2. We are past the problems associated with the double digit inflation from the late 70s but inflation has not gone away. In the past 10 years the average annual inflation rate was just 2.5%. Compare that with 5.1% in the 1980s and a runaway 7.4% in the 1970s. Inflation is a part of our lives. Prices for the things that we buy rise a little or a lot, but they rarely go down. Because of inflation, each of your dollar’s purchasing power will be less each year. Even 2 percent inflation impacts retirees. A 2 percent increase in inflation each year will reduce the purchasing power by 40 percent after 25 years and 55 percent after 40 years. Some people say that 3 percent inflation is “mild” inflation. How mild is 3 percent? A 3 percent rate of inflation will cut the purchasing power of your income by one-third in just 11 years. Even at a conservative 3%, inflation will double your cost of living in 24 years, about the length of time people spend in retirement. Let’s bump that up one percent to 4 percent. With a 4 percent inflation rate, your cost of living will double in 18 years. With 4% inflation, if you need $40,000 a year now (2004), you will need $80,000 a year in 2022. Your retirement income will have to rise yearly just to keep you in the same place. So, how can you determine what your future buying power will be? First, estimate the annual income you will need to live on in retirement. Then, multiply that amount by 1 plus the rate of inflation. Let’s say that you feel that you will need $50,000 a year and the rate of inflation is 3 percent-----$50,000 x (1 +.03) = $51,500. You will need $51,500 to cover your expenses in your second year. Repeat the calculation, using your new total, for every year. The results may surprise you. For example, the effects of 10 years of inflation means you'll need $67,196 to meet those same expenses. Good planning for retirement means that you account for inflation. The worst thing that could happen to you is that you will overestimate the rate of inflation and you will then end up with more money than you will need. Now, wouldn’t that be an interesting problem to have!!! You can perform your own inflation calculations by visiting the U.S. Department of Labor’s website at www.bls.gov/inflation.htm and click on the “CPI Inflation Calculator.” If the game of Monopoly had kept up with inflation, you’d get $2,441 each time you passed GO, not just $200. But, you’d pay $428 each time you landed on Park Place. Parker Brothers. -2- Homework: For July, 2004: How Long Will You Live In Retirement? One of the exercises that we use in our “Planning – Saving – Investing For Retirement workshops is to have the participants tell the group how long they expect to live in retirement. Usually a couple of people will have the correct answer but the majority will not. What I would like to have you do right now is to write down how long you expect to live----I expect to live to ____years. Important exercise? You bet. Retirement planning should really begin with knowing the true cost of your retirement----how much will you spend. How much will it cost for each year of retirement and for how many years? The answer really comes after you consider three important considerations--- 1. How much money will you need or want to spend each year in retirement? 2. What size nest egg will be big enough to support your wants or needs? 3. What sources of income will you have? Pension, Social Security, Personal savings and investments, etc.? The way longevity has been increasing in the past few decades, it’s not uncommon to live to 85, 90 or even crack the century mark. How long will you live? Now that you have guessed – decided, take a look at the longevity table on page 6. No fair peeking until you fill in the blank section in the second paragraph. And, by the way, keep up with your weight loss and fitness programs. Good Luck!!! A Question To Ask Yourself: Is Fidelity Magellan A Good Investment Today? Fidelity Magellan is a large mutual fund---not as large as it used to be---but still large. At its peak, it became the world’s largest mutual fund. It had more than $100 billion in assets. Chances are that you own or may have owned the fund at one time. About one in every 10 households with money in mutual funds owned Magellan. In January, 2004, Magellan held the #4 spot with $67.7 million in assets. The #1 fund, Vanguard 500 Index fund had $96.1 billion---the #2 fund, Growth Fund of America: $70.7 billion---the #3 fund, Investment Company of America: $67.9 billion. Magellan started doing business in 1963. In its glory days, it was managed by Peter Lynch, a legendary investor who managed to deliver annual returns of 29% a year for 13 years. Lynch left Fidelity in 1990. Over the past 10 years, Magellan’s annualized return is 9.1% (2/2004). Money magazine (April 2004) states that since Lynch left, Magellan has been riding on its reputation while producing lackluster results. “On the basis of its 10 year return, Magellan ranks 14th among the 15 U.S. equity funds with assets of $20 billion or more.”
