Wednesday, October 27, 2010

Another Retirement Survey

Many of you may not be aware of the Unretirement Index published by SunLife Financial. Based on a phone survey of over 1200 households, this wonder of a poll offered most of us a peek into the world of retirement that, unless you were living under a rock for the last couple of years, comes as no surprise.

What retirement boils down to, based on this survey and my own taking of the online version: one, what retirement was previously though of as, will change, two, we never gave retirement a serious thought until we found out we didn't really focus on it, and three, if you have a pension or as it is known in the financial business as a defined benefit plan (rather than 401(k) or IRA), you are much more likely to think of retirement in terms of what it used to be rather than what it has morphed into of late.

The SunLife Unretirement Index does not paint a very pretty picture of the concept of retirement. It goes so far as to report that for the vast majority of us, the concept of retirement means working longer to recoup investment losses, never stopping working in some way, or simply working as long as we can to achieve a state of living well. If you read the report, you will think that there is no difference between living well and living within your means.

We still have a preconceived notion of what retirement should be. We think of it as the old, production era idea of retirement as simply having toiled as a laborer until you were physically unable to continue. Without some retirement in place for this group of workers, the country would have spiraled quickly into poverty. Now, pensions do still exists and in many cases, for just this sort of worker. At not surprisingly, it is this group of workers that tend to respond favorably to their retirement outlook.

But the workplace dynamic has changed from industrial to service and with it, the belief that pensions are a way of rewarding the worker. Once the IRA or 401(k) became the commonplace, which has taken about two decades, the worker was given the tools to invest and it was widely believed, that was all that was needed. And many did.

But just having hammer doesn't make you a builder and more than half of us simply did not heed the call, buy the sell of these plans or were otherwise restricted by long vesting period, unattractive investment choices or low incentives. Did I mention that we didn't get it either?

If we had we would have been among the elite ranks of the investor class, the group that has few members and even fewer winners. Expecting the average person to grasp the nuances of the stock market, the convoluted thinking of fixed income, or the ability to balance the two in the right proportions as we aged turned out exactly as most would have predicted it would - had they been able to foresee a downturn: badly. We either assumed too much risk or we didn't assume any.

We either invested or we didn't invest enough, if at all. So where does that leave us?

There are basically three consideration in retirement: the ability to meet the basic needs to survive, the cost of health care, and defining quality of life. Most of us can't understand the cost of the basic needs to survive. We think of this in terms of what we have now instead of against what we absolutely need in terms of income flow to keep what we have now. That is simply skewed financial thinking. If you were to retire today, and were expected to live only another twenty years or so, on an income that was 40% smaller than your current one, could you do it without making some changes? Of course you couldn't.

But most respondents to these surveys believe that nothing should change. You should be able to keep your home (even if it will eventually be too big, too costly for upkeep and perhaps taxed right out of the reach of even a working family with growing income potential). This group also believes that restricting how much you consume will negatively affect that quality of life and among those restrictions are less debt, fewer toys and what some may see as an otherwise boring post-work life.

While a great many of the respondents suggested mental activity as reason to remain working, this is only part of the reason. The real reasons are the financial implications of retiring after having not given it much if any of a consideration. Some jobs are rewarding. But no job comes without performance stress and if this is the sort of mental activity they believe will keep them young, they should think again.

Marcelle Pick, OBGYN NP in Portland Maine recently wrote that "The World Health Organization estimates that by the year 2020, psychological and stress-related disorders will be the second leading cause of disabilities in the world." This sort of flies in the face of "we will all live longer, happier and healthier lives" and points to "shorter, stressful and ultimately less robust lives".

Back in the day, the benchmark for financial health, the one the bank often used during the mortgage process was 60/40, obligations to unencumbered income. This is the template we should all be using for retirement. It is a bit more complicated than that but like all templates, it focuses on what you need to get by.

Those who are older than 50 can count on most of the current support programs such as Social Security and Medicare being in place. This time frame also provides you with some time frame in which to hunker down so to speak, and save more, spend less and begin to experience the 60/40 lifestyle.

Those in their 40's can expect some of the social support programs to still be in existence but not as they were for the retirees a decade before you. But on the flip side, you will have a full decade longer to begin financing your 60/40 lifestyle. What retirement will look like in 20 to 25 years is anyone's guess. But if you assume the worst and plan for it, you should be at least cautiously optimistic about where you will be.

