How Should You Save?

When it comes to saving for retirement there are a number of ways to achieve your goal. On the MaxOut Savings Show we emphasize the importance of income based savings. After over 2 decades in the investment business we have seen how the average investor builds wealth for a successful retirement, they do it thru income based savings. This way you pay yourself first; having your savings deducted from each paycheck. It is called income based because the deduction is set at the same percentage of savings each time. This achieves a number of objectives when done this way. First of all the deduction is pretax, this gives you a tax deduction up to a certain limit Using payroll percentage based deductions allow for your savings amount to grow at the same pace as your income grows. In addition by paying yourself first it removes the temptation to spend your savings with the rest of the paycheck. Most important once set up your payroll deduction is on autopilot. Your savings plan is set and you do not need to worry about it.

Income Based Savings
Pay Yourself First
Set Savings as Percentage of Income
Savings Grow With Income
Locked up (you can't spend it)
Pretax (tax deduction)
Your Savings on Auto Pilot

How Much Should You Save?
We have a general target for all our listeners of a savings rate of 10% of your income. This means that for percentage savings rate for payroll deduction you should be deducting 10% allocated to your different programs. The lion;s share of that should go to your 401K or qualified plan. The 10% level does not include your company matching amount. The 10% payroll savings with the company match will typically get you close to 15% overall savings level, this should get you thru to a comfortable retirement. The 10% is for the average person, if you are within 10-12 years of retirement and are behind on your savings then your savings rate should be increased to 20% or more depending on the situation. We have seen many of our clients go above 20% as they near retirement and the kids are thru college. Life takes many turns and is impossible to predict, this is why we advocate the 10% plus matching. The percentage savings will turn with your turns and in our experience gets you there in good shape.

Minimum Goal: 10% Plus Company Match

Where Should I Save
When saving for retirement the majority of your savings should be directed at your qualified plans 401k, 403b etc….. The qualified plan or 401K has several advantages primary is tax deferred growth. All assets in a qualified plan grow tax free until money is withdrawn at retirement. Typically most moneys put into a qualified plan can be deducted from your taxable income, this is known as pretax saving. With pretax money put into a 401K you pay no taxes on it. It is very difficult to take money out of a 401K plan until 59 ½ or retirement without paying a tax penalty of ordinary income tax plus 10%. This is an advantage because it forces you to keep your savings next egg intact for retirement. Retirement plans are also often protected from creditors in case of unexpected financial problems are encountered this is especially true in the state of Texas. These are just some of the reasons that the 401K, 403b or qualified plans are the best place to place the bulk of retirement savings.

Housing Ghost Towns
Contrary to what you are hearing on the news the housing bust is not over, such talk is reminiscent of ;this is the bottom; in Cisco as it fell from $80 in 2000 to $10 in 2002 as the Tech Bubble collapsed. This week Centex Homes warned Wall Street that earnings were expected to be $.65 to $.75 for the quarter. This is in comparison to the $1.40 they were expecting for the quarter less than one month ago on September 19. To quote: ;These results reflect current record levels of homes sales contract cancellations, driven in many cases by the inability of buyers to sell their existing homes;. In addition today Janet Yellon President of the San Francisco Federal Reserve pointed out today.

SAN FRANCISCO (MarketWatch) -- The housing slowdown has turned some areas of Phoenix and Las Vegas into "ghost towns," where many unsold homes stand empty, Janet Yellen, President of the San Francisco Federal Reserve Bank, said Monday.

Yellen said that she heard the ominous description from a "major home builder," who told her that the share of unsold homes in some subdivisions around the two Western cities has topped 80%.

"Though the situation isn't that bad everywhere, a significant buildup of home inventory implies that permits and [housing] starts may continue to fall, and the market may not recover for several years," she warned, according to the text of a speech delivered Monday at the Hong Kong Association of Northern California in San Francisco.

We expect the housing markets to continue to weaken into next year further slowing the economy as home building slows job growth and the consumer.

Food Price Inflation
At the same time the Federal Reserve is making it clear that their priority is fighting inflation and rate cuts will be slow in coming and measured. Federal Reserve Bank of Chicago President Michael Moskow made the comment today "My current assessment is that the risk of inflation remaining too high is greater than the risk of growth being too low." The Federal Reserve is in no rush to cut rates until the weakness in the economy is more pronounced. The reason they are talking this way is if they cut too quickly it could lead to major weakness in the US Dollar. In addition they are looking at some of the agriculture commodities such as wheat. We have seen commodity stockpiles drawn down over a number of years to record low levels. This, coupled with the possibility of bad weather, is causing major moves in wheat, corn, orange juice and other commodities. As can be seen in the wheat price chart below, wheat has moved up over 40% in the last couple months. This should lead to inflation in food prices down the road and more pressure on the consumer. Therefore the Federal Reserve will be measured in any cut in Fed Funds rates going into year end and 2007. Wheat Weekly Price Chart

Gasoline Prices: Why did they fall?
The Financial Times of London published an article about a month ago http://search.ft.com/searchArticle?queryText=commodity+index+gasoline&y=0&javascriptEnabled=true&id=060830000824&x=0 stating one of the reasons gasoline went down in price is a change in the Goldman Sachs Commodity Index in weighting gasoline. Goldman Sachs reduced the weighting of gasoline from 7.3% to 2.5% in the popular commodity index. This caused a decline in the price of gasoline at the pump as a number of institutions benchmark to the index and buy those commodities outright or using derivative contracts. When the percentage is reduced in the index, institutions will sell the commodity to balance their portfolios to the new index weighting. This has led to a reduction in demand in gasoline and some selling to rebalance the index and therefore an oversize drop in gasoline prices. We expect gasoline has bottomed and will move higher over the next couple of months.

Given the recent rise in the stock market if the economy were to materially weaken over the next couple of months we could see a substantial correction. The combination of high stock prices and high oil prices, inverted yield curve, housing bust, inflation and slowing economy are not a good mix, as we wrote about in our last Report. The earnings estimates on Wall Street are too high if a slowdown materializes into 2007. We would use this strength to reduce U. S. financials, REITs, consumer durables and retailers.

Overseas large cap and non- emerging market debt look attractive. Keep in mind money funds yielding 4-5% are a good place to wait for better opportunities. We are also seeing good opportunities in Technology, Oil &Gas and Telecommunications. Now is the time to build up extra cash and be very precise with new investments.