As a growing number of Americans worry about outliving their retirement savings, the government is encouraging employers to offer an old-school, pension-style option for 401(k) holders.
The proposed revamp of retirement fund rules would make it easier for workers to convert part of their 401(k) savings into an annuity that would pay guaranteed income checks for life -- no matter the ups and downs in the markets.
And in keeping with the new assumptions about retirement, there is an unconventional component; a "longevity option" would let 401(k) savers take a lump sum portion at retirement age and defer it for 20 years, so retirees would start getting steady checks in the mail at age 85 and beyond.
Investment advisers say that's a big improvement on the "all-or-nothing" choice of many current plans, which allow retirees to take their entire 401(k) as a lump sum in cash or convert the whole thing into an annuity, instead of a combination of options.
"The new regulations give people more flexibility," says Warren Ward, a financial planner in Columbus, Ind. "You could put a third into an annuity and invest the remaining lump sum or keep some cash handy for medical needs and emergencies. It can give people piece of mind, which is important. After you work for your whole life, you don't want to worry about money when you get to retirement."
The U.S. Treasury proposal to encourage partial annuity options for 401(k) investors comes as Americans contemplate longer life spans while being spooked by the drop in value of retirement portfolios in the wake of the 2008 financial market meltdown.
A recent survey from global financial services association Limra found that 40 percent of Americans don't feel well informed about generating retirement income, investing their nest eggs, or managing their risks and expenses.
The survey, cited in a recent edition of Financial Advisor Magazine, also found that less than 50 percent of Americans plan for more than 20 years of retirement.
Only a handful have factored in how they might cover the cost of health care, long-term care, rising taxes and inflation, and what they might do in the event they outlive their savings.
View the original article here
Thursday, May 31, 2012
Saturday, May 26, 2012
8 Questions to Ask Yourself Before Retiring
Pulling the trigger on retirement can be a costly mistake if your finances aren't in good shape.
"It's a very uncertain time for people," says Doug Kinsey, a certified financial planner with Artifex Financial Group. Luckily, there are steps you can take to make yourself feel more secure as you approach retirement age. How can you tell if you're ready to retire the way you imagined? Here's a checklist of questions every pre-retiree should examine. Pulling the trigger on retirement can be a costly mistake if your finances aren't in good shape.
What kind of lifestyle do I want in retirement?
Several studies have tried to pinpoint how much money people should specifically have on hand before they retire. The truth is, though, that this amount is going to vary dramatically depending on what type of lifestyle you're looking to lead once you've left the workforce.
"Your entire financial plan is going to stem from that vision," says Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial(AMP). She suggests considering where you see yourself living, whether you plan to get another job during retirement and how you plan on spending your time.
"Free time is very expensive," agrees Diana Palmer, a certified public accountant with Family Financial Planning. "If you like to travel, your budget needs to be set much higher."
Will my debts be paid off?
Unpaid debts will contribute to your monthly expenses and play a huge part in how much money you will need to have on hand before you go ahead and leave the workforce. This is not to say your house needs to be paid off in full before you retire.
"If you have a low interest rate [on your mortgage], you'll have to ask, 'Do I want to pay this off in full?'" Kinsey says. On the other hand, if the mortgage is more substantial, you may want to consider taking money out of your investment portfolio so you don't have to worry about it moving forward. The point is, whichever option you chose will have a significant impact on your cash flow.
If you have other debts on the books, such as high credit card balances, you may want to look into what other factors may be behind the balances so you can get them paid off as much as possible before you abandon a steady paycheck.
View the original article here
"It's a very uncertain time for people," says Doug Kinsey, a certified financial planner with Artifex Financial Group. Luckily, there are steps you can take to make yourself feel more secure as you approach retirement age. How can you tell if you're ready to retire the way you imagined? Here's a checklist of questions every pre-retiree should examine. Pulling the trigger on retirement can be a costly mistake if your finances aren't in good shape.
What kind of lifestyle do I want in retirement?
Several studies have tried to pinpoint how much money people should specifically have on hand before they retire. The truth is, though, that this amount is going to vary dramatically depending on what type of lifestyle you're looking to lead once you've left the workforce.
