by Jessica L. Anderson
Friday, March 18, 2011
http://finance.yahoo.com/focus-retirement/article/112374/how-to-stash-1-million-savings?mod=fidelity-buildingwealth&cat=fidelity_2010_building_wealth
Dane Lacey, 49, a radiologist from San Diego, has saved nearly $1.4 million for retirement in eight years by living below his means.
Did you always have a goal to front-load your savings? Yes. I want to retire when I am still young enough to travel, hike and body surf. It was a race for me to put a large amount away so that I could enjoy it. I knew that if I got it in early, it could grow.
You've been in practice for 14 years. Why the big push for the past eight? During the tech bubble, I put every cent into Cisco and other tech stocks. Within two years, I had accumulated $300,000, while I was living on about $35,000 a year. I went on vacation and came back to find that my $300,000 was worth $10,000 because the bubble had burst. So I started over at age 41.
How did you make it happen? As a resident physician, you get paid about $26,000 a year for four years. Then when you're in practice, you start making big money. My first job paid $220,000 a year, so I had all this money coming in, but I didn't feel like I needed that much. I live in a small bungalow and drive a Chrysler PT Cruiser. I decided to live on what I was making before and just pay myself a little bit more each year. It would seem like a pay raise but still allow me to put a lot away for retirement. ( I do this!)
In at least two of the past eight years, you contributed more than $250,000 to retirement savings. How did you do that? Until recently I worked as a navy contractor, and I was basically self-employed, so I was able to save more money in tax-deferred retirement accounts than the average employee. In addition to funding my 401(k) account, I established a traditional defined-benefit pension plan for my business, which allowed me to contribute as much as $240,000 in one year. I used any excess money to pay down my mortgage or to add to personal savings and my IRA.
How do you manage your money? I used to keep all my money with a Merrill Lynch manager, who invested it in mutual funds. The approach was diversified, but he wasn't as aggressive as I wanted to be. Three years ago, I diversified my money managers as well, and I split the money in the defined-benefit plan in half. My guy at Merrill Lynch invests in mutual funds with half of the money, and I have a guy at Schwab who invests in stocks with the other half. It has given me peace of mind that I'm not basing my future on one person's decisions or one company's philosophy.
How did you learn to be so disciplined? My parents were very good with money and taught my brothers and me to be responsible. At age 14, we were required to get a job and budget our money. We budgeted for clothing, college, and room and board (which went into a college account), and we kept 20%. My family instilled good financial sense in me — your salary is for day-to-day expenses, and anything to play with, you work extra for. I don't borrow, except for my mortgage, and I pay my credit cards off every month.
What is your best advice for savers? Save first and pay yourself later. If you pay yourself first and then try to save, your standard of living will always adjust up to what you're making, and you're not going to have money left to put in savings. Figure out a goal and what you need to save for that, and then keep the rest.
Now that you've saved so much, what's next? Although I want to have the money to retire locked up by age 50, the savings habit is so ingrained in me that I'll probably just keep saving the way I have been and look at retiring early and getting out of the rat race. I plan on having a second career in retirement, something to get up to do every day, but without the responsibilities of being a physician. I'd be happy living a more comfortable lifestyle, although not a rich one. Still, I've always said that when I turn 50, I'll buy a doctor's car — a BMW or a Mercedes.
Friday, March 18, 2011
Monday, March 14, 2011
What is your tax bracket?
What's Your Tax Bracket?
Peter McDougall
Friday, March 11, 2011ShareretweetEmailPrintprovided by
Pop quiz: What's your tax bracket?
If you don't know which of the six brackets you're in, you're in good company. But you could be making some money goofs or paying too much in taxes as a result. "Figuring out your tax bracket is very simple," says Gil Charney, tax analyst at The Tax Institute at H&R Block. "And that number is key to every tax-related decision you make."
A quick tutorial: The U.S. tax system has graduated rates, which means you pay low tax rates on the first dollars you earn and progressively higher rates as your income goes up. If you file taxes jointly with your spouse, the first $16,750 you earn in 2010 is taxed at 10 percent; the next $51,250 is taxed at 15 percent; the next $69,300 at 25 percent and so on. The highest rate you pay is your marginal tax rate, often called your tax bracket.
Below, we've produced a full list of 2010 tax brackets for single people, married filing jointly and head of household. (Head of household status means you were unmarried on December 31, paid more than half the cost of keeping up your home, and a "qualifying person," such as a child, lived in your home more than half the year.)
On Dec. 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law. The law basically extended everything that was in place for another year.
Here are some of the differences for tax year 2011:
• The $400 ($800 if married filing jointly) Making Work Pay Credit will expire.
• The Social Security payroll tax rate will decrease by 2 percent, to 4.2 percent from 6.2 percent, for wages up to $106,800.
• The self-employment tax will decrease by 2 percent, to 10.4 percent from 12.4 percent, on self-employment income up to $106,800.
• The estate tax will return with a rate of 35% and a lifetime exclusion of $5 million for 2011 and 2012.
• The personal exemption amount will increase to $3,700 (from $3,650 in 2010).
• The 2011 standard deduction will be:
-- $5,800 for unmarried taxpayers or married taxpayers filing separately
-- $11,600 for married taxpayers filing jointly
-- $8,500 for taxpayers filing as head of household.
Once you've figured out your bracket from these tables, you can better tackle the financial questions that follow.
Filing Status: Single
Filing Status: Married filing jointly
Filing Status: Head of household
1. Should you buy a municipal bond fund or a taxable bond fund?
There has been quite an uproar recently in the municipal bond market. It started when experts and analysts questioned the ability of fiscally depleted states and municipalities to repay their bond obligations in the aftermath of the Great Recession. The anxiety of bond-holders skyrocketed after analyst Meredith Whitney went on "60 Minutes" and predicted widespread defaults in the municipal bond market. (Here is a great primer on munis; here is how a municipal default would work and here is a rebuttal to Whitney's central thesis.)
Since that time, municipal bond prices have dropped, causing individual investors to question whether these assets deserve a place in their portfolios. Here's a reminder of why municipal bonds might be worth considering.
