Reduce debts or save for retirement – Which one to go for?

You should be concentrating on paying off your debts. It is important that you pay off your debts as soon as possible to get your financial condition back on track. Well, things are always not that easy. There are issues that crop up as you age. This article is going to focus on the necessity of saving for retirement and how your idea to payoff debt first could be a good one.

Factors that will help your judgment

Should you focus on getting rid of debts or start investing money in some retirement plan? This may seem to be a recipe for confusion when it actually isn’t. All that you need to do is consider a few points that will help you decide on something that would actually work for you. You must not forget that requirements vary with individuals and there is absolutely no need to panic if a particular option doesn’t fit your profile. Mentioned below are a few questions that will help you make better judgments. Try to consider them to make sure you end up on the winning side.

Debt amount – Try to draw an estimate of your total debt amounts. It is important to consider the interest rates on your outstanding debts as well. This is the primary requirement when you’re planning to sort out the retirement plan that suits your profile.

Age – This is the most important part. There is no need to worry as a lot of people would like you to. Age should be considered not just while you’re choosing a retirement plan, but when you’re making debt payments as well.

Roth IRA – Go ahead and open a Roth IRA if you don’t have a 403b plan, business 401k plan or a SEP retirement plan. You won’t need anything to be eligible for the Roth IRA plan. Most people usually have the eligibility for this plan. You’re going to get a lot of benefits as soon as you start with one. Make sure you do this only when your debt amounts are low enough.

Employment – You need to have a stable source of income to be able to give these plans the right shape. It is important that you don’t plan to quit your present job in the near future and even if you do, make sure you’re earning 20% vesting annually. Don’t pay attention to what people have to say. Focus on the reality and move ahead with the right choices.

Daily expenses – There is absolutely no need to go for a retirement plan if that requires you to have a tough time living your life. Food and groceries are way more important than anything else. If your present is not good enough, chances are that your future is also not going to hold bright prospects for you. Focus on your priorities and things will sort themselves out if they have to.

It is always important that you consider your finances before investing in a retirement plan. Always remember to pay off all of your debts before you go for any investment in the future.

The Plight of the Rational (Investor)

For those of you who may not know what rational choice theory is, the behavior of picking what is right for you when it comes to your retirement plan creates what many are seeing as the greatest hurdle. The leap between what is right and what is most cost-effective, is the result of how we compare one move to another. This thinking which gave rise to behavioral studies that made Daniel Kahneman famous has proven to be less reliable than economists previously thought.

Consider the annuity. There is no doubt in anyone's mind that the concept of a steady stream of reliable income in retirement is what we all want and stive for. Knowing what we can expect gives us the much needed push to place a single monthly amount as the focal point in our plans for a post-work life. From a rational point of view, knowing what we can live on should drive us to pick this sort of product over any other method. But this is where rational choice theory fails.

If you knew you could determine the amount of income a certain investment could provide the logical (rational) choice would be to gravitate towards that choice. But those that do buy annuities are not governed by that thinking. And those who don't choose annuities for even a portion of their retirement investments seem to be ignoring what would be considered the most rational choice.

Perhaps we should first look back on the way we used to think. There was a time when pensions dominated the landscape. This sort of plan, referred to as the defined benefit plan had its drawbacks: it wasn't portable (you couldn't take it with you if you decided to change jobs) and it was at its most beneficial in the last years of employment (essentially a trade-off for years of sweat equity which became capital equity at retirement). The introduction of plans such as the 401(k) or defined contribution plan changed that thinking giving workers greater mobility (you could take your contributions and any matching employer contributions with you when left provided you worked for a certain amount of time called the vesting period) and of course the much advertised ability to self-direct your investments according to who you are.

These pre-401(k) days also saw a focus amongst workers of paying down mortgage debt in order to gain home equity. While this is still a good idea, it has fallen out of favor over the last three-to-four years for what could be called obvious reasons. Economic troubles aside, we view the pension as prohibitive and full ownership of our homes as all but unattainable.

Three decades later, after numerous bull markets and more bear markets than we feel should have occurred, we are back to thinking that this pre-retirement knowledge of how much we will actually have at when we stop working is not such a bad idea. And while paying down your mortgage hasn't gained the same attention, our thinking about retirement income is gradually shifting.

This shift is based on knowing how much you will actually receive rather than continually trying to calculate how much you can withdraw. But does the annuity provide the best offset between worrying about drawing down your retirement savings too fast and potentially outliving your "nest egg" or learning to live within the confines of a set amount paid to you year-over-year. Some of the decision is based on the ability to adjust spending while you are working, usually with the adoption of a "spend what you make" thinking which upon retirement become a "spend what you can [afford]". Neither work well.

