The current state of the economy is said to be a terrible time to retire. In addition to a steadily increase in living costs, the market is due for a correction which could potentially lower stock values by more than 20 percent.
Many feel powerless against the inevitable fall in the value of their hard-earned money – but the answer is not to cower in fear. Rather, those looking to retire now or in the near future should simply plan ahead so that their future can be as secured as possible in an uncertain world.
Remember to Diversify
The current bull market has low returns on bonds and cash, while stocks have multiplied their value four times over since March. The real problem is that everyone knows a stock downslide is coming after all these rises, but the rises keep consumers wishing to invest even more cash into their stock portfolios.
It may seem like a great idea to invest a large portion of your retirement savings into the stock market when things look so great, but it always comes down. That is why there is always the question of risk tolerance in stocks. How much could you potentially risk without significantly hurting yourself financially?
Rebalance Investment Portfolio
The idea would be to rebalance your portfolio soon to a desired combination of stocks, bonds, and cash. Among your stock investments, ensure they are also properly diversified in the way best fit for your unique situation.
One expert (Lawrence Heller, certified financial planner) suggests his clients to use what he’s deemed the “bucket” strategy. This means that people keep one to three years of expenses in cash and another seven to nine years’ worth in bonds. This gives them about ten years before they’d need to sell off any of their stocks – and offers a nice cushion for the event of a major downfall or stock market crash.
Pay Off Debt
In times of uncertainty it is wise to pay off all major debt prior to retirement. This might include items like mortgages, car loans, credit card debt, etc. This alleviates some of your cost of living after your working years.
Maximize Social Security
If you’re in overall good health and enjoy your job (most days, anyways) you may want to consider postponing retirement by at least a year or two. Monthly social security benefits increase by 7 to 8 percent each year that people put off beginning their checks after the age of 62.
Let’s say that you and your spouse are both set to receive a monthly check of $1,400 – which is what the average for 2018 is. That totals $2,800 a month combined income. Now, if the two of you wait until age 65 to retire, the monthly income becomes about $1,700 a month each instead – or a combined income of $3,400.
An average of $600 extra each month between a married couple is significant enough to alleviate medical worries and add to the household budget. It is even significant enough that a smart couple could potentially place half of that into a traveling budget or rainy day fund for the best possible retirement.Continue reading
Workers over the age of 55 are finding it harder to find jobs within their normal pay ranges, no matter how much education or experience they have. They hear remarks about how overqualified they are, or how companies can’t afford to pay them what they’re used to.
Forced to Take Lower Salaries
These older workers are often displaced from companies where they have invested decades of their work life. Once back in the marketer for a new position, it takes considerable time to find one. In the meantime, there are still bills to pay.
As house payments are missed, utilities come overdue, and 401(k) savings are depleted, these well-qualified workers are forced to take any position they can to continue providing for their families.
At the age of 55, many workers have not only grown used to a certain type of living (thanks to years of blood, sweat, and tears) but people fail to realize they may still have children at home. Many put off having children until their thirties, placing older teen children at home around the age of 55 – not to mention those in college.
More Workers 55+
An increasing number of people over the age of 55 are employed. The jobless rate for this age range is only 3.1%, in comparison to 3.9% of the population. Yet once unemployed, these same workers also stay out of work longer than those who are half their age.
After entering their sixties, workers suffer from a slow but steadily declining payrate. This payrate goes down regardless of how much education or industry-related experience they may have.
Why People Are Working Longer
People are living longer, and they are staying healthier into a much more advanced age. The rate of traditional pension programs has also begun to phaseout, lending towards lower guaranteed income after the working years end and retirement comes. All this translates to a desire to stay in the working force well past the years they chose to retire in decades past.
This could fulfill an exceptionally large gap in our economy. The ongoing labor shortage could be remedied by employing these older workers. But it would only work if employers were willing to employ them, which tends towards not being the case. But why?
Employers have a mind set that productivity rates decrease after a certain age. Lower productivity levels mean a decrease in the return on investment (ROI) per employee. Its natural to want the most for what you pay, but this presents a serious question. Is hiring for quantity better than hiring for quality?
Obviously, older workers bring considerable experience to the table – oftentimes in addition to advanced education. With experience comes an ability of knowing what will or won’t work in certain situations, and a chance to acquire skills that younger employees have not yet been able to.
The question becomes whether the modern employer is not willing to sacrifice productivity, but whether they are willing to make the even trade for experience instead.Continue reading
Everyone knows they need to save for retirement. But what happens when it’s time to start living on those savings after retirement? How do you make sure it lasts?