Municipal bond interest is exempt from federal income taxes (and in some cases state taxes), but it generally make sense to buy a muni bond fund only if you're in a high bracket. Otherwise, you might earn more, on an after-tax basis, with a taxable corporate or government bond fund.
Say you have $10,000 to invest and you're choosing between a muni fund yielding 3 percent and a taxable corporate bond fund yielding 4.5 percent. The muni fund will produce $300 in tax-free income. If you're in the 25 percent bracket, you'd earn more with that taxable fund: $338 after taxes. But if you're in the 35 percent bracket, a muni fund would be a better bet because its $300 tax-free payout beats the $293 you'd earn after taxes with the taxable fund.
If you live in a high-tax state such as New York or California, buying a single-state muni fund can be even more beneficial since you don't pay state or federal income taxes on the income.
To compare yields on taxable versus tax-exempt funds, calculate the muni fund's taxable-equivalent yield -- that's the yield a taxable fund would have to pay to produce the same after-tax income. The formula is the muni yield divided by (1 minus your tax bracket)/100. You can use online calculators such as Vanguard's to do this math.
2. Should you pay off your mortgage?
As a rule, the higher your tax bracket, the less money you'll save by prepaying your mortgage. Reason: The higher your bracket, the more your mortgage interest deduction is worth to you. Say you have a $300,000, 30-year, 5 percent fixed-rate mortgage and are consider sending the bank an extra $100 a month from day one. You'd save $39,938 in interest over 30 years. Subtract the value of your mortgage interest deduction, however, and you'd wind up saving $29,954 over 30 years if you're in the 25 percent bracket but only $25,960 if you're in the 35 percent bracket. Rather than using after-tax money to pay down their mortgage, high earners are better off boosting their pre-tax 401(k) contributions, where the money will grow tax deferred.
Peter McDougall
Friday, March 11, 2011ShareretweetEmailPrintprovided by
Pop quiz: What's your tax bracket?
If you don't know which of the six brackets you're in, you're in good company. But you could be making some money goofs or paying too much in taxes as a result. "Figuring out your tax bracket is very simple," says Gil Charney, tax analyst at The Tax Institute at H&R Block. "And that number is key to every tax-related decision you make."
A quick tutorial: The U.S. tax system has graduated rates, which means you pay low tax rates on the first dollars you earn and progressively higher rates as your income goes up. If you file taxes jointly with your spouse, the first $16,750 you earn in 2010 is taxed at 10 percent; the next $51,250 is taxed at 15 percent; the next $69,300 at 25 percent and so on. The highest rate you pay is your marginal tax rate, often called your tax bracket.
Below, we've produced a full list of 2010 tax brackets for single people, married filing jointly and head of household. (Head of household status means you were unmarried on December 31, paid more than half the cost of keeping up your home, and a "qualifying person," such as a child, lived in your home more than half the year.)
On Dec. 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law. The law basically extended everything that was in place for another year.
Here are some of the differences for tax year 2011:
• The $400 ($800 if married filing jointly) Making Work Pay Credit will expire.
• The Social Security payroll tax rate will decrease by 2 percent, to 4.2 percent from 6.2 percent, for wages up to $106,800.
• The self-employment tax will decrease by 2 percent, to 10.4 percent from 12.4 percent, on self-employment income up to $106,800.
• The estate tax will return with a rate of 35% and a lifetime exclusion of $5 million for 2011 and 2012.
• The personal exemption amount will increase to $3,700 (from $3,650 in 2010).
• The 2011 standard deduction will be:
-- $5,800 for unmarried taxpayers or married taxpayers filing separately
-- $11,600 for married taxpayers filing jointly
-- $8,500 for taxpayers filing as head of household.
Once you've figured out your bracket from these tables, you can better tackle the financial questions that follow.
Filing Status: Single
Filing Status: Married filing jointly
Filing Status: Head of household
1. Should you buy a municipal bond fund or a taxable bond fund?
There has been quite an uproar recently in the municipal bond market. It started when experts and analysts questioned the ability of fiscally depleted states and municipalities to repay their bond obligations in the aftermath of the Great Recession. The anxiety of bond-holders skyrocketed after analyst Meredith Whitney went on "60 Minutes" and predicted widespread defaults in the municipal bond market. (Here is a great primer on munis; here is how a municipal default would work and here is a rebuttal to Whitney's central thesis.)
Since that time, municipal bond prices have dropped, causing individual investors to question whether these assets deserve a place in their portfolios. Here's a reminder of why municipal bonds might be worth considering.
Municipal bond interest is exempt from federal income taxes (and in some cases state taxes), but it generally make sense to buy a muni bond fund only if you're in a high bracket. Otherwise, you might earn more, on an after-tax basis, with a taxable corporate or government bond fund.
Say you have $10,000 to invest and you're choosing between a muni fund yielding 3 percent and a taxable corporate bond fund yielding 4.5 percent. The muni fund will produce $300 in tax-free income. If you're in the 25 percent bracket, you'd earn more with that taxable fund: $338 after taxes. But if you're in the 35 percent bracket, a muni fund would be a better bet because its $300 tax-free payout beats the $293 you'd earn after taxes with the taxable fund.
If you live in a high-tax state such as New York or California, buying a single-state muni fund can be even more beneficial since you don't pay state or federal income taxes on the income.
To compare yields on taxable versus tax-exempt funds, calculate the muni fund's taxable-equivalent yield -- that's the yield a taxable fund would have to pay to produce the same after-tax income. The formula is the muni yield divided by (1 minus your tax bracket)/100. You can use online calculators such as Vanguard's to do this math.
2. Should you pay off your mortgage?
As a rule, the higher your tax bracket, the less money you'll save by prepaying your mortgage. Reason: The higher your bracket, the more your mortgage interest deduction is worth to you. Say you have a $300,000, 30-year, 5 percent fixed-rate mortgage and are consider sending the bank an extra $100 a month from day one. You'd save $39,938 in interest over 30 years. Subtract the value of your mortgage interest deduction, however, and you'd wind up saving $29,954 over 30 years if you're in the 25 percent bracket but only $25,960 if you're in the 35 percent bracket. Rather than using after-tax money to pay down their mortgage, high earners are better off boosting their pre-tax 401(k) contributions, where the money will grow tax deferred.