While we are working, our spending increases to meet our income. That option disappears once you are retired replaced by spending that adjusts to you ability to optimize your portfolio to meet the needs you might have. You have no way of knowing what those needs are when you are working and only a slightly better idea what they are once you retire.

According to a recent paper titled "Annuitization Puzzles" Schlomo Bernartzi, Alessandro Previtero and Richard H. Thaler, the the conceptually difficult question of how much is available to spend is answered with the annuitization of retirement savings. In other words, annuities take the calculations out of the mix. Studies have revealed a certain type of withdraw (or drawdown mentality) that many attribute to two basic ideas: fear of health costs and the wish to bequest. These 401(k) retirees focus not so much on how much they will need to spend but how much they will have left to spend should something happen medically and if that doesn't occur, how much they will leave to their estate once they are gone.

The paper makes it clear that conservative withdrawal rates at retirement are usually attributed to wealthier retirees and quicker drawdown rates that are mostly done by poorer retirees are not the problem: it is the calculation of how much is enough. The bequest motive, the authors point out is confusing considering most of those who focus on leaving money behind live on less to leave more for children who quite possibly don't need it and in more instances than not, are more affluent than their parents. Poorer retirees entertain the bequest motive as well but usually find that they need the money in greater quantities sooner than they anticipated.

Can annuities fix this "hard" calculation? Possibly but there are some psychological hurdles. One is the focus on retirement at 65. The less educated you are, the more you focus on this age even if you know that by waiting you will gain even more spendable income in retirement. But also ironically, the better educated retiree is more focused on leaving something to their heirs and in doing so, underspend.

While the choice of annuitizing is difficult, in part because our biases are so strong, the benefits of knowing should come to the forefront. Researchers suggest that if annuities were part of your retirement options in a 401(k), we would use them. Research has also pointed to the pivot point, when we retire and how the markets are doing at that point, as playing a role in the decision. If markets are robust, we don't buy annuities. When we feel less confident in the markets, we tend to purchase annuities.

Annuities do have cost hurdles with a great many people suggesting the fees and expenses as a reason to look the other way. Perhaps the best way to beat these biases is to plan with an annuity long before you make the decision to retire and having the choice inside your retirement plan at an early age could make your future plan more clear. It is no easy choice and it certainly shouldn't be your only choice, but for a portion of your retirement savings it could be the single easiest idea to take the worry out of retirement. Knowing also by default, focuses your savings as well.

Learn more. You can even get approved for no credit loans.

Is it Time to Rebalance Your Portfolio?

We are all familiar with the most popular stories from “The Tales of a Thousand and One Nights”. But what you may not know is that this expansive collection of stories has no named author or authors, no dates or places of composition and no single national tradition. In Marina Warner’s new book “Stranger Magic” she offers this guideline to the stories: “I think,” she writes, “that the reader should enrich what he is reading. He should misunderstand the text; he should change it into something else.” She believes that the reality of magic resides at two poles: one the poetic truth and the other bound in inquiry and speculation.

We as investors are guilty of wishing for, even trying to conjure magic for our investments and the portfolios in which they are nested. We attempt to make the leap from the known to the unknown, to embrace the magical thinking of a thousand different storytellers. And like this tale, there is always another story left incomplete at dawn.

So I thought today on the Financial Impact Factor Radio with Paul Petillo, Dave Kittredge and Neil Plein we’d discuss the magical thinking around the portfolio rebalance. We have watched with great amazement, our investments rebound and take on new life in 2012. Markets are up and this is one of those rare feel-good moments. Unfortunately, feeling good isn’t something you relax with when it comes to how you are invested. In fact, the maintenance these portfolios require is often counterintuitive. If your car, for instance is running and performing as it should, we are not inclined to look under the hood for potential problems. Rebalancing a portfolio however requires you to do just that: look for a problem where you might not have thought one exists. As I mentioned earlier, there are a thousand and one ways to do this. So let’s start there.

A quick glance at your statement might reveal a strong move to the upside. Why should we do anything?

How do we know when to do this and I have asked numerous guests who come on the show how do we pick our risk level, which is essential in the rebalancing?

How do we get beyond the concept of funding our losing positions and selling off our winning ones in an effort to adjust our portfolios?

Listen to Financial Impact Factor Radio with your hosts:
Paul Petillo of Target2025.com and BlueCollarDollar.com,
Dave Kittredge of FinancialFootprint.com and Neil Plein of InvestnRetire.com

Insuring Your Home: A Focus on Mortgage Insurance for Boomers

On a recent episode of Financial Impact Factor Radio, we discussed the topic of insurance. If you have never tuned into this show, I think you will find it interesting and topical. We have a wide range of guests and often discuss the very questions that concern Baby Boomers, their children and their parents. Because being a Boomer is more than just being a certain age. All of our shows on Financial Impact Factor Radio can be found here.

