Monthly Archives: September 2012

Seven Steps to a Sound Retirement

Good Day,

Ever wondered why everything that has been proven to work, always has steps for one to follow to achieve the desired goal. Maybe the secret is to break it down so that it becomes easier to put it to practice, for example driving, you have to get the basics first before getting behind the wheel, and takes another few years before you become an experienced driver. The same thing happens with financial planning, before you achieve your financial goals, you’ll have undergone serious adjustments to your life as you try to instill discipline when it comes to finances. That’s why it is always recommended that you review your financial plan every year, to see whether it is working or it needs adjustment due to the changes that have taken place in your life during the year. As Robert Powell points out in the following article, there are seven steps to a sound retirement.

There are seven keys to a lot of things in life. There are seven steps to heaven and seven types of intelligence and seven habits of effective leaders.

Now we have seven steps to retirement planning courtesy of the Society of Actuaries, which just released a 64-page report with the not-so-consumer friendly title “Segmenting the Middle Market: Retirement Risks and Solutions Phase II Report.”

“Retirement financial planning requires a methodical approach that identifies and quantifies each important component that affects the asset accumulation, income management and product selection/investment decision processes,” according to the report, which was sponsored by the society’s committee on post-retirement needs and risk and written by Noel Abkemeier of Milliman.

Not surprisingly Abkemeier says this approach is especially important for middle-income Americans who likely have less than $100,000 set aside for retirement. So what are those steps?

1. Quantify assets and net worth

The first order of business is taking a tally of all that you own — your financial and non-financial assets, including your home and a self-owned business, and all that you owe. Your home, given that it might be your largest asset, could play an especially important part in your retirement, according to Abkemeier.

And at minimum, you should evaluate the many ways you can create income from your home, such as selling and renting; selling and moving in with family; taking out a home-equity loan; renting out a room or rooms; taking a reverse mortgage; and paying off your mortgage.

Another point that sometimes gets lost in the fray is that assets have to be converted into income and income streams need to be converted into assets. “When we think of assets and income, we need to remember that assets can be converted to a monthly income and that retirement savings are important as a generator of monthly income or spending power,” according to SOA’s report. “Likewise, income streams like pensions have a value comparable to an asset.”

One reason retirement planning is so difficult, according to SOA, is that many people are not able to readily think about assets and income with equivalent values and how to make a translation between the two. Assets often seem like a lot of money, particularly when people forget that they will be using them to meet regular expenses.

Consider, for instance, the notion that $100,000 in retirement savings might translate into just $4,000 per year in retirement income.

2. Quantify risk coverage

Take stock of all the insurance that you might already have or need — health, disability, life, auto and homeowners. In addition, consider whether you might need long-term-care insurance, especially in light of the cost associated with long-term care and the very real possibility that you might need some assistance at some point in your life.

According to the report, those households with limited assets, say less than $200,000 in financial assets, may need to spend down their assets and rely on Medicaid, while those with more than $2 million in financial assets can cover long-term-care costs out-of-pocket. But those households with assets in between $200,000 and $2 million should include long-term care insurance in their plan, according to the SOA. And the best time to buy such insurance is in the late preretirement years.

The SOA also notes in its report the possible need for life insurance, the death benefit of which can be used for bequests or to provide income to a surviving spouse. Life insurance premiums can be expensive if you’re getting on in years. That’s why the SOA report suggests that you continue “existing preretirement coverages during the retirement period.”

Of note, there will soon be many policies that combine long-term-care insurance with life insurance and annuities.

3. Compare expenditure needs against anticipated income

The thing about retirement is that it’s filled with expenses, which according to the SOA report “can be thought of as the minimum needed to sustain a standard of living, plus extra for nonrecurring needs and amounts to help meet dreams.” What’s more, those expenses are likely to change over time.

So, to make your retirement plan work in reality you first have to make it work on paper. You need to compare whether you’ll have enough guaranteed income to cover your essential living expenses, including food, housing and health-insurance premiums, at the point of retirement and then compare what amount of income you’ll need to cover your discretionary expenses, such as travel and the like (if those are indeed what you might consider discretionary expenses).

Your guaranteed sources of income include Social Security, and possibly a pension and annuity. Your not-so-guaranteed sources of income include earnings from work, income from assets such as capital gains, dividends, interest, and rental property.

No doubt, as you go about the process of matching income to expenses, you might find yourself having to revise your discretionary expenses, especially if there aren’t enough guaranteed sources of income to meet essential expenses.

4. Compare amounts needed in retirement against total assets

So here’s where your math skills (or your Google search skills) might come into play. Besides calculating your income and expenses at the point of retirement, you need to figure out whether your funds will last throughout retirement. In other words, you need to calculate the net present value of your expenses throughout retirement.

Now truth be told finding the present value of your expenses is a bit tricky, especially since there are many factors that can affect how much is really needed, including the date of your retirement, inflation rates, gross and after-tax investment returns and your life expectancy.

But the bottom line is this: If, after crunching the numbers, the present value of your expenses is greater than the present value of your assets you’ve got some adjustments to make. And the good news is that there are plenty of adjustments that you can make.

You could, for instance, delay the date of your retirement or return to work or work part-time. Those actions might be enough to offset the difference. In addition, you might consider trimming your expenses or consider a more tax-efficient income drawdown plan.

5. Categorize assets

The SOA also recommends that assets be grouped to fund early, mid and late phases of retirement. Thus, assets for early retirement should be liquid, while mid-retirement assets should include intermediate-term investments such as laddered five-to-10-year Treasury bonds, TIPS, laddered fixed-interest deferred annuities, balanced investment portfolios, income-oriented equities, variable annuities, and the like. And late retirement assets include longevity insurance, TIPS, balanced portfolios, growth and income portfolios, laddered income annuities, deferred variable annuities and life insurance.

