Listen to internet radio with
Paul Petillo of Target2025.com/BlueCollarDollar.com
on
at Blog Talk Radio
Showing posts with label socially responsible investing. Show all posts
Showing posts with label socially responsible investing. Show all posts
Wednesday, October 26, 2011
On Socially Responsible Investing
Turns out, Boomers are very interested in this sort of investing. On Financial Impact Factor Radio we had Ron Robins, an MBA, founder and analyst for Investing for the Soul to discuss socially responsible investing. Dave K, Dave Ng and myself were curious about what even after decades continues to be a niche investment for many people. The main problem as Mr. Robins pointed out was the lack of recommendation by the financial services industry, even as the need and ultimately the performance of these investments has grown, and the low exposure in 401(k) plans (about 30% of the plans offer them).
Thursday, December 23, 2010
Researchers believe that Boomers are facing Retirement Risk
Late Boomers, early Boomers, GenXers, it's all the same. Retirement will be a risk and most of us aren't taking the risk seriously.
Most of us make a flawed assumption about retirement. We save (or as I prefer, invest) for our retirement and do so based on the fact that the taxes we pay now will be the same when we retire. This sort of assumption, according to the Center for Retirement Research at Boston College, puts 51% of American households at risk of not having enough to sustain their pre-retirement lifestyle in a post-retirement world.
The CCR takes the view that if this nation stays on its current course, and nothing is done about the increased level of Federal spending, "government debt will increase from the 2010 level of 61 percent of GDP to 79 percent by 2020, 118 percent by 2030, and 180 percent by 2040." This sort of escalation will result in one of two things happening to offset those increases: the government will need to reduce spending or increase taxes - or both. Neither option bodes well for those planning on retirement.
The Center is focused on a broad-based National Retirement Risk Index (NRRI) that "measures the percentage of working-age households who are ‘at risk’ of being financially unprepared for retirement." Even if the taxes we pay remain the same as they are today, most American households will find retirement financially challenging. But what if they rise as the report suggests they will - or better will need to?
The report was issued prior to the extension of the Bush-era tax cuts, which had they been allowed to expire, would have increased the overall taxes most of us pay impacting the amount of money we currently save for retirement. As a group, we react to incentives or in the case of increased taxes, disincentives in predictable ways.
First, we tend to invest less (if the pull back of the company match following the market downturn in 2008 and our failure to make up the shortfall in the wake of that decision is any indication) as we adjust our household budgets.
Those budgetary needs are real and present. But the future needs in retirement as a result are a real and present danger most of us are ignoring. Add the possibility (or the real likelihood) that taxes will increase in the coming decades from their current levels, and you have a recipe for financial disaster brewing beneath the surface.
The CCR projects that a value-added tax (VAT) would be necessary by 2020, and this tax, once introduced would need to escalate from 0.9% to 8.1% in the thirty years following its introduction. Social Security taxes would also need to increase from the current payroll tax of 12.4% to 14.7% by 2050. The group most at risk: older workers who have little time remaining in the workforce to increase their contributions to offset that shortfall. Younger workers would have time to adjust but the need to do so might cause a natural human reaction when faced with some tough economic decisions is to recoil, not regroup.
If a value-added tax were instituted, the retired worker would face some serious financial challenges that they may not have planned for while building their nest-egg. Granted, Social SEcurity tax increases would not impact this group, but once retired, each change in the tax structure, no matter how minute would lower the available amount of money they might need (and counted on) and i doing so, increase retirement risk.
In the wake of any fiscal policy changes to make up for the growing GDP, the CCR suggests that a higher target replacement rate would be needed. There is only one way to do this: increase contributions. Doing so would have the net effect of slowing the ability of any group to sustain a lifestyle current to the one they have and if they failed to budget for tax increases, put their retirement hopes and dreams in jeopardy.
Gen Xers would need to budget to spend less and invest more at a time when college debt, families and independence impact their day-to-day financial decisions. While this group can adjust their consumption rates to make up for the shortfall, it is unclear that they will. Late Boomers, those caught between the distant retires (Gen Xers) and the soon-to-be retirees (Early Boomers) also face risks. While those risks are not as great as their older cohorts, it would require them to make drastic cuts in how they currently live to make up for the projected shortfall in retirement.
The report concludes withe following statement: "If households were to respond by cutting savings as well as consumption, due to choice or necessity, the percentage of households ‘at risk’ would be larger. This brief errs on the conservative side by assuming no behavioral effect." But we know better.
We know that you will make some bad choices between now and then. If tax levels rise while you are still employed, the impact will be direct on how much money you take home. If you realize that your retirement calculations are incorrect, you may conclude that working longer (rather than saving more and adjusting spending habits) is the only way to make for lost ground and a diminishing timeframe.
We know that you will perceive risk as the enemy and find ways to reduce your exposure to risk by reverting to more conservative investment schemes like target date funds. This will have the net effect of protecting your money while forfeiting potential growth opportunities. The younger you are when you recoil from risk, the longer it will take to reach optimum retirement levels. Ironically, avoiding risk while you are working increases your retirement risk.
