3 biggest challenges facing retirement savings

Aron Levine, head of Preferred Banking and Merrill Edge

3 Hours AgoCNBC.com

When considering the biggest regrets of 2014, most of us think of common year-end responses, such as what we ate and drank or spending too little time with loved ones. However, the growing American mass-affluent segment experienced the most guilt—for not investing enough for the future.
And while it may be surprising, according to our latest Merrill Edge Report, the sentiment correlates with what we found earlier this year: Americans' top fear is going broke in retirement. Put simply, Americans are seriously afraid of running out of money in their golden years, and they feel guilty about how they're handling it.

Peter Zander | Getty Images

 

Due to the changing retirement landscape and longer life expectancy, we're seeing more Americans take an introspective look at investing for retirement, benchmarking their progress and acknowledging their successes as well their shortfalls. Nearly 6 in 10 are setting a goal to save more for retirement this year, overshadowing losing weight, paying down debt and taking more trips. And while I'm thrilled to see this long-term focus and goal setting for 2015, our research tells us that many of us are facing some challenges.

So while investors seem to have good intentions, what is really prohibiting them from investing more year after year? In today's economy, here are three of the biggest challenges Americans are up against while attempting to build their retirement nest egg.

Student debt. Debt remains a prominent prohibitor to investing for retirement, particularly among those saddled with student loans. Student loans are now the second largest debt class, at $1.2 trillion, behind only mortgages, according to a recent study by Experian. With such staggering amounts of debt, we're seeing this greatly impact Americans, who are delaying investing for retirement in addition to prominent milestones until they've paid off this debt. This is particularly evident with the millennial generation.

Aging parents. As life expectancy grows and health-care costs rise, more middle-aged adults are playing an active role in their elderly parents' care. With many also financially supporting dependents of their own and nearing retirement age, this so-called sandwich generation is feeling significant financial pressures. Defined as people who are simultaneously caring for a minor or grown child, in addition to a parent age 65 or older, this generation fits the profile of approximately more than 4 in 10 Gen Xers and one-third of baby boomers, according to Pew Research.

Everyday trade-offs and competing priorities. We continue to witness a trend of lifestyle preferences derailing financial goals, especially over the past two years. Most Americans are not convinced their short-term decisions really affect their finances in the long run, particularly what they spend on entertainment and eating out. Furthermore, future finances are clearly not top of mind. More than half respondents in our survey don't think about their long-term finances when making daily purchases.

These three challenges are extremely prevalent in today's world and are most likely some of the largest contributing factors to why more than half of respondents in our latest Merrill Edge Report did not save for retirement at all last year. So how can we start making good on our resolutions and start to put away more for retirement this year?

It can come from the simplest of actions—spending more time on budgets, seeking investment advice online to gain the confidence to make more informed decisions, and even implementing a monthly check-in to keep you accountable. If you don't know where to start, take the initiative to consult with a financial advisor.

Investing for retirement is a marathon, not a sprint. Small, steady strides are the key. So if you are facing one or all of these challenges, it's important to recognize the need to prioritize retirement and take actionable steps, investing as much as possible as early as possible. While Americans felt they could have done better with their finances in 2014, I am looking forward to more respondents feeling proud in 2015.

—By Aron Levine, head of Preferred Banking and Merrill Edge.

This is the only retirement guide you'll ever need

Who wants to live such a long time, given the retirement headlines?

Eric Rosenbaum | @erprose

 

When it comes to Americans and retirement, it seems nothing works better at grabbing our attention than fright.

It's the headlines I'm talking about—the ones that describe how far behind we all are in amassing the nest eggs that will see us through the golden years without the daily terror of exhausting our savings or being forced to face cat food meals and coupon-clipping sessions.

If you aren't already rich—and didn't cash in on the last housing bubble and don't have a "fat," guaranteed government pension or anticipate a huge inheritance—the headlines about retirement could easily lead you to conclude that you will never be able to retire, expiring at your desk while surfing the Internet for reverse mortgages and high-yielding bond investments (Henry Winkler, Robert Wagner and Belize CCC minus-rated bonds will never have looked so good).

But I don't need to remind you about all of this. What good does it do, anyway?

One word: Branding

Martti Salmela | E+ | Getty Images

 

Consider the source for almost all of the headlines and research conducted by the financial services companies. They could work with the Employee Benefit Research Institute (EBRI) on an annual retirement confidence survey—the longest-running annual retirement confidence survey in the U.S., with a 25-year history—for as little as $9,500, gaining access to all of the data from the 70-question survey.

