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Personal Finance Advice and Education! (2 Viewers)
- Thread starter No. 16
- Start date
Topes
Footballguy
No. If anything, pretend to be a student just to get MORE loans at 6.8%.THEN, infest in what siffoin's investing in.YWIAAs a 26 year old single guy who will be graduate in May, this is something I've been thinking a lot about. How does the advice change considering I have ~$50k in student loans at 6.8%? Should paying that off be the priority after investing the max in 401k and IRAs?
No. 16
Footballguy
So I just finished reading The Bogleheads' Guide to Investing and I must say it is a very informative and convincing book in regards to investing strategy/habits. Thanks to all those who recommended it. Right now I'm in the process of building up my bank roll (I have been saving 20-25% of my checks) so I still have more time to educate myself before I dive in.
The authors of the Boglehead book suggest that low cost mutual funds, preferably index funds, are the best way to invest in stocks. They are not sexy, but they offer steady returns over the long haul due to the low transaction and maintenance fees. They cite many research papers as the basis for this investment strategy and as a guy who loves data to support an argument this seems like a no brainer way to invest.
I have a few questions regarding the book.
- The premise of the book is that the past does not predict the future and that 80% of brokers/investors fail to generate more returns than an index fund over the long haul after you factor in transaction and maintenance fees.
So if the past does not predict the future, why is there so much support for low cost index funds? Empirical data used to support the argument is based on hundreds years of stock market data, but again the support is still past performance. Is the fact that index funds are generally supposed to mimic the US economy the key rather than individual sectors/companies? With index funds are you basically betting on America continuing to be THE player in the global economy? So basically the only way you can lose all your money in an index fund is if the ENTIRE US economy goes in the tank and by that time everyone is SOL. I just want to make sure I understand their enthusiam for the index fund.
Also if Wall Street and brokerage firms make money from investors based on transaction and maintenance fees, then how does a company offering low cost index funds (Vanguard, Fidelity(?), what are the others) make money? Are they counting on the quality/reputation to bring in and keep a high number of customers to offset the lower fees? Are they like the casinos who offer free shows/dinners and table games (index funds), so that people can lose more of their money at the slot machines (active funds/individual stocks)? Do companies like At the end of the day the business still has to make money so I want to know how the business is making money from me.
I think these are my major questions with the general advice of the book. I will re-read it again to truly understand the finer points when I have enough capital to invest, but right now the general understanding of personal finance is more important.
Now I just don't blindly follow everything I read so does anyone have any suggestions of a good book that would propose an alternate strategy from the Bogleheads based on empirical data or is much of it out there "noise" like the Bogleheads pointed out? More recommendations that follow the Boglehead advice is also welcome.
The authors of the Boglehead book suggest that low cost mutual funds, preferably index funds, are the best way to invest in stocks. They are not sexy, but they offer steady returns over the long haul due to the low transaction and maintenance fees. They cite many research papers as the basis for this investment strategy and as a guy who loves data to support an argument this seems like a no brainer way to invest.
I have a few questions regarding the book.
- The premise of the book is that the past does not predict the future and that 80% of brokers/investors fail to generate more returns than an index fund over the long haul after you factor in transaction and maintenance fees.
So if the past does not predict the future, why is there so much support for low cost index funds? Empirical data used to support the argument is based on hundreds years of stock market data, but again the support is still past performance. Is the fact that index funds are generally supposed to mimic the US economy the key rather than individual sectors/companies? With index funds are you basically betting on America continuing to be THE player in the global economy? So basically the only way you can lose all your money in an index fund is if the ENTIRE US economy goes in the tank and by that time everyone is SOL. I just want to make sure I understand their enthusiam for the index fund.
Also if Wall Street and brokerage firms make money from investors based on transaction and maintenance fees, then how does a company offering low cost index funds (Vanguard, Fidelity(?), what are the others) make money? Are they counting on the quality/reputation to bring in and keep a high number of customers to offset the lower fees? Are they like the casinos who offer free shows/dinners and table games (index funds), so that people can lose more of their money at the slot machines (active funds/individual stocks)? Do companies like At the end of the day the business still has to make money so I want to know how the business is making money from me.
I think these are my major questions with the general advice of the book. I will re-read it again to truly understand the finer points when I have enough capital to invest, but right now the general understanding of personal finance is more important.
Now I just don't blindly follow everything I read so does anyone have any suggestions of a good book that would propose an alternate strategy from the Bogleheads based on empirical data or is much of it out there "noise" like the Bogleheads pointed out? More recommendations that follow the Boglehead advice is also welcome.
Random
Footballguy
Gold, its NEVER been worth zero.
NewlyRetired
Footballguy
* First off, great job on educating yourself! That is a fantastic first step. It already puts you away ahead of the game as so many people don't even invest the little time you have already.* In general, all investments come with the caveat of "past performance does not indicate future potential". It is kind of a given and you almost have to ignore it in a way when evaluating investments since it is variable against all investments.
