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.

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.

Your Retirement Plan is Not the Solution

Under the current laws governing tax-deferred retirement plans such as a 401(k), withdrawing money has consequences. I have mentioned many of them here over the years, not the least of which is the early withdrawal penalty, the payment of taxes on those tax deferred investments and of course the loss of retirement money. Yet, those penalties haven’t stopped many of the people who have found it difficult to make their monthly budget work.

Of course, I am assuming a monthly budget. Without some anchor in reality, not having a budgetcan lead to rash decisions withut considering the far-reaching impact. Without a monthly budget, you will have no idea what could be cut to maintain some level of financial stability when times get rough. It is also safe to assume that if you do not have some sort of monthly accounting of your finances, you probably don’t have an emergency account. Both of these would have served the households with troubled income streams.

Two Georgia Congressmen think that those 401(k) plans might be able to help. Their idea: Hardship Outlays to protect Mortgagee Equity (HOME) Act. Introduced last week, U.S. Senator Johnny Isakson (R-Georgia) and U.S. Representative Tom Graves (R-Georgia) want their proposal considered as a way to keep homeowners in their homes. The concept, somewhat like throwing you a lifeline of your own making and designed to rescue you from poverty in the future offers a short-term fix in the near-term. They believe that if you have been a diligent saver, adding to your 401(k) religiously over the years, you shouldn’t be punished for needing the money now as opposed to later.

Rep. Graves is convinced that the housing crisis is the reason the economy has not recovered. Calling up his decades in the real estate business, he suggests: “This bill will help Americans who risk foreclosure use their own resources to make their mortgage payment on time without being penalized by the federal government.” If his assessment of who may need this money now – 23% of those who have mortgages are underwater but not necessarily facing foreclosure – the government should step out of the way and allow these folks to withdraw that money without penalty.

They are proposing that there be a lifetime cap on these withdrawals of $50,000 or one-half of the present value of one’s 401(k) account (whichever is smaller), so long as those funds are used for that purpose within 120 days of withdrawal. This is not the first bill of its kind.

Since the Great Recession began, Congress has struggled with what to do with corner of the financial world. A similar bill was introduced in 2009 and never debated on the Senate floor.

Numerous homeowners should not be in the homes they own in the first place. They may have obtained these residences with fraudulent applications, been unable to afford those homes during what would be considered a normal buying environment and failed to restructure their loans or worse, keep with the terms of their bankruptcy decisions. Because tax-deferred retirement accounts are not considered in these proceedings, some mortgage holders may have been in a position to financially right their own ship. But because of the penalties associated with tapping those accounts, they simply chose not to.

The HOME Act will allow wealthier homeowners to save their residences without penalty, while the rest of us, those that underfunded their retirement accounts or couldn’t wait for Congress to act, have already drained those accounts, paid the penalties and taxes and tried to move on. This effort woud do little to help those currently in the foreclosure vortex or who have been spat out by the continued downturn in housing.

No matter who you are, this last ditch effort is not the way to go. Reducing future retirement payouts (compounding and time suggest that $50,000 in retirement savings would provide only about $290 a month in retirement – a projected shortfall of over $1200) would set the average wage-earner, hardship or no, back decades in support of keeping the house. Few of these folks, given the opportunity and the consequence of this decision will consider the long-range impact of that decision. And if it gets Congressional approval, it will push the real problem further down the road.

On the surface, it might seem like the right thing to do. But beneath the veneer of a tax and penalty holiday the problems this money promises far outweigh the immediate salve it may provide. There are solutions, none of them pleasant.

If you are seeing the problem on the horizon, don’t wait until the day of reckoning. Contact your lender before you run into problems. If the problem has arrived, keep in mind, as devastating as it seems, it is not the end. While temporary may well last several years, longer if you successfully pursue a bankruptcy, protecting your future, a time when this will all be an unhappy bump in life’s road will be worth the sacrifice.

True, protecting your credit is important. Just keep in mind, it wasn’t as important when you bought the house as it is to you now. This too will pass.

The bottom line: those 401(k) provisions were established decades ago when the thinking was to make it painful to withdraw your money all the while giving you the illusion that if need be, you could tap it. Now provision, recent or past will stop you if you have made up your mind. But for those who see this as an exit strategy for a bad decision, this Act will add to the problem.