Sunday, January 23, 2011
What if...
What if loneliness was simply a feeling of impatience, telepathically sent to you by friends you’ve yet to meet, urging you to go out more, do more, and get involved so that life’s serendipities could bring you together…Would you still feel alone?
What if illness was just a signal a healthy body sent to urge clarification of your thoughts, feelings, and dreams…Would you still, at times, think of yours as diseased?
What if feelings of uncertainty and confusion were only reminders that you have options, that there’s no hurry, and that everything is as it should be…Would you still feel disadvantaged?
What if mistakes and failures only ever happen when your life was about to get better that its ever been before…Would you still call them mistakes and failures?
And What if poverty and lack were simply demonstrations of your manifesting prowess, as “difficult” to acquire as wealth and abundance…Would they still cause you to feel powerless?
What if illness was just a signal a healthy body sent to urge clarification of your thoughts, feelings, and dreams…Would you still, at times, think of yours as diseased?
What if feelings of uncertainty and confusion were only reminders that you have options, that there’s no hurry, and that everything is as it should be…Would you still feel disadvantaged?
What if mistakes and failures only ever happen when your life was about to get better that its ever been before…Would you still call them mistakes and failures?
And What if poverty and lack were simply demonstrations of your manifesting prowess, as “difficult” to acquire as wealth and abundance…Would they still cause you to feel powerless?
Tuesday, January 4, 2011
Sustainable Marriage
The Happy Marriage Is the ‘Me’ MarriageBy TARA PARKER-POPE
Published: December 31, 2010
A lasting marriage does not always signal a happy marriage. Plenty of miserable couples have stayed together for children, religion or other practical reasons.
But for many couples, it’s just not enough to stay together. They want a relationship that is meaningful and satisfying. In short, they want a sustainable marriage.
“The things that make a marriage last have more to do with communication skills, mental health, social support, stress — those are the things that allow it to last or not,” says Arthur Aron, a psychology professor who directs the Interpersonal Relationships Laboratory at the State University of New York at Stony Brook. “But those things don’t necessarily make it meaningful or enjoyable or sustaining to the individual.”
The notion that the best marriages are those that bring satisfaction to the individual may seem counterintuitive. After all, isn’t marriage supposed to be about putting the relationship first?
Not anymore. For centuries, marriage was viewed as an economic and social institution, and the emotional and intellectual needs of the spouses were secondary to the survival of the marriage itself. But in modern relationships, people are looking for a partnership, and they want partners who make their lives more interesting.
Caryl Rusbult, a researcher at Vrije University in Amsterdam who died last January, called it the “Michelangelo effect,” referring to the manner in which close partners “sculpt” each other in ways that help each of them attain valued goals.
Dr. Aron and Gary W. Lewandowski Jr., a professor at Monmouth University in New Jersey, have studied how individuals use a relationship to accumulate knowledge and experiences, a process called “self-expansion.” Research shows that the more self-expansion people experience from their partner, the more committed and satisfied they are in the relationship.
To measure this, Dr. Lewandowski developed a series of questions for couples: How much has being with your partner resulted in your learning new things? How much has knowing your partner made you a better person? (Take the full quiz measuring self-expansion.)
While the notion of self-expansion may sound inherently self-serving, it can lead to stronger, more sustainable relationships, Dr. Lewandowski says.
“If you’re seeking self-growth and obtain it from your partner, then that puts your partner in a pretty important position,” he explains. “And being able to help your partner’s self-expansion would be pretty pleasing to yourself.”
The concept explains why people are delighted when dates treat them to new experiences, like a weekend away. But self-expansion isn’t just about exotic experiences. Individuals experience personal growth through their partners in big and small ways. It happens when they introduce new friends, or casually talk about a new restaurant or a fascinating story in the news.
The effect of self-expansion is particularly pronounced when people first fall in love. In research at the University of California at Santa Cruz, 325 undergraduate students were given questionnaires five times over 10 weeks. They were asked, “Who are you today?” and given three minutes to describe themselves. They were also asked about recent experiences, including whether they had fallen in love.
After students reported falling in love, they used more varied words in their self-descriptions. The new relationships had literally broadened the way they looked at themselves.
“You go from being a stranger to including this person in the self, so you suddenly have all of these social roles and identities you didn’t have before,” explains Dr. Aron, who co-authored the research. “When people fall in love that happens rapidly, and it’s very exhilarating.”
Over time, the personal gains from lasting relationships are often subtle. Having a partner who is funny or creative adds something new to someone who isn’t. A partner who is an active community volunteer creates new social opportunities for a spouse who spends long hours at work.
Additional research suggests that spouses eventually adopt the traits of the other — and become slower to distinguish differences between them, or slower to remember which skills belong to which spouse.
In experiments by Dr. Aron, participants rated themselves and their partners on a variety of traits, like “ambitious” or “artistic.” A week later, the subjects returned to the lab and were shown the list of traits and asked to indicate which ones described them.
People responded the quickest to traits that were true of both them and their partner. When the trait described only one person, the answer came more slowly. The delay was measured in milliseconds, but nonetheless suggested that when individuals were particularly close to someone, their brains were slower to distinguish between their traits and those of their spouses.
“It’s easy to answer those questions if you’re both the same,” Dr. Lewandowski explains. “But if it’s just true of you and not of me, then I have to sort it out. It happens very quickly, but I have to ask myself, ‘Is that me or is that you?’ ”
It’s not that these couples lost themselves in the marriage; instead, they grew in it. Activities, traits and behaviors that had not been part of their identity before the relationship were now an essential part of how they experienced life.
