Monday, November 23, 2009

Yet Another Spotlight on Your Retirement Plan

A short while back, I wrote about a company that uses a series of benchmarks and mathematical equations to determine whether your 401(k) plan is doing what it should. Brightscope's product was designed to help plan sponsors find the problems in their plans and make an effort to correct them. As noble as that effort may be, the hurdles are numerous for plan participants to get their companies to make the necessary changes to their plans.

Now we have another entrant to the market place, this one offering the plan sponsor a look a their employee's retirement readiness. Fiduciary Benchmarks, based in Kansas will provide a snapshot look at a company's plan and the chances that their employee will arrive at retirement with enough cash to be considered adequate.

Using 100% as the retirement readiness benchmark, a number that represents different things to different income groups, the report, provided free in brief and at the cost of $100 for more detailed analysis looks at the average employee. From there, the report then analyzes various pathways that employee can take, and if they did, how well the plan allowed them to reach the optimum amount in their retirement accounts.

In a downloadable pdf, they suggest that a person earning $20,000 a year will need 94% of their pre-retirement income to survive. Although the plan does take into account conservative longevity predictions and the available investments in the plan, it does not look at the statistics for this particular group and their overdependence on Social Security benefits.

Their benchmark also suggests that someone earning three times that amount would need only 78% of their working income to hit the 100% mark in the company's index. Some industries fair much better than others. But this is not reflective of the whole of the employees in the plan, simply what the plan may do for you should you use it to its fullest.

And therein lies the rub. Most employees, no matter how good the plan, do not max out their retirement contribution, leaving them with a huge gap in what they will need and what they enter retirement with. Without full participation, there is little another tool for plan sponsors can do. The vast majority of plans are adequate even if they fall short on the educational side.

While there is emphasis on educating the participant through education of the plan sponsor, it is beginning to seem a little overdone, even as this type of spotlight is still in its infancy. Most employees wonder why their plans weren't improved sooner. And still more see the incremental improvements as a way to sustain the current level of contribution rather than an enticement to increase it.

The real improvement will come from the IRS. Once they fix the expected tax rate for retiree's plans when disbursement begins, and not leave the rate the big unknown, employees will see the future through a much clearer light. Not having any idea what those future taxes will be make it difficult to determine how much will be enough.

Thursday, November 19, 2009

Retirement Planning: Vacation Time and No Money?

We have found that 2009 was not so kind to those investing in their 401(k). Employers have reduced or eliminated their matching contribution and many recent surveys have suggested that this will be slow to return. What was once considered the competitive lure for many employees has no simply become a sidebar in the search for a job. For many, and employers know this all too well, just landing employment is benefit enough.

But what about those who already have a job? What if you are a long-term employee? Many of us, as we have noted numerous times in this blog (post about matchless strategies) and on, have taken the wrong path when confronted with this issue. Far too many of us reduced our contribution to our defined contribution plans when this occurred. Some have even determined that if the employer doesn't match, you shouldn't contribute either. And just as bad for your retirement future, you did nothing to help make up for that plan shortfall.

As we have noted, the best way to make up for this decrease in contribution is to increase the one you are making. For older workers, the higher salary they receive may make this possible. For younger workers, the decision becomes one of increased frugality, living well within their means and doing without some of the luxuries they may have built into their budget. If your employer contributed 3% and you contributed enough to make the match effective, your best move is to make up for the employer's shortfall.

Yet, there may be another way that your employer might be willing to allow. In an effort to get more people contributing more to these all-important accounts, the Obama administration has allowed retirement investors the option of rolling unused vacation pay or accrued sick pay into their plans.

This past year may have seen an increased workload at your job because of employee cut-backs. This may have forced you to defer a much needed vacation in favor of staying right where you were. Fear of seeming dispensable at a critical time, even though the need for vacation has been proven the best way to increase productivity. But this leaves you with an account full of unused vacation time.

Contributing this sort of payment to your 401(k) requires your employer to make some changes to their plan. Even as some have reduced the availability of their matching contributions, some have added this provision to their plans to allow exiting employees to have their unpaid time put into their 401(k) plan prior to rollovers and to allow those who did not use what they had, to use the time to contribute to existing accounts. The later can only be done if you have not maxed out your account (currently at $16,500 for those under 50 and $20,000 for those over that age).

Companies may find this incentive very alluring. Not only does it make them slightly more competitive (for one, employees are on the job more throughout the year) but it offer the illusion of a benefit increase without the actual pay increase.

