Monday, September 27, 2010

Is Knowing How Much Important to Your Retirement Plan?

It no longer is how much you have.  Now it is whether what you have will be enough.  From the age of accumulation, the twenty or so years prior to this, when growth was rampant, portfolio values seem to take on an endles stream of gains, and the opportunity to retire seemed within everyone's grasp, we now have the age of decumulation.  This newer word in the retirement planning world applies to the simplest of concepts: how much will I need each month.

Decumulation, as described in a recent New York Times article by Jennifer Saranow Schultz, is the ability to pay for a "similar quality of life, keeping financial autonomy, leaving money to children, philanthropy, hanging on to money to cover health expenses or a combination of these options or others". It's not that we weren't focused on those things before, running simple calculations in our heads and using online calculators.  But with so many of us seeing portfolio declines that we hadn't expected, and entertaining the possibility that we would see them again, possibly at the very moment we retired, knowing exactly what we could expect has suddenly popped to the front and center of every discussion.

There is much more to consider than in the previous decades.  Without ever swelling balances, the predictions of what may happen have become much more difficult.  News reports suggesting that we will live longer, that the cost of health care in retirement will eat away at those balances, and the potential of declining cognitive abilities all need to be considered -even if we can't put a price tag on any of them.  Simply suggesting that we will work longer or even work in retirement if needed do not satisfy the question of decumulation with any accuracy.

Does that mean we will all need an annuity?  According to Eric Johnson, a professor of marketing at Columbia Business School, annuities are still a hard sell to retirees who do o=not want to hand over a huge chunk of their retirement portfolio to one firm in exchange for a steady check.  If their annuity is to cover your spouse in any way, the cost goes up while the monthly payout goes down.

What do we know about annuities aside from the hybrid investment, part-insurance, part mutual fund aspect of the purchase?  There is also the actuarial element - how long you will live is calculated into the payout and if you include your wife, with her potential to live longer than the husband, the payout drops even further.

There is a behavioral aspect to the purchase of an annuity, most often bought at retirement when the defined contribution plan pay the retiree in a lump sum.  What many economists who study this event have found is not really surprising.  People make their decision of whether to buy or not using the last six months of the stock market as their best indicator.

The mention of cognitive decline also worries financial professionals and the government as well.  The older you get, the less likely you will be able to make the right decisions with whatever remaining wealth you might have. This sort of problem can occur only ten-years after retirement and with anyone overseeing the decisions - which get more complicated - there is good chance that the wrong one will be made.

Annuities are a hard sell based on what experts call mental accounting.Once you begin thinking in terms of different baskets for your money, spending what is needed often becomes a question of selling more investments than might be prudent.  Your retirement budget will change with time.  Studies have begun to suggest that in the first years, liesure spending will be far higher than it willbe just ten-years after you retire.  Annuities don't address this, often giving retirees too little money in the beginning and too much when they don't often have the ability to spend it.

Some believe that a self-examination of what you see in the future - based on who and what you are now - might be helpful.  Others disagree suggesting that if that were the case, and everything about the future seems to be not-so-bright, retirees might take an opposite stance and spend it now.

The best solution, which seems to be gaining ground it building the purchase of annuity right into the person's 401(k) plan.  This would allow them to see exactly how much they would get if they retired.  This would induce them to invest more, learn to budget now and possibly enter into retirement with fewer financial burdens. It would also benefit women who retire allowing them to get a clearer picture of what they will get based on what they have invested for the future.

Wednesday, September 22, 2010

Retirement Planning: The Pig in the Python Syndrome

When it is all said and done and the history books have had a chance to prove and reprove it, Baby Boomers are going to get the blame for everything. Most of the problems we have faced since the term was first coined will be attributed to those who were born between 1946 and 1964.  We sowed the seeds of consumerism, entitlement, privilege, wealth and health and redefined what retirement could be. Boomers saw themselves as different from the previous generations, a cultural swing that through sheer numbers changed how things were done. Boomers have been described as the "pig in the python" a huge generational bulge that was unmistakeable yet somewhat unpredictable as well.
And here we are, tossing around the notion of retirement while our children and sometimes even their children face a future where this will not be possible, at least framed the way Boomers had envisioned.  And as we think about this future of our own, for some a prolonged and redefined work career, the generation we sought so hard to distance ourselves from is closing in on us.

Aging parents are the discussion we don't want to have.  We thought our affluence would have allowed all boats to rise.  Most of could see a growth of our own wealth as being enough to cover all problems should they arise, give us enough to retire on comfortably, live the life of leisure we were so focused on and do so on the investments we made while we were working.  Like so many things we were presented with, we didn't think this through to its endless possibilities.

Aging parents are presenting a great deal of Boomers looking to retire in the next decade with a number of consideration they had previously ignored.  Boomers grew up knowing that everything would be okay.  Give it time, we thought, and a solution will present itself.  Now we have smaller portfolios, redefined dreams and working careers that could extend - if we have remained healthy enough - well beyond what we originally intended. And aging parents.

Here are three things to consider that you may not have fully faced quite yet.

