As I am sure many of you have read, according to a recent survey by Bankrate, roughly 36% of all Americans have exactly squat in retirement savings. While most articles on the subject look at those nearing retirement without any savings, I'll take a different tack:
Over a third of all Americans (36%) have not saved any money for retirement, according to a new Bankrate.com (NYSE: RATE) report. Sixty-nine percent of 18-29 year-olds haven't saved anything, along with 33% of 30-49 year-olds, 26% of 50-64 year-olds and 14% of people 65 and older.
I know all you guys have started investing and saving for retirement (probably in grade school for some of you) and I'm sure more than a couple of you have maxed out your contributions. However, a mere three in ten people under 30 have begun saving for retirement; a seemingly worrying number.
Going forward, how do you think this will affect you? Do the PWM guys see a potential flood of money coming in the next few decades as young people become more wealthy? Or, more pessimistic, do you see your taxes going up as more and more people fail to adequately prepare for increasingly long retirements?
that picture...
also I think the PWM industry will be cut in half by the time I die. not because of lack of desire for services, but because as the individual investor has gotten more savvy, low cost algos have cut out low value people, and I'd argue that about half (and that's probably generous) of the registered people in the world are low value and can be replaced by computers.
to the brokers who survive this time period, I do think that a massive amount of wealth can be created, as it is with the passing of any generation. to answer your question directly, I think that this will put an enormous amount of stress on the system to the point where we'll have to borrow as a nation to fund people's retirements and to pay it off we'll just inflate the problem away. that is of course unless we cut benefits meaningfully.
for whatever it's worth, I'm assuming $0 for my social security income. yes it's bullshit, but betting on that is like betting on getting a dividend from worldcom.
I'm betting on $0 for social security income as well. I'm maxing out my 401k at the beginning of the year. Once I have a rental property or two, I'll starting maxing out my IRA too.
I think your best bet is to buy real estate that you are going to live in. However, NYC has a very low cap rate, and many people move away after a few years, so young analysts in NYC should take my "buy your apartment" advice with a few more grains of salt.
If you think about it a home is a gigantic tax shelter. We all pay rent with after-tax income. Most of that income is from work, but some of it is from our taxable investments.
If you own a home, you substitute a rent payment for a mortgage, property taxes, and the maintenance of the property-- you take on your landlord's responsibilities. But now, the property tax you pay (subject to AMT), as well as your mortgage, is tax deductible (as a from-AGI deduction). And whatever rent you don't charge yourself has now become tax-free income.
401Ks are not a terrible place to stash money, but who knows where taxes are heading and whether the Feds will honor the tax structure on them and Roth IRAs. A home generates immediate income and is an inflation-resistant asset. Just don't go overboard.
I would not run your rental property through your IRA. You need to hold all property in your IRA at an arm's length. If you work on the property, live in the property, even set foot on the property, the IRS seems it a distribution, subjecting you to penalties.
Regardless, in most cases, I still think your first physical real estate investment should be the place you live in (held outside of a retirement account, of course), or maybe a parking spot if you are conservative and have a car. You have all of the advantages of a Roth IRA on the avoided rent, plus you get to take a property tax deduction and mortgage interest deduction on top of that. This is one of the only cases where you can deduct expenses against after-tax income or rent avoided.
Don't buy a home if you plan on moving in a few years. Don't buy a rental property that might become far away from you, either. (That's what REITs are for- and those are excellent investments for IRAs.
In regards to the 69% under 30 with zero savings, remember that pretty much every other industry does not pay as much as finance, and that most people are walking out of College with gigantic debts that they can barely afford to make minimum payments on, let alone actually putting money away.
Often overlooked at savings rates is the comparison to fundamental living costs. If you take those that are in lower socio-economic stratas, very often they can't really save without tangibly impacting their quality of life.
Put away $2000 on your 22nd birthday, $4000 on your 23rd birthday, $6000 on your 24th, ...., $48,000 on your 45th birthday, $50,000 on your 46th birthday (ie. increments of 2k up to 50k), and $50,000 every year from then on after until your 65 (all figures in real terms). Compound it at a conservative real return of 4% per annum and you have almost 3.5 million in real terms to retire with, which is pretty dam comfortable.
Saving is easy, and if your not starting in your twenties, you're wasting your time.
