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.

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

Your Retirement, Your Estimations

I understand that it is difficult to sum up all of the issues facing our quest for retirement, from our biases to having to participate in a market that seems almost impossible to embrace. So for the sake of this discussion: Here's the problem facing Baby Boomers. 

Paul Barnes wrote in 1987 that the reason ratios (percentages are used ) is a mathematical one "and is basically used to facilitate comparison by adjusting for size".  What he quickly pointed out was that their use is "only good if the ratios possess the appropriate statistical properties for handling and summarizing the data". It is why, when the information culled from a recent Wells Fargo survey expressed as a percentage, that 25% of the adult population would need to work into their eighties, a postponement of retirement that has become newsworthy of late. The survey even suggested that they accepted the fact.

Now we have always been barraged with percentages: 10% off this, we are the 99%ers that, the markets down such-and-such a percentage for month, the quarter, the year. Whatever it is, it blurs some distinct realities by ignoring, as Mr. Barnes suggested, some important data. And we don't need to go far beyond our own observations to find the underlying reasons why some people (25% evidently) are not retiring historically.

Let's start with the unemployment rate. Expressed as a percentage, perhaps because of the space needed to write such a large number over and over, it is hovering at 8.6%, give or take a re-estimate or revision. And quickly you will be told that to add in the disparaged worker, the underemployed person or even the fully employed person who is getting less and the percentage of people who will not be able to retire based on the typical timeline of a thirty year or even forty year career this number becomes almost impossible to calculate. Estimates push the real unemployment rate to around 14%. If you are older and long past the benefit-of-time growing your savings and a stat in this group, the trouble with these numbers can be even more devastating.

Let's from there move towards the participation rate in 401(k) plans. Or better, how about we look at the number of 401(k) plans there are, which is less than 50% of the workplaces. And that is only for those who don't have access to a 401(k). those percentages get worse when you consider that more than half of this group doesn't do a single thing to prepare for retirement.

And what about the folks that do have a 401(k)? Participation rates are up in some surveys, down in others. Chances are, if you were just hired, you were auto-enrolled in your company's plan. Recent numbers suggest that 90% of those newly hired chose to not opt out. While that is a headline number, the 10% who chose not to participate is more worrisome and adds to the quarter who will not have enough for retirement - although they may not be old enough to embrace the full consequence of that decision. But even auto-enrollment has its problems as two-thirds of those who are automatically enrolled don't do anything to adjust the default investment the plan picked.

Pamela Hess, director of retirement research at Hewitt Associates suggests that "Most employees who are automatically enrolled tend to stick with the employer-provided default contribution rate, so simply getting them into the 401(k) plan at a minimal contribution rate isn't going to help them meet their long-term retirement needs." That minimal contribution rate is often 3% and not close to adequate. In fact, in the larger picture, less that sixty percent of those who are in a plan contribute more than 5% of their pre-tax pay.

Ms. Hess believes that  "Companies should strongly consider increasing the default contribution rate and coupling automatic enrollment with contribution escalation, which automatically increases employee contributions to the 401(k) plan and helps get them to a better savings rate over time." Auto-escalation has helped, a method of putting some or all of the employee's raises into the plan but unless the worker understands the implications of failing to do so, they often don't opt for this benefit.

I have pointed out before that the recovery will need jobs that people want to stay in long enough to benefit from the company match. As much lip service as these plans offer when they match the contribution, vesting is still an issue. Some workers may be deciding to not stay long enough to get the matched contribution, a period that usually last five years and decide to not bother. And many who slashed their contributions have not returned to offering them, pushing participation down in their plans even for those who are fully vested. If these businesses have restored the match, they have often cut benefits elsewhere making the choice of contributing more a financial one with a harsh reality.

So when a survey crosses the retirement radar suggesting that 25% of us are planning to work into our eighties, the number misses some key data. Workers who suggest that a retirement number - a dollar amount base on any number of formulae - is what will determine their time of retirement, the estimates they embrace may be outsized. 

These folks fret over the stock market and construct a worse-case scenario for what might happen if the gains they had hoped for fail to materialize.

And then they turn around and overestimate their comfort zone, attempting to replicate exactly what they have now. Here is where they become discouraged. Previous generations of retirees had something we never had: modest outlooks. Skip back just three generations and the elderly were likely to move in with children in retirement.

When the numbers tell only part of the truth, as if shining a narrow beam of light and describing what it illuminates is all that matters to the discussion, we need to refocus and see what we've been missing. Retiring can still happen when it should - which is when you want and not when your retirement account statement says so based on some target. So embracing a time, which 20% of the surveyed did, is a much more realistic parameter. 

The only question left is how can you do it?

Two answers are worth repeating: you need to become a little more austere in your fifties and save more, much more. The reality of the harsh regime will stiffen your resolve for when work is not what you want to do. It is practice with a safety net. the second is readjusting your expectations and plan for those realities. The investment you make to mentally prepare yourself for this less-than-what-you-had-previously-planned retirement is still a plan and will work. And if its any comfort, the data shows that too many don't even have that!

Remember When a Million Dollars was the Goal?

