What to Do If You're Forced to Retire Before You're Ready

What to Do If You're Forced to Retire Before You're Ready



You've drawn up a retirement plan, you're saving each month, and you think you're on track for your financial goals. But even the best-laid plans can go wrong. If you're forced to retire sooner than expected, you could struggle to support yourself on a smaller nest egg that now has to last years longer.

Center for Retirement Research (CRR) at Boston College. Below, I explain common reasons people are forced to retire early and what you can do to prevent an unplanned retirement from threatening your financial security. " It's more common than you think. 37% of people retire earlier than planned, according to the Center for Retirement Research (CRR) at Boston College. Below, I explain common reasons people are forced to retire early and what you can do to prevent an unplanned retirement from threatening your financial security.
 

Common causes of unplanned retirement


The CRR study cites three main reasons people are forced to retire early. The first is poor health. While you may plan to work until age 65 or 70, a crippling illness or injury could prevent that. You'd lose months or years of income and be forced to tap your retirement accounts ahead of schedule. You may also have large medical expenses that drain your savings faster than anticipated.

The second cause is employment changes. If you're laid off or your company goes under, you'll have to decide whether to seek new employment or retire early. Those who cannot find a new job may not have a choice.

The third cause is familial shocks. A divorce, poor spousal health, or a dependent parent moving in could strain your finances, preventing you from saving as much as you'd like for retirement or draining your retirement savings too quickly.

How to deal with an unplanned retirement The first step is to decide whether you truly need to retire now. If you're unable to work because of poor health, you may not have a choice. But if you've lost a job, you can try to find a new one so you can continue working until your planned retirement date. Caring for a sick family member may prevent you from working a full-time job, but you may still be able to work part time to keep some money coming in.

Retirement calculator can help with this. Keep in mind that if you have a serious illness, you may now have a shorter life expectancy than you'd previously thought."Next, you need to reevaluate your existing retirement plan. Think about how long your savings now have to last and recalculate how much you need to cover living expenses. Total up your monthly expenses, including new expenses that weren't factored into your original retirement plan, like caring for an elderly parent. Then, multiply this by the number of years of your retirement, adding 3% annually for inflation. A retirement calculator can help with this. Keep in mind that if you have a serious illness, you may now have a shorter life expectancy than you'd previously thought.

Look for ways to make up the difference between what you have and what you need. This may include cutting back on expenses where possible and foregoing travel or large purchases. If you're 62 or older, consider signing up for Social Security if you haven't already.

Full retirement age (FRA) -- 66 or 67, depending on your birth year. You'll receive a reduced amount, equivalent to your full benefit minus ⅔ of 1% times the number of months you are below your FRA. If your FRA is 66 but you start benefits at 65, you'd receive 92% of your scheduled benefit per check. If you delay Social Security, your benefits will grow at this same rate until you earn the maximum benefit at age 70. This is 124% of your scheduled benefit for an FRA of 67 and 132% for an FRA of 66. You can figure out how much your benefit will be by creating a my Social Security account."You won't get your full benefit amount per check if you're under full retirement age (FRA) -- 66 or 67, depending on your birth year. You'll receive a reduced amount, equivalent to your full benefit minus ⅔ of 1% times the number of months you are below your FRA. If your FRA is 66 but you start benefits at 65, you'd receive 92% of your scheduled benefit per check. If you delay Social Security, your benefits will grow at this same rate until you earn the maximum benefit at age 70. This is 124% of your scheduled benefit for an FRA of 67 and 132% for an FRA of 66. You can figure out how much your benefit will be by creating a my Social Security account.

While starting early means accepting less money per check, these benefits could make up for some of your lost income. This will reduce how much you need to withdraw from your retirement accounts, stretching your savings a little further.

Health savings account (HSA), if you have a high-deductible health insurance plan. Money you put in an HSA is tax-deductible, and if you use it for medical expenses, you won't pay taxes on it at all. Once you turn 65, you can use the money just like a regular retirement account, though you'll pay income taxes if the money isn't used for medical expenses. Single adults may contribute up to $3,500 to an HSA in 2019 and families may contribute up to $7,000."There's no need to wait until you're forced into an early retirement to begin planning for one. Boost your retirement account contributions if you can and try to save more than you think you need. If possible health issues concern you, build these costs into your retirement plan. A 65-year-old couple retiring today will need about $280,000 to cover medical expenses in retirement, according to Fidelity. You could save for this in your retirement account or a health savings account (HSA), if you have a high-deductible health insurance plan. Money you put in an HSA is tax-deductible, and if you use it for medical expenses, you won't pay taxes on it at all. Once you turn 65, you can use the money just like a regular retirement account, though you'll pay income taxes if the money isn't used for medical expenses. Single adults may contribute up to $3,500 to an HSA in 2019 and families may contribute up to $7,000.

Early retirement is great if you can afford it, but if not, it can be more stressful than your time in the workforce. While you can never be certain whether you'll need to retire early, you can do your best to prepare today by saving as much as you can for retirement and thinking through how you would handle the situations outlined above.






Happy Investing
 

Technology in Investment Management – Friend or Foe?

Technology in Investment Management – Friend or Foe?

 
Research predicts that digital payments in India will exceed USD 500 billion by 2020, up from USD 50 billion in 2016. It s just one way in which fintech is changing the face of the financial industry. Fintech the technological innovation in the design and delivery of financial services and products is revolutionising customer expectations. Emerging technologies such as Artificial Intelligence (AI), big data and analytics, blockchain, cloud, Internet of Things (IoT), and robotics are disrupting traditional finance.

AI and machine-learning are transforming customer experience with personalised service and improvements in back-office efficiencies. Banks use big data and analytics in their fraud, risk management, and regulatory compliance. IoT is revolutionising insurance. But its growth is conservative in comparison to big data, cloud and machine learning used in payments and alternative lending. Big data and machine learning are spotting trends and providing better investment insight. Robots are venturing into investment and changing how wealth advisory is delivered.

The effect of machines on investment management professionals is a pressing question.

Digital and emerging technologies will have profound implications in the field of finance, but they are still nascent. Machines still require human direction to carry out tasks. Robo-advisors cannot operate independently of their human counterparts because their algorithms require a longer learning curve. Blockchain may redefine how financial institutions operate but it is not yet mature and will need to overcome hurdles if a sustainable business model with regulatory approval is to be achieved. AI does improve customer service but only in unison with human professionals.