All of this can be highly predictive for a couple’s long-term happiness. One scale designed by Dr. Aron and colleagues depicts seven pairs of circles. The first set is side by side. With each new set, the circles begin to overlap until they are nearly on top of one another. Couples choose the set of circles that best represents their relationship. In a 2009 report in the journal Psychological Science, people bored in their marriages were more likely to choose the more separate circles. Partners involved in novel and interesting experiences together were more likely to pick one of the overlapping circles and less likely to report boredom. “People have a fundamental motivation to improve the self and add to who they are as a person,” Dr. Lewandowski says. “If your partner is helping you become a better person, you become happier and more satisfied in the relationship.”
Published: December 31, 2010
A lasting marriage does not always signal a happy marriage. Plenty of miserable couples have stayed together for children, religion or other practical reasons.
But for many couples, it’s just not enough to stay together. They want a relationship that is meaningful and satisfying. In short, they want a sustainable marriage.
“The things that make a marriage last have more to do with communication skills, mental health, social support, stress — those are the things that allow it to last or not,” says Arthur Aron, a psychology professor who directs the Interpersonal Relationships Laboratory at the State University of New York at Stony Brook. “But those things don’t necessarily make it meaningful or enjoyable or sustaining to the individual.”
The notion that the best marriages are those that bring satisfaction to the individual may seem counterintuitive. After all, isn’t marriage supposed to be about putting the relationship first?
Not anymore. For centuries, marriage was viewed as an economic and social institution, and the emotional and intellectual needs of the spouses were secondary to the survival of the marriage itself. But in modern relationships, people are looking for a partnership, and they want partners who make their lives more interesting.
Caryl Rusbult, a researcher at Vrije University in Amsterdam who died last January, called it the “Michelangelo effect,” referring to the manner in which close partners “sculpt” each other in ways that help each of them attain valued goals.
Dr. Aron and Gary W. Lewandowski Jr., a professor at Monmouth University in New Jersey, have studied how individuals use a relationship to accumulate knowledge and experiences, a process called “self-expansion.” Research shows that the more self-expansion people experience from their partner, the more committed and satisfied they are in the relationship.
To measure this, Dr. Lewandowski developed a series of questions for couples: How much has being with your partner resulted in your learning new things? How much has knowing your partner made you a better person? (Take the full quiz measuring self-expansion.)
While the notion of self-expansion may sound inherently self-serving, it can lead to stronger, more sustainable relationships, Dr. Lewandowski says.
“If you’re seeking self-growth and obtain it from your partner, then that puts your partner in a pretty important position,” he explains. “And being able to help your partner’s self-expansion would be pretty pleasing to yourself.”
The concept explains why people are delighted when dates treat them to new experiences, like a weekend away. But self-expansion isn’t just about exotic experiences. Individuals experience personal growth through their partners in big and small ways. It happens when they introduce new friends, or casually talk about a new restaurant or a fascinating story in the news.
The effect of self-expansion is particularly pronounced when people first fall in love. In research at the University of California at Santa Cruz, 325 undergraduate students were given questionnaires five times over 10 weeks. They were asked, “Who are you today?” and given three minutes to describe themselves. They were also asked about recent experiences, including whether they had fallen in love.
After students reported falling in love, they used more varied words in their self-descriptions. The new relationships had literally broadened the way they looked at themselves.
“You go from being a stranger to including this person in the self, so you suddenly have all of these social roles and identities you didn’t have before,” explains Dr. Aron, who co-authored the research. “When people fall in love that happens rapidly, and it’s very exhilarating.”
Over time, the personal gains from lasting relationships are often subtle. Having a partner who is funny or creative adds something new to someone who isn’t. A partner who is an active community volunteer creates new social opportunities for a spouse who spends long hours at work.
Additional research suggests that spouses eventually adopt the traits of the other — and become slower to distinguish differences between them, or slower to remember which skills belong to which spouse.
In experiments by Dr. Aron, participants rated themselves and their partners on a variety of traits, like “ambitious” or “artistic.” A week later, the subjects returned to the lab and were shown the list of traits and asked to indicate which ones described them.
People responded the quickest to traits that were true of both them and their partner. When the trait described only one person, the answer came more slowly. The delay was measured in milliseconds, but nonetheless suggested that when individuals were particularly close to someone, their brains were slower to distinguish between their traits and those of their spouses.
“It’s easy to answer those questions if you’re both the same,” Dr. Lewandowski explains. “But if it’s just true of you and not of me, then I have to sort it out. It happens very quickly, but I have to ask myself, ‘Is that me or is that you?’ ”
It’s not that these couples lost themselves in the marriage; instead, they grew in it. Activities, traits and behaviors that had not been part of their identity before the relationship were now an essential part of how they experienced life.
All of this can be highly predictive for a couple’s long-term happiness. One scale designed by Dr. Aron and colleagues depicts seven pairs of circles. The first set is side by side. With each new set, the circles begin to overlap until they are nearly on top of one another. Couples choose the set of circles that best represents their relationship. In a 2009 report in the journal Psychological Science, people bored in their marriages were more likely to choose the more separate circles. Partners involved in novel and interesting experiences together were more likely to pick one of the overlapping circles and less likely to report boredom. “People have a fundamental motivation to improve the self and add to who they are as a person,” Dr. Lewandowski says. “If your partner is helping you become a better person, you become happier and more satisfied in the relationship.”
Wednesday, December 29, 2010
Smart Strategies to Boost Your Retirement Savings
Smart Strategies to Boost Your Retirement Savings
by Laura Rowley
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EmailPrint.Posted on Sunday, October 31, 2010, 12:00AM
It's National Save for Retirement Week, seven days devoted to call attention to an issue most Americans are negligent about. In fact, a survey released this week by TIAA-CREF found that 93 percent of Americans realize that saving is essential for financial security. But 82 percent say they don't know what it takes to reach their goal, and about four in 10 aren't saving at all.
"There's a big fear of the unknown," says Joe Wilson, an Atlanta-based wealth management advisor for TIAA-CREF, a financial services firm that serves employees participating in more than 27,000 retirement plans. "People understand the importance of saving, that's clear from survey — it's just about understanding what the next steps are and what options they have."
