Do these simple things to turn your retirement savings into big money


There isn’t much about the future that I can predict, much less guarantee to investors.

But here’s one thing I can guarantee: If you achieve as little as 0.5% extra annualized return on your portfolio while you’re accumulating assets — and continue to do so while you’re retired — you will be many, many dollars ahead.

The difference can change your life as well as the lives of your eventual heirs. Much of your investment returns will be determined by things outside your control.

• Were you fortunate enough to be born into a family that provided you with a good education, good financial examples, and maybe even a trust fund?

• Or did you have to scramble for every dollar and every advantage?

• When you’re near retirement or when you finally do make the leap, does the market suddenly take a big turn for the worse and force you to say goodbye to a lot of the money you have saved?

Those and other major factors such as your health certainly shape your financial future.

But how well you do financially over a lifetime is also affected by how well you play whatever cards fate deals you. A good place to start is to grasp just how big a deal that paltry 0.5 percentage point of long-term really is in the long term.

Imagine you and your twin sister are celebrating your 21st birthday together. You decide you’ll each invest $5,000 at once and add the same amount on every subsequent birthday until you reach the “new” expected retirement age of 67.

Now imagine that — for whatever reason — your sister achieves an annual return of 8.5% for that whole period, while your own retirement money earns only 8%.

Let’s ignore taxes and assume you’ll each do this within a Roth IRA.

Your first investment occurs on your 21st birthday, your final one on your 66th birthday. Those 46 investments cost each of you $230,000.

On your 67th birthday, you and your sister compare notes as you prepare to take your first annual retirement withdrawal. You both agree that on this and every subsequent birthday, you’ll each take out 4% of the balance in your account.

If you have carried out this plan faithfully, your Roth IRA should be worth about $2,259,500; your sister’s should be worth about $2,657,300. Just that difference, nearly $400,000, is considerably more than all the annual savings that either of you added over the years.

Your sister’s higher portfolio value on your shared 67th birthday is the first of three financial results she gets for earning an extra 0.5% along the way. The other two are bigger.

You withdraw 4%, or $90,380, for the following year to supplement your Social Security (which we hope will be there) and the other resources you have to support your retirement.

Your sister’s first 4% withdrawal is $106,292 — giving her noticeably more for that first year of retirement. (Maybe she’ll pick up the bill the next time the two of you go to dinner!)

Let’s assume you and your sister are in good health and can expect to live another 30 years, until you’re 97. Let’s assume also that once you’re retired, you each scale back your investment portfolios to take less risk by investing more in bond funds and less in equities.

And (this is crucial) let’s assume your sister continues for whatever reason to earn 0.5% more than you during retirement.

If your Roth IRA earns 6% during retirement and you continue taking out 4% every year, by your 96th birthday you will have taken out a total of $3.54 million — a huge return on those $5,000 investments you made over the years.

This is the second of the three financial results from your long-term plan.

And your sister? She will have been able to take you out to dinner many, many times during retirement. Her total withdrawals will equal $4.48 million.

So far, that extra 0.5% return has been worth nearly $950,000 to her.

The third financial result from all this is the amount each of you has left on your 97th birthday when (for purposes of this example only) we will assume your lives end.

Your Roth IRA will be worth $3.81 million at that point, making your heirs very grateful for your long-term investment success.

Your sister’s account will be worth $5.16 million, amply rewarding her heirs for that extra 0.5% return over many, many years.

Here’s what could be considered the “final score” between these two portfolios:

• The total of all your retirement withdrawals plus what’s left is $7.35 million.

• The comparable total for your sister: $9.64 million.

That difference — about $2.3 million — resulted from just one thing: the extra 0.5% of return over a long lifetime.

I can’t guarantee you (or your sister, for that matter) will be able to achieve returns of 8.5% or 8% or 6.5% or 6%.

But I CAN guarantee that an extra 0.5% return will make an enormous long-term difference. And I can guarantee you’ll get at least that much extra return (and perhaps considerably more) from doing a few relatively simple things that are under your control.

Here are three places to get that 0.5% advantage.

• First, invest in mutual funds with lower expenses. A typical actively managed fund charges annual expenses of 1%. A typical index fund charges much less than one-half that amount. Check.

• Second, bump up your portfolio’s equity allocation by 10 percentage points. Over the past half a century, for example, a switch from 50% in equities to 60% has added more than 0.5% in extra return. Check.

• Third, invest in the S&P 500 index
SPX,
+0.45%
,
but add equity asset classes that have long histories of outperforming that index with little or no extra risk. Here’s an easy and very effective way to do that. And here’s an even simpler way.