*I only have one comment about the above piece I quoted from your post. I very much think low cost index investing is a great idea. I would never say anything bad about it. However, I do want to point out one item about the 80% number. That means 20% of actively managed funds beat the index after all is said and done. 20% is an ENORMOUS amount of funds to choose from. It can be literally thousands to choose from.
As much as I like index funds, 95% of my investing which got me to early retirement was always in actively managed funds that I research and chose and then monitored to make sure they beat the index they were matched against. The only time I went into index funds was when I was stuck in a 401k with choices that were worse than the index funds offered (which is actually pretty easy to have happen in a limited 401k).
In an IRA type of investment vehicle where you have every fund in the world to choose from, you may benefit from looking at better funds than just index funds. They take a bit more care and effort but you can squeeze a bit more return out of them as well over the long haul.
If you are a "set it and forget it" type of investor, low cost index funds are pretty much the way to go. You will still need to monitor them to make sure your AA is correct for your goals but in general they will drive themselves.
NewlyRetired
Footballguy
The reason companies still make money on these even though they are low cost is that they take very little money for the company to manage. It might be low revenue but it is also low expense to the company. Where as an actively managed fund not only has a manager but an army of analysts working for it and that time and effort has to be reflected in the cost of the fund.Morningstar is a great place to learn about funds. Go there and you will be able to see which companies offer which type of index funds.
No. 16
Footballguy
Thanks. So where do I find info on these great actively managed funds? I can google it, but like I said earlier there's so much crap out there it's overwhelming.
Sarnoff
Footballguy
Interesting you bump this thread the same day the "Lazy Portfolio" thread comes up. You might want to read through some of the lazy portfolio pages on marketwatch. You can get index funds at low-cost places like Vanguard that don't focus on the US economy, and use those to hedge. They have several international index funds, some "whole world" (international + US markets), and you can invest in low-cost index funds of foreign currencies as well. If you pick a good mix of small & mid cap growth funds & large cap value funds, spread worldwide, you'll have the same upside with less exposure to risk if the US economy goes turtle.
Chadstroma
Footballguy
I have not read this specifically but other books with the similar position. The past does not predict the future but it does help to point out trends. The problem with a single stock is that trends are extremely flimsy (meaning, a company that has been trending well for a long time can have a catastrophic failure in a short time- think Enron or WaMu) but with an index fund, what you are doing is investing in a large number of companies- the trend is that economies will grow and as they do, companies will as well. This seems to be a truth in modern economics that despite times like the Great Depression or even now (the Great Recession), in the long run, economies will grow. This is even more true as the world becomes flat and economies and companies are more globalized, so as to decrease the geographic risk in a particular group of companies from a particular country. The real important part of this is that companies are complex and increasingly so. Whole teams of individuals with advances degrees in business, finance, economics, math, etc have a hard time consistently beating the broader market returns. And as they try to, they incur costs that must be paid for (their salaries, rent of their buildings, transaction costs of buying and selling stocks, etc) and you end up paying for it. With a low cost fund, all of those costs are minimized and you get the general return of the 'market'. Or in other words, you don't start off in as deep as a hole to dig out of (costs of the fund), so you end up getting more elevation down the road in general (ROI). As far as how they make money... think of it like this, you have your Saks Fifth Avenue stores and you have your Wal-Mart stores. They do basically the same thing (retail sales) but they operate very differently and offer somewhat different products. But just because you end up paying a lot more at Saks does not mean Wal-Mart is not making money. They are just doing it with lower margins and higher business volume. I would not have any recommendations as to what to get that would counter this argument but it may be good to pick up Investing for Dummies (will give you a broad framework of investing and understanding of all that is out there as far as options) or The Smartest Investment Book You Will Ever Read by Solin (I think that is his last name?) which gives the same advice as apparently Boglehead does~ perhaps hearing it from a different source and/or potential perspective may help you feel more comfortable?
NewlyRetired
Footballguy
go to morningstar. It is arguably one of the best places online to research funds.
No. 16
Footballguy
Hey everyone.
My situation remains the same: working 8-10 days per pay period on call with no benefits, still living at home, no debt, and the paying my credit card off every month. However, I just finally broke 10k in my savings account after putting away $500 every pay period. I was wondering if there any suggestions of what to do with this money aside from letting it sit in my savings account. As of right now this is all the money I have (and about 1 month pay in my checking after paying all my November bills) so I would need to be able to access this in case of emergency though my job is fairly stable.
I was thinking of doing a cash deposit ladder, but don't really know where to start looking for the best rates. I don't think I have enough savings to start an IRA, etc.
Also, my girlfriend and I are looking at moving into together (she makes more than I do). We'd like to eventually get a house but need to save more for a down payment out here in CA.
So is 10k enough to start doing other things with my money or should I just continue building the reserves first?
My situation remains the same: working 8-10 days per pay period on call with no benefits, still living at home, no debt, and the paying my credit card off every month. However, I just finally broke 10k in my savings account after putting away $500 every pay period. I was wondering if there any suggestions of what to do with this money aside from letting it sit in my savings account. As of right now this is all the money I have (and about 1 month pay in my checking after paying all my November bills) so I would need to be able to access this in case of emergency though my job is fairly stable.