3. It is information like this that is causing some investors to ask---“Why own Magellan.” And they are voting with their feet. CBS MarketWatch reporter Kathie O’Donnell reports that Magellan “had only two months of net cash inflows from investors in nearly two-and-half-years and has leaked $2.7 billion in 2004 through April (May 19, 2004). Bloomberg reports that profits at Fidelity rose 12.3% last year to $907.5 million. A good part of those profits come from Magellan. In his column for the Dallas Morning News (2/17/2004), columnist Scott Burns states “Magellan is generating about $516 million in annual fees for Fidelity.” Burns state that The Vanguard Index fund “is generating ‘only’ $129 million in annual fees for Vanguard.” He adds that “The annual difference, nearly $400 million, isn’t going into shareholder pockets. It’s going into management pockets.” Writing in Fool.com (6/15/2004), Shannon Zimmerman states, “I just don’t think investors should pay a premium to invest in a fund that tracks the S&P 500 as closely as this one does. Why pay 0.70% of your assets each year for Magellan, after all, when Vanguard 500 Index can be yours for just 0.18% each year?” Burns adds that he does not want to beat up on Fidelity but Magellan is suffering from “Severe underperformance.” “According to the year-end figures from Morningstar, Magellan trailed the S&P 500 index over the preceding one-year, three-year, five-year and 10-year periods. You have to go back a full 15-year investing period before Magellan beats the index.” Boston Globe and CBS MarketWatch.com columnist Chuck Jaffe (March 21, 2004) states that Magellan is “a bit like a grand old restaurant that’s past its prime.” “Like that grand old restaurant, Stansky (Robert Stansky – Manager) and Magellan may again be able to give investors a taste of the past, but investors who have been comfortable with the fund for years need to decide whether it still has the flavor they want, or whether recent numbers and changed expectations have made them bitter enough to move on.” A Question To Ask Yourself: Is Do It Yourself Investing ---401(k), 457, 403(b) Plans --- Working? I have been trying to follow the debate going on-----which is the better pension plan that will fund your retirement --- a traditional defined benefit plan or the defined contribution plan (401(k), 457, 403(b). For decades, the defined benefit plan served as the foundation of our retirement system. Many of us have benefited or will benefit from this plan. In the good old days, many of our parents benefited because it provided a vital source of retirement income---the company pension payouts were guaranteed. In a defined benefit plan, employees knew in advance the total of each pension check delivered by the mailman. The amount would be based on how long you worked for the organization, how much money you usually made in your last five years of employment. In order to provide that benefit, the organization would put aside some money and invest it so that there would be enough to cover the pension liabilities as they came due. When the market was booming, the organization would provide less money and when the market was moving in the other direction, they had to provide more money. The defined contribution plan (401(k) was developed in the late 1970s. Employers adopted the plan for a number of reasons---they cost less money to run and they were easier to run and the employee was responsible for investing the money. Initially workers welcomed their plan because they decided on how to save-invest their money. In the past 20 years or so, more and more companies switched to the defined contribution plan. Nearly three out of every five workers are enrolled in a 401(k). Twenty percent are covered by both plans and another 20 percent have only the defined benefit plan. The number of defined benefit plans decreased from about 175,000 in 1983 to around 32,000 in 2002. How do the two plans differ? In a defined benefit plan, the employer bears the investment risk. This means that good returns lower the employer’s cost and bad returns increase it. The employee’s benefit is not affected. In a defined contribution plan, employees bear the investment risk. Good returns increase their accounts and bad returns decrease them. The employer’s cost is not affected. So, the big question is--- Is Do It Yourself Investing---(401(k), 457, 403(b) plans)---Working? In their new book --- Coming Up Short --- pension experts Alicia Munnell and Annika Sunden show that in 2001, the typical household approaching retirement had amassed just $55,000 in 401(k)/IRA holdings – hardly much of a supplement to Social Security. They add that the 401(k) plan shifts the responsibility for funding their retirement on the individual. Munnell states, “What we found is people make mistakes every step of the way.” What kinds of mistakes? Twenty-five percent of eligible workers do not join. Ninety percent do not contribute the maximum. About 60% of participants are either virtually all in stocks or all in fixed-income investments. Hardly any participants rebalance their portfolios as they age or in response to market returns. About 55% cash out their accumulations when they change jobs and leave an employer. Almost no participants purchase an annuity when they stop working. The Employment Benefit New (6/1/2004) states, “Many workers nearing retirement today find the assets in the 401(k)s and individual retirement accounts will pay only a few hundred dollars per month during their golden years”. Munnell adds that the system is wrong. “It’s a system that puts all the burden on the individual and that is just not a reasonable requirement in my view.” In the August edition of “Your Retirement,” we’ll take a look at some of the suggestions that Munnell and Sunden and a number of other experts are making that can help retirement savers – investors to do a better job of building their nest egg with their 401(k), 457, 403(b) plan. -3-
