Retirement Savings

43% Have Less Than $10k For Retirement
Retirement Savings For The Self-Employed: IRA, SEP, Or 401(k)
Living On The Interest From One Million Dollars

By Chavon Sutton, WSJ | 11 March 2010

NEW YORK (CNNMoney.com)— The percentage of American workers with virtually no retirement savings grew for the third straight year, according to a survey released Tuesday. The percentage of workers who said they have less than $10,000 in savings grew to 43% in 2010, from 39% in 2009, according to the Employee Benefit Research Institute's annual Retirement Confidence Survey. That excludes the value of primary homes and defined-benefit pension plans.

Workers who said they had less than $1,000 jumped to 27%, from 20% in 2009. Confidence in ability to save enough for a comfortable retirement hovered at 16% of respondents, the second lowest point in the 20-year history of the survey. The percentage of workers who said they have saved for retirement fell to 69%, from 75% in 2009.

A Drop In The Bucket

"Americans' attitudes toward retirement have clearly tracked the economy the last couple of years, and that seems to be the case in 2010," said Jack VanDerhei, EBRI's research director and co-author of the survey, in a statement. While VanDerhei attributed the decline in current savings rates to job losses, mortgage problems and the suspension of corporate 401(k) matches in 2009, he said the economy isn't entirely to blame. "In previous years, there were a whole lot of people who had nothing to begin with," said VanDerhei.

The Ultimate Guide To Retirement

The gap between what Americans have saved and what they'd need for retirement is forcing workers to prolong their working years. According to the survey, 24% of workers said they have postponed their planned retirement age in the past year, up from 14% in 2008. But even as fears over health care costs and job prospects mount, the survey found that only 46% of workers have tried to calculate what they need for a comfortable standard of living in their golden years.

"People just don't want to think about this," said VanDerhei. "Everybody thinks they're too young to think about it, until suddenly they're too old to do anything about it". In general, financial planners say that retirement savings, including Social Security benefits and pension, should be large enough to provide about 80% of pre-retirement income.

To reach that target, "most Americans need to be saving within the healthy range of 6% - 10% (of their salary)," said Beth McHugh, vice president of workplace investing for Fidelity Investments. But the survey found that 54% of the workers with some form of savings said that they have less than $25,000 stowed away.

Delaying retirement, though not ideal, is a good sign that people are finally facing reality. "People have figured out that they don't have enough money," VanDerhei said. "Still, I'd rather they bite the bullet today, rather than take the chance that they'd have a job when they are 65". The EBRI surveyed 1,153 U.S. workers and retirees, age 25 and older, in January.

.

Retirement Savings For The Self-Employed: IRA, SEP, Or 401(k)

By ScienceandMoney | 11 March 2010

If you're self-employed, you have several options for a retirement savings plan. The "best" plan for you depends on how much you want to save and whether your business has employees. The IRS publishes a pamphlet with a great overview, so I'll just review the highlights.

Plans For Everyone: The Ira And The Roth Ira

Contributions to a traditional or Roth IRA are limited to $5,000/year or to your earned income, whichever is less. If you're over 50, you can put in an extra $1,000. Money put into a Roth IRA is post-tax, but withdrawals after age 59 1/2 are tax-free. Money put into a traditional IRA can be tax-deferred, subject to income limits, but growth and pre-tax contributions are taxed when withdrawn. An employer can set up employee IRA accounts which can be funded through payroll deduction.

Best Reference: IRS Publication 590— Individual Retirement Arrangements

SEP's And SIMPLE's

The Simplified Employee Pension (SEP) allows the self-employed person to sock away more money— 25% of net earnings, up to a maximum contribution of $49,000. An employer can also contribute directly to a SEP for employees. "Net earnings" is calculated after the retirement contribution. For example, if you earned $100,000 through your business, then you are allowed to put $20,000 in the SEP; because $100,000— $20,000 = $80,000 and $20,000 is 25% of $80,000.

