Potential Retirement Financial Crisis

Monday May 19, 2008 USA Today had a front page article titled "Bill for taxpayers swells by trillions". This article states that US Federal Government deficit is far bigger than government estimate.

The official government accounting method stated that the deficit for 2007 was $162 billion. The government accounting method and does not look at future obligations. When future obligations are considered the number increased to $2,534 billion or $2.534 trillion.

Statistics:

• Long term financial obligations grew by $2.5 trillion last year primarily related to cost of Medicare and Social Security benefits.
• We are on the hook for a total $57.3 trillion in future liabilities.
• This equates to $500,000 per household.
• When the state and local government obligations are included the number increases to $61.7 trillion or $531,472 per household.

What is driving the future obligations? It is higher projected medical cost. For some reason, I am not seeing future medical costs going down or growing at a rate less than inflation. As people continue to live longer medical costs will continue to increase at a steady inflationary pace.

Use this information as a wake-up call that you need to save for retirement. With these future obligations on the horizon you need to prepare for a dramatic reduction in Social Security and Medicare benefits. Reduce your future dependency on Social Security and Medicare benefits by increasing your retirement savings.

Be prepared now for the potential retirement financial crisis.

Generation X Retirement Planning

Tuesday, May 20, 2008 the USA Today had an article "Generation X struggles to build a nest egg". Generation X is defined as a person born from 1968 through 1980 who would currently be 27 to 43 years old. Bryan Short is featured in the article. He is a 30 years old attorney living in the Washington, D.C. area who graduated from Boston College and law school at the College of William and Mary.

You would think that an attorney would be doing well financially and would be able to save for retirement. The article paints a different picture because of the repayment of college and law school debt.

GenXers have a looming retirement problem because of 3 issues: fewer and fewer companies are offering a defined pension, the growth in social security benefits is not keeping up with inflation, and excessive debt preventing saving for retirement. This perfect storm looks like this: companies are no longer giving a guaranteed pension, the government program is losing ground, so they need to start saving for retirement now but are not able to afford it. No guarantees for a retirement and not able to save for retirement. OUCH!!!

The good news is that about 80% of GenXers have access to some kind of retirement saving plan at work. The bad news is that only 60% of GenXers actually contribute to a retirement plan at work. 40% either do not have access to a retirement plan at work or do not contribute to a retirement plan.

This means that 40% are not planning for retirement and will be less prepared, and more dependent on social security benefits. Given the bad news on the future solvency of the social security program this leaves a GenXer in a precarious position.

What should you do if you are a GenXer? Get some professional retirement planning help now.

How Fear Can Lose You Money

I found this article on MSN.com "How Fear Can Make You Lose Millions". It has a paragraph that recorded an October 10, 2002 headline in the USA Today "Where's the bottom? No end in sight...". The article says that it just so happened that this was the most recent bottom in the Dow Jones Industrial Average. In hindsight it was the day to buy instead of a day for fear.

Fear can be a good thing if you are a speculator or have a very short term focus. If you are investing in things like options, futures, or an individual stock.

Fear is not a good thing for a long term investor. The world's greatest investor is Warren Buffet. Does he invest out of fear? I think the answer is no because I have never heard or read where he used this word. Is he selling his investments in a downturn just because it is a downturn? No, he is a long term investor who invests based upon fundamentals.

If you have a portfolio that you are comfortable with and have a long term horizon you should never make investment decisions based upon fear. You hurt your future by becoming emotionally attached and listening to the media.

Emotionally Attached: It is human nature that when an investment is going up that it makes us feel successful because we were smart enough to invest in it. It also makes us feel not so smart when an investment is going down because we were dumb enough to invest in it. Isn't the object to buy low and sell high. When we get emotionally attached we tend to do just the opposite, buy high and sell low.

A natural tendency exists to invest more money in successful things so we tend to buy when something is going up. We want to avoid emotional pain and tend to get rid of it when it is going down.

Media: Why does the media exist? To make money for the media business. When you listen to a radio station, watch a TV channel, or read something in print the company that owns this media ultimately needs your attention because of money.

A media business needs more subscribers or listeners. Normally journalist rather than investment professionals write these articles. To sell more media, articles tend to feed your emotion. So when things are going up the media says that things are great. When things are going down the media says that things are bad.