4. -4- A Retirement Diary You’ve Got To Have A Package In our efforts to help folks plan for their retirement, we sometimes lose sight of one of the most important aspects of retirement planning; what are we going to do with what could be up to 1/3rd of our lifetime. We concern ourselves with Social Security, pensions, financial planning, investments, health care, early retirement, working in retirement, where we will live, legal affairs. Granted, these are all important but we sometimes neglect what could be the most important part. I call it "a package." A couple of weeks ago I talked with John at a gathering. John is 64 and he said to me, "I'm really looking forward to retiring next year." I asked him, "What are you going to do?" He replied, "I'll probably work a bit." I waited for the rest of his response but none was forthcoming. I then asked, "How are you going to spend your time?" His reply was that he didn't have any volunteer activities, no hobbies; "I just like to work." "What advice can you give me?" I replied, "You need a package." I never got around to asking Mary, John's wife, how she felt about his retirement. Many of us define ourselves by what we do, what we work at. That, in itself, is not bad. But, isn't there more to life than just work? Shouldn't there be a period in our life where we can... - work part-time if we want to? - spend more time with our volunteer activities? - sleep until noon if we want to? - spend all day reading an interesting book? - play an extra round or golf or a set of tennis or spend more time on the boat? - work around the house? - spend more time with the kids and the grandkids? - travel to interesting places? - take a class at the college, the university? - spend more time with our hobbies? You get the idea? That's what I call "a package.“ Retirees tell us that it's a mistake to assume that we can quickly invent satisfying, interesting and meaningful things to do on the day that we retire. Regardless of the amount of time you spend planning, it will not be easy to move smoothly from a work pattern to a retirement pattern. It won't surprise you to hear that in the past 10 years or so that many people retired reluctantly, unhappy to leave the job or the working environment. A good number of retirees have no plans, ambitions or dreams. In many cases, when they retire, they are fighting depression and boredom. The irony of this situation is most people have talents and abilities that can be constructively channeled into meaningful activities. How can we adjust? We have to alter our thinking about the worth of our "new time." We have to find in our new time the activities providing a sense of accomplishment, responsibility and fellowship that we used to obtain from a paid job. In many cases, it is possible to choose leisure activities that will supply the same kinds of satisfaction found in a job. For instance....If we enjoyed contact with people in a job, we can look for activities that will provide ample opportunities to meet and work with people. If we enjoyed the creative aspect of the job, we can look for activities that will allow opportunities to express ourselves creatively in retirement. Retirement can offer so many leisure activities that it is possible to be confused or overwhelmed and then have trouble deciding which activities will be the most rewarding. Retirement also allows us the opportunity to pick and choose. Unlike what happens at a job, you're the one deciding what to do. Make a checklist of things you like and want to do. Then, consider them separately on a priority basis. Which activities should have a priority on your time? It's not surprising to hear some retirees say, "I'm busier now than I was when I was working." Devote some time to various activities before you retire so you can determine how they fit into your lifestyle. Make some "trial runs" with activities while you are still working. According to a survey by Roper Starch Worldwide, New York City, retirement is seen as one of the most difficult transitions in life. Forty-one percent of people who have retired say the adjustment was difficult. Don't put off thinking about what you will do in retirement until a week or two before you are given your choice of the gold watch or a rocking chair for "your many years of faithful and dedicated service." I sure hope John is working on his "package." “ The devil finds work for idle hands.” St. Jerome (345-420), Proverb, 1721 How Can I: Find Out What My Social Security Benefit Will Be? Better late than never. We promised this piece in our June newsletter but we did not deliver. Go to the Social Security website---http://www.ssa.gov/planners/calculators.htm. Once you are at the site, you can Choose A Benefit Calculator. Use any of the three calculators to estimate your potential benefit amounts using different retirement dates and different levels of potential future earnings. The calculators will show you retirement benefits as well as disability and survivor benefit amounts on your record. The calculator estimates will differ from those on your Social Security Statement if you use different assumptions. How Can I: Find Out How Much Money I Will Need For Retirement? How much cash will you need to have to support your life style? A good question and you can find help online---more than 100 financial planning calculators, including a retirement calculator at www.choosetosave.org . This web site offers plenty of information that can help you with your retirement planning.