I know it’s old school but it is worth repeating: get a budget (and figure worse case scenario, not current spending habits to allow a downturn picture to standout), attempt to negotiate before the problem strikes (ironically, most job losses are not a surprise) and divide this time and the future into two separate lifetimes. Borrowing – or in this case, stealing from the future is not a good short-term remedy. It is a bandaid on a gapping wound.

A Long Journey to Even: Mutual Funds at the Halfway Point in 2011

For the vast majority of investors - mutual fund investors in particular, watching the major indices and judging your performance against them distorts the reality of not only where you should be but where you could have been. If you were to look only at the difference between the former highs the markets hit in October 2007 and those at the most recent close on Thursday (the Dow Jones Industrial Average DJIA +1.36% is around 12% below its all-time high of 14,165, and the S&P 500 index SPX +1.44% is nearly 16% below its October 2007 high of 1,565.) you might be considering jumping back in.

But you would have been much better off had you done absolutely nothing. Back in those desperate times, many people did what the rest of the herd did as stocks began to tumble. You sold. But three years later, that would have proved to be the wrong thing to do. During that period, most folks fled the actively managed mutual fund, particularly the domestic issues in favor of bond funds and in far too many instances, to target date funds.

Let's consider the indices that are often compared to the riskier funds, a benchmark that has proven to be less than accurate in terms of performance. The Dow and the S&P 500 track the largest companies, a group that has struggled to assure the investor that dividends and size were enough to best the market. Turns out, that picking and choosing, as actively managed funds do, would have been the better approach.

Two things come into play. One, these funds tend to have higher fees. Less those fees, you would have still found yourself in a better position than had you simply put your money in a benchmark S&P 500 index.

And secondly, there is the liquidity issue that comes with buying mid-cap and small-cap companies. Liquidity refers to the amount of stock available in smaller companies weighed against the amount of stock held by the principals. This makes these companies more volatile and even under-purchased in indexes that track those larger markets (the Wilshire 5000 for instance may track all available stocks but the indexes crafted based on this index only own.

To complicate matters somewhat, the Wilshire 5000 actually has 5700 stocks in the index, Wilshire 4500 is the Wilshire 5000 without the S&P 500 stocks in it. A Wilshire 5000 index fund (usually called total market index) will probably own around 4000 stocks. A Wilshire 4500 index contains those same stocks less the top 500 companies.

As Mark Hulbret noted in a recent column for Marketwatch, "According to a report produced earlier this week by Lipper (a Thomson Reuters company), 45% of the domestic-equity funds for which they have data back to October 2007 were, as of the end of May, ahead of where they were on the date of the stock market’s all-time high."

So the indexes are lower than where you would have been had you stayed put - of course this is based on the assumption that many of you where using actively managed funds in your 401(k) plans, that many of those funds did not have indexes available and the post 2007 products such as target date funds or even ETFs, weren't a consideration or even an option during those days. You embraced risk and ignored fees and looking at your portfolio, that was probably seen as a good thing.

Does that mean index funds shouldn't be part of your portfolio? The simplest answer is no. Index funds still provide a low cost and low turnover environment to invest in. More importantly, the largest cap indexes add dividends to the mix. This brings these investments closer to the domestic out-performance over the last half of the year.

Diversity in this investment environment, which is still far more volatile than anyone would like it to be, with global issues remaining a major concern, means taking a little less - in terms of performance. You should be in index funds now. To do this would be considered a defensive move for those that kept the actively managed faith.

A portfolio of five, perhaps six index funds, tracking sectors from the S&P 500, a mid-cap index, a fund tracking the small-cap, an international index (which tracks the companies of what is considered the developed world), an emerging markets index (contains investments from countries like China, India, Russia, Brazil and others) along with a bond index.  This sort of diversification keeps the low cost features of index funds and avoids any crossover investment (owning the same stocks in different funds).

You can be proud of your investment accumen in getting back to those 2007 highs and perhaps beyond. But show your real prudence and protect what you have done. This economy, both domestic and globally is far from recovered and the stock market is painting a better picture than reality suggests. Being a little defensive at this juncture will keep you in the game without risking what you have gained.

Your Retirement: It is Still up to You

The stock markets seem to be poised for what has been termed often as the "Santa Claus rally". Consumers, at least according to business surveys, are beginning to spend. And this is all occurring, while in the shadows, the economy or its numbers remain little changed. That and most of us are still suffering from investment paralysis. 

