4 Tips for How Young People Should Think About Retirement--Ben Kramer-Miller

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If you’re relatively young like me, then it might seem silly to begin thinking about retirement. But if you ask most Baby Boomers today, they’ll probably tell you that it’s a good idea because chances are you’ll be asking a Baby Boomer who didn’t and is consequently unprepared.
As a young person, it may seem like you have time before you need to worry about these things, and you’d rather take the money you would have put away for retirement and spend it on something fun. But as I’m about to show you, preparing for retirement while you’re young is crucial to saving up enough money to retire the way you want to, and 40 years from now you will have wished that you had taken these steps in order to prepare for your future.

1. Put money away regularly and start now

This is so easy that it is easy to forget to do it. But even putting away $100/week can make a huge difference. Don’t believe me? Consider that if you put away $100/week for a year and then generate an average annual 8 percent return for 40 years, this $5,000 becomes over $100,000! With this in mind, it is clear that the early years are the most important in building long-term wealth that can support you when you’re too old to work or too old to want to work. If you start late, then you miss out on most of the benefits of the long-term power of compounding, and you have to save 3-5 times as much.

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2. Do a lot of research

You probably think that you have a job and that you can take some money and put it away for retirement. But managing your money is just as important as your “regular” job, and it is possibly more important. Suppose you do no work and put away the same $5,000 for 40 years. Since you did no work you only generate a 5 percent return on your money. That $5,000 grows into $35,000. Not too shabby. But if you research your investments and are able to generate a 12 percent annual return over the same 40 years, you end up with $465,000. That extra work is worth $430,000!
Chances are if you’re young, you’re not making that kind of money, but if you’re working to make your money work for you then you can generate that sort of wealth! You won’t notice a huge difference immediately, but those extra few hours a week of researching your investments can mean the difference between saving a few hundred thousand for retirement by the time you’re 65 and retiring a multi-millionaire when you’re 50.

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3. Take calculated risks and be a contrarian

The most successful people take risks. If they succeed, they get ahead, and if they fail, they learn something for next time. As a young investor, you can afford to make mistakes now, and making them will make you a better investor going forward. Now when I say to take calculated risks you need to make sure that the potential reward justifies the risk. This often means being a contrarian and buying assets that everybody hates. Which assets does this encompass? There are certainly a lot that are down and out now, but what it doesn’t include are probably assets that you feel comfortable in such as “blue chip” stocks and bonds.
On the other hand, there are potentially incredible opportunities in assets that people hate such as Russian stocks, Argentinian stocks, coal stocks, and so on. We all know the narratives that keep people out of these last three assets, but at the same time the fact that the public has no interest in these assets means that the risks are priced in and then some.
When you’re thinking about generating long-term gains that can make you a lot of money, you need to consider owning assets that make you uncomfortable.

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4. Learn from your mistakes

If you spend a great deal of your time investing, then you are going to make mistakes. Mistakes will lose you money but you get experience in return. If you learn from this experience, you will make fewer or less costly mistakes in the future when you can’t afford to make them. If you’re young, you can afford to lose some money here or there because you have plenty of time to make it back. But make sure you don’t lose that money for nothing. If you don’t learn from your mistakes, you will lose money when you can’t afford to lose it, and you can potentially get into a lot of trouble.

Wallstreetcheatsheet

Americans Are Bad at Guessing How Long They’ll Live -Josh Zumbrun

One of the great economic challenges facing both policy makers and individuals is figuring out how to plan and pay for retirement. The challenge is that nobody knows, least of all people themselves, how long they’re going to live.
In 1992, researchers at the University of Michigan‘s Health and Retirement Study began asking people in their late 50s to estimate their odds of living to the age of 75, and have followed them since. New research, being presented today at the Brookings Institution, shows just how poor a job those initial respondents have done.

Among the people who thought they had no chance of living to age 75 (presumably, a group in very bad health in their late 50s), nearly half of them–49%–actually reached the age of 75.
Among people who gave themselves 50-50 odds, a full 75% actually lived to age 75. In fact, aside from people who gave themselves 90% or 100% odds of living to age 75, nearly everyone was too pessimistic about their chances. (Though people who give themselves 100% odds aren’t being terribly realistic.)
The paper’s authors Katharine Abraham from the University of Maryland and Benjamin Harris from Brookings, are presenting the data as part of a conference on retirement security. Their paper suggests that many people aren’t necessarily planning out their retirement savings in the right way.
People have only a vague sense of their odds–those who gave themselves 0% chance actually were less likely to live to 75 than those who gave themselves higher chances–but that means people probably aren’t planning how to stretch their savings into their late 70s and 80s. The odds are they could have a pretty long retirement. So many retirees face the unexpected risk of running out of retirement savings early, what economists call “longevity risk.”
Ms. Abraham and Mr. Harris think there’s an elegant solution for this problem of “longevity risk.” People could buy so-called longevity annuities. At age 60, you could take $100,000 and buy the annuity. Then at age 75 you would start getting an annual income of about $1,575 a month or $19,000 a year for the rest of your life. If you wait until age 85 to start collecting, the payments are even more substantial, $4,500 a month or $54,000 a year for the rest of your life.
If you knew you were going to live into your 100s, this would obviously be the way to go. But for most people $100,000 is a big, if not unimaginable, chunk of money to set aside at age 60 and not get back for a quarter century. A lot of people would rather have that money now. After all, what are the odds of actually living to 75? Or 85? They can’t be that good, right?

Culled from WSJ

US Pension Plans Need Massive $110 Billion In 7 Years-Moodys Warns

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Thanks to improving life expectancy and the Federal Reserve’s financial repression lowering yields, US company pension funds have been hit by a double whammy. As Moody’s warns, companies will have to find $110 billion in the next seven years to fund pension liabilities shortfalls. Moody’s adds, “given these increasing liabilities and cash drains, we expect to see an acceleration in lump sum offers,” as firms try to derisk. As Chief Investment Officer reports,

Improving life expectancy is expected to add billions to the amount companies must pay into their defined benefit plans.

US companies will have to find $110 billion in the next seven years to fund pension liabilities as life expectancy increases, according to ratings agency Moody’s.
Using data from new mortality tables published by the Society of Actuaries last week, Moody’s calculated significant increases in the amount of cash US firms would have to contribute to their defined benefit pensions in order to match growing liabilities.
The new mortality tables show male life expectancy at age 65 in the US has improved by two years since 2000, when the Society of Actuaries last updated its assumptions. For women, life expectancy at age 65 has improved by 2.4 years. This has resulted in an estimated increase of between 4% and 8% in company pension obligations.
Moody’s applied the calculations to the funding obligations for 10 of the biggest listed companies in the US. IBM’s funding obligations – which include servicing the pension fund as well as regular contributions adjusted for 2% inflation – were estimated at $99.7 billion in 2013, but Moody’s calculations showed this could increase to as much as $113.6 billion at the top end of assumptions.

“Given these increasing liabilities and cash drains, we expect to see an acceleration in lump sum offers and annuitizations similar to Motorola’s recent pension plan restructuring, which, through a combination of annuitizations and lump sum offers, it expects will reduce its [obligations] by $4.2 billion,” wrote Wesley Smyth, senior accounting analyst at Moody’s.
In September, ahead of the publication of the tables, Moody’s predicted the new data would trigger a rise in de-risking activity. This year has already seen several giant transactions, with the BT Pension Scheme, Motorola, Bristol-Myers, and two Dutch miners’ pension funds all engaging in de-risking deals.

Culled from zero hedge in Blacklisted