That third step is called diversification, and it’s one of the smartest things investors can do.

Just these three simple steps, all completely within your control, will make a huge difference in the long term. As these numbers show, little things can mean a lot. Guaranteed.

Richard Buck and Daryl Bahls contributed to this article.



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Italian trader loses his ‘entire life savings’ on one insanely risky position


This year’s been a real grind for Luckin Coffee
LK,
+36.04%

investors.

At one point, Lone Capital held $367 million in stock to lead all hedge funds covered by Insider Monkey. DSAM Partners had $146.2 million worth. Melvin Capital, Renaissance Tech and Tybourne Capital were also bullish on the company, according to Yahoo Finance.

So when the stock, which was already down 89% for the year, had its trading halted back in April amid an investigation into financial misconduct, the losses were felt far and wide.

But one retail investor with a PG-13 Reddit name took a particularly grievous hit.

Yes, StopFapForever, who claims to be a 28-year-old Italian, shared his brutal market mistake with the bunch on WallStreetBets. He apparently he went all-in on Luckin and lost his entire life savings in the process. “Now I’m broke af,” he wrote, posting this screenshot of the carnage:

The top response fits the general theme of the unforgiving, risk-embracing Reddit group: “You still have over $12k left, come back tomorrow and finish the job,” lehacf wrote.

When pressed by the mob as to why he would take sink all that cash into such an obviously sketchy position back in January, StopFapForever, who says he still runs two business that should allow him recoup the losses within a few years, did his best to explain.

“It was before corona, lockdown and fraud,” he said. “Nobody knew back then. It went from 17 to 51 in 2 months from Nov to Jan. Could have just kept going instead of explode.”

After getting hammered overnight, he shared the expensive lesson he learned. “I’m gonna just invest in ETFs, gold and bonds for the rest of my hopefully long but quite useless life,” he said.

For what it’s worth, his Luckin position enjoyed a double-digit gain in Wednesday’s session, following the Dow Jones Industrial Average
DJIA,
+3.15%

, S&P 500
SPX,
+2.62%

and tech-heavy Nasdaq Composite
COMP,
+2.06%

deep into green territory.



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Nearly 25% of Americans have no emergency savings


The coronavirus pandemic compounds an already dire financial situation for millions of Americans.

One-third of homeowners have less than $500 or, worse, nothing set aside for an emergency home repair, according to a report released Wednesday, and that includes 50% of homeowners with an annual household income of less than $50,000.

There’s growing concern among many Americans — especially those who are most in need of the checks and already have bills piling up — that the economy won’t restart in time to save them from paying the rent, their mortgage and going hungry.

The survey found that over half of homeowners (53%) have experienced a home repair emergency in the past 12 months. The poll, conducted online by The Harris Poll on behalf of HomeServe, a home-repair company, questioned 1,400 homeowners.

Some 38% of Americans could not come up with $500 in cash without selling something or taking out a loan, another report released Wednesday from SimplyWise, a website that gives advice on Social Security; 1 in 10 are planning to withdraw from their emergency savings to pay bills.

Also see: Millions of people of color have NO access to affordable health care or quality education — and 2 million Americans lack running water

What’s more, nearly 25% of all Americans had no emergency savings and 16% have taken on more debt, and nearly one-third of households reported lower income since the start of the pandemic, a separate report by Bankrate.com concluded.

“The pandemic is deepening the financial hardship for millions of Americans,” Bankrate chief financial analyst Greg McBride said. “The financial legacy of this pandemic will be elevated unemployment, reduced household incomes, more debt and even less savings.”

The pandemic has hit the Northeast hard, with 36% of Northeasterners reporting a fall in income, compared to 31% in the West, 29% in the Midwest, and 28% in the South. People in the Northeast are also more likely to have increased debt than those in those other regions.

The $1,200 stimulus checks money can’t come soon enough for the roughly 40 million people who are out of work, and others worried about bills and rent. They also can receive $600 per week extra in unemployment insurance as part of the $2.2 trillion CARES Act.

Read also: Stimulus checks are a mere Band-Aid for Americans — amid fears of an even bigger economic crisis than the Great Recession

Gallup data released Monday add more support to previous research that less-educated workers in low-wage, blue-collar roles have been hardest hit by COVID-19, and suggest the pandemic is “exacerbating the income inequality that existed before its arrival.”

