Approaching Retirement with little savings

If you are in your 60s with too little retirement savings, you aren’t alone. The median balance in defined contribution plans of those ages 55 to 67 is just $87,571, according to the Vanguard How America Saves Report.

Financial concerns are a fact of life for America’s retirees. In fact, an AARP survey found that 20% of adults ages 50+ have no retirement savings, and more than half (61%) are worried they will not have enough money to support them in retirement.

It’s not a comfortable financial position, as a $50,000 nest egg only allows you to withdraw around $2,000 in annual income, assuming you follow the 4% rule to set a safe withdrawal rate. With Social Security only replacing around 40% of pre-retirement income, $2,000 to spend each year from savings simply won’t cut it. You must find ways to boost your savings.

Be wary of quick money making schemes. Bernie Madoff’s Ponzi scheme, which ran for decades, defrauded thousands of investors out of tens of billions of dollars. Investors put their trust in Madoff because he created a front of respectability, his returns were high but not outlandish, and he claimed to use a legitimate strategy. In 2009 Madoff was sentenced to 150 years in prison.

My solution to this dilemma was a Reverse Mortgage on my house. It is an expensive choice but I can continue living in my house for the remainder of my life and Social Security pays my other bills.

Forget Multi-Level Marketing Businesses as a source of income. They are mostly Pyramid schemes. They can look remarkably like legitimate MLM business opportunities and often sell actual products, maybe even ones you’ve heard of. But if you become a distributor for a pyramid scheme, it can cost you and your recruits — often your family and friends — a lot of time and money that you won’t get back.

You Can Be Richer Too!

Stupid articles and papers telling us the obvious wastes our time. Businessweek featured such a totally wasteful piece discussing someone named Justin Wolfers, a University of Michigan professor, who wrote an article titled “Economists Nail It: You Can Never Be Too Rich.” Do I need someone to tell me that it is better to be rich than poor? Even the reporter, Peter Coy, who is a primary commentator/reporter for the magazine offered the obvious remark, That may seem to deserve a Homer Simpson “Duh!” award for most obvious research finding of the month. So why even post this report? The answer must be that he has space to fill.

This has been a great year to be just a little bit richer. If you were already rich you might have become a lot richer.

In just the four months of this year the Dow Jones Average increased by 14.3% and the S&P 500 increased by 13.2%. Understand that you did not have to be particularly smart to choose the right stocks to have earned that money. You simply had to buy an S&P 500 index account and your $1,000 would now be worth $1,132 today. If that investment had been $10,000 you could sell your gains now and have $1,320. Enough to buy that new giant TV or pay down a burdensome credit card.

So what’s the problem. “Your Money” reported that 55% of the people surveyed did not believe this has been a good time to invest.

So when is a good time?

You see article after article crying about the wealth gap between the rich and everyone else.

Sad to say it but the average man on the street is unwilling to take the chances that the rich take. Perhaps that is one of the reasons you may never be rich.

Some Investments are Appropriate

Why are you relying in savings account interest? Some banks are paying .05% APY on certificates of deposit. I saw an ad this morning trumpeting 0.9% APY. That is an unacceptable rate of return.

As we start the new year we are all looking at our savings and the earnings those savings provided. Commentaries on financial networks like CNBC and in the financial sections of newspapers all say that most of us have put our money in low interest earning savings accounts at banks. The reason is obvious. We fear losing those hard gained savings.

Businessweek December 24-Janauary 6 edition cover story Titled “Get Rich Slow” points out that at today’s bank interest rates it would take 1,387 years to double your money. Yes, the Federal Reserve is trying to encourage you to invest elsewhere. Honestly there are many investments that pay more than FDIC insured savings accounts. Some are just as safe as a savings account. My favorite is Ginnie Mae Bonds that are “providing a guaranty backed by the full faith and credit of the United States”. These bonds currently pay an interest rate of 2.68%. They have earned higher interest rates in past years. According to Morningstar, if you had invested $10,000 in January 2003 and had all interest re-invested in GNMA bonds, the current value would be $16,398.

There are other somewhat more risky investments but those risks are minimal. Consider Procter and Gamble the world’s largest consumer goods company, whose products like Tide detergent and Gillette razors are in 98 percent of U.S. households. Other products of theirs are Crest Toothpaste, Pantene Shampoo, Duracell, and Prilosec OTC. That is not the complete list that encompasses at least 32 items. The share price has varied over the decade but it has been a reliable dividend payer that now yields 3.19%. As one lady told me, “I do not care what the share price is as long as I receive my dividends”. She lives in an expensive independent living facility and draws her income to pay the bill from the dividends.

http://finance.yahoo.com/echarts?s=%5Egspc#symbol=^gspc;range=3m;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

The S&P 500 was at 1257.60 on January 1, 2012. Today the value is 1502.96. That is a 19.5% increase in value. There is no guarantee this growth will continue. Is this a bubble? Perhaps!

Can you afford to be a non-participant? If the market drops 10% just sell and you just might have more money than you do today.

Bank Savings are for Fools

I must be blunt. If you have most of your saving deposited in a bank or a credit union you are a fool. The interest you earn is most likely less than one percent (1%) a year. Your response is that the FDIC insurance guarantees the money’s safety. So while the S&P 500 has grown by well over 10% this year, you are sitting on the same amount of savings that you have had for the past two or three years.

OK, you aren’t comfortable with the stock market because it can easily go down in the next three months by 10% or more. There are alternatives.

The US government issues treasury bonds (notes) that are currently paying substantially more. Just yesterday this report, that appeared on Morningstar, from AllianceBernstein, lists their top holdings that include U.S. Treasury bonds paying as much as 8%. If the U.S. Treasury is not a reliable guarantor than neither is the FDIC.

OK you are still not satisfied. How about Vanguard GNMA fund? Again U.S.guaranteed bonds that are currently earning over 3%.

You don’t believe me. Check it out for yourself.