I was thinking of doing a cash deposit ladder, but don't really know where to start looking for the best rates. I don't think I have enough savings to start an IRA, etc.
Also, my girlfriend and I are looking at moving into together (she makes more than I do). We'd like to eventually get a house but need to save more for a down payment out here in CA.
So is 10k enough to start doing other things with my money or should I just continue building the reserves first?
Chadstroma
Footballguy
What are your monthly expenses now and likely what will it be if you moved in with the gf?
No. 16
Footballguy
I would say about 2k each month is what I have been tracking. However, most of it is discretionary spending (we eat out a lot) and could easily be funneled to covering expenses if we got a place together. The only bills I have are car and health insurance, cell phone, gas, and rent.
Dentist
***Official FBG Dentist***
Capital One Savings Account - 1% interest. If you don't have much risk that's safe and better than the 0.1% you'll get at a bank savings account.If you had a little more risk tolerance I might suggest a municipal bond fund (depending on your state)I don't think i'd get into equities right now though.
No. 16
Footballguy
I love to gamble. Please explain, though I live in CA so not sure if that's a good thing regarding municipal bonds.
Dentist
***Official FBG Dentist***
hmm... check american express or discover then.. i guess they've lowered it... I bought it through costco and am still getting 1.0% + the 10% quarterly bonus
Dentist
***Official FBG Dentist***
well unless you know about how to buy individual bonds (i don't and i'm guessing you don't) it's not a bad idea to look into a bond fund for your state.
The income on this fund will be tax free, but the price of the shares can rise and fall.
this company (and its a good one) has 17 california municipal bond funds... check them out:
http://www.nuveen.com/CEF/DailyPricing.aspx?refsrc=1
i-shares has a fund for it:
http://us.ishares.com/product_info/fund/overview/CMF.htm
With a Closed End Fund or an ETF at least you'll be able to buy and sell with minimal transaction fees and they should be relatively liquid.
I own the nuveen Missouri fund.
No. 16
Footballguy
Thanks. Checked costco and it's at .91%.
Dentist
***Official FBG Dentist***
good luck.you'd do well for yourself to at least research those cali muni funds though.... if not for now, at least in the interest of knowing what they are about for the future.
Chadstroma
Footballguy
Ok, what are your essential expenses? The car, insurance, rent, etc.'No. 16 said:
No. 16
Footballguy
Car insurance = $75Health insurance = $125Rent = $500 (living at home)Gas = $200Phone bill = $80Total = $980/month
Chadstroma
Footballguy
Ok, so 6 months = call it $6K. If you are very confident in income stability that is a good cushion. With unemployment benefits, that should be plenty to keep you well enough afloat. In these times I am more apt to play conservative with your money. You can start a ladder at 6 month intervals. A couple of options I would consider in your position:1) Take your current savings and get a better rate return than what you got (I have mine at Alliant CU getting 1.25% APY) then set up 4 CD's at 6, 12, 18 and 24 months. When the first matures then put it in a longer term CD but at that point you will have enough to add to the ladder as well, so 24 and 30 month CD's. Rinse and repeat. And in the meantime, you will have more than you need for the CD ladder and I would start an investment account at Fidelty. And you have enough to start an IRA and I would do that. At this point a ROTH would be best for you. You can do that thru Fidelty (or one of the others as well). 2) Same with the savings. Set up just two CD's with the larger amounts and build your savings in a year to add to the ladder. Same everything else. 3) Extend the ladder intervals to 12 months. Same everything else. 4) Go a little more aggressive and skip the CD ladders. Take the full $4K and open the investment account, start investment account etc. I would lean towards the ladder right now. The job situation is one thing but also the ladder is a good way to keep you building your savings and easier to build off of towards a future down on your first home etc. The money going into an investment account really needs to be seen as 'once it goes in- I wont touch it for years and years and years' mentality.
No. 16
Footballguy
Awesome. Will definitely look into these options. Thanks a million.Always looking for more input.
Dentist
***Official FBG Dentist***
This is the stuff i'm talking about - this scares me. I think this is going to be MAJOR headline stuff over the next 10 years. Are we as a nation going to turn a blind eye to the elderly and let them "retire" in poverty? Are the young going to have no sympathy for them since they really need them to quit working to have jobs?
Are they going to get bailed out with taxes on young people's 401ks? I mean there are plenty of sad stories, but a lot of these people are going to be broke towards retirement years mainly due to living in excess, bad choices, and too high of a standard of living. Is American just going to look past all that and bail them anyway?
this is a bad situation. The idea of retirement in the sense that it was golden years of travel, golf, and leisure is going to be totally gone soon. the idea that was around for centuries before that of working until death seems more likely. But will society allow that?
http://finance.yahoo.com/focus-retirement/article/113751/retirement-crisis-closes-baby-boomers-reuters;_ylt=AjYhTG4y_c2QKwyQ1h3.7jG7YWsA;_ylu=X3oDMTE1dnQ0aTB2BHBvcwMzBHNlYwNmaWRlbGl0eUZQBHNsawNyZXRpcmVtZW50Y3I-?mod=fidelity-readytoretire&cat=fidelity_2010_getting_ready_to_retire
Like many middle-class American baby boomers, Linda Carmona-Sanchez is anxious about slipping into poverty and says whatever dreams she once had about retirement in her "golden years" have turned into nightmares.