"Your entire financial plan is going to stem from that vision," says Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial(AMP). She suggests considering where you see yourself living, whether you plan to get another job during retirement and how you plan on spending your time.
"Free time is very expensive," agrees Diana Palmer, a certified public accountant with Family Financial Planning. "If you like to travel, your budget needs to be set much higher."
Will my debts be paid off?
Unpaid debts will contribute to your monthly expenses and play a huge part in how much money you will need to have on hand before you go ahead and leave the workforce. This is not to say your house needs to be paid off in full before you retire.
"If you have a low interest rate [on your mortgage], you'll have to ask, 'Do I want to pay this off in full?'" Kinsey says. On the other hand, if the mortgage is more substantial, you may want to consider taking money out of your investment portfolio so you don't have to worry about it moving forward. The point is, whichever option you chose will have a significant impact on your cash flow.
If you have other debts on the books, such as high credit card balances, you may want to look into what other factors may be behind the balances so you can get them paid off as much as possible before you abandon a steady paycheck.
View the original article here
Wednesday, May 23, 2012
How to Invest on Rising Bond Yields
Good news for some is bad for others. And when worries rise, cash is king.
That's the takeaway from the Federal Reserve's mildly upbeat comments Tuesday about the health of the U.S. economy. While growth is good, it could be costly to investors with money tied up in low-yielding bonds, including those near or in retirement. Good news for the U.S. economy may make long-term bonds harder to dump.
By early Thursday, some bond yields had started to inch up. The yield on the 10-year U.S. Treasury note, while still a low 2.27%, was hitting highs investors hadn't seen since November.
Of course, fixed-income investors have been desperate for higher yields. But rising yields are a double-edged sword due to the inverse relationship between yields and bond prices. As yields on new bonds go up, prices of older, stingier bonds fall.
Many factors determine just how much they fall, but the principle is simple. Imagine you paid $1,000 for a bond yielding 2%, or $20 a year. If a new $1,000 bond paid 4%, no one would give you $1,000 for your old one. In a worst case, you might get only $500 for it. At that price, the yearly earnings of $20 would equal a 4% yield, the same as an investor could get on a new bond.
In real life the damage isn't usually that great, but a 1 percentage point rise in prevailing yields can easily drive a bond's price down by 10%, wiping out years of interest earnings. The longer the bond has to mature, the greater the damage, since its owner would be saddled with a below-market yield for longer.
View the original article here
That's the takeaway from the Federal Reserve's mildly upbeat comments Tuesday about the health of the U.S. economy. While growth is good, it could be costly to investors with money tied up in low-yielding bonds, including those near or in retirement. Good news for the U.S. economy may make long-term bonds harder to dump.
By early Thursday, some bond yields had started to inch up. The yield on the 10-year U.S. Treasury note, while still a low 2.27%, was hitting highs investors hadn't seen since November.
Of course, fixed-income investors have been desperate for higher yields. But rising yields are a double-edged sword due to the inverse relationship between yields and bond prices. As yields on new bonds go up, prices of older, stingier bonds fall.
Many factors determine just how much they fall, but the principle is simple. Imagine you paid $1,000 for a bond yielding 2%, or $20 a year. If a new $1,000 bond paid 4%, no one would give you $1,000 for your old one. In a worst case, you might get only $500 for it. At that price, the yearly earnings of $20 would equal a 4% yield, the same as an investor could get on a new bond.
In real life the damage isn't usually that great, but a 1 percentage point rise in prevailing yields can easily drive a bond's price down by 10%, wiping out years of interest earnings. The longer the bond has to mature, the greater the damage, since its owner would be saddled with a below-market yield for longer.
View the original article here
Saturday, May 19, 2012
A Frugal Retirement: How to Live on Less
How much of your retirement savings can you withdraw each year -- 7% or 1.8%? Or something in between?
The answer, of course, will make a huge difference in your lifestyle. Fortunately, if you need a smaller withdrawal to keep your nest egg going, it may not have to be permanent, and people in or near retirement can consider some attractive short-term lifestyle changes to keep life interesting on a reduced budget. You could find yourself living large or living on little. Here's how to be flexible and frugal with your funds.