1. There may come a point in the near future when your parents may not be able to live on their own.  This is presenting problems for Boomers that run the emotional gamut. How do you convince an older parent that they are vulnerable to their own inability to live alone in the their own house?  Ignoring the problem is not the answer, and in a vast majority of the situations, is only confronted when there is an accident.  This can add additional costs to an issue that was easier to confront prior to a fall or a dramatic loss of weight.
If you need to enlist a doctor's help, don't hesitate. In many instances, this is the single person that can convince the aging parent that they need someone to come in a cook their meals, tidy-up the house and even do a little shopping for them or with them.

2. Consider the assisted living facility before they need it.  They will all resist it. The sales pitch will be off-putting but like so many things in life, discuss it with friends.  They also have aging parents and are facing the same problems as you. They know or have heard of these places and, if they can't offer any real advice on which one is best, they can offer you some insight on what they are feeling, if they had made the decision and how, and how they feel after-the-fact.

Examining your true motives may not be easy.  If you are asking yourself questions about how this will affect you, you may be asking the wrong questions. If an assisted living facility is something that is simply easier on you, it will be. You will have some peace of mind and a feeling that there is some continuity in your parent's life.  But that may not be shared by your aging parent.  Keep that in mind before signing any long-term commitment with any housing. They may not like it.

3.  Determining that your parent is a danger to themselves and others is perhaps the most difficult - especially if you live a considerable distance from them. They are adults and they are allowed to make mistakes. The only thing you can do in this instance is be persistant, not pushy, but patient in your explanation that it may be time to give up the fight for independence. As Carol L. Rosenblatt, RN, BSN, PHN, attorney, is author oThe Boomer's Guide To Aging Parents suggests: "Our ongoing encouragement and respectful, patient offers of help may be heeded over time."

Thursday, September 9, 2010

When Money Advice is Needed

In all likelihood you know someone who is marrying for the first time, blinded by the love they are in and at the same time, unable to see the future because of it.  Do you offer them advice?

Eventually, in the course of a serious relationship, the topic of marriage is discussed.  Because marriage is more than just being able to "kiss whenever you want to", the topic of money enters into the conversation.  This might come very early on as one half of the couple reveals their ability or inability to handle their own finances. Should it be a dealbreaker? Should you still consider the union of two people, which is more than love and compatibility but a business agreement when you are picking a spouse? Will it affect your retirement goals? Will you be able to buy a house, secure a lease or have a baby?
There was a time when the look of love was enough.  Now, couples consider each others attitudes towards frugality, their outlook for their monetary future and how much debt one or both bring to the union.  The focus on a far-off distant future has come to the forefront of many conversations in the recent downturn and with good reason.  The inability to handle a budget could restrict the ability to buy a house (for a reasonable interest rate), whether or not children are financially feasible, and should the relationship end for whatever reason, who gets left with what debt obligation.

Numerous couples are now considering the long-term effects of poor financial management as an insight into the future of the marriage.  While you might feel as though you have a bright future, shedding a light on how your potential spouse handled their past financial obligations has become the new pre-nup.

It was just a few short years ago, when everyone held bright and optimistic outlooks for their futures, that these sorts of financial considerations took a place on the back burner.  You understood the downside of poor money habits.  But the feeling that things would eventually work themselves out has diminished. Now, the prudent saver and investor is examining the financial statement of their partner, something you only did when one of the couple was rich.

Now, no one wants to marry debt.  With the current unemployment rate at unacceptable levels and many of those out-of-work folks in possession of large, unwieldy student loans, people are wondering if marriage is such a good idea.  Your outlook may dim your love somewhat as you try to see the future.

Financial responsibility is a learned art.  If you have found the right person for you, is there any proof that your influence over financial matters couldn't be taught?  Chances are, your experience has given you the financial outlook you possess now.  Can you teach someone who may not have had the same experiences, the same parental guidance, or the same lessons you have learned?

I'm inclined to believe it can happen.  In many marriages, this realization that one member of the couple does not possess the money management skills needed to achieve the hopes and dreams that helped you decide you could spend the rest of your life with came after-the-fact.  In those instances, one of you has stepped up to the responsibility of running the household finances.  This didn't stop the other half from committing financial infidelity (and some marriages have ended because of it).

There are a couple of things you need to keep in mind before you tie that financial knot.  Your spouses student loans are theirs - should the relationship end badly.  But while you are married, you should assume they belong to both of you.  If they have spent tens of thousands of dollars on higher education, the hope that they can eventually find work with enough income to handle those debts still remains.  We won't always be in a  downturn.

But your spouses credit record can have a downside effect on any money you might borrow as a couple.  Outstanding credit card debt will need to be handled and in many instances repaired.  And the frugal half of the couple needs to calculate just how long this might take.  To understand this timeframe, you should ask.  Money may not be able to buy you love yet on the other hand, love doesn't solve money problems.

Ron Lieber, writing in the New York Times suggested: "One advantage to prenuptial agreements is that they force the issue, even if it does turn the talks into a negotiation. “At least half the time, people are shocked at what the other person’s attitude is,” said Susan Reach Winters, a matrimonial lawyer with Budd Larner in Short Hills, N.J. “You ask how they’d handle it if someone wanted to stay home after having a baby, and at the same time they give completely different answers.”

These are worthwhile considerations, even if you are decades away from your retirement. And they need to be asked.  Student debt doesn't necessarily show that one of you is not able to handle money.  But it does put long-term pressure on many financial decision you might want to make.

To read more of Mr. Leiber's article.

 Paul Petillo is the managing editor of