If your company currently does offer this or is considering it, keep in mind that it will not come with or apply to any matching benefits the company offers. And they may also see it as a temporary offering rather than a fixed part of the plan. The only thing that is certain is the option must be nondiscriminatory.

Tuesday, November 17, 2009

Retirement Planning: The Dividend Difference

This week on MomsMakingaMillion Talk Radio we are discussing the art of dividend investing.

So what are dividends?
When a company makes a profit there are basically three things that can be done. Some reinvest it, which is what newer companies or growth companies do. They take those profits and channel them back into the company in the form of research or simply hold the cash for future mergers and acquisitions. Some companies use the money to buy back their own shares. This happens when the company realizes that its share price is below what they think it should be. Some use the cash to clear up their balance sheets by buying down their debt exposure. Others share it with the shareholders.

These are all good things to do with the cash they have made but nothing benefits the shareholder over the long run better than dividends do. Why is that?
Dividends are old school. I wasn't that long ago that Wall Street considered the act of dividends the most important aspect of an investment. Now we can look to dividends for one thing: to increase our wealth.

How often do companies pay their shareholders?
Dividends are decided by the board of directors. Then they set a declaration date, which is the day the dividend payment to shareholders becomes a liability on the company's books. This is followed by the shareholder of record date. If you are holding the stock on that date, you receive the payment. They refer to this point in time as the ex-dividend price for the stock. If you buy the stock before the dividend is paid, you get the dividend. But be careful, a company considers the shareholder of record a person who owns the stock four days before the dividend is actually issued. Buying a stock in this four day period means you will not get the dividend; the person who sold it to you will. And the other important date in this process is when the company actually pays you.

Do they always pay cash?
This is the most common way of doing it. A company will declare a dividend and that amount usually is split among four quarters. So if the business offers you a dollar dividend, each quarter you would receive 25 cents for each share you own. Sometimes they offer a one time special dividend which is a lump sum payment with no other date specified when they will do this again.

What do investors need to keep in mind when buying dividend paying stocks?
Three thing investors can keep in mind when looking a dividend paying stocks: they are less volatile because the companies who pay them tend to be far more stable in terms of share price than other companies, they outperform non-paying dividend companies by almost 3%, and the are easily reinvested providing the investor with additional opportunity to buy more stock which means more dividends.

Monday, November 16, 2009

Retirement Planning: It is Never Too Late to Start Investing

Chances are, the lesser your wage will working, the more dependent you will be on Social Security when you retire. While at first glance this might seem a sad state of affairs in terms of a retirement plan, it is not beyond your abilities to change this outcome before you retire. If you are aged 50-years, the ability to put together a viable plan is doubly difficult. But, even considering that, it is not impossible.

Several things need to be adjusted prior to that arbitrary date.

Retire when you can
Most of us have not been very successful with our retirement planning. We have begun late in many instances and have failed to utilize our options to the fullest. Many of us have not used these plans long enough to see the benefits. Long-term investing still needs thirty years or longer to work. The vast majority who have plans have used them less than 16 years.

During this time frame, often thrust upon us as your company changed from a pension plan to a 401(k) or you changed jobs repeatedly during that period, we experienced the shock of having to educate ourselves about what our options were and then set a plan that was previously managed for us to one that was defined by us.

For numerous folks, this meant doing the wrong thing first, then, as time passed, correcting those mistakes.

Default Investing
Up until several years ago, the default investment in your 401(k) could have been anything from a simple index fund to a money market account. The later simply parked your money, and while you never lost any of it, you never were able to take advantage of market ups and downs.

Now, new employees will be defaulted into target date funds (pick a retirement year or have one picked for you). And some, after the debacle that was 2008, have switched their retirement money to just such a fund in the hopes of recovering enough invested dollars to regain some of what you may have lost and preserve what was left.

The jury is still out on whether these funds will provide what you need to get where they say they will take you. Target date funds are navigating uncharted waters with a promise to do what never has been attempted. Unlike balanced funds (usually offering a 60/40 split between stocks and bonds), target date funds re-allocate your investment over time moving from more aggressive to less with the idea that this will protect your investment over time.

Over 50 Dilemma
If you are over 50, this strategy may prove to be the wrong one. In most cases, you are entering your largest income producing years. If you are contributing more as you earn more, you may be leaving a great deal of potential on the table as these funds try and protect those invested dollars instead of growing them.

