Retirement Planning Isn't Rocket Science

So if you feel behind or have been putting off planning for retirement you are certainly not alone.  For years economists and government agencies have been concerned we are heading towards a retirement crisis. With each study published it appears there is real reason for concern. 2020 did bring a bit of good news with IRS regulations becoming more favorable for Americans saving for retirement.

Major Retirement legislation was signed into effect at the start of 2020. THE SETTING EVERY Community Up for Retirement Enhancement (SECURE) Act was signed by President Donald Trump in December 2019 and became a law as of Jan. 1, 2020. The new legislation brings favorable changes for long-term retirement savings and affects Americans at every age.

What is the Secure Act?

The SECURE Act changed a variety of retirement account rules, including who is eligible to contribute to retirement accounts and when withdrawals are required. The new legislation also adds a new exception to the early withdrawal penalty. 

Important retirement account changes from the SECURE Act include:

  1. The required minimum distribution age increases to 72, up from 70 1/2.
  2. The age limit for IRA contributions has been removed.
  3. Inherited retirement account distributions must now be taken within 10 years.
  4. New parents can take penalty-free withdrawals.
  5. Long-term part-time employees will now be eligible for 401(k) plans.

According to BankRate’s March Financial Security Index survey, more than 1 in 5 American’s aren’t saving anything at all for retirement, emergency funds or any other financial goals. “This result has shown little change over the past few years, consistently coming in at 20 percent or 21 percent since 2016,” says Greg McBride, CFA, BankRate chief financial analyst. “Unfortunately, this means it hasn’t improved.”

Nearly half of working adults (48 percent) are saving something, but no more than 10 percent of their annual incomes. Only 1 in 6 employees (16 percent) report saving more than 15 percent of their yearly earnings.

Who is and who isn’t Saving?

Compared with their wealthier counterparts, low-income working Americans are more likely to say they struggle when it comes to saving money. More than 4 in 10 households (45 percent) earning less than $30,000 per year aren’t saving any money. That’s the case for about 6 percent of the highest-earning households. Men are more likely than women to say they’re saving more than 15 percent of their income. About 1 in 5 males and 13 percent of females fall into that category.

There’s also a generational divide between who’s socking away more money. Older households (age 55 and above) are more likely than other age groups to be saving more than 10 percent of their annual income. Millennials and Gen Xers, on the other hand, are more likely to say they’re not saving any money at all (or they’re not saving more than 10 percent of their income).

The survey results may highlight some of the financial challenges millennial’s face that make saving money difficult, like student loan debt, the lack of wage growth and the increased cost of essentials, says Douglas Boneparth, president of Bone Fide Wealth and co-author of “The Millennial Money Fix.” “There’s also greater pressures to spend,” Boneparth says. “You can’t ignore that we live in a consumerism kind of society that’s being amplified by things like social media.”

Gen Xers are in a similar financial boat. “I think Gen X has even greater responsibilities than millennial’s do, specifically when you think about college savings and expenses like that,” Boneparth adds.

Why Aren’t We Saving?

According to the survey, 38 percent of working Americans have too many expenses. Across different income levels, age groups and regions, that’s the most common reason we aren’t saving more money. But are people aware of where their hard-earned money is going or are they spending it mindlessly? A 2018 BankRate survey about financial vices found that the average American spends more than $2,900 a year on restaurant food, takeout meals, prepared drinks and lottery tickets. “I wonder how many of them really scrutinize what they’re spending their money on,” says Nancy Wong, professor and chair of the department of consumer science at the University of Wisconsin-Madison. 

“And a lot of the times, like what most I think financial consultants would say, it’s actually the little things that add up.” Sixteen percent of working adults claim they’re not saving enough money because their job isn’t good enough. And 13 percent blame their personal savings crisis on the amount of debt they’re carrying. Creating a plan and beginning to save monthly, even if it is not much in the beginning, can pay huge benefits later on.

 

7 out of 10 Americans fear they will never be financially stable!