Here we are, years after the fall of 2008, and the average middle class worker still has an account balance that is far from where it should be - if they plan on retiring. When most of us think is retirement age, we think in terms of what has been the generally accepted retirement age. This unfortunately is a failure on two fronts: yours and the plan sponsor.

Your responsibility is in the contribution.According to a Wells Fargo survey (pdf) conducted among 357 plans, middle class is defined as: "those aged 30 to 69 with $40,000 to $100,000 in household income or $25,000 to $100,000 in investable assets and those aged 25 to 29 with income or investable assets of $25,000 to $100,000." This group knows that they will need more than $300,000 to fund a basic retirement yet, on average those balances fall far short of that goal with $20,000. Is it any wonder that this group is increasingly buying into the notion that working longer is a fact of life in the post-downturn world?

Most of the middle class group contributes only about 7% of their pre-tax income to these plans. And if the survey is any indication, much of the fault lies in the employer's approach to these plans. The study suggests that employers are concerned about their legal liabilities in helping their employees even as they acknowledge the shared role in helping those workers.

These fiduciary concerns are widespread among plan sponsors who worry that should they provide advice, and that advice doesn't meet employee expectations, they will see the plan sued. 

This has led these employers to look for plans that offer third party advice, shifting the liability to another player. What they fail to embrace is that using a TPA (third party administrator) doesn't lessen the liability. While 89% of the plan sponsors understand that there is a need for retirement help, only 71% (as of 2009) think that they should help those employees understand what the plan can do for them.

In order of importance, and in reality, employers do something else entirely and your defined contribution plan's ability to get you there is reflective of this lackluster effort. Only 35% of the DC sponsors surveyed think that education is important, 22% encourage greater participation and increased contributions, 9% think investment diversification is important while only 2% facilitate the planning process by pointing out what is need in retirement and helping their employees use the plan to achieve this.

Are more funds in the plan the answer? Some DC sponsors believe they are and are looking to increase their offerings. But often, plans with more than fifteen funds aren't necessarily giving the employee more choices that suit their needs. The new choices are often in the form of target date funds and other more conservative investment offerings. This is often done at the exclusion of more suitable offerings (such as aggressive mutual funds for younger workers). Once again, they fear retribution for suggesting anything akin to risk.

DC sponsors are worried about what the industry calls investment paralysis. Too many funds, studies have suggested, often have lower overall participation rates that those with 15 fund or fewer in their plans. Because there is a growing movement to offer auto-enrollment, choosing a fund for that new employee often requires the plan to carry a wide variety of target date funds to pinpoint a "potential" retirement year.

But understanding the need and acting on it, from both a participants point-of-view and that of the DC sponsor are often far from what they are actually doing. Plan sponsors need to understand more than just the investment array, plan design, distribution options, education and communication, and fees charged by the plan. It is their fiduciary responsibility, one that carries legal risks if mishandled, to measure their plan's impact. Only 15%, according to the survey do so.

The employer still offers matching contributions in many defined contribution plans. But how and what are a matter of debate. Many still offer matches that are tied to company stock, put restrictions on access to those matching funds, and use the auto-increase contribution system as a way to offset raises. Often, maintaining the 401(k) plans they might have, as many of the companies surveyed suggested, is done for the sole purpose of getting and retaining new employees. This, in light of less-than-robust private hiring, might come at a reduction of other benefit programs.

If you are still in a DC plan and your employer's match is not as adequate as it should be, this doesn't let you off the hook. You still need to save more, much more than you are presently doing. While it is true that 5% is the cut-off point where pre-tax contribution investments don't impact take-home pay, some sacrifice on the employee's end is needed. And this should be done,match or no match.

If your employer's 401(k) plan is not as robust as it should be or doesn't fit your age needs, open an IRA or Roth IRA on your own. Contributing to both plans (10% to your 401(k) and the maximum allowed to an IRA or Roth IRA) is your responsibility. While we still look to the company we work for for guidance, and even to the point where we believe they care about us and our retirement future, the facts are not bearing this fuzzy feeling out in the surveys I have read.

As Laurie Nordquist, director of Wells Fargo Institutional Retirement Trust said: "If people aren't willing to pay for advice they are going to get a more vanilla approach to planning," adding, "But a simple plan is better than no plan."

