“Decluttering Your Financial Life”

As Americans, we own so much stuff that there’s now an entire industry of decluttering specialists who help you organize your home, get rid of things you don’t need, and create systems to keep you organized moving forward.

Just like at home, everyone has a different level of organization in their financial lives. Some people have everything perfectly in place and know exactly where everything is, while other people have a very messy financial situation with no organization and no real plan in place.

People seem to just accumulate things over the years. They may have an old 401K plan at a previous employer. Or they may have an IRA they have funded some years and not others or a random investment account they just happened to open ten years ago. Chances are these accounts are investing in funds with no rhyme or reason. Often, I find that clients feel as though they are diversified because they have money with different firms like Fidelity or Vanguard or they feel like they are diversified because they own quite a few different mutual funds. But typically that is not the case – meaning they aren’t as diversified as they think. What I do find is that their accounts are investing in many of the same companies so instead of being diversified they are actually being redundant. It is very important to understand how your invested and why you are invested the way you are.

I realize it’s overwhelming to start the process of cleaning and organizing at home, believe me – I do! For most people it’s probably no different when it comes to getting organized financially.

Start by thinking simple! Gather all current account statements whether we are talking bank statements or investment statements…determine your balances and who’s managing your accounts. Find tax returns, insurance policies…organize everything so that you know where things are and can access them easily.

If at some point you decide to work with a financial planner or coach you will be prepared. A true financial planner is going to want to analyze every part of your financial wellbeing from investment objectives, how you are currently invested and your insurance needs (whether liability, medical, homeowners, auto, life and long term care). They are also going to want to talk about the inevitability that you will die someday – so estate planning as well. If you get yourself organized prior to meeting with a financial planner the process of developing your plan will be easier, faster and you won’t be overwhelmed with the amount of data they are requesting. You’ll have it ready to go!

— Nikki Earley

The World May Come Up $400 Trillion Short in Retirement Savings by 2050

Longer life spans and disappointing investment returns will help create a $400 trillion retirement-savings shortfall in about three decades, a figure more than five times the size of the global economy, according to a World Economic Forum report. That includes a $224 trillion gap among six large pension-savings systems: the U.S., U.K., Japan, Netherlands, Canada and Australia, according to the report issued recently. China and India account for the rest.

Employers have been shifting away from pensions and offering defined-contribution plans, a category that includes 401(k)s and individual retirement accounts and makes up more than 50% of global retirement assets. That piles more risk onto the individuals, who often face a lack of access to the right options as well as the resources to understand them, according to the World Economic Forum report. Stock and bond returns that have trailed historic averages in the past decade have also contributed to the gap.

“We’re really at an inflection point,” Michael Drexler, Head of Financial and Infrastructure Systems at the World Economic Forum, said in a phone interview. “Pension underfunding is the climate-change moment of social systems in the sense that there is still time to do something about it. But if you don’t, in 20 or 30 years down the line, society will say it’s a huge problem.” A shortfall of about $400 trillion could be reached by 2050, the World Economic Forum said. The figure is derived from the amount of money government, employers and individuals would need to provide each person with a retirement income equal to 70% of his or her annual earnings before leaving the workforce.

The gap is partially driven by an aging world population. Life expectancy has risen on average by about a year every five years since the middle of the last century, and half of babies born in the U.S. and Canada in 2007 may live to 104, according to the report. In Japan, the figure is 107 years.

The World Economic Forum said its calculations are based on publicly available data on government programs such as Social Security in the U.S.; employer-based contributions and individual savings. It assumed that workers would retire between the ages of 60 and 70. Governments can ease the financial burden by increasing the target retirement age. People would also benefit from improved financial education and services. “A lot of the good solutions already exist somewhere in the world. Just no one has figured them out all together,” Drexler said. “There’s almost no new invention necessary.”

The defined-benefit plans that have fallen out of favor enjoyed advantages including shared risk and an investment manager to oversee allocations, according to the report. And those pension plans often had better collective bargaining power, Drexler said. Some countries are taking steps. The Netherlands and Canada both have collective retirement systems for defined-contribution plans. That has helped individuals pool risks and reduce fees, the World Economic Forum said. The group warned that the savings shortfall is growing at a rate of $3 trillion each year in the U.S. The shortfall might climb at an annual rate of 7% in China and 10% in India, which have rapidly aging populations, growing middle classes and a higher percentage of workers in informal sectors.

“What I’m really hoping will happen is that actions will be taken and will be taken now,” said Jacques Goulet, president of health and wealth at Mercer, a consulting firm that collaborated on the report. “There are three key stakeholders in here. There are governments, companies or employers, and individuals. And frankly the problem here is of such magnitude, that we need the engagement of all three in order to address it. That’s very important.”

Citations

1. https://bloom.bg/2qWfFVG – Bloomberg
2. http://cnnmon.ie/2qXgzl3 – CNN Money

The Good News Is . . .

• A noticeable pick-up in the services sector lifted the Composite Purchasing Managers Index (PMI) by 1.2 points to a solid 53.9 in the May PMU flash report. The services PMI rose 1.5 points to 54.0 as new orders are at their best level of the year and employment is improving. Costs in the service sample are rising due to higher wages and higher costs for raw materials. And service providers, in further evidence that demand is strong, are passing these costs through with output prices also at their highest level of the year.

