Where to Invest?

A major challenge for us in retirement has been to find investments with a good, steady returns during this economic crisis. We have not found any in which to invest. Here is an overview of the options that are available:

CDs and bonds Two to three years ago, it was possible to find 5 year CDs and bonds paying 4-5%. Now 5 year CDs and bonds are in the 2-3% range. Since I expect interest rates to be higher in the future, we have not recently purchased any CDs with long maturities.

Stock market. The stock market return from January 1, 2000, to December 31, 2009, has been -1%. With the volatility of 2008-09, it's been difficult to expect "historic" returns of 7-8%. Also, there seemed to be a reasonable probability of another economic slump.

Real estate. Other than our home, which has declined versus the purchase price, we have not seriously considered investing in real estate. For us, a real estate investment is too illiquid and requires too much attention and effort to maintain.

Since none of the above options were very attractive to us over the past year, we've been selling stocks into the current rally, and keeping most of the proceeds in money market funds, which only pay 0.05 -0.1%.

However, my opinion of the stock market has changed in the past couple weeks. Based on the recent earnings reported, I believe that many companies have already recovered from the recession. For example, on July 13, 2010, Intel reported it's highest earnings ever for a quarter. Many other companies, such as Caterpillar, are reporting robust demand for their products.

While the market has not fully reflected the strength of earnings reports, we plan to put funds back into stocks over the next year, in anticipation of continued business recoveries. We'll add the funds in stages, about 10% at a time, in case pull backs occur. Hopefully, by mid 2011, the stock market will be experiencing another bull market :-)

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Links To Carnivals From July 20 to July 26, 2010

Here is the link to the Carnival in which My Wealth Builder participated from July 20 to 16, 2010:

Carnival of Financial Planning #151

For some interesting articles from the blogosphere, check out this Carnivals and give the host some recognition for his hard work.

For more on Ideas You Can Use, check back every Tuesday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Contrarian Optimism

Last week I put more funds back into the stock market, which I started doing in May, 2010. I believe the correction is over and that there will be a rally, which hopefully will last for several months. Here are the reasons for my optimism:

Good earnings reports. Overall, I think the earnings and forward guidance have been very positive, showing that businesses have started recovering from the recession. For example, Intel had its best quarter ever.

Analysts are still skeptical of a business recovery. Surprisingly, many analysts are still bearish, believing that an economic double dip is likely. I agree there are still a lot of risks, such as Europe, job creation and housing. However, bull markets typically climb a "wall of worry."

Individual investors are still on the sidelines. Many pulled out of the stock market and missed the run up from March 2009 by being in "safe" investments. Their return to stocks can help fuel a rally.

Midterm elections are soon. The expectation is the majority party will likely lose a significant number of seats. Such a results may encourage President Obama to govern more from the center.

Next week, I plan to continue increasing my percentage of investments in equities. Hopefully, by being a contrarian at this time, I will be able to participate in the beginning of the next rally.

For more on Reflections and Musings, check back every Saturday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Retirement Finances - What worked and what did not

Managing finances in retirement is a new experience that has been challenging given the economic crisis of the past few years. For now, we're able to stay in retirement, which I attribute to some actions we took. On the other hand, there are some actions that have not helped much. Here's my summary of what has worked and what didn't.

Here are the financial elements that worked for us:

Having zero debt. When we retired in October, 2007, our only debt was a mortgage. We did not have any credit card balance, car or other loan that required a regular monthly interest payment. In May, 2009, we paid off our mortgage, making us completely debt free. Having no debt has made it easier for us to reduce expenses during the economic recession.

Keeping short term funds in cash or equivalents. We had about 3-5 years of funds for living expenses in cash, CDs and bonds when the market started declining. This has provide us with the confidence to stay in retirement, even during the recession.

Initially having more funds than needed. When we retired, we had at least 25% more savings than needed to fund a successful retirement. I never expected to use that margin of safety. Unfortunately, the stock market decline has reduced our savings by 33%, which has made staying in retirement a bit more challenging.

Here are the financial elements that did not work for us:

Counting on average annual stock market returns. Our retirement income projects were based on 7% average annual returns. We didn't expect the negative -37% returns of 2008 to occur. Perhaps, we'll get back to 7% in the near future, but unfortunately some damage to our savings has already been done.

