Financial Planning Archives

How much money do you need for retirement these days?

Although retirement may seem distant, it is important to start a strategic plan now so you are prepared when that day arrives. Timing is very important, and the sooner you start saving and investing, the sooner you can begin to focus on a life that will not require you to work.

How much money do you need for retirement?

Well it depends on three factors:

(a) when you retire

(b) where you retire

and

Not all of these questions need to be answered right away, but saving now in a retirement fund that has time to grow is invaluable. Fidelity says to try to have saved at least as much as your current salary by the time you are 35, have three times your salary saved by the time you’re 45, and at least five times your salary by your 55th birthday. When it’s time to retire, your goal should be to have saved at least eight times your ending salary. These numbers aren’t set in stone, but are good benchmarks to follow when starting your retirement savings and investment plan.

Dependable advice in a fluctuating market.

Learn more about our Retirement Planning services.

Dimensional Funds Advisors

Early this year, Barron’s posted an article by Beverly Goodman on a program orchestrated by financial firm Dimensional Fund Advisors, led by University of Chicago economist Professor Eugene Fama. Dimensional Fund Advisors’ investment strategy is based on Fama’s early and ongoing research, and the students at this program were the financial advisors who sell its products. Fama is a recent Nobel Prize Winner and the two day, biannual program, held in Austin, Texas allowed the students to hear about new research and new strategies from Fama himself.

Strategies like Dimensional Funds Advisors

It may seem like an exclusive strategy and that the information that Professor Fama spoke about during the two-day program is only available to a select number of people. In truth, this is a strategy that is available to everyone and we are very excited that Sherman Wealth Management can now offer services like this to you. We will determine if any of these strategies are right for your unique financial plan.

We believe everyone deserves sophisticated financial advice. Our mission is to provide the same kind of high-quality investment services offered by the finest financial institutions and private Wealth Managers, without the high account minimums or costs. Please give me a call at (240) 462-5273 or e-mail me at bsherman@shermanwealth.com so we can discuss how to help you meet your financial goals.

Dependable advice in a fluctuating market.
Sherman Wealth Management

LFS-897025-040614

Which Generation has a Better Handle on their Long Term Financial Goals

Long term financial goals for Millennials vs. Gen X

There is a common perception among our society that Millennials have the ‘You Only Live Once (YOLO)” attitude and are risk takers in all aspects of their life. However, Millennials are anything but when it comes to their finances. According to Financial Finesse 2013 Generational Research Report, the tech savvy Millennials “continue to be stronger than their older Generation X counterparts in many areas of day to day money management.”

Those under 30, commonly labeled the Millennial Generation, are doing a relatively good job managing their current cash flow on a day to day basis. In the age of the internet and now social media, technology is the leg up for Millennials. Accustomed to budget friendly websites, comparison shopping, and peer comparison, Millennials use what they have at their fingertips to do their own research and ensure they are getting the best deals. So when it comes to short term cash flow, Millennials’ top priority is making sure they have more money coming in than going out.

Additionally, the availability of parental support from the baby boomers (ages 45-65) has steadily increased in recent years, as 30% of young adults (ages 18 to 34) that are employed full time live with their parents or have moved back home temporarily. Thus giving Millennials extra time to build savings.

Financial Strengths

73% have a handle on cash flow
88% are paying their bills on time each month
62% are regularly paying off their credit card balances in full
52% check their credit rating on an annual basis.

However, although Millennials may not be sitting on the same amount of debt as their older counterparts, they tend to overlook a long term perspective that makes planning for retirement a top priority. According to the same Financial Finesse study, Millennials “suffer from a relative lack of investment knowledge” making long term financial goals their biggest challenge.