As a Boomer, I am always intrigued by the offers that begin showing up in my inbox/mailbox. Although they don't on the surface seem to be age related, one can't help but read between the lines. Are they talking to me? Are they worried about whether I will make it to the end? That "end" involves satisfying the largest debt any of us will ever own: our mortgage.

Last week I received a letter in the mail from the bank that holds my mortgage that would make most mortgage holders think twice. It was the offer of life insurance. My bank might think there are good reasons for offering this product that is different that many of the other types of insurance offered with these types of loans. For instance, PMI is private mortgage insurance the bank makes you buy if you are putting less than 20% down on a mortgage. The sole beneficiary in this instance is the lender, who knows that if you are going to default, this riskier loan covers their interest in the transaction. Known as PMI, its cost has begun to weigh on borrowers who find their loans underwater. Once you pass 78% mark because the value of your house compared to the amount of your initial downpayment, you can cancel the policy.

There is also mortgage insurance which for some borrowers seems like a good option as well. Essentially the lure of this product is to pay-off the mortgage in the event of your death. The insurer doesn’t pay you directly instead writing a check directly to the mortgage company or lender.

The letter I received offered a term policy that would last until I turned 80 years old, which is about 26 years from now. Like all insurance policies it plays on your fears and comes at a time when the typical term policy is about to expire if you bought insurance in your thirties, which is typically the time when most folks consider coverage. But it isn’t cheap. In fact, this sort of policy has a seven year flat rate, just a few medical questions without an exam and of course the tug-on-your-heart-strings assurance that your loved ones will be taken care of.

So today I thought we’d talk about late in life insurance coverage and whether we should consider it.

Listen to Financial Impact Factor Radio with your hosts:
Paul Petillo of Target2025.com/BlueCollarDollar.com and Dave Kittredge and Dave Ng of FinancialFootprint.com

A Boomer POV: Retirement

This is the point where two facts collide. You hear a lot of white noise about the so-called delayed retirement, the I'll-have-to-work-longer-because-my-plan-was-undone tales. Those headlines create anxiousness amongst even those who are prepared to retire as planned. This group second-guesses the plan they have in place even if it is viable. And then you also hear the unbelievable number of retiring Boomers that do take the leap, a number that doesn't seem real: 10,000 Boomers are reaching retirement age each day.

Who are these people? The unprepared and the prepared hurtling headlong into older adulthood. They both had expectations of retiring based on what can only be considered now as unrealistic math. They set goals and they weren't met as planned. A few got it right. Remember, there's no shame in that miscalculation. Folks have been doing it for decades. But your plan is all you really care about and if it hasn't met your expectations, which in many instances were a bit lofty, you resign to work longer. This is where the facts collide.

You know all too well that simply working longer will add to the amount of retirement income you will have but only if you significantly increase your contributions. Few resign themselves to do both.

But the other half of the equation, the Boomers who do retire, are often caught in the same anxiety ridden place. They question whether they made the right choice and more importantly, whether the money they have amassed will serve their purpose, remains hanging over every plan as an unknown.

That purpose is often clouded with not only the unpredictable cost of longevity but whether they might have enough to take care of their heirs - a serious consideration among a wide swath of retired adults and those about to retire. This last consideration is entertained by women more so than men, statistics have uncovered, which is often surprising. Why? This same group of women approaching retirement has often saved less, another unfortunate statistic concerning women and retirement.

Those that do retire should consider where they retire. And while there are many suggestions as to what to do and how to go about it, but a quick survey of your current surroundings will offer a great many answers to your dilemma.

For instance, seniors or those about to become seniors often fail to inventory the services they may need. Once retired, your daily life will require things you had previously not considered. More than just the availability of medical services, more than the infrastructure of city services such as public transportation and well-lit and well-patrolled neighborhoods, your current location needs to stimulate you or at least have accessible stimulation to keep you mentally sharp and involved. This is not how many American cities were designed. Far too many cities and their suburbs require a car. And while this may be seen by many older Americans as a freedom, not being able to drive can imprison some seniors if they find where they live too far away from these activities. Only vast sums of retirement income can change that one item and few seniors, who essentially are on a fixed income, want to reach for their wallet or purse to pay to go shopping.

To pre-Boomers or those who are still working, where you live is not often what you can afford. If you live in the city, chances are you rent. If you live in the suburbs, chances are you have a mortgage. If you have a mortgage, chances are you can't afford it. That's a lot of "ifs" but they are an approaching nightmare for those about to retire.

While many of believe that the cities we live in should adjust to us and our current and future retirement needs, it probably won't happen soon. So retirees look to communities that cater to their needs. This ghetto-izing of seniors, much like Florida and Arizona is not only unappealing to many Boomers, it is not as healthy as it first appears. Sure, these senior-only communities do provide like-minded companionship, concentrated services and accommodations that cater to gradual aging, but they are often culturally void of the stimulation that all walks of life can provide. Being isolated is not the answer.