Some 95% of workers in low-income households — making less than $36,000 per year — have either been laid off as a result of the coronavirus (37%) or have experienced a loss in income (58%). A quarter of workers earning between $90,000 and $180,000 a year saw an income loss.

“These patterns were predicted in the early stages of the pandemic, and proposals for relief called for targeted and proportional funding,” Jonathan Rothwell, the principal economist at Gallup, said. Three in 10 U.S. job openings disappeared since March, recruitment company Glassdoor added.

The Dow Jones Industrial Index
DJIA,
+0.04%

and the S&P 500
SPX,
-0.33%

were slightly lower Thursday, as investors weighed the impact of the social unrest over the death of George Floyd in police custody in Minneapolis, as well as possible progress in COVID-19 vaccine research.



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How do my wife and I divide college savings between our two sons — we’re questioning whether our method is fair


My wife and I have two sons, 17 and 15. We are both firm believers in the value of higher education.

We saved for our sons’ college educations by contributing between $2,000 and $7,000 every year to separate investment accounts since they were born (not in a 529 plan). The older son will start college this fall and has been awarded scholarships that effectively give him a full ride, including room and board. The younger son will start college in two years and will likely get scholarships to reduce his college expenses to between $15,000 and $20,000 per year, including room and board.

We conservatively estimate there will be a surplus of $180,000 in their combined college funds after paying for their bachelor’s degrees. We would like to use the surplus to pay for their post-graduate degrees, if they choose. Otherwise, we’d like to use the money to make a positive impact on their financial futures, such as a down payment on a house, or a college fund for their own children.


We also want to prevent any feelings of animosity between them later in life because we gave more money to one than the other.

Our thinking all along has been to keep the money for each son separate. Each account will have about the same value when the son enters college. We’d use the money in the account to pay for his bachelor’s degree and graduate degree, and if there’s any remainder, use it to help him at a later time. However, we’re now questioning if that method of dividing up the money is actually the most fair and the best use of the funds.

Our older son didn’t really work harder to earn his scholarships. He’s just incredibly smart (for lack of a better word) and school is much easier for him. Our younger son is still a straight-A-student and will do well in college. He works harder to earn his grades, but he’s not going to reach the same level of purely academic prowess in high school, and it’s unlikely he’ll receive as much scholarship money, but we’d like to see him reach the same level of education without having to work even harder to pay for it. Additionally, there may not be enough money to send both sons to graduate school. However, if one son decides to go to graduate school and the other does not, the extra money could still be used for education, as it was originally intended. Of course, there’s the potential for delaying graduate school a few years, too.

We also want to prevent any feelings of animosity between them later in life because we gave more money to one than the other.

Lastly, if there actually are funds remaining after paying for college, we’re looking for suggestions on how to use it to improve our children’s financial future. Note that we don’t need it for ourselves. We aren’t what we consider wealthy, but our retirement planning is on track, we have a six-month emergency fund, our house will be paid off in four months, and we have no other debt.

Answer No. 1: Financial Fairness

Questions of fairness present many parents with a conundrum. Do you save equally for each child’s college education, or do you save more for one child than the other?

Should you save equally for both children, since you love both children the same?

Or, should you save more for the younger child, since college will cost more by the time they enroll, due to tuition inflation?

Luckily, the rule of thumb to save $250 a month from birth for an in-state four-year public college and $550 for a four-year private college usually does not change over a few years difference in age, because the amounts are rounded to the nearest multiple of $50. Otherwise, the amount would need to be adjusted annually according to college tuition inflation. So, you could choose to contribute the same amount for each child.

Yet, even if you try to save equally for both children, the cumulative savings will likely differ because you started saving for each child at different times. Interest rates, fees and the resources you can afford to contribute will change over time. If you start saving for both children at the same time, as opposed to starting for each child at birth, the younger child will accumulate more savings because of a longer time horizon. There will also be differences in risk tolerance due to differences in the time horizon.

That doesn’t seem fair, unless you set the same savings goal for each child.

If you save in parent-owned 529 plan accounts, as opposed to custodial bank or brokerage accounts, you can rebalance the funds between the children by transferring money from one 529 plan account to the other.

But, there will also be differences because each child is unique.

What if one child doesn’t go to college? Or wins a full scholarship? Or their college costs are covered because they enroll at a U.S. Military Academy? What if one child enrolls at a high-cost private college and the other at a low-cost public college? What if one child goes on to graduate school and the other doesn’t? What if one child majors in a more lucrative field of study and the other pursues a lower-paying career? What if one child suffers from an illness or disability and needs more help?