While stocks are considered risky in this period, they should not be ignored. The best structured retirement plan will separate your investments into categories. If you are currently contributing 6% of your pre-tax income to your retirement plan (and this is not enough), you need to increase that amount to the point of causing you to rethink your daily budget needs.

Each pay raise should signal an increase in contributions. And each increase should go to a more conservative investment while leaving the initial 6% fully invested in stocks. This sort of self allocation will give some risk for old money invested and less risk for new. Shifting to a target date fund does not allow for this, taking much of the potential for risk off the table.

When and How
If you can wait to take a distribution from your 401(k), it will allow it to grow further. To do this, you will need to enter retirement without a mortgage, with your financial house in order (this means adequate savings, only the minimum in credit card debt and the all important emergency account). Your expenses will not decrease in retirement. The cost of maintaining insurances as well as your property will not go away. Your health could prove to be a factor as well and should be accounted for (and worked on while you are still employed) before you retire.

Many of these costs rely on projections. While these are difficult to make with any accuracy, they are not impossible to plan for. Inflation will increase by about 3% suggesting that each year, your expenses will go up, even the fixed ones (because inflation makes your dollar worth less). Insurances might increase on average 5-10%. And taxes will depend on how much income you have but basing your projections on current income rates might prove foolhardy. Add an estimated increase of 3% per year (this includes property taxes as well).

Arriving at retirement with any outstanding debt means one thing: you will have to continue to work just to keep up with the increases. The other option, of course, is to get used to these financial burdens while you are still working. Living a little bit more frugally now will offer you the opportunity to experience what life post-work will be like.

So the three basic tenets of investing apply: get your financial house in order, channel as much money as is possible into your retirement plan (without increasing the risk of creating more debt as you scrimp) and take some risks with your invested dollars. The first tow will offset any problems you might face with the last suggestion and allow your invested dollars to do some work that too conservative approach will not permit.

It's not too late. But the strategies are different.

Thursday, November 12, 2009

Matchless Strategies

For many us, the employer match to our 401(k) plans has gone, or in some cases reduced to a mere shadow of its former generosity. They are expected to return but it will take years before they return to their former levels - if they ever do.

This presents the person planning for retirement (perhaps predicting a retirement income would be a better description) with a dilemma. They are at first troubled by their own human nature.

Many of us have never made the attempt to increase our contribution to make up for the shortfall. Few of us max out these accounts, relying in the employer's match to give us three, possibly more, percentage points of pre-tax income contribution. If your employer stopped putting 3% (of free money) into your account, you risk missing your projections by up to $100,000 over a thirty year career.

To make up for this shortfall, we will need to increase our contribution by at least this much. In the short-term, this will mean taking home less. If your partner has a plan that continues to match, be sure they are contributing enough to receive it.

One or both of you could make up the increase by dividing the increased contribution. This might have a less of an impact on your take home pay.

This can also be done gradually, increasing your contrbution as you receive pay raises or bonuses (using them to offset any yearly income decrease as a result of your increased contribution). But it shouldn't be ignored.

This might also mean adopting increased exposure to more risky investment strategies. Many people are using a far-too conservative approach to their investments for retirement and often too soon. As I said "more risky". Adding a more aggressive fund or two and using the increased contribution to fund it might be the best option to recovering that lost ground quicker. Not always but in the long-term, it might be a risk worth considering.

And while you are making sacrifices, something that everyone seems resigned to do, start getting your financial house in order. A pay decrease shouldn't extend your credit balances on penny. In fact, a little austerity now could go a long way just ten-years down the road. Prepare your entire liability plan to be eliminated by the time you retire. A 30-year mortgage with fifteen viable work years left spells trouble in retirement.

I'm not saying there won't be debt scenarios that are unavoidable, but a mortgage shouldn't be one of them - and neither should outstanding credit debt. With no clear and concise picture of the cost of health care, the ability of Social Security to pay you what you think you have coming, and the performance of that 401(k) as you near retirement, carrying debt in light of this cloudy future can be the storm you were unprepared to deal with.

Tuesday, November 10, 2009

Is Roth IRA Investing Different?

Where to put your retirement money is always a problem. There is allocation, diversification and risk to consider. Expenses and fees, performance and tenure also come into play. If that is the case, is investing with a Roth IRA that much different than with a Traditional IRA?

Yes and No.