So what is? Cities are struggling with their finances and as a result are cutting back on services that once were taken for granted. We might be living longer but in far too many instances, your health may compromise that statistic or impact the quality of that longer life. And the cost of where you live - assuming your mortgage is paid off before you retire - is not getting cheaper. Add inflation into the mix and you have eliminated all but the most obvious choice: you have fewer options.

Of course, you can stay put in a house that might be too big and too costly to maintain. This will gradually eat away at your fixed income and reduce your opportunities to engage with the outside world. Now one plans on spending their day at McDonalds sipping bad coffee with fellow seniors, no matter how well-lit, no matter how inexpensive the house brew and no matter if the loitering rules don't apply. But take away any portion of that spendable income and you limit the choices.

Where is the right place? While there is no firm answer, you do have options. For instance, if family is important to you, be sure your family shares this thinking as well. The dynamic of marriage - and I am speaking of your children's marriage - can create some confusion. Deciding that you can rely on your children and their spouses for the help you might need is something you need to discuss well in advance of retiring.

At some point, one of your kids or their spouses may find you in their care. Perhaps not in the day-to-day sense or even the long-term care situation, but in the need to check-in, help with errands or assume a financial role. This needs to be discussed in advance, a discussion that should be instigated by you. This is no easy discussion.

You do need to tell your children what you expect from retirement, even if you are unsure. Answer the hard questions (can you afford to stay in your house for instance) and when the time comes, unfold your finances for them to see. Let them know where you stand and what your plan is.

Boomers will be sold a retirement that is unlike any other before them. If you live longer as the statistics suggest you will, what do you expect of your surroundings? What role does your community play in the decision? What role will your kids have? Retirement is much more than simply amassing cash. It is amassing support. And believe it or not, that is old school thinking, a throwback to the time when retired family members depended on their kids for everything. But those kids, who may not be thinking along the same lines as you need to be involved now, rather than later.

Leverage and Retirement

Over the years I have written about the topic of retirement planning, I have witnessed some incredibly crazy thinking. Many of those thoughts have come home to roost often too late for the investor to do anything to fix the situation. We plan, we tell ourselves, to retire at a certain age with a certain amount of money based on a certain withdrawal rate.  But those plans are often dashed by unforeseen events that, in hindsight we should have anticipated.

Recent reports have pointed towards an increase in employee contributions to their 401(k) plans. These upticks, however slight lead many to conclude that we are starting to get the message. But which message are we holding on to? Is it the need to simply save more because we know the chances are we will need more or is it the result of some other encouraging news? I'm inclined to go with the second choice.

Retirement planning is a whole package endeavor. In other words, simply putting money away for retirement is not enough. Numerous other pieces of the puzzle come into play and this is what is often ignored. The effort is noteworthy only if you have developed a budget that is actually less generous, forcing you to face the reality of an income in retirement that is not the same as the one the you had while working.

This income reduced budgeting is practiced by too few close-to-retirement planners. At no time in the history of retirement planning - and I'm going way back to the generous days of the defined benefit plan or pension - was the payout at retirement designed to replace 100% of what you live on now. The number was actually closer to 70% replacement and that was only if you had worked within the confines of that pension for thirty years or more (and it was not impacted by changes from the company). The remainder was to be supplemented by Social Security.

But with advent of the defined contribution plan (401(k), 403(b)), with the responsibility for funding your retirement placed squarely on your shoulders, we were forced to face the possibility that 70% of our current income would not be replaced. In order to get those kinds of post-work rewards, we would have had to invest 12-15% of our pre-tax income, every year without fail, in good markets and bad. For too many people with this plan, that sort of budget-busting restriction was simply too much to embrace.

We are to be forgiven for our human-ness however. We make mistakes and follow the herd - when they sell, we sell and when they pile in, we follow. In both instances we turn our backs on the whole concept of retirement planning: steady and ever-increasing contributions without consideration for what the overall market is doing.

Our employers didn't help much either. They gave us matching contributions, took them away or reduced them, and when they re-introduced them, they were far smaller. And we misinterpreted this as a sign that they knew something we didn't and mimicked their actions: we reduced our contributions when the matches were lowered and increased them when they were raised. As I said, we can be forgiven this tendency but we won't be absolved of this sin of remission when we begin thinking about retirement.

One of the other keys to the seemingly good news about an increase in contributions in 2011 is backlit with some additional news. Auto-enrollment helped to raise the account balances of the overall plan (and as employment improves, so will the news that we are using the plans in a more robust way). But those auto-enrolled new hires were placed squarely in the plan's target date fund of choice.