Why the IRS doesn't just call it 20% of earnings, I'll never know. The Savings Incentive Match Plan for Employees (SIMPLE) allows employees to contribute up to $11,500 ($14,000 if age 50 or over). The employer can match an employee's contribution up to 3% of compensation or contribute a fixed amount up to 2% of compensation.

Best reference: Publication 560— Retirement Plans for Small Business

The Self-Employed 401(k). The self-employed 401(k) is most advantageous to those who have relatively modest earnings and want to defer a larger percentage of their income. It's also called the solo 401(k) or individual 401(k).

The maximum contribution to a self-employed 401(k) is $16,500 plus 25% of your net earnings, with a total contribution limit of $49,000. For example, if you earn $100,000, you could defer up to to $36,500 or 36.5% of your total earnings. If you're 50 or older you can contribute an additional $5,500 for a total cap of $54,500 (no catch-up contributions are allowed for SEP accounts). (Through a SEP, you could defer only 20% or $20,000.)

A disadvantage of a self-employed 401(k) is that it only covers the owner and the owner's spouse, if the spouse also works for the business. To add employees, you must switch to a different type of retirement savings plan. There is also a bit more paperwork than for an IRA but nothing insurmountable. The self-employed 401(k) should also come in the Roth flavor, but you may have to call the brokerage and ask for it.

Best reference: Fidelity, Schwab, and other brokerages.

Qualified Plans, And Defined Benefit Plans

Qualified plans and defined benefit plans are more complicated than the other types of plans and are usually not of interest for very small businesses.

Best Brokerage for a SEP or Self-Employed 401(k)

Most brokerages will happily set up a SEP or self-employed 401(k) for you. Schwab, Fidelity, and Vanguard do not charge account maintenance fees. Both firms still charge for account transactions (e.g. buying and selling stock). Remember, you can contribute to your own traditional IRA or Roth IRA (if you're eligible) in addition to these employer plans, but your combined contribution (e.g., IRA plus SEP) cannot exceed your earned income.

Summary

The SEP is a great option for the self-employed person who wants to put away more for retirement than an IRA allows. If you want to contribute even more than a SEP, you can create an individual 401(k), but it will cost you some additional paperwork. Remember, you can contribute to both an IRA and a SEP, so a good option might be to contribute to a Roth IRA and put the rest in a SEP. Funding both pre-tax and post-tax retirement accounts provides a hedge against future tax-rate hikes.

.

Living On The Interest From One Million Dollars

By Ron Rowland | 11 March 2010

I made my first retirement plan after my freshman year at college. Back at home, with one year of college under my belt, my good friend John and I were discussing our plans for the future. I don't recall the entire conversation, but I do remember saying "my goal is to accumulate a million dollars, and then cash out and live off the interest". I further explained that this plan would generate $50,000 a year since 5% interest seemed reasonable.

The year was 1974. I came from a blue-collar neighborhood where typical incomes were in the $10,000 to $15,000 range. Anyone making $20,000 was well above-average. I believed my plan would overcome inflation, and it was based on an extremely conservative income assumption— living off the interest while never touching the principal.

It was a simple plan, but at least I had a plan. Many people never stop and think about their retirement income until much later in life. My plan has evolved over the years: I am no longer content with a $50,000 retirement income, and I am not relying on interest.

Unfortunately for millions of Americans, their plan is similar to my first one: accumulate a large amount of money and live off the interest. They worked hard all their life, perhaps paid off their mortgage, grew a sizable nest egg, and are now counting on it to generate income. Again, this sounds like a reasonable plan, but let's look at how it is doing.

The two largest retail money market mutual funds are Fidelity Cash Reserves (FDRXX) with assets of $127 billion and Vanguard Prime (VMMXX) with more than $109 billion. Funds like these are what thousands of investors and savers count on to generate "risk-free" income. Just three years ago, in 2007, the plan seemed to be working. These two funds were yielding 5% and kicking out $50,000 a year for every $1,000,000 (one million dollars) invested.