"We don't value people here in this country, and we value you less if you're not healthy and strong," Carmona-Sanchez, 55, said.
"To me it would almost be a welcome blessing to know that I would die rather than to be old and have to live in poverty," she said.
Her anxiety is widespread. In a recent Gallup poll, 66 percent of Americans ranked not having enough money for retirement as their top financial concern. That was up from 53 percent a decade ago and raised a red flag for U.S. policymakers concerned about distress and downward mobility in the middle class.
As the first members of the post World War Two baby boom generation turned 65 this year, the United States stood on the doorstep of what many experts see as a looming retirement crisis.
It is a crisis that has many implications — whether for U.S. consumer spending, for younger workers as baby boomers stay in the workforce, or for further strains on the federal government's already ugly budget picture as the elderly seek more welfare. For some companies, such as home builders, prospects of a surge in business from retiring baby boomers may also dim.
"Florida has always counted on a big chunk of the baby boomers retiring down here and buying property over the next 20 years," said Jack McCabe, a veteran Florida-based real estate analyst.
"We're not going to see this big influx of full-time senior citizen residents," McCabe said. "Home builders may need to re-analyze what they see as demand over the next five to 10 years."
Baby boomers are members of the first generation since the 1930s who will be worse off in their older years than their parents, says Teresa Ghilarducci, a retirement specialist and economics professor at the New School of Social Research in New York.
"According to our projections, it looks like most middle-class workers, not just low-income workers but most middle-class workers, will be living at or near the poverty level in their old age," Ghilarducci said in an interview.
"This is the first time since the Great Depression we are looking at poverty rates increasing among the elderly."
The Occupy Wall Street movement, and street protests staged by mostly younger people in major cities across the United States have grabbed the media spotlight in recent weeks.
But income inequality, bank bailouts and bad markets are issues resonating throughout the gated communities of traditional retirement havens like Florida as well.
Older Americans, a powerful voting bloc in the 2012 presidential election, are keenly aware of the economic downturn that has left growing numbers living in poverty.
Carmona-Sanchez runs a Miami-based non-profit dedicated to improving the early care and education of pre-school children.
She has traveled the world and once considered herself solidly upper middle class. But she has no pension or retirement savings plan, and soaring medical costs stemming from the prolonged care of a chronically disabled daughter have left her struggling financially as she hurtles toward what once might have been a comfortable retirement.
"No Savings... No Retirement"
Carmona-Sanchez's ex-husband helps shoulder some of her daughter's medical expenses. But even on an annual income of $50,000 from the American Federation of Teachers, she says she barely manages to make ends meet.
"I'm lucky if I have $25 in the bank at the end of the month," she said. "There's no savings, there's no retirement, there's nothing."
Carmona-Sanchez lives in a sprawling suburban tract, just off the Florida Turnpike, with the small but tidy cookie-cutter homes divided by well-manicured lawns long favored by America's retirees. She is now fighting to refinance her mortgage so she can keep her house while she continues working.
"It's not in my contract," Carmona-Sanchez said when asked about what she now sees as the untenable goal of retirement.
Older workers are postponing retirement plans, or giving up on them completely in mushrooming numbers, because of fears they will outlive their saved money.
"I'm going to have to work until I die," said Linda Crosnoe, 63, an Orlando-area bookkeeper who recalls her parents retiring in their 50s and living comfortably in retirement for 30 more years.
"It's a conglomeration of stuff that went down over the years," Crosnoe said of the difference between her parents' generation and her own. "It never got better for the little people," she said.
There are multiple reasons for reversals in gains in fighting elderly poverty, including the impact of the financial crisis on stock prices and interest rates, the end of many traditional defined-benefit pension plans which provided people with a guarantee of retirement income, and the bursting of the U.S. housing bubble. But the trend is in line with statistics showing that median household income fell last year to levels not seen since 1996.
Huge numbers of older Americans are likely to fall below the official poverty line in the coming years, said Jack VanDerhei, research director of the Employee Benefit Research Institute (EBRI).
The last of America's 79 million baby boomers, who get their name from a surge in the U.S. birthrate in the years after World War Two, turns 65 by 2030.
"The statistics are certainly worthy of the term crisis, there's no doubt about it," VanDerhei said.
Clinging to Jobs
EBRI, a Washington-based nonprofit that studies benefit plans for U.S. workers, says confidence about being able to reach a comfortable retirement has reached the lowest level in more than 20 years in a survey it conducts.