6. Relate investments to investing capabilities and portfolio size

This should come as no surprise; the SOA recommends that you invest only in things that are suitable, relative to your risk tolerance, investment knowledge and the capacity of the portfolio to accommodate volatility. “In short, a retiree should not invest beyond his investment skills, including those of his adviser,” the SOA report stated.

7. Keep the plan current

This too might be a bit obvious, but retirement-income plans must not be built and set on a shelf. The plan is a point-in-time analysis that must be reviewed on a regular basis.

Consider, for instance, just some of the things that could change in one year, according to the SOA. Health status or health-care costs could change; your life expectancy might change; your investment returns and inflation might be quite different than your assumptions; and your employment status and expected retirement date might change.

What’s more, you might suffer the loss of a spouse through death or divorce, or perhaps you might not be able to live independently any longer, or perhaps you might need to sell your house or unexpectedly care for dependents, or change your inheritance plans.

Said Abkemeier: “You want to keep your plan current. You need to tie everything together and go back to the start of the process each year. You want to enjoy retirement, but you don’t want to be at rest.”

Social Security Errors That Can Cost You Thousands

Good Day,

With the tough economic times, more and more people are depending on Social Security as their main source of income for their retirement. Nowadays, every penny is budgeted for, thus asking a retiree to delay collecting their Social Security is a death sentence for the majority. But even with the tough economy, there are measures that you can take that will ensure that you maximize the most out of the retirement income that you receive from Social Security. Thus, as you contemplate on how to maximize your Social Security benefits that will supplement you already meagre income, the following article by Steve Vernon, has tips on how to avoid errors that cost retirees thousands of dollars over the years.

Social Security benefits are the bedrock of most Americans’ retirement security. So it’s well worth your time to learn how to get the most from these valuable benefits, and avoid making mistakes in how you collect them.

To help you in this endeavor, I checked with two of the nation’s foremost experts on Social Security: Andy Landis, author of “Social Security: The Inside Story,” and Jon Peterson, who wrote “Social Security for Dummies.” Between Andy, Jon and I, we came up with four common errors that you should avoid and that will help you optimize your Social Security benefits.

Mistake #1: Starting retirement benefits too early

Half of all Americans claim Social Security at age 62, the earliest possible age with the lowest monthly benefit. But most workers can significantly boost their lifetime payout of Social Security income by delaying the start of their monthly benefits. By how long?At least until age 66, and to age 70 if you can wait that long. For many married couples, this strategy will also improve the financial security of widows who, when their husband dies, will step up to the Social Security income their husband was receiving before he died.

I realize that many people lose their jobs and claim Social Security benefits early to make ends meet. But personally, I’d take any job that would pay me an amount equal to my Social Security benefits in order to reap the advantage of delaying my benefits as long as possible. I’d work at Wal-Mart (WMT), Starbucks (SBUX) or any other part-time job that pays enough to replace my Social Security benefits, while giving me enough free time to look for a better-paying position. In the long run, it’s a financially smart move.

Mistake #2: Claiming Social Security now before program changes are made

“Some people think they must hurry to apply now, before Social Security runs out of money or before reforms make them ineligible,” Landis said. “In fact, Social Security is projected to have the money it needs to operate at the current level for over two decades. And nearly all reforms on the table will apply to younger generations, not those currently retiring. So calm down and follow your best plan for claiming Social Security benefits.”

Mistake #3: Not coordinating benefits for spouses

“Many people fail to coordinate claiming benefits with their spouse, and they miss opportunities for married couples to optimize their payouts,” Peterson pointed out. These strategies usually entail starting Social Security benefits at different times for the husband and wife, whereas many married couples start their incomes at the same time.

One common strategy is to delay benefits as long as possible for the highest earner — often the husband — for the reasons described above. The wife might then claim benefits at an earlier age to have some retirement income coming in. Whether the optimal age to start the spouse’s benefits is age 62 or age 66 (the official retirement age to collect full benefits) depends on your particular circumstances, such as the age difference and relative career earnings history of each spouse.

Two online services that can help married couples optimize their claiming strategies are and

Mistake #4: Under-reporting of income by self-employed individuals

Many self-employed people under-report their taxable income for Social Security purposes, or use tax deductions to minimize their taxable income, on the assumption that paying any taxes is bad. But “This can hurt if you want Social Security benefits one day — including disability benefits, in the case of unexpected illness or accident,” Peterson said.

I know a number of self-employed people who’ve minimized their Social Security taxes over the years and are now reaching their retirement years with little or no retirement savings and severely reduced Social Security benefits. Now they regret this strategy and will need to keep working indefinitely.

According to one analysis, Social Security taxes are actually a good investment, so don’t automatically think it’s a good idea to avoid paying these taxes.

These are just a few of the mistakes that people routinely make in drawing Social Security. Stay tuned for future posts on how best to use the federal program. It’s well worth your time to learn all you can about Social Security benefits; it can result in increasing the lifetime payout for both you and your spouse by many thousands of dollars.

8 Ways to Motivate Yourself to Save for Retirement

Good Day,

As I’ve always said over and over again, it’s not easy saving for retirement that is in the distant future. Many people usually fall off the bandwagon midway, and never realize their retirement dream. Motivating yourself to take up something that you won’t be able to see the result in the near future is one task a lot of folks avoid, but sadly to their detriment. The just concluded Olympics Games is a good example of how human perseverance, dedication, hard work and patience will get you your ultimate goal. I know its hard, but for your financial well-being, the following article by Emily Brandon will give you 8 ways to motivate yourself to saving for retirement

Motivating yourself to save for a retirement that’s decades in the future can be a daunting challenge. Behavioral researchers are testing exactly what triggers cause people to sign up for retirement accounts and increase their contributions. It turns out that a variety of experiences, including spending time with your grandparents, worrying about problems you could face in old age, and even picturing what you will look like in retirement could persuade you to boost your retirement account contributions. Here’s what researchers say motivates us to save for retirement:

Break it down into steps.

