Wednesday, August 28, 2013

Survey: The 5 Biggest Retirement Saving Mistakes


Saving for retirement shouldn’t be a guessing game. It should begin with your first job and in most cases not stop until you are collecting Social Security. Yet millions of people struggle to do anything at all, and still more make glaring mistakes.
To help you get started and avoid common traps, Four Seasons Financial Education, a financial wellness and education provider, has identified the top five retirement mistakes of employees at its client companies:
  • Over-relying on rules of thumb. Simple rules can be instrumental in getting a worker started saving early and putting them on the right path. Saving 10% of everything you make is better than being paralyzed and shooting for eight times final salary — and definitely better than having no goal at all. But rules can get you into trouble, too. The presumed 4% safe withdrawal rate in retirement is anything but perfect, and retirees with a traditional pension have far different savings needs than those without one. Use rules of thumb as a guidepost and to get started. But at some point you need a customized plan.
  • Going too conservative at retirement. As you age, you should gradually reduce portfolio risk by tilting more towards bonds. The previous point notwithstanding, a useful rule of thumb is subtracting your age from 110 to arrive at the percentage of stocks you should own. You may feel old at 65 but you may also live another 30 years. You will need stocks for growth if you expect your nest egg to last that long. Asset allocation is among the most important aspects of retirement planning to get right. If you want to keep it simple, consider a target-date mutual fund which adjusts automatically.
  • Taking Social Security benefits early. Although changes may occur with the Social Security system it will remain viable for many years and probably be a meaningful part of your retirement income. Your monthly benefit jumps 8% every year you delay filing between ages 62 and 70. For a lot of people, waiting to 70 and living to age 83 is the break-even point, and everything they collect from then on is a bonus.
  • Failing to use a retirement calculator The web has many useful online tools and since your retirement may last 30 year or longer you need all the help you can get. Computers are a tremendous aid. Don’t guess. Some of the best tools can be found at CNNMoney, T. Rowe Price, Fidelity, Schwab and BlackRock.
  • Cashing out retirement assets early Financial planners and policymakers have long puzzled over how to prevent leakage from 401(k) accounts as workers quit jobs and fail to roll over all their assets into an IRA or similar account. The temptation is mighty; especially if you have debts you want to retire. But with taxes and penalties this is a costly move. The money you saved over five years might require 10 to replace.

Wednesday, August 21, 2013

America’s Productivity Problem


Would you like a raise? How about more vacation? Of course you would. If you’re anything like me, one of your main motivations each day at the office is the prospect of advancing, making more money, or even earning more time off to spend on the things outside your career that matter.
The main factor that makes any of this possible is rising worker productivity. The more efficiently we do our jobs, the more our employers can justify paying us — be it in salary or leisure. And one of the economy’s main weaknesses of late has been a decline in the growth of labor productivity, a dynamic that might help explain the plight of the average American worker in recent years.
On Friday, the Labor Department announced that labor productivity rose at just 0.9% in the second quarter of this year, after falling 1.7% in the first quarter. And these numbers aren’t an anomaly: According to a report issued last week by JPMorgan Chase economists Michael Feroli and Robert Mellman, worker productivity has only grown at an annual rate of 0.7% in the past three years, after averaging 2.9% growth from 1995 to 2005.
And as Feroli and Mellman point out — and as TIME’s Rana Foroohar noted earlier this year when the JPMorgan economists identified this dynamic in a report called “Is I.T. Over?” – the decrease in productivity growth began even before the recession, and has coincided with a slowdown in technological growth, as measured by the pace in which computer equipment has become more affordable in recent years. According to the report, “Over the past few years the real price of information-processing equipment and software has declined at the slowest pace in more than a generation.”
So why does this change in the pace of technological advance matter? Economists believe one of the main factors that drive worker productivity is technology. As a firm invests in new technologies like new computers, software or high-speed internet, it enables its workers to get jobs done more efficiently. Over the past generation, we have seen an incredible decline in the price of high-tech equipment, which has driven much of our economic growth over that time period — especially during the boom years of the 1990s.
What the most recent numbers regarding prices of IT equipment imply is that the efficiency gains brought by the digital revolution may be petering out, and that will have a direct effect on our ability to become more efficient workers. And if we want to get back to the worker-productivity gains we were experiencing a decade ago, we need to somehow figure out how to encourage the kind of technological innovation that has led to previous waves of sharp productivity growth.
Of course, this raises the age-old question that economists have been arguing over for generations: What causes innovation? Conservative economists tend to believe that innovation is spawned mainly by the ingenuity of entrepreneurs. They rely on what is known as Say’s law, named after the classical economist Jean-Baptiste Say, which states that “supply creates its own demand.” When Steve Jobs designed the iPhone, for instance, there was no demand for the product. It’s creation created the demand for the product, which is now significant. Since the iPhone was launched in 2007, the smartphone market has exploded, and businesses across the world have invested in these products so that their workers can be constantly connected and work more efficiently. In this worldview, the entrepreneur is the instigator of growth, and therefore we must do what we can to avoid dampening his incentive to create.
But the entrepreneur isn’t the only source of productivity growth. Firms can simply invest more in existing technology, intellectual property, and research and development. And it turns out that growth of this sort of spending has slowed from an average of 4.7% per year in 1980 to 2000, to 2.8% per year over the past 10 years, according to the report.
And when you ask businesses why spending on R&D isn’t growing as quickly as it was in the past, or why business investment in general hasn’t rebounded as it did after past recessions, they say it’s because of a lack of consumer demand. And this is why liberals tend to argue for government stimulus to jolt the economy into what they believe will be a self-sustaining virtuous circle of higher demand and growth — especially during a time when interest rates are so low and therefore the cost of action small.
If you get the feeling there’s a certain familiarity to this argument, you’re right. The debate over why productivity growth has slowed echoes many of the political debates going on right now, with one side stressing the ingenuity of the producer class, while the other emphasizes the health of the consumer class. Ideally, an economy would have a risk-taking entrepreneurial class and a healthy and confident consumer class. Right now we have neither, and we’re not quite sure which ought to come first.