A new media invention is the appearance of trading as investing. Take the show Fast Money or Cramer on CNBC. What is the purpose of the show? To get you to buy and sell stock. It is important to the brokerage firms that is sponsoring this show that you trade more often because they only make money when you buy or sell. A trading show gives the illusion of having a purpose of making you money fast. The main purpose for the sponsors of the show is for you to give them money fast. It is a seconday benefit if you make money.

In a broker transaction, the broker and the brokerage firm are guaranteed to make money. You are never guaranteed to make money. Keep the money in your pocket rather than giving it away.

Perhaps the phrase a penny saved is a penny earned should be modified to a brokerage fee saved is money in your pocket.

Portfolio Building, Improve Return with Minimal Fees

You want your retirement money to grow as fast as possible. One way to improve the return on your investment is to purchase the best No-Load Mutual Funds and hold them to minimize transaction fees. This is better called Portfolio Building.

Where does this start? It all begins with an understanding of the current financial state and future needs. A financial assessment is needed along with a risk assessment. Then the key is Diversification, Diversification, Diversification of No-Load Mutual Funds.

No-Load: It is really important to purchase a no-load fund if at all possible. Sometimes, when you research mutual funds that invest internationally, the best funds have a load and in this instance it makes sense to buy a loaded fund.

When you pay a load you are really paying the mutual fund to sell it to you and others. Also a loaded fund has higher annual fees called 12b-1 fees used to promote the fund. Yes we pay to see our mutual fund company on TV or in print. Why pay money to a mutual fund so that they can sell and promote it to others?

The Best Funds: Mutual funds are given a grade and I use the Morningstar 5 star rating system. This looks at risk and return from a historical perspective. Another indicator is the size of the mutual fund and being too big or too small can hurt your return. Typically, for mutual funds with the same investment objective, the largest Morningstar 5 star rated mutual funds will not perform as well as medium sized Morningstar 5 star rated mutual funds.

Diversification of Stocks: It is important to have a broad portfolio that includes the best investments around the world. Multiple mutual funds are needed that invest in different sizes of companies and different industries, including commodites. Having mutual funds that invest internationally can improve your return while reducing risk.

Diversification of Bonds: It is important to have bond mutual funds with different time horizons. Short term bonds seldom, if ever, go down and have little exposure to a capital loss as interest rates rise. Long term bonds over a longer holding time will give a better return.

A retired person should have a certain amount of cash in a money market account. The reason is freedom to sell an investment when you want rather than when you have no other alternative.

Diversification of Time: Since it is impossible to know when an investment is at a market top or a market bottom making contributions on a regular basis makes sense. This is also called dollar cost averaging. Disciplined investment with regular contributions helps take some of the volatility.

Happy investing!!!

Suitable Retirement Investments

Congratulations you have started and are contributing to a retirement account. The question is what should be your investments?

From a legal perspective a retirement account can include: Stocks, Bonds, Mutual Funds, Annuities, Limited Partnerships, & U.S. Minted Coins. It can not include: Margin Accounts, Short Sales, Tangibles/Collectibles/Art, Speculative Options Trading, Term Life Insurance, Rare Coins, & Real Estate.

From a tax perspective 2 important points should be remembered:

1. A retirement account grows either tax deferred, such as in a traditional IRA, or tax free, such as in a Roth IRA.
2. Investment losses can not be deducted in a retirement account. A loss can be deducted in a non-retirement account.

Since it grows without a concern on paying taxes it is important invest in taxable investments. A tax free bond, such as a municipal bond, would not be appropriate. The focus has to be on growing as fast as possible.

Since investment losses are not deductible in a retirement account, you need to be concerned about the amount of risk. A higher risk investment, such as an individual stock, would be more appropriate in a non-retirement account as you can deduct any potential loss. A mutual fund of stocks would be more appropriate in a retirement account. Even though it is possible for a mutual fund to go down an individual stock can go down even further due to a lack of diversification.

Would I invest in bonds or a bond mutual fund within a retirement account? Only when the timeframe is less than 8 years and investor preference. Personally, I doubt if I will ever own a bond or a bond fund because of my personal preference.

Happy Investing!!!