Instead of focusing on the final account balance you will need for a comfortable retirement, figure out how much you need to save each week or month. “It gives you something in the immediate future to focus on rather than something in the distant future that you may or may not be able to relate to,” says Nicole Votolato Montgomery, an assistant professor of marketing at the College of William and Mary’s Mason School of Business. Her recent online survey showed 750 individuals an advertisement encouraging them to save for retirement, then asked how much they intended to save as a percentage of their salary. Young workers between ages 18 and 34 said they were going to save the largest portion of their salary (20 percent) when the advertisement told them the biweekly dollar amount they need to save for a secure retirement. In contrast, young employees presented with a long-term retirement contribution goal said they would save 14 percent of their pay for retirement.

Project your retirement income.

Consider calculating the annual income your current nest egg is likely to produce in retirement. A recent study of 16,881 University of Minnesota employees sent some workers a four-page color brochure with a customized projection of the additional annual retirement income that would be generated if they saved more. Among employees who adjusted their retirement-savings contributions, those who received retirement-income projections saved $1,152 more per year than people who didn’t receive the mailing. “By providing the individuals with projections about how much income they will have on an annual basis in their retirement, they actually save more. We’re helping them to better understand their return on their savings,” says Colleen Flaherty Manchester, an assistant professor for the Carlson School of Management at the University of Minnesota. “People often get intimated and overwhelmed by a huge number. When they see how much it actually translates into, they are maybe more motivated to make decisions.”

Don’t set your goal too low.

“People who want to save more should focus on ambitious targets,” says Emily Haisley, a behavioral finance specialist for the wealth and investment management division of Barclays. For her research, employees at a large technology company were sent several versions of an e-mail pointing out that they could earn a bigger 401(k) match if they set a savings goal of either $7,000 or $11,000 for the year. The higher goal raised contribution rates by 2.2 percent of income. E-mails that pointed out the maximum possible 401(k) contribution amount ($16,500 at the time) also pushed up savings rates by 1.5 percent of pay. “You should save when the inspiration strikes and not worry about having to back off a bit later on,” says Haisley.

Consider the negative consequences of failing to save.

Instead of focusing on the travel or golf you’ll enjoy in retirement, it may be more effective to focus on the negative consequences of failing to save, says Montgomery. “Younger workers are probably thinking about how great retirement is going to be. If you can reverse your mindset a little bit by thinking about some of the negative things that could happen, I think that can be very effective,” she says. “Focusing on some of the things that will happen if you don’t reach that goal can be an effective tool in encouraging workers to save. Failing to save can lead to a retirement that is not as enjoyable.”

Set up automatic contributions.

One of the simplest strategies to save more for retirement is to take the decision out of your own hands. About half (47 percent) of 401(k) participants are now in plans offering automatic enrollment, according to Vanguard data. Employees who are automatically enrolled in 401(k) plans had an 82 percent 401(k) participation rate in 2010, compared with the 57 percent of employees who voluntarily signed up for their 401(k) plan. But automatic enrollment is not a guaranteed path to retirement security because the most common default savings rate used by over half of plans is only 3 percent of pay. Workers in plans with automatic enrollment saved an average of 6.3 percent of pay, versus the 7.4 percent saving rate among voluntary 401(k) participants. To attempt to correct this, three-quarters of 401(k) plans with automatic enrollment also automatically increase the contribution rate annually, typically by 1 percent each year. Another 20 percent of plans allow workers to sign up for automatic increases in 401(k) contributions.

 Picture yourself in old age.

When researchers showed people aged photographs of themselves, it made them more likely to want to save for retirement. “Exposure to those images actually made people feel a bit closer to that self in the future,” says Hal Hershfield, an assistant professor in the marketing department at New York University’s Stern School of Business. In a 2011 study, after they were shown either an aged or current picture of themselves, the 50 participants were asked to allocate a hypothetical $1,000 among four choices: a retirement fund, checking account, fun and extravagant occasion, or to buy something nice for someone special. Participants who were exposed to the aged photo of themselves allocated more than twice as much money to the retirement account ($172) as those who viewed a rendering of their current appearance ($80). “There are websites that do this age progression thing,” says Hershfield. “When you need to make an important financial decision, you can do that and print it out.”

Spend time with your grandparents.

Strike up a conversation with retired relatives or neighbors. “Spend more time with older role models, people who may act as proxies for your future self like grandparents or older colleagues,” says Hershfield. They might provide some insights about what retirement is actually like, which could encourage you to plan for your own future.

Think about your future self.

People who feel more connected to their future self may be more likely to save for retirement, according to recent research. Some 193 Stanford University staff members received two different messages about their retirement accounts: one encouraging them to think of their own “long-term well-being” and the other telling them to think about a “future self” who is completely dependent on how much they save. A subset of participants who reported feeling closeness to their future, retirement-age selves responded to the “future self” message by saving 0.85 percentage points more of their salary annually. For a 30-year-old man earning $45,485 per year who increases his saving rate from 5 percent to 5.85 percent, this increase is equivalent to an additional $68,797 in savings upon retirement at age 65. “Write a letter to your future self,” says Hershfield. “That will at least help you start thinking about your future self as a realistic person who is going to be the recipient of the decisions that you make today with regard to finances.”

What Unexpected Expenses Crop Up in Retirement?