Instead, financial services companies go out and spend "well over $100,000" to do their own comprehensive surveys year after year, or they opt for a cheaper, snapshot survey—say, five questions—with an organization like Gallup, said EBRI president Dallas Salisbury. Why?
"A single word speaks to it, and that is branding," Salisbury said. A financial services company with a big 401(k) business and/or family of mutual funds wants to be the one you turn to when you stand up and admit that you have a retirement problem. They prefer to call it "thought leadership," but that's just a mouthful to make branding seem intellectual.

There is also a reason why so many of the retirement headlines are so alarming.
"People are always looking for what to do with a headline to maximize the potential someone will publicize the survey. Bad news sells," Salisbury said. "If the name of the sponsor is mentioned, they've met the branding objective. It's more PR than the other side, which is the underlying attempt to create an outcome," he added.

That outcome being that you start saving, or save more, for retirement.

"We all know most people aren't on track for retirement," said Morningstar's head of retirement research David Blanchett. "I think surveys that talk about poor savings in the U.S., or the fact that people haven't saved enough for retirement, are relatively worthless. Kind of like saying, 'The sky is blue'" (not much value there).
None of it would be possible without the partner in crime to the financial services companies—me, or more broadly, the entire financial media, and in particular, the online financial media, which does so well in terms of generating clicks based on the old, reliable "fear and greed" philosophy.

SHOCKING RETIREMENT HEADLINES!
Workers spend more time planning vacation than retirement
(CNNMoney, Aug. 19, 2014, based on Schwab survey)

Planning your retirement? Prepare to live on less
(CBS Moneywatch, Jan. 8, 2015, based on Transamerica survey)

Twenty-two percent of Americans would rather die than retire without enough money
(Huffington Post, Oct. 27, 2014, based on Wells Fargo survey)

Retirement savings fears grip Americans: 'I don't have enough'
(CNBC.com, June 9, 2014, based on Gallup poll)

For many Americans, retirement won't be golden
(CNBC.com, Dec. 1, 2014, based on EBRI annual study)

And my all-time favorite ...

Wave of surveys show Americans unprepared for retirement
(ThinkAdvisor, Dec. 11, 2014)

Let me give you what I think is the best example of all—and incriminate myself in the process.
A little over a year ago, I was reading through an annual Wells Fargo retirement survey looking for a lead, and I came across a finding that caught my eye: a significant number of Americans who thought they would never be able to retire. It turned out this was the first time Wells Fargo had ever asked that question. I went with the ever-so-delicate headline, "Six feet under as a retirement plan?"
Needless to say, one of my greatest successes ever in terms of clicks and shares—and (sadly) I knew it would be before ever hitting Publish.

The financial services industry retirement survey-online financial media complex is a productive one. They get the branding, and we get the traffic.

Igniting the fear factor

"Individuals don't spend a whole lot of time doing any planning or thinking about retirement until it happens, and that's a 25-year finding," Salisbury said
Forced to choose between the two ends of the spectrum—the good old days, when employees took on faith that they were all set for retirement, or a large portion of today's workers, who assume they won't have enough—Salisbury chooses the endless bad news for no other reason than it causes more focus on preparing.

And now for some good news

"The basic value of these types of 'pop psychology' articles is to increase overall interest in financial literacy and retirement planning. This is the first step in nudging the general public to start to open a retirement plan at work and then hopefully hire a financial planner," said Victor Ricciardi, finance professor at Goucher College and co-editor of "Investor Behavior: The Psychology of Financial Planning and Investing" with Kent Baker.
And EBRI research finds that the needle is moving: The amounts saved are going up a little, and the age at which people start to save is going down.

"I fear that in dwelling so incessantly on clients' futures, many financial advisors have no time left to focus on clients' present needs and wants." -Tim Maurer, director of personal finance at BAM Alliance

Though there is a risk.
"My concern with the studies is they often talk of despair vs. hope," Morningstar's Blanchett said. "I think more emphasis on how 401(k)s are helping, what activities help improve participant outcomes, would be far more useful." He added, "Scare tactics may move the needle some, but I think things like automatic enrollment (or even so far as mandatory contributions) are what's necessary."

