If you’ve been following me for a while now, then you might already know my take on target-date funds (TDFs). I’m a proponent — especially if you’re aiming to rebalance your portfolio — and need some help along the way. In this week’s column, I take you through what you need to know about TDFs when it comes to retirement.
FORTUNE – More than 51 million Americans have an active 401(k) retirement account, according to the Investment Company Institute. And if recent statistics from Vanguard hold across the category – more than half have at least some of their money in a target-date fund. That’s a lot of dough and it’s growing fast. According to BrightScope, target-date fund balances overall hit $500 billion in assets in 2012. The company is estimating them to reach $2 trillion by 2020.
In many ways, that’s a good thing. That shift has tempered the bi-polar tendencies of many 401(k) investors. According to Vanguard, 10 years ago, 13% of their self-directed 401(k) investors held no stocks and 22% held only stocks. No matter how you slice it, those investors were taking too little or too much risk. Last year those numbers dropped to 10% and 13%, respectively – a result, at least in part, of making TDFs the default option on many retirement plans.
I’ve been a proponent of TDFs over the years. I like the way they help humans who say they are going to rebalance their portfolios but never seem to get around to it stay at least in the vicinity of the track. Which is not to say I think they’re perfect.
For the full column, head over to Fortune.com
Hi Dave. Generally, no. There are a few exceptions — alimony and scholarships, for example. But perhaps the biggest is spousal income. If you have a spouse who works, you (and your spouse) can both make contributions based on that income.
Not being able to qualify for an IRA, however, doesn’t mean you shouldn’t save. Invest your money in a discretionary account just as you would an IRA, based on your age and your risk tolerance – and let the time value of money work on your behalf.
You can open a discretionary account at any major brokerage.
FORTUNE — Like many of you, I’ve been reading the doomsday headlines about frequent-flier mile programs. “The Sad Decay of Frequent Flyer Programs,” Wired intoned. “Now May Be A Good Time To Bail Out of Frequent-Flier Mile Programs,” grimaced the New York Times.
Sorry, but I’m not ready to do that yet. I know that compared to many of you, I am not all that frequent a flier, but particularly in the spring and the fall when my speaking business heats up, I’m on the road almost weekly. I can point you to the best salad at O’Hare (the Taqueria with smoky shrimp at Tortas Frontera) and explain why you shouldn’t bother with the cramped food court at Jet Blue’s (JBLU) Terminal 5 at JFK (Balthazar scones down the hall). And I’ve gotten used to the fact my husband and I can take a nice vacation about every 18 months courtesy of our miles, which for years we’ve embellished by putting just about every purchase on Citibank’s American Advantage card.
Over the past few years, however, redemption has gotten harder. Flying to the places we want to fly (Italy and Hawaii, most recently), when we want to fly there (summer and Christmas break, respectively), and sitting where we want to sit (up front, it’s a long flight) has meant forking over double the miles it used to take. Most recently, even having the miles to spend, it was excruciating to get seats.
For more, and to see who helped me with the article (and my future travel), head here.
This week we welcome Bill Somerville, a writer for the website Money Crashers. He’s here to give you some ideas for building your emergency cushion — as you know, I think having emergency money on hand is one of the keys to financial success (it’s even a Money Rule — #15: Emergencies Happen).
Unemployment remains high, no one is exactly sure what the Affordable Care Act truly means for healthcare costs, and the last government shutdown caused hundreds of thousands of workers a temporary job loss. During times like these, you have to protect yourself financially, and step number one means creating an emergency fund. If you’re currently dealing with credit card debt, student loans, or high monthly expenses, you may think an emergency fund belongs on the back burner. Don’t make that mistake. With just a bit of planning and forethought, you can devise a plan to both establish the backup money you need and to watch it grow in the right financial product. Do so, and your finances are going to be resistant to nearly any financial fluctuation or calamity. Here’s how to get it done.
1. Cut the Cost of Your Food Bill
If you’ve never thought about clipping coupons before, then you’re simply missing the boat when it comes to saving on groceries. They’re in the Sunday paper, but they’re also in your smartphone if you download apps like Yowza or RetailMeNot, and they are available at food manufacturers’ websites as well. Just commit to not using a coupon for something you wouldn’t normally buy – that’s spending money as opposed to saving it.