As long as I have been writing about financial topics, the million dollar mark has been the goal that most every retirement planner suggested was necessary to leave the workforce and have enough to live comfortably for the rest of your life. And then, not coincidentally, the post-2008 landscape changed that configuration, in many instances, actually lowering the goal.

Keep in mind that goals are backward looking even as they are forward reaching. You need one they suggest to know what you need to do to get there. The question that lingers is how much is a goal worth having if the goal creates stress on your well-being, your family dynamic and your overall health? In fact, the answer may eventually answer the question of how long will we live in retirement?

Is a goal worth having?

Yes and no. First it identifies what needs to be done to achieve whatever it is you dream of doing. You want to go to the movies, the goal is to produce the twenty bucks or so it will cost. This is a fixed goal with real tangible numbers to accompany the desire. You know the real cost of going: tickets, concessions, babysitter, etc. You also equate exactly how many hours you may have worked to achieve that goal. Retirement unfortunately is much different.

You don't know what anything will cost. Folks throw out inflation as a concern, healthcare as an untenable cost and your longevity is the long-term savings reducer rather than the concept that it will give you more fruitful lives. 

You do know that you don't want to be newsworthy. You don't want to be headlines: "woman says death preferable to living in poverty" or "man says I didn't plan on being poor". So you do two things that enable what might seem inevitable. You worry and you don't save.

So what is the number?

There is no number. There is just you trying to figure out the day-to-day while ignoring the future. Keep in mind that no retirement plan was ever designed to replace 100% of your current income. Eight-five percent is considered good and seventy percent of your current income would be do-able. You can subtract your projected Social Security Income and you have some sort of idea how much you will need based on how much you need now.

In survey after survey, you have answered with comments that suggest you are no where near where you should be. Of course you aren't. Even if you haven't invested/saved all that much, time will make it somewhat better. Compounding still works. The investments you make now will be better off in the future, even if only slightly so. And the budget you keep now will help you stomach living on less in the future.

In survey after survey, the folks who look at the data, construct the questions and parse the info the answers supply see a landscape littered with dispair and angst. They see people lamenting that they will work until they die. They see people complaining that they will do worse than their parents and suggest that they will do worse than any generation prior to this one. They find that people are unwilling to adjust their dreams and use that as the goal, even if it is wholly unrealistic.

Is the answer your 401(k) plan sponsor's responsibility?

Russell Investments thinks this may be the key. They did a study recently that suggested two things: higher income wage earners will be better prepared for any problems they may encounter in retirement (healthcare costs, market volatility, inflation, etc.) while lower income wage earners will struggle with the day-to-day expenses prohibiting them from finding any available cash in which to save. The study does suggest that Social Security plays a lesser role in the higher pre-retirement income wage earners plan (about 36%) as compared to the lower income worker (about 51% of current income could be replaced).

But where the study differs from other reports on the dire state of this affair is helping the plan sponsor reconstruct their role in the process. Without citing the cost to businesses for retaining older workers (some numbers have put the cost as high as an $50,000 per worker past normal retirement age), focusing on the near-term expenses by making the plan better may be the best way to move this worry into the realm of manageable.

I'll give you the link to the whole study (here) but the element that intrigued me the most was the suggestion that the defined contribution side of the equation, the fiduciary responsibility of the company, could play the role that has been often overlooked. It is easy to say save more without offering the employee any hope of finding the right investments in which to do just that.

The way they suggest it would work is first to induce the employee to use the plan. Rather than a dollar for dollar match up to a certain percentage, they suggest that the employer match 75% of the first 5% contributed. Five percent has long been considered a sort of break even point for the employee providing some contribution without impacting the take-home pay needed by the lower income earning group.

If you were to see it written as a math sentence, it would look like this: A 75% match of first 5% of income creates a savings rate of 8.75% or 5% plus (0.75 x 5%) = 8.75%

But they think the best option would be to not stop there with the incentives. They think a secondary match should kick in once the employee taps the 5% mark. Companies could offer a 25% match on the next 5% contributed.

If you were to see this next stage of the plan, it would look like this: 8.75% plus (0.25 x 5%) = 15% savings rate.

The study goes a bit further suggesting that auto-enrollment and auto-escalation (essentially forwarding pay raise to the plan instead of to the paycheck) would get these hesitant savers on board sooner rather than later. It would also require the plan administrator to refocus on the core demographic of the employees, tailoring the underlying investments towards that group and controlling expenses better in the process.

And that would change the question of whether a million dollars was enough to "aren't we in this together?"

Why Cartoon Laws Apply

Remember Saturday mornings, cartoon, pajamas and a bowl of cereal. We entered into a world of animation that had rules in play we knew only existed there. Boomers may have forgotten those laws and have grown up thinking that was then, this is now. But perhaps...

It all seems so otherworldly these days. As if everything that seems familiar isn’t and the laws the govern rational – and often irrational behavior no longer apply. Markets are up then down and then post the worst third quarter in recent memory – and we’re not sure what that means. Does it indicate something wicked this way comes or perhaps the end of the episode? So I turned to some laws that explain the world of finance, retirement and just getting-by in a world gone wacky.

Cartoon Law I.