Long-time readers know about my reservations with these funds. New readers should note: target date funds are often less transparent than stand-alone funds, the underlying portfolio can be suspect, the target date may not be far enough in the future to be realistic and to date, the rebalancing implied in the fund is not determined by any specific guidelines. In other words, those who are put in a target date fund via auto-enrollment would be wise to get into an index fund (or four raging across a variety of markets) as soon as possible.

Those folks, the youngest among us who are the most likely candidates for these auto-enrollment options can make changes that will get them much closer to the goal. Older workers, however don't. And they know it. But they have some advantages, at least in their mind that the younger worker doesn't: equity.

And that equity in their homes, combined with the historically low interest rate environment has given many Baby Boomers a second option: to borrow against their homes and take the refinanced money and put into their retirement accounts. Is it a good idea or one that is bound to backfire?

Three things make it risky. One the equity in your home may not recover. Older homeowners who tap their home's equity are doing so at the risk of increasing their mortgages at a time when additional debt, no matter how inexpensive is not prudent. Two: They are eliminating a safety valve that could be used if retirement got too rough: the reverse mortgage. And third, if they are forced to or simply want to sell, the equity in their property is not there to give them a downpayment for new housing.

Leveraging your home to finance your retirement account does come with some tax advantages though. Just because one account increases as one is leveraged doesn't necessarily give you a balanced approach. In other words, there are "veiled risks".

You will still need to allocate your portfolio to perform better than the cost of the new loan and the interest rate you pay. This means that year-over-year, you will need to do much better than you may have calculated. A four percent mortgage added into the cost of the refinance (another one percent) added to the rate of inflation (another three percent if it holds steady) means your portfolio will need to return north of eight percent year over year - without fail.

The only way to give your retirement income any sort of sure footing is to increase your contributions by a much wider margin than what has become known as the average - 8% - and pay down your mortgage.

Fifteen percent is still the optimum contribution rate and even that number will give you only 75% of your current income in retirement - provided you saved for twenty years or more. Paying down the mortgage reduces your overall cost of debt service while increasing your equity.

How Going Back to College Impacts Your Retirement

When you send your son or daughter off to college this year, the person sitting next to them in that lecture hall is more likely now than ever before to be your age, or close to it. If the rates of college borrowing are any indication, forty year olds and older are finding themselves back in school. While attending college has been touted most recently as a way to add ten-years to your life, or at least your mental health, these students are more interested on improving their chances at getting a job. Not a better one; any job.

The stress facing an older worker or recently unemployed person turned student can be monumental. There may be numerous reasons why you didn't complete college in the first place or find yourself with a worthless piece of paper from your previous go-around. None of those matter. You have decided, and the experts suggest that this is correct, that getting more training is better than not.

But college at forty or older comes with its own unique problems. Not the least of which is the worth of the education. College tuitions are increasing as parents of children in the typical age group know all too well. When you make the decision to return to school as an older worker, the cost may be offset by some prior attendance experience or work-life experience.

One of the easiest ways to offset the tuition cost is to challenge the course, suggesting to over 2,900 accredited colleges that you know what that course offers and don't need to take it for the credit. This challenge not only save money but time that could be better spent getting the education sooner to allow you to get back in the hunt for employment.  CLEP, the College Level Exam Program, is the most widely accepted "life experience" challenge exam program and the one every older student should use. The CLEP program features 32 single-subject college exams and five general exams. (For more information about CLEP exams, contact: The College Board, 800-257-9558.)

There are other ways to help in getting your degree quicker and for less cost. Your employer might have in-house programs designed to finance higher and continuing education. If you are not employed, research and study what you know as much as possible before taking these tests.

You have three things that are to your advantage and three things working against your success.

The three things in your favor. First: you probably have the focus to do well. College isn't your first experience with independence. Of course I'm not suggesting that all-students entering or in college aren't focused; they just have a higher degree of potential available distractions to take them off course. Two: you know how much this is really costing. You have a better concept of what these dollars cost against what they can return. Three: Your work ethic comes from actually working and should be transferrable, at least in your head, to a better framework of organization. In other words, you can place the most important tasks first and that ability to prioritize is probably something you didn't even realize you possessed.

The three things working against you. One: Your focus to do well may actually overload your ability to do as well as you would have hoped. Taking on too much will find you in conflict with the rigors of what your daily life has become. This is certainly not insurmountable. Experts agree that you should get as much sleep as possible and find a scheduled time to study and prepare. That advice is given to twenty year olds as well. But it is doubly important for the older student.