A call to action

Here's a modest proposal: Make this the last retirement guide you ever read. Begin with the assumption that you are not saving enough. Then come to the realization that you just wasted a little time reading rather than working on your plan to actually save.
Add a recurring item to your smartphone calendar that once a month will alert you to the fact that your retirement is still at risk and that you could be saving more and it's time for a checkup. You can set up as many alerts as you like (I've included a handy list at the end of this article).
"The financial industry has an economic bias to use endless scary retirement surveys to attract assets on which they can charge fees and commissions," said Tim Maurer, director of personal finance at BAM Alliance and a CNBC Financial Advisor Council member. "I fear that in dwelling so incessantly on clients' futures, many financial advisors have no time left to focus on clients' present needs and wants."

But you didn't need another article to tell you that, did you?

START SAVING FOR RETIREMENT—TODAY!
Here is a helpful list of retirement tasks to input as smartphone calendar prompts so you stay on top of your retirement throughout the year.

Time to check your contribution level! If it is not at the maximum, consider if you have had any positive change in your income/financial situation that might allow you to increase it. On the other hand, consider if you are contributing too much: You may not want to save more than the company match if you have revolving credit card debt. You can "earn" a 20 percent rate of return (after-tax, risk free) paying down credit card debt, while you'd be lucky to make half that investing in a 401(k).

Time to consider a target-date fund! If you aren't already using one, see if your plan offers one—it's the simplest way to invest in a retirement portfolio that is designed to match your risk tolerance as you age.

Time to take an online risk assessment! Five minutes of your time is all it takes to see if the funds you are invested in match your risk/return tolerance. (If you are using target-date funds, you can skip this exercise.)

Time to make sure that fund fees are justified! Most 401(k)s now offer index options, even if not from the company regarded as the lowest-cost index fund provider, the Vanguard Group. See if the cost of any actively managed fund you use is merited based on its performance in the past one-year, three-year and five-year periods versus its index benchmark.

Time to make sure you are not using too many funds! Choice is great, but if your 401(k) account is spread across a dozen funds just because you thought it was correct to check off every fund on the plan menu, you probably should be using a target-date fund instead. Most investors don't have the sophistication to create a custom portfolio that's going to be any more productive than a target-date offering. Bear in mind: The total number of funds is less an issue than overlap of stocks held in multiple funds (which is when you are really and truly wasting money). There's a good chance that if you thought of a 401(k) fund menu as an opportunity to go on a shopping spree, then it's likely you've now got at least a few funds that really aren't necessary.

Time to see what your advisor has done for you lately! If you are paying for a financial advisor to oversee your retirement account or provide additional advice/recommendations, make sure they are actually providing you with services that merit the cost. What have they done that goes beyond the basics of any 401(k) platform?

Time to review any previous employer plans! Make sure that you roll over assets into an IRA or new employer-sponsored plan (if allowed) before your account is closed and a lump-sum (taxable) check issued. Only stay in a previous employer plan if the employer allows it AND the fees are lower than you would be able to find in an IRA or new employer plan.

AND ONE BONUS CHORE:

Time to go to the Social Security Administration website! Use its retirement benefits estimator to see how much you can expect to receive based on your earnings record (this should sufficiently scare you, especially when you consider one long-term EBRI finding that has barely budged over the past 40 years: The percentage of Americans that rely on Social Security as their main retirement income source has been around 60 percent since the 1970s. For 36 percent of Americans, it's their only source.

Eric RosenbaumFinancial Writer and Editor

Dentist is best job in America: U.S. News

Fred Imbert

Tuesday, 13 Jan 2015 | 3:09 PM ETCNBC.com

Mediaphotos | Getty Images

 

Dentists have the best job in the U.S., according to U.S. News and World Report's rankings, which were released on Tuesday.
The jobs selected are based on the U.S. Bureau of Labor Statistics' predictions on which 100 jobs will grow the most between 2012 and 2022, the report said. "Those top 100 jobs, from the industries of business, creative, construction, health care, social services and technology, are then ranked based on projected openings, rate of growth, job prospects, unemployment rates, salary and job satisfaction," the report said.

Dentists have the best job in the U.S. for four reasons, the report said. "One, a low unemployment rate of 0.9 percent. Two, decent work-life balance, especially compared to other health-care jobs. Three, the take-home pay is simply phenomenal," according to the report. Dentists earned an average wage of $168,870 and a median hourly wage of $72.74 in 2013, according to the BLS.


The fourth reason dentists took the top prize is because of their employment outlook, the report said. The BLS projects employment for dentists will grow 16 percent between 2012 and 2022, adding 23,300 jobs.