“Any body suspended in space will remain in space until made aware of its situation.” We basically have two things to focus on: our future and what will happen next. We are continually being told to invest, max-out that 401(k), do everything you can now, pain equals pleasure which has replaced risk equals reward. That is until we chance to look down. And you know what happens next.

Cartoon Law II.

“Any body in motion will tend to remain in motion until solid matter intervenes suddenly.” Our retirement goals have experienced this law firsthand.  Hitting the cartoon telephone pole at full speed is, as this Law II suggests, the only way to stop forward motion with any success. There is the comic slide down the pole immediately following the impact which can only mean two things: we will sit as the cartoon stars whirl around our collective heads, trying to regain our reason for moving forward. Once our heads are cleared, Law II is waiting with the next pole a little further down the road.

Cartoon Law III.

“Any body passing through solid matter will leave a perforation conforming to its perimeter.” If you follow the markets, any markets, no matter how much information you think you have, now matter how timely it seems to be, the person in front of you will create their own cookie-cutter hole, exit, leaving you to get ahead of the problem that no one, including you is sure is a problem.  So instead of leaving by the door, they exit through a wall, evidently not a solid enough surface to allow Cartoon Law II to come into play.  We are at the mercy of speculators it seems who apparently have little regard for laws of supply and demand but understand two things: your predictable behavior and the ability of cartoon physics to protect them.

Cartoon Law IV.

“The time required for an object to fall twenty stories is greater than or equal to the time it takes for whoever knocked it off the ledge to spiral down twenty flights to attempt to capture it unbroken.” This is my favorite axiom of all.  Who among us has not seen the Federal Reserve try and do this?  We are watching this occur as we speak as Fed chairman Ben Bernanke races down the stairs with his latest effort in Operation Twist. Only Cartoon Law IV is a waste of time.  The priceless nature of the economy, the object hurtling through global space in this instance, falls victim to the inevitable comic result: it might be too big to fail but the attempt to catch it will prove unsuccessful as well.

Cartoon Law V.

“All principles of gravity are negated by fear.” I offer last quarter’s frenetic trading as proof that investors can spin their feet so quickly that they do not touch the ground while any news good or bad propels most of them straight up a flag pole. These days many average investors are left scratching their heads as they realize that just the sound of the unknown can change the direction of the market dramatically.

Cartoon Law VI.

“As speed increases, objects can be in several places at once.” You know this one as the cloud of dust and debris brawl, to be witnessed as the candidates begin their battle for the White House.  With the economy hanging in the balance or at least by their telling of the tale, the next year should provide numerous occasions of spinning and throttling as no candidate so far can pinpoint where the nation is right now and offer a plan of where we should be.

Cartoon Law VII.

“Certain bodies can pass through solid walls painted to resemble tunnel entrances; others cannot.” This inconsistency has played itself out to great effect in housing.  The folks who stand at the helm of the economy have painted an imaginary tunnel and allowed millions of Americans to pass through but when those that needed help the most attempted to follow, the surface was once again solid. This trick surface has left many wondering why something cohesive can’t be done. Housing may never recover if recovery is gauged by where it was. Yet so many people are wondering why the supposedly smart financial people who aided and abetted in this financial crime won’t simply understand that they have an option – and it isn’t achieved by raising ATM or debit card fees.

Cartoon Law VIII.

“Cartoon cats have more than the traditional nine lives.” They become like water snapping back to whatever they were prior to their mishap, even assuming the shape of the container if they happen to find themselves in one.   Seems that we alone know this to be true and no matter how many times the economy can be “decimated, spliced, splayed, accordion-pleated, spindled, or disassembled, it cannot be destroyed.” It becomes the equivalent of a cartoon mulligan. Someone please tell those in Washington. They think that what the economy needs is simple: more self-regulation and perhaps a little agency consolidation, a trillion dollar cut in spending here and an entitlement cutback there. We’ve seen it before and it gives us hope. We know that after the economy regains its shape, these set-backs (weak dollar, global slowdowns, market volatility and commodity speculation) will prove there are lessons we haven’t really learned and why should we have. We are pretty confident as a group that we will have another life to do it over again. At  least we hope that this cartoon law is real.

Cartoon Law IX.

“Necessity plus Will provokes spontaneous generation.” This opens the door to the “controversial pocket theory” which  “suggests objects can be drawn from unseen recesses of a character’s costume, or from a storehouse immediately off-screen” or can be borrowed directly from what you will owe at some point in the future.  And then, as if by magic, this future they tell us will just show up as if it “merely defers the question of how any absolutely apt object is instantaneously available”. Of course, you do need to believe in magic and if magic is the suspension of disbelief, saving will help – a lot.

Cartoon Law X

“For every vengeance there is an equal and opposite re-vengeance.” This is the one law of animated cartoon motion that also applies to the physical world at large. The bottom line is that we are not to blame. Each time I talk to an expert on my radio show we are told is our behavior that is the reason we are in the mess we are in. Every nuance we have is examined and studied and plans for re-vengeance are hatched. It has become us versus them. Instead of financial products getting simpler and more easy to understand, they ultimately become more nuanced, more layered with possibilities and as they get less expensive, they don’t become less expensive. It seems that all we want is to fall on the right side of cartoon law.