Good  Day,

There is a reason why companies always compare notes when it comes to the annual budget, which is prepared at the beginning of the year, and the actual expenses that were incurred during the financial year. The two figures will always differ and this will call for an investigation, but that will depend on the policy of the company with regards to the variances reported. The reason companies undertake this exercise is that, maybe it will help them become better at anticipating its future costs. The same thing happens with retirement planning, would-be retirees are normally advised to make a budget on expenses that they anticipate will be incurred during retirement, and in most cases, the figure is grossly underestimated. When the actual expenses add-up, most retirees are normally caught off-guard. Consider the following article by Christine Benz from a poll done by on the unexpected expenses retirees encountered during retirement, some of the expenses might shock you.

Many pre-retirees sensibly devote a good deal of attention to forecasting how much they’ll spend in retirement, thinking through their basic living expenses as well as how much they’ll spend on extras like dining out and travel. They anticipate when they’ll need to replace their roofs, when it will be time for a new car, and how their medical expenses are likely to trend up as they age.

But it’s simply not possible to forecast each and every expense with precision. In a recent Investing During Retirement Discuss forum thread on, I asked our retired readers to share which retirement expenses had caught them off guard. Health-care-related expenditures topped many retired readers’ lists, with dental work most frequently cited as an unpleasant source of additional costs. Other readers noted that happy aspects of retirement–new grandchildren, travel, and hobbies–had bumped up their in-retirement expenses.

‘An Unanticipated Dental Event’

One of the most striking aspects of the discussion was just how many posters mentioned dental expenses as a cost they had underrated prior to retirement. Although many employed people are covered under their companies’ plans, retirees can’t typically purchase insurance, and costs for significant dental work can be exorbitant.

LFremont summed it up as follows: “The one cost area that is uncontrollable and hard to anticipate is dental. I don’t think there is any decent insurance to protect you, and the cost can be really substantial.”

And in contrast with other expenses, such as home and car maintenance, dental costs can be lumpy, making budgeting difficult. Orygunduck wrote, “Dental expenses are tough to predict, as a couple of crowns can run up costs, quickly! I liken it to having to have major work done on your car’s engine and transmission at least once a year.”

Posters Jkimel44 advised that the best defense against rising dental costs is to set aside a fund to defray them as they occur. “Put a little extra money aside each year to cover an unanticipated dental event.”

‘Health Insurance Is Also a Growing Burden’

Although dental care received a large number of mentions, many readers cited health-care insurance premiums, as well as additional medical expenses not covered by Medicare, as a source of unanticipated costs during retirement.

Health-care insurance is a particularly large and unwelcome expense for retired people who aren’t yet eligible to obtain coverage under Medicare. Gizmo25 shared, “Health-care insurance was expected to be expensive, but the actual amount was a shock. I retired at 57, my wife at 53. Over one-third of our living expense is for health care, and Medicare is still a couple of years away.”

Reddog is facing down a similar situation. “My wife is pre-Medicare, and insurance is a whopping $4,000 a year, even with my company’s plan. Yikes, pretty outrageous.”

The rapidity with which health-care premiums have risen caught Gyer12 off guard. “Health-care insurance premiums went up 100% after the first year of retirement and 30% last year.”

Ditto for HNRROBERT, who shared specifics on rising health-insurance premiums. “Our biggest surprise was heath insurance, we retired when we were 57 and health insurance was $8,500 then; now, four years later, we pay $15,300 for less coverage.”

Unfortunately, being eligible for Medicare doesn’t eliminate unexpected costs altogether. Dr Helen noted, “Even with Medicare, health insurance is also a growing burden with Part B & D premiums as well as Medicare supplementary.”

Given that inflation in health-insurance premiums could be here to stay, Jkimel44 believes that it’s valuable to build those increases into the budget. “Health insurance is expensive, but fairly predictable. Just make sure to factor in a 20% rise in premiums each year.”

In addition to citing insurance costs, readers noted that they hadn’t fully anticipated other health-care-related expenditures in retirement.

GilT4609 wrote, “Drug co-pays and ‘donut hole’ costs [were] a surprise even with a Medicare advantage plan.”

Long-term care costs, even with a long-term care insurance policy, can also be eye-popping, according to JonathanQ. “My parents’ biggest (mostly) unanticipated expenses relates to care for my stepfather’s Parkinson’s, dementia, and his inability to fully care for himself after some strokes. A top-of-the-line long-term care policy pays for the $100,000 a year nursing home, but he could outlive its six years of benefits and there are plenty of incidental expenses. His retirement assets (rental property) could be liquidated for a few years’ more care; after that she will be supporting him on her pensions and investments.”

While acknowledging that medical expenses can be difficult if not impossible to control, Billster advised that retirees can empower themselves by taking preventative measures: “There are certainly no guarantees in retirement life but maintaining a healthy preventative lifestyle goes a long way toward a happy, healthy, and secure retirement. In fact it is every bit as important as making the right investment/asset allocation choices, as your physical health or lack thereof directly affects your financial health. Investing an hour each day exercising could have a huge payoff financially over the course of your retirement lifetime.”

‘We Are Under Water’

For other posters, their biggest category of unanticipated expenses during retirement has related to their homes.

Rabsint, like many, has seen plans to downsize derailed by an uncooperative housing market; having to bring cash to the closing on the sale of the home will be an unanticipated expense. “We planned to sell the house and downsize but it hasn’t sold for two years and we are under water. This year we are determined to get out but the loss will be substantial and not tax-deductible. We will have to take a large distribution from my [retirement plan], which will increase our taxes so we get hit on both ends.”

For Veroman61, fluctuating homeowners insurance rates have complicated the budgeting process. “Living in the state of Florida, homeowner’s insurance is volatile. We have been lucky the last eight years with no major hurricanes so the state has been underfunding the catastrophic insurance fund. This is money contributed by private insurers. To comply, premium increases are passed on to consumers so I along with countless others have seen our premiums rise to an average of 40% in a single year. That has been the biggest surprise.”

