The Big Question: When Can I Retire?

Written by Rob Copeland | 07 September 2023

"When is the right time to retire? And how much money will I need so be sure I’ll never run out?" 
 
Those are perennial questions asked by every Americans who doesn’t intend to work until they drop. They’re so popular that all the brand-name financial companies seem to have a rule-of-thumb formula for figuring it out. 
 
Fidelity's guideline is to save at least one time your salary by age 30, three times by 40, and so on. Vanguard recommends saving 12% to 15% of your pay each year. T. Rowe Price says you should have as much as 11 times your salary saved by the time you’re 60. 
 
People are especially nervous about their retirement savings now because of the nasty inflation we’ve experienced in the past couple of years, as well as last year’s market rout of both stocks and bonds. No one wants to retire just as their nest egg is taking a beating from bad markets and inflation is eating into their buying power.
 
So fretting over when to retire and what it will cost is warranted. It’s normal these days for retirements to stretch on to 30 or 40 years thanks to longer lifespans. The bad scenario is to have to cut way back on your lifestyle in order to stretch your savings. The extra-bad one is to have to move in with your kids, or worse. 
 
So it’s important as you save for retirement to make sure you're on track to reach your goals. But you shouldn’t rely on rules of thumb from the investment companies mentioned above. 
Let’s leave aside the possibility that these firms’ advice is skewed by a desire to have you invest as much money as possible in their funds. The real problem with retirement-savings rules of thumb is that they’re too general. 
 
There are some calculations that are helpful in getting started. Calculating your present income minus expenses can give you an idea of what your spending will look like in retirement, for example. But the right savings target for each individual depends on personal factors. How long are you likely to live? Family health history can yield some clues there. Do you want to live large in retirement or pursue a simpler lifestyle? And how much risk are you willing to take in your retirement portfolio in hopes of maximizing growth? If you’re a more cautious investor by nature, you’ll need to save more.
 
It's easy to make overly optimistic or pessimistic assumptions if you’re trying to calculate your savings target on your own. An experienced investment advisor can give you a factual, non-emotional perspective. I’ve had to persuade clients who were absolutely convinced that they could not retire that they were wrong. I’ve had others who expected to live off $5,000 a month in retirement when they were spending $10,000 per month in the present. I’ve told others they can retire if they’re willing to pick up some part-time work. Reality checks are the stock in trade of a good investment advisor. 
 
I strongly suggest working with an investment advisor to at least pinpoint a realistic nest-egg target. Look for an experienced advisor: There’s a big advantage in working with a 20-year professional because they’ve not only built retirement plans but executed them and seen the results. It’s also imperative to work with an advisor who is independent and a fiduciary—meaning they’re legally required to place your financial interests above their own. If you go to a big, marquee-name brokerage house, you may find yourself pushed toward whatever investment product is most lucrative for them, and your target number may be suspect as well.
 
What’s your retirement number? No formula or rule of thumb can really tell you—it’s a personalized question whose answer is unique to you.

How to Fix Your Retirement Savings

Written by Rob Copeland | 14 August 2023

There are all kind of reasons that people don't save for retirement, or fail to save enough.

Retirement may seem far away. The rising cost of living may make it hard to find extra money. And life can throw you expensive curveballs, like health crises and divorce. Before you know it, you're 40 or 50 years old and you're not on track to retire when you'd hoped to.

Often, the real reason people end up unprepared for retirement is procrastination. If you can't save enough to make a difference, it's better to wait until you can. That kind of thinking is a trap, because if you're not comfortable setting money aside now, you may never be.

So start now. Set aside what you can, and do it through autopay: Make it like paying your mortgage, where you don't even think about it. Aim to save 10% to 15% of your income during your working years, and more if you're catching up.

The important thing is to start putting money aside, even if it's a modest amount at first. Let's say you're able to contribute just $200 a month to your retirement account. By the second year you may be able to increase the amount to $400 a month. Let's say that by year five, you're doing better financially and are able to contribute $1,000 per month. That continues for the next five years. Assuming an investment return of 7% per year—which is a good bet based on historical market returns—you'll have more than $95,000 at the end of that period. That's $16,000 of interest.

In a different scenario, if you invest $1,000 per month with a 7% annual return, you'll have more than $170,000 after 10 years--$70,000 of which is interest. After 20 years, you'll have $574,000--$344,000 of which is interest. Compounding really works, and the more you save, the greater the compounding effect is.

The way that you invest your money is important. You shouldn't swing for the fences with aggressive investments that put your hard-earned savings at risk. On the other hand, it's a mistake to be too cautious. While you may want to stash your money in a bank account, or buy safe Treasury bonds, those investments won't give you the kind of returns that will grow your money adequately for a comfortable retirement. What's needed is a diversified portfolio of stocks and bonds, with risk levels that are tailored to your goals, tolerance for market volatility, and time horizon.

It's never too late to get started. Please contact us if you'd like to learn more about saving and investing for retirement.

Why You Should Be Invested Right Now

Written by Rob Copeland | 29 June 2023

There's lots of volatility in the market right now. Since the beginning of the year, the S&P 500 index has risen 9.3%, then fallen 7.8%, only to rise another 14.8%. Since mid-June, it's fallen 1.2%.