These laws were borrowed liberally from “Elementary Education” by Mark O’Donnell (Knopf (1985) in the hope that when you encounter these situations, you may fall on the right side of cartoon law.

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

If You're asking "now what" perhaps an Investment Plan

I've been away a couple of weeks on hiatus but is seems there is nowhere in the world you can escape the marketplace concern. We have turned into a nation of economy-watchers. It's as if the voyeuristic nature of simply gazing helplessly, frozen in place or prompted by muscle memory, should force us to make investment, retirement and personal finance decisions right now even though we might just regret them at some point in the future. So I offer you a four part series on what we should do in the coming weeks as we anticipate that the previous weeks will give us more of the same.

So we begin with Now What Retirement

Believe it or not, some people, the true Boomers are actually on track for retirement. Right on the cusp of making the decision is quite possibly the wrong time to make most difficult one you will ever make. You may have second guessed your investment strategies over the last several years but had you been closer to what we consider traditional retirement age, those choices became fewer. And harder.

In fact, had these Boomers been preparing as they should have, sitting on their well-diversified portfolios and riding out the downturn in 2008 until the present, they may have actually found inaction more fruitful than shifting gears - gears that should have been set for low in the first place. And now, as the market roils for what looks to be another rise, dip and with any luck, rise again in the coming months, the nearest retirees need to make choices that are just as prudent as they are. For those of you who are not ready but at that age, the sooner you answer the following questions, the closer you too will get to the point.


What to do with your 401(k)? For this person, the choices are relatively narrow with consequences on each decision possibly impacting their income decades down the road. To leave your money in your old employer's 401(k) might be a good idea if your old employer has a good plan. They may have low cost fund options and on the other hand, have higher than needed administrative costs. If your plan had the foresight to include an annuity and you are a woman, this quasi investment (part mutual fund/part insurance plan) will give you a relatively clear look at your future income based on a unisex life expectancy. (Annuities bought outside your 401(k), will cost a woman more because of the expected longer-life span for women as compared to the same age man.)


And if I have to rollover? In most cases, you will be jettisoned form the plan which means you now have to make the choice. If you are a man, the decisions you make should always include "what if I die first" as the ultimate determination of how you take money from your retirement plan. For women, the consideration should be less about what your spouse may or may not do but what you should do should he make the wrong choice. You will need to protect your life first, and doing something that goes against your very nature: putting everyone else second.

Once again, you will consider the annuity. But you probably shouldn't commit your entire nest egg to it. You will need access to cash and keep that money invested at the same time has been the hardest job seniors have had in the low interest rate environment we have right now. A 10-year Treasury, based on inflation at its current levels, is actually considered a loss. So you will need to keep some of your money invested, perhaps across low-cost index funds.


Does Debt have an impact? It will be tempting to use this payout to get your retirement debt in order. This is generally not considered a good option unless that debt is so large that it will saddle you for the rest fo your life. On a fixed income, a debt counselor can construct a good plan and get the process moving along quicker and more efficiently. Keep in mind, you may love the house or condo you live in, but if the debt from trying to own it is too high, a debt counselor will tell you what you can't admit to yourself. If you overpaid for your home and do not expect to live long enough to recover your payment and equity, the counselor should be able to help with this as well.

Without debt, your home may be the single greatest retirement safety net you have. But don't use it until you are actually about to fall. Tapping the equity in advance of when you might have an emergency need is foolhardy in most instances. Wait as long as possible. Involve your children and your attorney (who has your will) and if you have one, a financial planner. You'll need experts.


Should I take Social Security? As to Social Security, take it when you need it. Experts are telling us to wait as long as possible. And it is sage advice. But if it is possible to take it, save it and return it at full retirement without having spent it, you can upgrade your monthly payment to the full payment due at full retirement. But you have to save it. And even if you don't, you now have the emergency medical account you might need is the interim. But if you can do it, don't calculate this income until the last possible minute. Ladder your retirement income so as to get an economic boost every several years with Social Security withdrawal being the last step.

And don't become frustrated with the argument that you could have done more. We all could have. But regret doesn't solve the issue at hand: dealing with what you have is the most important job right now.

So take your eyes of the news. Long-term issues are rarely reported on any channel. They just aren't sexy. If this reality is difficult to imagine, live the sixth months before you retire on half of your current income. Can't seem to do it? Then you need to rethink how much you will need, in part because for most retirees, even if they are beginning retired life with 75% of their current income, inflation, taxes and health care considerations will soon bring it to fifty percent. So calculate from there.

Next up: now what investments


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

Retirement Planning: Pick up a Broom

Unlike cleaning up some of the small things that can have great effect, cleaning up a retirement plan is not so easy. And unlike the stat I mentioned on homeownership previously (how 80% of will be in the same house 10-years from now) we change jobs far more more frequently. And for the vast majority of us, this is why we sell our homes.

Looking back, you probably have had numerous jobs, some which you stayed at for more than five years. It usually takes a person that long to become dissatisfied enough to earnestly begin looking elsewhere. Add to that the current job market, which may have pushed you to stay longer than you would have liked. And when you did, you might have money left behind.

