Just so you know

by Don Kuehn

You must learn from the mistakes of others. You can't possibly live long enough to make them all yourself. --Sam Levenson

The end of the AFT's publishing year seems like a good time to touch upon a few observations and sore points about your money (or lack thereof).

• There's an unhealthy spiral of kids who graduate from high school with no clue about how to handle money, then go to college and amass serious debt on credit cards, get married in elaborate ceremonies that cost more than my first house, lavish every toy and gadget on their kids, fail to save for college, and find themselves facing retirement without enough resources to survive the next 30 years.

• Children today seem to think that they are entitled to enter adulthood with the same standard of living that their parents achieved after 10, 20 or more years of economic sacrifice. It takes time, and there's a maturation process that requires setting financial goals and achieving them.

• Parents, in general, lack financial confidence. According to a study by Northwestern Mutual, only 23 percent of parents had discussed investing with their children. Just 39 percent had talked about using credit cards responsibly. Half of the survey respondents said they would be poor role models for their kids when it comes to handling money. If you are a parent, you have to get past, "Money doesn't grow on trees." Sometimes the poorest man leaves his children the richest inheritance.

• Although women who have access to employer-sponsored savings plans--like 401(k)s--put the same percentage of their income aside each month as men do, they end up with far less money at retirement than their male cohorts. This is partly because they earn less for the same work, and partly because their opportunities for career advancement are stunted from being out of the job market for blocks of time raising children. As a result, they earn less over their careers.

• The average age of widowhood, according to BusinessWeek, is 56. The typical widow exhausts her husband's life insurance within 2½ months. Most people have small policies through their employer--usually $50,000 or less. The odds are, if you're a woman, you'll either be widowed or divorced. You owe it to yourself to learn as much about saving and investing your money as you can. Start now.

• Fewer than 37 percent of us have ever tried to calculate how much money we will need in retirement. So, what if you reach your planned retirement age and then take time to figure it out, only to find that you have fallen far short? Aren't your choices to forego retirement and keep working, retire and keep a part-time job or continue doing as you have and spend until the cash runs out? Why not go to http://www.choosetosave.org/ and complete the "ballpark estimate" retirement planning worksheet, just for fun? It will open your eyes.

• Life expectancies in the United States are growing. Time was when a person who lived beyond age 65 was pushing the envelope. Today, a man age 65 has a 50 percent chance of living to 85 and a 25 percent chance of making it to 92. A 65-year-old woman has a 50-50 chance of getting to 88 and a 25 percent chance of seeing 94. But a couple, both age 65 now, has a 50 percent chance that one will live to 92 and a 25 percent chance that one of them will live to 97 years of age. The implications of saving for retirement are enormous.

• The four biggest threats to a comfortable retirement are inflation, increased longevity, underestimating expenses (especially for healthcare and long-term care) and unsustainable rates of withdrawal from retirement accounts. Most people have wised up to the need for a plan to distribute their assets after they die, but very few give much thought to how they will distribute their wealth while they are alive.

• While there are experts who throw out numbers for withdrawal rates that range from 3 percent to 6 percent, consider gradually increasing the percentage you take out of your investment accounts. A formula put out by Fidelity Investments last year suggested that in your fifties, you could safely withdraw just 3.5 percent to 5 percent of your assets annually. In your sixties, you can boost that to 4 percent to 5.5 percent; in your seventies, 5 percent to 7 percent; and in your eighties, 6.5 percent to 10 percent. It's best to be conservative. Once you've run out of savings, there's no going back.

  A person with half a million dollars invested who has the misfortune of experiencing a multi-year market decline in the first few years of retirement could see her assets completely used up in less than 20 years. The same person, lucky enough to see steady market returns for the first 20 years before any significant multi-year correction, should still have more than 70 percent of her assets 30 years after retirement. Timing may be everything, but luck counts, too.
   

• On average, Americans save only about 4 percent of their after-tax income. That's poor by comparison to the French (12 percent), Germans (14 percent) and the Japanese (15 percent).

• About 43 percent of American families spend more than they earn each year. Average households carry almost $8,000 in credit card debt. Most staggering: On average, Americans spend $1.22 for each dollar they earn!

• On a popular television show recently, the host was trying to help a young couple out of a financial bind. They had less than 50 bucks in the bank, had filed for bankruptcy less than a year earlier but hadn't changed their spending habits. They continued to pay $135 a month for cable, buy designer clothes, go out for lunch and pay credit card minimums with other credit cards! Our culture is driven by advertisers who try to blur the line between "needs" and "wants."

• Credit card companies and banks make no money on accounts paid in full each month. The lure of easy credit is a siren's call, and too many of us are answering it. In September 2003, bankcard delinquencies reached 4.09 percent; auto loan delinquencies hit 2.48 percent and home equity loan defaults topped out at 2.52 percent--all record levels. If you are already in debt, the first thing to do is stop getting into more debt.

• A reader e-mailed me recently asking for advice on where to invest $20,000 that she wouldn't need for 10 years or more. I explained that I am not qualified to advise her where to put her money (as tempting as it might be) but that with a little study, she could find places that are safe, beat inflation and allow her access to the money should she need it sooner than expected.

My knowledge comes from trial and error, and from educating myself about money. There's plenty of help for readers who have never gotten into the "investing thing." Go online and learn about investments and teach yourself how to grow your money. Here are a few places to start:

http://www.smartmoney.com. Look for tabs on "personal finance" or "mutual funds." After each article there are more articles archived. Some features are only available with premium services at an extra fee.

http://www.motleyfool.com/. You can get free e-mail newsletters and join discussion boards on related topics. Look for links to personal finance, "Fool's school" and retirement.

http://www.cbs.marketwatch.com/. Go to "personal finance" and look at sub-tabs on investing, mutual funds, retirement, etc. Especially good is "getting started."

http://www.fidelity.com/. Under planning and retirement, look for estate planning and the retirement resource center. There are several planning tools and calculators that let you plug in your own numbers and visualize your financial situation.

I know there are a lot of generalizations in this piece about "average" and "typical" Americans and their families. But too many of us fall into the cases cited here. If you are one of them, there is no time like right now to pledge to change your circumstances. Educate yourself about money and begin a disciplined plan to get out of debt or start an investing program. The future starts here.