The Financial Shift

Most common retirement planning mistakes - CBS News

(MoneyWatch) Millions of baby boomers are approaching retirement as unprepared as Aesop's grasshopper. Here are 18 reasons why that's the case.

They fail to plan. To develop a well-designed plan, you must determine how much you'll spend. And unforeseen events that could create demands on capital must be planned for as well. The investment plan should be integrated into an overall estate and tax plan that includes wills and financial/health care durable powers of attorney.

They fail to start saving early. The failure to save early makes accumulating sufficient capital far more difficult.

• Six ways to avoid expensive investment mistakes
• How to boost your expected returns
• How you and your employer botch your 401k

They overestimate expected equity returns. Because equities have historically provided a return of about 10 percent, investors may assume they will earn that rate going forward. Unfortunately, most financial economists are forecasting future returns will be lower (e.g., 7 percent). And historically the average actively managed fund and the average investor have both underperformed the market by significant margins.

They fail to consider that the order of returns matters. Unfortunately, returns are not constant, and systematic withdrawals during bear markets exacerbate their effects, causing portfolio values to fall to levels from which they may never recover. Historically, a safe harbor withdrawal rate for a 65-year old couple has only been about 4 percent (adjusted each year for inflation). Given today's lower yields and lower expected stock returns, even that figure may be too aggressive.

They underestimate their needs. The average person will need to replace 80-90 percent of their pre-retirement income.

They underestimate their investment horizon. For the average 65-year-old couple, the life expectancy of the second-to-die is about 25 years. That means half can expect to live longer. Since being alive without sufficient assets is unthinkable, your plan should extend beyond life expectancy.

They overestimate their ability to continue working. People frequently retire early, often for good reasons. Unfortunately, there are also negative reasons, such as having to leave the work force due to health reasons, loss of job, or having to take full-time care of a spouse or elderly parent. A good retirement plan considers contingencies, including the need for disability insurance.

They become to

via www.cbsnews.com

Preliminary 2013 Financial Data & Fiscal Cliff Scorecard &

 

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Despite Gains, Many Flee Stock Market - WSJ.com

The stock market is reaching toward new highs on the fourth anniversary of the financial crisis, but many people refuse to be lured back.

Noah Rabinowitz for The Wall Street Journal

'I do not trust the stock market to put in lasting gains,' said Franklin Riesenburger, a lawyer and former buy-and-hold stock investor.

Even as stock indexes have doubled in value since the market low in March 2009, investors have yanked a net $138 billion from mutual funds and exchange-traded funds that invest in U.S. stocks, according to the Investment Company Institute, a mutual-fund trade group. Investors over the same period put $1 trillion into bond funds, a traditionally lower yielding but safer investment.

It marks the first time since 1981 that investors have pulled money from U.S.-stock funds for more than a year at a time.

Crumbling confidence in stocks reflects a broader loss of trust in the stock market and in the idea that the prudent investor could expect a comfortable retirement and even a measure of wealth.

The stock market has become the foundation of U.S. retirement savings, with nearly half of American families owning stocks. But wounded investors, worried about another big loss, are triggering a decline in stock ownership.

Market busts in the 1930s and 1970s soured previous generations of investors. Now, said money manager Steven Leuthold, of the Leuthold Group in Minneapolis, "I think we've lost another generation."

via professional.wsj.com

BERK: Big mistake...Fixed income is the riskiest investment right now, not stocks of great companies.

Sir John Templeton 16 Rules For Investment Success | The Big Picture

This means the return on invested dollars after taxes and after inflation. This is the only rational objective for most long-term investors. Any investment strategy that fails to recognize the insidious effect of taxes and inflation fails to recognize the true nature of the investment environment and thus is severely handicapped.
It is vital that you protect purchasing power. One of the biggest mistakes people make is putting too much money into fixed-income securities.

Today’s dollar buys only what 35 cents bought in the mid 1970s, what 21 cents bought in 1960, and what 15 cents bought after World War II. U.S. consumer prices have risen every one of the last 38 years.

If inflation averages 4%, it will reduce the buying power of a $100,000 portfolio to $68,000 in just 10 years. In other words, to maintain the same buying power, that portfolio would have to grow to $147,000— a 47% gain simply to remain even over a decade. And this doesn’t even count taxes.

