Category: Retirement

What’s Your Financial Independence Number?


What’s your financial independence number?

Most in the financial world prefer to describe this vague sum as a retirement number, but as we’ve discussed before, the concept of retirement often carries a negative connotation that I would rather avoid. Our goal at FYI is to achieve financial independence in order to move on to more important life tasks, not simply retire to the golf course or couch. That being said, let’s not be swept off topic by the semantics of the wording.

How much money do you need to exit the rat race and live the life you’ve envisioned?

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Longevity Adds to Women’s Financial Strain

Occasionally I come across articles that are worth passing along. Kudos to for sharing financial advisor Wayne Fourman’s insight on the compounding issues facing the fairer sex. I have written about the gender pay gap and how marriage roles often derail a woman’s ability advance in her career field.

The financial strain that women endure is exacerbated by their longevity. Not only do women earn 78 percent of what their full-time male counterparts bring in, but women also live several years longer, which often leads to higher nursing care costs. Two items that Fourman discusses are especially troubling: (1) a single woman over 65 is five times as likely as a married couple the same age to fall into poverty; and (2) nearly half of single women rely on Social Security to provide 90 percent of their retirement income.

Those figures are disturbing. While it’s reassuring that women’s rights have progressed to the point that many Generation Xers and millennials have flooded higher education and put themselves in position to earn considerable salaries and chip away at the ever-present glass ceiling, the women of the baby boomer generation, as a whole, do not share the same optimism. According to the White House, only 15 percent of women between the ages of 25-34 had at least a bachelor’s degree in 1974. That number had jumped to almost 40 percent by 2014. The lack of an advanced education makes alleviating financial strain difficult, as most high-income jobs require such degrees.

Financial literacy thereby becomes critical in saving money to complement Social Security checks and understand the basics of monetary discipline. There is hope for our daughters, but we have to put forth the effort to help the women of the older generations live the final years of their lives with dignity.

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Treat Social Security as End-of-Life Insurance

First things first: let’s kill this notion that my fellow Generation Xers started spouting years ago about how Social Security benefits will not be around when they get to retirement age. It’s nonsense. I don’t factor Social Security into my retirement planning, but not because I expect those funds to be dried up (recipients will receive just 75 percent of their benefits starting in 2033 if the current fund erosion isn’t addressed).

I don’t factor Social Security into my retirement planning because I view the benefits as an insurance policy. That’s not some revolutionary idea, either. Social Security was established as a social insurance program in the 1930s after the 1929 stock market crash had essentially erased the savings of many senior citizens, dropping them into poverty. There have been various changes to the Social Security program over the last 80 years, leading to where we currently stand. The basics are a 6.2 percent tax rate for employees on income under $118,500 and inflation-adjusted benefits based on the last 35 years of salary.

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Savings Rate Concerns

The U.S. Commerce Department recently announced that the personal savings rate across the country had risen to 5.8 percent in the month of February. The only positive bit of news in the report, however, is that the savings rate improved rather than declined. The Wall Street Journal’s Jeffrey Sparshott highlighted the fact that heavy snowfalls and otherwise poor winter weather in general is likely responsible for the uptick in savings. If you are unable to leave your house, it’s difficult to spend the money in your pocket.

The more troubling news is that the 5.8 percent mark is seen as a quality figure. The personal savings rate has fluctuated roughly between 2 percent and 8 percent for 14 of the last 15 years. Only in 2013 did the savings rate extend beyond that 8 percent threshold, cracking 10 percent momentarily. To be fair, interest rates and inflation have long played a role in our country’s savings rate. The personal saving rate was consistently above 10 percent during the 1970s due to high inflation. With interest rates at all-time lows for an extended period of time, the potential return on cash is not worth the effort, or so it appears to many Americans.

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Stay the Course: Nasdaq at 5,000

You may have heard the news last night or this morning that the Nasdaq composite index finished above the 5,000 mark for the first time in over 15 years and for only the second time ever. Big news, right? Maybe, maybe not. I believe stocks are a tool to be used primarily for long-term investments (5+ year horizon), so I have never been one to get caught up in the day-to-day, week-to-week swings of the Dow, S&P 500 or NASDAQ indexes.

