That’s apparently what most Americans concluded after adding up the effects of the financial crisis. A survey by Bankers Life and Casualty found that many think they’ll delay retirement by five years after the crisis. The survey focused on middle income Baby Boomers, surveying 500 Americans ages 47 to 65 with incomes between $25,000 and $75,000. The key finding was that 79% are delaying retirement, and the average length of the delay is five years. The survey had a number of other interesting findings:
• Uncovered health-care expenses (80 percent), inflation (79 percent) and living longer than their money lasts (71 percent) are the top three financial concerns that middle-income Boomers have about retirement.
• Pensions and guaranteed income are what sixty percent (60 percent) of middle-income Boomers envy most about the retirement of previous generations.
• Three out of four (73 percent) middle-income Americans age 47 to 65 say that their financial situation, not age, is now the key indicator for when to retire.
• Three out of four (75 percent) middle-income Boomers expect to work in retirement; more than half (57 percent) of those expect they will have to work for financial reasons.
Employers help employees plan for and accumulate funds for retirement. Employers provide education and resources to help employees decide how much to save and how much to invest to be able to fund an attractive retirement. Yet, as employees near retirement, employers don’t have much to offer. There aren’t too many tools for planning distributions or investing to preserve that nest egg for a few decades. That’s the word from money manager BlackRock after surveying boht employers and employees and taking a look at the 401(k) market. Most employees now are in target date funds, but those funds currently are for accumulation, not distributions.
Castille pointed to survey results showing that 67.7% of employees believed that their employers should care more about financially secure retirements, and 63.8% of employers believed, paternalistically, that their firms should indeed care more. But 57% of employees said their employers were not helpful in making sure that their money lasts all through retirement and only 17% of employers said they felt a great deal of responsibility about the issue.
BlackRock has a financial interest here. It manages a lot of money for 401(k) plans and recently began offering a series of target date funds designed to address the issue of helping employees manage portfolio for retirement income. The funds include immediate annuities. But many analysts agree that the current 401(k) structures aren’t set up to help people once they retire.
A major debate among financial advisers is how badly economic and market downturns affect individual finances in the long-term. Some advisers and economists believe these events are cyclical, and that a severe downturn will be offset by an offsetting boom period at some point. In other words, most people will be able to recover what was lost. Others disagree, arguing that it takes a very strong boom to recover losses. Also, people are likely to change behavior and become more cautious after a decline, so they won’t get all the benefit of any subsequent boom.
A different approach was taken by the Urban Institute and the Center for Retirement Research. Using a custom computer model, the research attempted to factor in all the effects of the Great Recession, including lost wages, reductions in income, and investment losses. It also looked at the effects on different age groups. Its findings were that people at all age groups face lower retirement income of about 4.3% annually after age 70 because of the downturn.
The study notes this drop results almost entirely from the anemic wage growth that occurred during the recession, which the model assumes will permanently reduce future wages. Employment declines will have little effect on future aggregate retirement incomes because most workers remained employed during the recession and the losses that occurred are generally inconsequential when averaged over an entire career.
Retirement incomes will fall most for high-socioeconomic-status groups, who have the most to lose, but relative income losses will not vary much across groups. Those workers who were youngest when the recession began will be hit hard. They are most likely to have lost their jobs and the impact of lower wages will accumulate over much of their working lives. But retirement incomes will also fall substantially for those in their late fifties in 2008, because the drop in the economy-wide average wage will lower the index factor in the Social Security benefit formula, permanently reducing their annual benefits. Also, many workers who lost jobs late in life will never become reemployed.
It’s no secret that the current Medicare system is unsustainable, or it shouldn’t be a secret. That’s why there are a number of proposals and laws to change the system. There’s a great deal of confusion and misinformation about the different proposals, of course. Here’s an article with an analysis of the main proposals out there. It also offers proposals the authors believe will help both Medicare and the medical care system in general.The article also points out that the medical reform law enacted in 2010 already schedules changes in Medicare:
But at what cost to the elderly? Consider people reaching the age of 65 this year. Under the new law, the average amount spent on these enrollees over the remainder of their lives will fall by about $36,000 at today’s prices. That sum of money is equivalent to about three years of benefits. For 55-year-olds, the spending decrease is about $62,000—or the equivalent of six years of benefits. For 45-year-olds, the loss is more than $105,000, or nine years of benefits.
In terms of the sheer dollars involved, the law’s reduction in future Medicare payments is the equivalent of raising the eligibility age for Medicare to age 68 for today’s 65-year-olds, to age 71 for 55-year-olds and to age 74 for 45-year-olds. But rather than keep the system as is and raise the age of eligibility, the reform law instead tries to achieve equivalent savings by paying less to the providers of care.