Rising property taxes, particularly unwelcome in a cratering housing market, have been an unwelcome budgetary surprise for causal research, who wrote, “The biggest expense that we could have anticipated, but didn’t was property tax. From the time we planned our retirement budget to now our property tax has increased over 300%. Not only does the rate go up but the city and county both raise property valuations as if there was no real estate crisis. No one in our neighborhood could sell our property for the tax valuations, but all protests are denied.”

Richendric‘s experience has been similar–higher taxes, sinking property values–but he hopes the worst is over. “The only big surprise so far has been the 30% increase in property taxes on our retirement home in the last two tax years. The magnitude of this increase was caused primarily by reduced state funding to local school districts. After the latest local elections, we now have some local spending cuts and a new tax rate for the 2012 tax year, which is about 1% lower than last year with an across the board 5% reduction in property valuations, without any classroom teacher layoffs. Hopefully, the situation has stabilized.”

‘A Whole New Cost Center’

Other posters noted that spending money on family–either to lend a helping hand to family members in need, help pay for weddings, or spoil grandkids–ranked among their largest unplanned expenditures in retirement.

For SailerBob, and many families, the economic crisis has made helping out essential. “Surprises: Having to help one of our kid’s family when he went through a period of stagnant income growth (none) for about four years when his employer changed ownership. We took out a mortgage on the paid-off house to do that, but made a second mortgage on his house as collateral for a loan, not a gift. They are paying it off, but having a mortgage of our own was a major surprise.”

Jkimel44 agrees that family obligations can create unanticipated outlays: “You can also get hit by unexpected expenses from your children and your parents if any of them needs to turn to you for financial assistance. I have, so far, been able to budget ahead for those items.”

For other posters, unplanned in-retirement expenses have arisen from happy life events.

For example, retirement often coincides with children’s weddings; orygunduck and his spouse will be pitching in to fund an event that will be more lavish than they expected. “[Our daughter] said years ago that she only wanted a simple, private, and low-key ceremony. Yeah, right.”

Monitro is also helping to foot the bill for wedding-related costs. “A daughter’s upcoming wedding has been a large, unexpected debit to absorb. Although, I can’t imagine skimping on your first-born’s wedding.”

Grandchildren have been a joy, and also a source of unplanned spending, for other readers. Emkute quipped. “Grandchildren are a whole new cost center.”

Orygunduck concurred. “We have seven [grandchildren], and had never thought we’d be spending so much on them. Although this is a ‘feel good’ expense, it’s still an unplanned expense.”

For DrHelen, caring for furry family members has carried an unexpectedly high price tag. She wrote, “Veterinary bills are almost as much of a surprise as dental. Also providing care for the animals (two cats and a dog) when we travel adds up to roughly the cost of an additional hotel room every day.”

Other retired readers noted that having more free time, as is typically the case during retirement, simply affords more opportunities to spend.

Gyer12 wrote, “With the additional time, shopping has become a pastime.”

An unanticipated leisure-time expense for Kayaker?”Golf! My wife took up golf when we retired, and now she has twice as many pairs of golf shoes as I do–and ‘golf outfits,’ too, whatever those are!”

Travel has beckoned for DrHelen. “With more time we take longer trips. It’s well worth it, but we hadn’t originally budgeted for this much.”

How to Deal With Unplanned Expenses

Readers also shared tips for anticipating, and managing, unplanned expenses.

LCBenz acknowledged that some expenses are difficult to forecast and manage, but advises, “To establish a degree of stability, we setup a reserve fund–linked to our joint checking account–into which we deposit any excess funds each month. If it grows, we’ll then tap it for vacation funds or another pleasure junket.”

Jkimmel44 shared this strategy. “Each year I make up an ‘operating budget’ and a ‘wish list.’ As an operating surplus develops during the year, we may or may not buy one or more items from our wish list. I generally ‘book’ these as capital purchases.”

Chief K concurred with this strategy, urging, “Figure out what you can afford as regular, routine, and recurring expenses for your expected standard of living and budget for those expenses. Then see how many wishes, splurges, surprises, shocks, or downright disasters you can enjoy, or survive, while maintaining that ‘expected standard of living.”

4 Steps To Building A Profitable Portfolio

Good Day,

Building a profitable portfolio is a task every investor wishes to achieve every time they decide to invest some of that extra cash that is lying idle in the bank, but very few investors achieve their goal. The strange thing about investments is that you have to be on top of your league because every now and then, the market will take a new direction. This is where most investors lose out on the game, because even after watching the warning signs right in front of their eyes, some sit back and hope that everything will reverse soon. Being a successful investor has to do with you knowing when it is time to exit your position in the market. Developing a successful investment strategy has everything to do with making the right steps, and as Chris Gallant explains in the following article there are four steps to building a profitable portfolio.

In today’s financial marketplace, a well-maintained portfolio is vital to any investor’s success. As an individual investor, you need to know how to determine an asset allocation that best conforms to your personal investment goals and strategies. In other words, your portfolio should meet your future needs for capital and give you peace of mind. Investors can construct portfolios aligned to their goals and investment strategies by following a systematic approach. Here we go over some essential steps for taking such an approach.

Step 1: Determining the Appropriate Asset Allocation for You

Ascertaining your individual financial situation and investment goals is the first task in constructing a portfolio. Important items to consider are age, how much time you have to grow your investments, as well as amount of capital to invest and future capital needs. A single college graduate just beginning his or her career and a 55-year-old married person expecting to help pay for a child’s college education and plans to retire soon will have very different investment strategies.