5. - 5 - Sandy Says: Too Much Invested In Your Employer’s Stock? From what I hear a lot of you guys who are in a 401(k) have invested too heavily in your employers stock. Bad idea. It could be hazardous to your retirement wealth. You could run out of dollars before your run out of days. A study from Hewitt Associates on the saving and investment behavior of more than 2.5 million employees found that company stock accounted for 41% of balances in plans that included it. Thirty percent of workers aged 60 and older had most of their 401(k) money in employer stock. That pal is a huge risk. Holding a large percentage of your assets in any one stock is a no-no and it’s a double no-no when it’s your employer’s stock. It’s like putting all of your investment eggs in one basket. And, if, by chance, the company does poorly, not only will your investments do poorly but you can also lose your ability to earn income at the same time. This is exactly what happened to a good number of employees at Enron, WorldCom and Global Crossing. The company collapsed---they lost their jobs---and their retirement savings. A good number of employees overloaded on their employer’s stock because of loyalty to their organization and because of a requirement, in some cases, to obtain a matching employer’s contribution. Some also were barred from selling company stock during a so-called blackout period. Enron employees watched in disbelief as their 401(k) plans, many of which contained just Enron stock, decreased in value as the stock fell from $90 a share in 2000 to 26 cents at the close of 2001. And, it didn’t help when we had 12 of the 15 Wall Street analysts who followed Enron still rating Enron stock as a “strong buy” or “buy” just a couple of weeks before the company filed for bankruptcy. And these are the guys that are supposed to supply us investors with solid research of the company? Give me a break! Where were you --- Eliot Spitzer --- when we needed you? How much company stock is too much? There is no hard and fast rule but a good number of experts say that you should limit your investing in any one stock to 10% - 15% of your total investment assets. However, sticking to this rule of thumb (or paw) may not be practical since many employers make their matching contributions in the form or company stock. And some restrict employees from selling shares until they are 55 and have more than 10 years of service. If possible, don’t concentrate all of your investments in one individual security. I mean, I have a lot of acorns stored for the future but what would happen if all of them were lost, destroyed or even stolen? I’d be out on the corner with a tin cup and sign asking for donations to “Sandy’s Retirement Fund.” I diversify my locations for storing. In order for you to be a smart saver like me, you need to diversify, diversify, diversify. Even chocoholics acknowledge that too much chocolate ice cream, candy, chip cookies, mousse, and goobers, can be bad for you. Is it really possible to eat too much chocolate? “ Be careful of owning too much in any one nation, industry or type of asset.” Sir John Templeton, Pioneer – Financial Investing, 1912 - Sandy Cartoon Sandy Says: : How is your uncle Herman, the stock broker, doing? Camille: Well, he used to have a corner on the market. Now he has a market on the corner. Sandy: Yeah. Different corner. Different market. Planning - Saving - Investing For Retirement Sandy Says: Too Much Invested In Your Employer’s Stock? Quick Takes: #1: Buy On The Recommendation Of Experts? You’ve seen---heard the stories---“Five Hot Stocks To Buy”, “All Star Picks For Your Investments”, “Red-Hot Funds To Own”---you know what I mean. The experts follow one another on CNBC, CNN, etc. with their pitch. They are always “buying something”. Most of the time we don’t really know how their recommendations turn out unless we invest in one or more of them. Thanks to the April 2004 issue of Investment Advisor magazine, we have the opportunity to see what happened to a panel of Fortune magazine “all star” analysts stock picks in the July 2000 issue. How did their picks turn out as of 12/31/2003? WorldCom Oracle Global Crossing CMGI Price on 7/5/2000 $45 $72 $26 $44 “ All Star” Analyst “Dirt cheap” “Target of “Could triple “A screaming Comment $115” in a year” buy” Price on 12/31/2003 in Chapter $13.23 in Chapter $1.78 11 11