The key: Keep flexible by avoiding big long-term commitments such as a second home, a large mortgage, oversized car payment or owing a pricey, unsalable condo with big association fees.
Since the early 1990s, many financial advisers have recommended starting retirement with a 4% annual withdrawal rate, or $40,000 for a $1 million nest egg. If you start there, you can increase the annual withdrawals by enough to offset inflation and keep going for 30 years.
That was the theory, anyway. But recent research says that as conditions change the withdrawal figure could be as high as 7% and as low as 1.8%. That impressive $1 million nest egg could therefore generate a tidy $70,000 a year, or a stingy $18,000 -- before taxes.
The first thing to note is that unless you can live on a very, very low withdrawal rate, your fund would have to include some stocks and long-term bonds as well as cash. After all, a five-year certificate of deposit yields only 1.157%, according to the BankingMyWay.com survey. But stocks obviously have risks, and you could face lengthy downturns.
The second point: You might well have to trim your withdrawals if the markets dip. Taking a full withdrawal when your stocks are down could inflict permanent damage on your nest egg, especially if the markets stayed down for several years.
View the original article here
The answer, of course, will make a huge difference in your lifestyle. Fortunately, if you need a smaller withdrawal to keep your nest egg going, it may not have to be permanent, and people in or near retirement can consider some attractive short-term lifestyle changes to keep life interesting on a reduced budget. You could find yourself living large or living on little. Here's how to be flexible and frugal with your funds.
The key: Keep flexible by avoiding big long-term commitments such as a second home, a large mortgage, oversized car payment or owing a pricey, unsalable condo with big association fees.
Since the early 1990s, many financial advisers have recommended starting retirement with a 4% annual withdrawal rate, or $40,000 for a $1 million nest egg. If you start there, you can increase the annual withdrawals by enough to offset inflation and keep going for 30 years.
That was the theory, anyway. But recent research says that as conditions change the withdrawal figure could be as high as 7% and as low as 1.8%. That impressive $1 million nest egg could therefore generate a tidy $70,000 a year, or a stingy $18,000 -- before taxes.
The first thing to note is that unless you can live on a very, very low withdrawal rate, your fund would have to include some stocks and long-term bonds as well as cash. After all, a five-year certificate of deposit yields only 1.157%, according to the BankingMyWay.com survey. But stocks obviously have risks, and you could face lengthy downturns.
The second point: You might well have to trim your withdrawals if the markets dip. Taking a full withdrawal when your stocks are down could inflict permanent damage on your nest egg, especially if the markets stayed down for several years.
View the original article here
Tuesday, May 15, 2012
Investment Fees Are Something, but Not the Only Thing
The big talk in the 401(k) world is fee transparency and lower fees. It seems as if everyone has concluded that, "If we can get fees down, the rate of return will improve."
But the cheapest index funds cost 0.1% to 0.4%, and the most expensive active open-end funds cost between 1.2% and 2%. Assuming both have the same annual total return, the most you can increase your return is 1.9%. Lower fees may mean a better rate of return, but they're only a piece of a much bigger picture.
No doubt 1.9% compounded over 20 years or more is a significant increase, but that is an extreme example; the normal difference is maybe 0.5 to 1%. The lower the additional yield, the lower the long-term impact.
The real issue is that fees are only a piece of a much bigger picture.
Investing is not simple. Index funds and active funds are not always the best answer. The best answer is that sometimes, for some assets, indexes are best, and sometimes, for some assets, active funds are the best. The 401(k) industry and the Department of Labor have been looking for the holy grail of simple investing so the average person can make a good rate return to be able to retire on their 401(k) balance, but the problem is there is no simple investing concept -- and even if an approach works for a time, it will not always work.
Pre-retirees should know 401(k) investing is built on Modern Portfolio Theory, and the most important point here is that MPT is nothing but a theory.
