Wednesday, April 6th, 2011
I recently came across an old article from the New York Times that offers us a view of retirement planning that we don’t often hear…are we saving too much?
According to them, the financial industry, with its ostensibly objective online calculators, overstates how much money someone will need in retirement. Some, in fact, contend that financial firms have a pointed interest in persuading people to save much more than they need because the companies earn fees on managing that money.
The more realistic amount could be as little as half the typical recommendation made by Fidelity, Vanguard or any number of other financial institutions.
For a middle-income couple, that could mean trading $400,000 in retirement money for about $3,000 a year more during prime working years to spend on education or home improvement. For a middle-class household, that’s a lot of money, said Laurence J. Kotlikoff, a Boston University economics professor, who is on the forefront of this research into spending and savings, and is selling his own retirement calculator.
Andrew Behla is a case in point of someone who is not saving enough. Mr. Behla, a Los Angeles graphic designer and consultant, is at age 38 just starting to think about retirement. He and his wife, Michele Krolik, a payroll manager, together have just $70,000 squirreled away for their old age.
I think we will have to save a lot more, he said, a point on which the economists and the financial planning industry would agree. Even so, the couple recently bought a house and put extra money they had into improving it, figuring that over their lifetimes it will add handily to their net worth.
But other people like Beverly Alexander, 49, an energy consultant in Marin County, Calif., might be able to slow down. Her financial planner has her retirement finances mapped out to age 105 (her parents are still alive in their 90s), a plan that gives Ms. Alexander, a former utility executive, the freedom to quit her corporate job and live on her consulting income.
One reason I could retire, she said, was that I saved and I always lived below my means.
The findings of the economists are being met as most challenges to orthodoxy are: with stony silence or extreme umbrage.
I count myself as deeply skeptical, said Christopher Jones, the chief investment officer at Financial Engines, a financial planning software company.
The big financial services companies refused to comment on the research but they did say that their use of simple rules of thumb keeps the process of retirement planning less complicated, and thus, less daunting.
After the recent events in the market, we might be hard pressed to find anyone who thinks they have saved too much for retirement.
Nevertheless, I think the key factor in the entire article was the quote from M. Alexander who simply stated the most basic tenet of financial success… “I saved and always lived below my means” .
I don’t think that we need a “professor” to tell us that!
Posted in Saving Money | 8 Comments »
Saturday, November 13th, 2010
The topic of paying down one’s mortgage vs. investing seems to be a never ending debate with everyone having their own opinion on which method is better.
The argument for either side of the equation usually heats up over the topic of investment return. While some argue that investing can yield a higher after tax return based on historical figures, others posit that those historical figures are likely not going to be accurate going forward and that finding a ‘guaranteed’ rate of return in the current environment as high as your mortgage rate is improbable.
While both can make good arguments, I am not going to approach the mathematical side of this subject with this article.
The truth of the matter is that everyone’s situation is different and everyone has their own personal views on risk and debt. Truth be told, I firmly believe that we can’t reasonably compare an investment portfolio with one’s personal residence. Therefore, I view this argument as much more emotional than mathematical. It is for that reason that I want to bring to light some of the emotional trigger points that evoke the polar responses often associated with the pay down debt vs. investing debates.
Let’s start with a few basic questions that may help you decide whether it is better for you to invest or to pay down your mortgage.
1.) How many years are remaining on the current amortization of your mortgage?
If you have fewer than 10 years remaining on your mortgage amortization and your rate is fixed until maturity, you may be better off taking the guaranteed return associated with retiring your mortgage early. The reasoning behind this is that, while investments in the stock market may yield a higher return on average, ten years is a relatively short period of time to invest in the stock market. This is especially true when we consider the necessity to achieve after-tax returns greater than your mortgage interest rate.
2.) Do you have the financial discipline to invest 100% of the amount of your mortgage payment once it is paid off?
If you choose to pay off your mortgage prior to retirement, you will have some catching up to do with respect to your investing goals for retirement. While there is peace of mind involved in being ‘mortgage free’, diverting that former mortgage payment to an investing/savings account is the perfect way to beef up your retirement portfolio. the opponents to the pay off the mortgage early plan often cite the tempation for the new found cashflow to lure you in to a lifestyle that you won’t be able to afford once your working days are through.
3.) How confident are you in your investing abilities?
While I like to think that by investing in dividend growth stocks and dividend paying ETFs, I don’t always make the perfect investment. Yes, I even lose money sometimes 
According to the statistics, most of us do not have the ability to consistently out perform the stock market indexes. What’s more, none of us have the ability to move the market which puts us at a further disadvantage. So, I must agree with Five Cent Nickel on one benefit of paying off the mortgage early:
Another advantage of paying off your mortgage early is that doing so protects you from yourself. While paying the minimum on your mortgage and investing the difference might sound like a great idea, there are no guarantees that you’ll actually follow through on the second part of the equation.
4.) What is your current state of job security and liquidity?