A second factor to take into account is your personality and risk tolerance. Are you the kind of person who is willing to risk some money for the possibility of greater returns? Everyone would like to reap high returns year after year, but if you are unable to sleep at night when your investments take a short-term drop, chances are the high returns from those kinds of assets are not worth the stress.

As you can see, clarifying your current situation and your future needs for capital, as well as your risk tolerance, will determine how your investments should be allocated among different asset classes. The possibility of greater returns comes at the expense of greater risk of losses (a principle known as the risk/return tradeoff) – you don’t want to eliminate risk so much as optimize it for your unique condition and style. For example, the young person who won’t have to depend on his or her investments for income can afford to take greater risks in the quest for high returns. On the other hand, the person nearing retirement needs to focus on protecting his or her assets and drawing income from these assets in a tax-efficient manner.

Conservative Vs. Aggressive Investors

Generally, the more risk you can bear, the more aggressive your portfolio will be, devoting a larger portion to equities and less to bonds and other fixed-income securities. Conversely, the less risk that’s appropriate, the more conservative your portfolio will be.

The main goal of a conservative portfolio is to protect its value. The allocation shown above would yield current income from the bonds, and would also provide some long-term capital growth potential from the investment in high-quality equities. A moderately aggressive portfolio satisfies an average risk tolerance, attracting those willing to accept more risk in their portfolios in order to achieve a balance of capital growth and income.

Step 2: Achieving the Portfolio Designed in Step 1

Once you’ve determined the right asset allocation, you simply need to divide your capital between the appropriate asset classes. On a basic level, this is not difficult: equities are equities, and bonds are bonds.

But you can further break down the different asset classes into subclasses, which also have different risks and potential returns. For example, an investor might divide the equity portion between different sectors and market caps, and between domestic and foreign stock. The bond portion might be allocated between those that are short-term and long-term, government versus corporate debt and so forth.

There are several ways you can go about choosing the assets and securities to fulfill your asset allocation strategy (remember to analyze the quality and potential of each investment you buy – not all bonds and stocks are the same):

  • Stock Picking – Choose stocks that satisfy the level of risk you want to carry in the equity portion of your portfolio – sector, market cap and stock type are factors to consider. Analyze the companies using stock screeners to shortlist potential picks, than carry out more in-depth analyses on each potential purchase to determine its opportunities and risks going forward. This is the most work-intensive means of adding securities to your portfolio, and requires you to regularly monitor price changes in your holdings and stay current on company and industry news.
  • Bond Picking – When choosing bonds, there are several factors to consider including the coupon, maturity, the bond type and rating, as well as the general interest rate environment.
  • Mutual Funds – Mutual funds are available for a wide range of asset classes and allow you to hold stocks and bonds that are professionally researched and picked by fund managers. Of course, fund managers charge a fee for their services, which will detract from your returns. Index funds present another choice; they tend to have lower fees because they mirror an established index and are thus passively managed.
  • Exchange-Traded Funds (ETFs) – If you prefer not to invest with mutual funds, ETFs can be a viable alternative. You can basically think of ETFs as mutual funds that trade like stocks. ETFs are similar to mutual funds in that they represent a large basket of stocks – usually grouped by sector, capitalization, country and the like – except that they are not actively managed, but instead track a chosen index or other basket of stocks. Because they are passively managed, ETFs offer cost savings over mutual funds while providing diversification. ETFs also cover a wide range of asset classes and can be a useful tool for rounding out your portfolio.

Step 3: Reassessing Portfolio Weightings

Once you have an established portfolio, you need to analyze and rebalance it periodically because market movements may cause your initial weightings to change. To assess your portfolio’s actual asset allocation, quantitatively categorize the investments and determine their values’ proportion to the whole.

The other factors that are likely to change over time are your current financial situation, future needs and risk tolerance. If these things change, you may need to adjust your portfolio accordingly. If your risk tolerance has dropped, you may need to reduce the amount of equities held. Or perhaps you’re now ready to take on greater risk and your asset allocation requires that a small proportion of your assets be held in riskier small-cap stocks.

Essentially, to rebalance, you need to determine which of your positions are overweighted and underweighted. For example, say you are holding 30% of your current assets in small-cap equities, while your asset allocation suggests you should only have 15% of your assets in that class. Rebalancing involves determining how much of this position you need to reduce and allocate to other classes.

Step 4: Rebalancing Strategically

Once you have determined which securities you need to reduce and by how much, decide which underweighted securities you will buy with the proceeds from selling the overweighted securities. To choose your securities, use the approaches discussed in Step 2.

When selling assets to rebalance your portfolio, take a moment to consider the tax implications of readjusting your portfolio. Perhaps your investment in growth stocks has appreciated strongly over the past year, but if you were to sell all of your equity positions to rebalance your portfolio, you may incur significant capital gains taxes. In this case, it might be more beneficial to simply not contribute any new funds to that asset class in the future while continuing to contribute to other asset classes. This will reduce your growth stocks’ weighting in your portfolio over time without incurring capital gains taxes.

At the same time, always consider the outlook of your securities. If you suspect that those same overweighted growth stocks are ominously ready to fall, you may want to sell in spite of the tax implications. Analyst opinions and research reports can be useful tools to help gauge the outlook for your holdings. And tax-loss selling is a strategy you can apply to reduce tax implications.

Remember the Importance of Diversification.

Throughout the entire portfolio construction process, it is vital that you remember to maintain your diversification above all else. It is not enough simply to own securities from each asset class; you must also diversify within each class. Ensure that your holdings within a given asset class are spread across an array of subclasses and industry sectors.

As we mentioned, investors can achieve excellent diversification by using mutual funds and ETFs. These investment vehicles allow individual investors to obtain the economies of scale that large fund managers enjoy, which the average person would not be able to produce with a small amount of money.


