Saving for retirement getting tougher
March 28, 2006
Retirement planning isn’t all for the rich. On the contrary, financial advisers from the Carson Valley to Lake Tahoe say those with low to moderate incomes may want to save even more than their wealthy counterparts.
To many, the idea of having enough money for retirement seems daunting – especially since the amount of cash it takes to live on now will not cut it by the time retirement age rolls around. Inflation will require double the amount of money to live comfortably through a 20-year retirement period. The average age of mortality for men is 85. For women, it’s 88. And Social Security may end up being a moving target by the time retirement comes around.
“The cost of living doubles every 24 years. That could amount to a third of your life,” Edward Jones investment representative Ron Bankofier said during a financial workshop set up through Douglas County Parks and Recreation.
South Lake Tahoe’s average household income is $34,700.
A first-class stamp, which cost 8 cents in 1973, went up to 37 cents three years ago. By 2033, the U.S. Postal Service predicts it will rise to 90 cents. The cost of a new car is expected to increase by six times in the same length of time.
Still, the dire picture of the cost of goods going up hasn’t sparked Americans’ interest in saving. In 2005, Americans’ personal savings rate has shown people are spending more than they’re making – something that hasn’t happened since the Great Depression of 1933, the Commerce Department reported a few months ago. More people are spending more than they make. That’s one of the first things financial consultants will tell people seeking debt relief.
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Be ahead of the game
Cheryl Sillings of Brookstreet Securities recommends simple measures to make the savings add up – anything from learning to cook and making coffee at home, investing in tax-deferred funds or paying off credit cards.
“I’ve seen so many people in this town get into trouble,” she said, mentioning one person she knows with $50,000 in credit card debt.
Even Oprah Winfrey has a debt diet now.
“People just don’t pay attention,” she said.
And when credit card bills are paid late, there’s not only the interest rate to pay on, a $25 to $35 late fee is usually added.
The other hidden costs may be in a coffee cup or a restaurant meal.
“If you’re spending $3 a day on a cup of coffee, that’s $900 a year. That’s crazy,” Sillings said.
The biggest expense is often the biggest asset.
High housing could be a bane and a blessing. The dream of owning has squeezed half the paychecks of homeowners, despite financial advisers recommending a third go to the expense. Rising property values have allowed homeowners to cash in on the equity, but sitting on the biggest asset may not be the long-term answer for those seeking retirement.
“I lay awake at night trying to figure out how they can get the money out of their house,” Edward Jones representative Janice Rice said. The point is, people have to live somewhere.
Knowledge is power
Once spending is controlled, Sillings and Bankofier suggest the low-to-moderate income buy mutual funds first if there’s a limited amount of money to be invested, because it’s the quickest way to diversify. There’s more to the adage: “Never put all your eggs in one basket.”
Diversifying means a mix of stocks and bonds that provides a balanced-toward-growth portfolio. “Large cap accounts” as in capitalization, provide more security in Blue Chip companies like IBM. But “small cap” companies may be riskier to buy into, but their aggressive nature may pay off in a bigger way if time is running out for baby boomers at middle age trying to save enough in time for retirement.
People wanting to invest may do so at their local bank, with a brokerage firm or in investment pools. The trick is to be ahead of the news on a company’s stock, anticipating as much about the industry as the individual firm.
Either way, a little reading and less intimidation can pay off. With limited means, some investors have found the charm and advantage of entering investment clubs.
Investment club option
South Shore dental hygienist Jan Miller got into an investment club seven years ago, finding success in each person tracking the stock and sharing information and camaraderie at the dinner meetings. Her favorite was Whole Foods, which the club bought for $22 a share. They sold stock in the specialty grocer a year ago for $100.
Miller used to check the price on the Internet and visited the Marin store on occasion.
“It did really well,” she said.
Investment clubs have become more popular and for good reason, Sillings said.
“It’s a great way to learn about the stock market and have better control over your money,” she said, comparing the practice to buying mutual funds where a money manager buys an assortment of stocks. “You have to lay ground rules though.”
An interested investor can read about the pools through the National Association of Investment Clubs.
Choosing a financial advisor
— Find someone you can trust
— Match the personality with yours.
— Select a full-service brokerage firm to get the widest array of products.
Source: Brookstreet Securities
— Get out of debt by paying off credit cards, especially the high-interest variety.
— Live within your means.
— Try to pay off your home mortgage sooner than the allotted timeframe – one way, making an extra payment every year can accelerate payoff by three times.
— Pay yourself first by investing in pre-tax and tax-deferred products such as 401(k)s and IRAs.
— If the disposable income to invest in is limited, put the money in in mutual funds because they’re considered diversified accounts.
— Join an investment club.
Sources: Financial advisors: Edward Jones’ Ron Bankofier, Brookstreet Securities’ Cheryl Sillings and Jeff Miner
How long will it last?
A $300,000 investment could run out in 13 years if 10 percent ($30,000) is removed each year from your portfolio at a 5 percent rate of return. Instead, taking out 7 percent ($21,000) would last 23 years, the average length of time one retires.
Source: Edward Jones