That pessimism may be a healthy sign, since it means that Americans are losing a false sense of confidence and learning the virtues or savings and thrift. But it also means that people are working longer, because they cannot afford to leave the workforce and lose much needed paychecks and benefits.
Older Americans are already clinging to jobs at the highest rate since before Medicare - the federal health insurance plan for the elderly and disabled - was signed into law in 1965.
According to Labor Department statistics in an EBRI report, 31.5 percent of Americans aged 65-69 were still in the workforce in 2010, compared to 21 percent in 1990. Of those aged 70-74, 18 percent were still working in 2010, up from 11 percent in 1990. Labor Department (BLS) statistics also show that the workforce of people 65 and older nearly doubled in the last 20 years, rising to 6.7 million in 2010.
Still, many seniors leave the workforce earlier than planned because of health problems or layoffs. And critics say there are simply too many obstacles to building adequate savings for retirement.
"Rapidly rising healthcare costs are gobbling up everything," said Alicia Munnell, a veteran economist who heads the Center for Retirement Research at Boston College.
Munnell notes that only about half of the private sector U.S. workforce is covered by retirement savings plans. But even among workers who have retirement accounts, along with stocks or stock market mutual fund investments, there is little confidence about building retirement nest eggs.
Less than half of participants in a Wells Fargo/Gallup Investor Retirement Optimism Index survey earlier this year said they were confident about their ability to achieve a comfortable retirement or maintain their lifestyle without working in retirement.
Pensions and retirement investment portfolios took a major hit during the 2008 economic crisis.
Participants in the Wells Fargo/Gallup survey represented roughly the top third of Americans in terms of investable assets. The survey said the "lack of confidence concerning retirement among this more financially secure group of Americans does not bode well for those not as well off."
"Day-by-Day"
The "not as well-off" include people like Joe McElwee, a 67-year-old Miami resident and widower, who recently started collecting $1,261 a month in government Social Security payments to live on. Those payments put McElwee well above the official poverty line for a single person over the age of 65, which was an annual income of $10,458 in 2010.
But McElwee, who has been desperately looking for work since he was laid off by a condominium management company more than year ago, pays $850 a month in rent and utilities and $130 in monthly car insurance. His medical bills are covered by the Veterans Administration. But he says he has no real savings to cover food and other basic expenses and is behind on his rent.
"You kind of get by day by day," said McElwee, who still considers himself middle class and said he was once pretty well off. "It certainly isn't the way I thought it was going to be," he added, referring to his increasingly grim prospects for seeing out his days in Florida's sunshine.
Current average Social Security benefits for retirees are just under $14,200 a year and many lawmakers and deficit hawks are pushing to scale them back for future beneficiaries.
But Social Security has been the leading source of income for about two-thirds of U.S. retirees for decades, and trimming the program will only put more people at risk, as a growing number of companies freeze or eliminate pension plans.
AARP, formerly the American Association of Retired Persons and a powerful interest group for older Americans, recently launched a national advertising campaign urging members of Congress to protect current and future retirees from cuts to their Social Security and Medicare benefits.
"I'm not a number. I'm not a line item on a budget. And I'm definitely not a pushover. But I am a voter," says the AARP television ad script, seeking to drive home the point about the power of seniors in next year's election.
"It (Social Security) is sometimes characterized as so generous and it's not," Munnell said. "I think we should be very cautious about cutting back on Social Security."
John Bogle, the 82-year-old founder of Vanguard Group, a mutual fund powerhouse, called the U.S. retirement security system a "real mess," saying it was in need of deep-rooted reforms.
He also said the current average balance in Vanguard's 401(k) retirement savings plans was only about $26,000, and that rose to only about $60,000 for the median account of older people, far too little for anyone to build a retirement on.
"We have to have people save more, we have to have corporations pay more," Bogle said.
That savings message offers little solace to people like Margaret Davis. A 59-year-old Orlando-based Realtor, Davis says she has shelved plans to retire next year after losing 75 percent of her net worth in the economic crisis and Florida's housing bust.
A daughter of hard-working Cuban immigrants, who retired comfortably in south Florida, Davis is partly disabled and now plans on working for at least another 10 years.
Davis' $1,200 monthly health insurance premiums are covered through a home equity line of credit.
"I was the American dream. I worked 80-hour weeks as a single mom. I worked like a dog, very successful. I never felt entitled. I didn't do anything wrong. And my money's gone," Davis said.
"I'm devastated. I'm disgusted at how marginalized people are," she added, referring to what she described as the yawning gap between the very rich and everyone else.
"Whatever the American dream was, it's now out of reach for the middle class, and that's why people are scared and pissed off."
Copyrighted, Reuters Limited. All rights reserved. Republication or redistribution of Reuters content is expressly prohibited without the prior written consent of Reuters. Reuters shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.