I have a better idea: everyone should be aiming to save 15-20% of their income per year, and planning on working until 70. If you can save 20%/year, you probably have a 90% chance of making it to age 70 with enough saved to retire. Some financial planners say 8-12% but they're assuming that the next 50 years will be as good as the last 50, which may not be the case. There's actually a lot of non-stationarity in the model and the most conservative thing to do is to assume returns will get a little bit worse over the next 50 years.
These savings threads become the biggest circle jerky. Build up a liquid account with 6 months to a year living expenses, get some aflak insurance, put your companies 401k match in the account and have little to no consumer debt.
I second what IP says about owning real estate. The tax advantages are nuts. Move into a reasonable city and buy a condo.
People should be living their lives at 20-30. Go on trips, do cool shit, invest in yourselves. Also, so many of these savings mantras are ridiculous and unreal for anyone outside of front office finance.
Most Americans don't have a lot because their home is their asset. They get a 30 year mortgage and raise a family. People are obsessed with building a massive investment portfolio.
The night of the Lehman bankruptcy is the exact opposite of what I'd call a fun story.
Everyone on this website should read this post from @"IlliniProgrammer". The key is COST-EFFECTIVE fun. I completely agree with this, and am still paying off credit card debt because I didn't practice this in my 20s. Seriously, it's way easier to have fun later in life and still be able to cover things that you may want to pay for (such as fully funding a 529 plan for your kids) if you pay attention to your spending and saving from your teens to 20s.
One thing that I've been curious about (I can't do it because I have a family and it doesn't make financial sense) is employer sponsored HSA accounts. Basically, many employers will set up an HSA for you and put, say, $2500 in it and you pay in the same or more out of direct withdrawals from your paycheck. Then, whatever you don't use, stays in the account and can be invested in the market. You have to keep it in there until you reach 65 (I think), and it can be used tax-free for medical expenses. My thoughts were that if someone young had one of these accounts, rarely went to the doctor and got the employer contribution plus theirs, they could use the account to build it up, then keep it for their medical expenses upon retirement (as it is intended) or cash it out with a penalty to use for their retirement. Yes, you would face a penalty (probably 15% and maybe a taxation fee based on what was initially contributed) but if you contributed a match of what your employer contributed, you start with a 100% ROI each year, then you are benefited to whatever your invested account returns... It seems like a great idea to use it as intended if you don't have massive healthcare costs (like me who has a wife and three kids) or as a supplement to your retirement savings. Anybody looked at this how I'm looking at it? Just wondering.
HSAs are a wonderful thing, if you use it for medical it's 100% tax free, if you don't need it it essentially turns into a traditional IRA at retirement (pay tax on distributions but no penalty, regardless of what it's for). if you have the option, max that baby out.
That's what I'm thinking... max it out in addition to an employer's contribution. More and more companies seem to move to this. Makes sense for the company, because people take more initiative and oversight of their costs and care. If used right, and only when medically necessary, I think that it will really be an amazing opportunity to decrease retirement costs. My only gripe is that I'm on my wife's insurance, because it is a better plan (we are both in management with different railroads, and the benefits are incredible). I tried to see if I could do the HSA with my work, and also be on my wife's plan, but they won't allow me to be on a PPO with my wife's company, and then have an HSA with mine.
I believe the max is around ~3K (individuals) or although I haven't seen an employer cover all of it. Average (based on I think UHC survey?) was $500 or $1000 and the rest was employee's responsibility. I do agree, the triple tax savings is huge and I wish I had this option earlier in my career when medical expenses were fairly low.
To manage rental assets in an IRA you need to make sure the IRA itself has an arms length reach from your other assets. I would argue that while the tax benefits are nice they aren't really worth the risk to other assets that comes from possible legal issues arising from tenants. I'd take loosing 100k in taxes over the life of the investment compared to the possibility of loosing all of your assets.
I have almost no money saved outside of a small amount sitting in an IRA and a small amount in investments, and haven't added to it in some time. About to go to b-school, then I have the fun task of paying off those loans. Then will probably buy a place, so will have a fun time paying that off. Exciting...
I thought it was scary but interesting! Yes I didn't know if the world was going to end. But I bought MLPs paying 14% distributions. I bought into the S&P at 7000. Because the company we both worked for went BK, there was this huge buying opportunity for young people and I might one day be 1/100th as rich as you.
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