7 in 10 American’s fear they will never be financially stable; according to research published last month. And this might be the result of a lack of financial knowledge — the survey of 2,000 Americans revealed 59 percent of respondents said they don’t know enough about their own financial situation today. 

The survey also found 68 percent of respondents want to learn more about their finances, but don’t know where to go. Conducted by OnePoll on behalf of SoFi, the survey asked respondents about their finances, how knowledgeable they feel on the subject — and how they might like to learn more. 

More than eight in 10 respondents said they believe high schools should be required to teach financial literacy. Another 55 percent of those surveyed said they’re too intimidated to ask for professional financial advice. In order to learn more, 57 percent have tried to teach themselves about their finances.

The top thing respondents had to teach themselves was how to pay their taxes, closely followed by learning about how credit card interest works. Perhaps this is all connected to how mom and dad handled their finances back in the day – as 72 percent of respondents said they felt their parents didn’t teach them enough about their finances. 

Retirement income planning may seem overwhelming but it doesn’t have to. Many financial advisors provide services to individuals just beginning their nest egg for little to no fees. If you are still quite a ways off from retirement you could really learn enough to get your self off to a good start by reading up on the basics of income planning online.

Top financial lessons Americans teach themselves

  • How to do taxes: 42 percent
  • How credit card interest works: 37 percent
  • How to apply for a car loan: 36 percent
  • How to apply for a personal loan: 36 percent
  • How to make a monthly budget: 35 percent
  • How to apply for a mortgage loan: 34 percent
  • How to invest: 33 percent
  • How to create a savings account: 33 percent
  • How to create a checking account: 33 percent
  • How to apply for a student loan: 32 percent
  • When to save for retirement: 28 percent
  • How the stock market works: 27 percent
  • The difference between stocks and bonds: 27 percent
  • How to create an emergency fund: 27 percent
  • What a 401(k) is: 23 percent
  • How to refinance a loan: 23 percent 
 

99% of Americans don’t use a financial advisor

If you manage your own money, you are like most other Americans, according to the new CNBC Invest in You survey released Monday.

In fact, only 1% of those polled said they use a financial advisor. Yet how do you know if it is the right move? And if you think you want an advisor, what do you need to look for? “Finding a financial advisor isn’t something you can be pushed to do,” said certified financial planner Winnie Sun, president and founder of California-based Sun Group Wealth Partners.

 

“You’ll know when the time is right.”

The remaining 99% of those surveyed said they either do it themselves; have their spouse, parent or someone other than a financial advisor handle it for them or didn’t answer. The national poll, conducted for CNBC and Acorns by SurveyMonkey Oct. 21–25, surveyed 2,776 adults and had a margin of error of plus or minus 3 percentage points.

What’s holding people back?

There are a number of reasons people are staying away from getting professional financial help, experts said. For one, there is a lot more information online these days, compared to past generations, so people feel like they can do it themselves, said Sun, a member of the CNBC Digital Financial Advisor Council. Younger Americans are also saddled with more debt, like student loans, so they don’t have a lot to invest, she said.

Then there is the cost. Many people think using a financial advisor is expensive and only for the wealthy, said certified financial planner Douglas Boneparth, president and founder of Bone Fide Wealth in New York. Plus, people may not understand the different functions a financial advisor can provide, he added.

 

When to hire an advisor?

The decision on when to hire a financial advisor is a very personal one and isn’t necessarily tied to a certain amount of money saved or a specific age. Boneparth, also a member of the CNBC Digital Financial Advisor Council, said it’s about “becoming financially-planning ready.” “It has to do with where they are in terms of responsibilities in their life,” he explained.

For Sun a good indication on when you should speak to someone is when you feel like you want to make a difference in your life and aren’t sure where to go. Another signal is if the information you are getting online isn’t speaking to you or making any sense, she added.

“You don’t want to make a mistake,” she said.

 

Vetting an advisor

The most important thing to look for in a financial advisor is someone you can have a conversation with and listens to you, Sun said. Experience also matters. You’ll want someone who has been in the industry at least through one recession, she advises. “It is really easy to manage money when the market is doing well. It is harder when the market isn’t doing well,” Sun said. 