Is there a rule of thumb that a monthly pension payment should equal a certain amount of dollars of savings? We hear that we need X dollars for retirement, but with a pension, what might that equate to? Some of us will have pensions from previous employers and wonder what it means in terms of the amount we need to save. (For example, does $1,000 in a monthly pension = $125,000 in savings?) What are good numbers to use in planning? Thank you.
Kathie, it really all boils down to how much of your pre-retirement income you’re trying to replace. That’s what you should focus on. Recent research has shown that spending in retirement isn’t linear as previously thought. You were often told you should plan on spending 70 to 80% of your pre-retirement income in retirement. In fact, spending usually tails off after the kids go to college and leave the house and, eventually, you stop working full time. Then life gets really expensive when you hit uber old age and healthcare expenses ramp up.
That said, on average, aiming for that 80% replacement rate is probably a pretty good move. You need to head to a retirement calculator that allows you to input how much you’re expecting from Social Security and your pension as well as how much you’ve saved. The AARP’s retirement calculator – which you’ll find here – will let you do just that. It’ll run the numbers and help you figure out how much more you need to save to meet your goals.
Merrill Edge has a new mobile app, Merrill Edge’s Face Retirement. In response to research from Stanford University that found that being able to see yourself older may encourage you to save more and focus on your retirement planning, the app (and coordinating web version) encourages you to “meet the future you” by aging a picture of yourself. See my aged photo below — while I can’t say the results made me want to save more, they did make me want to buy anti-aging cream.
FORTUNE — In the last two days, I have read two newspaper stories that have me worried.
The first, from Washington Post syndicated columnist Kenneth Harney, pointed to a huge rise in the amount of debt being taken out in the form of home equity lines of credit. “New home equity credit line borrowings soared by 42% in the final three months of 2013 and were up sharply for the entire year, to $111 billion,” he wrote. As for the reasons behind the increase, Harney singled out the comeback in home prices in the last couple of years that sent equity soaring, combined with the fact that teaser rates on HELOCs make them more attractive than a cash-out refi (and that’s before you consider a refi’s closing costs).
The second story, in Monday’s Wall Street Journal, focused on the rise in people taking out student loans not because they want to earn a degree, but because they need the money — and student debt is cheaper and easier (i.e. no credit check) than getting a loan from a bank or leaning hard on your credit card. “College officials and federal watchdogs can’t say exactly how much of the U.S.’s swelling $1.1 trillion in student-loan debt has gone to living expenses,” wrote reporter Josh Mitchell. “[A report from the Education Department's inspector general] also found the schools disbursed an average of $5,285 in loans each to more than 42,000 students who didn’t log any credits at the time.
For more head over to Fortune.com
FORTUNE — The most frightening billboard I saw in recent months ran along the Westside Highway in Manhattan. From the good folks at Prudential, it read: The First Person To Live To 150 Is Alive Today, with the subhead, Plan For A Longer Retirement. A few weeks later, our sister publication, Time Magazine, followed in tandem, asking the question on its cover: Can Google Solve Death?
We get it. From a financial (as well as, of course, a medical) perspective, longevity is very likely the issue of the century. What can you do about that? Saving more never hurts, the folks behind America Saves Week, which happens to be now, nudge us to remember on an annual basis. (If you need help saving more, check out the resources here.)
But, the longer your time horizon, the more you may also want to think about socking away in stocks. A new paper from Morningstar Head of Retirement Research David Blanchett along with Michael Finke of Texas Tech University and Wade Pfau of The American College looks at the issue of time diversification, defined as “the anomaly where equities become less risky longer investment periods.” The researchers look at 113 years of data from 20 countries and found that, yes, the longer your time horizon, the more you may want to allocate your investments to equities.
For more, head over to Fortune.
I’m excited to have John Schmoll as today’s guest poster. I met him when I spoke at FINCON — a financial bloggers conference — last year, and have enjoyed reading his blog Frugal Rules since. Today, he’s sharing his tips for saving for retirement when you’re self employed.