There's also the small matter of finding the cash to save when incomes for most people are relatively flat and the costs of food, utilities, gas and health care are rising. While the national savings rate jumped to 5.8 percent in September, that's not because poor and middle-class people are stashing cash in bank accounts, economists say.
"The savings rate has always been driven largely by the affluent," says George Loewenstein, behavioral economist at Carnegie Mellon University. "For a while they had cut back on saving because their assets — most recently their houses — had appreciated so much they were saving without saving, and could (cash out their equity) and spend it. But when the housing market crashed, the affluent segment of society realized it had to do the real hard work of saving."
The personal savings rate doesn't include retirement contributions, but a recent study measuring those accounts shows most workers falling short of their goals. Financial Engines studied 2.8 million participants in 272 employer plans and found nearly three in four 401(k) participants will be able to replace only 45 percent of their pre-retirement income — versus a goal of 70 percent. That's based on their current balances, plan contributions and projected Social Security benefits.
We all know the virtues of brown-bag lunches and carpooling to boost savings. So here are a few strategies from behavioral economists that might help feather your retirement nest:
Translate Short-Term Behavior Into Long-Term Results
Saving for retirement is difficult because the pleasure derived from the money is delayed and intangible — and it's hard to imagine how putting away a few bucks now can make a difference later. Loewenstein says the key is to think big picture.
"In so many situations it's not short-term versus long-term — it's the drop-in-the-bucket problem," he says. "If you're trying to save $500,000 for retirement and you're facing the question of whether you should have a $4 latte, you might as well have it, right?" That small indulgence hardly registers an impact.
Solution: Try this calculator, which shows savers how small daily sacrifices can add up to big dollars in retirement.
Understand How You Frame Goals, and Plan Accordingly
Research has found consumers tend to think about goals in two ways: "High-level construal" focuses on the why — i.e., "I want to save for retirement because I want to spend those years relaxing on the beach." By contrast, "low-level construal" focuses on the how — i.e., "I want to save for retirement, so I need to figure out how to invest my 401(k)."
One study found that when asked to put a specific dollar figure on a goal, the big-picture ("how") folks were more successful at saving, because they focused on the target, while low-level ("why") construers easily discouraged low-level ("why") construers.
If you think about objectives in a big-picture way, try a retirement calculator like this one to put a real number on your goal. (Or spend a half hour with this tool created by Boston University economist Laurence Kotlikoff.)
If you're a detail person, keep it simple: Join your firm's 401(k) plan, contribute at least enough to get an employer match, and boost the contribution by 1 percent every time you get a raise. Choose a life-cycle or target-date fund, which offers an investment mix tailored to your age or retirement date, if the plan offers it. Don't focus on reaching a specific number, because it may discourage you from trying to save at all.
Spread Savings Behavior Through Social Networks
Decades of research underscore the power of social contagion. A study in the New England Journal of Medicine, for example, found that if a friend becomes obese, you have a 60 percent higher chance of similar weight gain. On the upside, another study found a decision by one person to join his employer's retirement plan clearly influences co-workers' decisions to do so.
There's no reason you can't find additional savings by applying social contagion to other settings. Dan Ariely, a behavioral economist at Duke, gave an example from his North Carolina neighborhood, where a group of parents were gathered at a birthday party.
"One person said, 'Look, the kids want a birthday as nice as all the other kids — but all they really want is a chance to run around together. If we all just scaled down, they'd be just as happy,'" recalls Ariely. The suggestion worked, and the neighborhood birthday parties are now more low-key and less costly.
Automate, and Get Help
Perhaps the most effective retirement plan is one that flies on autopilot. In 2007, the Department of Labor approved rules allowing employers to automatically enroll new employees in retirement plans (unless they opt out), and to invest the money in a mix of investments geared to their age and projected retirement date. Those plans have been a boon to younger, lower-paid workers.
Financial Engines found that 52 percent of workers under 30 in default plans have the appropriate risk and diversification for their age, compared with just 12 percent of their peers in plans that don't offer that option. For people earning less than $25,000 a year, the figures were 50 percent and 24 percent, respectively.
If your firm doesn't offer a default investment option, get some advice on how to invest. A separate study by Financial Engines found the median return for participants who got professional investment help offered by their employer was almost 2 percent higher than those who did not.
It doesn't sound like much — but it adds up over time. A 45-year-old who gets help will have saved 47 percent more by age 65 than a peer who doesn't, assuming the 2 percent higher median annual return is maintained over the 20-year period. For a 25-year-old, the difference is more than 100 percent. (If your employer doesn't offer advice, find a fee-only financial planner.)
Finally, if your employer doesn't offer a 401(k) plan, check out my blog for a how-to on individual retirement accounts.
by Laura Rowley
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EmailPrint.Posted on Sunday, October 31, 2010, 12:00AM
It's National Save for Retirement Week, seven days devoted to call attention to an issue most Americans are negligent about. In fact, a survey released this week by TIAA-CREF found that 93 percent of Americans realize that saving is essential for financial security. But 82 percent say they don't know what it takes to reach their goal, and about four in 10 aren't saving at all.
"There's a big fear of the unknown," says Joe Wilson, an Atlanta-based wealth management advisor for TIAA-CREF, a financial services firm that serves employees participating in more than 27,000 retirement plans. "People understand the importance of saving, that's clear from survey — it's just about understanding what the next steps are and what options they have."
There's also the small matter of finding the cash to save when incomes for most people are relatively flat and the costs of food, utilities, gas and health care are rising. While the national savings rate jumped to 5.8 percent in September, that's not because poor and middle-class people are stashing cash in bank accounts, economists say.
"The savings rate has always been driven largely by the affluent," says George Loewenstein, behavioral economist at Carnegie Mellon University. "For a while they had cut back on saving because their assets — most recently their houses — had appreciated so much they were saving without saving, and could (cash out their equity) and spend it. But when the housing market crashed, the affluent segment of society realized it had to do the real hard work of saving."