The real challenge is finding the right talent pool to complement the agility of the technologies. Investment management firms must compete with other industries using disruptive technologies to attract the best people. Investment teams and technical teams will need to be integrated to create checks and balances on the models and processes. Proper integration is a counter to the potential lack of transparency and interpretability in these models decision making.

Fintech s prominence is shaping the investment industry s evolution. CFA Institute is engaging with regulators and policymakers to explore ways to support fintech s investor protection standards. To succeed in the new-age investment management industry bearing down on them, advisors need new skills and training in their core domain, and importantly in soft skills. A study found that organisations retooling for the future are instilling cultures of ethical decision making, to complement specialised financial analysis, and sophisticated IT skills. CFA Institute has also integrated big data, AI, and robo-advisory into its CFA Program curriculum.

The human element is still vital even as firms harness fintech capabilities to survive in an era of low latency and algorithmic, high frequency trading. Technology will enhance advisors and investors will seek out institutions employing the right human-machine mix. Increased competition in the market will reduce fees and improve quality of service for investors. Technology will create new business models and revenue streams for financial institutions. The investment industry and its customers can both be winners when the blend is in equilibrium.






Happy Investing
 

3 Big Financial Risks Retirees Face Late in Life

3 Big Financial Risks Retirees Face Late in Life

 

Retirement should be a time to enjoy life, but sadly it has become a time when many seniors face money troubles. These financial problems could range from run-of-the-mill budget shortfalls that make it impossible to splurge on nice trips or generous gifts for grandkids, to true financial disasters.

&Unfortunately, certain events can trigger a financial crisis, or at least make retirees far less financially secure. The Center for Retirement Research at Boston College has identified three of the biggest risks retirees tend to face late in life, especially after 75.

Planning for these risks is essential to ensure that you can live the rest of your life comfortably.

 

1. Widowhood

The good news is, the risk that widows will end up in poverty has declined.

In 1994, the poverty rate for widows was 20%, so as many as one in five women ended up living at or below the poverty level after a husband's death. Because more women now participate in the labor force and receive advanced education, the poverty rate for widows had dropped to 13% by 2014 and is expected to continue dropping.

more significant reduction in their standard of living upon the death of their husbands than in the past because of the design of Social Security benefits. " The bad news is, while widowhood may not leave as many women in poverty as before, women may experience a more significant reduction in their standard of living upon the death of their husbands than in the past because of the design of Social Security benefits.

Widows have a choice of receiving the larger of their own benefit or their husband's survivor benefit. As the chart below shows, when women don't earn much relative to men, the jump up to receiving widow's benefits makes up for much of the income women lose when their husbands die and their Social Security check disappears. But when a wife's benefits are comparable to her husband's, switching to survivor benefits won't increase her benefit much -- so there's a huge drop in total household income upon the death of the husband.

View photos

Chart showing widow's benefits as a percentage of a couple's combined benefits.More Image source: Center for Retirement Research.

A bigger drop in income after a husband dies may not mean a widow is suddenly under the poverty level if her own benefits are reasonably generous. But it does mean she may experience a major decline in her quality of life in late retirement.

Claiming Social Security for as long as possible. Saving a big enough nest egg to provide a financial cushion for a surviving spouse is also essential, so whichever spouse lives longer doesn't have to struggle to get by on a smaller Social Security benefit without additional income from retirement investments. " One way to reduce the chances that widowhood will make the surviving spouse much poorer is to maximize survivor benefits by making sure the higher earner delays claiming Social Security for as long as possible. Saving a big enough nest egg to provide a financial cushion for a surviving spouse is also essential, so whichever spouse lives longer doesn't have to struggle to get by on a smaller Social Security benefit without additional income from retirement investments.

2. Costly health issues

Healthcare is a major concern for seniors, and costs rise in the later years of retirement. For most seniors 75 or over, out-of-pocket healthcare costs eat up about 20% of total household income. However, for 5 percent of senior households, standard care expenditures take more than half of their total income.

Seniors who need long-term care face an even worse situation. The average household incurs around $100,000 in total out-of-pocket medical expenditures from the early 70s on -- once long-term care costs are included. And households with spending in the top 5 percent incur close to $300,000 in care costs.

&Spending on healthcare as a percentage of total household income also tends to rise dramatically, as this chart shows.

View photos

Out-of-pocket spending as a percentage of household income.More Image source: Center for Retirement Research.

Planning for hundreds of thousands of dollars in healthcare costs is a major challenge. Seniors should choose the most comprehensive Medigap or Medicare Advantage policy they can afford if they expect to face serious health issues. Many older people should also consider long-term care insurance.

Investing money in a health savings account (HSA) throughout your working years can also help to ensure you have funds available to cover out-of-pocket expenditures during your later years.

3. Cognitive decline

Lastly, seniors are at risk of financial shortfalls if cognitive decline makes them less capable of managing money.

As an ever-increasing number of seniors rely on 401(k) or IRA accounts for retirement income instead of a defined-benefit pension plan, there's increased risk of losing money due to cognitive decline, because entire investment portfolios are in danger of fraud.

Unfortunately, the Center for Retirement Research says, the ability to effectively manage money begins to decline for many seniors by their 70s. What may begin as small mistakes, such as forgetting to pay bills, can quickly turn into large-scale financial disasters as further mental decline happens and conditions such as dementia become more common. Seniors who develop dementia and who have no assistance in managing funds are 7 percentage points more likely to experience financial hardships defined as severe -- such as not being able to pay housing bills or food costs.

Compounding the problem is the fact that seniors are much more likely to be targets of scammers than their younger counterparts. Cognitive decline plus aggressive targeting by thieves has resulted in a startling one in six seniors losing funds to fraudulent investment schemes.

Seniors can reduce the risk of financial loss due to cognitive decline by making arrangements with trusted family members or younger friends early in retirement. A springing power of attorney allows older people to maintain control over their own financial situation while designating someone they trust to assume authority in the event of mental incapacity.

Creating a revocable trust and designating a trusted person as a backup trustee is another solution, although a more expensive and difficult one to establish.