Some families may run out of money for the younger child because they didn’t save enough for the older child, placing the younger child at a disadvantage.

No matter what you do, feelings may be hurt. If you give the same amount of money to both children, the younger child will be forced to borrow more, burdening them with more student loans. If you give more money to the child with the greater costs or needs, the other child might resent that.

It may help to distinguish between paying for college and other purposes. If there’s leftover money after you’ve fulfilled your promise to help them pay for college, perhaps you can split it evenly among the children. Your commitment was to pay for college, perhaps even a particular type of college, and not to provide a specified sum toward college costs.

Splitting the leftover money evenly lets each child choose how to use their share of the money. They could use it to buy a car, pay for a wedding, save it for a down payment on a home, start a business, get a head start on retirement savings, build a college fund for their own children or repay their student loans.

Communication with the children can help avoid acrimony. Be honest and transparent about how you decided how much to contribute to each child’s college education. Be clear that differences in the savings account balances are not a reward for good behavior or a measure of your love for each child. Rather, you are addressing your children’s needs, and each child’s situation is different.

Answer No. 2: Titling of Account

It is important to understand the titling of the investment accounts, since that can affect the possible uses of the money. The main options are a Totten trust account and a custodial account.

A Totten trust or payable on death account, which is titled “parent in trust for child”, passes to the child outside of probate upon the death of the child. The parent can use the money for any purpose and has no duty to use it for the benefit of the child.

A custodial account, which is titled “parent as custodian for child”, is established under the Uniform Transfer to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA). The money is legally the property of the child and must be used for the benefit of the child.

Thus, if the college savings funds are in a custodial brokerage account, the money cannot be given to a sibling.

This is in contrast with a 529 college savings plan where a parent is the account owner and the child is the beneficiary. The account owner can change the beneficiary to a member of the family of the current beneficiary, such as a sibling.

(There is also a different type of 529 plan, called a custodial 529 plan, where the child is both account owner and beneficiary. If the child has not yet reached the age of majority, the custodial 529 plan account is managed by a custodian. However, the custodian cannot change the beneficiary on the custodial 529 plan account.)

The money could also be in a brokerage account in the parent’s name, in which case the parent can use the funds to pay for either child’s college education, or for any other purpose.

The titling of the account can also affect the child’s eligibility for need-based financial aid. If the money is in a custodial bank or brokerage account, it is reported as a student asset on the Free Application for Federal Student Aid (FAFSA). If the money is in a custodial 529 plan account, or in the parent’s bank or brokerage account, it is reported as a parent asset on the FAFSA.

Student assets are assessed more heavily on the FAFSA than parent assets. The student’s eligibility for need-based financial aid is reduced by 20% of the student assets. Parent assets, on the other hand, are assessed on a bracketed scale with a top bracket of 5.64% after subtracting a small asset protection allowance based on the age of the older parent. Thus, $10,000 in a child’s custodial brokerage account will reduce aid eligibility for $2,000 and $10,000 in the parent’s name will reduce aid eligibility by at most $564.

Mark Kantrowitz is Publisher and VP of Research for Savingforcollege.com, the most popular guide to saving and paying for college.



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Prosperity Bancshares: Cost Savings And Loan Growth To Drive Earnings (NYSE:PB)


Prosperity Bancshares (PB) is one of the few banks that did not see a hike in provision expense amid the COVID-19 pandemic. The company’s earnings increased by 38% sequentially to $1.39 per share in the first quarter. For the full year, I’m expecting earnings to be higher than last year partly because of loan growth under the Paycheck Protection Program. Moreover, the company will likely benefit from cost savings after the conversion of LegacyTexas’ systems in June. On the other hand, a slight increase in provision expense will limit earnings growth. Overall, I’m expecting earnings per share to grow by 12% year-over-year to $5.06 in 2020. The December 2020 target price suggests a 13.6% upside from the current market price. I believe the upside is not high enough to compensate for elevated risks in the wake of COVID-19; hence, I’m adopting a neutral rating on PB.

NIM Compression to Counter Loan Growth

PB’s participation in the Paycheck Protection Program, PPP, will likely boost loan growth in the second quarter. As mentioned in the first quarter’s investor presentation, PB funded $630 million worth of loans under PPP in the first phase. Moreover, the management intends to fund another $1.1 billion worth of loans in the second phase of PPP. I’m expecting a majority of the PPP loans to get forgiven in the third quarter. Apart from PPP, there is little opportunity for loan growth because I’m expecting the Texan economy to take time to recover after the lockdown. Overall, I’m expecting loans to increase by 8% in the second quarter and then decline by 7% in the third quarter, on a linked-quarter basis. Further, I’m expecting PB to end the year with a loan balance of $19 billion, up 1.4% from the end of 2019. The following table shows my estimates for balance sheet items.