During that five years, you became vested in the 401(k) plan. This process of setting a timeline for when those company matches actually match is considered reasonable by law. You may have been enrolled through auto-enrollment and had contributions made on your behalf. Perhaps you made some yourself. That money should come with you. And often it doesn't.

Small companies are often as sloppy with their accounts as you are. If your account reached a certain balance, it might not send a red flag to the plan sponsor to cash you out. Cashing out, I should mention just because I brought it up, is not a good idea for even the smallest amount of money. Under 59 1/2 and you not only pay income tax but a 10% penalty - if you don't roll it into an IRA.

And this is why, even if they still have your money in their accounts, you should roll it over as well. IRAs have two distinct benefits for most retirement planners (not the professional kind, I'm referring to you), the first of which is much more favorable terms for distribution (eventually that 401(k) at retirement will do exactly the same thing: give you a lump sum). And secondly, in many instances, the fees are far less.

That doesn't mean all the fees. But the fees for the 401(k) plan itself which as it turns out, are the real culprits in the battle to have enough to retire. Many plans have shown major improvements in fund selection and investment options. Many more, particularly the plans at smaller companies, have a long way to go. Yet as the funds got cheaper, the administrative costs may have actually risen.

Yes there is an outcry about these costs and most people will tell you to pay attention and even question the plan about these costs. Few will get much in the way of relief though. It costs money to run these plans and unfortunately, the smaller plans have less participation and participation lowers fees. The more money under management, the lower the cost of administering the plan.

So recover those orphan plans and do it as soon as possible. Where you roll it to is not that difficult. Most plan sponsors will offer you options from the same fund family and will facilitate the process. Once you leave though, this door may be closed. You get the money but it would be up to you where to put it.

Wherever it goes, choose the lowest cost option that would still keep you invested, something like an index fund. You may already been re-employed and beginning to vest in another plan. And if that's the case, you will want to keep what fees you do have control over as low as possible.

The other quick fix to your retirement comes with a quick fix to your personal finances. Why do you suppose 28% of 401(k) plan participants have borrowed against their 401(k)s? Is it because they get a no credit check loan at very reasonable rates? Is it because you essentially pay yourself the interest? Is it because of you don't lose your job before you pay it off, it becomes a no-harm no-foul? While each of those answers does suggest that 401(k)s are good for quick emergency loans, they shouldn't be touched.

Do you suppose that of those 28% with outstanding loans, all of them had emergency accounts? Probably not and the 401(k), their precious future livelihood was their only source for cash in times of trouble. An emergency account is not that tough to build and worth the effort even if it does create some sacrifice.

Most financial sages suggest three to six months but suggest it be at your current spending. Done correctly, with everything pared back as far as possible, a single month's worth of emergency cash might actually be worth two additional weeks. So six months might actually get you by as long as nine.

Doing so requires that you figure how much needs to go out (absolutely needs to go out) each month to keep a roof over your head and food on the table. It requires a budget. But one quick glance is about all you need to see all of the additional holes that could be filling up your emergency account, the single most important stopgap measure you could have.

Doing these two things - and continuing to contribute to your plan on a regular basis - will give you a boost that was just waiting to happen.

The Good, the Bad, the Annuity

Nothing that is good for you can be considered bad and vice versa. Except perhaps when asking a five-year old about broccoli. But the vast majority of adults, fifty years hence wouldn't even consider an annuity for their retirement and if they did, would almost certainly regret the decision at some point soon after. How can annuity be both regrettable and not, good and sometimes bad, bad and almost the best option?

First, a disclaimer: I am not a big fan of annuities - too complicated and too costly and too much insurance. Secondly, as if that weren't enough of reason to dislike them, they are quickly becoming an idea with a certain allure, almost mystique. They have done little to reinvent what they are - aside from some product tweaks along the way, they are essentially exactly what they always were. So why the sudden interest? Okay, it's not really sudden. The thought that is currently being bandied around by many of my cohorts is worth considering. After I tell you what they are.

If I were to offer you a "guaranteed income for life" that grew at 4%, you'd think to yourself that this was too good to be true. If it were free of fees and locked in penalties and all sorts of hidden costs, it would be too good. But this is an insurance product. And I'd be willing to wager you have never met, over the course of your lifetime, an insurance product that is free of some small print just waiting to rear its ugly head the moment you need it. Then they tack an investment portfolio into the mix and you have a recipe for problems. Kinda sorta.

First off, you need to buy the product. When you buy it has more to do with it than the actual need or desire. Annuities come with salespeople in tow and when they begin talking, most of the information you might need to know later gets pushed to later. What stands out is the fixed number, the income for life. Secondly, you will not be the same person ten-years from now and this makes this sort of purchase subject to those shifts in not only who you are but where you are financially.

MetLife explains the difference between the two most common types: the fixed and the variable. A fixed annuity "earn[s] a guaranteed rate of interest for a specific time period, such as one, three, or five years. Once the time period is over, a new guaranteed interest rate is set for the next period. A fixed annuity guarantee is subject to the financial strength and claims-paying ability of the insurance company that issues the annuity."