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

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 Target2025.com/BlueCollarDollar.com

Retirement Planning and Observation

You will always be able to find two views. One comes from industry insiders who will be willing to signal the end of an era and the glorious advent of another. The other comes from the observer’s point of view, which is never given a voice, or more often than not, simply misunderstood.



Percy Hutchison, the late poetry editor of The New York Times once offered the following criticism: ““From one end of the book to the other there is not an idea that can vitally affect the mind; there is not a word that can arouse emotion. Hence, unpleasant as it is to record such a conclusion, the very remarkable work of Wallace Stevens cannot endure.” The comment was made about Mr. Stevens book Harmonium and was added because of a quote that was used in the book to illustrate a point.

Mr. Stevens suggested that, “accuracy of observation is the equivalent of accuracy of thinking.” And while Mr. Hutchison described poetry as “"stunts" in which rhythms, vowels and consonants were substituted for musical notes”, his work has endured. But that is not why he was given quote space in the book.



Stevens is not often the poet that comes to mind when greatness is discussed. And I’ll admit, he is not among my favorites. But the following piece, ripped from the heart of his work titled “Of Modern Poetry” offers a suggestion about what we hear and how we should think about the message that is being delivered.



“And, like an insatiable actor, slowly and
With meditation, speak words that in the ear,
In the delicatest ear of the mind, repeat,
Exactly, that which it wants to hear, at the sound
Of which, an invisible audience listens”

I offer harsh criticism for those who offer opinions about why pension plans (defined benefit plans) have fallen to the wayside in favor of the more corporate friendly defined contribution plan. I don’t believe that the majority of people who participate in them – and this may be a direct reflection on those that still do not – relish in the thought that making the kinds of decisions necessary so far in advance of actually having to use them.

And when folks like John Brennan, Vanguard chairman and CEO suggest that the “era of defined benefit plans is drawing to a close”, I wince. The original idea behind defined benefit plans was to encourage loyalty. And the fact that corporations rarely if ever, nurture the kind of commitment from their employees that pension plans once offered has made it easier to shift the burden of retirement to the worker.



That doesn’t make it better. It simply makes one believe that what is directly in front of you, what is presented to you as the best option, is not always as it seems.

J. Hillis Miller writes of Steven’s work Sunday Morning: “If the natural activity of the mind is to make unreal representations, these are still representations of the material world. So, in "Sunday Morning," the lady's experience of the dissolution of the gods leaves her living in a world of exquisite particulars, the physical realities of the new world: "Deer walk upon our mountains, and the quail / Whistle about us their spontaneous cries; / Sweet berries ripen in the wilderness."



And as much as I am loath to admit it, the defined contribution plan is here to stay, a physical reality of the new world.

Retirement Planning and the Social Science of C.W. Mills

Discussing C. Wright Mills is often controversial, always enlightening and somehow necessary. Including a quote from this distinguished social scientist was a risk worth taking. Even discussing social science with retirement planning can be a stroll through a minefield.



Mills, who was born in Texas (1916-1962), delved into topics that many in his field of thought considered out-of-bounds. He was gifted at separating smaller personal troubles from the much larger and more prominent public issues of his day.

Consider this: “When, in a city of 100,000, only one man is unemployed, that is his personal trouble, and for its relief we properly look to the character of the man, his skills, and his immediate opportunities. But when in a nation of 50 million employees, 15 million men are unemployed, that is an issue, and we may not hope to find its solution within the range of opportunities open to any one individual. (Mills 1959: 9)”



He was a radical. He interviewed Castro. He denounced American Imperialism. He attacked intellectuals for knowing enough to change the course of history but refusing to do so. He believed that knowledge could change the course of society and much of what he wrote (beautifully), read with great passion and has been accused of criticizing the same traits he exhibited. According to the Encyclopedia for Informal Education, “He was said to disguise his faults by admitting to even worse faults.”

He was, as his biographer Irving Louis Horowitz wrote in his profile of Mills titled American Utopian, “However much those who knew him firsthand differed about the quality of his work, they were unanimous about his personality.”



Mills did not address the topic of retirement planning specifically but instead sought to have a more open, well-discussed opportunity to choose. That is not present in our current retirement system.

Pension were, at there founding, a way of keeping workers with skill when their human capital, the cost of what they had to offer a fledgling enterprise by rewarding them in their later years with a degree of financial satisfaction. Focus on growing the business and we will focus on taking care of you in you golden years.