• Nurse practitioner
• Software developer
• Physician
• Dental Hygienist

Read the full report here.

Fred Imbert 

News Associate

Are actively managed funds still worth owning?

Kelley Holland | @KKelleyHolland

 

Tuesday, 6 Jan 2015 | 11:55 AM ETCNBC.com

Last year was a rough one for actively managed mutual funds.

Sure, the stock market saw double-digit growth again, and bonds had a surprisingly strong year. But now the taxman cometh, and many mutual fund investors with taxable accounts are finding out that their actively managed funds realized significant capital gains, which they must now pay taxes on. (When a mutual fund sells some of its holdings at a gain, it must pass through the taxable income to shareholders — even if those distributions are then reinvested in the fund.)


Some 453 mutual funds estimated their capital gains distributions for 2014 would be more than 10 percent of net asset value, 52 estimated distributions would exceed 20 percent, and 12 projected distributions of 30 percent or more as of Dec. 15, according to CapGainsValet.com, a website that tracks mutual fund distributions. The site's creator, Mark Wilson, chief investment officer of The Tarbox Group, a California-based wealth management firm, said that by his estimate, "maybe two or three index funds had greater than 10 percent distributions." The other funds were all actively managed.

The larger distributions, and resulting tax bills, from the actively managed funds would be easier to swallow if they were accompanied by extraordinary performance. But a majority of actively managed mutual funds are being outperformed by passive funds, including exchange-traded funds (or ETFs), that mirror popular indexes. About 85 percent of active large-cap stock funds failed to beat or even match their benchmark index through Nov. 25, according to Lipper, a research unit of Thomson Reuters. 

Not surprisingly, investors are wondering: Does it make sense anymore to invest in traditional actively managed mutual funds?
"In taxable accounts, actively managed funds are really tough," Wilson said. "It's really difficult to beat indexing."

If recent inflow and outflow patterns are any indication, a growing number of investors agree.
In December, fund-research form Morningstar reported that in the previous year, active U.S. equity funds lost $91.9 billion in outflows while passive U.S. equity funds drew in $156.1 billion. "A clear pattern has emerged this year," wrote senior analyst Alina Tarlea, "consistent outflows on the active side and inflows on the passive side."


One beneficiary has been Vanguard: On Sunday, The Wall Street Journal reported that investors poured $216 billion into the biggest provider of index-tracking products, a record inflow for any mutual-fund firm.
 
ETFs as a category are also benefiting. The number of ETFs, which trade like stocks but hold a basket of assets like a mutual fund, grew from 113 in 2002 to nearly 1,300 in 2013, according to the Investment Company Institute. And last month, they hit another milestone, surpassing $2 trillion in assets. While that's still dwarfed by the $16 trillion in mutual funds, ETFs are growing at a faster rate. In 2010, they had just half the assets they do now.

Actively managed funds fall short

Isu | Stock4B | Getty Images

 

Actively managed funds have another problem when compared to index-fund investing and ETFs: in general, their fees are higher. While fees on all funds have come down over the years, average fees on actively managed equity funds were 89 basis points in 2013, compared with 12 basis points for index equity funds, according to the Investment Company Institute. (When it comes to the cost of index funds relative to the cost of ETFs, a study by Alex Bryan and Michael Rawson of Morningstar found that "the difference in expenses between the two vehicles is small.")

Still, some active fund managers out there do beat the market. One example: Morningstar has nominated the managers of several domestic stock funds, including the American Century Mid Cap Value Fund and T. Rowe Price Mid Cap Growth, as contenders for domestic stock fund manager of the year. These funds outpaced the vast majority of their peers and beat their benchmark indices.
"It's hard work separating the wheat from the chaff" in the world of actively managed funds, said Stephen Horan, managing director at the CFA Institute, but winners do exist.


John Rekenthaler, vice president of research at Morningstar, examined the total returns of different fund management approaches in 2014, comparing actively managed Vanguard funds, which have relatively low fees, to other low-cost active funds, Vanguard passively managed funds, and actively managed funds with high fees. The highest ranked were Vanguard's actively managed funds, followed by the other low-cost active funds and the passive funds. The high-cost actively managed funds were the lowest ranked.
"It's true that active management sold at its customarily steep price is second rate. But so are high-cost index funds," he concluded. "How a fund is managed is less important than its cost headwind."

