Why are oil prices rising when the situation in Iraq seems to be improving, tensions with Iran appear to be easing and a mild late winter is expected in the US?
Now that the price of crude oil has crossed the psychologically important US$100-a-barrel threshold, and then retreated, what direction will it take next?
Many experts say it will go up, then down, and then maybe up again. That, anyway, has been the pattern of the last several years of volatile prices.
The arguments for even higher oil prices are well known. The economies of China and India are booming and hungry for energy. Oil fields in Mexico and the US are drying up, tightening world supplies. Venezuelan President Hugo Chavez is using oil as a political weapon. Rebels in Nigeria are creating havoc in some of Africa's most productive oil fields.
The war in Iraq rages on. The dollar is weakening, causing hedge funds and traders to flee to oil and other commodities as a safe haven.
But all those factors were in play last summer when the price fell to about US$60 a barrel, before it rallied at the end of the year. The price touched US$100 on Wednesday and surpassed that briefly on Thursday before retreating after the US government reported higher-than-expected heating oil and gasoline supplies. The price settled at US$99.18 a barrel, down 44 cents.
"Predicting oil prices continually demonstrates the perils of prophecy, because oil prices are the derivative of what happens in the global economy and global geopolitics," said Daniel Yergin, chairman of Cambridge Energy Research Associates. Yergin said he could foresee oil prices surging as high as US$150 in the next few years or falling as low as US$40.
John Richels, president of the Devon Energy Corp, an international oil and gas company based in Oklahoma City, said US$150 a barrel was possible, but so was US$55.
"We have to make investments based on our outlook over a long period of time," he said. "It is tough."
Central to the question of where oil prices will go is the effect of high prices on the consumption and development of alternative fuels.
Large amounts of public and private investment are going into solar, wind and biofuel development, but so far they are making only a slight contribution to energy supplies. Scientific and engineering leaps, like developing the atomic bomb or sending a man to the moon, can be made relatively quickly, but they are still measured in years.
Until now, most economists have been surprised that the steady rise in oil prices -- from as low as US$11 less than a decade ago -- has not had a greater effect on US consumers. But with oil prices rising at an increasingly rapid rate over the last few months in conjunction with the housing market slump and credit squeeze, many economists wonder whether oil prices could tip the economy into a recession.
A recession, of course, would curb oil demand. That would push oil prices right back down again, or so the theory goes, as fewer consumers drive to the mall, companies produce and ship less and world trade slows.
"If we are slowing down, we will not be buying as much goods from China and services from India," said Addison Armstrong, director for market research at Tradition Energy, an energy broker that deals with banks and hedge funds.
"My forecast for 2008 is that crude prices will average US$75 a barrel, and that is based on a scenario of a slowing economy in the United States," he said.
But Armstrong and other experts cautioned that a protracted insurgency in Nigeria, a punishing hurricane season or other unpredictable events could take oil prices up.
So why are oil prices going up now? The military situation in Iraq is arguably improving, and Iraqi oil exports are beginning to flow again. Tensions with Iran have eased a bit. There are forecasts for a mild late winter in the US, which should help bolster oil and gasoline inventories going into the spring and summer driving season.
Many experts say the answer lies in the investment decisions of traders and hedge funds. With the markets in equities, housing, credit and currency shaky in the US, traders are betting on oil and other commodities as a perceived safe haven.
Phil Flynn, a vice president and market analyst with the Alaron Trading Corp in Chicago, said the recent interest rate cuts by the Federal Reserve had underscored for traders the depths of the country's economic risks and led them to buy oil futures.
Flynn said he thought that oil prices were more likely to fall than rise, "because I think the factors that drove us to today are unlikely to repeat in 2008."
He added that he thinks the dollar will find a bottom this year and that the problems in housing are already priced into the markets.
But most experts say that if oil prices do go down, they will probably not go down very far or for very long.
Richels of Devon Energy said that consumers in Europe and Japan were not feeling the same pressure as Americans because their currencies have been strengthening and not weakening.
"There is still a lot of demand that is outside of the United States," Richels said. "There is increasing oil consumption, particularly in the developing nations, and oil is getting more difficult to find."
NY TIMES NEWS SERVICE, NEW YORK
2008年1月7日 星期一
What's Really Bothering Beijing?
By Gerrit van der Wees
Almost every day, Taiwan is feeling the heat of China's aggression: Beijing's military threat and intimidation, more than 1,000 missiles aimed its way, constant attempts to isolate it internationally and a failure to accept Taiwan as a friendly neighbor.
What is China fighting against? What is driving China's leaders in their obsession with Taiwan? When we go back in history, we see three main reasons.
One is the Chinese Civil War, which the Chinese Communist Party (CCP) fought against the Chinese Nationalist Party (KMT). This struggle was deeply ingrained in the minds of older leaders of the CCP, and still plays an important role in the thinking of the present leadership. But as the international power and influence of the KMT waned in the 1970s and 1980s, the old hostility was refocused on the new "threat": Taiwan's democracy.
While Taiwan considered its transition to democracy in the late 1980s and early 1990s a momentous achievement, the leaders of the PRC perceived it as a threat to the authoritarian system they had built in China.
If the Chinese had ideas similar to those of the Taiwanese, then the rule of the CCP would be finished.
China is thus not fighting Taiwan because the latter wants to remain separate: History shows that most Chinese leaders don't care much whether Taiwan is separate or not. It is an outlying place -- very much like the Northwest Territories for the US -- and not crucial to China's "center of civilization."
The real reason China is fighting Taiwan is because it represents a successful democracy right next door, undermining the CCP's authoritarian "stability."
The second reason that seems to be prevalent in Chinese thinking is to "right the wrongs" caused by two centuries of "humiliation"at the hands of Western countries.
This may have been a factor in the 19th century, after the Opium Wars, when Western states established enclaves along the Chinese coast, but the trials and tribulations of the 20th century were of China's own making: The Chinese Civil War, the Great Leap Forward and the Cultural Revolution were internal Chinese affairs with which the West had little to do.
The third reason for China's hardheaded attitude toward Taiwan is that it thinks Taiwan's close association with the US and the West stands in the way of China becoming a "great power."
The leaders in Beijing have set an ambitious course for China to become a "superpower" along the lines of the US: wielding economic and political influence and power across the globe.
For China's leaders, "possession" of Taiwan is a key element in their geostrategic competition with the US -- and to a lesser extent in their regional competition with Japan.
This is because of Taiwan's strategic location -- straddling the important sea lanes between Japan and Southeast Asia while keeping China from unfettered access to the deep oceans of the Pacific.