While that did not present choice, at least as we often define it, it did allow us to develop relationships with our families, grow intellectually if we so chose to do and give back to society when we had the opportunity. With the advent of self-directed retirements, we were given choices – that few understood and many still do not – and told that by doing so, our participation in the defined contribution plans would allow us to have much richer lives.




But that is not the way it worked out. Mills, who lived far in advance of this change in retirement thinking and worker contribution, would have been appalled. His many confrontations with the power of stratification in American society over the life of the individual would have gained new strength. His focus on the distinct levels of difference between who runs the country and who provides the labor would have risen to a boil. He was confrontational and by examining the stress of workers within the labor movement, in the situation of the middle class, in the elite strata of society, within the discipline or sociology or in his own personal life--there was a search for some path to achieve "the all-around growth of every member of society."

The following four notes come from Mills’ book “The Power Elite” published by Oxford Press in 1956. Keep in mind several things as you read them. One, even though you are permitted to choose, there are boundaries already placed around you retirement choices and they were not open for discussion. Secondly, the cost of those choices was not democratically considered with the input of the largest group – the actual investor – who is almost completely ignored in the process of picking which plan administrator, is best for the whole. You have to accept the plans offered by your employer – if they offer any at all, limit your contributions based on legislation and exercise the so-called portability of many plans that often comes without good instruction on how to best create an alternative plan when the worker leaves her or his current employer.




Mills writes:

“I. In the democratic society of publics it was assumed, with John Locke, that the individual conscience was the ultimate seat of judgment and hence the final court of appeal. But this principle was challenged-as E. H. Carr has put it-when Rousseau 'for the first time thought in terms of the sovereignty of the whole people, and faced the issue of mass democracy.'

“II. In the democratic society of publics it was assumed that among the individuals who composed it there was a natural and peaceful harmony of interests. But this essentially conservative doctrine gave way to the Utilitarian doctrine that such a harmony of interests had first to be created by reform before it could work, and later to the Marxian doctrine of class struggle, which surely was then, and certainly is now, closer to reality than any assumed harmony of interests.

“III. In the democratic society of publics it was assumed that before public action would be taken, there would be rational discussion between individuals which would determine the action and that, accordingly, the public opinion that resulted would be the infallible voice of reason. But this has been challenged not only (1) by the assumed need for experts to decide delicate and intricate issues, but (2) by the discovery-as by Freud-of the irrationality of the man in the street, and (3) by the discovery- as by Marx-of the socially conditioned nature of what was once assumed to be autonomous reason.

“IV. In the democratic society of publics it was assumed that after determining what is true and right and just, the public would act accordingly or see that its representatives did so. In the long run, public opinion will not only be right, but public opinion will prevail. This assumption has been upset by the great gap now existing between the underlying population and those who make decisions in its name, decisions of enormous consequence which the public often does not even know are being made until well after the fact.”

Retirement Planning and the Whaling Industry

I begin chapter 15 with a story of Nantucket. While for many, the first thing that comes to mind are those bawdy limericks, the village in Massachusetts was once the third largest city in the state behind Salem and Boston.



Whaling was an important source of income for the city and as the video below shows, allowed the world to see after dark. Whale oil was a superior product. The quest for the riches it would provide to those willing to take the risk was often paid for with the lives of the men (and sometimes women disguised as men) who boarded the ships. But when the hunt was successful, everyone was entitled to a lay.



A lay was a fraction of the proceeds of the catch. In Nantucket, the average whaler would receive 1/175 of the proceeds. The Merriam-Webster Dictionary, in an entry dated 1590, describes the nouns as “terms of sale or employment : price b: share of profit (as on a whaling voyage) paid in lieu of wages”.

Elmo P. Hohman wrote an article for the “The Quarterly Journal of Economics” (Vol. 40, No. 4 Aug., 1926) titled “Wages, Risk, and Profits in the Whaling Industry” where he described the method of payment as singular to the whaling industry.

He wrote: “The whaleman was not paid by the day, week or month, nor was he allowed a certain sum for every barrel of oil or for every pound of bone captured. Instead, his earning consisted of a specified fraction share known as a lay, of the total net proceeds of a voyage.” The amount was determined by the skill and efficiency of the person hired.



This sort of partnership is at the heart of your retirement plan. Because of the structure of many defined contribution plans (your 401(k) is a defined contribution plan – you are responsible for making the deposits into the account for your future rather than receiving a set amount from a pension – a defined benefit plan). You are in it as a group, using a single captain – also known as, at least for the sake of this example, the mutual fund manager running your investment) to steer you towards profitability. In turn, each of the participants it entitled to his or her share depending on the amount they have invested.