Capital gains conundrum

As for tax efficiency, exchange-traded funds and index funds both tend to generate fewer capital gains than actively managed funds year by year, partly because they buy and sell securities less often. ETFs in particular have an advantage because managers create or redeem "creation units" rather than actual securities to manage inflows and outflows or to rejigger asset allocation. But when investors sell their ETFs, index funds, or actively managed mutual funds, they owe capital gains on any appreciation.


Read MoreInvestors flocking into index funds – here's why
"ETFs and mutual funds have to follow the exact same tax rules," said Joel Dickson, principal in the investment strategy group at Vanguard.

Some experts say many of the tax costs of mutual fund investing simply occur at different times than the costs associated with investing with ETFs. Horan points out that when a mutual fund distributes capital gains, its net asset value decreases by that amount. So all else being equal, when an investor sells the mutual fund shares, the gain logged then will be smaller than it would have been without the distribution.

The mechanics of buying and selling mutual funds and ETFs are another consideration. ETFs can be traded any time the markets are open, while mutual fund sellers and buyers get the end-of-day price no matter when they put in the order. But when an investor buys or sells a mutual fund position, the price is simply the end-of-day price, while the seller of an ETF position may incur an additional, unseen cost if the ETF trades at a discount to the underlying assets, or if it is trading at a premium when the investor buys in.

"Usually the value of the ETF is very close to the underlying holdings, but not always," Dickson said.

(Closed-end mutual funds also trade at a premium or discount to net asset value, but at $279 billion at the end of 2013, assets in closed-end funds were a tiny fraction of the $15 trillion in U.S. mutual fund assets, according to the Investment Company Institute, and about one-sixth of those in ETFs.)

The silver lining in taxes

Horan argues that the ability to trade ETFs anytime may actually hurt average investors. "Having the ability to trade intraday can actually work against you in a behavioral, psychological way. There is plenty of evidence to suggest that the more individual investors trade, the worse they do," he said.
One example: Terrance Odean, a professor at University of California Berkeley's Haas School of Business, examined trading records from a large discount brokerage firm, and said in a 2014 interview that "both men and women on average underperformed the buy-and-hold approach to investing." (In an interesting side note, he also found that men underperformed by one percentage point more a year than women.)

Ultimately, Horan said, investors should first determine their investment approach. The type of investment will follow from that.

"Index funds are a good long-term strategy for folks that don't necessarily have an expertise in picking managers, or picking stocks themselves. That's going to be the majority of us," he said. "Are there active managers that have key insights and a steely discipline and an ability to capitalize and execute on those insights? I think the answer is yes. But they are not the norm."

Kelley Holland 

Special to CNBC

What's the best way to pay off holiday debt?

Kelli B. Grant | @kelligrant

CNBC.com

Plenty of consumers start the new year with extra debt. More than one-third of Americans took on new debt from holiday spending, according to CreditCards.com. Worse, Consumer Reports estimates that 7 percent of consumers went into the holiday season still owing on holiday purchases from 2013. The results, combined with existing debt, can be staggering. CardHub.com puts the average household's credit-card debt at $6,802—and climbing.

To figure out a payoff plan, make a list of all your credit-card debts, including the balance owed and current interest rate. "The right strategy really depends on the psychology of the consumer and what motivates you," said Curtis Arnold, founder of CardRatings.com.

AndreyPopov | Getty Images

From a numbers perspective, tackling the cards with the highest interest rates first can save you more over the long run. Knocking those balances down first means you'll pay less in interest overall. But a 2012 study from Northwestern University's Kellogg School of Management found that consumers are more likely to eliminate that debt if they use the so-called snowball method, and tackle their smallest balances first. "Especially if you're juggling multiple cards with balances, getting one card out of the way is a big win," said Arnold.

Using a balance transfer offer can help rein in bigger balances in the meantime. Some of the best available right now have no transfer fees, and extend as long as 18 months. Just make sure to stay on track with payments so the balance is paid off before the offer expires and rates jump. "We are great at fooling ourselves, and we need to remember that moving debt around is not the same as being debt free," said Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. "Before you know it, the introductory rate period is over, and you're worse off than you were."
Whatever strategy you choose, changing habits is a key element to success—it'll be that much harder to pay off debt if you continue to add to the balances owed. Switch to cash where you can, and use a credit card that offers zero percent interest on purchases to avoid racking up any new debt.

DNY59 | iStock | Getty Images

 

Kelli B. Grant 

Personal Finance and Consumer Spending Reporter