It's not surprising, then, that many investors are on the sidelines. But while they wait for the markets to calm down, one thing is certain: Thanks to inflation, they're earning a negative return of about 4% a year.

Whether your cash is intended for short-term or long-term use, it should be invested right now. There are good yields right now on short-term bonds and money market funds, and even CDs and savings accounts. And while long-term investments in stocks and other assets may rise and fall in the short term, history shows over the long run they help investors beat inflation and earn enough return to help pay for goals like retirement.

For short-term investments, the best savings accounts are paying 4.5% annualized interest or even a little more. That's enough to beat inflation and protect your cash's buying power. One-year CDs, meanwhile, are paying more than 5%. U.S. Treasuries are paying attractive yields as well: The one-year note currently yields 5.35%.

For longer-term money that you don't need to touch for at least five years, it makes sense to stay invested in the stock market. Short-term volatility is the rule in the stock market, not the exception. Between 1946 and 2022, the market declined between 5% and 10% 84 times, which averages out to more than once a year. But stocks also go up—a lot more than they go down. Over the past 20 years, the S&P is up 400%.

Stocks have far more growth power than bonds, and that growth is necessary to achieve goals like retirement or college funding. Since 1926, large-cap stocks have returned 10% a year on average, while long-term government bonds averaged between 5% and 6%. Stocks' higher growth power helps disciplined long-term investors not just keep pace with inflation, but to come out ahead.

But it's critical that you stay invested. Frequent buying and selling of stocks will invariably decimate your long-term returns due to missed opportunities. Not even professional investors can predict when a long period of declines will give way to periods of appreciation, and vice-versa. Trying to guess means you will likely sell when prices are low and buy when they are high.

It's easy to make emotional, short-term decisions if you invest based on news headlines. The way to be successful as an investor is to figure out how much money you need to invest in safe, short-term solutions and how much you should invest in more volatile investment like stocks—and then stick to the plan. If you'd like to review your investments, don't hesitate to reach out to us.

Here’s Why I’m a “No” on Annuities

Written by Rob Copeland | 30 May 2023

Annuities are more popular than ever: Last year, buyers put a record $310.6 billion into the hybrid insurance and investment products, and sales are still going strong. Fixed-rate annuities, which guarantee a rate of return over a set time period, did particularly well, more than doubling their sales from the previous year.

Why are annuity sales surging? One reason is that stocks and bonds both had terrible years in 2022, and they haven't been stellar this year either. Meanwhile, the Federal Reserve has raised interest rates aggressively, fueling recession fears. Both factors have made annuities, with their promise of predictable income streams, look like a safe haven. In addition, those rising interest rates have also translated into higher annuity payouts.

Early in my career I really liked annuities. They provide that reliable stream of income over a specific period or for life. They can help provide financial stability during retirement, and help mitigate the risk of outliving your savings.

But I quit selling them 15 years ago. One of my big concerns with annuities is that there's a huge incentive for financial advisors to push them on clients. The sales commissions are typically 5% or 6%. So if an advisor sells a $1 million annuity, he or she pockets a quick $50,000 or $60,000. It's easy for advisors to overlook the question of whether an annuity is right for their client when they know recommending one could put a new Tesla in their driveway.

By the way, I never receive sales commissions for selling any financial product. As a fee-only, fiduciary advisor, I'm paid strictly for giving objective advice about investing and financial planning.

Annuities also lock up your money, typically for five to 10 years. During this "surrender period," if you withdraw more than a certain percentage of your annuity's value, you may be subject to steep surrender charges. Surrender charges typically start at 7% in the first year and decrease by 1% each subsequent year until they reach 0%.

Tying up your money for several years also carries an opportunity cost. In other words, you may miss a change to earn higher returns elsewhere. If, for example, we get another bull market where you have a chance to earn 10%, 15% or 20% returns, you'll have to settle for single-digit returns from a fixed-rate annuity.

It's true that you can earn more using an index-linked annuity. But annuities in general tend to have higher overall costs and fees than, say, mutual funds due to their insurance features, guarantees and administrative expenses. And the returns of index annuities are typically capped so that the insurance companies that issue them can ensure that they make a profit. In other words, you can leave money on the table with an index annuity.

Finally, annuities can create bad tax situations for both their owner and any heirs. Annuities aren't tax-free, they're tax deferred. And they're taxed as ordinary income, which is a higher rate than the capital-gains rate that applies to stocks and bonds. And it's impossible to say what your income-tax rate will be during the course of your retirement. If you're in a high tax bracket, you could really get walloped.

Furthermore, if you pass away while holding an annuity, your beneficiaries may not receive a step-up in tax basis as they would with stocks and other kinds of investments. This means that any gains that have accrued within the annuity would be subject to income tax when the beneficiaries receive distributions.

There are probably cases where annuities make sense for certain people, but I'm hard-pressed to name one. With the benefit of 24 years' experience as an investment advisor, I've come to believe there's pretty much always a better alternative. Don't hesitate to reach out to me if you'd like to learn more.