Are your retirement planning assumptions correct?

by Jim Sloan

A recent survey by the Transamerica Center for Retirement Studies in Los Angeles found that nearly 40 percent of the workers plan to work long past normal retirement age--an increase from the 28 percent who asserted that in 2010. Many, blaming the staggering losses they suffered to their investments and retirement savings accounts during the Great Recession, say they won't retire at all.

But now the Wall Street Journal is warning workers that many of the assumptions they have been making in their retirement savings accounts plans--such as staying on the job into their 70s--have to be re-examined in light of new research. For instance:

  • If you're expecting your income to continue rising as you approach retirement, think again. The Journal notes that latest government data shows that the average worker's pay levels off in their 40s and remains stagnant for 15 years--for white collar workers as well as blue-collars. Even common retirement planning tools assume salaries will climb and that inflation will remain low. But those assumptions are often false.
  • You may want to work into your 70s, but will you still have a job? The unemployment rate for people 55 and older has increased from 2.9 percent in 2008 to 6.8 percent in May 2011, and older workers remain out of work an average of 41 weeks--six weeks longer than their younger counterparts. That kind of idle time can have a devastating effect on your savings accounts and money market accounts.
  • Your expectations for Social Security may be overblown. Many of us have looked at our Social Security statements and been reassured. We can see what we're going to get, particularly if we can hold off taking benefits until we're 66 or even 70. But according to the Journal, if your wages do fall in your later years, you could be looking at less coming in each month.

Step up your savings rates

The advice from the Journal is to start making adjustments now by spending less, saving more and pretending like your income has dropped by 20 percent. Most people plan for retirement with a best-case scenario, but those who assume the worst--and plan for it--not only survive nicely but often are unexpectedly rewarded.

Other options:

  • Instead of paying for your child's education, tell them to take out student loans and then help they pay them off if your retirement investments yield more than expected.
  • Stay in the workforce as long as possible, even with a lesser salary; your Social Security benefits may not be drastically affected, and you won't start tapping your retirement investments as early. Even when lower-earning years are factored in, someone receiving $1,700 a month in Social Security benefits at 62 will get $2,400 at 66. The Social Security Administration lets you review the different scenarios at www.ssa.gov/estimator.
  • Consider changing careers. Even at the age of 50, if your industry is dying and your prospects are not good, get some training and reinvent yourself. Education may be one of your best investments.

In general, don't forsake your employer's company 401(k) savings account match. It's never too late to start saving, even if it feels like you're being forced to climb an awfully steep hill. Company matching policies can be tough to figure out, but find out what the maximum amount is they will match and make sure you're putting in at least that amount. According to Smartmoney.com, three out of 10 workers don't participate in their company's 401(k) plan.

Americans' savings rate far behind their parents rate

by Jim Sloan

Americans aren't saving as much as their parents did, although they think they are doing a pretty good job.

According to the website financial-planning.com, a recent survey showed that nearly half of those surveyed believed they are saving more than their parents.

That sentiment flies in the face of a recent Bureau of Economic Analysis report showing that our personal savings rate was only 3.48 percent over the past 10 years, far below the 9.63 percent that was going into savings accounts from 1971-81.

Making other plans to boost savings

Experts from financial-planning.com said the meager interest rates being paid for certificates of deposit and other low-risk savings instruments requires that people today explore other avenues for putting money into high-yield savings accounts, including retirement savings accounts. When even the best certificate of deposit pays less than 2 percent, the incentive for putting money into low-risk savings accounts is low.

Some suggestions:

  • Since interest rates are so low, consider increasing the percentage of your salary that you are saving to make up for the meager returns on your savings accounts.
  • Search for the best savings accounts, including online savings accounts.
  • Commit a percentage of your paycheck to your savings accounts.
  • Although even the best CD rates are still low, consider "laddering" your certificates of deposit so all your savings are not tied up in a CD with a very low interest rate. Laddering is the process of staggering the terms for the CDs you invest in, so a portion of your savings matures each year so you can take advantage if interest rates go up.

