is commonly recommended. Fifteen percent of those older than 55 thought they would be “safe” withdrawing 10-12% per year.

*The S&P 500 has returned positively in 30 of the last 35 years. Just 8% of those answering Fidelity’s quiz guessed this.2,3

Apart from these examples, consider another one at the macro level. According to the latest National Financial Capability Study from FINRA (the Financial Industry Regulatory Authority), only about a third of Americans younger than 40 understand the basic financial concepts of compounding, inflation, and risk diversification.1

Statistics aside, think about how a lack of financial acumen hurts people’s chances to build or protect wealth. How about the employee who skips retirement plan enrollment at work, mistakenly thinking that a tax-advantaged retirement account is the same as a bank account? Or the small business owner puzzled by cash flow and profit-and-loss statements? Or the young borrower who fails to grasp the long-run consequences of only making interest payments on a credit card or loan?

Financial professionals continually educate themselves. They stay on top of economic, tax law, and market developments. Investors should as well. Ten or twenty years from now, you may find yourself in an entirely different place financially – who knows? The economy, the Wall Street climate, and even the investment opportunities before you could all differ from what you see today. If your financial knowledge is ten or twenty years out of date, you risk being at a disadvantage.

Financial literacy is not about prevention, but instead about empowerment. The more you understand about personal finance, the more potential you give yourself to make smart money decisions.

«RepresentativeDisclosure

Citaions.

1 - marketwatch.com/story/should-colleges-require-a-financial-literacy-class-2017-04-03/ [4/3/17]

2 - investopedia.com/news/3-ways-improve-financial-literacy/ [4/21/17]

3 - marketwatch.com/story/most-americans-failed-this-eight-question-retirement-quiz-2017-03-23 [3/23/17]

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Building an Emergency Fund

Everyone should aim to have a cash reserve.

We all would love to have a little extra cash on hand for emergencies. Saving up that cash can be a challenge – but with a little effort, that challenge can be met.

Imagine a 30-year-old couple with no real savings. Let’s call them Kurt and Diana. Together, they earn about $8,000 a month, but their household finances are being squeezed by education debt, rent, and the high cost of living in an affluent metro area. They have about $300 in the bank between them, and they just learned they have a baby on the way. Their need to save has never been greater. How can they do it?

They have many options for building their fund, more than they first assume. Kurt has an old dirt bike gathering dust in his dad’s garage, and he is no longer into off-road motorcycling. Even in its dusty condition, it could easily be sold for more than $1,500. They each have gym memberships; Kurt drops his and Diana switches to a cheaper gym, leading to a 12-month savings of $500.

Kurt also explores the possibility of working weekends or evenings as a barista in addition to his full-time job, a move that could bring in a couple of thousand dollars in the next few months. The pair sense they have a federal tax refund coming – and the average I.R.S. refund for the 2015 tax year was $2,860. They could put some or all of a four-figure refund toward their emergency fund, rather than toward paying down their student loans.1

Ideally, Kurt and Diana’s emergency fund should be $25,000 or more (the equivalent of 3 or more months of living expenses). No, they are not going to come close to that this year. Or next year. They have started, though, and it looks as if they will soon have a few thousand dollars set aside for emergencies. Even having $1,000 could ease many acute financial pains.

There are numerous potential ways to boost your emergency fund. Some are simple: save $5 or $10 a week and deposit it, eat out less, drop those memberships and subscriptions, sell something, save the money the I.R.S. hands back to you. Some require more ingenuity and energy: getting a part-time job for supplemental income, renting out a room.

Perhaps the easiest way of all is to create an automatic transfer of a small portion of your paycheck into a dedicated emergency savings account each month. Saving will seem painless this way, and when you pay off a debt, you can direct the money you used each month to reduce it into your emergency fund instead.

«RepresentativeDisclosure»

Citations.

1 - fool.com/retirement/2017/02/26/how-big-is-the-average-americans-tax-refund.aspx [2/26/17]

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What Could You Do With Your Tax Refund?

Instead of just spending the money, you could plan to pay yourself.

