Tuesday, February 23, 2010

The Missing Link to a Secure Retirement

We know we should have started younger.  In fact, we know we should be doing more now for our retirement.

We have wasted the following examples on the youth: If you begin in your twenties and put away $5,000 a year, every year, faithfully until you retire, you will have a 401(k) worth in the neighborhood of about $700,000.  Of course this also relies on a steady growth in the markets of at least 5%.

But what if you missed that initial decade?  What are the chances of reaching that amount?

Since the vast majority of us missed that decade, how much more would we need to get it back?  It is important to understand, this "invest in your twenties" adds the miracle of compounding to the mix. It allows markets to correct even as you are afforded more risky investments.  What goes up in other words, really goes up and when it goes down, it doesn't fall as a far.

Older folks on the other hand, witness direct changes to their invested dollars when markets recede making the pain even more real.  As the recent market downturn proved, the average investor had about two-thirds of their own money in their plan.  Losing more than 33% of your account's value wiped out not only all of your gains, but also ate into the money you worked so hard to invest.

To make up the shortfall, sage advisers suggest that you invest more (raises, bonuses, etc. as soon as you get them), that you gradually increase your contribution to make up for those "missing years" and that you never let up.  In works in theory of course and on any retirement calculator you might use.  But in practice, you have to adjust to living with far less now to ensure you don't live on far less in the future.

To read more about how to get back that missed opportunity...

Sunday, February 21, 2010

More Participants in Your 401(k): A Good Idea?

More businesses are now autoenrolling their employees in their 401(k) plans. Is this a good idea for those already enrolled or simply window dressing allowing their higher paid employees to contribute more?
Autoenrollment in 401(k) retirement plans was mandated in the Pension Protection Act of 2006. The PPA saw the idea as a way to help ensure that employees at least had a jump start at retirement. By enrolling new employees automatically, the theory of getting more workers involved in the plan sooner would them an opportunity to grow their future right from the first day (in some cases). At the time, it was thought to solve the under-use of these plans by a great many workers.
The theory seemed sound. But the execution of the idea has been found to be lacking. Seeking to understand the impact of this idea, several groups looked to judge the success of this plan. The trouble was, how? There were basically three approaches to the topic of whether the autoenrollment was working and if it was, was it doing what it was supposed to do.
According to a study done by the Center for Retirement Research at Boston College, past studies had always put the worker as the focus of how well a 401(k) performed. Did they enroll? Did they contribute? What sort of choices did they make when they did enroll and contribute? The employer’s role was almost secondary in the discussion.

Thursday, February 11, 2010

The Hidden Reality in the Company Match

You were among the fortunate ones.  You kept your job.  You were also among the unfortunate ones.  You lost money in your retirement just at the time when your company was trying to stop bleeding cash.  They stopped matching your contribution and you, wondering if they knew something you didn't, stopped investing exactly at the time when you should have actually upped your exposure to a nosediving stock market.  No one ever got rich investing at the top.

But you were scared.  You saw your 401(k) balance nosedive and your future evaporate (or at least it seemed it was) right before your very eyes.  Hindsight tells you that you shouldn't have done a thing; simply waited.

And now, the stock market is moving in the right direction - albeit sproradically and in fits and jerks.  And behold, companies are talking about bring back the matching contribution.

When the 401(k) match returns, and it will, you might find it to be a different beast than the one that was canceled in the previous years. The 401(k) match, a perk or incentive to get you to invest in your retirement in the absence of a pension, disappeared as companies cut back on hiring, increased layoffs and looked for numerous ways to cut costs.

They knew -and in many cases still do – that those that have a job were likely to stay put. Even without the incentive that the matching contribution was, jobs weren’t readily available. In other words, folks stayed put because they had to, not because company B down the road was offering better benefits than company A.

Are we being too optimistic about the 401(k) match?

Paul Petillo is the managing editor of Target2025.com

Tuesday, February 9, 2010

Retirement Planning and Deficiency Judgments

Retirement is tricky enough without having to carry bad decisions into the future.  It is my greatest hope, particularly for those close to retirement, that your house is secure, with any luck close if not already paid for and there is no chance of foreclosure in your future.  But things happen and fates change.

Last Friday, on MomsMakingaMillion radio with Gina and Kat, the topic of deficiency judgments was discussed in the MoneyTips section of the show.  I know something about foreclosures and wondered if what was being discussed could be prevented and how.

In a previous article here, we looked at the possibility of walking away from your home. The obligation, we argued is one that involves two parties: lender and the borrower.  Every financial contract, we all know comes with obligations.  But exactly how those obligations are applied can vary from state to state.

Gina, who resides in Nevada, gave fair warning to the homeowners in her state about the pitfalls of owing money long after you have been foreclosed.  Called a deficiency judgment (the only states that have no right for the lender on the books are Massachusetts, Mississippi, West Virginia and Delaware), this action theoretically allows the lender to pursue you for the balance of the loan due after the house has been foreclosed, .  While on the surface, this seems like an additional blow to your already decimated financial world, but there are steps that must be taken and certain rules that protect you.

Do you know about deficiency judgments?

Paul Petillo is the Managing Editor of Target2025.com

Tuesday, February 2, 2010

Should You use Annuities in Retirement?

Annuities are back in the news.  And the insurance industry is jumping for joy.  Should you?

The Obama Middle Class Task Force is looking to annuities as a way to make retirement just a little more secure.  While they have come up with numerous incentives, they should also consider a fixed lifetime tax on all retirement income up to a certain amount.  They have discussed this for the first $10,000 of annuity income but they could also extend this incentive to IRAs as well.  If the retiree (or future retiree) could determine how much of a bite taxes would take, they could better estimate how much they will actually get when they retire.  Currently, the assumption is that retirees will earn less and therefore be taxed at a lower rate.  Guaranteeing that rate will enable folks to project better. 

Unless you or the insurer passes away!  More on annuities at Target2025.com