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It Can't Always Be Great--A Not So Good Article On Retiring Rich

Pretty much the same old stuff from this article about retiring rich--your expenses will stay about the same in retirement, inflation eats away at your money, Medicare doesn't cover all medical expenses, and so on.  But read it anyway, mainly for the last sentence.

Retire Rich: Learn From Someone Who Did

by Walter Updegrave/Money Magazine

When Henry "Bud" Hebeler was winding down his career at Boeing nearly 20 years ago, he was appalled at the advice he got from retirement planning software.

"The assumptions about returns, inflation, longevity and expenses were highly simplistic," says the 74-year-old Hebeler. With his engineering degrees from MIT and his experience - first as Boeing's chief forecaster and planner and later as president of Boeing Aerospace - Hebeler figured he could do better.

He has. His Web site, AnalyzeNow.com, is a compendium of advice and tools (mostly free) that can help you tackle topics ranging from how to create a retirement budget to whether to buy an annuity.

What distinguishes Hebeler from the typical retirement "expert" is that he combines a strong quantitative background with real-life retirement experience - his own and that of fellow retirees.

Hebeler took time out from his hectic schedule of skiing, golf, travel and running a site to share his thoughts.

Q. What's the most popular misconception about retirement planning?

A. That your spending will drop as you age and you become less active. My father played golf until he was 95. My wife and I are in our seventies and we ski the expert slopes at Park City, Utah.

My friends who have reduced their spending didn't do so because of lack of energy or physical ability. It doesn't take much effort to get into a taxi and go to the theater. They're cutting back because they know they're going to live longer than they thought they would. They spent too much too early and now they're worried about running out.

Q. So what can you do to assure that your money will last?

A. If you have enough savings to live on, consider delaying taking Social Security until full retirement age or even later. Holding off can be especially worthwhile if you have a spouse who didn't work or had a low income, since the higher payment you get by waiting can be passed on to your spouse when you die.

I also think retirees should consider putting some, but not all, of their money in an immediate annuity. Look at inflation-adjusted immediate annuities, since they provide a lifetime income that, like Social Security, goes up with inflation.

Q. How did your work at Boeing influence the advice you give?

A. It made me more conservative. In business you see how often things don't work out as you planned. Projects cost more to complete than you estimated.

The same is true of retirement, but retirement plans seldom call for setting aside reserves for unforeseen events. There are a lot of surprises, usually more bad ones than good.

Q. What kinds of surprises?

A. For one thing, your expenses are likely to be very different in retirement than during your career. Things that were probably covered by your company insurance - dental work, vision care, a variety of medical tests - typically aren't paid for by Medicare. My hearing aids alone cost $6,000, which wasn't covered at all.

People also don't anticipate the impact of inflation. In the first 10 years of my retirement, the purchasing power of my company pension declined by 30%. And then there are obligations people rarely plan for, such as having to help parents or adult children who are struggling financially.

Q. If you could advise people to do just one thing to improve their retirement prospects, what would it be?

A. People who aren't retired need to know how much to save. My father used to tell me that you should always save at least 10% of your income.

That's more like 15% to 20% today because you're less likely to have a pension.

Writing Off 2008 Already

The new year has a rough start.  Will it continue?  Who knows but historically the beginning of the new year has little impact on what happens for the rest of the year as shown in the following article from Marketminder.com.

January Ineffect
1/7/2008

Story notes:

• January’s rough start has many investors invoking the old saying, “So goes January, goes the year.
• Statistically, this belief isn’t supported. History shows negative starts can be followed by positive years and vice versa.
• Market volatility is normal, no matter when it happens, and doesn’t mean a prolonged downturn is at hand.

_________________________________________________________________________

January has commenced with gray weather, record snows, fierce storms, already broken New Year’s resolutions (stupid leftover pumpkin pie), and the usual post-holiday gloom—not to mention a continuance of December’s volatility. Most major market indexes are negative so far this year, leading many investors to invoke the old saw “so goes January, goes the year.” Already, we’re seeing stories highlighting the long and widely held belief that a rough start to January portends trouble ahead.

The Stress Is Just Beginning
By Tomoeh Murakami Tse, Washington Post
http://www.washingtonpost.com/wp-dyn/content/article/2008/01/05/AR2008010500149.html 

This article states, “If the first three trading days of the year are any indication, 2008 is bound to test the nerves of even the most poised investors.” Fair enough—volatility always “tests nerves.” Except the first three trading days are never an indication of what’s ahead. Not ever. Three days of any month, no matter the calendrical significance, tell you nothing. Investors wouldn’t make a stock forecast based on the Ides of March—there’s nothing about any one day or group of days’ returns that tells you anything about what to expect looking forward.

Statistically, this is easy to disprove by checking historical data to see what happened each January and the annual results. Throughout history, negative starts to January have been followed by all sorts of combinations of positive and negative returns. Positive start, negative January, positive year. Negative start, positive January, negative year. On and on. Looking at the six worst first 10 days for the S&P 500, you see US stocks ended positively four of those times—one year up a big 42%! Another up 26%! What does that tell you? Nothing—beyond stocks are positive more than negative. And the third best start ever ended the year down 15%. Not so great.