China's threats to Taiwan are thus not caused by Taiwan's efforts to seek its rightful place under the sun, but rather by geostrategic competition with the US. This argument is made eloquently in a recent book titled Why Taiwan? by Alan Wachman of Tufts University. As long as "Taiwan's people seek the dignity of sovereignty and the assurance that so long as they do no harm to the PRC, Beijing will regard the island with neighborly comity," Wachman writes.
He argues that if, on the other hand, one views the issue through the lens of Beijing's geostrategic ambitions, one might come to a very different conclusion. If it sees Taiwan as essential to its security and even more importantly as part of a broader geostrategic competition with the US and Japan, the chance of Beijing resorting to the use of force is much greater.
This has important implications for the US. Another US East Asia researcher, Don Rodgers, recently wrote: "In the United States, policymakers must be careful not to view increasing tensions between China and Taiwan as the outcome of a `trouble-making' government in Taiwan (as they seem far too inclined to do), but rather as one manifestation of an intensifying geostrategic competition between China and the US and Japan."
Let us hope that Washington pays heed.
Gerrit van der Wees is editor at the Washington-based Taiwan Communique.
Almost every day, Taiwan is feeling the heat of China's aggression: Beijing's military threat and intimidation, more than 1,000 missiles aimed its way, constant attempts to isolate it internationally and a failure to accept Taiwan as a friendly neighbor.
What is China fighting against? What is driving China's leaders in their obsession with Taiwan? When we go back in history, we see three main reasons.
One is the Chinese Civil War, which the Chinese Communist Party (CCP) fought against the Chinese Nationalist Party (KMT). This struggle was deeply ingrained in the minds of older leaders of the CCP, and still plays an important role in the thinking of the present leadership. But as the international power and influence of the KMT waned in the 1970s and 1980s, the old hostility was refocused on the new "threat": Taiwan's democracy.
While Taiwan considered its transition to democracy in the late 1980s and early 1990s a momentous achievement, the leaders of the PRC perceived it as a threat to the authoritarian system they had built in China.
If the Chinese had ideas similar to those of the Taiwanese, then the rule of the CCP would be finished.
China is thus not fighting Taiwan because the latter wants to remain separate: History shows that most Chinese leaders don't care much whether Taiwan is separate or not. It is an outlying place -- very much like the Northwest Territories for the US -- and not crucial to China's "center of civilization."
The real reason China is fighting Taiwan is because it represents a successful democracy right next door, undermining the CCP's authoritarian "stability."
The second reason that seems to be prevalent in Chinese thinking is to "right the wrongs" caused by two centuries of "humiliation"at the hands of Western countries.
This may have been a factor in the 19th century, after the Opium Wars, when Western states established enclaves along the Chinese coast, but the trials and tribulations of the 20th century were of China's own making: The Chinese Civil War, the Great Leap Forward and the Cultural Revolution were internal Chinese affairs with which the West had little to do.
The third reason for China's hardheaded attitude toward Taiwan is that it thinks Taiwan's close association with the US and the West stands in the way of China becoming a "great power."
The leaders in Beijing have set an ambitious course for China to become a "superpower" along the lines of the US: wielding economic and political influence and power across the globe.
For China's leaders, "possession" of Taiwan is a key element in their geostrategic competition with the US -- and to a lesser extent in their regional competition with Japan.
This is because of Taiwan's strategic location -- straddling the important sea lanes between Japan and Southeast Asia while keeping China from unfettered access to the deep oceans of the Pacific.
China's threats to Taiwan are thus not caused by Taiwan's efforts to seek its rightful place under the sun, but rather by geostrategic competition with the US. This argument is made eloquently in a recent book titled Why Taiwan? by Alan Wachman of Tufts University. As long as "Taiwan's people seek the dignity of sovereignty and the assurance that so long as they do no harm to the PRC, Beijing will regard the island with neighborly comity," Wachman writes.
He argues that if, on the other hand, one views the issue through the lens of Beijing's geostrategic ambitions, one might come to a very different conclusion. If it sees Taiwan as essential to its security and even more importantly as part of a broader geostrategic competition with the US and Japan, the chance of Beijing resorting to the use of force is much greater.
This has important implications for the US. Another US East Asia researcher, Don Rodgers, recently wrote: "In the United States, policymakers must be careful not to view increasing tensions between China and Taiwan as the outcome of a `trouble-making' government in Taiwan (as they seem far too inclined to do), but rather as one manifestation of an intensifying geostrategic competition between China and the US and Japan."
Let us hope that Washington pays heed.
Gerrit van der Wees is editor at the Washington-based Taiwan Communique.
2008年1月6日 星期日
2008年1月2日 星期三
How to Cash in on a Warming Planet
By Adam Aston
Set aside, for now, the really complex and costly financial implications of climate change. Ignore the tricky abstractions of carbon trading. Forget the worries over flooded cities and the ins and outs of renewable energy.
Instead, consider just a few everyday money-making ideas created by the warming of our planet. For example, oenophiles could short the stocks of vintners in drought-prone areas such as Australia or California and bet on upstarts in Canada and England, where new wineries are sprouting as temperatures rise. Or, since ski resorts are seeing less and less snow, it might make sense to buy and hold manufacturers of snowmakers.
Of course, the potential of climate-change investing goes far beyond mere curiosities. A growing number of advisers to big institutional investors and high-net-worth types are sizing up companies based on how likely they are to benefit from rising energy prices, stricter regulations, and changes to the natural world ranging from freshwater shortages to new disease patterns and more chaotic weather. Since public opinion is increasingly driving U.S. policymakers to act, analysts' climate predictions need not be perfectly prescient to pay off. "Perception drives valuations," says Edward M. Kerschner, chief investment strategist for Citi Global Wealth Management (C), who recently made public a list of some 90 "climate consequences companies" he believes could excel as the climate changes and limits on carbon emissions multiply.
If there's a whiff of familiarity to investing in climate change, that's because some of its key elements have already attracted attention. Pure-play renewable energy stocks, for example, make up a big slice of the new climate change offerings and have seen meteoric gains over the past year. The difference is that climate change strategists make their picks from a larger pool, including everything from small-cap alternative energy startups to globe-spanning conglomerates, as well as a few decidedly nongreen plays. Given the breadth of companies in this space, "there's significant opportunity for actively managed funds," says Michael Herbst, a mutual fund analyst at Morningstar (MORN).
HOT OPTIONS
Consider HSBC's (HBC) Global Climate Change Benchmark Index, which tracks 300 equities, spans 34 countries (11 of which are emerging markets), and includes small, medium, and big companies. Simulations of the 45 months prior to its September debut show the index would have beaten the Morgan Stanley (MS) Capital International (MSCI) global index by 70%. In November, HSBC launched a fund in Europe that focuses on a subset of about 60 companies from the index. A U.S. version, the GIF Climate Change Fund, is due by April.
Deutsche Bank's (DB) DWS Climate Change Fund beat HSBC to the American market last November. It mirrors the German DWS Klimawandel fund, which since its launch last February is up 10.4%. For DWS's U.S. offering, expect somewhat pricey expense ratios of 1.75% to 2.5% of assets.
For a lower-cost approach, stock pickers can follow the pros' logic and make their own calls. Luckily, evaluating equities on their potential to capitalize on climate change is easier than untangling the complexities of global warming. A useful approach is to split the opportunities into two broad groups, explains Mark Fulton, climate-change strategist at Deutsche Bank Asset Management: mitigation and adaptation.
The first basket includes products and services that slow the flow of greenhouse gases by using less energy or by substituting clean energy for fossil fuels. That's why so many renewables such as solar and wind show up in the new climate-change funds and indices.
As of September, for example, the top 10 holdings in DWS Climate Change Fund included nine that either produce carbon-free energy or help conserve fossil fuels: solar energy (LDK Solar (LDK), SolarWorld, Umicore, and First Solar), wind energy (Acciona Energia and Gamesa), electric efficiency specialists (ABB (ABB) and Emerson Electric (EMR)), and an electric vehicle maker, Tanfield Group.
Fulton's second category includes opportunities to help the world adapt to the effects of the changing climate. This group may offer hidden values in some more obscure sectors. DWS's fund, for example, owns Veolia Environment, a water-services specialist that can help parched regions adjust. Citi's Kerschner, likewise, predicts growth for Leighton Holdings, an Australian engineering contractor that is building a growing number of plants that make seawater drinkable.
SHADES OF GREEN
If anything, the greenest of investors may be put off by aspects of climate-change investing. Citi likes big nuclear plant operators such as Entergy (ETR) and Exelon (EXC), despite worries over their waste, since their reactors crank out huge volumes of juice with virtually no greenhouse gases. Fluor (FLR), a U.S. engineering construction giant, makes the cut since it's positioned to benefit from demand for new power plants, regardless of whether they're powered by clean gas, controversial nuclear, or even not-so-clean coal.
Many of the top picks among the adaptation plays are cheaper than mitigation stocks. Ormat Technologies (ORA), a leader in renewable geothermal energy, has a pricey p-e ratio of 41, based on 2008 earnings. But in the less glamorous auto sector, makers of mileage-boosting technologies may outsell competitors more reliant on gas guzzlers. By this logic, France's PSA Peugeot Citroën, which builds Europe's most fuel-thrifty fleet, stands to beat out U.S. rivals as global demand for eco-vehicles rises. Its p-e is just 9.
An upside to these broad climate-change funds is that they expose investors to plays of all sizes, in both developed and emerging markets. But tracking such a diverse portfolio requires unusually broad expertise in complex energy, technology, and cross-border markets, notes Angus McCrone, chief editor at New Energy Finance, which tracks green markets. Regulatory reversals can also dent returns. As U.S. lawmakers debated the recent energy bill this fall, renewable stocks were whipsawed on each rumor that beneficial tax credits would disappear or expand.
Set aside, for now, the really complex and costly financial implications of climate change. Ignore the tricky abstractions of carbon trading. Forget the worries over flooded cities and the ins and outs of renewable energy.
Instead, consider just a few everyday money-making ideas created by the warming of our planet. For example, oenophiles could short the stocks of vintners in drought-prone areas such as Australia or California and bet on upstarts in Canada and England, where new wineries are sprouting as temperatures rise. Or, since ski resorts are seeing less and less snow, it might make sense to buy and hold manufacturers of snowmakers.
Of course, the potential of climate-change investing goes far beyond mere curiosities. A growing number of advisers to big institutional investors and high-net-worth types are sizing up companies based on how likely they are to benefit from rising energy prices, stricter regulations, and changes to the natural world ranging from freshwater shortages to new disease patterns and more chaotic weather. Since public opinion is increasingly driving U.S. policymakers to act, analysts' climate predictions need not be perfectly prescient to pay off. "Perception drives valuations," says Edward M. Kerschner, chief investment strategist for Citi Global Wealth Management (C), who recently made public a list of some 90 "climate consequences companies" he believes could excel as the climate changes and limits on carbon emissions multiply.
If there's a whiff of familiarity to investing in climate change, that's because some of its key elements have already attracted attention. Pure-play renewable energy stocks, for example, make up a big slice of the new climate change offerings and have seen meteoric gains over the past year. The difference is that climate change strategists make their picks from a larger pool, including everything from small-cap alternative energy startups to globe-spanning conglomerates, as well as a few decidedly nongreen plays. Given the breadth of companies in this space, "there's significant opportunity for actively managed funds," says Michael Herbst, a mutual fund analyst at Morningstar (MORN).
HOT OPTIONS
Consider HSBC's (HBC) Global Climate Change Benchmark Index, which tracks 300 equities, spans 34 countries (11 of which are emerging markets), and includes small, medium, and big companies. Simulations of the 45 months prior to its September debut show the index would have beaten the Morgan Stanley (MS) Capital International (MSCI) global index by 70%. In November, HSBC launched a fund in Europe that focuses on a subset of about 60 companies from the index. A U.S. version, the GIF Climate Change Fund, is due by April.
Deutsche Bank's (DB) DWS Climate Change Fund beat HSBC to the American market last November. It mirrors the German DWS Klimawandel fund, which since its launch last February is up 10.4%. For DWS's U.S. offering, expect somewhat pricey expense ratios of 1.75% to 2.5% of assets.
For a lower-cost approach, stock pickers can follow the pros' logic and make their own calls. Luckily, evaluating equities on their potential to capitalize on climate change is easier than untangling the complexities of global warming. A useful approach is to split the opportunities into two broad groups, explains Mark Fulton, climate-change strategist at Deutsche Bank Asset Management: mitigation and adaptation.
The first basket includes products and services that slow the flow of greenhouse gases by using less energy or by substituting clean energy for fossil fuels. That's why so many renewables such as solar and wind show up in the new climate-change funds and indices.
As of September, for example, the top 10 holdings in DWS Climate Change Fund included nine that either produce carbon-free energy or help conserve fossil fuels: solar energy (LDK Solar (LDK), SolarWorld, Umicore, and First Solar), wind energy (Acciona Energia and Gamesa), electric efficiency specialists (ABB (ABB) and Emerson Electric (EMR)), and an electric vehicle maker, Tanfield Group.
Fulton's second category includes opportunities to help the world adapt to the effects of the changing climate. This group may offer hidden values in some more obscure sectors. DWS's fund, for example, owns Veolia Environment, a water-services specialist that can help parched regions adjust. Citi's Kerschner, likewise, predicts growth for Leighton Holdings, an Australian engineering contractor that is building a growing number of plants that make seawater drinkable.
SHADES OF GREEN
If anything, the greenest of investors may be put off by aspects of climate-change investing. Citi likes big nuclear plant operators such as Entergy (ETR) and Exelon (EXC), despite worries over their waste, since their reactors crank out huge volumes of juice with virtually no greenhouse gases. Fluor (FLR), a U.S. engineering construction giant, makes the cut since it's positioned to benefit from demand for new power plants, regardless of whether they're powered by clean gas, controversial nuclear, or even not-so-clean coal.
Many of the top picks among the adaptation plays are cheaper than mitigation stocks. Ormat Technologies (ORA), a leader in renewable geothermal energy, has a pricey p-e ratio of 41, based on 2008 earnings. But in the less glamorous auto sector, makers of mileage-boosting technologies may outsell competitors more reliant on gas guzzlers. By this logic, France's PSA Peugeot Citroën, which builds Europe's most fuel-thrifty fleet, stands to beat out U.S. rivals as global demand for eco-vehicles rises. Its p-e is just 9.
An upside to these broad climate-change funds is that they expose investors to plays of all sizes, in both developed and emerging markets. But tracking such a diverse portfolio requires unusually broad expertise in complex energy, technology, and cross-border markets, notes Angus McCrone, chief editor at New Energy Finance, which tracks green markets. Regulatory reversals can also dent returns. As U.S. lawmakers debated the recent energy bill this fall, renewable stocks were whipsawed on each rumor that beneficial tax credits would disappear or expand.
Some Financial New Year's Resolutions
by Anya Kamenetz of Generation Debt
It's 2008 - and time to make a fresh financial start.
Simply ringing in the new year at midnight just doesn't do it for me anymore. I have a six-year tradition of greeting the dawn on New Year's Day. There's nothing like a cold, clear January sunrise to make you really believe in new beginnings.
Not that new beginnings are in short supply during the Gen Debt stage of life. Most of the young adults I know already have lives that are jam-packed with transitions: graduating college, starting grad school, changing roommates, changing jobs, changing cities, changing relationships. Even relatively small shifts like taking out a loan, getting a promotion at work, or dealing with the holidays can add stress to our lives. Check out this scale to see just how many "Life Change Units" you've piled up in the last year.
No matter what changes you might be experiencing, the new year is an excellent time to take stock of your personal, professional, and financial lives. According to a Harris Survey commissioned by Yahoo!, 65 percent of Americans who make a financial New Year's resolution vow to eliminate or reduce debt. Here are some of my own monetary resolutions for the year.
Spend lean and green
With the Bali climate conference taking place in December, a big energy bill in the Senate, and Al Gore accepting the Nobel Peace Prize for his efforts to help solve the climate crisis, awareness of our impact on the environment is at an all-time high. Recently, I had an inspiring conversation with TLC's Peter Walsh (the host of that cable network's "Clean Sweep") in which he pointed out that every purchase we make includes "buying in" to the manufacturing, transportation, and packaging of the product.
The earth's future belongs to young people like us, and that's why I'm trying hard to buy less, buy used, buy local, and buy green. This doesn't always mean purchasing the cheapest thing in the store - certainly not if it's going to wear out and need to be replaced right away. It means making conscious spending decisions, choosing items that are beautiful enough to give you joy and well-made enough to last a lifetime.
For more motivation, watch this very informative animated Web lecture, "The Story of Stuff."
Monitor your credit score
I had a ding on my credit score early last year due to a missed bill while I was out of the country, so I've been ordering my credit scores from MyFico.com for $15.95 a pop every six months.
This is an excellent place to start getting a handle on your financial life. (You can also go to Annualcreditreport.com to get your free credit report as required by federal law, but it doesn't include your score.) The credit report shows all the revolving accounts you have, such as credit cards, student loans, and car loans. It shows your payment history and the number of credit inquiries made in the last year -- for example, if you signed up for a new cell phone account or applied for a car loan, a company may have pulled your file.
If you see any mistakes on your account, you'll need to send a letter disputing the charge. MyFico does a good job of explaining which actions (like paying off your cards) can help your score and which actions (like maxing out your cards) can hurt it. But don't sign up for the extras like credit-score monitoring services (which alert you monthly, weekly, or even daily to changes in your credit) -- they're of dubious value.
Rediscover pencils, paper, and cash
Financial management is increasingly taking place online. This fall I've been trying out some of the different free online financial planning services aimed at younger folks, such as Mint, Geezeo, and Wesabe.
These sites centralize all of your accounts in one place, which makes things easier for you if you have multiple credit cards or student loans. For me, what works best is to have one bank account, one credit card that I use, and one brokerage account. Each of these institutions sends me a monthly e-statement, reminding me to go over the books.
As useful as online tools can be, 2008 is going to be the year of the analog for me. Just last week I was trying to figure out a discrepancy in my credit card bill, and I ended up writing down and adding up all the charges for the last three months. I was shocked to realize that on the credit card I "never use," I had made over $250 worth of purchases. There's nothing like pen and paper to make money clear and concrete.
I also vow that January 2008 is going to be the month I try out the envelope trick. If you want to get a clue about how much you're spending on incidentals, go to the ATM at the beginning of the week and distribute the cash into envelopes marked Food, Travel, Entertainment, Pharmacy, and Miscellaneous. When you go to a store, take out the cash from the right envelope and put in the receipt. No more cash? No more movies or pizza slices until next week.
Get proactive about saving
Pay yourself first. Your first priority is paying down high-interest debt. Then you want a $2,000 emergency fund (invested in a money market or e-savings account earning 4 percent-plus) and a retirement account. If you're a savings pro, purchase a 12-month CD (topping out at 5 percent interest) as a way to save for medium-term purchases like a vacation or a car. If you devote 10 percent of your income to savings, you'll be a happy camper.
Take control of retirement planning
If you're in your 20s and you don't have a 401(k) through your employer, do not pass go. Open a Roth Individual Retirement Account right now. There is no minimum amount to open the account.
Once you open it, there is the question of how to invest the funds. This can be surprisingly simple. I originally opened my IRA with my bank in 2004. I had asked for my retirement savings to be invested in "low-cost" mutual funds and trusted the friendly, helpful representative at the bank to provide them.
This year, in an attempt to diversify, I also purchased some overseas mutual funds with Vanguard, the market leader in low-cost investing. In the process, I learned that I should be looking to invest in "no load" mutual funds with an "expense ratio" of 0.75 percent or less.
It turns out that for an average, long-term investor, low administrative costs and commissions are far more important to your returns than the "performance" of the fund or how well your stocks do in any one year.
In fact, those who simply purchase very low-cost index funds -- a broad sampling of stocks from the entire market -- are far ahead of the game.
"I have yet to meet a retiree that couldn't have met his or her retirement goals just with market returns," Paul Merriman, the editor of FundAdvice.com and an investment adviser at Merriman Berkman Next in Seattle, told "The New York Times" earlier this fall.
So I decided to switch my IRA into low-cost, no-load index funds. It was very frustrating to learn that my existing account didn't provide no-load options, and that the "low cost" mutual fund I was signed up for actually had a high expense ratio of 1.75 percent.
I'm now in the process of moving my IRA over to Vanguard so I can keep my investing costs as low as possible, and opening a SEP IRA (Simplified Employment Pension IRA) so I can increase the amount I put away. Fidelity is another often-recommended broker with lots of resources for retirement planning.
Get ahead of tax time
An old-fashioned receipt spike, like you see in a restaurant, will help collect business-related receipts for better filing in chronological order, whether you use an online tool to record expenses or not.
Set conscious goals
It's natural to get stressed out when thinking about money. What helps me deal is to picture positive long-term goals. What's your vision for the year? Improving your credit score 20 points into the "good" range? A fully funded retirement account? Getting into "good standing" with Sallie Mae? Opening your bills right away instead of tossing them?
Write your goals on Post-It Notes and stick them next to your desk or on your bedside table. Or set up an online calendar reminder to pop up in a month or two.
When my reminder comes up on Feb. 1, I'll re-read this column to see how on-track I am. If anyone else has financial resolutions, please leave them in the comments; you're more likely to keep a public pledge.
It's 2008 - and time to make a fresh financial start.
Simply ringing in the new year at midnight just doesn't do it for me anymore. I have a six-year tradition of greeting the dawn on New Year's Day. There's nothing like a cold, clear January sunrise to make you really believe in new beginnings.
Not that new beginnings are in short supply during the Gen Debt stage of life. Most of the young adults I know already have lives that are jam-packed with transitions: graduating college, starting grad school, changing roommates, changing jobs, changing cities, changing relationships. Even relatively small shifts like taking out a loan, getting a promotion at work, or dealing with the holidays can add stress to our lives. Check out this scale to see just how many "Life Change Units" you've piled up in the last year.
No matter what changes you might be experiencing, the new year is an excellent time to take stock of your personal, professional, and financial lives. According to a Harris Survey commissioned by Yahoo!, 65 percent of Americans who make a financial New Year's resolution vow to eliminate or reduce debt. Here are some of my own monetary resolutions for the year.
Spend lean and green
With the Bali climate conference taking place in December, a big energy bill in the Senate, and Al Gore accepting the Nobel Peace Prize for his efforts to help solve the climate crisis, awareness of our impact on the environment is at an all-time high. Recently, I had an inspiring conversation with TLC's Peter Walsh (the host of that cable network's "Clean Sweep") in which he pointed out that every purchase we make includes "buying in" to the manufacturing, transportation, and packaging of the product.
The earth's future belongs to young people like us, and that's why I'm trying hard to buy less, buy used, buy local, and buy green. This doesn't always mean purchasing the cheapest thing in the store - certainly not if it's going to wear out and need to be replaced right away. It means making conscious spending decisions, choosing items that are beautiful enough to give you joy and well-made enough to last a lifetime.
For more motivation, watch this very informative animated Web lecture, "The Story of Stuff."
Monitor your credit score
I had a ding on my credit score early last year due to a missed bill while I was out of the country, so I've been ordering my credit scores from MyFico.com for $15.95 a pop every six months.
This is an excellent place to start getting a handle on your financial life. (You can also go to Annualcreditreport.com to get your free credit report as required by federal law, but it doesn't include your score.) The credit report shows all the revolving accounts you have, such as credit cards, student loans, and car loans. It shows your payment history and the number of credit inquiries made in the last year -- for example, if you signed up for a new cell phone account or applied for a car loan, a company may have pulled your file.
If you see any mistakes on your account, you'll need to send a letter disputing the charge. MyFico does a good job of explaining which actions (like paying off your cards) can help your score and which actions (like maxing out your cards) can hurt it. But don't sign up for the extras like credit-score monitoring services (which alert you monthly, weekly, or even daily to changes in your credit) -- they're of dubious value.
Rediscover pencils, paper, and cash
Financial management is increasingly taking place online. This fall I've been trying out some of the different free online financial planning services aimed at younger folks, such as Mint, Geezeo, and Wesabe.
These sites centralize all of your accounts in one place, which makes things easier for you if you have multiple credit cards or student loans. For me, what works best is to have one bank account, one credit card that I use, and one brokerage account. Each of these institutions sends me a monthly e-statement, reminding me to go over the books.
As useful as online tools can be, 2008 is going to be the year of the analog for me. Just last week I was trying to figure out a discrepancy in my credit card bill, and I ended up writing down and adding up all the charges for the last three months. I was shocked to realize that on the credit card I "never use," I had made over $250 worth of purchases. There's nothing like pen and paper to make money clear and concrete.
I also vow that January 2008 is going to be the month I try out the envelope trick. If you want to get a clue about how much you're spending on incidentals, go to the ATM at the beginning of the week and distribute the cash into envelopes marked Food, Travel, Entertainment, Pharmacy, and Miscellaneous. When you go to a store, take out the cash from the right envelope and put in the receipt. No more cash? No more movies or pizza slices until next week.
Get proactive about saving
Pay yourself first. Your first priority is paying down high-interest debt. Then you want a $2,000 emergency fund (invested in a money market or e-savings account earning 4 percent-plus) and a retirement account. If you're a savings pro, purchase a 12-month CD (topping out at 5 percent interest) as a way to save for medium-term purchases like a vacation or a car. If you devote 10 percent of your income to savings, you'll be a happy camper.
Take control of retirement planning
If you're in your 20s and you don't have a 401(k) through your employer, do not pass go. Open a Roth Individual Retirement Account right now. There is no minimum amount to open the account.
Once you open it, there is the question of how to invest the funds. This can be surprisingly simple. I originally opened my IRA with my bank in 2004. I had asked for my retirement savings to be invested in "low-cost" mutual funds and trusted the friendly, helpful representative at the bank to provide them.
This year, in an attempt to diversify, I also purchased some overseas mutual funds with Vanguard, the market leader in low-cost investing. In the process, I learned that I should be looking to invest in "no load" mutual funds with an "expense ratio" of 0.75 percent or less.
It turns out that for an average, long-term investor, low administrative costs and commissions are far more important to your returns than the "performance" of the fund or how well your stocks do in any one year.
In fact, those who simply purchase very low-cost index funds -- a broad sampling of stocks from the entire market -- are far ahead of the game.
"I have yet to meet a retiree that couldn't have met his or her retirement goals just with market returns," Paul Merriman, the editor of FundAdvice.com and an investment adviser at Merriman Berkman Next in Seattle, told "The New York Times" earlier this fall.
So I decided to switch my IRA into low-cost, no-load index funds. It was very frustrating to learn that my existing account didn't provide no-load options, and that the "low cost" mutual fund I was signed up for actually had a high expense ratio of 1.75 percent.
I'm now in the process of moving my IRA over to Vanguard so I can keep my investing costs as low as possible, and opening a SEP IRA (Simplified Employment Pension IRA) so I can increase the amount I put away. Fidelity is another often-recommended broker with lots of resources for retirement planning.
Get ahead of tax time
An old-fashioned receipt spike, like you see in a restaurant, will help collect business-related receipts for better filing in chronological order, whether you use an online tool to record expenses or not.
Set conscious goals
It's natural to get stressed out when thinking about money. What helps me deal is to picture positive long-term goals. What's your vision for the year? Improving your credit score 20 points into the "good" range? A fully funded retirement account? Getting into "good standing" with Sallie Mae? Opening your bills right away instead of tossing them?
Write your goals on Post-It Notes and stick them next to your desk or on your bedside table. Or set up an online calendar reminder to pop up in a month or two.
When my reminder comes up on Feb. 1, I'll re-read this column to see how on-track I am. If anyone else has financial resolutions, please leave them in the comments; you're more likely to keep a public pledge.
$100 Oil Will Hit Gas and Airfare
by Steve Hargreaves and Keisha Lamothe, CNNMoney.com staff writers
The rising price of oil is starting to bite - at the pump, the airline ticket counter and possibly in your home.
Oil hit $100 a barrel Wednesday and gasoline prices could soon top their all-time record from last May of $3.22 a gallon.
"There's no doubt, gasoline prices are rocketing higher," said Stephen Schork, publisher of the industry newsletter the Schork Report. "We could be paying more for gas than we were during the start of the summer driving season."
Gas prices now average $3.05 a gallon nationwide, according to AAA. Many states have had gas over $3 for some time.
In the past few months, drivers have gotten off easy - gas prices hadn't kept up with the increase in oil prices. The main reason: Demand has been fairly tame.
But demand picked up during the holiday season.
At the same time, supplies of gas could get tight as many U.S. refiners are undergoing maintenance, according to Schork. And they stand ready to decrease production if gas prices don't move higher, according to Kevin Norrish, a commodities analyst at Barclays in London.
"The relative price of gasoline is low, and that's unsustainable," said Norrish.
As for next spring, when gas prices usually spike on anticipation of increased demand over the summer, Schork noted that in all likelihood we'll be going into the season with much less in gasoline inventories than last year.
"You're that much closer to $4" a gallon gasoline, he said.
Expensive flights
Higher oil prices also mean higher airfare for travelers. As the price of crude rises, jet fuel prices also increase.
In November, American Airlines - the nation's biggest carrier - raised the price of U.S. round-trip tickets by $20, and other major airlines followed suit.
American said it increased fares in an attempt to offset losses from rising crude oil and jet fuel prices.
The Air Transport Association (ATA), the airline industry's main trade group, said recently higher fuel prices drove second-quarter costs 5.6 percent higher. That's more than twice the rate during the same period last year.
"Jet fuel has been going up consistently for the last 3 to 4 years to the point where it's affecting the airlines bottom line," said Will Alibrandi, an analyst for the aviation market analysis firm Forecast International. "Any cost gets returned to the customer, so they've been bumping up ticket prices to make up the difference," he said.
Heating up a bit
Rising oil prices could also mean higher heating bills for those who use oil - mostly households in the Northeast, or about 7 percent of the country.
For them, oil's rise will be particularly painful: a 22 percent increase in bills from last year, according to the Energy Information Administration.
The rest of the country doesn't face such steep increases, but they won't exactly get a free ride.
Roughly 50 percent of Americans use natural gas to heat their homes. And while natural gas prices aren't tied directly to the price of crude, those who use natural gas could see a 10 percent increase in home-heating bills.
Norrish expects natural gas prices to rise only modestly in the near future.
People who heat with electricity, about 30 percent of the nation, can expect to pay 4 percent more.
The bigger picture
One fear is that higher gas prices will lift the costs to transport all goods, whether by truck, ship or plane - and that manufacturers and retailers will respond by raising prices for consumers.
But economists say that's unlikely.
While costs to business have risen, cost for consumer goods have not posted a corresponding increase, said Drew Matus, a senior economist at Lehman Brothers.
"We haven't seen an impact," said Matus. "It's just not as significant as the shock value suggests."
As for consumer spending, Matus said high gas prices haven't had much of an impact as gasoline generally doesn't make up a huge chunk of people's disposable income.
"I think energy prices would have to be much higher in order for them to have an impact on consumer behavior," he said.
The rising price of oil is starting to bite - at the pump, the airline ticket counter and possibly in your home.
Oil hit $100 a barrel Wednesday and gasoline prices could soon top their all-time record from last May of $3.22 a gallon.
"There's no doubt, gasoline prices are rocketing higher," said Stephen Schork, publisher of the industry newsletter the Schork Report. "We could be paying more for gas than we were during the start of the summer driving season."
Gas prices now average $3.05 a gallon nationwide, according to AAA. Many states have had gas over $3 for some time.
In the past few months, drivers have gotten off easy - gas prices hadn't kept up with the increase in oil prices. The main reason: Demand has been fairly tame.
But demand picked up during the holiday season.
At the same time, supplies of gas could get tight as many U.S. refiners are undergoing maintenance, according to Schork. And they stand ready to decrease production if gas prices don't move higher, according to Kevin Norrish, a commodities analyst at Barclays in London.
"The relative price of gasoline is low, and that's unsustainable," said Norrish.
As for next spring, when gas prices usually spike on anticipation of increased demand over the summer, Schork noted that in all likelihood we'll be going into the season with much less in gasoline inventories than last year.
"You're that much closer to $4" a gallon gasoline, he said.
Expensive flights
Higher oil prices also mean higher airfare for travelers. As the price of crude rises, jet fuel prices also increase.
In November, American Airlines - the nation's biggest carrier - raised the price of U.S. round-trip tickets by $20, and other major airlines followed suit.
American said it increased fares in an attempt to offset losses from rising crude oil and jet fuel prices.
The Air Transport Association (ATA), the airline industry's main trade group, said recently higher fuel prices drove second-quarter costs 5.6 percent higher. That's more than twice the rate during the same period last year.
"Jet fuel has been going up consistently for the last 3 to 4 years to the point where it's affecting the airlines bottom line," said Will Alibrandi, an analyst for the aviation market analysis firm Forecast International. "Any cost gets returned to the customer, so they've been bumping up ticket prices to make up the difference," he said.
Heating up a bit
Rising oil prices could also mean higher heating bills for those who use oil - mostly households in the Northeast, or about 7 percent of the country.
For them, oil's rise will be particularly painful: a 22 percent increase in bills from last year, according to the Energy Information Administration.
The rest of the country doesn't face such steep increases, but they won't exactly get a free ride.
Roughly 50 percent of Americans use natural gas to heat their homes. And while natural gas prices aren't tied directly to the price of crude, those who use natural gas could see a 10 percent increase in home-heating bills.
Norrish expects natural gas prices to rise only modestly in the near future.
People who heat with electricity, about 30 percent of the nation, can expect to pay 4 percent more.
The bigger picture
One fear is that higher gas prices will lift the costs to transport all goods, whether by truck, ship or plane - and that manufacturers and retailers will respond by raising prices for consumers.
But economists say that's unlikely.
While costs to business have risen, cost for consumer goods have not posted a corresponding increase, said Drew Matus, a senior economist at Lehman Brothers.
"We haven't seen an impact," said Matus. "It's just not as significant as the shock value suggests."
As for consumer spending, Matus said high gas prices haven't had much of an impact as gasoline generally doesn't make up a huge chunk of people's disposable income.
"I think energy prices would have to be much higher in order for them to have an impact on consumer behavior," he said.
Reluctant Retirement Savers May Be Scared Straight by These Stats
by Robert Powell, provided by MarketWatch
What's the best way to motivate Americans to save, invest and prepare for retirement? Some behavioral finance experts suggest using the carrot. Others suggest using the stick. And still others suggest using a combination of carrot and stick.
As for me, I suggest the use of statistics. Consider just a sampling of the numbers that have been released this year:
IRAs and 401(k)s
There's $4.23 trillion in individual retirements accounts, but that figure hides the fact that very few Americans contribute to an IRA and even when they do the amount is small.
On average, just 10% of eligible Americans contributed to an IRA for the years 2000 to 2002, according to the latest issue of EBRI Notes. And in 2004, the median contribution to a traditional IRA was just $2,300, according to the Investment Company Institute. The maximum you could contribute to an IRA in 2004, by the way, was $3,000 or $3,500 for those 50 and older.
Now you might say that's not so bleak given that working Americans are presumably saving for retirement using an employer-sponsored plan, such as a 401(k), 403(b), 457 or Thrift Savings Plan. But again, the numbers are somewhat depressing.
There are nearly 100 million Americans age 21 to 64 working full-time, full-year. But of that number, just 60% or 58.4 million work for an employer that sponsors a retirement plan, and only 52.7%, or 50.8 million participate in a retirement plan.
That means roughly half of all working Americans don't participate in a retirement plan or don't have an employer-sponsored plan in which to participate. It also means that a huge number of adult Americans -- by my estimate 150 million of a potential 200 million -- aren't saving for retirement in any meaningful way, if at all.
Retirement risks
According to the Society of Actuaries' 2007 Risks and Process Retirement Survey, roughly half to 60% of retirees worry about three things: the cost of health care, the effect of inflation on their nest eggs and not being able to maintain a reasonable standard of living for the rest of their life.
Those worries are justified given the lack of savings in America. But what's really bothersome is the degree to which those who aren't worried should be.
Consider, for instance, health-care costs. Fidelity Investments estimated earlier this year that a 65-year-old couple retiring today would need $215,000 set aside just to pay for medical expenses over a 20-year span. And if that wasn't depressing enough, other estimates are even higher.
Paul Fronstin of the Employee Benefit Research Institute, for instance, said a 65-year-old couple retiring today would need, assuming average life expectancy of 82 for men and 85 for women, more than $300,000 set aside to pay for health-care costs (premiums and out-of-pocket expenses) in retirement, and more than $550,000 if the couple lives to age 92.
What's even more depressing is that neither the EBRI nor Fidelity estimates factor in the cost of nursing homes, long-term care or assisted-living facilities, or home health aides. And those costs are staggering.
According to the MetLife Mature Market Institute, it costs $69,000 per year for a semiprivate nursing-home room, $35,628 per year for a unit in an assisted-living facility, $19 an hour for a home health aide and $61 per day for an adult day care center. Where's that money going to come from?
Retirement expenses
Retirees and would-be retirees are also right to fret about maintaining their standard of living. Consider, for instance, these numbers: The median household income (half above, half below) in America is $48,451 and the average is $65,527, according to the U.S. Census Bureau. But in retirement, income falls dramatically.
The average total income for those 65 and older in America is $25,610, and the median was a meager $16,770, according to EBRI Notes. That means retirees are living on roughly one-third of their preretirement income. And that's a far cry from the 70% to 80% income replacement experts suggest Americans need to maintain their preretirement standard of living.
Besides not having the income to maintain a similar standard of living, retirees will face expenses that are certain to rise faster than the average rate of inflation.
Consider, for instance, the results of the 2002 Consumer Expenditure Survey. On average, retirees spent 32.6% on housing, 14% on food, and 13% on health care. But that's the average. What's interesting is the degree to which money spent on health care in retirement changes over time.
For instance, those 55 to 64 spend 6.8% on health care, those 65 to 74 spend 11.2% and those 75 and older spend 15.1%. That percentage rises in part because the cost of health care is rising twice as fast as the core rate of inflation (less energy and food), 5% vs. 2.3%, according to the U.S. Bureau of Labor Statistics. But it also rises because older retirees tend to spend more on health care than younger retirees.
Source of retirement income
So where do retirees get their income once in retirement? Again, the numbers are depressing (and deceiving). On average, retirees get 39.8% from Social Security, 23.7% from earnings, 19.4% from pensions and annuities, 15.4% from assets (IRAs and the like) and 1.9% from other sources, according to EBRI Notes.
But the composition of the income changes dramatically based on income. Retirees in the bottom fifth of income, those with less than $8,261 in 2006, got 87.6% of their income from Social Security while those in the top fifth of income, those with greater than $34,570, got 36.4% from earnings, 22.6% from pensions, 20.5% from assets, and just 18.5% from Social Security.
The moral of story
If you are among the 150 million who are not saving for retirement, now would be a good time to do so. If you are among the 50 million who are saving for retirement, now would be a good time to save more.
If you are among those who aren't worried about health-care costs, inflation or maintaining a standard of living in retirement, now would be a good time to start worrying.
If you are among those who worry about retirement risks, now would be a good time to do something about it: Set aside money for health care, for instance.
And if you are among those who don't know what your sources and composition of retirement income will be, now would be a good time to figure that out. After all, waiting to see how things might work out isn't the world's best plan.
Robert Powell has been a journalist covering personal finance issues for more than 20 years, writing and editing for publications such as The Wall Street Journal, the Financial Times, and Mutual Fund Market News.
What's the best way to motivate Americans to save, invest and prepare for retirement? Some behavioral finance experts suggest using the carrot. Others suggest using the stick. And still others suggest using a combination of carrot and stick.
As for me, I suggest the use of statistics. Consider just a sampling of the numbers that have been released this year:
IRAs and 401(k)s
There's $4.23 trillion in individual retirements accounts, but that figure hides the fact that very few Americans contribute to an IRA and even when they do the amount is small.
On average, just 10% of eligible Americans contributed to an IRA for the years 2000 to 2002, according to the latest issue of EBRI Notes. And in 2004, the median contribution to a traditional IRA was just $2,300, according to the Investment Company Institute. The maximum you could contribute to an IRA in 2004, by the way, was $3,000 or $3,500 for those 50 and older.
Now you might say that's not so bleak given that working Americans are presumably saving for retirement using an employer-sponsored plan, such as a 401(k), 403(b), 457 or Thrift Savings Plan. But again, the numbers are somewhat depressing.
There are nearly 100 million Americans age 21 to 64 working full-time, full-year. But of that number, just 60% or 58.4 million work for an employer that sponsors a retirement plan, and only 52.7%, or 50.8 million participate in a retirement plan.
That means roughly half of all working Americans don't participate in a retirement plan or don't have an employer-sponsored plan in which to participate. It also means that a huge number of adult Americans -- by my estimate 150 million of a potential 200 million -- aren't saving for retirement in any meaningful way, if at all.
Retirement risks
According to the Society of Actuaries' 2007 Risks and Process Retirement Survey, roughly half to 60% of retirees worry about three things: the cost of health care, the effect of inflation on their nest eggs and not being able to maintain a reasonable standard of living for the rest of their life.
Those worries are justified given the lack of savings in America. But what's really bothersome is the degree to which those who aren't worried should be.
Consider, for instance, health-care costs. Fidelity Investments estimated earlier this year that a 65-year-old couple retiring today would need $215,000 set aside just to pay for medical expenses over a 20-year span. And if that wasn't depressing enough, other estimates are even higher.
Paul Fronstin of the Employee Benefit Research Institute, for instance, said a 65-year-old couple retiring today would need, assuming average life expectancy of 82 for men and 85 for women, more than $300,000 set aside to pay for health-care costs (premiums and out-of-pocket expenses) in retirement, and more than $550,000 if the couple lives to age 92.
What's even more depressing is that neither the EBRI nor Fidelity estimates factor in the cost of nursing homes, long-term care or assisted-living facilities, or home health aides. And those costs are staggering.
According to the MetLife Mature Market Institute, it costs $69,000 per year for a semiprivate nursing-home room, $35,628 per year for a unit in an assisted-living facility, $19 an hour for a home health aide and $61 per day for an adult day care center. Where's that money going to come from?
Retirement expenses
Retirees and would-be retirees are also right to fret about maintaining their standard of living. Consider, for instance, these numbers: The median household income (half above, half below) in America is $48,451 and the average is $65,527, according to the U.S. Census Bureau. But in retirement, income falls dramatically.
The average total income for those 65 and older in America is $25,610, and the median was a meager $16,770, according to EBRI Notes. That means retirees are living on roughly one-third of their preretirement income. And that's a far cry from the 70% to 80% income replacement experts suggest Americans need to maintain their preretirement standard of living.
Besides not having the income to maintain a similar standard of living, retirees will face expenses that are certain to rise faster than the average rate of inflation.
Consider, for instance, the results of the 2002 Consumer Expenditure Survey. On average, retirees spent 32.6% on housing, 14% on food, and 13% on health care. But that's the average. What's interesting is the degree to which money spent on health care in retirement changes over time.
For instance, those 55 to 64 spend 6.8% on health care, those 65 to 74 spend 11.2% and those 75 and older spend 15.1%. That percentage rises in part because the cost of health care is rising twice as fast as the core rate of inflation (less energy and food), 5% vs. 2.3%, according to the U.S. Bureau of Labor Statistics. But it also rises because older retirees tend to spend more on health care than younger retirees.
Source of retirement income
So where do retirees get their income once in retirement? Again, the numbers are depressing (and deceiving). On average, retirees get 39.8% from Social Security, 23.7% from earnings, 19.4% from pensions and annuities, 15.4% from assets (IRAs and the like) and 1.9% from other sources, according to EBRI Notes.
But the composition of the income changes dramatically based on income. Retirees in the bottom fifth of income, those with less than $8,261 in 2006, got 87.6% of their income from Social Security while those in the top fifth of income, those with greater than $34,570, got 36.4% from earnings, 22.6% from pensions, 20.5% from assets, and just 18.5% from Social Security.
The moral of story
If you are among the 150 million who are not saving for retirement, now would be a good time to do so. If you are among the 50 million who are saving for retirement, now would be a good time to save more.
If you are among those who aren't worried about health-care costs, inflation or maintaining a standard of living in retirement, now would be a good time to start worrying.
If you are among those who worry about retirement risks, now would be a good time to do something about it: Set aside money for health care, for instance.
And if you are among those who don't know what your sources and composition of retirement income will be, now would be a good time to figure that out. After all, waiting to see how things might work out isn't the world's best plan.
Robert Powell has been a journalist covering personal finance issues for more than 20 years, writing and editing for publications such as The Wall Street Journal, the Financial Times, and Mutual Fund Market News.
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