Wednesday, March 31, 2010

The Tax Day Prompt: Review Your Retirement Plan



Most of us like to be reminded of the things we often forget. For instance, changing the batteries in your smoke detectors is often prompted by the change of the clocks. And despite numerous reminders to do these sorts of regular reviews of our retirement plans, specifically those of us who have the defined contribution sort, we seldom do.
Right around the end of the year is bad and not because of Christmas; because many mutual funds make distributions. Right around the beginning of the year is bad because we tend to break resolutions before we even have a chance to do anything. But doing so around tax-time may be the best solution. Your 401(k) after all, is a taxable (or should I say, tax-deferred) event.


Read more here

Tuesday, March 30, 2010

Times have changed: Has your retirement plan?



I am alarmed with the amazing frequency of the most recent downturns and even more amazed at the swiftness of the recoveries. There was a time when, if the downturn was severe, the recovery took decades.  Now it seems as though it take less and less time from the top to the next top. This means that there will be more risk, more often. Running from it, may not prove to be the wisest move in the long run.
Among all of these age groups, diversity among as many asset classes as possible is still key. We are no longer in the “set it and forget it” world of retirement planning. The only way to keep your plan healthy is to run towards the danger.  It is the new retirement plan. 




Saturday, March 27, 2010

A Change in Municipal Bond Ratings

This article previously appeared as a new feature at Target2025.com: Repercussion- A Retirement Review.

We are far from free of the clutches of the Great Recession.  The hold that the recent economic downturn has had on numerous types of investment portfolios will continue, even if, one the surface, it seems to abated somewhat in the equities markets.  The recent decision by Fitch, a bond ratings company, to revisit their grading strategies of municipal bonds may be simply cloaking the possible maturity wall facing bond investors.

Municipal bonds have historically been rated slightly lower when compared to corporate bond issues.  While the default rate for munis is much lower (0.7% compared to 2.1% default by corporate bonds) these debt securities used for public financing of roads, water, sewer and other public projects have often received a slightly lower rating.  This despite what appears to be a robust fiscal balance which includes increasing tax revenue, the ability to enforce revenue collection, control over expenses gives the municipality better flexibility, and the right of local communities  to tap reserves when needed.

The question is simple: will this change in ratings by Fitch (following a recent change initiated by Moodys), often moving munis up a grading notch provide better transparency or simply complicate the ability for buyers of these bonds to tell the difference?  This is of particular concern for those close to retirement looking to exert more stable control over their accumulated assets, fixing their projected returns and protecting capital.

It is our belief that munis will be approaching the same "bubble status" as mortgage backed securities attained just two years ago.  While Fitch claims to be looking at the long-term ("The aspiration is for Fitch’s ratings to demonstrate broadly comparable levels of default patterns over long periods") they may be looking at more historical data on the sector rather than the possibilities that in the near future, these securities might be facing the same trouble as the rest of the bond market might face in the coming years.

The "Maturity Wall", a point in the future when a great deal of corporate and Treasury bond issues mature and demand for debt might be overwhelmed by too many choices, often at higher prices and lower yields. Seeing that possibility will force investors to flock to munis if they feel as though they are immune.  They may well be in just as much trouble if the projects they are undertaking fall short of funding from the federal government.

More from Dan Seymour writing in BondBuyer

Thursday, March 25, 2010

Retirement Poverty: The Two Words Don't Belong Together

This article previously appeared as a new feature at Target2025.com: Repercussion- A Retirement Review.

These days, if you really want to scare someone, use the words retirement and poverty in the same sentence. David McPherson used those words in a recent article published at ABC News.  Unfortunately, his suggestions may just help you get only a hair's breadth away.

Just a couple of thoughts on his suggestions: The sooner we think of the money we put away as an "investment" and not savings, the sooner we will get over the shock that we might lose a little ground along the way in order to gain more over the long-term. Far too many writers make this mistake.

He also suggests that a 1% contribution is the best place to start. I strongly disagree. A five percent jumping off point, match or no match, will not, in all most every instance, have any effect on a person's take-home pay.  And that is usually the focus of concern for most beginners whose focus is on the prize at the end of the week; not the end of the career.

The last thought: Don't be conservative about this effort.  Risk is the only path to reward over a long period of time.  If you are young, assume a lot of it.  As you age, assume less.
Read his thoughts here.

Tuesday, March 23, 2010

Can Wall Street be Trusted?

Now that we have healthcare reform, which can only help the retirement efforts of a younger population and control the costs of the older generation closer to the retirement goal, it is time to focus on the problems in the financial system.  This is no easy task.

Senator Christopher Dodd of Connecticut, chairman of his chamber's Banking Committee takes up the challenge beginning on Monday (03.22.10) with the same opposition and negative opinions circling the effort as President Obama's healthcare bill.  Only this time, Wall Street is being asked for their say-so.  So far, it has been about what they don't want; not what they are willing to give.