Fundamentally, this makes even less sense. What do a few days in January tell us about investor demand for securities? Markets don’t obey a calendar. There’s nothing magical about January’s start suggesting markets must suddenly begin “behaving” themselves. Markets are volatile. They can be volatile in January, July, on Tuesday, the day after the Fourth of July—pretty much any time. Markets don’t have neat steps-and-stairs increases, and if they did, you wouldn’t be happy with the return you got. If you want that kind of steady appreciation, you’re going to have to be satisfied with what you can get by buying US Treasuries and holding them to maturity (i.e., not much).

We call the market “The Great Humiliator” (TGH for short) around here for a reason. Its sole purpose is to humiliate as many people as it can for as long as it can for as much money as it can. Scaring investors out of superior long-term returns with a bumpy start to the year is one way the market robs otherwise rational people of their senses.

We remain confident the world is altogether too dour. Don’t let TGH humiliate you out of the market with a bumpy start to the year—that’s just what that filthy trickster wants

How Much Is Enough To Retire? Finally Some Reasonable Answers

When I see something I like, I steal it.  Or at least borrow it.  The financial world is full of worthless calculators.  Here is something by Jon Clements of the Wall Street Journal that makes sense.

It's halftime. What's the score?

Today, I turn 45. (Don't feel bad; only my mother ever remembers.) By my reckoning, that puts me halfway through my working career and hence halfway to retirement.

How big a nest egg should a 45-year-old have? Here's a look at who faces a midlife financial crisis -- and who might be able to retire early.

Taking stock. Start with the accompanying table, which shows what percentage of pre-tax income you need to sock away over the next two decades, depending on how much you currently have saved.

Suppose you have a $240,000 portfolio, equal to three times your $80,000 annual income. To retire in comfort, you ought to save a manageable 12% of income every year for the next 20 years, calculates Charles Farrell, a financial adviser with Denver's Northstar Investment Advisors.

That savings rate -- which would include any employer contribution to your 401(k) -- will give you a retirement stash equal to 12 times income at age 65, or $960,000 in today's dollars. If you then use a 5% initial annual withdrawal rate, your savings will kick off $48,000, or 60% of your old salary. Add in Social Security and you might be hauling in a respectable 80% of pre-retirement income.

All this assumes you can clock an after-inflation investment return of five percentage points a year during the next two decades. To hit that target, keep a healthy sum in stocks and a tight lid on investment costs. (If you don't have precisely 20 years to retirement and want a sense of whether you're on track, try the retirement planner at www.dinkytown.com.)

Quitting early. What if you have savings of four or even five times income? As you can see from the table, amassing enough for retirement should be a breeze. In fact, if you have savings of five times income today and you never saved another dime, you would hit 12 times income at age 63.

But if you have already amassed a hefty nest egg at 45, you're probably a diligent saver, and you might look to retire early. Let's say you salt away 20% a year.

At that rate, if your portfolio today is equal to four times income, you will hit 12 times income at age 59, Mr. Farrell calculates. Similarly, if you currently have five times income saved, you should be set by age 56.

True, that means retiring before you're eligible for Social Security. But if you are a diligent saver used to living on a small portion of your income, that shouldn't be a big sacrifice.

Catching up. On the other hand, maybe you haven't been so thrifty. As the table indicates, the annual savings rate required to amass 12 times income by age 65 is 20% if you currently have two times income saved -- and a whopping 27% if your nest egg today is merely equal to your annual income.

Can't do it? Instead, you could scale back your retirement goals, delay retirement or both. Suppose you have savings equal to twice your income. If you sock away 12% of income per year, you could retire at age 69 with 12 times income.

Alternatively, you could call it quits with 10 times income at age 66. Again, imagine you earn $80,000 a year. If you retire with 10 times income, or $800,000, and use a 5% withdrawal rate, you will have $40,000 a year from your portfolio, equal to 50% of your old salary.

Meanwhile, if you have a nest egg of just one times income and you can't see cranking up your savings rate to 20% or more, you will likely have to curtail your spending fairly sharply in retirement, unless you work well past 65. For instance, to retire with 10 times income, you would need to salt away 12% of your pretax income every year until age 71.

One warning: All of the above presumes your income rises at the inflation rate between now and retirement. What if your income rises much faster? Ironically, that could make it tougher to retire.

"Let's say you get a big raise at age 50," Mr. Farrell says. "It's probably not feasible to replicate that lifestyle in retirement. The majority of that money should probably be committed to additional savings." If you do that, your nest egg will grow faster, and you won't have to throttle back your spending quite so much when you retire.