Today the story is different. According to iMoneyNet, the current yield (as of 3/2/10) on FDRXX is 0.02% and for VMMXX it's just 0.01%. Instead of $50,000 in annual income, these two funds are only providing an average of $150 per year. That is not a typo, and there are no zeroes missing.

What seems at first like a risk-free plan has at least two enormous risks. The first is interest-rate risk. The plan assumed 5% and didn't take into account that interest rates could drop to nearly zero. A 99.7% decline in interest income is not only possible, it has happened.

The second unmanaged risk is inflation. If you think it's hard to live on $150 a year today, just think what it will be like when oil gets back above $100 and health care costs climb even higher than today. Lower prices for housing, education, and consumer goods are of limited value to retirees, whose expense patterns do not necessarily match the official inflation rates.

The fact is that money market funds are enormously risky if you count on them for income over long periods of time. Stocks and bonds are risky, too, but in different ways. That's why investment management is a key ingredient for long-term success.

You can't put all your eggs in one basket and then ignore them, even if that basket is cash, If your plan is still based on living off the interest, or if it has been a while since you last updated your plan, perhaps now is a good time to review the assumptions and see if they are still reasonable.

ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

.

Living On The Interest From One Million Dollars

By Ron Rowland | 11 March 2010

I made my first retirement plan after my freshman year at college. Back at home, with one year of college under my belt, my good friend John and I were discussing our plans for the future. I don't recall the entire conversation, but I do remember saying "my goal is to accumulate a million dollars, and then cash out and live off the interest". I further explained that this plan would generate $50,000 a year since 5% interest seemed reasonable.

The year was 1974. I came from a blue-collar neighborhood where typical incomes were in the $10,000 to $15,000 range. Anyone making $20,000 was well above-average. I believed my plan would overcome inflation, and it was based on an extremely conservative income assumption— living off the interest while never touching the principal.

It was a simple plan, but at least I had a plan. Many people never stop and think about their retirement income until much later in life. My plan has evolved over the years: I am no longer content with a $50,000 retirement income, and I am not relying on interest.

Unfortunately for millions of Americans, their plan is similar to my first one: accumulate a large amount of money and live off the interest. They worked hard all their life, perhaps paid off their mortgage, grew a sizable nest egg, and are now counting on it to generate income. Again, this sounds like a reasonable plan, but let's look at how it is doing.

The two largest retail money market mutual funds are Fidelity Cash Reserves (FDRXX) with assets of $127 billion and Vanguard Prime (VMMXX) with more than $109 billion. Funds like these are what thousands of investors and savers count on to generate "risk-free" income. Just three years ago, in 2007, the plan seemed to be working. These two funds were yielding 5% and kicking out $50,000 a year for every $1,000,000 (one million dollars) invested.

Today the story is different. According to iMoneyNet, the current yield (as of 3/2/10) on FDRXX is 0.02% and for VMMXX it's just 0.01%. Instead of $50,000 in annual income, these two funds are only providing an average of $150 per year. That is not a typo, and there are no zeroes missing.

What seems at first like a risk-free plan has at least two enormous risks. The first is interest-rate risk. The plan assumed 5% and didn't take into account that interest rates could drop to nearly zero. A 99.7% decline in interest income is not only possible, it has happened.

The second unmanaged risk is inflation. If you think it's hard to live on $150 a year today, just think what it will be like when oil gets back above $100 and health care costs climb even higher than today. Lower prices for housing, education, and consumer goods are of limited value to retirees, whose expense patterns do not necessarily match the official inflation rates.

The fact is that money market funds are enormously risky if you count on them for income over long periods of time. Stocks and bonds are risky, too, but in different ways. That's why investment management is a key ingredient for long-term success.

You can't put all your eggs in one basket and then ignore them, even if that basket is cash, If your plan is still based on living off the interest, or if it has been a while since you last updated your plan, perhaps now is a good time to review the assumptions and see if they are still reasonable.



ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.




ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.