Two: You have a much firmer grasp of time and the time you have left to not only pay back the loan but to do so with enough of an income to make it worthwhile. And like younger students, you need to balance the loan to potential income. According to the STudent Loan Network: "By keeping your borrowing to one year's salary, you're effectively dedicating 10% of your future income to repayment, which is a manageable amount of debt. Statistically speaking, graduates who have 10% or less of their income dedicated to debt repayment are able to manage their debts; those who exceed 15% of their income tend to default." And for the older worker, this calculation is incredibly difficult to make. There is no guarantee that you will get adequate compensation when you do get a job upon graduation.

Three: Your work ethic will actually work against you. You may have previously sleep-walked in your previous job, focused on  the daily grind with the least amount of energy. Re-prioritizing your life will come without the usual support groups afforded the younger student, you will need to build a self-centered support and wedge it into your regular routine. College for the older student requires an enormous amount of focus. There are some things that can help you keep the objective in reach and not lose your forward momentum. They include: staying organized, getting more sleep than you afforded yourself when you were working, and studying. The last may take a little re-learning so be sure to give yourself time to learn how to learn again.

If you are still working, don't become complacent. Continue to improve your chances and opportunities even if life has become somewhat complicated. Spending a little at a time is far wiser than borrowing a huge sum to attend college full-time. If you aren't working, keep in mind that even the best degrees don't always end up in the best paying jobs. Get as much counseling as you can before picking a course of study. Some job choices are fleeting or don't return in salary what you expect them to pay.

The popular notion is that we will work longer than our parents, postponing retirement beyond the age of 65. If that's the case, choose a career that gives you longevity in the workforce and not just something that provides a paycheck. And even if all it does is add ten-years to your mental health, it might be worth considering.

Will you self-direct your retirement?

Today on the Financial Impact Factor Radio with Paul Petillo, Dave Kittredge and Dave Ng we continue the discussion we began yesterday about self-directed IRAs. While having control over your retirement is important, how much risk is too much and who can handle the increased potential of loss or gain.

To listen to yesterday's show, click here.

Here are some outtakes from this conversation:

Yesterday we discussed a different corner of the retirement investment world when we talked about self-directed IRA. I suggested that “If there is one thing we all seem to be seeking and at the same time, remains as elusive it is control. Our investments often seem to want us to master its fate, as if simply involving yourself is enough.” T.S.Eliot seemed to agree although we all know he wasn’t talking about your retirement plans when he wrote: "Only those who will risk going too far can possibly find out how far it is possible to go."

Jim Hitt of AmericanIRA.com to discuss the IRA that you control. There is a lot left to be discussed it seems and little clarification is needed in advance. Jim is a third party administrator or TPA. We have had a few professionals who ply their trade as a go-between, somewhat detached from the other two parties but necessary in the legal and tax compliant execution of a retirement plan. Sometimes we need to be reminded that all retirement investments, 401(k)s, 403(b)s, IRAs in all their incarnations are essentially parts of the tax code. And I’d be willing to wager that when taxes are mentioned, there is a certain fear, perhaps caution that moves to the forefront. Self-directed IRAs are no different.

On numerous occasions, we have, in advance of a guest appearing on the show prepped the listening audience, discussed what we knew about the next day’s topic and did so in almost every instance, without the guest’s knowledge. Today, we’re going to look back.

Most of us have had out retirement plans nestled safely – and I’ll describe what I mean by safely in a moment – inside a 401(k). The way these plans are constructed give us a sense that someone else is watching over us. They choose the investments. They made the match. They suggested that they had a fiduciary responsibility to us. I asked Jim if he had just such a responsibility and he simply replied: no.

So we began the discussion there as I asked Dave and Dave if they would like to tell us what fiduciary responsibility is?

Now we all know that risk is something we need and knowing how much of a risk you can take is key in the way you execute your goals. But this is no easy task when it comes to this type of IRA. "Trust your own instinct, “ as Billy Wilder once said: “Your mistakes might as well be your own, instead of someone else's."

As Baby Boomers begin this massive wave of retirement, many are for the first time going to get their life’s retirement account to control. I was caught by one thing Mr. Hitt suggested as to the people who come to him: they come in good times and bad.

The risk of self-directing your IRA is there. Jim discussed using this money for real estate investment purposes, business opportunities and other investments such as gold, commodities, etc. And it all boils down to coordination.

Listen to Financial Impact Factor Radio with your hosts: Paul Petillo of Target2025.com/BlueCollarDollar.com and Dave Kittredge and Dave Ng of FinancialFootprint.com The show is broadcast daily, online at 6amPST/9amEST.

On the Radio with Lynnette Kalfani-Cox

I believe it was Einstein who suggested that “we cannot solve our problems with the same thinking we used to create them”. And with us today, we have a very special guest who has done what many of us might think impossible, taking something as abstract as credit and money and turning it into a reality that we can all relate to.