Retirement focused Americans should be wary of WS efforts to soften the reform ("The fact is that there is relative uniformity in the financial-services industry that something ought to be done as long as it is reasonable," says T. Timothy Ryan, president and CEO of the Securities Industry and Financial Markets Association, or Sifma, a trade group representing hundreds of securities firms, banks and asset managers), enforce the Volcker rule (re-write of the Bank Holding Company Act, which would prohibit proprietary trading and hedge-fund sponsorship for "systematically important" institutions with assets of $50 billion or more) and make everyone in the financial system accountable ("We would hate to oppose this -- and we haven't been").

From Barron's.

This article previously appeared as a new feature at Target2025.com: Repercussion- A Retirement Review.

Tuesday, March 16, 2010

Missing the Target; Gaining Praise

Target date funds, those investments that pick a date in the far off future and sell you on the notion that your retirement plan is headed in the right direction continue to lose ground.  But that doesn't stop this default investment for the widely used defined contribution plan - your 401(k) - from receiving inflows in record amounts.


After the 2008 investment season and early into 2009, there were only a handful of investors who could claim to have these elusive skills. As far back as Benjamin Graham, the skill that was needed to be a successful investor was widely believed to be a possession of the few.  It wasn't necessarily the wealthy either.  But a subset of the populace who, for some reason, understood the mechanism better than others.

This led more than few folks to look at target date funds as an investment that might hold the elusive key to investment success. Money poured into these types of funds and continues to this day.  This in large part because of the default option that new hires receive.

While all investors face the same problem, those further along in their careers have an unique problem. Too conservative and there won't be enough money.  Too aggressive and there may be losses that are not welcomed.  But target date funds, while they have gained praise as they continue to underperform, are not the answer.

Paul Petillo is the Managing Editor of Target2025.com

Sunday, March 7, 2010

The Once-Bitten 401(k) Investor


A great number of investors reacted in a very predictable fashion as the Great Recession took hold.  They sold their holdings on the way down, in large part because no one could predict how far down would actually be and stopped contributing to their 401(k) plans.  Employers, as we have discussed here, suspended their matching contributions for several reasons (no need to spend money where it didn't need to be spent and there was no longer any reason to offer this as an incentive to keep or hire new employees).

Adding to the mad dash to protect dwindling balances, target date funds and bond funds swelled with new contributions. This was, in many instances, akin to stuffing money under the mattress.  Not that some these funds did poorly or had mediocre performance, although many did, investors felt protected or at least safe from the chaos and volatility of the open markets.  It was a flight to risk-free, or at least, invest-and-forget investments.


Once-Bitten
Historically, the bad news of a falling stock market lasts about six months.  This quick, fall-off-a-cliff drop to the bottom is often followed by a market where investors find innumerable bargains. Over the last decade, unlike all of the previous data on the equities market, recent recoveries, this one included have come at record speed.  Five years in-between market drops and recoveries is not the norm.  But possibly, could be.

This may have something to do with a much larger segment of the investment market coming from 401(k) investments. Although these plans have been around for thirty years, they have not really caught on until recently and even that trend is not fully employed by those who have access to these types of plans.  Pensions may have gone away but 401(k) plans have not fully replaced them with the working public.

That fact leaves many investors vulnerable to their emotions and to the forces that promote the marketplace.  A recent study done by Hewitt Associates found that the vast majority, or what they termed typical, investor under the age of forty had moved some or all of their retirement funds into target date funds.  Those over the age of forty found the move to bond funds more appealing.  Both of these investments, albeit conservative in nature, were forgivable. They were doing what any "once bitten" investor would do.

Read more here.

Paul Petillo is the Managing Editor of Target2025.com and BlueCollarDollar.com

Friday, March 5, 2010

The Future of Your 401(k) Withdrawals

I am asked quite frequently how much you should have in your 401(k) when you retire.  The real question is how much will I need to have to withdraw a certain amount of income from the plan when they retire. 

These seem like the same question, at least on the surface.  Determining your eventual distribution from your plan depends on how much is in your plan.

The problem lies in an unknown future filled with financial events that are largely beyond your control.  We can’t predict inflation.  It could be mild as it is currently or it could skyrocket.  We can’t predict taxes. 

They could remain stable and if the popular theory of being taxed less in retirement holds any validity, we can make educated guesses as to what that rate will be – but not much more.  We can’t predict the markets.  We tend to be an optimistic sort projecting past historic returns as a measure of future results.

So if inflation doesn’t cooperate and taxes could rise and the markets continue to be volatile, where does that leave us?  And with what controls?

Read more here.

Paul Petillo is the managing editor of Target2025.com and BlueCollarDollar.com