Those in their 30's or younger should never forget the look on your parent's faces post-2008. No one can say with any certainty what your retirement will look like or whether such a concept will even exist. One thing does remain constant, even in these seemingly inconsistent times: the longer you have to prepare, the better your financial outlook will be.

If you would like to take the SunLife Unretirement survey, something I did and they suggested that I was a cautiously optimistic, which seemed to be an odd conclusion considering you either are or you aren't. Click here unless you already know who you are and what you have to do.

Paul Petillo is the Managing Editor of

Thursday, October 21, 2010

A Week to Save for Retirement

Apparently, National Save for Retirement Week has been in place for about four years. It was instituted at a time of high hopes for the 401(k) plan. The defined contribution plan had recovered somewhat since its first real test (in 2000-2001 when the internet bubble burst atking a great deal of the market with it) to regain its stature as the main vehicle for a solid retirement strategy. This was good, of course, for those who came onboard with the retirement plan after that incident.

For most workers, the 401(k) which replaced the defined benefit plan or pension as the go-to plan for businesses and you was their only option. It was a stay-in-it or lose option that many were unwilling to take and even fewer understood. What they did know was how well the person in the cubicle next door was doing. And they invested as well.

If you were to ask the average worker whether they would be happier knowing exactly what their retirement payout would be on a month-to-month basis, many would respond with "yes they would". But over the last 35 years, the number of people who can count on such a thing happening has dropped from 35% of those employed to less than 25%. This shift has left over 75 million working people with their only option: the self-directed plan or the 401(k), which as a rule doesn't offer any such guarantees.

Euphoria leads markets higher. And at the time of the creation of this government sponsored cheering section, we were quite euphoric about what these plans could do. Matches, the employer's contribution to the plan, were prevalent throughout the investment land as returns on every invested dollar soared on just about any pick in the portfolio. While all of us with any experience should have seen it coming, the vast majority of us were swept up in the seemingly endless growth of everything we touched, tangible (our homes) and intangible (our portfolios). We were kings and queens and we had no idea why. And in truth, few of us cared. We were too busy planning our early retirement exit strategies.

Which makes National Save for Retirement Week both important and passe. For one, it doesn't even really involve us. It seems to be an industry sponsored function that is designed to get employers back into the fiduciary game - but not so much to give you the added boost you need - and everyone knows a boost would be nice - but to give the employer the guidance on how to proceed forward at a time when forward seems almost anachronistic. Many of us simply want to hold on to what we have, giving little and often fleeting thought about the future.

That boost, the missing or somewhat elusive matching contribution has taken the employer out of the retirement game and in many instances, the employee as well. How do we expect one group to continue to invest in their future when the plan sponsor has so little faith? The match contribution came in many forms in the pre-2008 meltdown. It was generous in many instances and in being so, employees chased those matches with great gusto, even zeal. Writers and pundits called it free money - which it really wasn't (it was your boss looking to incentivize your participation and offset their obligation to help you save for retirement).

The rules to get that match often confused and befuddled more than it helped even as companies strained to introduce Investment Policy Statements. These legal documents are designed to outline the sponsor's method of not only picking which investment is right for their plan but also how they plan to monitor it. The IPS, advisers suggested, need not be burdened with outsized complications. It might even be considered a document that was open to frequent editing, before and after the fact. If a business were to merge with another or there was a change in demographics, for example, the IPS would change as well. Like many policies in business, it is designed to shift with the needs of its creator, not so much for those it governs.

The same goes for the matching contribution, which all but dried up following the calamity known by many and still feared by most. And with it, the efforts by you, the investor, the plan participant, the one who is supposed to be in charge of your retirement future, also went away. Those that remained shifted the lion's share of their investments to much more conservative investment products.

At the center of National Save for Retirement Week is the National Association of Government Defined Contribution Administrators (NAGDCA), which was founded in 1980. According to their website, the "NAGDCA is a professional organization made up of the deferred compensation/defined contribution plan administrators from the 50 states and over 100 local governments and entities, as well as the private industry plan providers."

These folks help businesses design their IPS. They help interpret what sort of document you need (much of which is compliance with the Department of Labor with an eye towards what ERISA requires), how to build a policy and plan that attracts outstanding employees (a much more difficult job in an environment of corporate cash hoarding, increased vesting times and lower matching contributions), how to encourage those who currently are employed to participate (there is an increased emphasis on education which is ironically not so much a boon for the employee as a way to offset potential legal battles the employee might wage) and lastly, to do so without costing the employee too much (or the business too much as well).