About 70% of taxpayers receive sizable refunds from the Internal Revenue Service. Just how sizable? The average refund totals about $2,800.1

What do households do with that money? It varies. Last year, consumer financial services company Bankrate asked Americans about their plans for their federal tax refunds. Thirty-one percent of the respondents to Bankrate’s survey said that they would save or invest those dollars, and 28% indicated they would attack their debts with the money. Another 27% said they would buy food with that cash or use it to pay utility bills. Just 6% said they would earmark their refunds for shopping sprees or vacations.2

So, according to those survey results, about six in ten people who get a refund will use it to try and improve their personal finances. You could follow their example.

Do you have an adequate emergency fund? If not, maybe you could strengthen it with your refund. If you have no such fund at all, your refund gives you an opportunity to create one.

You might use your refund to pay off your worst debts. High-interest debts, in particular – if you pay off a debt that carries 16% interest, getting rid of that liability is, effectively, like getting a 16% return. If you lack an emergency fund, you should create that first, then think about reducing your debt. Paying debt down without an emergency fund or some reservoir of savings just sets you up for quickly accumulating more debt.

If you own a home, you may want to consider making a thirteenth mortgage payment before 2017 ends. Putting your refund to work that way may make more sense financially than putting it in the bank, given the minimal interest rates on so many deposit accounts today.

You could pay insurance premiums with the funds. An IRS refund of around $3,000 could go a long way. If you have put off buying a term or permanent life policy, your refund might make insuring yourself easier.

Could you invest the money the IRS returns to you? You could increase (or max out) your annual retirement plan contribution with it or simply direct it into another type of investment account. Whether the savings or investment vehicle is tax-advantaged or not, you have a chance to make that lump sum grow with time.

Aside from investing in equities or debt instruments, you could take your refund and invest in yourself. Maybe you might use it to start a business or support a business you already own. It could also be spent on education. Think of these options as “indirect investments” that might help you or your household grow wealthier one day.

Lastly, remember what a federal or state tax refund represents. It is a percentage of your earnings that the government holds back, in the event that you owe it in taxes. If you repeatedly get a refund, you might want to carefully adjust your W-4 withholding, so that your paychecks are larger during the year.3

Citations.

1 - azcentral.com/story/money/business/consumers/2017/01/21/tax-season-6-things-to-know/96776554/ [1/21/17]

2 - thestreet.com/story/13523031/2/why-you-should-invest-your-tax-refund-instead-of-spending-it.html [4/8/16]

3 - turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Forms/Top-5-Reasons-to-Adjust-Your-W-4-Withholding/INF14437.html [2/9/17]

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Saving $1 Million for Retirement

How can you plan to do it? What kind of financial commitment will it take?

How many of us will retire with $1 million or more in savings? More of us ought to – in fact, more of us may need to, given inflation and the rising cost of health care.

Sadly, few pre-retirees have accumulated that much. A 2015 Government Accountability Office analysis found that the average American aged 55-64 had just $104,000 in retirement money. A 2016 GoBankingRates survey determined that only 13% of Americans had retirement savings of $300,000 or more.1,2

A $100,000 or $300,000 retirement fund might be acceptable if our retirements lasted less than a decade, as was the case for some of our parents. As many of us may live into our eighties and nineties, we may need $1 million or more in savings to avoid financial despair in our old age.

The earlier you begin saving, the more you can take advantage of compound interest. A 25-year-old who directs $405 a month into a tax-advantaged retirement account yielding an average of 7% annually will wind up with $1 million at age 65. Perhaps $405 a month sounds like a lot to devote to this objective, but it only gets harder if you wait. At the same rate of return, a 30-year-old would need to contribute $585 per month to the same retirement account to generate $1 million by age 65.3

The Census Bureau says that the median household income in this country is $53,657. A 45-year-old couple earning that much annually would need to hoard every cent they made for 19 years (and pay no income tax) to end up with $1 million at age 64, absent of investments. So, investing may come to be an important part of your retirement plan.4

What if you are over 40, what then? You still have a chance to retire with $1 million or more, but you must make a bigger present-day financial commitment to that goal than someone younger.

At age 45, you will need to save around $1,317 per month in a tax-advantaged retirement account yielding 10% annually to have $1 million in 20 years. If the account returns just 6% annually, then you would need to direct approximately $2,164 a month into it.4

What if you start trying to build that $1 million retirement fund at age 50? If your retirement account earns a solid 10% per year, you would still need to put around $2,413 a month into it; at a 6% yearly return, the target contribution becomes about $3,439 a month.4

This math may be startling, but it is also hard to argue with. If you are between age 55-65 and have about $100,000 in retirement savings, you may be hard-pressed to adequately finance your future. There are three basic ways to respond to this dilemma. You can choose to live on Social Security, plus the principal and yield from your retirement fund, and risk running out of money within several years (or sooner). Alternately, you can cut your expenses way down – share housing, share or forgo a car, etc., which could preserve more of your money. Or, you could try to work longer, giving your invested retirement savings a chance for additional growth, and explore ways to create new income streams.