In other words, you know exactly what it is your are getting into - if only it were that simple. The fixed rate often offered is just barely beating inflation and won't beat taxes. Yes it will be fixed but this also depends on your age and your sex. If you are a woman, you will receive less compared to a man because you will live longer - the insurance side of the deal in the equation.

If you meet a retiree who regrets their decision once they have bought and annuity, it will be because the stock market is doing well. Studies have shown that if the markets are good in the months preceding retirement, the retiree will more than likely opt for investing on their own; if they are bad, they buy an annuity.

When MetLife describes variable annuities, they roll their eyes and shrug their shoulders, knowing that even as the markets are doing better, you still want safety. They describe these products: "Variable annuities typically offer a range of funding options from which you may choose. These funding options may include portfolios comprised of stocks, bonds, and money market instruments. The account value of variable annuities can go up or down based on market fluctuations. Your purchase payments and earnings are not guaranteed; they depend on the performance of the underlying investment options."

But believe it or not, there is a place in your retirement plan where these products belong: inside your 401(k). When asked about them in 401(k) plans: "Eleanor Blaney, consumer advocate for the Certified Financial Planning Board, is blunt, "This is categorically a bad idea."" Of all people, women benefit the most from annuities in these plans. They don't discriminate based on sex. They give women the conservative approach many say they want - and the knowledge of knowing what they will have - and it gives them the opportunity to educate themselves about other potential investments available to them. Plus, it eliminates the choice at retirement that most people can't make. Stuffing them in every 401(k) can help men make the right choice for their wives - who will live longer and benefit from them.

In Your Retirement Plan: Should ETFs Be Considered?

Mark Twain suggested: "The reason we hold truth in such respect is because we have so little opportunity to get familiar with it." This will be the selling point for exchange traded funds: you will hear that they are less expensive, that they are better than the mutual funds - many of them indexed, and that you should own them in your 401(k).

They will suggest you overlook the cost of trading them, the fact that they tempt you to trade them more frequently than ou would a mutual fund and in doing so, allow you to follow the herd on any given day, a behavioral no-no for every investor. So what exactly is the attraction that they want us to see? Are mutual funds better or worse than ETFs?
The answer depends on who you are. If the sort of investor who believes that they can make small moves to harness big gains, then you should probably avoid the lure of ETFs. Exchange traded funds are mutual funds that can be traded just like stocks. They tend to have lower fees than their comparable cohort the mutual fund but the commissions that brokers charge for these trades tend to erase the advertised returns you might get.

If you are the sort of investor who buys to hold, then the surprising choice would be ETFs. Yet you will need to harness the inner trader in you that wants to succumb to the temptation to trade. This sounds easy. But in truth, is no easy feat.

So let's run some numbers comparing a total stock market ETF sold byVanguard and a total stock market index sold by the same company. The ETF (trade as VTI) carries and expense of 0.07%. The mutual fund version of the same thing (bought as VTSMX) levies a 0.18% fee on investors. The former has no minimum investment,; the later wants $3,000 to begin. So we'll start there and propose a hopeful return over 10 years of 4%.

In the first calculated example, the investor made no additional contributions to the investment. Vanguard does suggest that they charge no brokerage fees but they do charge a $20 annual fee for the account. This might be much higher when accessing these funds through your 401(k) and there may be additional brokerage fees. So we'll assume a $10.00 brokerage fee - as I said, yours might be lower and in most cases, the brokerage charge is on both ends of the transaction.

Based on the above numbers, the ETF, once purchased and held begins to creep past, in terms of raw returns by the third year. By the 10th year, you will have saved about $19.41 in fees giving you a net gain for your ETF of $32.82.

But begin adding to the security on a regular basis (say $200 a month) and the differences are much more notable. To add to the ETF in equal proportions over the same 10 year period would cost you $1021 in commission costs and with this money not working for you, the sacrifice in what each would be worth at the end of the 10-year investment period used in our example in addition to the trading cost would leave you with over $1200 less in the ETF account.

Inside a 401(k), where regular contributions rule the way you invest, ETFs can give the average investor less of an opportunity than proponents suggest they will. In a taxable account, bought without commissions such as Vanguard offers and purchased in large lump sums, ETFs slightly trump their mutual fund siblings.

Will you take the time to learn the truth about yourself before making the decision on which investment is better? You are the debate.

Can a pension be a 401K?

Is the pension plan, the dinosaur retirement plan of times gone by the answer to getting the older worker to retire at the historic retirement age and the answer to all of the economic problems facing the country right now?Possibly. Monique Morrissey, an economist and Ross Eisenbrey, the vice president of Economic Policy Institute recently offered their thoughts on why the pension offered the older worker the kind of security that is mostly absent in the 401(k).

Are pensions dinosaurs?

The idea has legs but not based on how they believe it could be achieved. While the authors suggest: "workers with only 401(k)s are better off than the nearly half of full-time workers with no retirement plan at all. The impact extends beyond older workers, their families, and younger workers waiting in the wings." They believe that adjustments made at the legislative level to make health insurance more affordable would be enough to give older workers the needed nudge to retire on time.