Planning for these three financial risks is imperative &Almost every retiree is likely to experience one or more of these financial risks while aging. It's important to plan for them while you're as young as possible to mitigate any damage from cognitive decline, widowhood, or high healthcare costs. Put a plan in place today, whether you're retired already or still working with ample time to save, to meet the needs of your spouse and you in retirement.

Happy Investing

A happy retirement is more than just money

A happy retirement is more than just money



An active, satisfying and happy retirement involves more than having adequate savings. It also entails interesting leisure activities, creative pursuits and mental and physical well-being.

You can supplement retirement savings and help stretch what you've already socked away by working a little longer, or part-time in retirement, at a profession or hobby you love.

Write down exactly what you want your life to look like during retirement, and develop a plan to make it happen.


Reports of Americans being unprepared for retirement have become so widespread that it no longer seems to elicit any emotional response.


The Employee Benefit Research Institute found that 40.6 percent of all U.S. households (where the head of the household is between ages 35 and 64) are projected to run out of money in retirement. Moreover, the average Social Security benefit provides an income equivalent to the poverty level for a family of four.

Daunting numbers indeed, but these conditions speak to priorities undertaken years earlier. Many families would list education as their No. 1 goal, and given the exorbitant cost of college tuition, it only makes sense that their nest egg is less than robust.

This is an important distinction to make, that insufficient retirement savings could be more a function of conscious decisions made in the past than a failure to behave responsibly.

Furthermore, saving for retirement is not as easy as advertised.

Glossy financial planning brochures with couples in their mid-50s riding a sailboat notwithstanding, this is simply an unrealistic expectation for many households. Given our increasing life expectancy, accumulating enough money in 35 to 40 years of working to sustain us for the remainder of our lives is no easy task.

To put this into perspective, if you take out 5 percent from a diversified portfolio each year, you stand a 58 percent chance of running out of money within 30 years of retirement.

After all, anyone taking withdrawals during the 2008 housing crisis would have a dramatically different outcome than investors who retired in 2009 and lived off market returns in the beginning of retirement. Volatility matters. This would suggest that you need $2,000,000 saved to generate $100,000 in annual income.

It's also worth mentioning that distributions from retirement accounts are subject to ordinary income taxes. In other words, there's a fair chance that a great many savers — unless they make lifestyle sacrifices or wiser investment decisions or have an actual pension — won't be able to maintain their current quality of life once they leave the workforce.




Happy Inveswting

5 Retirement Saving Tips for 2019 -- and Beyond

5 Retirement Saving Tips for 2019 -- and Beyond

 
Are you on track to save enough for retirement in 2019? Is your 401(k) invested properly? Are you taking full advantage of the tax-advantaged retirement savings tools at your disposal? Here's what you should know about these retirement savings topics, along with a few other tips, as you plan your retirement savings strategy in 2019 and beyond.

Contribute enough to get your employer's match . Terrible retirement mistake by not taking advantage of their employer's matching contributions. Choosing not to contribute enough to get the full match is literally turning down free money."About 20% of Americans are making a terrible retirement mistake by not taking advantage of their employer's matching contributions. Choosing not to contribute enough to get the full match is literally turning down free money. 

One common culprit is 401(k) plans that auto-enroll new employees, which is typically done at a low contribution rate. For example, if your employer is willing to match contributions of as much as 5% of your salary, but you're auto-enrolled at a 2% contribution rate, you're leaving a lot of money on the table unless you make the effort to adjust your contributions.

Getting the match isn't enough Contributing as much to your 401(k) or 403(b) plan as your employer is willing to match is a good start, but it's by no means enough. Many financial planners, including myself, suggest saving at least 10% of your compensation in tax-advantaged accounts for retirement -- not including any matching contributions your employer makes on your behalf.

If you qualify. An IRA gives you the flexibility to invest in virtually any stocks, bonds, or funds you want with your retirement savings. Traditional IRAs have the same tax benefits as pre-tax 401(k) contributions, and Roth IRAs allow you to avoid paying taxes after you retire."This doesn't necessarily mean you need to contribute 10% of your salary to your 401(k). Once you've maxed out your employer match, it could be a smart idea to open an IRA if you qualify. An IRA gives you the flexibility to invest in virtually any stocks, bonds, or funds you want with your retirement savings. Traditional IRAs have the same tax benefits as pre-tax 401(k) contributions, and Roth IRAs allow you to avoid paying taxes after you retire.

You also don't need to get to the 10% savings rate immediately. One popular strategy involves increasing your contribution rate by 1 percentage point per year until you reach your goal, for example. However, the point is that if you have a single-digit retirement savings rate, it may be a smart idea to rethink your strategy.

Keep asset allocation in mind Saving enough money is only half of the battle -- once you set money aside for retirement, you need to make sure it's invested properly.

Here's a quick asset allocation check for you. Subtract your current age from 110. This tells you the approximate percentage of your assets that should be in stock (equity) investments in order to balance long-term growth potential and risk. For example, if you're 40, this implies that roughly 70% of your retirement investments should be in stock-based funds or other equities.

If you're just getting started with retirement savings or haven't made any changes to your 401(k) investments in a while, now is a good time to do an asset allocation checkup. And be sure to do this every few years going forward.

Use an HSA if you can &&&If you have a qualifying high-deductible health plan, a health savings account, or HSA, can be your best friend as a retirement saver, so take advantage.

Money you contribute to an HSA is tax-deductible, just like the money you save in your 401(k). But unlike a flexible spending account (FSA), money saved in an HSA can be invested (similarly to a 401(k)) and is allowed to grow and compound on a tax-deferred basis and can be rolled over from year to year. And if you use the money in your HSA for qualified medical expenses, your withdrawals will be 100% tax-free, as well -- giving HSAs a unique triple-tax benefit that other types of accounts simply don't have.

Fidelity estimates that the average 65-year-old couple retiring in 2018 will spend $280,000 on out-of-pocket healthcare expenses throughout their retirement, so by setting money aside regularly in your HSA, you can help reduce this burden later in life.

Take advantage of catch-up contributions Finally, if you're 50 or older, it's important to realize that you can contribute more to your retirement accounts than younger Americans.

For example, if you're contributing to an IRA, the 2019 limit is $6,000 for most Americans, but savers who are 50 or older can make an additional $1,000 catch-up contribution. For 401(k)s and similar retirement plans, it's even more generous. The 2019 401(k) contribution limit is $19,000 for elective deferrals but rises to $25,000 if you've reached your 50th birthday.