Are they going to get bailed out with taxes on young people's 401ks? I mean there are plenty of sad stories, but a lot of these people are going to be broke towards retirement years mainly due to living in excess, bad choices, and too high of a standard of living. Is American just going to look past all that and bail them anyway?
this is a bad situation. The idea of retirement in the sense that it was golden years of travel, golf, and leisure is going to be totally gone soon. the idea that was around for centuries before that of working until death seems more likely. But will society allow that?
http://finance.yahoo.com/focus-retirement/article/113751/retirement-crisis-closes-baby-boomers-reuters;_ylt=AjYhTG4y_c2QKwyQ1h3.7jG7YWsA;_ylu=X3oDMTE1dnQ0aTB2BHBvcwMzBHNlYwNmaWRlbGl0eUZQBHNsawNyZXRpcmVtZW50Y3I-?mod=fidelity-readytoretire&cat=fidelity_2010_getting_ready_to_retire
Like many middle-class American baby boomers, Linda Carmona-Sanchez is anxious about slipping into poverty and says whatever dreams she once had about retirement in her "golden years" have turned into nightmares.
"We don't value people here in this country, and we value you less if you're not healthy and strong," Carmona-Sanchez, 55, said.
"To me it would almost be a welcome blessing to know that I would die rather than to be old and have to live in poverty," she said.
Her anxiety is widespread. In a recent Gallup poll, 66 percent of Americans ranked not having enough money for retirement as their top financial concern. That was up from 53 percent a decade ago and raised a red flag for U.S. policymakers concerned about distress and downward mobility in the middle class.
As the first members of the post World War Two baby boom generation turned 65 this year, the United States stood on the doorstep of what many experts see as a looming retirement crisis.
It is a crisis that has many implications — whether for U.S. consumer spending, for younger workers as baby boomers stay in the workforce, or for further strains on the federal government's already ugly budget picture as the elderly seek more welfare. For some companies, such as home builders, prospects of a surge in business from retiring baby boomers may also dim.
"Florida has always counted on a big chunk of the baby boomers retiring down here and buying property over the next 20 years," said Jack McCabe, a veteran Florida-based real estate analyst.
"We're not going to see this big influx of full-time senior citizen residents," McCabe said. "Home builders may need to re-analyze what they see as demand over the next five to 10 years."
Baby boomers are members of the first generation since the 1930s who will be worse off in their older years than their parents, says Teresa Ghilarducci, a retirement specialist and economics professor at the New School of Social Research in New York.
"According to our projections, it looks like most middle-class workers, not just low-income workers but most middle-class workers, will be living at or near the poverty level in their old age," Ghilarducci said in an interview.
"This is the first time since the Great Depression we are looking at poverty rates increasing among the elderly."
The Occupy Wall Street movement, and street protests staged by mostly younger people in major cities across the United States have grabbed the media spotlight in recent weeks.
But income inequality, bank bailouts and bad markets are issues resonating throughout the gated communities of traditional retirement havens like Florida as well.
Older Americans, a powerful voting bloc in the 2012 presidential election, are keenly aware of the economic downturn that has left growing numbers living in poverty.
Carmona-Sanchez runs a Miami-based non-profit dedicated to improving the early care and education of pre-school children.
She has traveled the world and once considered herself solidly upper middle class. But she has no pension or retirement savings plan, and soaring medical costs stemming from the prolonged care of a chronically disabled daughter have left her struggling financially as she hurtles toward what once might have been a comfortable retirement.
"No Savings... No Retirement"
Carmona-Sanchez's ex-husband helps shoulder some of her daughter's medical expenses. But even on an annual income of $50,000 from the American Federation of Teachers, she says she barely manages to make ends meet.
"I'm lucky if I have $25 in the bank at the end of the month," she said. "There's no savings, there's no retirement, there's nothing."
Carmona-Sanchez lives in a sprawling suburban tract, just off the Florida Turnpike, with the small but tidy cookie-cutter homes divided by well-manicured lawns long favored by America's retirees. She is now fighting to refinance her mortgage so she can keep her house while she continues working.
"It's not in my contract," Carmona-Sanchez said when asked about what she now sees as the untenable goal of retirement.
Older workers are postponing retirement plans, or giving up on them completely in mushrooming numbers, because of fears they will outlive their saved money.
"I'm going to have to work until I die," said Linda Crosnoe, 63, an Orlando-area bookkeeper who recalls her parents retiring in their 50s and living comfortably in retirement for 30 more years.
"It's a conglomeration of stuff that went down over the years," Crosnoe said of the difference between her parents' generation and her own. "It never got better for the little people," she said.
There are multiple reasons for reversals in gains in fighting elderly poverty, including the impact of the financial crisis on stock prices and interest rates, the end of many traditional defined-benefit pension plans which provided people with a guarantee of retirement income, and the bursting of the U.S. housing bubble. But the trend is in line with statistics showing that median household income fell last year to levels not seen since 1996.
Huge numbers of older Americans are likely to fall below the official poverty line in the coming years, said Jack VanDerhei, research director of the Employee Benefit Research Institute (EBRI).
The last of America's 79 million baby boomers, who get their name from a surge in the U.S. birthrate in the years after World War Two, turns 65 by 2030.
