Retirement

The 4% rule derived from a 1994 study by William Bengen in which he found that 4% was the highest rate that held up over a period of at least 30 years. Here’s how the rule works: You start by withdrawing 4% of your nest egg and then adjust the withdrawal amount to keep pace with inflation. So should you follow the 4% rule? Walter Updegrave on CNN Money recommend to start out with a reasonable withdrawal rate between 3% to 4% to support you 30 or more years in retirement. “You can go with a higher rate or a lower one. Just remember that the lower your initial rate, the less income you’ll have to meet your spending needs and the more likely you could end up with a big retirement account balance late in life. Conversely, starting with a higher rate will provide a more comfortable lifestyle, but could subject you to a greater risk of outliving your savings. Once you’ve decided on a withdrawal rate, you should be ready to boost or cut back your withdrawals based both on your spending needs and how much your nest egg’s value is rising or falling.” (cnn.com)

Most American workers are falling short when it comes to saving for retirement. As research has shown,  savings trends are getting worse. This shortsightedness costs Americans $1.7 trillion in retirement savings. Ben Steverman writes on Bloomberg: “You’re traveling across the desert, feeling parched and looking dirty. You take a long drink of water from your canteen, then wash your face with the rest. As you’ll discover before you die of thirst in a day or two, you just made a huge mistake. Outside of cartoons, nobody is this stupid. But people make the same kind of mistake all the time, putting their current happiness (vacations, flat screens, new cars) way above their future well-being. Economists call this kind of irrationality ‘present bias.’ And according to a National Bureau of Economic Research study, it and other biases are holding back millions of Americans from saving enough money for that ultimate future need: retirement. How much money? Try $1.7 trillion on for size. That’s 12 percent of the $14 trillion in U.S. individual retirement and 401(k) accounts.” (bloomberg.com)

401(k) is a retirement account sponsored by an employer. It lets you save and invest a percentage of your paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account. 401(k) statement is the one financial statement you should almost never look at. Ben Walsh writes on Huffington Post that “once you understand the basics of your 401(k) and set it up, the only decisions left to make are ones that will hurt you in the long run. Instead, the best thing to do with your 401(k) is set it and forget it.” The recommended investment vehicles are index funds or target date funds. With an index fund, you will capture the total return while the cost is super low. The less you pay in fees, the more you keep in your investment—it’s that simple. “Once you’ve set up your super boring investments, you’re done. Maybe look at your 401(k) around tax time to remind yourself that you made a good decision,” said Walsh. (huffingtonpost.com)

The new rule, that protects retirement savers by setting a fiduciary standard for financial brokers, won’t be fully enacted until 2018. Meanwhile financial journalist Kathy Kristof pointed out 5 ways to avoid retirement rip-offs:

1. Don’t buy from the bank as bankers are notorious for selling high-cost investments of dubious value
2. Beware advisers inviting you to learn about retirement investments at hosted meals
3. Stick to what you understand as good investments are straightforward
4. Read as fiduciary rules will require anyone who sells retirement products to spell out any potential conflicts of interest
5. Ask if you don’t understand an investment

(cbsnews.com)

Bowing to pressure from the financial services industry the Obama administration weakens retirement advice rule, announced by the Department of Labor. The new rule intended to protecting retirement savers from profit-hungry brokers by setting a fiduciary standard for financial brokers and requiring them to put clients’ best interests before their own. As reported by Reuters, “unlike the draft proposal, the final rule does not restrict brokers from pushing proprietary products, splitting revenue with creators of funds they promote, or recommending risky, high-fee investments in alternative assets and certain annuities.” The final version also loosened guidelines on pay, allowing advisers to collect “common types of compensation,” such as commissions and revenue-sharing. Knut Rostad, an investor advocate who chairs the Institute for the Fiduciary Standard, said he was disappointed that the final rule was not tougher, calling it “a major defeat for investors, period.” As Financial firms continue telling common investors that we need Wall Street and money managers, investors have to educate ourselves about investing and personal finance. Cost is everything. The more we pay in fees, the less we have for ourselves. (reuters.com)

Market timing is a sucker’s game, and trading in retirement is a very bad idea. Mr. Naples, described in The New York Times, “learned that it’s hard for an individual investor — even a retired one with lots of spare time — to outdo the pros and beat the market’s maddening volatility.” Researchers Odean, Andrade and Lin completed a study and found that “investors naturally get excited by investing during bubbles and are often blinded by emotion. If they’re excited about, say, tech stocks, they buy more of them. Because no one quite knows when it’s time to leave an inflated market or when to return and shop for bargains, millions of people guess wrong or follow the current trend.” During retirement, it’s best to put your investment in a passively managed portfolio so you have more time spending with your loved ones and on important stuff in lives. Just don’t follow any day trading program during retirement. (nytimes.com)