Financial Weaknesses

Only 67% say they have a general knowledge about investments
Only 37% have taken a risk tolerance assessment
Only 29% rebalance their investments
Only 83% are contributing to their retirement plan at work
Only 29% have run a retirement projection
Only 17% say they are on track to replace 80% of their income in retirement
Only 26% contribute to a traditional or Roth IRA
Only 29% are confident their investments are allocated appropriately

To get Millennials on track, they need to bring their long‐term goals into focus. This generation favors the opinions and advice of peers and first‐hand users over those of traditional experts. Seventy‐five percent have created a profile on a social network and are more likely than any other generation to visit the website several times a day. Finding a way to incorporate a social platform with an educational platform allowing Millennials to share their experiences, with hands‐on applications, as well as testimonials and peer recommendations, will resonate well with this generation as they believe the classroom is a thing of the past. Thirty-nine percent of Millennials see the future of education as more virtual.

Gen X

Generation X, ages 30-44, is considered the more self-reliant generation. They are the first generation to grow up with both parents working outside the home and have had independence and freedom at a young age compared to other generations. That, coupled with being the first generation to grow up with computers, has given Gen X the ability, as well as the need, to control their own lives, including their financial goals.

Gen Xers, on average, have a higher income than their younger counterparts and tend to be homeowners and/or married with a dual household income. However, this generation was hit the hardest by the Great Recession, losing quite a bit of their savings, most significantly when the housing market collapsed. This creates a struggle for Gen X in prioritizing their financial responsibilities. This group is paying down debt from their self-reliant 20’s but with more immediate obligations, such as mortgage payments and young children, it becomes difficult to balance. Those more immediate expenses tend to seek priority over their day to day cash flow.

What holds Gen X back is not their desire to save, but rather their debt that hangs on them like a noose around their necks. Forty-nine percent have debt that keeps them from saving for emergencies, children’s college tuition and ultimately retirement.

During the financial crisis: *

15% of Generation X made early withdrawals from their retirement accounts
23% stopped contributing to those retirement accounts
22% stopped contributing to college accounts

* 2012 report by the Insured Retirement Institute.

It may help Generation X to be aware of the vast number of available college financing options. Those options make saving for college a lower priority than saving for their own goals like retirement, an emergency fund, and of course, paying off debt. It is important they learn to balance competing demands and meet long term goals while faced with immediate growing priorities.

Gen X’ers rely heavily on education and take advantage of tools that are made available to them. One tool this age group has taken advantage of, and had a high level of confidence in, is the stock market, which may be why they are struggling to meet their long term goals. Many Gen X’ers largely missed the huge run up in stock prices in the 80’s and 90’s, and may need more aggressive retirement investment strategies or alternatives to compensate. They understand the importance of investing and are not afraid to do so aggressively.

Both generations need to be realistic about their finances

Both generations view “old age” at somewhere around 78 or 80 and the life expectancy of a current 60 year old, according to government statistics, has reached a record 84 years. But with both Gen Xers and Millennials facing the impending shortfalls of Medicare and Social Security, how will either generation prepare accordingly? This, combined with the reduction in employer‐sponsored retirement benefits, makes both groups subject to suffer shortfalls in their own savings unless drastic measures are taken.

Both generations have had some help from the Baby Boomers along the way—whether through life insurance, college savings or financial support post college. But are either the Millennials or Gen X’ers going to have the ability to do the same for their own children?

Although Gen X may not have as much time as Millennials for their savings to compound and grow, the silver lining is both generations have time on their side. But time is money, right? Start planning your financial success today.

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Sherman Wealth

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Advantages of Participating in Your Workplace Retirement Plan

As young adults, 20 and 30-year-old’s tend to procrastinate when it comes to saving for retirement, thinking they have all the time in the world.But the key is to start now. When it comes to saving for retirement, there are few better ways than a workplace plan such as a 401(K). Yet, there are a few common excuses for not opting into an employer compensation plan.

● There will always be Social Security
● I can’t afford it right now. I’m not making enough money to save yet.
● Fear of losing money in bad investments.
● I’m so young, I have all the time in the world.

The 411 about the 401(K)
A 401K allows employees to withdraw money from their paycheck prior to taxes and invest it in a retirement savings plan. Many employers then match the contributions proportionately, sometimes even dollar for dollar. The contributions are not taxed until the money is withdrawn. As of 2014, you can contribute up to $17,500 per year.

