Savings Rates By Generation

According to a recent article in USA Today, there are stark differences in the way the three current “at work” generations view savings habits. The three generations are Baby Boomers (born 1947-64), Generation X (born 1965-80), and Generation Y (born 1981-95).

The rate of participation in retirement savings plans for the Boomers is the highest, as you might imagine – at 72%, with an average account balance of approximately $93,000. The Gen X group is next at a participation rate of 63%, account balances around $31,000. Gen Y brings up the rear in participation rate at 31%, and account balances around $3,200.
While these numbers aren’t necessarily unexpected, they highlight two issues:

1) Gen Y members need to get “with it”, since they are far more likely to have jobs without traditional pensions; and
2) Baby Boomers need to increase that average account balance. Less than $100,000 in a retirement account and nearing retirement is not a promising place to be. Without some other form of sustenance, this amount will be woefully inadequate as you begin drawing on the balance to live on in retirement.

So, if you’re one of those folks whose retirement account is in good shape – keep it up! If you’re “average” or below, you want to start concentrating on your savings. And help your children understand that they need to start saving, as well.

Tax Deductions

Many Americans unknowingly overpay on their income taxes each year – because they don’t know all of the deductions that they have available to them. Listed below are several new and commonly-missed deductions that you may not be aware of:

$$$ - for 2006, you could be eligible for up to $3,400 in tax credits if you purchase a hybrid automobile – but don’t wait until the end of the year! This credit is limited to the first 60,000 units of these cars (allocated to the several given hybrid manufacturers by volume), and once they’re gone, it’s gone.

$$$ - according to the GAO, over 2 million taxpayers overpaid on their taxes in 2002 simply because they didn’t take advantage of the tax laws enacted late in the year. The same held true for the 2004 provision to deduct state sales tax instead of income tax – since it was enacted late in the year, an estimated 1 million taxpayers didn’t take advantage of it.

$$$ - with the skyrocketing cost of medical expenses, it may make sense to track these costs and deduct them. For retired folks on limited income, with high medical expenses, the 7.5% floor is often easily met. This is a deduction that often gets overlooked because the taxpayer hasn’t tracked the expenses throughout the year.

$$$ - speaking of the elderly, if you’re providing support for elderly parents or grandparents, and their income (above Social Security) isn’t more than $3,200, you can claim them as dependents on your tax return – even if they live by themselves or in a nursing facility. You must provide more than half of their support in order to claim this exemption.

$$$ - when making charitable contributions, it pays to note the actual date when you’ve made the contribution. For 2005, for example, cash donations made after August 28th (Hurricane Katrina) could be deducted in full, rather than being limited by your income as contributions would be otherwise.

$$$ - the same goes for business deductions: for 2005, any mileage driven in your personal car for business purposes could be deducted at a rate of 48¢ per mile for miles driven between September 1 and December 31 – an 8¢ increase of the rate from earlier in the year.

Asset Allocation

On these very pages not too long ago, I pointed out the most important factor to achieving your investing goals, and that is consistent accumulation. The second most important factor?

Asset allocation is the process of dividing your investment “pile” into various different types of investments in an effort to maximize your exposure to the benefits of each type of appropriate asset class – while at the same time utilizing the risk as efficiently as possible.

There are two primary factors which help to determine how you might allocate your investment assets: risk tolerance and time horizon.

Risk tolerance deals with whether or not you can sleep at night knowing that your investment could fall (or rise!) by 15%, for example. If you’re a person who has to watch your investments every day and can’t stand it when you see a loss, you have a low tolerance for risk. If, however you recognize that it is important to take measured risks in order to achieve a better return, you may have a moderate tolerance for risk. On the other hand, if you consider the lottery, Texas Hold ‘Em, and day-trading penny stocks to be reasonable components of a portfolio, you’ve got an inappropriately large appetite for risk.

Risk is tempered by time horizon. In other words, even if you’re fairly risk-averse, if your time horizon is long enough, you can (and should) take on a fairly risky allocation model. Conversely, when your time horizon is shorter, you need to back off on the risk – even if you have a high appetite for risk – the short time horizon reduces your ability to recover from significant losses should they occur.

What’s important to remember is that investing too conservatively early on in your savings career can have a drastic affect on the results. Since you have a significant amount of time for compounding to work in your favor, it makes sense to take additional risk to increase the overall return for your portfolio. With time on your side, you can afford to take a little more risk when the reward is appropriate.

At the same time, when your investing horizon is shorter, say less than five years, you can’t afford to put your funds at much risk. But this doesn’t mean that you should put your money under the mattress – inflation will eat away the buying power of your money in a short time. It’s important to maintain a degree of risk in your portfolio throughout your investing life in order to combat the impact of inflation and provide for a minimal amount of growth.

Having determined an appropriate allocation model to follow, it makes sense to review and re-balance your portfolio about once a year – in order to make sure your allocation model is still in effect. Rebalancing more often doesn’t produce benefits to match the amount of effort and transaction costs that you would incur.

Happy allocating! As always, if you need some help with this, I would be happy to help out – just give me a call.