"The statistics are certainly worthy of the term crisis, there's no doubt about it," VanDerhei said.
Clinging to Jobs
EBRI, a Washington-based nonprofit that studies benefit plans for U.S. workers, says confidence about being able to reach a comfortable retirement has reached the lowest level in more than 20 years in a survey it conducts.
That pessimism may be a healthy sign, since it means that Americans are losing a false sense of confidence and learning the virtues or savings and thrift. But it also means that people are working longer, because they cannot afford to leave the workforce and lose much needed paychecks and benefits.
Older Americans are already clinging to jobs at the highest rate since before Medicare - the federal health insurance plan for the elderly and disabled - was signed into law in 1965.
According to Labor Department statistics in an EBRI report, 31.5 percent of Americans aged 65-69 were still in the workforce in 2010, compared to 21 percent in 1990. Of those aged 70-74, 18 percent were still working in 2010, up from 11 percent in 1990. Labor Department (BLS) statistics also show that the workforce of people 65 and older nearly doubled in the last 20 years, rising to 6.7 million in 2010.
Still, many seniors leave the workforce earlier than planned because of health problems or layoffs. And critics say there are simply too many obstacles to building adequate savings for retirement.
"Rapidly rising healthcare costs are gobbling up everything," said Alicia Munnell, a veteran economist who heads the Center for Retirement Research at Boston College.
Munnell notes that only about half of the private sector U.S. workforce is covered by retirement savings plans. But even among workers who have retirement accounts, along with stocks or stock market mutual fund investments, there is little confidence about building retirement nest eggs.
Less than half of participants in a Wells Fargo/Gallup Investor Retirement Optimism Index survey earlier this year said they were confident about their ability to achieve a comfortable retirement or maintain their lifestyle without working in retirement.
Pensions and retirement investment portfolios took a major hit during the 2008 economic crisis.
Participants in the Wells Fargo/Gallup survey represented roughly the top third of Americans in terms of investable assets. The survey said the "lack of confidence concerning retirement among this more financially secure group of Americans does not bode well for those not as well off."
"Day-by-Day"
The "not as well-off" include people like Joe McElwee, a 67-year-old Miami resident and widower, who recently started collecting $1,261 a month in government Social Security payments to live on. Those payments put McElwee well above the official poverty line for a single person over the age of 65, which was an annual income of $10,458 in 2010.
But McElwee, who has been desperately looking for work since he was laid off by a condominium management company more than year ago, pays $850 a month in rent and utilities and $130 in monthly car insurance. His medical bills are covered by the Veterans Administration. But he says he has no real savings to cover food and other basic expenses and is behind on his rent.
"You kind of get by day by day," said McElwee, who still considers himself middle class and said he was once pretty well off. "It certainly isn't the way I thought it was going to be," he added, referring to his increasingly grim prospects for seeing out his days in Florida's sunshine.
Current average Social Security benefits for retirees are just under $14,200 a year and many lawmakers and deficit hawks are pushing to scale them back for future beneficiaries.
But Social Security has been the leading source of income for about two-thirds of U.S. retirees for decades, and trimming the program will only put more people at risk, as a growing number of companies freeze or eliminate pension plans.
AARP, formerly the American Association of Retired Persons and a powerful interest group for older Americans, recently launched a national advertising campaign urging members of Congress to protect current and future retirees from cuts to their Social Security and Medicare benefits.
"I'm not a number. I'm not a line item on a budget. And I'm definitely not a pushover. But I am a voter," says the AARP television ad script, seeking to drive home the point about the power of seniors in next year's election.
"It (Social Security) is sometimes characterized as so generous and it's not," Munnell said. "I think we should be very cautious about cutting back on Social Security."
John Bogle, the 82-year-old founder of Vanguard Group, a mutual fund powerhouse, called the U.S. retirement security system a "real mess," saying it was in need of deep-rooted reforms.
He also said the current average balance in Vanguard's 401(k) retirement savings plans was only about $26,000, and that rose to only about $60,000 for the median account of older people, far too little for anyone to build a retirement on.
"We have to have people save more, we have to have corporations pay more," Bogle said.
That savings message offers little solace to people like Margaret Davis. A 59-year-old Orlando-based Realtor, Davis says she has shelved plans to retire next year after losing 75 percent of her net worth in the economic crisis and Florida's housing bust.
A daughter of hard-working Cuban immigrants, who retired comfortably in south Florida, Davis is partly disabled and now plans on working for at least another 10 years.
Davis' $1,200 monthly health insurance premiums are covered through a home equity line of credit.
"I was the American dream. I worked 80-hour weeks as a single mom. I worked like a dog, very successful. I never felt entitled. I didn't do anything wrong. And my money's gone," Davis said.
"I'm devastated. I'm disgusted at how marginalized people are," she added, referring to what she described as the yawning gap between the very rich and everyone else.
"Whatever the American dream was, it's now out of reach for the middle class, and that's why people are scared and pissed off."