Lynnette Khalfani-Cox is known as The Money Coach® has done more than just expose the soft-underbelly of everything financial – she has performed surgery. Her efforts as a personal finance expert, television and radio personality, and the author of numerous books, including the New York Times bestseller Zero Debt: The Ultimate Guide to Financial Freedom has created a wealth of information for those who face the incredible hurdle of mastering the income they earn. Lynnette once had $100,000 in credit card debt and in three years, did what many of us might consider impossible: paid it off.

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Paul Petillo of Target2025.com/BlueCollarDollar.com

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Does Your Retirement Plan Fit?

Last week on the Daily Show with Jon Stewart, Charles Barkley, basketball star turned sportscaster offered his thoughts on retirement. Granted, professional athletes are hardly the poster boys and girls of those seeking to retire. They have made huge sums of money in a relatively short amount of time and retirement usually means a second, perhaps third career managing that money, be it a car dealership or real estate investments or sportscaster.

So they aren't usually who writers such as me profile as "retirees". But he did make one comment that was noteworthy: "I was bored out of mind by the third month of retirement". (I'm paraphrasing of course but it was as close to the quote as I intend to get.) We spend so much of our time and mental effort focusing on the goal of retiring at whatever age we pick, that we seldom realize that for many of us, a whole lifetime may await us when we retire.

I know what you are already thinking: yes, you might live for an additional twenty or thirty years after retiring but they are hardly years of increasing quality. And as one well-to-do acquaintance recently suggested: "rich people never retire". So when I suggest that whole lifetime awaits you in retirement, the suggestion either falls on deaf ears or scares you more than you want to admit.

In reality, you will live at least an additional ten years after whatever date you pick to retire. While 75 or 80 doesn't seem to be that old, at least in the conversations I have overheard, it is. You are not the person you once were and the mechanized hum of that inner world of you is not humming along the way it did when you were forty. In fact, when you were forty you barely heard it. At sixty, your insides send you regular messages. At eighty, I imagine its a cacophony of sounds.

So have you asked yourself what retirement will really be like, beyond the dreams you may have harbored for most of your life? Have you equated what your body has told you about those dreams in some sort of altered wish? 

Probably not. What you may have thought would have been the ideal place to retire, the ideal lifestyle to live, may no longer be what you are capable of doing.

So you should try it on for size. First, the dream place. Warm climates attract your tired bones with thoughts of heat and sun and outdoor activities you may have enjoyed for week long vacations while you were working. Resort living is not the same as permanent residency. Many warmer, resort like climates offer an enticing postcard view of how you might end your days. But proximity to good medical care - even if you think you are healthy - should be a consideration.

Hawaii, for example is warm and tropical and part of the US. Medical care there is good. But the cost of living on the islands, and that includes medical, food and utilities, is almost twice the cost of living based on the whole of the contiguous US. Accumulate a month's worth of vacation and spend it in your dream locale before you retire. 

Many resort locations have rentals that are more residential and less beachfront. Families often seek these places out in the hopes of saving a few bucks. Compared to what it might cost to live there full-time, you will get a fairly accurate picture of the day-today expenses.

I have been an advocate for second careers for as long as I can remember. So try your second career out now. You may like where you live. It is close to friends and family, places you are familiar with and activities you enjoy. So take a month off and stay at home. Mr. Barkley said that by month three he was going crazy. And he had a good sum of money put away to indulge in whatever whim passed his way. You won't have that luxury - you'll be on a fixed income. A month should be enough on the average income to understand what you can do and what you can't afford to do. It will also give you the chance to work at career two.

Which brings me to the last part of my try it on for size. Your income will be fixed. Although in reality, it will be diminishing, which is fixed with minuses. Inflation, taxes and insurance will play a much more major role when it comes to your income. Yes it might be the same amount each month but each passing month will take a little piece of it. Try this concept on for size.

You could do a lot of positive things for yourself in 2012. But pretending to be retired, if only for a month, will give you some clear understanding of what retirement, at least the early years of it, will be like. Doing it while you are working gives you time to alter the course and embrace a new life while still living in your old one.

As we turn the calendar: Your retirement is in your hands - again!

This article written by Paul Petillo originally appeared at Target2025.com

Jimi Hendrix once wrote: "I used to live in a room full of mirrors; all I could see was me. I take my spirit and I crash my mirrors, now the whole world is here for me to see." When it comes to the reflection staring back at us, our retirement, like those images, are a search for imperfection. We don't look at ourselves to admire how good we look; we look for flaws. We don't imagine a future; we see the relics of past decisions.