There are options. The first and most obvious is increase your contributions. This is the right choice to make but comes with a caveat: you cannot increase your debt in the process, a normal reaction to lower daily spending opportunities because your budget has tightened.
The second and less obvious choice is to assume some risk either in your 401(k) or outside. It is true that the current tax rate will be extended. So why not pay the taxes for your retirement income now in the form of a Roth IRA while rates are predictable and lower than future rates?
Here's an idea worth considering: invest in your 401(k) up to 10% of your pre-tax income, match or no match (more if you can). Use the most aggressive funds in the plan to position yourself for the greatest amount of growth (if you are younger - Gen Xer or an Early Boomer). On the outside of that plan, open a Roth IRA and focus your investments on an index fund such as the S&P500.
Because of the tax efficiency of an index, paying the taxes in the future on what your tax-free principal has earned, even if they are higher, would be less than what your 401(k) or traditional IRA owner would pay. There is no fixed time to begin taking distributions (it is possible this could change but a lot of tax analysts think this is unlikely) and your estate is better served with a Roth IRA. Because you can begin distributions when you want, this could be an added boost for your retirement income in the advent of any tax increases in the future.
No one can say for sure that taxes will stay the same or go up. We do know one thing for certain: they will go up - as will inflation. If you aren't planning for this, you should and the sooner the better.
Most of us make a flawed assumption about retirement. We save (or as I prefer, invest) for our retirement and do so based on the fact that the taxes we pay now will be the same when we retire. This sort of assumption, according to the Center for Retirement Research at Boston College, puts 51% of American households at risk of not having enough to sustain their pre-retirement lifestyle in a post-retirement world.
The CCR takes the view that if this nation stays on its current course, and nothing is done about the increased level of Federal spending, "government debt will increase from the 2010 level of 61 percent of GDP to 79 percent by 2020, 118 percent by 2030, and 180 percent by 2040." This sort of escalation will result in one of two things happening to offset those increases: the government will need to reduce spending or increase taxes - or both. Neither option bodes well for those planning on retirement.
The Center is focused on a broad-based National Retirement Risk Index (NRRI) that "measures the percentage of working-age households who are ‘at risk’ of being financially unprepared for retirement." Even if the taxes we pay remain the same as they are today, most American households will find retirement financially challenging. But what if they rise as the report suggests they will - or better will need to?
The report was issued prior to the extension of the Bush-era tax cuts, which had they been allowed to expire, would have increased the overall taxes most of us pay impacting the amount of money we currently save for retirement. As a group, we react to incentives or in the case of increased taxes, disincentives in predictable ways.
First, we tend to invest less (if the pull back of the company match following the market downturn in 2008 and our failure to make up the shortfall in the wake of that decision is any indication) as we adjust our household budgets.
Those budgetary needs are real and present. But the future needs in retirement as a result are a real and present danger most of us are ignoring. Add the possibility (or the real likelihood) that taxes will increase in the coming decades from their current levels, and you have a recipe for financial disaster brewing beneath the surface.
The CCR projects that a value-added tax (VAT) would be necessary by 2020, and this tax, once introduced would need to escalate from 0.9% to 8.1% in the thirty years following its introduction. Social Security taxes would also need to increase from the current payroll tax of 12.4% to 14.7% by 2050. The group most at risk: older workers who have little time remaining in the workforce to increase their contributions to offset that shortfall. Younger workers would have time to adjust but the need to do so might cause a natural human reaction when faced with some tough economic decisions is to recoil, not regroup.
If a value-added tax were instituted, the retired worker would face some serious financial challenges that they may not have planned for while building their nest-egg. Granted, Social SEcurity tax increases would not impact this group, but once retired, each change in the tax structure, no matter how minute would lower the available amount of money they might need (and counted on) and i doing so, increase retirement risk.
In the wake of any fiscal policy changes to make up for the growing GDP, the CCR suggests that a higher target replacement rate would be needed. There is only one way to do this: increase contributions. Doing so would have the net effect of slowing the ability of any group to sustain a lifestyle current to the one they have and if they failed to budget for tax increases, put their retirement hopes and dreams in jeopardy.
Gen Xers would need to budget to spend less and invest more at a time when college debt, families and independence impact their day-to-day financial decisions. While this group can adjust their consumption rates to make up for the shortfall, it is unclear that they will. Late Boomers, those caught between the distant retires (Gen Xers) and the soon-to-be retirees (Early Boomers) also face risks. While those risks are not as great as their older cohorts, it would require them to make drastic cuts in how they currently live to make up for the projected shortfall in retirement.
The report concludes withe following statement: "If households were to respond by cutting savings as well as consumption, due to choice or necessity, the percentage of households ‘at risk’ would be larger. This brief errs on the conservative side by assuming no behavioral effect." But we know better.
We know that you will make some bad choices between now and then. If tax levels rise while you are still employed, the impact will be direct on how much money you take home. If you realize that your retirement calculations are incorrect, you may conclude that working longer (rather than saving more and adjusting spending habits) is the only way to make for lost ground and a diminishing timeframe.