In other words, the IRS allows older Americans to save more aggressively. Take advantage.

Keep this in mind from now until you retire As the headline of this article suggests, these tips aren't just for 2019. They should be used in 2019 and each year going forward as you move toward retirement. Some of the figures, like the IRA and 401(k) contribution limits, are likely to change as time goes on, but these five concepts are evergreen.




Happy Investing

 

Good News for Retirement Investors

Good News for Retirement Investors

 
When you think of investing, you might believe you have no control over the outcome. Perhaps you think of a casino, where the "house" always wins in the end, while hapless gamblers continue stuffing hard-earned dollars into the slots, fervently hoping for a big payout.

Fortunately, there is good news for people investing for their retirement.

It's true that nobody can control the movements of the stock-and-bond markets. There's a positive aspect to that: It's exactly because of this uncertainty that investors are rewarded for taking the risk.

But retirement planning is more complex than simply taking a flyer on the market, or, even worse, stashing your funds in a certificate of deposit or money market account, the modern-day equivalents of the coffee can in the backyard.

This is where financial advisors add value for clients. Despite market vicissitudes, there are several areas of your financial and investing life that you can control to give yourself a greater chance of a successful retirement outcome.

Here are three points to remember:

-- Develop an investment plan tailored to your needs and risk tolerance.

-- Structure your portfolio around dimensions of returns.

-- Diversify broadly.

Plan Based On Your Needs and Risk Tolerance"Plan Based On Your Needs and Risk Tolerance

Investing isn't about just growing a bigger pot of money than the next guy. That's an old-school stock broker's approach, put into practice before the science of investing and financial planning came into its own.

Jeff Mills, co-chief investment strategist at PNC Financial Services Group in Philadelphia, says investors must consider risk, but their goals should come first. "If you build an investment portfolio that only takes into account how much risk you can tolerate, you are then simply left with the result of that asset allocation, with no consideration of what you need that portfolio to accomplish in the long run from a returns perspective."

Mills emphasizes that investing should help achieve a specific goal, such as retirement. "You should always start with the goal first: What do I need my investment to produce in order to meet my financial goals? From that point, you can work backwards and see how much risk you likely need to take to accomplish that goal," he says.

""Sara Behr, owner of Simplify Financial Planning in San Francisco, adds that it's crucial to create a solid investment plan to help achieve one's goals. "As a financial advisor, I work with my clients to develop an investment policy statement at the outset of our engagement. This outlines the client's investment goals and risk tolerance, which is a fundamental part of their financial plan. I believe that investing in business equity, or stock, is the best way to build wealth over the long term. That said, understanding a client's entire financial picture is essential to successful investment. The result is a diversified portfolio that promotes growth and provides for downside protection."

Structure Your Portfolio Around Dimensions of Returns

When new clients come in, their portfolios are almost never organized around a philosophy or strategy designed to balance risk and return. Instead, they are generally a collection of "stuff," assembled for various reasons. Maybe there are some inherited securities, or funds never re-allocated from an old 401(k). Maybe it includes expensive funds that a non-fiduciary broker collected a commission to sell. Often, clients cannot even recall or articulate why they own a certain investment.

This is understandable. Americans have been led to believe that everyone has the knowledge to be a successful do-it-yourselfer, despite no training or education in the science of investing. Other investors prefer to be hands off, and cede control of their portfolios to a commission-based broker (who generally bills him- or herself as an "advisor" or "planner"). These clients tend to have little involvement with the process of investment selection.

"Not everyone has the time, interest or inclination to become super knowledgeable about his or her investments. Nothing wrong with that, but at the very least, it's imperative to understand that returns are driven by specific factors; that willy nilly collection of expensive "stuff" probably is not optimized for your unique situation.

Decades ago, it was more of a guessing game than it is today. Now, thanks to research by Harry Markowitz, William Sharpe, Eugene Fama, Kenneth French and others, we know there is a scientific way to derive returns, using specific asset classes.

"Value stocks return more than growth stocks; small caps return more than large; and more profitable companies return more than their less profitable peers." It has a fancy name, "dimensions of returns." But it's actually a pretty simple concept. Over time, stocks return more than bonds; value stocks return more than growth stocks; small caps return more than large; and more profitable companies return more than their less profitable peers.

George Reilly, owner of Safe Harbor Financial Advisors in Occoquan, Virginia, uses visual tools to explain the need to invest in different asset classes. While the expected return of certain asset classes is higher over the long haul, that doesn't mean it will outperform in every time period, something Reilly points out to clients.

"I am a visual learner and like to use show-and-tell type of tools. We have a laminated version of one of the 'periodic table' type of colorful charts that shows asset class returns over 20 years or so," Reilly says.

"This type of chart truly shows the value of diversification as you follow a particular asset class by color across the years. One of my favorite things to point out is that in 1998 and 1999, large-cap growth funds were the top of the list, and if you decided to go big on that asset class you were in for a very unpleasant surprise in 2000 when it plunged to the bottom as the tech bubble burst and fixed income rose from the bottom to the top," he adds.

Diversify Broadly"Diversify Broadly

This concept dovetails with Reilly's show-and-tell example, as well as the idea of using dimensions of returns to your advantage. Back in our parents' or grandparents' era, investors basically had a choice between big U.S. stocks and big U.S. stocks. In other words, the investment choices were severely limited.

Today, with the advent of indexed exchange-traded funds and inexpensive mutual funds structured around dimensions of returns, investors have easy ways of accessing broader markets. In addition, it's easier than ever to purchase non-U.S. stocks and bonds through mutual funds and ETFs. Small stocks, too, are included in many of these inexpensive vehicles. This is a far cry from what was available as recently as 25 years ago.

"S&P 500 components constitute the entire market." However, it doesn't help that the financial TV channels and many financial publications continue to focus on large-cap domestic stocks, giving investors the impression that S&P 500 components constitute the entire market.

Jill Kismet, owner at Plan For Joy in Tucson, Arizona, emphasizes the need for broad allocation, given the yearly changes in asset-class performance. She also notes the ability to diversify easily and inexpensively.