If, as many people I have spoken with admit, we'll never go back to pensions, perhaps we should instead look to some sort of hybrid idea. The 401(k) had the net effect of shifting risk to the worker, allowing for worker mobility and giving the employer a cost savings not present in the pension plans many were managing. Now, we pine for the days of the pension.

The birth of the 401(k)

Not that this was how it actually happened, but you can picture the backroom thinking: we'll shift the burden of retirement (and risk) on our workers and force them to buy into the stock market. The market will boom (see the bull market that coincided with the advent of the 401(k)) and everyone will be happy. We'll have a mobile and disposable workforce that can take their money with them when we no longer need them. No pensions, no loyalties, no ties that bind for decades, no human capital trade-offs in the early years. Genius. As I said, not that this actually happened. And furthermore, I believe that when Ted Benna, the father of the 401(k) and discoverer of the line in the tax code introduced the notion, this wasn't what he envisioned.

Fast forward three decades

And then the housing crisis crippled the mobility part. Too many people want to move to another city for another job but won't or simply can't. Older workers who have work are focused on being sure that they can retire and as a result are clogging the system of job turnover, necessary to accommodate the growing workforce.

Rather than shift the burden on the government by making benefits more accessible, why not use a pension trick. If employers offered an incentive like the five best, older workers might be willing to move on. Here's how it would work. In most instances, older workers earn the most in the final years of work. Why not reward them for their loyalty and expertise by offering a double or even triple contribution to their 401(k) if they also max-out their contribution. Rather than pushing the burden of catch-up onto the employee, the employer would also step-up their matches as well. It would probably require a tweak of two to current law to allow it. But the change would be worth it.

Three things would happen.

The older worker would get this massive incentive to save more in the final years and although they wouldn't be forced to retire, the contribution bonus could end at 65. The worker could stay on but the catch-up period would be over. This would allow the older worker to see the advantages of saving more sooner and capitalizing on the contribution bump. And the employer would see an offset in cost with a new hire, often employed for far less than the older worker.

The best of pensions combined with the self-direction of 401(k)s and the incentive to retire seems to be a simple tweak, a proverbial gold watch and a more secure older worker entering retirement. And the job cycle would, at least in theory, get moving again. And while Washington is legislating, how about requiring index funds in all 401(k) plans and annuities (which are forbidden to consider sex when tucked in these plans - which is a benefit for women in particular and men as well).

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

Is Your Plan in need of a Stress Test?

Baby Boomers may be acquainted with stress test and treadmills. But the importance of testing your retirement plan under certain types of stress is just as important as trying to figure out how well your heart is pumping.

The term stress test brings the fear of the unknown to otherwise stable events in our lives. The term became part of the vernacular of the financial system when the Secretary Treasurer  Andrew Geithner began asking how well the banking system would hold up under certain conditions. He knew that there were problems in how well a bank would withstand a crisis but until they tested for it, few people knew it as much more than a gimmick. Turns out, the nineteen banks that were tested, eleven failed.

Now stress testing adds its own stress. In part because we are all optimists at heart, seeing the future as brighter than it is and always believing that somehow we will survive whatever life throws our way. Even the off-handed question: "what's the worse that could happen?" never really attempts to answer the query, simply make you consider that something wrong might occur. And when it does occur, we simply suggest that we didn't see it coming.

In the world of personal finance, asking what's the worst that could happen is not the same as asking: "will I be able to afford this?" or "have I saved enough for retirement?" The worse-that-can-happen actually imagines the worst. It doesn't make plans for the worst based on optimistic scenarios. It plans for the downside and readjusts the outlook from just-in-case to what-now?

We're not conditioned to think like that. So I thought I'd give you some scenarios you think so brightly about and throw a little water on them. First: your budget. You lie about this too often. You project into the future (I'll be receiving a bonus or a raise next month) and spend money as if you had it. Otherwise you would even pull your credit card from your wallet. it is borrowed money that projects your optimistic ability to pay the money back at the end of the month. There are few of us out there who prudently deduct this cash from your available cash balances; but their number is small.

To stress test your budget you will need to know exactly how much meeting the so-called ends actually is. Not adding in the incidental items that can be canceled in the event of an extreme financial emergency (cable, internet, cell phones all of which are still luxuries even though we identify them as necessities), how much is your survival costs: housing, food, fuel, utilities?

A stress test would ask if you have accumulated enough in reserve to pay those basic necessities in the event of an emergency. How long could you pay for these necessary items based on what you have in your emergency accounts? My guess is not long. But once you identify this problem, you have to solve it - which is why many of us fail to do this sort of test. It adds stress. To realign this budget problem you can do three basic things: put $25 a way each week for emergencies (a cookie jar is just fine and you'd probably be surprised at how much loose change you can accumulate over time), stop spending someone else's money (try to get through a month, perhaps two without using a credit card - yes you will have to think more about each purchase) and debate the worth of every purchase (remember, just because something is on sale or looks inexpensive doesn't make it something you need.)