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scientist
Footballguy
Yep. Low cost index funds. And read that book! 1) Do not try to pick stocks, and don't pay someone else to pick stocks for you. It is not cost-efficient for normal people to do this (people who are not high net worth individuals or institutional investors).
2) I've reperformed empirical research that shows lower cost funds outperform higher cost funds controlling for cost. That means not only are you saving money on fees, you're returns are better. Historically, Vanguard has the cheapest funds available many of which also outperform the competition - they are like the Walmart of the investing world and I mean that in a good way. Personally, I think their S&P 500 index fund is the best way normal people should gain long-term exposure to the stock market. Don't worry about the economy right now - the companies that comprise the S&P 500 are going to continue converting assets into dividends over the next 30 years regardless of what happens in Greece over the next 12 months. For long-term investors, now is a time to buy low; you are getting those future cashflows at a discounted price right now. As for what percentage of your savings to put in the market (and by market I mean an S&P 500 index), that is up to your personal risk preference.
Just looking for some simple financial advice. I just graduated and currently the two goals I'm focused on are saving for a down payment on a house and paying off student loans. I'm looking to buy a house when my current lease runs out in approximately 7 months. After that I will focus more on paying off my student loans since they are locked in at a high rate. I've got about $10k that's just sitting in a savings account with a tiny interest rate. What investments should I be looking at in the short term?
Random
Footballguy
How high is the student loan rate?
If you need the money in 7 months, you can't afford to risk it in many investments (stock market, real estate, etc.) You're probaby best just leaving it in the savings account. You might want to search money market savings accounts and find one with the highest rate but you're still not looking at much of a return.
6.8% on most of the loans.
Dentist
***Official FBG Dentist***
I agree with this. I like ETFs a lot - vanguard has several of them, but other companies do as well like I-shares, SPDR, etc.
However, i'm not so sure that buy and hold and forget is going to be a viable model over the next 10-20 years just as it was a tough way to make money back in the 60's.
Get your exposure to stocks through low cost baskets like ETFs or even mutual funds (which i like a lot less due to your lack of instant liquidity) but I think if you don't get yourself involved in the market and do some active management that your returns are going to be paltry
Random
Footballguy
Honestly you may want to consider using the 10K (or most of it and most future savings) to pay this down. Thats a very high rate. Rent till its paid off.
Another thing too....is the $10K all of your savings?I wouldn't suggest throwing it all into a house. Make sure you have some sort of emergency fund set up in case of job loss or something else pretty bad.
Cliff Clavin
Footballguy
And all of the expenses that come in the first few months for a first time homeowner.
Dentist
***Official FBG Dentist***
This. I've never spent more money in my life than in the first 6 mo. of owning a house.Sometimes i regret owning a home
Not it's not all of my savings. I have another account for general savings and I add money to both accounts monthly. The reason why I have getting a house as a priority is because I'm in the Phoenix market and I can easily have a mortgage on a nice house for what I currently pay in rent.
Cliff Clavin
Footballguy
I'm about a year and half in and still haven't stopped buying crap I "need".
Dentist
***Official FBG Dentist***
never forget what an increase utilities, water, maintenance, upkeep, etc. Costs.
When i bought a house my rent and mortgage were similar, but my utilities, hassle, and upkeep costs went through the roof.
something is always breaking... yard needs mowed, watered.. furnace filters need changed, water heater needs drained, humidifier filter needs changed, windows need washed, deck needs stained, spray the weeds, pick up leaves, vacuum, change lights that burn out, garage door breaks.....
it's a gateway purchase fo sho... you will greatly underestimate the true costs
Wife keeps adding things to the need list as well. What I do for occasional sex.
Dentist
***Official FBG Dentist***
i wouldn't even bother with that amount. it'd be like playing the casino.Between the account fees you'd have for that low of a balance, plus the trading fees, plus the total lack of diversification you'd have with that amount, i just wouldn't do it.The rake would eat you alive.Unless you're taking casino shots at penny stocks or something you're not even close to the min. amount i'd have to even bother, which is about $5,000.. and that's a BARE BARE min amount.
Dentist
***Official FBG Dentist***
i'm believing in those more and more as time moves on.cooking and cleaning for yourself saves boatloads, as does yard labor.Now, I haven't grown very much, i haven't really done much clothes mending and i'm not big on hunting/fishing ( i do own fishing poles and have fished plenty, but not hunting)What does place with access to a self-sufficient life mean? somewhere with farmland as opposed to big city with no fishing, hunting/growing space?
Chadstroma
Footballguy
What is your income? How secure is your job? What are your expenses? Do you have any other debt? How much in student loans do you have? How much are the properties you are thinking about going for? How much is your student loan debt monthly payments?
Cliff Clavin
Footballguy
Its always something...
No. 16
Footballguy
Definitely a great read and a heartbreaking story, but how many of the elderly were truly financially smart with their money? Also, if I never have enough money to live in America when I retire, I'll just live somewhere in Latin America or the Philippines. Someplace where the exchange rate is good when you're spending US dollars.