Needless to say, many of these policies are written in sand. And groups like the NAGDCA suggest that this is probably the best way to do things. They suggest fiduciary responsibility and leave you with a plan that is often unsuitable for current plan participant. But they can, as a defense, suggest that the plan does often educational tools, low-cost funds and investments and argue that because of that, they have fulfilled whatever obligation they may have thought they had. In fact, these folks are relieved that many have continued to invest in your retirement plans, diverting on average about 8% of your pre-tax income.

But you could also ask: what other options did we have? Which leads us to ask: what other options could there have been that would have made it better? In a report issued today at Bloomberg: "A Bloomberg National Poll conducted Oct. 7-10 finds that 41 percent of female likely voters are either very or fairly confident they will have enough money in retirement, compared with 48 percent of male likely voters. Thirty-two percent of these women are confident they won’t have to work beyond their target retirement age; 40 percent of men say the same."

Friday, October 15, 2010

Adjusting the Dream of Retirement

Since the advent of blogs, the ability to complain has gone beyond grumbling to your co-worker and on to the world stage.  Much of the complaining has been egged on by writers looking to fire up your anger and make you face the consequences of a period of time when wealth seemed like it was attainable for everyone. The sad truth is that this simply was not possible for everyone and for the vast majority of us, the reality was a harsh and somewhat rude awakening.

Outraged, we looked to the government to save us from ourselves and when they admitted that this was not possible for everyone, we did what was expected: expressed our outrage. In a recent post on the AFL-CIO blog by former news reporter Mike Hall, the suggestion that Washington should wake-up and come to terms with a $6.6 trillion retirement deficit lays the responsibility on the wrong party. yes, that is a lot of money. Yes, it has impacted everyone (with the exception of the highest wage earners).  And yes, it does make me just as angry as you might be.

But I blame myself and in many instances, you should blame you.  Mr. Hall suggested that this multi-trillion dollar deficit will prevent us from the "hope to maintain your current standard of living when you retire".  To do that, you would need to have enough income in retirement to match what you currently earn.  With few exceptions, your retirement income is designed - and if properly funded - to replace only 70-80% of what you currently earn.  With few exceptions, the vast majority of us do not plan our retirement based on these assumptions.

Let's consider those assumptions.  Retirement still is and always has been a combination of elements working in tandem. The first is your own ability to live within your means.  This allows you to build some sort of savings/investment plan to meet your needs when you no longer want to work.  And for the majority of the current workforce, some reliance on Social Security.

It is amazing how many people who are close to retirement believe that Social Security will somehow survive without some adjustments. Minor tweaks to Social Security will happen.  But it will have the greatest effect on those who are still decades away from drawing on the program. It does remain solvent and will do so in the near future - long range though, several things have to happen.

The size of the group contributing needs to increase. If the government does anything it should be to focus on the current wave of cash hoarding by the country's largest corporations. This means more employed workers contributing which means more revenue.

You will always be able to take the early draw on SS.  While most experts agree that this is not a good idea, they are referring to the workers who can continue to work beyond the targeted retirement age. Plan your retirement based on this early withdrawal number. True, it is worst-case scenario but the true essence of plan is based on this concept; not shooting beyond what it possible.

You can also help your cause by contributing to an IRA or if your employer allows you, to their 401(k) plan.  Five percent a paycheck does not alter your take-home pay. While the $6.6T number quoted in Mr. Hall's piece seems daunting, it creates sensationalism and lacks solutions. Most of us need to keep in mind that a great deal of the wealth recently amassed and lost was due to a bull market that lasted between 1982 and 2000, much of which was due to the elimination of pension plans and the forced march to defined contribution plans. We can't go back.  But we can move on.

As for pension plans - still the great economic stabilizer - they are under pressure to reduce their impact on the employer.  If such a thing comes to pass, what it won't take away is what you already earned, just the projection of what you could have earned.  While austerity is a difficult pill to swallow, there are ways to increase your retirement opportunities.

Adjust the dream you may have harbored and do not want to let go. Get your house in order by imagining living on 30% less income than you do now. Underspend and over save/invest. Get healthy and stay that way - medical costs will have the greatest impact on your retirement income and doing this could save you thousands of dollars in medical bills that otherwise could have been spent on living expenses.

There is no quick or easy answer and like most problems facing the American worker these days, it relies on realistic assumptions, workable plans and a measure of hope that we will survive the current economic situation. I'm not sure the government can rescue us all - which means that some of us will need to learn how to swim.