The personal savings rate doesn't include retirement contributions, but a recent study measuring those accounts shows most workers falling short of their goals. Financial Engines studied 2.8 million participants in 272 employer plans and found nearly three in four 401(k) participants will be able to replace only 45 percent of their pre-retirement income — versus a goal of 70 percent. That's based on their current balances, plan contributions and projected Social Security benefits.
We all know the virtues of brown-bag lunches and carpooling to boost savings. So here are a few strategies from behavioral economists that might help feather your retirement nest:
Translate Short-Term Behavior Into Long-Term Results
Saving for retirement is difficult because the pleasure derived from the money is delayed and intangible — and it's hard to imagine how putting away a few bucks now can make a difference later. Loewenstein says the key is to think big picture.
"In so many situations it's not short-term versus long-term — it's the drop-in-the-bucket problem," he says. "If you're trying to save $500,000 for retirement and you're facing the question of whether you should have a $4 latte, you might as well have it, right?" That small indulgence hardly registers an impact.
Solution: Try this calculator, which shows savers how small daily sacrifices can add up to big dollars in retirement.
Understand How You Frame Goals, and Plan Accordingly
Research has found consumers tend to think about goals in two ways: "High-level construal" focuses on the why — i.e., "I want to save for retirement because I want to spend those years relaxing on the beach." By contrast, "low-level construal" focuses on the how — i.e., "I want to save for retirement, so I need to figure out how to invest my 401(k)."
One study found that when asked to put a specific dollar figure on a goal, the big-picture ("how") folks were more successful at saving, because they focused on the target, while low-level ("why") construers easily discouraged low-level ("why") construers.
If you think about objectives in a big-picture way, try a retirement calculator like this one to put a real number on your goal. (Or spend a half hour with this tool created by Boston University economist Laurence Kotlikoff.)
If you're a detail person, keep it simple: Join your firm's 401(k) plan, contribute at least enough to get an employer match, and boost the contribution by 1 percent every time you get a raise. Choose a life-cycle or target-date fund, which offers an investment mix tailored to your age or retirement date, if the plan offers it. Don't focus on reaching a specific number, because it may discourage you from trying to save at all.
Spread Savings Behavior Through Social Networks
Decades of research underscore the power of social contagion. A study in the New England Journal of Medicine, for example, found that if a friend becomes obese, you have a 60 percent higher chance of similar weight gain. On the upside, another study found a decision by one person to join his employer's retirement plan clearly influences co-workers' decisions to do so.
There's no reason you can't find additional savings by applying social contagion to other settings. Dan Ariely, a behavioral economist at Duke, gave an example from his North Carolina neighborhood, where a group of parents were gathered at a birthday party.
"One person said, 'Look, the kids want a birthday as nice as all the other kids — but all they really want is a chance to run around together. If we all just scaled down, they'd be just as happy,'" recalls Ariely. The suggestion worked, and the neighborhood birthday parties are now more low-key and less costly.
Automate, and Get Help
Perhaps the most effective retirement plan is one that flies on autopilot. In 2007, the Department of Labor approved rules allowing employers to automatically enroll new employees in retirement plans (unless they opt out), and to invest the money in a mix of investments geared to their age and projected retirement date. Those plans have been a boon to younger, lower-paid workers.
Financial Engines found that 52 percent of workers under 30 in default plans have the appropriate risk and diversification for their age, compared with just 12 percent of their peers in plans that don't offer that option. For people earning less than $25,000 a year, the figures were 50 percent and 24 percent, respectively.
If your firm doesn't offer a default investment option, get some advice on how to invest. A separate study by Financial Engines found the median return for participants who got professional investment help offered by their employer was almost 2 percent higher than those who did not.
It doesn't sound like much — but it adds up over time. A 45-year-old who gets help will have saved 47 percent more by age 65 than a peer who doesn't, assuming the 2 percent higher median annual return is maintained over the 20-year period. For a 25-year-old, the difference is more than 100 percent. (If your employer doesn't offer advice, find a fee-only financial planner.)
Finally, if your employer doesn't offer a 401(k) plan, check out my blog for a how-to on individual retirement accounts.
Economic Growth and Well Being....
What's the Link Between Economic Growth and Well-Being?
by Laura Rowley
Thursday, December 23, 2010
As countries get wealthier over time, do their citizens get happier? In other words, does more money equal more happiness? The answer seems to be a point of contention among academics and also depends on how you define happiness.
First, a new study of 54 lesser-developed and transitional countries finds happiness does not rise in tandem with economic growth. While it's true that rich people tend to be happier than poor people, and people in more affluent nations report higher levels of happiness, when you track the data in one country over a period of time, higher income doesn't bring greater levels of happiness, according to the study published last week in the Proceedings of the National Academy of Sciences.
The research was conducted by University of Southern California economist Richard Easterlin, who first discovered the phenomenon in the 1970s by studying developed nations such as the U.S. and Japan. He found that big jumps in growth were accompanied by only marginal increases, or declines, in reported happiness. This became known as the "Easterlin Paradox."
"If you look across countries and compare happiness and GDP (gross domestic product) per capita, you find that the higher the country's income, the more likely it is to be happier," Easterlin told the Web site LiveScience. "So the expectation based on point-in-time data is if income goes up, then happiness will go up. The paradox is, when you look at change over time, that doesn't happen."
In this update of his previous work, Easterlin and his colleagues examined 10 and 34 years of happiness survey data from 17 Latin American countries, 17 developed countries, 11 Eastern European countries transitioning from socialism to capitalism and nine-less developed countries. None showed a relationship between economic growth and happiness. Even in China, where per capita income has doubled over the last decade, happiness levels haven't moved at all, the researchers report. Similar economic gains in South Korea and Chile show no correlation with reported happiness levels.
With incomes rising so rapidly in these countries, where are the elevated levels in well-being you'd expect to find?
Not so fast, say Justin Wolfers and Betsy Stevenson, economists at the Wharton School of Business at the University of Pennsylvania. In their recent paper with Ph.D. candidate Daniel Sacks, they studied 140 countries and found that "as countries experience economic growth, their citizens' life satisfaction typically grows, and that those countries experiencing more rapid economic growth also tend to experience more rapid growth in life satisfaction."