In a traditional IRA, the money you invest is done so on a tax deferred basis. Money you invest in a Roth IRA has been taxed, leaving only your earnings on those investments taxable at the date of your retirement. Because you paid taxes on the money you have put in, it is essentially yours to remove at any time. But once you do, although you will not face the tax or penalties associated with withdrawing invested dollars from a Traditional IRA, it still hampers the overall investment.

In both plans, the money is set aside (invested) for the future. It is not meant to be taken out before you retire - for any reason. Doing so will take potential growth off the table and this will change any projections you may have made based on assumed growth and potential retirement distributions, no matter how small.

The inside workings of these two types of IRAs is essentially the same. Although Roth 401(k) plans have surfaced recently, Roth IRAs have gained acceptance as a way for folks to continue to invest for their future in lieu of pensions and 401(k) plans. This makes the Roth IRA perfect for the investor who has maxed out every other form of tax-deferred investment.

Which makes the Roth IRA not so ideal for those looking to pay less taxes now by deferring those taxes until a time when their income will be less (most retirement planners will point to an annual income post-work of 75% of your current/future earnings as a benchmark for your retirement plan's success). Using a Roth may seem attractive at first glance, but unless you are swimming in invest-able dollars, it might be wise to keep the tax deferred plans fully funded first.

If you have, your current fund family, broker or bank will be a good first place to look. If you do, you should have a working knowledge of how to solve those nagging allocation and diversification problems (be careful to avoid buying funds that have similar investment goals in both your Traditional IRA and your Roth IRA - although they seem different, they still belong to you), fund expenses and fees (I'm assuming that if you have already committed to a group of funds in your tax-deferred accounts, they are already inexpensive compared to their peer group and in some instances, to the benchmark) and the overall performance of the offerings (look long-term, preferably longer than five years).

Once that is accomplished, you can invest in a Roth IRA with exactly the same discipline you would any other investment. You should understand your objectives, have a relatively decent grasp on your own investing behaviors and tolerance for risk, and do so with an eye on investing as inexpensively as possible.

Paul Petillo is the Managing Editor of

Monday, November 9, 2009

Retirement Planning: Rollovers and Other 401(k) Considerations

While the 401(k) plan you have access to at your place of employment is a a "better-than-nothing" retirement plan doesn't mean that you should ignore the benefits of investing for your future.

There are three basic problems with the retirement plan (and how you use it) known as the 401(k). You can read the full article here.

What to keep in mind about your 401(k) plan and rollovers:

If you have a 401(k) plan use it and if possible, use it to its fullest.

Get your financial house in order while you are working, especially if you have only been in your 401(k) plan for less than fifteen years.

Rollover your old 401(k) into a Traditional IRA within 60 days and be careful with the paperwork.

If you have more money to invest, open a Roth as well.

Thursday, November 5, 2009

Five 401k Questions

On Friday 11.06.09, I will be talking with Gina and Kat about 401(k)s on their popular radio show MomsMakingaMillion. Here is a glimpse of what we will be discussing about your defined contribution retirement plan.

"So you're looking at your 401(k) and suppose its just average. Not too large and not too small. Can you pick too many funds?"

Five would be about the optimum number to own. Because you have to begin somewhere, most of us opt for the index fund that tracks the 500 largest companies. This is good first choice and if the 401(k) is really small, a decent only choice.

To read the full article about how to build a 401k from scratch...

Wednesday, November 4, 2009

A Fiduciary Duty with Respect: Retiring with a Plan

Buried inside many 401(k) plans are fees charged by the plan sponsor that are often in addition to what many would consider the transparent information available. These fees are not often known to the 401(k) investor at a glance.

Fiduciary responsibility remains a difficult ideal to litigate. "Captive" investors may simply have to deal with higher fees in the short-term until there is some ruling supporting comparisons. Or, as many in the investment community hope, the markets will return and these concerned investors will simply forget how much they could have made with lower fees as higher return offset the losses.

Paul Petillo's full article on fiduciary responsibility can be found here.

Monday, November 2, 2009

Lower Bar Means Easier Results

If you were to open your third quarter 401(k) statements, and I hope that you do, you will find that your balance in your retirement plans has jumped significantly from its lows from the year ending 2008. This would, to the untrained eye, point to a recovery led by the stock market.

And the stock market has recovered - to a degree. Yet, expecting this to reflect into the economy that we experience day in and day out, is not there. And may not be for months. Why is this? The full article can be found here.

Paul Petillo is the Managing Editor of the