The Nasdaq’s breakthrough on Monday is valuable in highlighting the stock markets’ role in your retirement portfolio. It’s also reminder to stay the course. So many people my age allowed their emotions to get the better of them in at least one of the market crashes over the past 15 years. Instead of taking the time to understand what the economic downturns actually meant, they pulled their money out at the worst possible time. Despite knowing the old adage to sell high and buy low, they did the opposite out of fear. Many are now blaming Wall Street for their languishing portfolios.

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The Hidden Benefit of the Roth IRA

If the 401(k) is the granddaddy of retirement investing, then the Roth IRA is the cool kid next door. The 401(k) emerged from the Revenue Act of 1978, which included a provision that employees would not be taxed on a portion of their income they elect to receive as deferred compensation. The money you funnel into your 401(k) is sliced off the top of your taxable income, thereby lowering your current tax bill, and those funds are tax-deferred until you withdraw them after 59 ½. The Roth IRA arrived nearly 20 years later in the Taxpayer Relief Act of 1997 and was named after its chief sponsor, Senator William Roth of Delaware. Contributions are not tax-deductible, although the beauty of the Roth IRA is that withdrawals are tax-free after 59½.

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Stay the Course in 2015

Happy New Year!

What better way to kick off 2015 than with advice from investment wiz Warren Buffett?

In one excerpt of the Berkshire Hathaway CEO’s 2014 annual letter to shareholders, Buffett talked about focusing on the future productivity of your assets instead of the day-to-day fluctuations. People watch CNBC 24/7 and panic over one percent drops in the stock market, yet pay no mind to slight variances in their home prices. Why? Because most of us buy homes for extended periods of time and take out 30-year mortgages to do so. I’m not overly concerned with the valuation of my home today, as I have no plans to move for another 4-5 years. House price data is also not slammed in your face every evening on the local news.

That’s not the case, however, with the stock market. Every dip and rise is news worthy because so many attempt to time the market and attempt to make significant profits in short order. It doesn’t work, folks.

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How Much Money Do You Need in Retirement?

Financial advisors have long recommended that you need to save enough to reproduce 80 percent of your current salary for retirement income. If anything, that suggestion serves as a starting point, but what does it really mean? Let’s assume I make $100,000 a year. If I retire at 65 and expect to live to 90, then I would have to accumulate $2 million in savings, not counting Social Security or pensions, before pushing away from the work desk for good to meet that 80 percent threshold.

Easy enough, right?

Unfortunately, our income-driven society and the corresponding financial planning often leave out one equally important variable in determining how much money you need to live on after freeing yourself from the daily work grind – your expenses. There’s income and there’s outgo. As destructive as inflation can be to the future dollar value of your nest egg, lifestyle creep might be even worse. As your income rises, so does your spending level. As we progress through our careers, our promotions and raises are all too often visible in the form of bigger homes, nicer cars and high-end clothing and not in the size of our savings accounts.

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Dismissing the Old Age Myths

We’re living longer and working less as a culture, but are the years at the end worth living?

As a child, I thought 40 was old. As I rapidly approach that milestone, I’m hesitant to make similar claims about more distant age thresholds as I realize I’ll end up there (hopefully) at some point in the not-too-distant future. Regardless of how we categorize age groups beyond our current setting, is there legitimate reason to think that quality of life diminishes once Social Security and Medicare kick in?
WSJ stat chart  
Apparently not. The Wall Street Journal’s Anne Tergesen wrote an enlightening article today attempting to answer that very question. Some of her gems include research indicating “that emotional well-being improves until the 70s” before plateauing and data suggesting “that friendships tend to improve with age.”

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Achieve the Unthinkable: Max Out Your 401(k)

The IRS recently increased the 401(k) maximum contribution limit from $17,500 to $18,000 for 2015, and if you’re like most Americans, you likely scoffed at the notion that anyone is capable of contributing that amount of money to a retirement account. If you fall in that category, then you’ve got a point. Vanguard reports that only 12 percent of its 401(k) plan participants deferred all $17,500 in 2013. The median deferral rate was 6.0 percent, while the number of participants deferring more than 10 percent was 22 percent.

The national median household income is $53,891 as of June, and although it’s fair to assume a good portion making below that amount are not enrolled in a 401(k) plan, let’s use that figure for some hypotheticals. Let’s say Joe Worker makes the median household income and contributes the median amount to his 401(k). That means he’s putting away $3,233.46 or 18.5 percent of 2014’s maximum contribution. That $500 boost from 2014 to 2015 doesn’t seem that relevant in that context.

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