Overall, a well-diversified portfolio is your best bet for consistent long-term growth of your investments. It protects your assets from the risks of large declines and structural changes in the economy over time. Monitor the diversification of your portfolio, making adjustments when necessary, and you will greatly increase your chances of long-term financial success.

8 Reasons To Never Borrow From Your 401(k)

Good Day,

With these tough economic times, most of us will require some sort of assistance to make ends meet. In most cases, the sort of financial assistance most people go after is bank loans, but the stringent measures financial institutions are demanding before advancing the funds is scaring a lot of people away. With the options of getting access to a cheap loan being kind of limited, this is forcing a lot of folks to turn to their retirement funds as a form of loan. While this is a form of ‘cheap’ loan, the potential long-term effects are not that rosy. Come to think of it, it beats the whole purpose of retirement saving, considering that you saved money for a number of years, only to withdraw it later when things take a turn for the worst. Well, I hope the following article that can be accessed in Investopedia website, will make you think twice once you get a picture of the reasons why you should never borrow money from you 401(k).

‘’There’s a bill before the U.S. U.S. Senate concerning new rules for 401(k) and other retirement accounts. The U.S. Senate wants people to not use retirement accounts as a source of personal loans. The number of times a person is allowed to borrow from their retirement account could be limited by a new bill.’’ SynthiaP

Pundits claim that your 401(k) balance is a less expensive way to borrow money because the interest rate charged is generally lower than the rates on a commercial loan. They also cite the fact that when you repay the loan, you are paying yourself back with interest, instead of paying a bank. Despite these claims, borrowing from your 401(k) goes against almost every time-tested principal of long-term investing. Here we look at eight major reasons why borrowing from your 401(k) is a bad idea.

1. You Are Not Saving

If you borrow money from your 401(k) plan, most plans have a provision that prohibits you from making additional contributions until the loan balance is repaid. Even if your plan doesn’t have this provision, it is unlikely that you can afford to make future contributions in addition to servicing the loan payment. Because the whole point of having a 401(k) plan is to use it is as a way to save for the future, you are defeating the purpose of having this account if you use it before you retire.

2. You Are Losing Money

If you not are not making contributions, not only is the entire balance that you borrowed missing out on any potential growth in the stock or bond markets, but each future contribution that you are unable to make (since you have a loan outstanding) isn’t growing either. The extraordinarily low interest rate that you are paying to yourself with your loan payment is likely to be a pittance in terms of return on investment when compared to the market appreciation that you are missing.

3. Time Will Work Against You

Long-term investing (such as saving for retirement) is based on the idea that by putting time to work on your behalf, your money will grow. Most calculations suggest that your money will double, on average, every eight years. 401(k) plans permit each loan to be held for up to five years or longer. Therefore, if the loan is used to fund a first-time home purchase, loan holders not only lose out on what should have been an opportunity to nearly double their money, but they are also left unable to make up for the lost contribution and growth opportunities. Over time, their balance is unlikely to ever reach the total that it would have reached had contributions continued uninterrupted.

4. You Could Lose Even More Money

Should you find yourself in a position where you are unable to repay the loan, it is treated as a withdrawal and the outstanding loan balance will be subject to current income taxes in addition to a 10% early withdrawal penalty if you are under age 59.5.

5. You Are Trapped

If you have an outstanding loan, most plans require that the loan be immediately repaid if you quit your job. So, as long as you have a loan, you are stuck in your current job and may be forced to pass up a better opportunity – unless you are willing to take the loan balance as a withdrawal and pay the 10% penalty.

6. You Lose Your Cushion

Taking a loan from your 401(k) plan should only be done in the direst of circumstances after you have completely exhausted all other potential sources of funding. If you take money from your plan to fund a vacation or pay off higher interest loans, the money won’t be there to borrow if you really need it.

7. It Suggests That You Are Living Beyond Your Means

The need to borrow from your savings is a red flag – a warning that you are living beyond your means. When you can’t find any other way to fund your lifestyle than by taking money from your future, it’s time for a serious re-evaluation of your spending habits. What purchase could possibly be so important that you are willing to put your future in jeopardy and go into debt in order to get it?

8. It Violates The Golden Rule Of Personal Finance

“Pay yourself first” is the golden rule of personal finance. This rule considered a primary tenet of good financial planning, and violating it is never a good idea.

Think First

If the idea of taking a loan from you 401(k) plan crosses you mind, stop and think before you act. Instead of short-changing your future to finance your lifestyle today, consider re-evaluating your current lifestyle instead. Scaling back on your expenses will not only reduce the burden on your wallet, but will increase the odds that a sound retirement nest egg will be waiting for you in the future.

Protect Assets, Create Income, Retire Happy

Good Day,

The thing about owning an asset is that one day they could be worth a fortune, the next moment they are worthless following crucial information that has been brought to the attention of investors. A good example is the tech bubble of early 2000, these stocks were the in-thing and everybody wanted a piece of the action, despite repeated warning by the Fed chairman, nobody wanted to listen and supply could not satisfy demand, and the result was that the prices went through the roof. D-day finally arrived, and the stock prices crushed together with the hopes and dreams of millions, including retirees who had invested their retirement funds in these tech companies. When we talk about protecting your assets, in this case your retirement fund, it is always advisable that you understand where you are investing your money, because this is the only way you’ll be able to create a reliable stream of retirement income.  Thus, it is fundamentally important to have an idea of the type of asset you will depend on to provide an income during retirement, and as Chris Seabury elaborates in the following article, protecting your asset leads to a happier retirement.