Declining housing prices

Americans' view of savings unquestionably shifted when housing prices skyrocketed in 2005, as many viewed their retirement savings as being the equity they held in their homes.

But housing prices have taken a steep dive in recent years, and Americans who felt their homes were serving as interest-bearing savings accounts have become disillusioned by the declining home values and the lost wealth. According to the Associated Press, a Gallup poll released in 2010 found that 20 percent of non-retired Americans believed their home equity was a major source of their retirement, a 33 percent drop in the percentage since 2007, when 30 percent felt their home equity was a major retirement savings account.

And that percentage may continue to decline. A recent Standard & Poors/Case-Shiller index of 20 metropolitan areas found that home prices in regions across the country hit their lowest level since the housing market began to collapse in 2006. A billowing number of foreclosures and short sales have driven housing prices downward, and tighter lending requirements have made it difficult for many potential buyers to get mortgage loans to purchase homes.

Despite the increase in the savings rate from 3.8 percent to 5.8 percent in 2010, many consumers today remain far behind the savings rate their parents maintained back when interest rates on savings accounts, money market accounts and other savings instruments were much higher.

About one in three consumers surveyed admitted they weren't saving as much as their parents, and about 22 percent said they were saving about as much as their parents did, the San Francisco Chronicle reported.

5 ways to cut impulse spending and add to savings accounts

by Barbara Marquand

Eighty percent of American adults admit they bought something on impulse in the last year, and among those, 66 percent say they later regretted the purchase, according to an online survey commissioned by the National Endowment for Financial Education and conducted by Harris Interactive in August 2010.

Think you're immune to impulse spending?

Take a look at the pile of cast-offs in your garage or closet and then decide.

Too much impulse spending cuts into your ability to set aside cash in money market accounts and savings accounts for emergencies, not to mention retirement investments. If you don't have at least six months worth of living expenses saved in case of a job loss or other emergency, and you're not setting aside the maximum amount allowed into tax-deferred retirement accounts, then ask yourself whether impulse spending is putting a dent in your finances.

Here are five ways to beat impulse spending:

1. Track your purchases.

Write down everything you spend for a month to see where your money goes, suggests the National Foundation for Credit Counseling. You might be surprised to learn how much you're spending on insignificant stuff and how fast it adds up over the course of a few weeks. Add those purchases up over the course of a year, and you have a tidy sum that could have been stashed in a certificate of deposit.

2. Create a realistic spending plan

List your essential expenses, such as housing food, utilities, rent, insurance and others, and compare that to your income to see how much you have left over for discretionary spending and saving. Don't make the saving plan too strict, or you won't be able to stick with it. The National Foundation for Credit Counseling advises to think in terms of cutting back on extras rather than cutting out.

3. Plan your credit card purchases.

Credit cards make sense for big purchases and online shopping, but their convenience can make it too easy to splurge. If you have trouble sticking to a shopping budget, whether you're stocking up on school clothes for your kid or doing buying weekly groceries, leave your credit cards at home and use cash instead.

4. Find other ways to reward yourself.

Many people spend money as a way to burn off stress or treat themselves for getting through life's daily challenges. If that's the case, find some cheap or free alternatives to relax or give yourself a treat. Seek professional counseling if impulse spending has turned into a compulsive habit you can't tame on your own.

5. Automatic savings

Money that's out of sight is out of mind. Have money automatically deducted from your checking account to a money market account or high-yield savings account every month before you have a chance to spend it.

To highlight the issue of impulse spending, the National Endowment for Financial Education has launched the Spendster Second Chance, an online video confessional where Americans can share stories of impulse buys and poor spending habits. Those with the most popular stories have a chance to win awards from $250 to $1,000. The Spendster site also provides advice for curbing poor spending habits and a calculator that lets you determine how much the money you wasted would be worth had you parked it in a high yield savings account for 40 years. In addition, the calculator tells you how much you'd spend if you charged the purchase on a credit card at 9 percent interest and paid only the minimum payment for a year.

For instance, a $20 impulse buy would cost you $140 on the credit card if only minimum payments were made, and would be worth $240 after 40 years in a high-interest savings account.

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