Paying for long-term care is among the greatest concerns of those in or near retirement. Survey after survey shows that. In the past we discussed how to prepare for that by purchasing long-term care insurance or through other means. Last weekend’s Wall Street Journal had an interesting approach that often isn’t considered with LTC: Negotiate for a better price. Kelly Greene’s article first directs you to surveys we’ve cited in the past that list the cost of different types of care in different areas of the country. The Genworth survey came out with its latest data recently. (www.genworth.com/costofcare) The piece also discusses how you can use this and other information to get a better deal from a care provider.
Knowing local costs is one of the few ways to feel like you have some leverage in discussing how much to pay for care. Bob Bua, president of Genworth’s CareScout unit, says that is particularly true if the facility or agency you are talking to is charging more than the median rate in that region. “They might have some room to discount,” he says.
A few hundred dollars a month may not seem worth haggling about at a time when you are more concerned about helping a parent or spouse get the best care possible. But long-term-care costs add up quickly—and typically there isn’t a way to know how long you will need the services.
There also are many services that you may need to add over time if a chronically ill family member’s health continues to decline. In the facility chosen by Mr. Skipper, the financial adviser, the base rate for care was $3,200 a month. But after it assessed his mother’s needs, the facility tacked on $400 a month to give her medicine and an additional $900 a month for dressing, bathing and eating assistance, he says.
Exchange-Traded Funds (ETFs) have been very popular. They’re the fastest-growing financial product ever. But many people don’t fully understand them, and a number of people are worried about them. Terry Smith, a mutual fund manager writes that he’s concerned about ETFs. He calls them “worse than I thought.” There’s the usual worries about ETFs not tracking indexes the way they’re supposed to and being backed by futures contracts or other derivatives instead of actual stocks and bonds. But Smith also worries that because ETFs can be sold short, an investor might find himself buying shares of an ETF from a short seller that are not backed by actual assets of the ETF. The string of events that would lead to a short squeeze and leave an investor potentially holding the bag is a big complicated. If you want to know the full sequence of events, read the blog.
Retirement has changed, and it will change again. That’s one of our long-term themes at Retirement Watch. Alicia Munnell of the Center for Retirement Research says these changes make retirement harder, or at least riskier, than it was for the parents of today’s retirees. To see her reasons (which we’ve discussed before in Retirement Watch and in my book The New Rule of Retirement, click here.
Most investment portfolios have what advisors call a “home country bias.” That means a vast majority of the portfolio is invested in assets of the owner’s country of residence. That’s been slowly changing, and it’s definitely changing for the wealthy in the U.S. The highest growth rates are in overseas economies, and those investments also can have more attractive tax and regulatory burdens. Some wealthy also are concerned about the strength of the dollar, so they want to be invested in other currencies. Two recent surveys report that a high percentage of the wealthy are moving more of their money outside the U.S.
A new survey by the Institute for Private Investors of families with $30 million or more of investible assets showed that the families have one third of their assets overseas. One in five wealthy families has more than half their investments overseas. Most of them are buying overseas stocks, while they also are buying into hedge funds and private equity with exposure abroad.
Conventional investment theory says that to earn higher returns you need to take more risk. That’s why many portfolios are heavily weighted toward stocks, even when stocks are trading at high valuations and the economy is stagnating. The truth is quite the opposite. You don’t need to take more risk to earn higher returns. In fact, the opposite is true. Buying assets when the risk of future losses is low is the best way to earn above-average long-term returns. We’ve addressed this before both in this blog and in Retirement Watch. John Hussman, manager of the Hussman funds, spent some time on this point in this week’s Weekly Market Comment. The whole essay is worth a read, but here’s a key passage:
One of the interesting points that both Warren Buffett and Howard Marks have stressed over the years is that risk – viewed as the risk of losing significant amounts of money – moves in the same direction as valuations. So as valuations become rich, risk increases, and as valuations become depressed, risk declines. At the same time, rich valuations imply weak long-term prospective returns, while depressed valuations imply strong long-term prospective returns. As a result, both Marks and Buffett suggest that risk is lowest precisely when prospective returns are the highest, and risk is highest precisely when prospective returns are the worst.
A few months back we added preferred stocks to our recommended portfolios. It was a good move, as this post from Bespoke Investments shows. I’m not recommending individual preferreds or the ETFs that mirror indexes. Instead, I’ve recommended Cohen & Steers Preferred Income and Securities. This fund is more diversified. It invests globally, not just in the U.S., and it invests in a broader range of industries. U.S. preferreds tend to be heavily focused on financial and banking stocks.
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