Funds withdrawn prior to age 59 ½ are subject to a 10% penalty and are taxed as current income in the year withdrawn.

A Mini History Lesson about Pensions and Employer Compensation Plans
It was during the American Revolution, that what we know as a pension, came about. The Continental Congress offered soldiers a monthly lifetime income as an incentive to join General Washington’s army.The income they’d receive when the war was over would be a payment for their service.This lifetime income was called a pension.The offer was repeated by the federal government the during the Civil War and has continued ever since.

The first private company to offer a pension plan was American Express in 1875. They gave an income to each retired employee. The amount was equal to half of the worker’s annual pay, based on an average of the worker’s final ten years of employment (up to $500 annually). Over the next 50 years, hundreds of other companies created similar plans. (However, now it’s based on the average of the worker’s highest paid income of 35 years!)

The end of 1929 brought the Great Depression. Millions of people became unemployed which created fierce competition for jobs.The nation’s economy at the time was agricultural and industrial— both very physically demanding— placing older Americans at a distinct disadvantage. So when older employees lost their jobs, they were unlikely to find new ones and found themselves involuntarily retired.

Thus, in 1935 came the Social Security Act which was signed by President Roosevelt,establishing the first public retirement plan and a national retirement age of 65.Similar to the private plan created by American Express, Social Security was to pay monthly benefits based on each worker’s length of service and average annual salary.

Addressing the Excuses

There will always be Social Security
When the Social Security Act was established, the average American lifespan was 61.7 years, however, today it is 78 years. Now, one must plan income for retirement to get you to age 100 or beyond. You can no longer solely rely on Social Security alone to maintain you through your retirement years. It should only provide you with one-third of your retirement income.

Few companies still maintain traditional pensions (paid for by employers). In this day and age, people are no longer staying at one place of employment for their entire career which is usually the case in which a pension would still exist. The vast majority of today’s retirement plans fall under “defined contribution plans” such as the 401(K).

I can’t afford it right now. I’m not making enough money to save yet.
You do not have to make a lot of money to participate in this program. Typically an employer only requires 1-2% of the participant’s salary. On a $50K salary, that is only $42 to $84 per month. And remember, your employer may contribute proportionately every time you do. How much do you spend on your cable bill? Or phone bill? Or your gym?

Your employer automatically deducts your contributions every time you are paid. If you don’t see the money, it won’t be so hard to part with it! Most of the legwork to provide investment options is done by your employer and the professional advisers they hire to assist them. An increasing number of plans offer “auto enroll” and “auto escalate” features. The first automatically signs you up for your retirement plan; the second automatically boosts contributions as your salary increases.

Another perk: You get two tax advantages when you save in a 401(K) plan. First, your contributions are tax-deductible. Second, the money you contribute doesn’t count toward your gross income for the year, lowering your taxable income. There are also no taxes on interest or dividends at the end of the year like in a non qualified investment or savings. Say you put 10% of your $50,000 salary into your account each month. That’s $416 you don’t have to pay tax on. If you’re single, that translates to about $104 in monthly tax savings, or $1,245 a year and tax deferred until its withdrawn.

Fear of losing money in bad investments.
Sometimes taking your hard earned money and putting it where you can’t see it is scary. People who have fear of going to the doctor but have to go anyway. Think of it the same way. Most 401(k)s let the employee choose where to invest their savings from a variety of options ranging from aggressive choices as to less volatile choices.

I’m so young, I have all the time in the world.
The key to success of a 401(K) is to start as early as possible and to try and contribute the maximum allowed. According to FinancialSamurai.com, in 2014, if a 22 year old started participating in a 401(K) by the time they are 65, they will have saved $743K to $3.5 million, depending on the percentage of contributions to the plan. But if someone does not start contributing until age 40, by the time they are 65, they will have saved $305.5K to $550K, depending on the percentage of contributions to the plan. Wouldn’t you prefer to be the former?

Don’t leave money on the table. If your company offers a 401(K), find out the details of the plan and consider taking advantage today.