I have some additional thoughts on the subject here.

Tuesday, October 5, 2010

Retirement Planning: A Commentary

We have been forced to become much more attentive. We have to be.  Some of us have enormous amount at stake in every turn of the economic universe while others among us struggle with putting two cents together for our retirement accounts.  

If you are paying attention, you or someone close to you is in serious financial decline.  And even if you have resources that you have now been able to calculate in both present and future terms, you can't help them.  But you feel their angst, understand their pain and feel very close to being in the same position.

This can be passed off to a number of different things occurring almost simultaneously.  It is difficult to pinpoint with any accuracy when a growing economy finally decides to grow faster. Is it relaxed regulation, political fair winds, exploitable tax bases or simply the belief that every man and woman, no matter who and where you enter into the system, can one day be wealthy? We knew what good times looked like and we liked what we saw.

So we acted wealthy. And with each of us acting in concert, we began the economic propulsion that became the "markets", an all inclusive term for everything from stocks to houses. Everything was marketable. And that's okay as long as all of the players in the game are playing fair.  Trouble is, no one told us that the rich don't really want us to be rich and therefore have no real interest in playing fair.  In my opinion, having us be middle class is about where they want us.

Les Leopold, writing in the Friday Huffington Post suggested that there is actually a class war in the making. "The wealthy may loathe hearing about "class struggle," he writes, "but we're in the middle of one -- and it's a doozy." He then explains the way the world worked prior to the creation of class so wealthy, their wealth no longer created jobs as it did in the past.  It simply was unimaginable in size and mostly unspendable. We hear of huge charity donations but not a single one creates a job trend. And that, Mr. Leopold suggests was where this whole breakdown began.

He's right to a point.  We do like the concept of blame. But as he suggests in a revolutionary lilt: "We just want to find a job, or keep the one we have, be with our families and cope with what life throws at us while enjoying as much of it as we can. We don't want to go to war with the richest people in the world, even though we greatly outnumber them. But we can't avoid this battle--it's coming to our doorsteps."  Or as Oscar Wilde writes: "It's not whether you win or lose, it's how you place the blame."
Perhaps it's just us.  We have a view of ourselves that even in this sort of economicsituation, refuses to alter itself. We still see us regaining what we had rather than embracing what really is. Could it be the color in the collar that keeps us from banding together?

White collar workers approached middle class as simply a staging area for something greater. Blue-collar workers tended to come to grips more with the realities of being middle class although they pushed their children to get away from the colored collar they owned. Now, we are, as Douglas Coupland described in his OpEd in the NYTimes titled Dictionary of the Near Future: "Blank Collar Workers - Formerly middle-class workers who will never be middle class again and who will never come to terms with that."

And that is a good thing. Combining the inability to be satisfied with what life has dealt you is far different than aspiring to riches and positioning yourself to get them. We have to be in it as one. As "blank collar workers" we can do what needs to be done and do it without taking it to the streets. How is the problem.  So its no wonder that last resorts be put first.

We can begin with being realists. This is the hand we've been dealt, we need to cope with it.  That is a huge hurdle but until we all make the same choice, that wanting is not the same as needing, instead it is sort of a balancing act between what needs to be spent and what doesn't. Some folks, those friends we talked about earlier are already there. You need to practice as if tomorrow you will be there to.

We have seen this sort of rebooting of the economy before and it takes time. Is it wrong to adopt the medical parlance of living every day like its your last and suggest you think of everyday on your job as your last. It is an admittedly harsh way to approach a plan. But it might be more effective than believing that things are going to get better sooner than they will.  Mr. Leopold is not alone in his thinking that it could be a decade or more before things get back to normal - whatever that may be.

I found it ironic that Mr. Leopold would invoke an old union song asking the question which side are you on. Perhaps that is the answer we are avoiding? We all need to be on the same side.

Paul Petillo is the Managing Editor of

Friday, October 1, 2010

Retirement Planning: The Annuity Answer is a Question

You can't escape it.  You are having your choices about retirement and your plan diced and splayed and discussed in any number of forums.  None of the outcomes from these conversations are suggesting what you want to hear. So here's a flash: you're worried.