"Year to year a particular equity or asset class can excel while others decline," she says. " Therefore, diversification is really a portfolio optimizer toward whatever gains or losses occur in the market over the long-term. Now more than ever, is it easy and cheap to diversify your portfolio by using passive index funds. Diversification coupled with index funds are a great equalizer for all personal investors seeking long-term wealth-building."




Happy Investing
 

Don't jeopardize your own retirement savings

Don't jeopardize your own retirement savings. Here's how teach your kids to be financially independent


Many parents may be endangering their retirement by spending too much on their adult kids and not enough for their own later years. 

To help children become independent, lessons should start when they are young, experts say. 

Parents also need to take a hard look at their own habits.

It's only natural that parents want to help their children succeed in life, but many may be jeopardizing retirement in doing so.

In fact, parents are spending twice as much on their adult children than they are putting away to live out their golden years, according to a recent study by Merrill Lynch and Age Wave.

So what's a parent to do? Experts believe kids should start learning about finances when they are young. Parents also need to take a hard look at their own habits.

The Merrill Lynch study found that 79 percent of parents continued to give money to their adult children, age 18 to 34. That includes things like college and weddings, as well as everyday expenses such as cellphone services and groceries. They spent a total of $500 billion annually, compared with the $250 billion they contributed to retirement accounts, the survey found.

"That is really staggering," said Lisa Margeson, who oversaw the research as head of retirement client experience and communications at Bank of America, which owns Merrill Lynch.

"There is certainly an emotional aspect to this," she added. "You want to provide for your kids.

"At the same time you want them to become financially independent," Margeson added. "But when you combine those emotions with money, parents really risk making financial decisions that can comprise their financial future and their children's."



Helping your kids

To start children down the road of financial security, it's important to begin talking about money early and often — and also make it personal, Margeson said.

For example, teach young kids about saving their allowance. They can even have three piggy banks — labeled "fun," "future" and "donate" — that they split their money between.

Also, keep the conversation flowing, she said. Don't shy away from talking about finances with your kids, just as you talk about the day's activities around the dinner table.

"Having those conversations early will start a dialogue that will be meaningful and allow for tougher conversations as they age," said Margeson.

Finally, making it personal will get kids to pay more attention to it, she contends. When her kids turned 16, she took them to a bank and opened checking and savings accounts so they would start to understand financials.

But what about older offspring who have already been dependent on their parents for more than 20 years? Len Hayduchok, president of Dedicated Financial Services, said for those young adults, behavioral patterns may have to be relearned.

"The problem I see more often than a physical need to support children is the lack of responsibility," he said. "Responsibility is much broader than finances. It's a character trait.

"It's a way of life," Hayduchok added. "So if children have not learned to be responsible, then that's going to be a problem."

However, he pointed out that a disruption in retirement savings is understandable if parents are helping pay for their children's college education.

"Those could be temporary costs and they're just staggering," said Hayduchok, who is based in Hamilton, New Jersey. He is also president of Dedicated Senior Advisors, a retirement advisory and insurance agency.

To help older children become financially independent, the first thing to do is make a financial plan — which starts with coming up with a budget and then sticking to it, he said. If it isn't working, there are two options: get more income or reduce the spending.

"If the child is not able to get more income, we have to figure out how to reduce the spending," he said. "If we can't do that, then we are going to have a lifetime of dependence.

"It's plain and simple."


Taking stock of your finances

Parents also need to focus on their own finances to make sure they have enough to currently live on and to ensure they are putting away enough for retirement.

"A lot of it is around understanding their own money status and making good decisions for themselves so they are preparing for their own future," Margeson said

For one, she recommends sticking to a budget in order to manage expenses, as well as putting away money for emergencies.

When it comes to saving, it's important for parents to start saving early and plan ahead.

That means keeping up with and contributing as much as they can to their 401(k) plan or individual retirement account. It can also mean considering a 529 college savings plan to save for the soaring cost of higher education and contributing to a health savings account, which allows you to put away pretax money toward qualified health expenses.

In doing so, parents are not only securing their own future, they also become a "strong financial role model" for their children, Margeson pointed out.

In the end, taking care of your own finances ultimately benefits your children in other ways.

"The greatest gift a parent can give their children is not to be a financial burden to them," Hayduchok said.


Happy Investing
 

How a rules-based system can help you become a successful trader

How a rules-based system can help you become a successful trader

There are many ways of trading at the market and all of them are good. Conversely, there is no one strategy that can be considered the best over a long period of time. The key to success is consistency.

Most traders start their journey in the market based on recommendations from a friend or a neighbour. After some initial success, he feels that he has found a new revenue source. He increases capital and starts looking for other similar sources in media, analysts or other services that promote "stock ideas".

But when a position goes against him he is left high and dry. Some of these traders then feel that they can still make money with some education and thus take up some reading or attend training sessions. At the same time, equipped with some knowledge the trader sets himself a target for the returns that can be generated every month, quarter and in a year.

But to his surprise, he finds that the techniques that looked great during the training session started failing when he practically traded it.  Unable to meet his monthly goals the trader has added a layer of stress.

The trader then jumps strategies in the search for the proverbial holy-grail.

The trader now hides behind conspiracy theories convincing himself that someone is tracking his trades and manipulate prices just to shake him out of the trades. From a trader, he then decides to invest in stocks for long term. But the same scenario is repeated, except in slow motion.

The market is a graveyard of such traders. People pursue trading as a simple avenue to make money without realising that it is one of the toughest profession. Stock market trading is a good business provided you have a systematic approach. Apart from the method, psychology and money management are important aspects of trading. Like any good business it needs a process, or some underlying wisdom to support it.

Process

The reason trading is difficult is because we let emotions drive it rather than process. When we are trading in the markets, buy or sell is just a thought away. Our emotions keep changing with every tick, and most of the decisions are emotion driven. We can overtrade, we can leverage more and commit grave mistakes. Imagine things in life if it were as per our desire and comfort zone. I would have never gone to school in the first place. But practically, that is not possible and it is better to realise this sooner than later!

The process includes defining rules, writing a plan, maintaining records, checklist and tweaking the rules if necessary.

Rules: First thing you need to do is define the rules of your trading. There are many methods of trading the markets, learn them to identify the ones that suit you the most. Remember, you can’t trade based on all theories or opinions. Define a basic philosophy of your trading or your core strategy, continue to refine it based on your learnings, but the basic outline should be defined and should not be breached.