Working to increase probability of staying in retirement. While working has covered some living expenses and reduced our withdrawal rate, it's effect on retirement success is much less than those of investment returns. For example, part time work at best may cover 25-30% of our annual expenses. Our savings have fluctuated by 100%-300% of our annual expenses on a quarterly basis.

Going forward, our focus will be on managing our spending, maintaining a "no risk" 3-5 year living expenses fund, minimizing part time work, and increasing investment returns.

For more on Reaping the Rewards, check back every Friday for a new segment.

This is not financial or retirement advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

It Keeps Getting More Competitive

At a family gathering, my nephew complained that school is much harder today than it was in my generation's time. I've been thinking about his comment since it didn't seem the content of his subjects in school were any more difficult than mine.

In the past year, my experience have given me a better perspective on my nephew's comment. During that time, I've taught first graders in an after school program and tutored high school students for the ACT/SAT tests. I confirmed my belief that the curriculum is not any harder. However, more students are willing to put in the extra effort to do well in school, making it much more competitive and harder to do well.

For example, I remember learning how to read in kindergarten. Today, it seems a significant number of kindergartners already have some reading skills, due to pre-school or parental guidance. In high school, I was one of a few students who studied seriously. Now, it seems that rigorous studying is the norm for the high schools in my area.

I find the same situation exists for sports. When I played football for a state championship team, only a couple players did weight training or conditioning during the off season. My nephew trains year round for his football team, even though he hasn't been a starter yet. On his team, all the starters do year round conditioning and may even participate in independent football camps to sharpen their skills.

Needless to say, careers and work are also more competitive. Just about everybody is working extra hours or long days as part of their job. When I started, working long days or extra hours was a way to advance one's career, since only a few people did it.

So while I agree with my nephew that I did well school, sports and work with less effort, it's not because the content or problems were easier. It's primarily because of higher competitiveness, i.e. there are now more people putting in extra effort necessary to do well, which was also probably true between my parent's generation and my generation.

For more on Crossing Generations, check back every Thursday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Eliminate Recurring Expenses to Save Money

Reducing expenses has always been a tactic and strategy to improve one's financial situation. For us, a good approach to reducing expenses has been to focus on costs that occur on a monthly basis. Here are some examples:

Subscriptions and memberships. We've tried to eliminate products and services that have recurring monthly fee. For example, we do not subscribe to a local newspaper, cable/satellite TV, or a cell phone service. We have joined my company health club, but only pay for the months we actually use it. Also, I have a free subscription to The Wall Street Journal and Barron's through airline miles awards. Our only current recurring monthly subscription is our land line phone and Internet service.

Mortgage or rent. Our largest recurring payment used to be our mortgage, which was about 24% of our monthly expense. A little over a year into retirement, we paid off our mortgage and significantly reduced our monthly expense.

When I first started working, I rented an apartment for about 11% of my monthly salary. Keeping my rent cost low enabled me to begin saving part of my salary immediately.

Debt payments. After graduating from college, we've both had student loan debt, which created a regular monthly payment for 10 years. Fortunately, we've never carried a credit card balance that required a minimum monthly payment.

Additional car. Now that I've retired, we probably could become a one car family. That would eliminate the license, insurance and maintenance costs for a car. At this point, we still like the convenience of having two vehicles. We'll seriously consider going to single car if we should ever need to replace a vehicle.

Overall, I consider eliminating recurring payments an effective way to create a sustainable reduction in monthly expenses. The decision can be made one time, and is often easier to maintain than a expense reduction that may be reviewed on a monthly basis.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Links To Carnivals From July 12 to July 19, 2010

Here are links to the Carnivals in which My Wealth Builder participated from July 12 to 19, 2010:

Carnival of Financial Planning #150

The Bobo Carnival of Politics

Carnival of Financial Independence

For some interesting articles from the blogosphere, check out these Carnivals and give the hosts some recognition for their hard work.

For more on Ideas You Can Use, check back every Tuesday for a new segment.