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Berk: Invest for Maximum Total Return or don't forget about taxes and inflation....

Family Business: Money Management Lessons, Part III » Naples Daily News

8. Looking At Relative Performance Only — Traditionally, large institutional managers emphasize relative performance comparing against indexes. While it can be gratifying to learn your portfolio outpaced the S&P 500, it is really quite irrelevant. Generally for those investors who play this game, they only want to play part of the time.

They want to beat the indexes when the market is increasing, but not lose any money when the market tumbles. Unfortunately, it can't be both ways. More important is how well your investment program is doing in relation to your personal goals. Measuring your performance the right way should include reviewing the overall portfolio results against your targeted goals; determining after-tax returns; taking into account inflation and expenses; using the appropriate benchmarks to compare segments of your portfolio; and recognizing the level of risk associated with your returns. In most cases, consistent results are a wiser choice over spectacular performance.

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BERK: Good advice. "You can't relative performance" or it does not matter how well your portfolio does in relation to an index or to another person.

Indices don't have to fund their own retirements or leave a legacy for their grandchildren. Indices don't pay taxes either.

Invest for your personal goals.

Personal Financial Plans: Saving for the Future | AccountingWEB

Many American families are struggling to make ends meet and save for their future needs, according to a report from the Consumer Federation of America (CFA) and Certified Financial Planner Board of Standards, Inc. (CFP Board), but those with a financial plan do better and are more confident about meeting their goals. 

 

But only 36 percent of the 1,508 household financial decision makers who participated in the CFA/CFP Board 2012 Household Financial Planning Survey have ever prepared a comprehensive financial plan. Respondents with higher annual incomes and older respondents were more likely than middle-income families to have a financial plan.

 

Survey responses reflected the effects of the recession that began in 2008. Nearly 38 percent of households said they live paycheck to paycheck. Less than 30 percent indicated they felt comfortable financially, and only 34 percent think they can afford to retire by age 65. The survey was conducted by Princeton Survey Research Associates International (PSRAI).

 

Regardless of income, decision makers with a financial plan, whether it is one they have prepared on their own or with a professional, are more likely to feel they are on pace to meet all of their financial goals by a margin of 50 percent to 32 percent. By an even larger margin (52 percent to 30 percent), and across all income brackets, families with a financial plan are more likely to feel "very confident" about managing money, savings and investments.

 

What Is a Comprehensive Financial Plan?

The survey assumes that a comprehensive financial plan will identify a family's financial goals, and a plan for savings and investments that will help them meet those goals.  For most families, those goals will be income in retirement, college education for children, insurance needs, emergencies, and other expenses (e.g., assisting parents). The plan should include paying off credit card debt.

 

Most Americans have spending plans, the report says, but few have savings plans except for employer-sponsored retirement plans. Many respondents say that they do not earn enough money to save. "Advances in technology have made accessing and analyzing financial information much easier, but a lack of understanding about savings and investment options and how to best manage household finances remains a serious obstacle to Americans' financial preparedness," the survey reported.

 

Comparison with 1997 Survey

The CFA/CFP Board survey utilized a number of questions asked by a 1997 CFA-NationsBank survey, also developed with and administered by PSRAI. This made possible a comparison of consumer attitudes and habits in the more optimistic, low unemployment year of 1997, with attitudes and habits in 2012, in the aftermath of the recent severe recession.

 

The number of Americans who reported living paycheck to paycheck rose from 31 percent to 38 percent from 1997 to 2012, and the percentage who indicated they felt comfortable financially fell from 38 percent in 1997 to 30 percent in 2012.  

via www.accountingweb.com

Having a financial plan builds confidence and saving | Reuters

Reuters) - Americans who have a financial plan of any sort not only feel more confident and are more optimistic about their futures, but are also saving more and getting into financial trouble less than those without a plan, according to a new survey.

The report comes from the Certified Financial Planner Board of Standards, Inc., which represents more than 60,000 financial planners. But even though the CFP Board has the vested interest of professional advisers at heart, the survey was "not specific about how that plan was created," said Kevin Keller, chief executive of the CFP Board.

The purpose, he said, was to assess the value of financial planning more globally, the survey and was co-sponsored by the Consumer Federation of America, an advocacy group.