If you consider yourself a Baby Boomer, the reflection in the mirror is an image that polarizes: we are comfortable in the what the future holds or we are worried. There is good reasons for this feeling of either hope or dispair, with no real middle ground. This group has seen the demise of the defined benefit plan (pensions) and the introduction of the defined contribution plan (401(k)). You have seen the greatest bull market in investing history and witnessed two major crashes that have rattled your confidence in the decade following. You are the first generation to realize that your future is in your hands and you were not ready for the responsibility.

If you are younger than a Boomer, you are the first  generation to have never seen any other opportunity to finance your future than with a 401(k). And you have come to realize that this is not the plan it was intended to be. 401(k) plans were not designed to be the one and only vehicle for retirement. We were sold a notion that this was the end-all-to-be-all plan that would afford us a better retirement than our parents only to find out that it hinged on two extremely volatile concepts: your ability to consistently earn money and your level of contribution. Your 401(k) became your anchor and your wings.

I imagine that many of you will look back on the highlights of 2011 and find yourself in either one or two camps: you were able to hold onto your job, pay your bills and put some money away for retirement or you will be looking back at a year of indecision, regret and the promise to do better in 2012. You may be celebrating simply getting through it or wishing it never happened. To that, I offer some simple resolutions to embrace in 2012.

One: Revisit your idea of retirement. You can promise to save more money for your future, increasing your contribution to your plan or perhaps, in the absence of a plan, begin one of your own using IRAs. But you do this without really looking at that future. Retirement will not be the same of any two of us. For some it will be a life of struggle, an ongoing effort to make ends meet when they may never  met while they were working. For some it will be the realization that the balance between the now and the future relies on a level of personal sacrifice we were smart enough to embrace while we were working. For others, it will simply be a resignation of sorts, a belief that it will never happen.

Retirement is three things: A time when we find new opportunities outside the confines of what we called a career, a place of unimaginable risk and/or a chance to take a breather. It is not a place of no work and all play. It is not a time spent waiting for the end to come. It is not what we imagine because, if we looked closely at that image we see flaws. So we don't look as closely at those who are retired, examine how they live and ask if this is what they had planned. In revisiting the idea of retirement, your concept of that future, consider looking closer. If you don't like what you see, resolve to change it. But don't look away.

Two: Don't reflect on what you've done. You made mistakes; we all have. Some of us took too much risk, some not enough. Some contributed as much to their retirement as their budgets allowed, others did not. Some of us made poor mortgage or credit decisions, others did not. No matter what you did or didn't do, looking back will not improve the look forward.

Looking forward doesn't mean turning your back on on any of those events. It means focusing all of your energy on fixing them. This is a twofold effort, the first being getting the budget you may not have in line with your paycheck and focusing on paying down your mortgage (keep in mind that even if your home is underwater - meaning your mortgage is greater than the value of the house itself - the interest you pay on than loan is eating away at your future invest-able or save-able dollars). Does this mean you should not put money away in a 401(k) plan and redirect every dollar to the day-to-day? Not at all. Keep in mind that a 5% contribution will, in almost every instance, not impact your take home pay.

Three: Don't over think the process. From every corner of the financial world you will hear: rebalance your 401(k). If you chose a minimum of four index funds spread across four sectors, or four ETFs that do the same thing, rebalancing is a waste of time. You diversify so you can capture ups in one market and downside moves in another and your contribution doesn't allow you to buy more when one market moves up and allows you to buy more when it goes down.

We want to think we are in control when in fact, the only thing you actually control is how much money you want to put in. Markets will do what they do best: move. It might be up one day and down the next. It doesn't really matter. What matters is that you do something and in 2012, it should be significantly more than you are doing now.

Four: Stop being selfless. One of the hurdles we are told, for women investors specifically, is their inability to put themselves before their family. This is a cause for concern of course but not  a disaster in the making. Take a good long and hard look at your family and ask yourself: could I spend my retirement years living with any of them? Do they want you to?

Five: Embrace the truth. Now there will be an increased amount of pressure from every financial professional to get advice on your investments. This educational effort will evolve in the next several years from long, drawn out seminars on how your 401(k) works to short, ADD friendly videos that last several minutes and offer key points on what to do. The truth still relies on your ability to put more money away. Five percent will net you 25% of your current take home in retirement. A ten percent contribution over the average working career will pay you about 50% of what you earn today in retirement. Fifteen percent contributed to a 401(k) plan with average (modest) historical returns will allow you to live on 75% of your current income. Can you handle that truth?

Six: Stop worrying about it. According to HealthGuidance.org, you are killing yourself with worry. Michael Thomas writes: "Worrying leads to stress and stress has been linked with a number of health problems. People who suffer from high levels of stress are much more prone to cardiovascular disease, gastrointestinal issues, weight problems and there has even been a link made between stress levels and certain cancers." Instead resolve to do more saving than you have ever done, spend less than you did last year and embrace the reality of what fixed income is. Retirement is fixed income. Resolve to live like that now.

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