• Tiffany & Co., a leading fine jewelry and specialty retailer, reported earnings of $0.74 per share, an increase of 59.6% over year-earlier earnings of $0.69 per share. The firm’s earnings topped the consensus estimate of analysts by $0.04. The company reported revenues of $899.6 million, an increase of 1.0%. Management attributed the results to strong wholesale demand in the Asia Pacific region and improvement in its overall gross margin.

• The Huntsman Corporation agreed to merge with Clariant of Switzerland, continuing a consolidation push in the chemicals industry. The all-stock transaction, dubbed a “merger of equals” by the companies, would create a business with a combined market value of about $14 billion. The chemicals industry has seen a number of mergers recently, as many of its biggest names try to gain scale and reduce costs. The transaction, which would create HuntsmanClariant, is expected to result in $400 million in annual cost savings. Under the terms of the proposed deal, Clariant shareholders would own 52% of the combined company. Huntsman shareholders, including its founding family, would own the rest. Huntsman investors would receive 1.2196 shares in the combined company for each Huntsman share they own.

Citations

1. https://bloom.bg/2eVhfSb – Bloomberg
2. http://cnb.cx/2lwnm3s – CNBC
3. http://bit.ly/2r4vPuL – Tiffany & Co.
4. http://nyti.ms/2s4IAEN – NY Times Dealbook

Planning Tips

Common Retirement Myths to Avoid

Ideally, retirement is an idyllic time during which you can relax and do all the things that you have always wanted to do. But getting to the point where you can pay for the retirement you want is not easy; it requires hard work and sacrifice during your working years. And if you fall for any of these common retirement myths, then all that effort you put into saving over the years may be for naught. Below are six myths about retirement to avoid. It is important to work with your financial advisor to determine the best retirement strategy for your goals and current situation.

65 is the right age for retirement – Once upon a time, 65 was considered full retirement age. This was the age when many people both retired and filed for Social Security benefits, because they were now entitled to receive the full benefit amount for which they were eligible. However, as the average lifespan has climbed, the Social Security Administration has pushed the full retirement age forward a bit. If you were born between 1943 and 1954, your full retirement age is 66. For those born in the following years, retirement age creeps up by two months per year, meaning that someone born in 1955 would have a full retirement age of 66 years, two months. Everyone born after 1959 has a full retirement age of 67. If you claim Social Security at age 65 under the mistaken belief that that is the best time to file, your benefits will be permanently reduced because you claimed them before your actual full retirement age. And without the help of Social Security benefits, most people would not be able to afford retirement at age 65 without putting a dangerous strain on their retirement savings.

Stocks are too risky for retirement investments – Stocks are definitely a riskier investment than, say, government bonds or bank savings accounts. However, stock investors are rewarded for taking on risk by getting a comparatively high average return over the long haul. Without the help of that high average return, you would need to save much, much more money during your working life to get enough retirement savings built up. For example, let’s say you’ve saved $1,000 per month (which adds up to $12,000 per year) and put it in government bonds, getting an average annual return of 2%. At the end of 30 years, you’d have $496,553 saved up. On the other hand, if you had put that same $1,000 per month in stocks and gotten an average annual return of 7%, you would have $1,212,876 saved up after 30 years. The most significant risk factor with stock investments is their volatility: while they show terrific returns over the long term, in any given year they can climb or fall dramatically in value. Thus, as you approach retirement, it is wise to shift most of your retirement funds over to bonds instead. That way you can have your cake and eat it too: enjoy the high returns of stocks, yet enter your retirement with a much safer portfolio of bonds in hand.

Medicare will cover all my healthcare costs – Medicare is a wonderful program, but it is not a cure-all. Original Medicare will cover some hospital and doctor related medical expenses, but there are large gaps in its coverage. For example, Medicare will only pay for the first 100 days in a nursing home. If you need to stay longer than that, you had better be prepared to pay a great deal of money; according to AARP, the average cost for a nursing home is over $50,000 per year and about 1/3 of nursing home residents pay all of it out of their own pockets. And that is just one example of where Medicare can fall short. Plus, several components of Medicare require you to pay monthly premiums, including Medicare Part B. It is important to set aside part of your retirement budget to cover the medical costs you will incur.
Once I retire, I won’t have to worry about taxes – You have probably heard the saying about death and taxes. As long as you live, the federal government—and possibly your state as well—will continue to present you with an annual tax bill. But once you retire, you will not have an employer to take that money out for you every month and send it to the IRS. You will be responsible for calculating and paying your taxes yourself. This means that your tax challenges will likely increase rather than decrease once you retire. And you should definitely budget for the taxes you will be paying on part if not all of your retirement income.

I can keep working as long as I have to – Anyone who has ever been through an unexpected layoff knows that job security is not what it used to be. The days when someone could expect to work for the same company for their entire career are long gone. And if you think that hustling up a new job on short notice during your 30s and 40s is tough, think how hard it would be when you are in your 60s. Also, you could run into health problems or other challenges that would require you to leave your job earlier than you anticipated. Thus, it is wise to plan for a retirement date somewhere in your 60s and save accordingly. If all goes well, you may indeed end up stretching out your working years into your 70s and beyond. But if all does not go well, you will have the funds to take care of yourself.

Citations

1. http://cnb.cx/2s4BRLc – CNBC
2. http://bit.ly/2iMSzew – US News & World Report
3. http://bit.ly/2rABDer – Motley Fool
4. http://bit.ly/2qrXmV1 – FinancialMentor.com
5. http://fxn.ws/2mxS5Ks – Fox Business News