Retirement can be a comforting but challenging event in many people’s lives. You want to be able to live comfortably during this time without worrying about how to make ends meet. To do this requires that you have a solid strategy in place that can provide consistent income, protect you against inflation and allow you to live a comfortable lifestyle during your retirement years. In this article, we will examine some of the things that you can do to have an enjoyable retirement without the stress and challenges that so many retirees face today.

Factors That Erode Retirement Assets

There are many factors that can lead to loss in value or purchasing power of your retirement assets, and one of them can create a situation where you might not have enough money to live on during retirement. In this case, knowledge is power, and if you are aware of these factors, you can take steps to ensure that they do not affect you.


It doesn’t take a rocket scientist to understand how inflation can affect your everyday life. However, it can also have an effect on your retirement in that it increases your cost of living every single year. Between 1960 and 2009, inflation has averaged a 4% increase per year. This means that something that costs $100 today will cost $180 in 15 years if inflation continues at the same rate. This can be significant when you are living on a fixed income. To be able to continue to live a comfortable lifestyle in retirement, your portfolio must be able to keep up with inflation.

Living Longer

People are living longer now than at any other time in history. The average man who retires at 65 can expect to live until 82, while the average woman who retires at the same age can expect to live until 85. This can pose an enormous potential challenge for you in that the longer you live, the better the chance that you will not have enough money to live on when you retire. To be able to live a comfortable retirement, you must be able to structure your income and investments so that they can continue to provide for you, even if you surpass the average life expectancy.

Lack of Diversification

Many people don’t balance out their portfolios to protect themselves against a bad investment. They usually end up placing a substantial amount of their investments in one particular area or asset class. Far too often, investors assume that a particular area or company is “good” and that as long as they stick with their current strategy, they will retire with more than enough income and assets. Such was the case with many retirees and pre-retirees who invested in Enron stock. When the energy-trading company collapsed, many employees had invested the majority of their assets in the company’s stock, and their savings were virtually wiped out. Along with that went the retirement savings that they had accumulated for years. The basic idea here is not to put all of your eggs in one basket.

Medical Expenses

Another area that can affect your retirement income and assets is medical expenses. As you age, the need for medication and healthcare will only increase. Consider too that healthcare costs have been rising consistently over time. According to a March 2008 report by Fidelity Investments, the cost for healthcare had risen by a total of 41% since 2002, with an annual average increase of 5.8%. It is estimated that within the next 10 to 15 years, many retirees will spend half of their incomes from Social Security on healthcare costs. To be able to have a worry-free retirement you must keep up with these costs so that they don’t reduce your income or assets.

There may be other factors that could derail your retirement plans. It may help to use the ones presented here to start a list, so that you can take a proactive approach to implementing ways to protect your retirement assets.

Ways to Protect Assets and Create Income

There are many ways you can protect your assets against some of the risks listed above and create additional income. Diversification is the key to allowing you to maintain stability, growth and income. Below are several tips and tactics that you can use to protect yourself against the challenges that you may face in retirement.

Equities / Dividend Stocks

In order to combat the forces of inflation, your assets and income must grow at a rate greater than inflation. One way to do this is through the use of equities or dividend-paying assets. Over the past 50 years, stocks have averaged 6.6%, while the average inflation rate has been 4%. The average dividend rate of the S&P 500 is 5.3%. What this shows is that investing in stocks and dividend-paying stocks can keep your assets and income growing faster than inflation by giving you long-term growth and strong, consistent dividends. When you put the two elements together, the overall return is much greater than inflation. The important key is to use a conservative approach that can provide you with consistent long-term growth and dependable, increasing dividends.


Another way that can provide income and stability during retirement is through the use of bonds. Over the past 50 years, bonds have averaged 5.5%. Generally, bonds are considered to be a conservative investment. When you purchase a bond you become a creditor to the company or government that issued the bond. During the life of the bond (five years, 10 years, 30 years) you will earn a consistent interest rate, which is stated at the time of purchase. These interest payments will continue until the bond matures. U.S. government bonds are the safest, followed by municipal bonds and corporate bonds. These types of assets will provide you with consistent income on a regular basis. In retirement, they can complement your overall strategy by bringing a conservative, income-orientated side to your portfolio, providing you with income stability.

Mutual Funds / Bond Funds

If you are uncomfortable investing in stocks or bonds, consider mutual funds and bond funds. A mutual fund is a company that raises money from investors (shareholders) and invests that money in a portfolio of stocks, bonds or both. The idea is that they will provide you with diversification and balance so that you won’t have to worry about which stocks to buy or sell. A bond fund invests in bonds with the purpose of providing income and stability.

These two types of funds can provide your portfolio with balance and income without you having to determine which stocks or bonds are the best for you.

Fixed Annuities

An alternative way to protect your assets and create income is through the use of fixed annuities. A fixed annuity is a written contract between you and an insurance company that is designed to provide you with regular payments at specific times (usually monthly, quarterly or annually) and can be for a certain number of years or your lifetime. These types of annuities are not tied to stocks and will pay you a stated guaranteed amount as a worst-case scenario. They can be used to supplement your retirement income and can provide you with diversification as well.

Ideally, your retirement portfolio should have a mixture of some or all of these investment options to balance growth and income. The percentage allocation will usually depend on your risk tolerance, your retirement horizon and your growth and income needs.

The Bottom Line

Your retirement doesn’t have to be burdened with the stress and challenges that so many face today. By using a diversified strategy, you can achieve stability, income, growth and peace of mind. This diversification can be achieved by using a variety of tools, such as a balanced portfolio and asset-protection strategies. However, as with all strategies, it is important to first evaluate your own situation to determine the strategies and solutions that are suitable for you. Unless you are an expert in these areas, you may want to work with professionals who can help you to achieve your goals. This will help you to have the worry-free retirement that you’ve always envisioned.

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