Insured Retirement Institute President and CEO Cathy Weatherford recently wrote "Unfortunately, as the promise of Social Security continues to be on unsure footing, working Americans are coming to realize that they will need more than just that paycheck to sustain them throughout their retirement." Even when the Employee Benefits Research Institute released its most recent report, concerns about retirement were, as they could only be expected to be, were the top concern.
And with that comes the numbers.  Now I tend to agree with Steven Strogatz, professor of applied mathematics at Cornell and the author of "The Calculus of Friendship when he suggests that although we are easily duped by words, numbers "brook no argument," he writes suggesting that they "are the best kind of facts."  he describes them as cold, hard, and objective. So when the EBRI reports that 69% of those recently surveyed believed that retirement accounts were extremely important, most of us agreed. Three out five the EBRI concludes from their question don't believe in Social Security and almost two-thirds say they lack confidence in the program enough to begin saving more.

Now to Ms. Weatherford's defense, she sells annuities.  So when she adds that "Increasingly, they [the working folks] are looking for ways of securing their retirement income through annuities, retirement savings accounts and other insured retirement strategies. Employers can play an important role in helping to connect employees with available benefits that can lead to a financially sound future."  I am left to ask the question: wasn't it the employers who got us to this point?

Although as the report, which was commissioned by Project 2010 suggests that 94% of the employers offer a plan of some sort, the less than surprising number is the actual participation.  With three-quarters of the employees that have access us them, it is the fourth that don't is the more troublesome number. And tucked inside these numbers is the fiduciary fib that these employers have done everything they could do to get their employees involved.

Employers are directly responsible for encouraging their employees to invest for their own futures.  Some incentivize their plans with matching contributions. Matching contributions do not have to be high in order to get their workers to participate in the plan.  In fact, studies have shown that a more modest matching contribution might actually spur the employee to put additional funds into their accounts. In the latest economic downturn, companies dropped or greatly reduced their matching contributions and are slow in returning to them.

The matching contribution does a great deal in getting the employee to do right by their own future.  But more important is the period of time between initially beginning the job and the actual beginning of their participation in the plan.  Some employers hold their matching contributions for a longer (than is necessary or even in some cases, realistic) vesting period giving the employee less incentive to invest if they feel as though they don't expect to remain at the job that long.

Some employers do offer plans that are both robust but well-supported with information and educational materials. But no plan is the be-a;;-to-end-all offering that would create the perfect scenario for everyone: employers, employees or the plan administrators. And also included in the report was the fact that 17% of the plans now offered annuities. Is this just an attempt at getting to that perfect "everything" plan?

This lack of what the investment industry refers to as a holistic approach, or decumulation, has professionals practically drooling in anticipation of of what these products can hold for their industry.  I don't really worry that my opinion about annuities will alter simply because this product has begun to emerge as the next big element in your retirement plan.  An annuity will always be an annuity and because of that, will always have more unanswered questions that concrete evidence that it is a better product as a whole instead of its parts.

Annuities are hybrids, born in the insurance industry as part insurance and part investment.  They are costly and unwieldy, ripe with fees and special ta situations for your heirs, hard to get rid of if you change your mind and don't necessarily do for women the way they provide for men.  That last part about women versus men is an actuarial adjustment for the longer lives women have. No other "investment" makes such a distinction.

Then there are the idea of guarantees. Annuities make certain promises, the largest of which is that they will never go out of business. Never is a really long time. And depending on the potential you might have for living longer than you anticipated, it would be nice to think that a company could never falter, never be affected from some unforetold expectation and never consider closing its doors for good. But it happens. It doesn't happen with your equity mutual funds and some bonds might default in your bond funds, but insurers are not forever. This is risk that is grossly understated.

What makes people so fearful about Social Security is the very thing that makes it work.  Whenever you can pool risk, you eliminate more than you create.  The fixes to Social Security are rather simple and even if you are decades from retirement, the program has the legs to continue on even in the face of the Boome onslaught (a wave that may effectively be not much more than swell in this post-recession economy). Annuities can't do what Social Security does and for good reason: there is no money to made.

In the name of fiduciary responsibility, plan sponsors will be begin to offer this sort of product with questions on cost, viability and suitability all left unanswered.  Even a simple CD could do the same sort of thing an annuity would, come with FDIC insurance and promise to never lose a penny.  A well paid CD tucked inside a retirement portfolio but outside the tax-deferred plan would help ease those fears just as well.

But the biggest fear is that when they do become available in your 401(k), they won't be one annuity, but a succession of small, mini-products, each with differing contracts. So far, no retirement plan has been able to answer the question of liquidity and security. Until those can be answered with any certainty the annuity will languish as an option, even with government support.

Paul Petillo is the Managing Editor of