Isn't It About Time?

If your life is anything like mine, I’m sure you can relate: it seems like every available moment is filled with multiple activities that you need and want to take part in, plus, it seems that the to-do list grows longer daily. If you’re not dashing off to a baseball game or soccer match, then there’s club meetings or church commitments, yard work, family obligations, volunteer activities… the list goes on and on.

Add to this the stress that goes along with having to make all of the financial decisions in your life, not knowing for sure where to turn for advice, and ultimately making a choice that just “seems right” – but there’s always that question nagging in the back of your mind: “Am I doing the right thing?”.

Wouldn’t it help to have an expert review your entire financial picture – your credit cards, insurance, real estate, employer plans, mortgages, IRAs, 401(k)s, etc. – and provide a clear-cut approach to moving toward your life’s goals, answering that nagging question?

I can’t say that this kind of guidance will give you more time, but perhaps you’ll be able to enjoy your life’s activities a little more with one less thing on your mind.

Isn’t it about time? Let’s get started.

Student Loans

Anyone who has student loans that are in need of consolidation should act now and get this done before the end of June. On July 1, the guaranteed rates for consolidated student loans will increase dramatically, from 4.7% to 6.54%.In addition, beginning on July 1, a recent change in the law restricts borrowers to one consolidation – regardless if you’ve gone back to school and incurred additional loans above the original consolidation.

College Preparation

If your student will be a sophomore or junior in high school this fall, it’s time to get serious (very serious, if they’re going to be a senior!) about preparing for college. This includes school choices, scholarship research, funding arrangements, and other financial issues.

Don’t know where to start? Give me a call. As a Certified College Planning Specialist, I am in a unique position to help you navigate this important preparation phase as you and your child prepare for this next chapter of their lives.

New Retirement Risk Index

Earlier this month, the Center for Retirement Research (CRR) at Boston College published a briefing on their new Retirement Risk Index.

As you might expect, most of the report is pretty dull, without much of any interest to anyone other than a statistics geek like me. There are a couple of notes in the text though, that I thought I’d point out to you, as they indicate some trends that you may be able to identify with, or they might just spur you into taking some actions for yourself and your family.

Social Security Replacement Ratio. The first interesting fact that the CRR found is that, for the foreseeable future, the rate at which Social Security is expected to replace your salary upon retirement will continue to erode. This isn’t a shocking revelation, we’ve expected it and quite often incorporate this fact into retirement plans, but this report is the first I’ve seen where actual projections are being made as to the rate of the erosion.

The report indicates that the replacement ratio for 1992-2002 was 40%, when Medicare Part B deduction is taken into account. The projection is that, by 2030, when the first of Generation X will be ready to retire, the replacement ratio will be approximately 33%. This represents a reduction in the real purchasing power of the payments of approximately 17.5% - meaning that you’ll either have to make up that much more with your retirement account, or you’ll need to tighten your belt that much more.

The Risk Index. What the index itself indicates is that there is a certain segment of our population that is “at risk” of having inadequate income for retirement. Overall, the CRR says that 43% of all households are “at risk”. When you take that figure and apply it to those around you, it quickly becomes apparent that we’re going to have a major problem as folks begin to retire – especially the very large “Boomer” generation. Nearly one out of every two households are considered “at risk”.

For the earlier Boomers, born 1946-1954, the figure is a little better, at approximately one out of three at risk. Perhaps this means that as folks get nearer to retirement, they “see the light” and are making up the difference where possible. I hope so.

Exchange-Traded Funds

For those of you who have worked with me, you likely already know that I am a fan of Exchange-Traded Funds, or ETFs for developing appropriately diversified portfolios.
Why ETFs? There are several reasons, but the ones I find most compelling are:

• Low cost
• Ease of Use
• Simplicity

Taking these factors one-by-one, first I’ll address the Low Cost factor. Since most ETFs require no management since they’re simply tied to an index, the expense ratio is incredibly small. For example, the average S&P 500 index mutual fund carries an expense ratio of 0.577%, while the average S&P 500 ETF has an expense ratio of roughly one-sixth the size, at 0.092%. Over the long term (which all of our equity investments should be) this differential can make a substantial difference in the results of your investments.

I work very hard to make sure that your investment portfolio is as cost-effective as possible – and using ETFs is, at this point in time, the best option I can find that strikes the balance between low cost and effective diversification.

Secondly, I choose ETFs due to their Ease of Use. What I mean by this is that ETFs, specifically index ETFs, provide the investor with immediate access to broad portions of the stock market with ease. When developing a portfolio of appropriate diversification, there is no doubt that you are covering the various facets of the market when you choose an indexed ETF for that market segment.

Lastly, the Simplicity of ETFs is readily apparent – when you realize that you can purchase an ETF from any brokerage account, with only the (usually small) transaction fee, you notice that there’s a small delay as your transaction settles in the account, unlike traditional mutual funds, which make take a day or two to complete the transaction.

Combining the simplicity, ease of use, and low cost of ETFs makes this choice a “triple threat” when constructing an investment portfolio.