The compression in net interest margin, NIM, in the coming quarters will offset loan growth. PB’s average yield on earning assets is quite rate-sensitive because floating rate loans make up 32.5% of total loans. Furthermore, variable-rate loans make up 32.1% of total loans, as mentioned in the presentation. The management expects total NIM to be in the range of 3.45% to 3.55%, as mentioned in the first quarter’s conference call. Further, the management expects core NIM (excluding purchase accounting accretion) to be between 3.30% to 3.36%. Considering these factors, I’m expecting NIM to decline by 30bps in the second quarter. The LegacyTexas merger bumped up NIM in the fourth quarter of 2019, which is why the average NIM will be higher in 2020 on a year-over-year basis. The following table shows my estimates for total NIM, yield, and cost.

Prosperity Bancshares Net Interest Margin

Cost Savings to Support Earnings

PB’s non-interest expense will likely trend downwards in the second half of the year after the completion of the conversion of LegacyTexas’ systems. The management intends to convert the systems of the acquired bank in June, which will likely result in merger-related charges of $3 million to $5 million in the second quarter, as mentioned in the conference call. Following the conversion, the management expects to reduce costs by $8 million to $9 million every quarter. Taking management’s guidance, I’m expecting non-interest expense to increase by 4% in the second quarter and then dip by 7% in the third quarter, on a linked-quarter basis.

Exposure to High-Impact Industries Creates Risks

PB is one of the few banks that did not see a hike in provision expense in the first quarter. Charge-offs and recoveries canceled out the hike in provision expense from the environmental outlook in the first quarter. As a result, PB reported close to zero net provision expense.

I’m expecting provision expense to be slightly higher in the coming three quarters because PB has significant exposure to high-impact industries. As mentioned in the investor presentation, around 4% of total loans were to the oil and gas industry as of March 31, 2020. Additionally, hotels made up around 2% of total loans, restaurants made up around 1%, and medical loans made up around 3% of total loans at the end of the first quarter. Moreover, PB’s market in Texas depends on the oil and gas industry; hence, turmoil in the crude oil market can indirectly affect other portfolios too. On the plus side, Texas eased lockdown restrictions in early May; however, the return to normality is quite slow according to news sources. There is also a fear that reopening too soon will lead to another lockdown in the future. Considering these factors, I’m expecting provision expense to increase to $6 million in 2020 from $4 million in 2019.

Earnings per Share to Increase by 12%

For the full year, I’m expecting cost savings and loan growth to drive earnings. At the same time, I’m expecting an increase in provision expense and NIM contraction to limit earnings growth. Overall, I’m expecting earnings per share to increase by 12% year-over-year to $5.06 in 2020. The following table shows my income statement estimates.Prosperity Bancshares Income Forecast

The credit quality of PB’s loan portfolio is sensitive to oil prices, which makes credit costs difficult to predict in the currently uncertain oil market. As a result, there is a chance that the provision expense will exceed expectations in the year ahead. Furthermore, PPP fees are difficult to forecast for 2020 because the duration of PPP loans is unknown. There is a chance that PPP fees will miss estimates for 2020 if the duration gets prolonged to next year. These uncertainties make PB a risky investment.

Upside not High Enough to Compensate for Elevated Risk Level

I’m using the historical price-to-tangible-book multiple, P/TB, to value PB. The stock has traded at an average P/TB multiple of 2.53x in the past, as shown below.Prosperity Bancshares HIstorical Price to Tangible Book

Multiplying the average P/TB ratio with the forecast tangible book value per share of $29.4 gives a target price of $74.3 for December 2020. This price target implies an upside of 13.6% from PB’s May 29 closing price. The following table shows the sensitivity of the target price to the P/TB multiple.Prosperity Bancshares Valuation Sensitivity

PB also offers a low dividend yield of 2.8%, assuming the company maintains dividends at the current level of $0.46 per share in the remainder of 2020. The price upside and dividend yield combine to give a total expected return of 16.5%. In my opinion, the expected total return is not high enough to compensate for the high level of risk. Therefore, I believe that the stock is currently not attractive and that the stock price should remain range-bound at the current level. As a result, I’m adopting a neutral rating on PB.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article is not financial advice. Investors are expected to consider their investment objectives and constraints before investing in the stock(s) mentioned in the article.





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