If you observe merit in some rule or information, test it and then incorporate it in your trading process. It can be any branch of analysis and your setups may not be completely objective in nature but your decision-making process should be well defined. No method or rule is magical, but having rules is very important to keep us disciplined.

the biggest advantage to having rules is that you will know when to exit the trade if things go wrong. This simple rule will make you a winner in the long run. Rules should not be restricted only to the entry or exit. Write a trading plan that includes all aspects of trading.

Trading plan:  A trading plan is more detailed where a trader specifies the timeframe he will trade, allocation per trade, maximum permissible risk at any point in time, the number of open positions at a time etc.  Every question related to decision making and execution should be written in the trading plan. Every statement in the trading plan should be specific and objectively defined.

Once you write a trading plan, your job is then to ensure execution.  Don’t trade any observation instantly; it should be written separately for further analysis. Your trading plan will decide the checklist you need to prepare to ensure better execution.

Records: Trade as per your plan, and maintain records of every trade. Every trading plan goes through a process and even experienced traders are often guilty of not following the plan.

Record your thoughts while taking the trade and whether you could stick to your plan. Your trading records will help you analyse the performance of your system and your ability to stick to the rules. Both will improve over a period of time. Though a trading plan might require tweaking the rules, beware of over-tweaking.

A well-defined process will ensure better risk management. You will always be aware of the total exposure and risk open at a point in time. This will safeguard your capital when the tide turns and markets are not conducive for your strategy.

But, sticking to the rules is easier said than done, because more than sticking to them, it is ignoring the rest of the things that turns out to be more difficult.

Focus and consistency

There are many ways of trading at the markets and all of them are good.  Conversely, there is no one strategy that can be considered the best over a long period of time. The key to success is consistency. You will find this common with all successful traders; they are consistent with their core methods. Define your core strategy and practice it consistently. Overcoming all noise and sticking to the one is a key to achieve consistent success in markets.

There are people with great judgement and screen reading of markets – but it takes them years of experience to reach there. It takes time to understand the market, to build perception and to be able to find conviction. Even simple rules take a lot of time to gain a conviction. It needs repeated observation and consistent practice. This is why it is not possible to replicate the success of any trader even if you know the rules of his system.

There are many distractions that will influence you to lose focus. It is very important that you have a set of rules and a trading plan. In the long run, a disciplined trader would outperform well informed or intelligent traders. By setting up a process, we end up managing the risk and the markets will take care of rewards automatically.

Happy Injvesting
Source: Definedgesolutions.com

Mutual fund lesson: What should you do in volatile markets?

Mutual fund lesson: What should you do in volatile markets?

Cost of investing in equities is that it is a volatile asset class- there will be times when your portfolio value will be lower than what you invested


“I am an ordinary investor, investing monthly through SIPs in mutual funds. Markets are volatile and I see that I’m losing money every day. I think I should stop investing till markets stabilize. Am I correct?”

“I want to make money but don’t want to take risks. I can’t bear to see my portfolio in the red. What do I do?”

I come across questions like this every day. Well, the answer is actually more straightforward than you think. Stay invested. Continue investing. In equities, your time horizon should be 5-7 years at least.

If you are buying units- that is what you are doing as a mutual fund investor; if you are buying, why would you be upset that the price has now fallen?

I know, because you have also invested before and the value of that has fallen. Remember one thing, this is notional, the profits and the losses. It isn’t real till you book it. And if your time horizon is for another 5-7 years, why would you panic now?

You should be happy that markets are lower when you are investing and that they will be better when you want to withdraw that money seven years later. But you will benefit from that only if you continue investing.

We need to invest in equities because we want more from our lives. We want to live today fully and also have a great tomorrow. Both are generally not possible. You will get one at the cost of another. For example, our parents sacrificed their 'Todays' for our better 'Tomorrows'. And since we want both, a great today and a safe tomorrow, we need to invest in equities which is a growth asset class.

But growth comes at a cost. Cost of investing in equities is that it is a volatile asset class- there will be times when your portfolio value will be lower than what you invested. If you can stomach that, only then will you be rewarded with good returns in the next few and many years.

So, invest in equities with your eyes wide open. Don’t be delusional that you will get great returns just because it has given great returns in the past. Have reasonable expectations. So that they will be met.

No, your portfolio won’t double in three years. Can it? Yes, it can. But it won’t. Invest knowing you will get 12 percent per annum returns but these won’t be given to you every year, you will get this only if you stay committed and stay invested.

Most people exit equities because they don’t see the annual return like FDs, but know that equities are not FDs and so you won’t see returns like that every year. However, if you stay invested for 7-10 years, you will be rewarded for your patience, for your perseverance and will get a better return than FDs.

Someone also asked me what happens if they make mistakes in investing? The rule of any mistake applies to investing as it applies to life. You pay for your mistakes. In investing, you might pay heavily and it might hurt more. It hurts more because money is very personal to us. It also hurts because we think anyone can be a great investor. Yes, anyone can be a great investor, provided he has the time, expertise, enjoy learning it as a subject and can be unemotional. However, most of us aren’t but would like to think that we are.

Most DIY (Do It Yourself) investors I speak to say though they haven’t formally studied, they spend 4-5 hours a week reading on investing and so can invest by themselves. However, If I claimed to do the same, they would not trust me with their investments, would they? We are biased when it comes to us. So, don’t hesitate, seek advice. You don’t need to learn from your mistakes, it might be a very expensive lesson.

Happy Investing

Source: Investography.com

The systematic methods: SIP, STP, SWP

The systematic methods: SIP, STP, SWP



These 3 terms are frequently used in the context of mutual funds. Learn what they mean and learn how you can benefit from these plans



Systematic investment plan (SIP), systematic transfer plan (STP) and systematic withdrawal plan (SWP) are methods of systematic investing and withdrawal. They serve different purposes, as discussed below.



Systematic investment plan (SIP)



An SIP allows you to invest small amounts of money over time to build a corpus. By spreading out investments over a period of time, they help investors average their purchase cost. This prevents you from committing all your money at a market peak and hence maximises returns. SIPs also bring discipline to investing and make investing a habit.