I have learned a lot about myself in the 18 months or so that I’ve been self-employed. I’ve learned about what truly motivates me, what I do in the face of a challenge, and how easy it can be to let things slide by.
One particular area that I’ve been guilty of letting slide by over the past year is actively saving for retirement. Gone is the 401k and the ability of getting that nice employer match – it all rests on my wife and I now. I’ve learned that even with the ups and downs of self-employment it is possible to have balance and put away money for retirement, though it takes action on your part.
Months Turn in to Years
If you run your own business, you know better than most that time is precious and there never seems to be enough of it in a day. As a result, time passes and things get delayed as you implement an “I’ll take care of it tomorrow” mindset.
The problem with this mindset, as it relates to retirement investing, is those days turn into months and thus you lose that precious time needed to grow your portfolio. This temptation to delay happens to the best of us and the best thing you can do is take the bull by the horns and actively engage with your retirement investing now.
Know Your Options
Many employers offer a solid framework you can use to save for retirement in a 401k. Often, entrepreneurs allow this lack of framework to hold them back from saving for retirement. If you’re self-employed, there are many retirement saving options you can use to create your own framework:
- SEP IRAs
- SIMPLE IRAs
- Solo 401ks
Most brokerages offer all of these options, but make sure you find the one that works best for you and has either no fees or low fees so you can have more of your money working for you.
One nice added feature is that you can invest in virtually anything in these retirement accounts vs. restrictions you might face in an employer-sponsored 401k. Thus, you have access to lower-fee index funds as opposed to being forced to choose between several higher-fee funds – which means more of your money can work for you.
Look at Your Priorities
The problem many face in their self-employment journey is fluctuating income. You could have a stellar month followed by one that is barely enough to get by. When dealing with this fluctuating income there are a number of things to look at:
- What are you spending money on each month that can be cut?
- What is your rolling average of income over a longer period of time?
- Are you sitting on too much cash?
Taking a serious look at some of these things can not only reveal what your priorities are, but it can also show you that you do have money you could set aside each month or quarter for retirement. Of course you still want to be able to live life, but you don’t want to do it at the expense of sacrificing your future for the present.
Saving for retirement while running your own business does present some unique challenges, but it’s not impossible. Making it a priority and knowing your options will set you up to succeed in the long run.
About John: John Schmoll is the founder of Frugal Rules, a blog created to help people experience financial freedom through frugality. John is passionate about budgeting, saving and investing and enjoys sharing his knowledge and experience with others so they can avoid making some of the mistakes that he made. A veteran of the financial services industry, John has an MBA in Finance and experience as a licensed stockbroker. You can find John online at frugalrules.com and follow him on Twitter at @frugalrules.
Aimee Shaffer had to make it work. After years of working as a public service news director at a radio station, her employer downsized, leaving Schaffer jobless, and unable to seek radio jobs at competing local stations (the fine lines of her contract). Left without a steady paycheck for the first time, Shaffer started saving.
By paying her bills with unemployment money, and cutting back on spending altogether, she made it work. For example, for her entertainment, Shaffer purchased a $10 pass to her local parks, and took to hiking and biking. She also steered her way onto a different career path and started her own business as a professional pet sitter. Shaffer even saved for retirement along the way. As she shared with America Saves, “I didn’t think I had enough money to save but I started by putting $25-$50 away with each paycheck and now I have a nice little fund.”
Shaffer’s story on saving, along with others’, can be found on the America Saves Week website.
As it just so happens, next week is America Saves Week (February 24th – March 1st). I know, it certainly doesn’t sound as fun as World Bartender Day, which is also next Monday, but it’s a week worth observing…and an action to start taking if you aren’t already. Since 2007, the week has been an opportunity for organizations to promote fruitful saving practices, and for individuals to confront their own savings habits (or lack there of).
Maybe your story is similar to Shaffer’s, or perhaps “saving” to you means scoring a great deal on a fabulous pair of shoes. Chances are you could be saving more. Don’t by it? The organization’s website also has a test you can take to assess your savings IQ. For instance, how much do you think the average American spent on the unexpected (i.e. emergencies) last year? Hint: It’s a lot.
For more on America Saves Week – what it’s all about, how to pledge, and above all, how to save more – head over to the organization’s site.