Friday, August 16, 2013

How to Get the Most from Social Security


One of the biggest mistakes retirees make is getting their Social Security benefits wrong—taking them too early or too late, or failing to coordinate with their spouse. Miscues in this area can cost thousands of dollars over the course of a retirement.
In one respect, mistakes are understandable. Getting every dollar you are eligible to receive can be painfully complicated. The economist Larry Kotlikoff, an authority on maximizing Social Security benefits, estimates that a 62-year-old couple must, before they reach 70, choose from over 100 million possible combinations in terms of precisely when to take benefits and make various adjustments.
In another respect, though, getting Social Security seriously wrong is inexcusably negligent. The typical retiree counts on Social Security for 70% of his or her income. About one in four retirees has no other ready source of funds, and in the 401(k) age even those with a decent nest egg may have no other stream of guaranteed lifetime income.
The good news is that for the vast majority of retirees, getting the calculus right on Social Security should be easy. It only gets complicated in a handful of relatively unusual situations: 1) when spouses of very different ages both have earned income and one income is significantly larger than the other; and 2) when you want to keep working late in life.
The basic rule is to delay benefits to age 70 if at all possible. That way you get the highest possible monthly payout, which will keep coming for as long as you live. You become eligible for early but reduced benefits at age 62 and full benefits between 65 and 67, depending on the year you were born. But for every year that you delay taking full benefits, the monthly payout you eventually receive increases until age 70, when you max out your income stream.
Consider someone born in 1937. Their normal retirement age was 65 (true for anyone born before that). If they started collecting at 62, they got just 80% of their full monthly benefit. But if they waited to age 70 they got 132% of their full monthly benefit. The math is similar at all age groups. Those born in 1960 have a normal retirement age of 67 (true for anyone born after that). If they choose to collect at age 62 they’ll get just 70% of their full benefit but if they wait to age 70 they’ll get 124%.
These are meaningful differences. The typical monthly benefit today is around $1,200. That would mean a 76-year-old who took early benefits is getting $960 a month while one who waited to age 70 is getting $1,584. Schwab figures that by the age of 81 a top-earning retiree who delayed benefits comes out marginally ahead, and everything they receive the rest of their life is a bonus. The math is a little different for everybody; your beak-even may be age 83 or 84. You can estimate your break-even point with an online calculator.
A lot depends on your health. If you are in poor health, it may make sense to start collecting as early as possible. If you and your partner are in decent shape, however, you stand a good chance of one or both getting past the break-even point. Your main consideration should be whether you could get by on savings and other income until you reach age 70 — but if the answer is yes, the safe bet is to assume you or your spouse will live long enough to benefit from the near-term sacrifice. As Kotlikoff writes: “Social Security benefits are an insurance policy against one of life’s most expensive accidents: failing to die on time. Unless you or your partner has a terminal condition, you probably should figure on living to 100 for the simple reason that you might.”
Once you’ve considered delaying, the next big planning point for couples is managing spousal benefits. A lower earning spouse is entitled to three types of benefits: one based on his or her own earnings; a benefit equal to half the higher earning spouse’s benefit; and a survivor benefit equal to the higher earning spouse’s benefit after he or she dies.
A common strategy is to begin collecting the lower-earning spouse’s benefit early but delay the higher-earning spouse’s benefit to age 70. This gives you some income now and will max out the biggest benefit. It also ensures that the second to die will be left with the highest monthly income stream possible from Social Security.
But there is no cookie-cutter approach. You might also be better off filing for benefits at normal retirement age, triggering the spousal benefit for a low-earning partner, and then suspending your own benefits until age 70. This is the kind of complex strategy that can stretch income but probably requires the eye of a professional. Couples can get more timing tips here. In general, it’s also a good idea to postpone early benefits for as long as you have income from a job above $15,120.
Perhaps the biggest trap to avoid is thinking that you should grab what you can while it’s still there. Social Security is projected to have all the funds it needs for at least two decades. So relax. You have time. Yes, sorting it all out can be complicated. But the basic rules will work for most people.