Why do the two studies come to opposite conclusions? One problem is that surveys define happiness in several ways. One takes into account feelings, or "daily affect," represented by questions such as "how much did you smile yesterday?" Another is an assessment of life satisfaction, which typically asks people to rank where they stand on an imaginary ladder with "best possible life" at the top and "worst possible life" at the bottom. There's also a "purpose in life" test designed to measure an individual's experience of meaning and purpose in their lives.
The "best possible life" assessment correlates most closely with income. For instance, recent research by Princeton psychologist Daniel Kahneman and economist Angus Deaton found that while more money buys happy feelings, the effect plateaus at around $75,000 in income, while life satisfaction continues to rise with income.
Wolfers suggests that the data in Easterlin's analysis are noisy because it incorporates several different happiness questions. By contrast, Wolfers, Stevenson and Sacks focused on life satisfaction, but to do so, dropped from their analysis a number of countries that didn't have survey data centered on that aspect of well-being.
"Wolfers loses a lot of Latin American countries from his sample," says Carol Graham, senior fellow with the Brookings Institution, who also studies well-being. "If you are interested in the relationship between growth and well-being, you could also argue that dropping a huge number of countries that are of the most interest is also questionable. Every single model is based on assumptions intended to deal with limitations in the data, and you can have very different opinions about whether those assumptions are correct." She says the results can also shift depending on the sample of countries and the time period used.
Graham's own work, for example, has found that Afghans score higher than the world average for daily affect and lower than average on the best possible life ladder. "While naturally cheerful and able to make the best of their lot, the Afghans also know that the best possible life is outside Afghanistan," Graham wrote in a recent blog post about the Easterlin-Wolfers dust-up.
In a season given to self-reflection, the studies provide food for thought when pondering the keys to individual happiness. If you find your well-being has grown over time with your income, as Wolfers and company suggest it should, you can boost it even further by giving generously. Recent research of 136 countries found that using financial resources to help others is consistently associated with greater happiness.
Alternatively, if your happiness has waned because of an income decline, don't ruminate on the loss. Negative feelings make it harder to see the big picture, research shows. Consciously shift your attention to activities that are engaging and meaningful.
On the other hand, if your income has improved over the years and you don't experience a leap in well-being, it's likely the "hedonic treadmill" at work. We get excited about a purchase, then adapt to the things we acquire, and seek more. So it's frightfully easy to adjust to jumps in income; instead of enjoying a bigger paycheck, suddenly we need every dime we make.
There are a few ways to get off the hedonic treadmill. First, avoid comparisons. A number of scholars suggest that it's how we measure up to our peers that matters most to happiness (and thanks to sites like Facebook, it's easier than ever to see how others are doing and judge ourselves against people we haven't seen since the eighth grade).
Graham found this in studies of well-being in China: "When you look rural respondents and ask them to assess their financial situation, they will compare themselves to themselves a year ago. When you ask a migrant urban worker, they automatically look at the reference norm for other people in the new city they just moved to. So their income may have quintupled, but they look at how much other people have."
Second, slow down your hedonic adaptation by spending money on experiences rather than things, and spread them out. You'll get more pleasure out of three or four short vacations than two weeks away each year.
Finally, invest time in things that research has found are critical to well-being: family, friends, your health, your spiritual life, work or hobbies you love. Savor that wealth by taking the time to express gratitude.
And have a happy holiday.
by Laura Rowley
Thursday, December 23, 2010
As countries get wealthier over time, do their citizens get happier? In other words, does more money equal more happiness? The answer seems to be a point of contention among academics and also depends on how you define happiness.
First, a new study of 54 lesser-developed and transitional countries finds happiness does not rise in tandem with economic growth. While it's true that rich people tend to be happier than poor people, and people in more affluent nations report higher levels of happiness, when you track the data in one country over a period of time, higher income doesn't bring greater levels of happiness, according to the study published last week in the Proceedings of the National Academy of Sciences.
The research was conducted by University of Southern California economist Richard Easterlin, who first discovered the phenomenon in the 1970s by studying developed nations such as the U.S. and Japan. He found that big jumps in growth were accompanied by only marginal increases, or declines, in reported happiness. This became known as the "Easterlin Paradox."
"If you look across countries and compare happiness and GDP (gross domestic product) per capita, you find that the higher the country's income, the more likely it is to be happier," Easterlin told the Web site LiveScience. "So the expectation based on point-in-time data is if income goes up, then happiness will go up. The paradox is, when you look at change over time, that doesn't happen."
In this update of his previous work, Easterlin and his colleagues examined 10 and 34 years of happiness survey data from 17 Latin American countries, 17 developed countries, 11 Eastern European countries transitioning from socialism to capitalism and nine-less developed countries. None showed a relationship between economic growth and happiness. Even in China, where per capita income has doubled over the last decade, happiness levels haven't moved at all, the researchers report. Similar economic gains in South Korea and Chile show no correlation with reported happiness levels.
With incomes rising so rapidly in these countries, where are the elevated levels in well-being you'd expect to find?
Not so fast, say Justin Wolfers and Betsy Stevenson, economists at the Wharton School of Business at the University of Pennsylvania. In their recent paper with Ph.D. candidate Daniel Sacks, they studied 140 countries and found that "as countries experience economic growth, their citizens' life satisfaction typically grows, and that those countries experiencing more rapid economic growth also tend to experience more rapid growth in life satisfaction."
Why do the two studies come to opposite conclusions? One problem is that surveys define happiness in several ways. One takes into account feelings, or "daily affect," represented by questions such as "how much did you smile yesterday?" Another is an assessment of life satisfaction, which typically asks people to rank where they stand on an imaginary ladder with "best possible life" at the top and "worst possible life" at the bottom. There's also a "purpose in life" test designed to measure an individual's experience of meaning and purpose in their lives.