Copyrighted, Dow Jones & Company

Oil At $100 A Barrel--Maybe Not So Bad This Time

I see no reason that oil is so expensive but it is.  And that is a fact, for now.  But, as screwed up as some people think the world is right now, it could be worse.  It could be the 1970's when the whole engine fell off the track.  Here is an article from the London Times that gives some insight as to why now is different.

Gerard Baker

It's human nature to imbue inert numbers with profound significance. We celebrate 18th birthdays and 25th anniversaries as though doing so might pause, even for a moment, the merciless ticking away of life's clock. We build buildings without 13th floors. In Asia they will go to extreme lengths to avoid any contact with the number 4. The Bible can be read like an extended number puzzle: twelve tribes, ten commandments, seven plagues, four horsemen.

In financial markets this tendency has fascinated economists. A certain number in an index or a price for a traded instrument is said to be “psychologically important”. It is believed that traders behave differently when they near or cross some round number - a $2 pound, 10,000 on the Dow Jones industrial average.

It seems implausible at first sight that hard-bitten capitalists would be victim to such unreason. Yet the idea that particular numbers matter persists in the minds of some people in the markets, which is enough to make it a kind of reality, I suppose. Sometimes, it seems, like an old horse that whinnies and retreats from some unseen spectral object, markets really do think a particular number might be haunted.

One of those magic numbers is $100 for a barrel of oil. On Wednesday, for the first time, contracts for future delivery on the New York Mercantile Exchange finally recorded that figure.

There seemed something especially ominous about hitting such an iconic number on the very first trading day of the new year - a year already invested with so much fear for the global economy. It was generally reported that, unless you happen to work for an oil company, this was a seriously bad number.

I beg to differ. There are good reasons not to fear $100 oil and even a case for mild celebration. That might not make much sense as you stand shivering this morning spending half a day's wages to fill up your petrol tank. And it might appear to sit oddly with our last experiment with rapidly rising oil prices - those halcyon economic days of the 1970s - but it's true.

The oil shock of the 1970s did help to bring the world that ugly pantomime horse called stagflation - stagnation with inflation. The quadrupling of prices in the 1970s to a price that, in inflation-adjusted terms, was just about the same as this week's was one of the primary factors behind the worst decade for the global economy since the Great Depression.

But while it's obviously true that today's higher oil prices represent both an inflationary risk and, at the same time, a recessionary one, as a kind of additional tax on our disposable income, there are lots of good reasons to think the effect this time should be much smaller than it was 30 years ago.

The first is that, back then, a sluggish global economy was hit hard by the deliberately restrictive policies of the oil-producing nations. It was, in the economist's jargon, a supply shock, as oil output was restrained by the producers from keeping pace with demand.

This time the principal reason for rising prices is less to do with supply than with demand. For all the talk of imminent global recession, 2007 was another bumper year. The continuing advance of China and emerging markets, solid growth in the US and a sprightly performance by those old laggards Europe and Japan meant that available oil production could not keep pace with demand. Now, of course, the rising price is the mechanism by which that demand will be restrained a little - but that is no reason to think a slump is on the cards.

The second big difference concerns the other end of the stagflation horse - inflation. A good reason for mild optimism today is simply that our policymakers have already lived through the experience of the 1970s and know what to do to avoid repeating it.

Back then, the oil shock came on top of a decade of steadily rising inflation, which nobody seemed to mind much. In the 1960s and early 1970s respectable economists thought there was a trade-off, that a bit more inflation was a price worth paying to keep growth going and unemployment down. So they “accommodated” the oil shock with easier monetary policy.

We learnt the hard way there is no such trade-off. If central banks accommodate higher oil prices with easier monetary policy, the almost immediate consequence will be rapid inflation, which will kill off growth.

Of course, today's economic climate poses threats. The continuing global credit crisis means that central banks might not be able to be as tough with rising inflation as they would like. But current easy monetary conditions are a temporary, emergency measure to tide us over this immediate crisis, not a permanent feature of the economic landscape.

The third good reason for suppressing our misery at $100 oil is that we are much less dependent on that baleful commodity than we were. Manufacturing - with a high energy-intensity - takes up barely half the share of our economies that it did in the 1960s. Thanks to improved production techniques and more efficient combustion engines, it has been estimated that today each unit of the West's economic output requires about a quarter of the energy input that it did 40 years ago.

Which leads us to the case for gentle euphoria at world record oil prices. A large part of the reason we are more energy efficient than we were 40 years ago is precisely because oil prices went so high in the 1970s, forcing us to use fuel more effectively.

Whether or not you believe that climate change is the world's biggest medium-term economic challenge and whether or not you believe that attempts to reduce our consumption of fossil fuels will make a bit of difference to it, you cannot seriously think that going on consuming oil at current rates is healthy.

Our continuing dependence on oil is wasteful, it messes up our environment, and it maintains our ruinous obligations to some of the most unpleasant regimes in the world - from Saudi Arabia to Venezuela via Russia and Iran.

If $100 doesn't wean us off the petroleum fix, perhaps we should start cheering for $200.