"It's understood that planning can be useful even if a family doesn't secure the services of a trained professional. Just sitting down at the kitchen table and thinking about one's finances can be very helpful," said Stephen Brobeck, executive director of the CFA.

Nevertheless, it's still a challenge to get people into planning mode. Only 31 percent of respondents said they had a comprehensive financial plan, defined as a written document that includes saving and investment strategies. A greater number, 63 percent of respondents, indicated they follow a plan for at least one of their savings goals.

As expected, the percentage of consumers with plans was highest in the $100,000-plus income bracket, with 55 percent having a comprehensive plan in contrast to 35 percent in the $50,000-$99,999 bracket. The high earners with plans were the most likely to say they live comfortably. Also, 100 percent of them have retirement savings, 92 percent have emergency savings and 73 percent are saving 10 percent or more of their income annually.

While the high earners outranked those in the $50,000-to $99,999 bracket in all those categories, Broback and Keller pointed out that those in the moderate income bracket with financial plans did better in some categories than those who make more than $100,000 but had no financial plan.

For instance, of those in the $50,000-$99,999 bracket who had a plan, 40 percent had 10 months or more of emergency savings, while of those in the higher bracket who had no plan, only 36 percent had at least 10 months of emergency savings. The same pattern applied to paying off credit card bills each month (45 percent to 41 percent), and never having declared bankruptcy (90 percent to 85 percent).

In addition, more respondents in the $50,000-$99,999 bracket who had a plan said they lived comfortably than did those in the top bracket who had no plan (50 percent to 47 percent); were more confident managing money (47 percent to 34 percent); and were more likely not to feel behind on any specific goal (46 percent to 35 percent).

via www.reuters.com

Americans worried about retirement, survey shows | Business | Detroit Free Press | freep.com

Although attitudes have changed and concerns have risen over time, there is one constant. "People who have a financial plan feel more confident about their financial future and report more success managing money, saving and investing," Keller says.

And when low-income families have a financial plan, they are more likely to pay their credit card bills in full and avoid debt, the survey found.

Yet only 31% of Americans have put together a financial plan, whether on their own or with a financial adviser, the survey says. And that was the same percentage as in 1997, when a similar survey was conducted. Among other findings:

• 38% of Americans live paycheck to paycheck, vs. 31% in 1997.

• 48% of families with college-bound children are saving for their education, down from 56% in 1997.

• 55% are worried about losing money if they invest it, compared with 45% in 1997.

• About half of Americans are behind in retirement savings, compared with 38% in 1997.

• 34% of Americans say they can retire at 65, vs. 50% in 1997.

Older workers are in more dire financial straits. Another survey out today from Allianz Life found that 28% of Baby Boomers ages 55 to 65 are worried that they won't be able to cover basic living expenses in retirement, it found. And 43% of them don't plan to focus on retirement income strategies until they are fewer than five years away from retirement.

Although 30% expect to work part time after they retire, studies show that they may have difficulty doing so, says Allianz, adding that the lack of basic retirement financial information is alarming.

Financial planning "requires one to think seriously about their finances, and many Americans would prefer not to and then don't," says Stephen Brobeck, executive director of CFA. "But having a personal financial plan helps both rich and poor achieve their financial goals.

via www.freep.com

Stocks for Bond Lovers - SmartMoney.com

Now seems a good time for bond investors to consider adding more shares for income. Investors have just come through "the decade of the bondholder," during which bond prices have soared on falling interest rates and companies strengthening their balance sheets, says Katherine Nixon, chief investment officer at Northern Trust, a Chicago investment firm managing $700 billion. Now they're likely entering the decade of the shareholder, when companies will be pressured to turn their cash hoards into dividends and stock repurchases, she says.

Below are listed P&G and four other companies with unsecured bonds rated Aa or better by Moody's, whose dividend yields are larger than the yields on their intermediate-term bonds.

Company (Ticker)	Bond Yield	Bond Maturity	Dividend Yield
Chevron (CVX)	1.9%	Mar. 2019	3.4%
Coca-Cola (KO)	2.3%	Sep. 2021	2.6%
Johnson & Johnson (JNJ)	2.8%	Nov. 2024	3.6%
Procter & Gamble (PG)	3.0%	May 2027	3.7%
United Parcel Service (UPS)	2.1%	Jan. 2021	2.9%

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Berk: Buy Stocks of Great Companies now.