The "best possible life" assessment correlates most closely with income. For instance, recent research by Princeton psychologist Daniel Kahneman and economist Angus Deaton found that while more money buys happy feelings, the effect plateaus at around $75,000 in income, while life satisfaction continues to rise with income.
Wolfers suggests that the data in Easterlin's analysis are noisy because it incorporates several different happiness questions. By contrast, Wolfers, Stevenson and Sacks focused on life satisfaction, but to do so, dropped from their analysis a number of countries that didn't have survey data centered on that aspect of well-being.
"Wolfers loses a lot of Latin American countries from his sample," says Carol Graham, senior fellow with the Brookings Institution, who also studies well-being. "If you are interested in the relationship between growth and well-being, you could also argue that dropping a huge number of countries that are of the most interest is also questionable. Every single model is based on assumptions intended to deal with limitations in the data, and you can have very different opinions about whether those assumptions are correct." She says the results can also shift depending on the sample of countries and the time period used.
Graham's own work, for example, has found that Afghans score higher than the world average for daily affect and lower than average on the best possible life ladder. "While naturally cheerful and able to make the best of their lot, the Afghans also know that the best possible life is outside Afghanistan," Graham wrote in a recent blog post about the Easterlin-Wolfers dust-up.
In a season given to self-reflection, the studies provide food for thought when pondering the keys to individual happiness. If you find your well-being has grown over time with your income, as Wolfers and company suggest it should, you can boost it even further by giving generously. Recent research of 136 countries found that using financial resources to help others is consistently associated with greater happiness.
Alternatively, if your happiness has waned because of an income decline, don't ruminate on the loss. Negative feelings make it harder to see the big picture, research shows. Consciously shift your attention to activities that are engaging and meaningful.
On the other hand, if your income has improved over the years and you don't experience a leap in well-being, it's likely the "hedonic treadmill" at work. We get excited about a purchase, then adapt to the things we acquire, and seek more. So it's frightfully easy to adjust to jumps in income; instead of enjoying a bigger paycheck, suddenly we need every dime we make.
There are a few ways to get off the hedonic treadmill. First, avoid comparisons. A number of scholars suggest that it's how we measure up to our peers that matters most to happiness (and thanks to sites like Facebook, it's easier than ever to see how others are doing and judge ourselves against people we haven't seen since the eighth grade).
Graham found this in studies of well-being in China: "When you look rural respondents and ask them to assess their financial situation, they will compare themselves to themselves a year ago. When you ask a migrant urban worker, they automatically look at the reference norm for other people in the new city they just moved to. So their income may have quintupled, but they look at how much other people have."
Second, slow down your hedonic adaptation by spending money on experiences rather than things, and spread them out. You'll get more pleasure out of three or four short vacations than two weeks away each year.
Finally, invest time in things that research has found are critical to well-being: family, friends, your health, your spiritual life, work or hobbies you love. Savor that wealth by taking the time to express gratitude.
And have a happy holiday.
Tuesday, December 28, 2010
Not finance related, but it begins with a bank account ;)
BANK ACCOUNT!!!
A 92-year-old, petite, well-poised and proud man, who is fully dressed each morning by eight o ' clock, with his hair fashionably combed and shaved perfectly, even though he is legally blind, moved to a nursing home today. His wife of 70 years recently passed away, making the move necessary.
After many hours of waiting patiently in the lobby of the nursing home, he smiled sweetly when told his room was ready.
As he maneuvered his walker to the elevator, I provided a visual description of his tiny room, including the eyelet sheets that had been hung on his window. I love it, ' he stated with the enthusiasm of an eight-year-old having just been presented with a new puppy.
Mr. Jones, you haven ' t seen the room; just wait. 'That doesn't have anything to do with it,' he replied. Happiness is something you decide on ahead of time.
Whether I like my room or not doesn ' t depend on how the furniture is arranged ... it ' s how I arrange my mind. I already decided to love it. 'It's a decision I make every morning when I wake up. I have a choice; I can spend the day in bed recounting the difficulty I have with the parts of my body that no longer work, or get out of bed and be thankful for the ones that do. Each day is a gift, and as long as my eyes open, I'll focus on the new day and all the happy memories I've stored away.. Just for this time in my life.
Old age is like a bank account. You withdraw from what you ' ve put in.
So, my advice to you would be to deposit a lot of happiness in the bank account of memories!
Thank you for your part in filling my Memory Bank. I am still depositing.
Remember the five simple rules to be happy:
1. Free your heart from hatred.
2. Free your mind from worries.
3. Live simply.
4. Give more.
5. Expect less.
A 92-year-old, petite, well-poised and proud man, who is fully dressed each morning by eight o ' clock, with his hair fashionably combed and shaved perfectly, even though he is legally blind, moved to a nursing home today. His wife of 70 years recently passed away, making the move necessary.
After many hours of waiting patiently in the lobby of the nursing home, he smiled sweetly when told his room was ready.
As he maneuvered his walker to the elevator, I provided a visual description of his tiny room, including the eyelet sheets that had been hung on his window. I love it, ' he stated with the enthusiasm of an eight-year-old having just been presented with a new puppy.
Mr. Jones, you haven ' t seen the room; just wait. 'That doesn't have anything to do with it,' he replied. Happiness is something you decide on ahead of time.
Whether I like my room or not doesn ' t depend on how the furniture is arranged ... it ' s how I arrange my mind. I already decided to love it. 'It's a decision I make every morning when I wake up. I have a choice; I can spend the day in bed recounting the difficulty I have with the parts of my body that no longer work, or get out of bed and be thankful for the ones that do. Each day is a gift, and as long as my eyes open, I'll focus on the new day and all the happy memories I've stored away.. Just for this time in my life.
Old age is like a bank account. You withdraw from what you ' ve put in.
So, my advice to you would be to deposit a lot of happiness in the bank account of memories!
Thank you for your part in filling my Memory Bank. I am still depositing.
Remember the five simple rules to be happy:
1. Free your heart from hatred.
2. Free your mind from worries.
3. Live simply.
4. Give more.
5. Expect less.
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