This is where we have to take a long, hard look at our personal situations and assess those things that could derail even our best laid plans. If you are confident in your job security and are comfortable with lower liquidity as you aggressively reduce your mortgage, then mortgage reduction may be the decision that is best for you. However, if job security is a question or if you are the sole breadwinner in the household, you may be more inclined to carry a higher level of liquidity (ie. larger emergency fund).
So, what am I doing?
I took a similar approach to this question that The Financial Highway suggests. Look at both the mathematical and emotional aspects of the equation and answer honestly to the above four questions.
Well, I am somewhat confident in my investing abilities, but the emotional side of me would like to eliminate my mortgage. However, the real benefit for me in eliminating the mortgage is in the increased cashflow provided from the complete elimination of the debt.
You see, my mortgage rate is variable and currently at 2.25% 2.50%, so the idea of paying extra payments instead of investing has little merit in reducing the overall interest paid on my mortgage.
Comparatively, saving/investing until I can eliminate the debt entirely will have the effect of keeping my funds liquid as a hedge against job loss or another financial tragedy until such time as I can mitigate the risk of job loss etc. by removing the entire mortgage payment from my liabilities.
What are your thoughts on the invest vs. pay down mortgage debate?
Resources:
Mortgage Pay Down vs. Investing Calculator
Posted in Debt | 6 Comments »
Sunday, December 14th, 2008
Saving money around the holiday season is a very common theme this year and retailers are doing their best to entice consumers to open their wallets with sales and discounts that many thought we would never see.
Many, if not all, online stores are offering free shipping and the savings on non-essential items like video games and electronics is virtually unheard of.
Holiday Incentives
Many traditional retailers are offering incentives on financing. Just what a nation that has lived on credit for the last ten years needs – more debt. I do believe that the main stream media, with a the constant barrage of negativity toward the economy, has scared the average person into saving more money. (The only good thing the media has accomplished over the last few months.)
Some recent statistics show that many Americans are not taking on any credit card debt this holiday season and that is certainly something that has changed from recent years. With mortgages getting harder to qualify for, the importance of a good credit score has finally hit home with American consumers.
Many consumers have also said that they are planning to spend significantly less money this holiday season overall. Again, a profound change from the overspending that plagued recent years.
Will this Be Lasting Change?
One has to wonder if these changes will become habits that will last and be ingrained in the generation like the spendthrift and frugal survivors of the great depression era, or if the ideals of the recent “have it now” ideology will return with a vengeance at the end of this economic downturn.
I must say that I personally do not know which one is the lesser of the two evils? There must be a reasonable balance between spending and saving that will both benefit the economy and businesses as a whole and the individual. That is the balance that we seek as a society.
Today’s Investors Will Benefit
I am certain that this economic downturn will offer today’s young investors, who continue to buy stocks, an opportunity at wealth in their later years.
No matter how much money you spend this holiday season, I urge you to not only look in your favorite stores, but look at them as well. Who knows, the best bargain you find this season may be that beaten down retail store stock you’ve always shopped at!
Posted in Saving Money | 3 Comments »
Monday, October 27th, 2008
As we saw on Friday, the current financial crisis has investors all over the world living in fear now. And this time, it’s the government who is helping businesses to bring down what is crippling markets – the credit crunch precipitated by the U.S. housing collapse.
Governments in North America, Europe and Asia have provided bailouts to troubled financial institutions, liquidity to money markets and guarantees to banking systems. And all of this is in addition to drastic interest rate cuts. Fortunately, there are some very encouraging signs that these initiatives finally are starting to work.
Some Good News For A Change
Indications that credit is starting to flow
- The rate at which banks lend to one another known as the London Interbank Offer Rate (LIBOR) decreased from a peak of 6.88% earlier this month to less than 1.3%.
- The spread between 3-month LIBOR and U.S. Treasuries (the risk-free rate) decreased from a record high 4.65% earlier this month to 2.7% on Friday. A narrower spread means that banks are more willing to lend to each other.
Good news for U.S. housing
- U.S. fixed-mortgage rates decreased helping more borrowers qualify
- Variable rates continue to decrease due to Fed rate cuts
- Oil and gas price declines result in more affordable heating costs for homeowners as we head into the colder months
- Data from August and September shows reduced inventory of U.S. homes. The 10.6 months supply of homes in August slipped to 9.9 months supply in September
- The FDIC and the U.S. Treasury are working on a proposed plan to prevent avoidable foreclosures by offering guarantees to lenders and companies that service mortgages
Despite these encouraging signs, we will continue to see volatility as investors react (or is that overreact?) to every new piece of information released.
Facts About Stocks and Recessions
There’s a lot a worry about the recession now. But what’s important to remember is that equity markets tend to be leading indicators of the economy.
Looking back through history, equity markets have typically retraced prior to, and in the early stages, of recessions. Once equities have reached their lows, they tended to rise quickly preceding the broader economic recovery.
So, make sure you don’t let yourself fall into the mob mentality or you may find yourself missing the upturn in equities.
We don’t know exactly when the recovery will commence, but over the long-term equities has still been the top-performing asset class. And out of all the equities, the dividend growers have been the most stable.
Posted in Investment News | 4 Comments »