This so-called partnership in the enterprise, according to John Randolph, who wrote The Story of the New England Whalers in 1909, this also extended to anyone involved in the ship including the boatbuilders, the blacksmiths and the coopers. Each man was working for himself and hoping that the captain was able to give them an adequate return for their efforts.



This may have been the first instance where “past performance, while not a guarantee of future success” was used as a guide to determine which vessel was the best one to sign on to.

I write in the book that like investing, “the seas can get rough, the catch can be nimble and sometimes scarce and worst of all, the world can be awfully unpredictable.”

Retirement Planning and Another Rainy Monday Morning

Although there is no scientific proof that we think about retirement most often on a rainy Monday morning, it would have to rank high among the reasons of why folks focus their hard earned cash on reaching those final days. The idea of dragging ourselves out of bed to go off and do a job we may or may not be necessarily enamored with doing, can seem especially hard as the list of things we would rather be doing grows.



But few of us use work and the paycheck that comes from the job you do in a way that would limit the number of Monday mornings you have yet to face.

Consider the employee who participates in a 401(k) plan. She or he is probably contributing the same amount to their tax deferred plan as they did when they first signed up for the program.

In the mean time, the nature of your job has changed. If you haven’t left for greener pastures at another company, you may have received some time based or merit raises. Bonuses aside, the increase in pay was probably quickly, even seamlessly absorbed into your daily budget. And there is your retirement plan, the one you set up all those years ago, languishing.

But wait, you might say. As your pay increases, so does the amount taken out of your check if you have set yourself up to have a certain percentage removed. But it is not enough to take a percentage of a percentage. If you receive a 2% raise, a $1,000 a week paycheck would increase by $20. A 5% deduction of pre-tax income would see an increase of exactly one dollar a week or $52 a year.

You have basically two choices. Dave Barry, humorist and author who at one time suggested investing in tiger poo instead of mutual funds said, "You still have time to salvage your retirement! All you need to do is develop some financial discipline, develop a realistic budget, avoid frivolous spending, pay off your debts and start putting away a meaningful amount of money each month for the future. Don't be discouraged! You really can do it, if you put your mind to it and use your magic time-travel ring!"

Or you can funnel a percentage of that raise (or all of it) into your 401(k). Suppose the increase in pay you receive takes place on a annual basis. Suppose that you take that modest cost of living adjustment of just 2% we mentioned above. This is almost a negligible amount when you look at it on a week-to-week basis on a $52,000 yearly income to about $20. This may not seem like much except when you apply it to your future. That $1,040 extra bucks is huge to your retirement plan.

In the book, I ask you to look at work from your current point of view. You may enjoy your work. The vibrancy and daily rigor a great job can give you are hard to replace during retirement.

The Bureau of Labor Statistics publishes a monthly report on employment. This report can be an indicator of economic strength or weakness and depending on who you are – average Joe or a Wall Street investment type, it can mean nothing or everything. What we miss in those numbers, which for the most recently published unemployment rate in September was 4.7%, is what they tell us about the future. This number comes with all sorts of caveats and often is re-adjusted for one reason or another.



One other number we should look at is the Civilian Labor Force Participation Rate. For September, it was estimated that 66.0% of the population was working.

Yet, according to National Atlas, a government mapping site, the growth of the population, especially among those who are aging, could spell disaster.




The site reports that “for the population 65 years and over, the growth rate in the South (16 percent) was nearly three times the growth rate in the Northeast. And the growth rate in the West (20 percent) was more than three times that of both the Northeast and the Midwest for this age group.

“The 50-to-54-year age group experienced the largest percentage growth. Of the 5-year age groups, 50-to-54 year olds experienced the largest percentage growth in population over the past decade, 55 percent. The second fastest-growing group was the age group 45 to 49.



“The baby-boom cohort entered these two age groups during the past decade. The third fastest-growing group in the past decade was 90-to-94 year olds, which increased by 45 percent.”

To me, this signals some tough competition for fewer jobs. If you had planned on working in your later years and you haven’t decided what that some other job will be. You had better ramp up those savings while you have a chance.

If you did plan on working well into what would normally be considered retirement age, now is the time to cultivate a new career.