Perhaps I am preaching to the choir here but this crisis is far too real not to bring the subject up once again. If not for yourself, then maybe your children, or someone close to you that could be facing severe financial problems as they approach the retirement years. The crisis can be avoided of course and I wrote this article offering my opinions.
Don't Take My Word For It, Just Look At The Facts
According to this article, the savings of far too many folks of all ages is perilously low. Look at this chart:
34% have nothing, and 32% have less than 50k saved, and this is based on a survey of Baby Boomers, Generation X'ers, as well as Millennials.
If you want a dream retirement someday, you need to set aside money now. But many Americans aren't doing this. Not only do they lack the amount needed to retire comfortably, but a majority of Americans don't even have enough savings to cover basic retirement expenses for a year. That's what GOBankingRates found in its 2017 Retirement Savings survey.
Here are some charts that show the breakdown by age demographics:
This is perhaps the most troubling in my opinion:
An increasing percentage of baby boomers and seniors are nearing retirement age with no savings. The survey found that 29 percent of adults ages 55 and older said they have $0 saved in 2017, up from 28 percent in 2016. Among those who are saving for retirement, a significant portion doesn't have enough set aside for a comfortable retirement:
- Less than half of adults ages 55 and older have more than $50,000 saved.
- Only 22 percent of baby boomers ages 55-64 have $300,000 or more saved.
- About 1 in 3 (29%) seniors 65 and older have $0 saved for retirement.
One reason such a large percentage of boomers and seniors have little saved is because some are relying on pension payments. The Insured Retirement Institute found that one in four boomers expects to receive a pension in retirement. And nearly 60 percent expect Social Security to be a major source of income in retirement, according to IRI.
However, many boomers simply haven't taken the time to figure out how much money is needed to retire, said O'Connor. "They're not planning," he said.
The good news, though, is that a greater percentage of boomers have substantial retirement savings than other age groups. Fifteen percent of adults ages 55 and older said they have $100,000 to $299,000 saved. And, 25 percent have saved $300,000 or more.
I especially like this survey as to why folks are not saving or investing enough for retirement.
The most common reason survey respondents gave for not having any retirement savings is, "It is not a priority for me." About 40 percent selected this option, which suggests everyday expenses are likely taking priority over saving for the future.
"We're so focused on today," said Tom Zgainer, CEO of America's Best 401k, a workplace retirement plan provider. As a result, many people aren't thinking about how they'll be able to cover their expenses in the future when they stop working. "It's astounding that we're not thinking forward," he said.
The second most common response also shows a lack of foresight. Nearly 22 percent of respondents said they have no retirement savings because they raided their accounts for a financial emergency. It's not surprising, though, that so many had to tap their retirement funds to cover emergencies. Another GOBankingRates survey found that one-third of Americans have $0 in a savings account - which means they likely don't have cash saved for emergencies.
So How Are YOU Doing?
The following signs could mean you will be broke in retirement based up this report:
1. You Don't Have Enough Cash in Your Portfolio
If you have not set aside any funds for emergencies, regardless of your investments and savings, you won't be able to avoid tapping the core nest egg or selling stocks to pay for emergency issues!
2. Your Portfolio Is Overweight With Employer Stock
If you are fortunate to work for a company that offers shares of its stock as part of your compensation, make certain you have other stocks and enough diversity to offset a potential disaster with your employee stock.
3. Balances Are Growing on Your Credit Cards
Make sure you work hard to get rid of most of your debt before retiring, especially credit cards debt. Credit cards are fine, but only if you pay off the balance before being charges the outrageous interest rates.
4. The Majority of Your Net Worth Is Tied Up in the Home
Consider cashing out and downsizing, even if your mortgage is paid off. If you do not have an investment portfolio that pays you an income, how will you pay the bills if they are higher than your income?
5. You Forget About Inflation
Keep in mind that the value of today's dollar will be less tomorrow. If you do not have an investment strategy that keeps up with inflation, you could begin eating into your core investments at some point.
6. You Are Still Waiting for the Right Time to Invest
Time IN the market is far better than trying to TIME the markets. If you have not started some sort of investment plan for retirement, then you run the risk of going broke. As everyone here knows, I am a dividend income growth investor, and I will get to that a bit later.
7. You Load Up on Bond Funds
Having a percentage of bonds or bond funds is not a bad thing for any portfolio, but if that is all you have, then you could be facing problems, as noted by Charles C. Scott, president of Pelleton Capital Management in Scottsdale, Arizona:
"Picture a teeter-totter," he said. "On one end sits interest rates, and on the other end is principal value."