The frequency of SIPs can vary; you can do a monthly, weekly or daily SIP. Also, there are various 'types' of SIPs. For instance, a value SIP changes your SIP amount as per the expensiveness of the market. Though this option sounds good, tinkering with the basic idea of SIPs only makes it complex. You are better off sticking to an ordinary SIP, preferably on a monthly basis.

SIPs have limited use in debt schemes as they are not as volatile or risky as equity schemes.



Systematic transfer plan (STP)

 Generally, one starts with an STP when there is a lump sum to invest. An STP helps spread investments over a period of time to average the purchase cost and rule out the risk of getting into the market at its peak. With an STP, an investor can invest a lump sum in one scheme (mostly a debt scheme) and transfer a fixed amount regularly to another scheme (mostly an equity scheme).

The basic idea behind an STP is to earn a little extra on the lump sum while it is being deployed in equity. Debt funds excel over the normal savings bank account.

Depending on the lump-sum amount, the investor can decide the period over which he wants to deploy the money in the market. Typically, the larger the amount, the longer the time period.

An STP can be done from an equity fund to a debt fund as well. If you are saving for some important goal, like your child's education, buying a home or retirement and you are nearing your goal, don't wait till the target date. Begin moving your money from equity to debt well before the time when you need the money.



Systematic withdrawal plan (SWP)

 An SWP allows you to withdraw a designated sum of money from a fund at regular intervals. Such a system is particularly suited to retirees, who are looking for a fixed flow of income.

SWPs provide the investor a certain level of protection from market instability and help avoid timing the market.




Happy Investing
 

Your investments diversify your life

Your investments diversify your life



You diversify your investments, and your investments diversify you


When asked about what the most important concept in investment is, many--if not most-investors would point to diversification. Diversifying your investments is a very important thing indeed. And yet, there's another kind of diversification that's actually more important and not everyone has it. I'm talking about the diversification of your life.

In these times of uncertainty, many people find their careers stagnant or shaky at a certain point. Generally, they find it hard to switch to another industry which has better prospects. That's because after a decade or so of working in a kind of a job, you become good at it, but also become its prisoner. In my observation, people who have good savings accumulated at this point generally manage to weather the crisis and adjust their career path to something better. They are able to diversify their life. In a very real sense, your investments provide you with this ability to diversify your life.

This is something that should thought about and planned out consciously because there can be some pitfalls. Some years ago, a friend of mine hit a crisis which first made me realise the nature of this problem. This couple both worked in a large IT company. Predictably, a good amount of their investments are in the form of their own company's stock options. On top of that, because they thought they understood the industry well, they also had a good amount of equity investments in other technology stocks.

You can guess the rest. Gradually, at a certain point, the utter lack of diversification in their lives came home to them. Over the years when the tech industry declined from being a permanent sunrise sector, realisation dawned that the long-term bright future that their industry was supposed to have may not exist. And, at the same time, their investments in their own employer declined to less than half in little more than a year. During the time, like all its peers, their employers' stock too hardly rose when the markets were rising but fell with great speed when the markets fell.

This point is not a commonly realised one. Diversification is supposed to be the most important part of any investment strategy. You are supposed to spread your investments spread across different sectors and industry so that bad times in one may be offset by another. However, diversification must start with diversifying one's life, not just one's investments. Your career is tied up with a particular industry, so your stock investments must necessarily be as far diversified from that industry as possible.

However, for a variety of reasons, the reverse seems to be true. One of the biggest reasons seems to be that many of the employees of who receive ESOPs are otherwise not stock investors. They never buy too many other stocks or mutual fund and thus most of their investments are in their own company. What's worse, I hear that some companies have a culture of bias against selling ESOPs and employees face a subtle pressure against selling. Even worse, talking to some ESOP-holders about their investments, I've realised that even when they diversify, they have a tendency to buy the stock of other companies in the same industry, probably because they feel they understand the industry or they admire another company in the same industry. This is illusory diversification. Maruti employees buying Tata Motors stock or Infosys employees buying TCS stock may feel like they are diversifying but they are not.

Tying up both your career and your savings to the well-being of the same company (or the same industry) is clearly a case of putting all your eggs in one basket. And that's never a good idea. What's more, consciously diversifying your investments away from the rest of your life will help you in ways that you may not have anticipated.


Happy Investing
Source: Valueresearchonline.com

MAKING YOUR MONEY WORK TO CREATE WEALTH: How to choose an equity fund

MAKING YOUR MONEY WORK TO CREATE WEALTH: How to choose an equity fund: How to choose an equity fund Six factors you must consider while choosing an equity fund The mutual fund universe is huge; there are more t...

How to choose an equity fund

How to choose an equity fund


Six factors you must consider while choosing an equity fund


The mutual fund universe is huge; there are more than 550 equity funds available. With this kind of choice, picking a mutual fund is a task in itself. This quick primer will help you understand how to pick an equity fund.


Following are the factors to be considered while choosing an equity fund:


Investment horizon: Your investment horizon determines whether you should go for an equity fund or a debt fund. For long-term goals - those that are more than five years away - equity is the best asset class. While equities are volatile in the short term, over the long term, the volatility is ironed out. For short-term goals, debt funds are the best option.


Risk appetite: While debt funds are generally safe, the riskiness of equity funds varies. Among equity funds, balanced funds are least risky and mid-cap and small-cap ones are the riskiest.


Balanced funds combine both debt and equity and hence are less volatile. Large-cap funds invest in large companies and tend to give moderate returns at a low risk. Multi-cap funds invest in companies of all sizes and are the best equity funds to own to have exposure to companies of all sizes. For investors who can take higher risk, mid- and small-cap funds are the option. Finally, funds investing in just one sector or one theme should be avoided as they can show wild swings and provide no diversification.


Fund performance: Investing in performing funds is absolutely essential to achieve your goals. You can start by checking the star rating of a fund on www.ValueResearchOnline.com. Two other things that you should check are (i) consistency in performance and (ii) the fund manager's track record.


Expense ratio: In simple words, it is the fee that an AMC charges the investor for managing a fund. It may also include a commission paid to your broker or distributor. Often it happens that two similar funds from different AMCs have different expense ratio. Your aim should be to go for a fund with a lower expense ratio. That way you will end up investing more money.


Age: If your goal is several years away, you must invest in equity funds. Even if an investor is retired, he can invest in a balanced fund if he is going to need the money, says, ten years later. Still, starting early has its own advantages. Investing when you are young enables you to benefit from the true compounding power of equity.