The data shows time and time again more American’s are taking on the responsibility of investing on their own. This can definitely be done successfully but it is important to have a good foundation and a basic understanding of the fundamentals of financial planning. During the accumulation phase of your retirement savings diversification is a primary concern. Which is something most Robo-Advisors can do very well.

Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio. A diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt at limiting exposure to any single asset or risk.  As you approach the transition phase, the 5 to 10 year period prior to retirement, it may be worth your time and energy to discuss your situation, goals and objectives with a professional who specializes in the distribution phase. 

 

Funding Longevity: Evaluating Proposals to Improve Retirement Security

Published in May, 2020 by the Stanford Center for Longevity, this report (based on expert interviews held October – December, 2019) starts by summarizing the issues and analyses for assessing Americans’ retirement readiness. It then analyzes and compares various proposed programs that could help improve the financial security of Americans, with a special focus on programs that aim to enhance retirement preparedness.

In doing their research and interviewing experts they came up with a couple of proposals to address the current system’s shortfalls and challenges. Here is a brief summary of seven major policy proposals that this report reviews in more detail:

“A Two-Tier Structure for Social Security” aims at increasing the transparency of Social Security and refocusing its priority on eliminating old-age poverty, while also mandating minimum contributions from employers and workers to private retirement savings plans.

“Progressive Price Indexing” helps improve the sustainability of Social Security with a combination of price indexing and wage indexing in the benefits calculation. The goal is to curb the growth of benefits for future middle-income and affluent retirees, while maintaining the real purchasing power for future low-income retirees.

“Supplemental Transition Accounts for Retirement (START)” increases retirement incomes for future retirees by facilitating the delay of claiming Social Security benefits. This would be accomplished by providing a bridge payment between the time a worker retires and the time they subsequently claim Social Security benefits.

Is American Headed Towards A Retirement Crisis?

Some people call the challenges described previously as a “crisis,” whereas others perceive these issues to represent significant retirement planning challenges for individuals and their families. A handful of respected research institutions, including Aon Hewitt, the Boston College Center for Retirement Research, and the Employee Benefit Research Institute, have prepared assessments of retirement adequacy in the United States.

Their analyses estimate the percentage of the U.S. population that has sufficient retirement income for an “adequate” retirement, as defined by the researchers (see below for more details). The Society of Actuaries (SOA) published a report in 2018 that examined this body of research, titled Retirement Adequacy in the United States: Should We Be Concerned?

With permission from the Society of Actuaries,  the Stanford study provided a few key quotes from the executive summary of this report:

“Although the major studies reviewed in this report have significant differences in empirical approaches, data, and measures of adequacy, they relatively consistently conclude that from 25% to 35% of the population is at risk of being unable to maintain their pre-retirement standard of living throughout the retirement period (See Tables 3, 4 and 5). However, these results should be tempered by SOA research based on surveys, focus groups, and in-depth interviews, which generally indicate that many retirees are quite content with living at lower standards of living in retirement than they maintained during their working years. When we use less generous measures of retiree needs (such as consumption-based measures or minimum needs measures), the percentage who are at risk is naturally lower.”

“The current system of voluntary employment-based retirement plans has been largely successful from the perspective of companies sponsoring plans for individuals with long-term employment covered by such plans.” “Similarly, the mandatory Social Security system has done much to reduce poverty in old age.”

 

“For households without access to employer retirement plans, Social Security will still provide a base level of lifetime inflation-adjusted income, but this alone will not allow them to maintain their pre-retirement standard of living. Considering the generally low levels of household wealth, these households will usually need some combination of delayed retirement and Social Security claiming, continued paid work at older ages, increased saving, downsizing of their spending, and reliance on family to meet their retirement needs.”

A great way to begin retirement planning is to take a little time and estimate how much monthly income you’ll need in retirement.  Below is a easy to use 4 page retirement income planning worksheet to help you get started.

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