View the original article here
But the cheapest index funds cost 0.1% to 0.4%, and the most expensive active open-end funds cost between 1.2% and 2%. Assuming both have the same annual total return, the most you can increase your return is 1.9%. Lower fees may mean a better rate of return, but they're only a piece of a much bigger picture.
No doubt 1.9% compounded over 20 years or more is a significant increase, but that is an extreme example; the normal difference is maybe 0.5 to 1%. The lower the additional yield, the lower the long-term impact.
The real issue is that fees are only a piece of a much bigger picture.
Investing is not simple. Index funds and active funds are not always the best answer. The best answer is that sometimes, for some assets, indexes are best, and sometimes, for some assets, active funds are the best. The 401(k) industry and the Department of Labor have been looking for the holy grail of simple investing so the average person can make a good rate return to be able to retire on their 401(k) balance, but the problem is there is no simple investing concept -- and even if an approach works for a time, it will not always work.
Pre-retirees should know 401(k) investing is built on Modern Portfolio Theory, and the most important point here is that MPT is nothing but a theory.
View the original article here
Friday, May 11, 2012
Getting Fat Yields From Municipal Funds
Searching for income, investors have been pouring cash into high-yield municipal funds, which hold bonds that are rated below-investment grade. According to Morningstar, the tax-free funds yield 4.0%. That is the equivalent of a taxable bond with a yield of more than 6% for someone in the top tax bracket. In comparison, intermediate municipal funds -- which emphasize investment-grade bonds -- deliver tax-free yields of only 1.6%.
While low-quality municipals can be enticing, they come with considerable risk. During the market turmoil of 2008, high-yield municipal funds lost 25.3%, trailing intermediate funds by 23 percentage points. Because of the big losses, the high-yield funds rank as the worst-performing municipal category for the past five years.
To get decent income without taking on much risk, many investors should consider those investment-grade funds that deliver above-average yields. The funds fatten their yields by holding big stakes in bonds rated A and BBB, the two lowest rankings in the investment-grade universe.
This strategy is different from the approach of typical investment-grade portfolios, which steer away from BBB bonds and focus on issues that are rated AAA and AA, the top two categories. While they yield 2 percentage points more than top-rated AAA issues, the BBB bonds have tiny default rates. Defaults should remain limited because many municipalities have reduced budget deficits in recent years by cutting payrolls and raising taxes.
Intermediate funds with above-average yields and strong long-term performance records include BlackRock Intermediate Municipal (MEMTX), Commerce National Tax-Free Intermediate Bond (CFNLX), USAA Tax Exempt Intermediate-Term (USATX), and Vanguard High-Yield Tax-Exempt (VWAHX).
A steady choice is USAA Tax Exempt Intermediate-Term, which yields 2.5%. During the past 10 years, USAA returned 5.0% annually, outdoing 85% of intermediate competitors. While the average intermediate fund has 63% of assets in bonds rated AA or AAA, USAA only has 32% in the top two grades. The average fund has 8% of assets in BBB bonds, compared to 27% for USAA.
"We manage our fund with an income focus, and a lot of times we have the highest yield available in the intermediate-term category," says portfolio manager Regina Shafer.
View the original article here
While low-quality municipals can be enticing, they come with considerable risk. During the market turmoil of 2008, high-yield municipal funds lost 25.3%, trailing intermediate funds by 23 percentage points. Because of the big losses, the high-yield funds rank as the worst-performing municipal category for the past five years.
To get decent income without taking on much risk, many investors should consider those investment-grade funds that deliver above-average yields. The funds fatten their yields by holding big stakes in bonds rated A and BBB, the two lowest rankings in the investment-grade universe.
This strategy is different from the approach of typical investment-grade portfolios, which steer away from BBB bonds and focus on issues that are rated AAA and AA, the top two categories. While they yield 2 percentage points more than top-rated AAA issues, the BBB bonds have tiny default rates. Defaults should remain limited because many municipalities have reduced budget deficits in recent years by cutting payrolls and raising taxes.
Intermediate funds with above-average yields and strong long-term performance records include BlackRock Intermediate Municipal (MEMTX), Commerce National Tax-Free Intermediate Bond (CFNLX), USAA Tax Exempt Intermediate-Term (USATX), and Vanguard High-Yield Tax-Exempt (VWAHX).