Tax-planning: Saving income tax is a priority for most of us. Thus, a tax-planning fund, which are also known as ELSS, should be a part of every portfolio. These are nothing but regular equity funds that also give you tax benefit under Section 80C. If you just stick to investing in tax-saving funds in a disciplined manner, you can do very well over time.


A good place to start choosing an equity fund would be the Fund Selector tool, which pretty much aggregates all the necessary information about multiple funds in a single place. Then, of course, we have an array of other useful tools that will help you zero in on the appropriate fund(s).

 
Happy Investing


Source : Valueresearchonline.com

How are debt funds more tax efficient than fixed deposits?

How are debt funds more tax efficient than fixed deposits?

 

I think short duration funds are likely to provide you returns in this range. But returns from mutual funds cannot be guaranteed neither they give you indicative returns. Yes, debt funds are more tax efficient as compared to bank deposits. When you invest in a bank fixed deposit, all your interest is taxed. The interest is added to your income and taxed at the marginal rate. So if you are in the highest tax bracket, your interest income would be taxed at the highest slab, that is 30 per cent. In debt mutual funds, there is no difference if you sell your investment within three years. All the realised gains would be added to your income and taxed at the marginal rate. The only difference here is that, in mutual funds, the gains are taxable only when they are realised on redeeming your investment. However, interest income is taxable on accrual basis every year. It doesn't matter whether you have actually realised the interest or not.

Also, if you redeem your investment in mutual fund after three years, the gains become long-term capital gains and you are allowed to take the indexation benefit. Only the residue gains after subtracting the inflation is liable to tax. That too, at 20 per cent. In case of interest income, the whole amount is taxable.

 

Accumulating enough to retire

Accumulating enough to retire


Contrary to popular belief, big retirement targets are easily attainable. We give you a comprehensive roadmap


Many young people cherish the dream of retiring from their nine-to-five job by the time they are in their 40s or 50s and then spending the rest of their lives travelling the world or pursuing hobbies. But it is when you sit down to calculate how much you'd need to save to achieve this dream that reality hits you hard. Use any online retirement calculator and you will find that your mind boggles at the size of the corpus that you will need to build up for a comfortable retirement.


Estimating the target sum you would need to retire is a tricky task because the number depends on so many moving parts - your lifestyle, inflation rates, investment returns, longevity, etc. But using a simple calculation, if you are 30 and today spend Rs 60,000 a month, you'll need to build up a retirement corpus of nearly Rs 12 crore to generate the income you will need to meet your expenses (assuming inflation at 7 per cent a year, retirement at 60 and life expectancy of 85 years).


Now any investment goal of a crore or above flashing on the screen usually prompts young investors to simply give up and stop thinking about retirement. But the truth is that the retirement targets you see on these calculators are easily attainable provided you are disciplined and start early. The above investor will, for instance, need to save about Rs 17,200 a month and invest it in a vehicle earning an annual return of 15 per cent to get to that Rs 12 crore corpus.


But implementing such a strategy is easier said than done, given the many uncertainties that are likely to pop up during your working life. So here are five factors to keep in mind while constructing your financial plan for retirement.


One, retirement is one financial goal where it is absolutely imperative for your investments to beat inflation. Given that most of us have to fund about 30 years of retired life (assuming you retire at 60 and live until 90) during a 35-year career (starting at 25), our retirement goals would be simply unattainable if we rely only on 'safe' fixed-income investments to accumulate enough towards retirement. This makes equity investments an inevitable part of your investment plan.

Two, while textbooks may recommend complicated asset-allocation plans that keep changing with your life stage to get to retirement, a heavily equity-tilted portfolio is really your best bet to get you to a comfortable corpus by the time you hang up your boots. In the illustration above, if the 30-year-old invests in an 8 per cent return debt option, instead of the equity fund to save towards retirement, she would have to save over Rs 70,000 a month, an impossible task! Return data from the Indian markets shows that it is nearly impossible to make a loss from your SIP investments in an equity fund if your SIP runs for a minimum four years. Therefore, we recommend that any investor who has five plus years to retire should rely heavily on equity mutual funds to build a retirement corpus.


Three, while there are umpteen number of special 'retirement' plans that the financial industry bombards at you to build your retirement kitty, a majority of them are sub-par choices to get to your goal. Deferred pension plans from insurers deliver very low returns; ULIPs tend to be opaque and rigid; retirement plans from mutual funds carry long lock-in periods. One of the key attributes you should seek from a market-linked product when you are saving towards such a critical long-term goal is transparency and the flexibility to move out if the product doesn't deliver. An SIP in a set of plain vanilla open-end equity mutual funds is, therefore, your best bet.


Four, don't be daunted by the high monthly savings target you see on retirement calculators. If you can't afford to save the sum they throw up, start an SIP with whatever sum you can manage to save. But do not forget to diligently step up your SIP every time you get an increment, switch to a better job or see a jump in family income. If you get a windfall, plough it into your retirement kitty through an SIP. Stepping up your SIP every year can work miracles with your retirement target. Tune out all noise about where the Sensex is and stick with your SIPs through market ups and downs, no matter how violent they are.


Five, no piece of advice in the financial world holds good for all times. Therefore, both your retirement targets and the funds you choose to invest in will need regular reviews (at least twice a year) to ensure that you are making adequate progress towards your goal. Your retirement target may change if you upgrade your lifestyle, add dependents to your family or witness a rise or fall in the inflation rates that you factored into your retirement target. The funds you chose will need to be replaced if they consistently lag benchmarks or peers. Therefore, do review your retirement portfolio at least every six months to verify if the funds need changes.


So if you've arrived at your retirement target, what investments should you choose to get to it? Well, if you are already contributing to the Employees' Provident Fund (EPF) through your employer, consider that to be the fixed-income portion of your retirement corpus. But don't rely on it to see you through your retirement. Start SIPs in three other equity funds to make up the bulk of your retirement kitty.


If you have over 10 years to retire, having a mid-cap and small-cap component to your retirement investments can add a kicker to your returns. Go for two multi-cap funds and one mid/small-cap fund. However, if you can't stand volatility, stick to two-three multi-cap funds. If you have less than 10 years, stick to only multi-cap funds.


Happy Investing
Source: Valueresearchonline.com