Category Archives: debt

How Much Do You Need to Save for Retirement?

In the financial advisory business, one of the most pressing and controversial topics is how much money people need to save during their working years in order to provide for long-term retirement income.  The research on this topic has evolved quite a lot in recent years, and a recent issue of Money magazine features a series of articles representing the current view on this critical topic.  These articles, based around interviews with a number of the current thought leaders on this topic, deserve to be widely read and discussed.

The series of articles in Money kicks off with perspectives by Wade Pfau.  Pfau’s introductory piece suggests a difficult future for American workers.  A traditional rule-of-thumb in retirement planning is called the 4% rule.  This rule states that a retiree can plan to draw annual income equal to 4% of the value of her portfolio in the first year of retirement and increase this amount each year to keep up with inflation.  Someone who retires with a $1 Million portfolio could draw $40,000 in income in the first year of retirement and then increase that by 2.5%-3% per year, and have a high level of confidence that the portfolio will last thirty years.  It is assumed that the portfolio is invested in 60%-70% stocks and 30%-40% bonds.  The 4% rule was originally derived based on the long-term historical returns and risks for stocks and bonds.  The problem that Pfau has noted, however, is that both stocks and bonds are fairly expensive today relative to their values over the period of time used to calculate the 4% rule.  For bonds, this means that yields are well below their historical averages and historical yields are a good predictor of the future return from bonds.  The expected return from stocks is partly determined by the average price-to-earnings (P/E) ratio, and the P/E for stocks is currently well-above the long-term historical average.  High P/E tends to predict lower future returns for stocks, and vice versa.  For a detailed discussion of these relationships, see this paper.  In light of current prices of stocks and bonds, Pfau concludes that the 4% rule is far too optimistic and proposes that investors plan for something closer to a 3% draw rate from their portfolios in retirement.  I also explored this topic in an article last year.

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What Happens in A Nation of Renters?

Time magazine has a new article on changes in the home ownership in America.  The article, titled A Nation of Renters: Should We Be Worried That Fewer Americans Own Homes?, explores the substantial decline in the fraction of Americans who own their own homes.  I have followed this issue for quite some time and the implications for investors may be substantial.  Continue reading

Financial Literacy: State of the Union in 2013

April is financial literacy month.  I believe that lack of financial knowledge is one of the most critical problems that our country faces. Continue reading

Choosing and Paying for Higher Education

I am now at an age at which many of my friends have kids preparing for, or going to, college.  I have a few more years to figure out the details, but this is an issue that I have followed for a long time.  My local in-state university, the University of Colorado at Boulder (CU), estimates the all-in cost of attendance at $26,000 per year.  This varies a bit, based on which program you choose.  Tuition, fees, and books cost about $14,000 per year (though this varies by program) and the estimated cost of room and board is about $12,000 per year.  Continue reading

The Golden Rule of Investing

Guest post by Contributing Editor, Lowell Herr, ITA Wealth Management. Lowell is a subscriber to the Portfolioist and his investment philosophy is similar to ours.  Enjoy.

The Golden Rule of Investing is simply, “Save as much as you can as early as you can.” The operative word is early. William J. Bernstein lays it out in stark language in his book, “The Investor’s Manifesto“ when he writes, “Each dollar you do not save at 25 will mean two inflation-adjusted dollars that you will need to save if you start at age 35, four if you begin at 45, and eight if you start at 55. In practice, if you lack substantial savings at 45, you are in serious trouble. Since a 25-year-old should be saving at least 10 percent of his or her salary, this means that a 45-year-old will need to save nearly half of his or her salary. Most 45-year-olds will find this nearly impossible, if for no other reason than the necessity of paying living expenses, payroll taxes, and income taxes.” Continue reading

Investors’ 10 Most Common Behavioral Biases

Guest post by Contributing Editor, Robert P. Seawright, Chief Investment and Information Officer for Madison Avenue Securities.

Barry Ritholz (of The Big Picture and a Sunday Business columnist at The Washington Post) recently contributed Investors’ 10 most common mistakes to The Washington Post Business Section quarterly investing section. It’s a commentary that he has been working on for a while — the ten topics are listed with links to longer discussions of each common mistake here. I created my own investing “checklist” (here) in response to Barry’s original list. For yet one more iteration of the theme, I offer my list of Investors’ 10 Most Common Behavioral Biases.  There are a number of others, of course, and more will continue to be uncovered.  But I think that these are the key ones. Continue reading

Sector Watch: Low-Beta Stocks

Financial theory suggests that risk and return go hand-in-hand:

Small company stocks tend to be riskier and outperform large company stocks. Long-term bonds tend to be riskier and outperform short-term bonds. Corporate bonds tend to be riskier than Treasury bonds (with comparable terms) and outperform Treasuries over time.

However, there is one group of stocks that has consistently defied this risk/return relationship: Low-beta stocks. A low-beta strategy involves selecting stocks that have a lower-than-average beta value. (Beta is a measure of the stocks’ volatility and adding low-beta stocks to your portfolio can help investors build a diversified portfolio.) The good news for investors here is that Continue reading