Another optimistic project that needs to be stress tested is your retirement. I suggest based on what I know and what I research, that most of us are not in a good position to retire anytime soon. But even these folks who acknowledge their financial shortfall are still looking at the big picture through rose colored glasses. We project investment earnings (without any real basis for these conclusions). We often think our portfolios will return 5-7% even as we switch from aggressive investments in our youth to conservative investments as we near retirement, which even a math challenged person will see as a falsehood. You can't protect money and still earn better than historic returns.

We base inflation numbers on what we know. We think of taxes based on what we currently pay. And we calculate our withdrawal based on what we think we'd like to live on. These aren't stress tests; they're optimistic projections. Stress tests give us a worse case scenario. You can also do three things here as well: contribute more, use both a before tax and after tax retirement plan (such as a 401(k) and a Roth IRA) and lastly, imagine life on half the income you currently earn.

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

Retirement Planning: The Answer is Yes

Yes, you can retire to which you answer: "how?" All of the pundits from every corner of the planet suggest that this is simply not possible, you continue adding that the retirement you envision will simply not be possible. And I listen intently looking for signs of your willingness to compromise. Oddly, you don't mention anything of the sort despite having accustomed yourself to years of doing just that.

Granted, the compromises you made throughout your life were, at best minor ones. You may have come to grips with numerous economic realities that gave way to great stories at the Christmas dinner table or perhaps among friends and family that shared those experiences. Many of these financial tales do not begin with 'remember when we had money' but more like 'no one knew how poor we were'. That's because pulled by the bootstraps stories are far more interesting to the listener and the teller of the tale when there is some drama, some obstacle to overcome.

So we are beginning to tell a tale of woe long before the story is finished. The vast majority of us did not begin our financial journey with money. We may have been given a little bit of a boost by parents who spent their hard-earned money, money they probably could ill-afford to spend, to help us. But the quest for more money would become the only job many of us will have ever had. What we did should have been the great modifier of how far that quest could have taken us. But access to credit sort of screwed that dynamic up; not permanently.


So when I hear forty-year olds tell me that they know they will never retire, adding to the chorus of those who really have a problem as the approach sixty, I wonder whether they aren't telling the tale too soon. And if that is the case, are they listening to the story they are telling?

Here is the problem and the solution in three steps:

One: You probably have the resources available to live on less. I'm not suggesting you go frugal by any stretch - that would probably take some sort of intervention. Instead, understand what your money is going for and how long it took for you to get it. In the good old days, folks saved for the things they wanted. Suppose you approached each item over one hundred dollars with the same thought. Suppose you work 2000 hours in a  given year and you net about $50,000. That's about $25 an hour. So each purchase in excess of a hundred dollars would cost you four hours of labor.


In all likelihood, you throw out about one-fifth of the food you buy either as leftovers or simply because you failed to consume it. You may have worked about an hour or two for nothing, depending on your grocery bill. Each month, you probably work ten hours to pay for your cable (TV, internet, phone), a possibly ten to fifteen to pay for utilities. And that is based on $25 an hour for your work, which is above the national pay-per-hour median and mean average salary reported by the Bureau of Labor Statistics.

Now the answer to this dilemma resides in imagining you earn less. The rich do this quite often and bank the difference. It is often called a cushion, such as when there is more money being brought in but less dollars relegated to the budget, more or less forcing more austere measures on the household.

Two: The what-to-do-with-the-extra-cash basically solves the retirement puzzle. But only in part. Most of us have access to retirement plans but the quality and the cost of those plans varies widely or should I say wildly from one plan to the next. If you are married and don't work for the same employer, you have the ability to pick and choose the better of the two plans.


While many 401(k) plans have been making strides in reducing the cost of the funds being offered in their plans, they have turned around and raised their administrative costs. If you are married, fully funding the best of the two and picking and choosing with the second best plan. This is good couple time and a chance to review how your tale is beng written.

If you are single, the choices are more narrow but not without benefits. You have no co-author for your story and therefore, you are the sole writer of the ending. Even if you have never written a word, you probably have read. Good writers give you several subplots, characters you want to know and a conclusion that both satisfies and amazes.

Your subplots are already in place (kid perhaps, college debt, etc.) and how you handled each one developed your characters (were they handled well or are they going to be redeemed) and as you head towards your conclusion, will the person reading your financial life empathize, sympathize or simply suggest that had you done this or that along the way, the story could have been better.

Three: You are your own critic. Churchill once said: "Criticism may not be agreeable, but it is necessary. It fulfils the same function as pain in the human body. It calls attention to an unhealthy state of things.” being critical of your work thus far is essential in negating the pain and getting to healthy. Once you resign yourself to hear only the downside of possibilities, you entertain no hope of redemption. If you were reading your life, would you be thinking that this particular tome is not worth the time or effort.


Good writers seed this despair with hope. If you suggest that retirement is simply not possible, for instance, what is the ending going to look like? Are you the reader anxious to read further? Probably not. So you think about the positive endings that could take place, list them out and how plausible they might be and choose one. You have all of the information to finish this book by the half-way mark of your working life. You can look at your parents and grandparents and project the potential for your own life expectancy. You can look at how far you've come and know how far you need to go. All that's left is the plan to get to the end.


Yes you can retire. Yes you should retire. Yes, you have the money. This is the ending, you the reader wants.