We know that you will perceive risk as the enemy and find ways to reduce your exposure to risk by reverting to more conservative investment schemes like target date funds. This will have the net effect of protecting your money while forfeiting potential growth opportunities. The younger you are when you recoil from risk, the longer it will take to reach optimum retirement levels. Ironically, avoiding risk while you are working increases your retirement risk.
There are options. The first and most obvious is increase your contributions. This is the right choice to make but comes with a caveat: you cannot increase your debt in the process, a normal reaction to lower daily spending opportunities because your budget has tightened.
The second and less obvious choice is to assume some risk either in your 401(k) or outside. It is true that the current tax rate will be extended. So why not pay the taxes for your retirement income now in the form of a Roth IRA while rates are predictable and lower than future rates?
Here's an idea worth considering: invest in your 401(k) up to 10% of your pre-tax income, match or no match (more if you can). Use the most aggressive funds in the plan to position yourself for the greatest amount of growth (if you are younger - Gen Xer or an Early Boomer). On the outside of that plan, open a Roth IRA and focus your investments on an index fund such as the S&P500.
Because of the tax efficiency of an index, paying the taxes in the future on what your tax-free principal has earned, even if they are higher, would be less than what your 401(k) or traditional IRA owner would pay. There is no fixed time to begin taking distributions (it is possible this could change but a lot of tax analysts think this is unlikely) and your estate is better served with a Roth IRA. Because you can begin distributions when you want, this could be an added boost for your retirement income in the advent of any tax increases in the future.
No one can say for sure that taxes will stay the same or go up. We do know one thing for certain: they will go up - as will inflation. If you aren't planning for this, you should and the sooner the better.
Friday, March 12, 2010
Investing Responsibly with SRI
Earlier today, on MomsMakingaMillion radio, I discussed the topic of socially responsible investing. I have written about this topic numerous times and will continue to do so as the effort to invest where the right thing is being done continues to expand. Once it was all about ethics and morality. Now it is including shareholder advocacy and community involvement.
Here is a transcript of the interview I had with Kat Bellucci.
Kat Bellucci: A lot of us have become very aware about what we eat, what we buy and what kind of a footprint we leave. And then, when we invest our money, we often don’t consider that the companies we are buying in our mutual funds might be the very businesses we would avoid in the marketplace.
Well ladies, its time to take a look at taking your investments down a path that suits your concerns about the world around and the world your children will inherit?
Paul Petillo: Most investors are narrowly focused. They want to make money. But some investors want to make money without destroying the environment, without violating their personal values and possibly even helping others in the process.
While these types of investments have been around for decades, the cost of doing this sort of investment was not always cheap. The sorts of investments first came across my radar when my daughter, a free spirit who was interested in investing asked me: “are there any mutual funds that are ethical?”
What she was really asking was whether the companies that the mutual funds invested in were screened for more than just performance. While we would like to believe that all mutual funds are ethical; what about the companies they invest in?
Kat: So what describes ethical?
Read the full interview here at Target2025.com
Tuesday, January 26, 2010
How Green is Your Portfolio?
As we age, we tend to be come more concerned. And not just about our own retirement, although we should be as concerned as anyone about it. But we become more caring. We have children who may needs us more now than when they were younger. And they in turn may have children, your grandchildren. More than how much can we leave them in terms of inheritance, Boomers are increasingly concerned about the state of the world they are living in and whether they can change it for the good.
But can the investment choices we make have an influence. And of so, can we make any money switching to a more sustainable approach? As the investment year that was 2009 came to a close, one interesting group of funds came to the top of the heap: socially responsible funds or SRI.
They have long been derided by mainstream investors. And in many cases, with good reason. Socially Responsible mutual funds were small (higher risk), cost more (generally at the top of the list for fees-charged) and unable to beat the usual benchmarks most funds are held against. That is until this year.
As it turns out, investing in socially responsible funds would have done the investor a world of good while doing the world some good. We all know now that actively managed mutual funds outperformed the S&P 500 index in 2009. While critics suggest that this is cyclical - and they may be right on some counts - the fact that 65% of these SRI funds who focus on businesses doing the "right thing" not only for their shareholders but the world in which these shareholders live, took much of the investment world by surprise. Read more to find out whether it is socially responsible to outperform.
Paul Petillo is the Managing Editor of Target2025.com
But can the investment choices we make have an influence. And of so, can we make any money switching to a more sustainable approach? As the investment year that was 2009 came to a close, one interesting group of funds came to the top of the heap: socially responsible funds or SRI.
They have long been derided by mainstream investors. And in many cases, with good reason. Socially Responsible mutual funds were small (higher risk), cost more (generally at the top of the list for fees-charged) and unable to beat the usual benchmarks most funds are held against. That is until this year.
As it turns out, investing in socially responsible funds would have done the investor a world of good while doing the world some good. We all know now that actively managed mutual funds outperformed the S&P 500 index in 2009. While critics suggest that this is cyclical - and they may be right on some counts - the fact that 65% of these SRI funds who focus on businesses doing the "right thing" not only for their shareholders but the world in which these shareholders live, took much of the investment world by surprise. Read more to find out whether it is socially responsible to outperform.
Paul Petillo is the Managing Editor of Target2025.com
Subscribe to:
Posts (Atom)