How long will a million-dollar retirement fund last? If it is completely un-invested, you could draw down about $35,000 a year from it for 28 years. The upside here is that your invested retirement assets could grow and compound notably during your “second act” to help offset the ongoing withdrawals. The downside is that you will have to contend with inflation and, potentially, major healthcare expenses, which could reduce your savings faster than you anticipate.

So, while $1 million may sound like a huge amount of money to amass for retirement, it really is not – certainly not for a retirement beginning twenty or thirty years from now. Having $2 million or $3 million on hand would be preferable.

Citations.

1 - investopedia.com/articles/personal-finance/011216/average-retirement-savings-age-2016.asp [12/8/16]

2 - time.com/money/4258451/retirement-savings-survey/ [3/14/16]

3 - interest.com/retirement-planning/news/how-to-save-1-million-for-retirement/ [12/12/16]

4 - reviewjournal.com/business/money/how-realistically-save-1-million-retirement [5/20/16]

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Do Our Attitudes About Money Help or Hurt Us?

We may need to change them to better our financial prospects.

Our relationship with money is complex & emotional. When we pay a bill, go to the mall, trade in a car for a new one, hunt for a home or apartment, or pass someone seemingly poor or rich on the street, we feel things and harbor certain perceptions.

Are our attitudes about money inherited? They may have been formed when we were kids. We watched what our parents did with their money, and how they managed it. We were told how important it was – or, perhaps, how little it really mattered. Parental arguments over money may be ingrained in our memory.

This history has an effect. Some of us think of money, finance, investing, and saving in terms of getting ahead, in terms of opportunity. Others associate money and financial matters with family struggles or conflicts. Our family history is not responsible for our entire attitude about money – but it is, undoubtedly, an influence.

Our grandparents (and, in some cases, our parents) were never really taught to think of “retirement planning.” Just a century ago, the whole concept of “retiring” would have seemed weird to many Americans. You worked until you died, or until you were physically unable to do your job. Then, Social Security came along, and company pensions for retired workers. The societal expectation was that with a company pension and Social Security, you weren’t going to be impoverished in your “old age.”

Very few Americans can make such an assumption today. Many are unaware of the scope of retirement planning they need to undertake. An alarming 54% of pre-retiree respondents to a 2016 Prudential Financial survey had no clue how much they needed to save for retirement. Additionally, 54% had balances of less than $150,000 in their workplace retirement plans. Have they been lulled into a false sense of security? Did they inherit the attitude that when you retire in America, Social Security and a roof over your head will be enough?1

How can pessimistic attitudes about money, saving, & investing be changed? Perhaps the first step is to recognize that we may have inherited them. Do they stem from our own experience? Or are we simply cluttering our minds with the bad experiences and negative assumptions of years ago?

One example of this leaps readily to mind. Earlier this year, Bankrate surveyed investors per age group and learned that just 33% of millennials (Americans aged 18-35) owned any equities, while 51% of Gen Xers did. (That actually represented a dramatic increase: in 2015, only 26% of millennials were invested in equities.)2,3

College loan debt and early-career incomes aside, millennials watched equity investments, owned by their parents, crash in the 2007-09 bear market. Some are quite cynical about the financial world. A 2015 Harvard University study showed that a mere 14% of respondents aged 18-29 felt that Wall Street firms "do the right thing all or most of the time” as they conduct business.3

How do you feel about money? What were you taught about it when you were growing up? Did your parents look at money positively or negatively? These questions are worth thinking about, for they may shape your relationship with money – and saving and investing – here and now.

Citations.

1 - businessinsider.com/reasons-for-americas-retirement-crisis-2016-11 [11/29/16]

2 - ibtimes.com/should-you-invest-stock-market-why-millennials-might-be-missing-out-when-it-comes-2389589 [7/6/16]

3 - thestreet.com/story/13135109/1/why-millennials-dont-trust-wall-street-or-investing-in-stocks.html [5/2/15]