The Past: Pensions
In the past, people relied heavily on pensions. If you got a good job with benefits, worked it for thirty or so years, and then retired from that same company you could rely on pension payments to cover most (if not all) your living costs during retirement.
With a good pension, retirees could invest small amounts of money into bonds and certificates of deposits (CDs) to supplement a more luxurious form of lifestyle – not pay their living costs.
Unfortunately, most companies do not offer a pension anymore. In fact, they are almost non-existent. This means that retirees need to rely heavily on other income sources for retirement – and social security payments are not livable wages.
The earlier you start saving for retirement, the better. At a minimum, you should begin to store away cash and invest in a diversified portfolio fifteen years before you plan to retire. If you can begin even earlier – such as in her late twenties or thirties – that’s even better. The longer you plan, the better it will be.
Create A Plan
Retirees should have a plan in place which tells them how much money they will withdraw from their nest egg for each month. Take into consideration the times when you will spend more – like Christmas. Calculate your monthly living expenses, and plan on withdrawing no more than 4 percent of your savings each year. Figure out how much that is per month and calculate your spending accordingly.
Diversify for A Safety Net
Stocks have the potential to go way up in value, but they can also decrease dramatically. Consider a mixture of stocks with risk tolerances which fit your situation. But do not rely on stock dividends alone.
Besides stocks, consider CDs, bonds, and annuities. Don’t forget to have some kind of cash savings, also, and remember other options like reverse mortgages or life insurance pay outs.
Social security payments offer a steady source of monthly income, but you want to wait to start claiming them whenever possible. The minimum retirement age is 62, but people are not eligible for full SSI payments until they reach between 66 and 70. By using this too early you could be sacrificing more than 20 percent of what your payments could be.
If retiring later doesn’t sound ideal to you, try to set yourself up to live on other sources until you reach age 70. Higher social security payments will take the burden off your other financial assets considerably and make it last longer.
Investing in a source of recurring income prior to retirement is a good idea if you have the funds. One popular option is through purchasing rental properties – or by downsizing your own living arrangements and renting out the home you’ve been living in, versus selling.
This option is ideal for homeowners who pay off their mortgages at least five years prior to retirement. When considering properties and rental income, also consider what the mortgage on a new property would be. Consider how much of a profit you would make each month, and whether that is worth it for you.Continue reading
Most people have not saved enough for retirement. The closer they get to the end of their working years, the more obvious this becomes.
The good news is that there is a minimum of seven different bills which could help if they were to be passed by Congress. Even more amazing is that some of these bills are prompting the cooperation of both Republicans and Democrats.
Retirement Enhancement and Savings Act (RESA)
If this bill passes it would require employers to tell their employees how much their 401(k) is worth in retirement – not just how much they have currently invested in it.
The idea is that telling people how little is invested in their retirement will generate greater motive to save.
Strengthening Financial Through Short-Term Savings Act
This second bill is designed to help people handle unexpected emergencies. People could sign up at work to have some earnings placed away, tax-free. The idea is to deter people from withdrawing from their retirement accounts, which often comes with heavy penalties.
The Millennial Problem
What does this have to do with millennials? Millennials are a sizable generation in American, which were born between 1982 and 2000. Their biggest worry is that they will never see as much as 80 percent of what they are paying into social security.
The fear is well-founded. Current funding levels for SSI will officially begin paying out higher amounts than it brings in during 2021. By the year 2034 the benefits people receive will need to cut by around 23% to offset this.
How to Fix It
There are a few ways that Congress could potentially fix the problem, although none of the solutions are particularly appealing for anyone. They are, however, better than the option of paying into a fund only to be unable to withdraw your rightful amount come retirement.
The current options being thrown around Congress include:
- Lift the wage cap so all wages are taxable. As of right now, the ceiling for taxed income is $128,400.
- Raise the full retirement age (again). This is currently set at 67 but moving the full retirement marker up another year or two can help offset some of the losses.
- Increase legal immigration so there are more young workers in the country, which would increase the amount of money going towards funding social security.
What Can Be Done?
If Congress doesn’t do anything than millennials will need to plan ahead for a shortage in social security funding, which could potentially drop monthly benefit amounts drastically. Exactly what can be done will depend on your risk tolerance, income limits, and other individual factors, but a few ideas include:
- Closed-end funds – Specialized portfolio usually concentrated within a specific niche or geographical location.
- Real estate investment trusts – Investments in properties producing income or mortgages.
- Asset management and business development companies – Investing in companies who invest in small companies who are likely to grow quickly.
- Master Limited Partnerships – Investment in the production of energy, transportation, processing, etc. This can include anything which generates 90 percent of its revenue from natural resources.