A steady choice is USAA Tax Exempt Intermediate-Term, which yields 2.5%. During the past 10 years, USAA returned 5.0% annually, outdoing 85% of intermediate competitors. While the average intermediate fund has 63% of assets in bonds rated AA or AAA, USAA only has 32% in the top two grades. The average fund has 8% of assets in BBB bonds, compared to 27% for USAA.
"We manage our fund with an income focus, and a lot of times we have the highest yield available in the intermediate-term category," says portfolio manager Regina Shafer.
View the original article here
Monday, May 7, 2012
Protect Nest Eggs With Stable Value Funds
With the Federal Reserve holding down interest rates, plenty of cautious savers feel forced to accept puny yields. Money-market funds pay next to nothing, and most five-year certificates of deposit yield less than 1%. But investors in 401(k) plans have a richer alternative: stable value funds, which yield 2.9%.
In recent years, stable value funds have served as workhorse investments, accounting for 12% to 15% of assets in 401(k) and other defined contribution retirement plans. The funds have $540 billion in assets, according to the Stable Value Investment Association.
The value of the stable funds became clear as the financial crisis savaged 401(k) plans. During 2008, stocks plummeted, and many bond funds dropped sharply. But throughout the turmoil, millions of savers were protected by holding stable value funds. Nearly all the funds stayed afloat, returning more than 4% for the year.
8 Stocks Rising Fast on Rich People's Spending
Some investors think of stable value funds as bank accounts. The funds protect principal and pay interest. But the stable value accounts are not guaranteed by the Federal Deposit Insurance Corp. Instead the returns of the funds are protected by insurance contracts known as wraps that are offered by banks and insurance companies.
In some key respects stable value funds resemble intermediate-term bond mutual funds. Both kinds of funds invest in portfolios of bonds. When interest rates rise, the value of the bonds tends to fall. If that happens, a shareholder in a typical bond mutual fund could lose principal. In contrast, a saver who makes a withdrawal from a stable value fund would not suffer because the insurance contract protects against principal losses.
In the event of bankruptcy or other problems, stable value funds can lose the insurance protection. But when the insurance lapses, savers do not necessarily suffer big losses. After Lehman Brothers went bankrupt in 2008, insurance coverage terminated for the company's 401(k) plan. Lehman employees with assets in the stable value fund lost about 1% of their principal. That was an annoying outcome -- but not as devastating as the losses that many investors suffered in the stock market.
View the original article here
In recent years, stable value funds have served as workhorse investments, accounting for 12% to 15% of assets in 401(k) and other defined contribution retirement plans. The funds have $540 billion in assets, according to the Stable Value Investment Association.
The value of the stable funds became clear as the financial crisis savaged 401(k) plans. During 2008, stocks plummeted, and many bond funds dropped sharply. But throughout the turmoil, millions of savers were protected by holding stable value funds. Nearly all the funds stayed afloat, returning more than 4% for the year.
8 Stocks Rising Fast on Rich People's Spending
Some investors think of stable value funds as bank accounts. The funds protect principal and pay interest. But the stable value accounts are not guaranteed by the Federal Deposit Insurance Corp. Instead the returns of the funds are protected by insurance contracts known as wraps that are offered by banks and insurance companies.
In some key respects stable value funds resemble intermediate-term bond mutual funds. Both kinds of funds invest in portfolios of bonds. When interest rates rise, the value of the bonds tends to fall. If that happens, a shareholder in a typical bond mutual fund could lose principal. In contrast, a saver who makes a withdrawal from a stable value fund would not suffer because the insurance contract protects against principal losses.
In the event of bankruptcy or other problems, stable value funds can lose the insurance protection. But when the insurance lapses, savers do not necessarily suffer big losses. After Lehman Brothers went bankrupt in 2008, insurance coverage terminated for the company's 401(k) plan. Lehman employees with assets in the stable value fund lost about 1% of their principal. That was an annoying outcome -- but not as devastating as the losses that many investors suffered in the stock market.
