Financial Straight Talk

With retirement looming over most Boomer’s heads, there’s only one question left to ask: when do you start drawing from your retirement account?

Well, did you know that only 17% of women, have saved for retirement?  If you are a part of that group, this is a proud day for you. You didn’t wait for that “knight in shining armor” to come rescue you; INSTEAD, you counted on yourself.

Today, 20% of women are in the workforce until age 70, and 26% have no plans to retire.

Saving, and putting together a portfolio for yourself has been a wise decision.  For the first time in history, there are more women in the “single” category than “married.”  In fact, married couples have become a minority in America.

Those of you in that 17% category, have planned well for your retirement.  Your 401(k)s, savings, and IRA’s have helped you to be ready. 

Today, a 65 year old woman has a 56% chance of living to 85, and a 35% chance of living to 90?  Now, that’s important to know considering today you have to be prepared for your retirement dollars to last anywhere from 20 to 25 years, or maybe more.

I’d suggest laying out a plan with your wants and needs.  This will give you an idea of what your monthly expenses will be, and what monthly income you will need.  Besides the day-to-day necessities of life, there may be a special dream plan.  This is the time when your dreams should come true.  Lay out a plan for your dream vacation, and include it in your budget.  You also might include monies for long-term care.  

Now, once you know your expenses, add up your income, and do not forget to include your social security as part of your retirement income.  If you were born between 1946 and 1960, full benefits begin at age 66.

With living longer, you will need to think of ways to stretch your retirement dollars.

If you do not already have a financial advisor, I would suggest that you get one to help you plan this important stage in your life.

Retirement is probably the biggest expense that most people will ever have to pay for during their lifetime.  If your employer offers a 401(k) plan, it is a great way to begin saving for retirement.  A 401(k) allows a worker to save for retirement, and have the savings invested, while deferring current income taxes on the saved money and the earnings until withdrawal.  Some employers will even make a matching contribution.  If your employer offers a 401(k), look into the employer’s matching contribution; this could be a windfall for you if there is a match, which is like getting “free money.”

  Today, with a record number of people unemployed, many people are searching for additional funds.  The current economic environment is causing many people to struggle financially to the point where they are willing to cash out of their retirement plan.  This may seem like a good idea for someone who is strapped for cash, but down the road the consequences can be very severe.  A 25 year old, cashing out $5,000 today, may be sacrificing around $75,000 at retirement, assuming a 7% return until age 65.  Before cashing out, check with your personnel department to see if your company’s 401(k) has a loan provision, some plans do, and some do not.

A recent study by Hewitt Associates, surveyed 170,000 401(k) participants, who lost, or changed jobs in 2008.  It showed that 46% of workers with 401(k) plans, who switched or lost jobs, cashed in their plans.  Around 60% of people cashing out their plans, were younger employees who were in their 20’s.  Of those in their 50’s, only around 33%, cashed out their plan.

    Cashing out of your retirement plan, prematurely, is usually never a good idea.  I would suggest you roll over your 401(k) into an IRA.  There is no tax consequence, and you are still keeping your retirement funds intact.  The money that you have begun to set aside for retirement, should not be used for current financial situations.  If you really need the available funds, try cashing out a little from your personal retirement plan, or personal savings, instead of your 401(k).  You should consult your financial advisor before you withdraw any funds from your retirement plan, remember in addition to everything else, you may end up paying a substantial penalty on an early withdrawal.

When we look at the various ways to expand investments internationally, the Asian market comes to mind. In Asia, we see one of the biggest success stories in the investment world. Since 2005, Asia has been a money maker.

            During 2009, the Asia Pacific price index rose 26%, the Hang Seng Index rose 32%, the Shanghai Exchange increased by 43%, and India’s market hit an impressive 49% increase. With these impressive upturns, you can see why this has been a market that you might want in your portfolio. Asian funds, with U.S. mutual fund companies, have been a great place to be.

            Asia has a growing middle class with huge numbers that is coming out of poverty. These new middle class consumers are now buying, and this is what fuels the growth in the Asian markets. With Chinese markets growing at a rate of $16.4 billion a day in trading volume, it seems to me this is the time to take action for the long haul.

            Looking at the volatility of the Asian market, over the last twenty years, we can see a need for active management.  Remember, we need to look at the Asian market as a bullish long-term investment. For most of us, investing with a mutual fund company, with quality management, and good performance will be the key to success in the Asian Market.

            The idea of investing through U.S. mutual fund companies is more expensive than doing it on your own, but remember what you are getting in return.  These management teams understand Asia’s broad and complex markets, and they can take advantage of this momentum.

            In any market environment, I strongly believe that all investors should be diversified with a variety of asset classes. By working with a financial advisor, you can have a portfolio that is properly diversified, meets your time horizon, your tolerance for risk, and your long term goals.

  China is currently one of the largest countries in the world, with a population of around 1.3 billion people, and a growing middle class.  Their middle class is spending, and could potentially be the growth engine that delivers the world from its economic downturn.   

            To say that China’s middle class is expanding is an understatement. Currently, there are about 120 million of urban population in China. Of that 120 million, the richest 20% of this urban population has annual household income of about $8,000 U.S. dollars per year, and the richest 10% of this population has around $15,000 U.S. dollars or more per year.

Since the growth rates in China are so overwhelming, it means that household income is expected to increase by 100% every 5-6 years. However, we must keep in mind that China is not a developed country like the United States; so, the household income may seem low, but when it is put into perspective, the projected income increase makes all the difference. Essentially, this will have a very strong impact on the consumption power of the Chinese population.

             It definitely sounds like the increasing household income of the middle class in China, along with the increasing middle-class population are definite signs of economic growth.  They are on track, even in these tough economic times.

Investing can be a time consuming process, and it can be complicated and frustrating.  As an investor, you should take advantage of any tool that may help you ease some of the burden. With that being said, tax-deferred savings is one method that you can utilize to make your funds grow. 

With tax-deferred savings, you can postpone paying taxes, on any earnings in your tax deferred account, until you withdraw the funds.  By doing this, you can lower your current taxable income. Additionally, you may be able to benefit from being in a lower tax bracket when you do decide to withdraw the funds.

There are a number of different tax deferred savings plans, a well-known one is a 401(k) retirement plan.  This plan offers high maximum contribution limits, and the opportunity to save over time.  If your employer offers a matching 401(k) plan, it may be a good idea to make contributions, to the maximum amount.  If you leave your place of employment before you are eligible for retirement, you usually have the option of rolling your money over into an IRA.

Let’s take a look at an example.  If your monthly contribution is $250, at 6% interest, compounded annually, in 20 years it will grow to about $116,000 in a tax-deferred plan.  In a similar savings plan, that is not tax deferred, assuming a tax rate of 20%, you will only be making a $200 monthly contribution.  You will end up only saving around $93,000, without the tax-deferred plan, which is a difference of around $23,000.  Remember, you would be paying additional taxes each year on the earnings.  A tax deferred savings plan is a great way to see your nest egg grow; as long as you do not withdraw your money before you are 59 ½ , or you will incur a 10% penalty, on top of the taxes.

Any way you slice it, tax-deferred savings are a good way to prepare for you retirement. You may want to take advantage of the opportunity.