Since 1982, interest rates have gone down, so principal values have gone up, Scott said. "Interest rates are at or near historical lows, so when that reverses direction, values will go down."
The duration of a bond fund will have a big impact on how much rising interest rates will damage returns.
"A fund with a duration of 6.5 years will lose principal value of approximately 6.5 percent for every 1 percent increase in long term interest rates," Scott said. "It's just bond math. Know what will happen when interest rates go up and take appropriate steps."
Having a well rounded portfolio of equities and having a sound plan with it, will obviously lead you to greater financial freedom later in life.
8. You Take Distributions From a 401k Plan When Leaving an Employer
This could be a retirement killer in more ways than one:
- You will face a large tax bill which can be avoided by just rolling over the 401k into a self directed IRA, or into a new employers 401k plan.
- Having your hands on a bunch of cash makes that BMW look awfully sweet! You just might spend a chunk of the money even before you pay the taxes!
- Take out the money and it will almost feel as though you are starting over, and that could have a huge psychological affect on many folks.
Have An Investment Strategy And Stick To It
I know far too many folks who view investing as one big gamble. While there are always risks associated with any sort of investing, if you are trying to build a portfolio for retirement with "the next best thing stocks" or penny stocks you have heard about in some magazine or website or continuously jump on a momentum stock because everyone else is, you are just looking for trouble.
While it is true that some folks have become mega wealthy by chasing a pot of gold, most people will simply go broke and have a retirement that either might not exist, or one that is far from what you might envision.
The only reason I began the model portfolio, TARP, was to show how I invest, and hopefully share some strategies that could reduce risk and offer a more secure financial future. Dividend income investing, in the greatest companies on the planet can help regular people achieve a more comfortable lifestyle once they hang up their spikes!
The model portfolio now currently consists of the following stocks: Exxon (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), Procter & Gamble (NYSE:PG), Coca-Cola (NYSE:KO), Realty Income (NYSE:O), Main St. Capital (NYSE:MAIN), Microsoft (NASDAQ:MSFT), Con Edison (NYSE:ED), Altria (NYSE:MO), Ohio Valley Banc (NASDAQ:OVBC), Apollo Global Management (NYSE:APO), and Apple (NASDAQ:AAPL).
Here is the latest chart with the recent actions taken:
I am not suggesting that this should be YOUR portfolio because there are many top notch dividend paying companies that have paid and increased its dividend for 25 consecutive years, or longer. These are the 2017 Dividend Aristocrats, and any portfolio that has a majority of these stocks could help you reach financial security in retirement.
This portfolio is throwing off about $13,700 in dividend income right now, and that will raise an average couples annual income from social security from about $32,000 to $45,000. The average retired couple spends about $41-$43,000, so based on this model and average expenditures in retirement, the average retired couple is just making it over the average.
This is cutting it close especially when you figure in taxes owed, so the goal of this model is to continue growing the annual income with solid dividend paying (and increasing) companies, and of course to begin early and invest regularly for as long as you can to have an even greater nest egg to begin with!
Knowing your risk tolerance and time horizon might also indicate whether or not you can allocate some retirement funds into a growth stock, whether or not it pays a dividend. I selected Apple last week, but that company does pay a decent dividend, so I felt I was being conservative for this model.
The Bottom Line
There are different approaches towards building a retirement portfolio, and thousands of equities to choose from. If it works for you, then who is to say that it is not the right strategy. For my money however, the dividend growth investing strategy, with super elite stocks, minimizes my risk while getting to where I want to be.
If you spend less than you make, forever, you will be just fine with any strategy!
Not To Bore You, But ...
Knowledge is power, and many folks shy away from the investing world because that very world makes it more confusing each and every day in an effort to sell you something: stock picks, technical strategies, books, videos, subscriptions with "secret ideas," gadgets, and even snake oil.
My promise to you is that my work here will remain free to all of my followers, with the hope of giving to you some of the things that took years for me to learn myself. That being said, let me reach out to you with my usual ending:
**One final note: The only favor I ask is that you click the "Follow" button so I can grow my Seeking Alpha friendships. That is my personal blessing in doing this, and how I can offer my experiences to as many regular folks as possible, who might not otherwise receive it.
Disclosure: I am/we are long AAPL, APO, ED, JNJ, KO, MAIN, MO, MSFT, O, OVBC, PG, T, XOM.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The portfolio is for educational purposes only, and not an actual portfolio.