View the original article here
Thursday, May 3, 2012
Get Fat Yields With Foreign Dividend Funds
Hungry for reliable income, investors have been embracing dividend-paying blue-chips. Plenty of solid utilities and consumer companies yield 3%. That seems like a rich payout at a time when 10-year Treasuries yield 2.0%.
But to get an even higher yield, consider funds that focus on foreign dividend stocks. Many foreign blue-chips yield more than 4%. Forward International Dividend(FFINX), a mutual fund, yields 5.9%.
Besides paying higher yields, foreign dividend payers tend to be cheaper than their U.S. counterparts. While the S&P 500 has a forward price-to-earnings ratio of 13, the stocks in the Forward fund have a P/E of 8.6.
Foreign small-cap funds can be attractive. WisdomTree International SmallCap Dividend(DLS), an exchange-traded fund, yields 3.8% and has P/E of 11. In comparison, the Russell 2000 small-cap index yields 1.4% and has a P/E of 17.
Foreign stocks have traditionally paid higher yields than their U.S. counterparts. Investors in many countries have preferred fat dividends, and companies have paid out relatively large amounts of their earnings.
But these days, the foreign yields are especially rich because the stocks are out of favor. At a time when debt problems plague Europe and Japan, many foreign economies are struggling, and the markets are depressed. As share prices fall, dividend yields rise.
To find the best dividend payers, Forward International portfolio manager David Ruff considers stocks of all sizes that yield more than 2%. The companies must have strong earnings and the ability to increase dividends at double-digit annual rates.
Ruff pays close attention to the dividend payout rate, which is the percentage of earnings that goes to cover the dividend. He typically prefers stocks with payout rates of 30% to 60%.
When the payout rate is lower, Ruff worries that management is not committed to paying dividends consistently and could spend extra cash on reckless acquisitions. Companies with high payout ratios could be on shaky ground.
"If the payout rate is 95%, then there is not much room to increase the dividend in the future," he says.
A big holding in the fund is Unilever(UN), the Dutch maker of Lipton tea and Hellmann's mayonnaise. The stock yields 3%. Another holding is Sanofi(SNY), a French drugmaker that yields 4.7%.
View the original article here
But to get an even higher yield, consider funds that focus on foreign dividend stocks. Many foreign blue-chips yield more than 4%. Forward International Dividend(FFINX), a mutual fund, yields 5.9%.
Besides paying higher yields, foreign dividend payers tend to be cheaper than their U.S. counterparts. While the S&P 500 has a forward price-to-earnings ratio of 13, the stocks in the Forward fund have a P/E of 8.6.
Foreign small-cap funds can be attractive. WisdomTree International SmallCap Dividend(DLS), an exchange-traded fund, yields 3.8% and has P/E of 11. In comparison, the Russell 2000 small-cap index yields 1.4% and has a P/E of 17.
Foreign stocks have traditionally paid higher yields than their U.S. counterparts. Investors in many countries have preferred fat dividends, and companies have paid out relatively large amounts of their earnings.
But these days, the foreign yields are especially rich because the stocks are out of favor. At a time when debt problems plague Europe and Japan, many foreign economies are struggling, and the markets are depressed. As share prices fall, dividend yields rise.
To find the best dividend payers, Forward International portfolio manager David Ruff considers stocks of all sizes that yield more than 2%. The companies must have strong earnings and the ability to increase dividends at double-digit annual rates.
Ruff pays close attention to the dividend payout rate, which is the percentage of earnings that goes to cover the dividend. He typically prefers stocks with payout rates of 30% to 60%.
When the payout rate is lower, Ruff worries that management is not committed to paying dividends consistently and could spend extra cash on reckless acquisitions. Companies with high payout ratios could be on shaky ground.
"If the payout rate is 95%, then there is not much room to increase the dividend in the future," he says.
A big holding in the fund is Unilever(UN), the Dutch maker of Lipton tea and Hellmann's mayonnaise. The stock yields 3%. Another holding is Sanofi(SNY), a French drugmaker that yields 4.7%.
View the original article here
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