This is not financial, or political advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Determining Failure Points for our Retirement Savings

Until now, we've been estimating retirement success based on probabilities of our savings lasting with a projected investment return of 7%, estimated living expenses at 14% above our current level and 4% average inflation. This analysis has shown that we have sufficient savings to last until our nineties, with a confidence limit of 86%.

Given the volatility of the stock market and the slow economic recovery, I am no longer confident that we will be able to achieve the assumptions used in the previous retirement savings analyses. Therefore, I've asked our financial advisor to help us identify specific points where our retirement savings will fail to meet our needs. Here's what our financial advisor will provide us when we meet in two weeks.

Minimum investment return. An analysis can be done to show the minimum investment return needed to fund our retirement into our nineties. In addition, a separate analysis will be done on my company stock and stock options to determine the returns needed.

Minimum funds needed by age. The analysis will also show the amount of savings needed at each age to ensure a success retirement. Since retiring in October, 2007, we've been using a 20X salary savings target, which was probably above the minimum needed. This analysis will give us a better understanding of what multiple to target for during each year of retirement.

Different income needs. Both the invest return and minimum funds required analysis will be done at three different annual income levels: 1) current annual spending; 2) 114% of current spending; and 3) our original retirement income target, which is 142% of current spending levels.

With this information, we will be able to better understand our capability to maintain our retirement. In addition, we will have identified specific minimums that need to be met to continue with our retirement.

I expect to have specific numbers for each area by early August, 2010.

For more on Strategies and Plans Ideas , check back every Monday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Reducing My Part Time Work

For the past 10 weeks, I've been working 40+ hours a week due to a temporary part time job for 30 hours a week that was supposed to last only six weeks. The job will end in the next few weeks as the work winds down. Since I've already met my original commitment for six weeks, I plan to finish early by making next week my last week.

I'm glad this temporary job is going to be over. In hindsight, taking on an additional 30 hours a week for a temporary job was a bit overzealous on my part. I thought the flexibility of working anytime 24/7 would make it feasible. However, working this job did end up cutting more into my personal time more than I would like.

Finally, taking the 30 hour per week job didn't reduce our withdrawal rate from savings by much. Our savings withdrawal rate is 3% and the 30 hour per week job only reduced it by 0.15%. Overall, it wasn't worth the time invested, since there were no employee perks associated with this job. However, I did get firsthand experience working a temporary government job and met some new people with whom I enjoyed working.

So I'm back to working 3 part time jobs for a total of 15-20 hours a week, which I feel is an appropriate balance for me. In the future, if I pick up a new part time job, I will drop an existing one.

For more on Reaping the Rewards, check back every Friday for a new segment.Photo

This is not financial advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Protecting Near Term Fund Needs

During this economic crisis, a key insight for me was the importance of keeping funds for near term expenses in non-volatile investments. Doing so avoids the discouragement from having a significant part of the funds eliminated by market fluctuations. This is a change from the past, when keeping near term funds in the stock market was a relatively good decision.

Since retiring, I have been defining near term as 3-5 years. While working, I probably would have considered near term as one year, since we would have more stability with a regular income.

Here are some examples of our near term fund needs we want to protect in retirement:

Living expenses such utilities, food, transportation, entertainment and insurance. These are relatively consistent year to year and we can plan for them on a 3-5 year basis. We have the amount for this period invested in money market funds and CDs.

Emergency fund. While this is never planned, we like to have a fixed amount available when needed. Since retiring, we have included our emergency fund as part of our 3-5 years of living expense funds.

Here are some short term fund needs we will want to protect for the future:

Car purchase. Although we are at least 5 years from a car purchase, we have that amount set aside in a separate account in mainly money market funds.

College tuition. The college account we have for our daughter is currently 100% invested in stocks since she is 13 years away from attending. When she is a sophomore in high school, we plan to convert the investments to money market funds and CDs. This would help us avoid the possibility of having college fund investments decline significantly, as they did in the past two years, when the tuition is due.

Although I don't expect to need one again, I would consider a home down payment as a near term expense that would be important to keep in non-volatile investments.

The non-volatile investment instruments I use are cash, money market and CD accounts. Although these are paying very low interest rates, I can be confident that the principal will be available when I need the money.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC