Since the Credit CARD Act was signed into law a decade ago, itâs become more challenging for college students to get approved for their very own credit card. Hereâs what you need to know about why itâs more difficult nowadays and what you can do to improve your chances of getting approved.
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Saving for retirement is one of the most popular topics that clients want to discuss with their financial advisers. In fact, Boston Private’s recent WHY of Wealth Survey found that preparing for a comfortable retirement was the most important factor driving the wealth planning efforts for nearly a third of all high-net-worth respondents.
But how do you begin planning for such an important financial milestone like retirement? Itâs a question I hear quite often. And while thereâs no magic formula or right number that works for everyone, I have found that the following three steps can help almost any individual build a successful plan for what I like to call the âseven-day weekendsâ of retirement.
Though not the most exciting, this is an absolutely crucial step. Before you can plan a future, youâll need to understand the full financial picture of your life today. The easiest way to start is by creating a net worth statement that details all of your assets and liabilities.
As youâre taking note of your assets, be sure youâre reviewing how your financial accounts and other assets are owned and invested. What is the interest rate on your cash balance? How are your retirement accounts invested? As you review your mortgages and other liabilities, make note of the loan terms in addition to the balances. Do you have a 15- or 30-year mortgage? Whatâs the interest rate on your credit cards? How long do you have left before you are debt free? Donât forget to include other assets, such as real estate, collectibles and life insurance.
As you prepare your net worth statement, this is also a great time to review all of your accounts with beneficiary designations to make sure the correct person is listed.
Once you have a full view of your current financial picture, make a list of the income sources you might be eligible for in retirement. This might include pension income from your employer, or perhaps you own rental real estate. For most individuals this would include Social Security benefits.
The easiest way to find out how much your Social Security payment will be is to obtain a copy of your Social Security statement. You can download copy of your statement from the Social Security Administration at www.ssa.gov. Your official statement will show your projected Social Security benefit at retirement and your entire work history. An important note: If you spot any inaccuracies in this statement, be sure to clear them up now.
One question I often receive as clients review their potential income streams is: âHow should I factor in a potential inheritance?â Unless you know the particulars of this potential benefactorâs financial situation and legacy wishes and the inheritance is imminent, I typically recommend not including an inheritance in your projections because it is never a sure thing. If it happens, then great! You will be that much better off financially. However, you donât want to bet your long-term financial security on something that doesnât materialize.
One of the most common questions I receive is: âHow much do I need to retire?â Because everyoneâs circumstances are unique, my answer is always, âWell, it depends.â
Even though answering this question might feel like aiming at a moving target, these guiding questions will help you arrive at a best guess, which is critical to building your plan:
Now that you have a better understanding of how much money youâll need and where it will be coming from, itâs equally as important to understand how much of that money will need to be paid to the government. Each asset and income source has its own tax treatment, so itâs important to understand the rules that apply to each. For example, if you plan on taking portfolio withdrawals from a brokerage account, you will most likely need to pay capital gains taxes as you sell investments to raise cash.
Each retirement investment vehicle and benefit plan has its own unique tax structure and rules, so make sure to understand the differences and requirements of each. For example, while distributions from traditional IRAs, 401(k)s, 403(b)s and Social Security benefits are all taxed as ordinary income, how much of your Social Security is taxed is dependent on how much other income you have. If you take distributions from a Roth IRA, those distributions are not taxable as long as you meet certain conditions.
Going through this exercise often helps illuminate changes that may need to be made in your current savings plan. Many individuals know that itâs important to diversify your investments, but fewer understand the importance of diversifying their savings from a tax perspective. If all of your retirement nest egg is held in your 401(k), for example, you might want to build up your savings outside of your 401(k) so you can lean on this account to help you decrease your taxable income in retirement.
By following the three steps above and asking yourself all the right questions, youâll be well on your way to creating the life you want to live during your seven-day weekends. And if you remember nothing else, remember that the best time to start planning for retirement is now.
When folks think of the worst stocks of the past 30 years, Lehman Brothers, Enron or Arthur Andersen are but three among legions of notorious names that might immediately come to mind.
Yet somehow, those corporate catastrophes don’t come near cracking the top 20 stocks that destroyed the most shareholder wealth in recent history.Â
That’s partly due to the depressing fact that there’s simply too much competition.
The respective popping of the tech and real estate bubbles in the U.S. and Japan; an appalling catalog of corporate malfeasance, malpractice and fraud; and the Great Financial Crisis make for a crowded field when it comes to the wholesale destruction of shareholder wealth since 1990.
But before we get to these all-time drags on shareholder performance, let’s start by defining our terms for wealth creation and destruction.
Hendrik Bessembinder, a finance professor at Arizona State University’s W.P Carey School of Business, takes a different tack when it comes to studying the best and worst performing equities.Â
The idea isn’t to figure out stocks’ straight-up returns, be they positive or negative, over some defined time period. Rather, as Dr. Bessembinder writes in his research:
“We measure for each stock the dollar amount by which the wealth of shareholders in aggregate was enhanced by their decision to take on the risk of stock investing rather than investing in low risk U.S. Treasury bills.”
Put another way, Bessembinder measures long-term shareholder outcomes both in terms of compound returns and relative improvement to shareholders’ wealth.
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To oversimplify a bit: Imagine an investor back in 1990. Rather than buy shares in, say, Apple (AAPL), what if he or she instead sunk their capital into risk-free one-month U.S. Treasury bills?Â
Think of Apple’s “return” in this case as essentially the change in market capitalization adjusted for things such as dividends, share repurchases or new equity issuance, when compared against the compound return of risk-free one-month U.S. Treasury bills over the same time period.
The T-bills are a kind of stand-in for opportunity cost. And the difference over time between the two investment choices, when positive, is wealth creation. It’s the enhancement.
In Apple’s case, the enhancement happens to be tops among the 30 best stocks of the past 30 years. Apple created $2.67 trillion in shareholder wealth, or 23.5% annualized, from 1990 to 2020, according to Bessembinder’s research.
But what happens when the enhancement is negative? That’s when you get wealth destruction.Â
“Wealth destruction is not simply a decline in market cap, though in many instances this will be the largest contributor,” Bessembinder says. “My calculations all take the one-month Treasury bill rate as the opportunity cost.”
A firm that generated a zero return would be destroying wealth, at least in those months where T-bill rates are positive, Bessembinder adds. His calculations also implicitly account for any share repurchases or new equity issuances.
“If a firm’s market capitalization falls, but the reason is a share repurchase, then no wealth is destroyed,” Bessembinder says.
Have a look at the top 20 stocks of the past 30 years in terms of how much shareholder wealth they destroyed:
“Long-term shareholder returns: Evidence from 64,000 global stocks” by Hendrik Bessembinder, W.P. Carey School of Business, Arizona State University, et al.
Note that 12 of the wealth destroyers in the table above are Japanese firms â and 10 of those names are banks. Japan’s banking crisis, which ran from 1991 to 2005 following a collapse in stock, real estate and other asset prices, is to blame.
The U.S. has the dubious distinction of making four contributions to the list. Wachovia, which fell apart amid the GFC, is today part of Wells Fargo (WFC). WorldCom, among the most infamous accounting scandals of its day, emerged from bankruptcy in 2003 under the name MCI. Parts of that business survive today within Verizon’s (VZ) Verizon Business division.Â
However, the greatest wealth destroyer of the past three decades by far is PetroChina (PTR). The Chinese oil-and-gas company is the listed arm of state-owned China National Petroleum Corporation. From June 2000 through December 2020, its Shanghai- and Hong Kong-listed shares destroyed more than a half-trillion U.S. dollars in shareholder wealth, Bessembinder found.
Perhaps the most salient aspect of Bessembinder’s research is that the vast majority of stocks are duds. Indeed, all of the $76 trillion in net global stock market wealth created over the past 30 years was generated solely by the top-performing 2.4% of stocks.
Investors were highly unlikely to buy and hold a concentrated portfolio of the market’s vanishingly small handful of outsized wealth creators. At the same time, the market’s biggest wealth destroyers were out there helping to crush investors’ long-term plans and goals.
If the lists of greatest wealth creators and wealth destroyers tell us anything, it’s the supreme importance of having a diversified portfolio.
College is expensive. That means that even if you saved up your pennies since you were five, are currently working two part-time jobs, with a clutch of scholarships in tow, you might still need a little extra student loan cash to help you pay for your degree. There are a number of ways to finance […]
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Before you hit the Zillow listings you need to ask yourself: How much house can I afford? Hereâs how to figure out all the factors that go into this huge investment.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
Marriage is a huge step for most people. It signifies some major life changes â including to your finances. Even as you celebrate, you might have some questions about exactly what marriage means for your financial future. Is their debt now yours? What is your liability when it comes to student loans, credit cards, and […]
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This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
Money talks. And student debt proves youâve made a massive investment in your career. While most people want to pay student loans off as quickly as possible, it can actually be smart to take a little longer to do so and start saving for retirement sooner. Sure, retirement isnât a trendy topic at happy hour. […]
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