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.

Throwing Your House into Reverse: Not a Mortgage for Everyone

American dream or not, the games you may have once played with financing your home are not available for the vast majority of homeowners. And there is no doubt that this a good thing, a lesson learned that was far too painful but often, those tales are. But there is another game afoot in the world of mortgages, even as the largest lenders pull the plug on the process: the reverse mortgage.

Most of us don't envy those who are toying with this option. We know two things about these folks: one they own quite a bit of their house, referred to as equity and two, these homes are owned by cash-strapped people older than 62.

The reverse mortgage is a rather simple product with relatively simple goals. Because those who are considering this option are often older and in possession of much of the house they live in. This pool of cash is a very tempting option to a fixed income or one where retirement savings no longer is able to keep up with the cost of living. There are a variety of reasons they may need to tap this cash in their homes from medical bills to simply poor money management.

So the concept of tapping some of that equity is quite appealing. A reverse mortgage essentially gives you the money that your house is worth. Ron Lieber recently visited this topic in the New York Times explaining "reverse mortgages begin with a lender that is willing to pay you instead of you paying the bank. How much you get depends on your age, prevailing interest rates and the amount of equity you have in your home. The payout may also depend on whether you choose a lump sum, a line of credit, a regular payment for as long as you live or a regular payment for some fixed number of years."

The problem is getting a lender to do that. Many of the biggest banks have pulled away from offering the product, not because they don't think it is a good idea. But because those they lend the money to tend to fall behind on key elements of the loan agreement: paying taxes and keeping the house in sale-able condition. Aside from a check with the feds, there is no credit check on the applicants.

So banks, seeing the issue of foreclosing on granny because she opted for the lump sum payout and failed to keep current on those obligations have decided the bad PR will come with too steep a price. So enter the second and third tier lenders who will, without a doubt fill the void.

This could create several issues. The first would be fewer loans or on the flip side, loans that revert back to why this type of mortgage got its bad rep in the first place. Fees will be higher in a space with fewer competitors. Elderly will sign more complicated documents that will force them to maintain a fund for emergencies - which on the surface isn't a bad thing but could turn turn out to require higher funding balances than needed, leaving the reverse mortgager with less cash for the effort.

Another issue might be in how your heirs feel about the whole process. Often, parents,who may have mentored their children on the subject of money and financial prudence and who now find their finances in need of some review, may not be willing to or may be too embarrassed to ask for help. If there is no dialogue, the whole process might come as a surprise for kids who thought that house would eventually become part of the estate. And once these second and third tier lenders begin the process of foreclosing, it is often too late for the children to step in to help.

There are some key things to consider here. The first is what options do your parents have? Can they downsize? If not, can you talk to them about the options? Often this conversation needs to happen but it also needs to approached with great care and consideration. But once the barrier has been breached, you can move to include yourself in their financial affairs before it is too late.

This is also some tricky water to navigate. But the effort is worthwhile. If they need the money, and many older Americans will, attempt to get them to allow you to help budget the funds. In the future, HUD will probably set rules about creditworthiness and because many older Americans have little or no recent credit history, this might prove an obstacle at a time when they are already facing one too many. Helping them build some creditworthiness will enable them to be in a better position - with your help - to get the best deal possible.

Once you have gained their trust, you can include your input with their financial planners, with their attorneys and possibly with their medical doctors, all of whom may not be able to tell you what their clients or patients are deciding. You can take control of the vital payments that need to be made and keep things in good financial order.

So this summer, take a moment when visiting your parents or grandparents and have the discussion. And while you are at it, consider a plan to pay off your mortgage as well. (You can find recent articles about this topic here.)

Behind the Retirement Curve

There is still a great deal of discussion surrounding the fact the women are further behind the retirement curve than they should be. It is estimated that women will need $240,000 in retirement funds compared to $170,000 needed by men. These estimates, in my opinion need some fine tuning. Nonetheless, even if current 401(k) balances are taken into consideration, both groups are still far behind where they should be.

Consider this: Amongst the facts available concerning retirement, one number stands out. The cost of healthcare, the unknown possibility that at some point during your retirement you will need much more than Medicare can provide, will be close to $100,000. This means that both men and women will be left with far fewer dollars to subsist on than they have anticipated.


Consider this: Women still face individual hurdles in the workplace. This gap in pay is closing but not for the reasons you might think. Men faced the biggest problems during the recent downturn and women saw the biggest opportunities in landing any newly created jobs. But were those jobs as good as they should have been?

It has long been a fact that the vast number of women entering the workforce do so at a lower pay grade than their male cohorts. They will find more jobs in smaller businesses and because of that and those employers, they may find the options to save for retirement smaller. In many instances, these smaller businesses have less than adequate 401(k) plans, some merely a shell of of what larger corporations offer.

It is also a problem for women employed in larger companies with adequate 401(k) plans in part because the plan matches are smaller and are not expected to return to pre-2008 levels anytime soon.

It is also well-known that women will not be paid as much as men are or have been paid for similar jobs. USA Network founder Kay Koplovitz suggested recently that women simply don't ask for what they feel they deserve. It might have something to do with the fact that women "lean back" in the initial stages of their careers, looking toward the possibility that they will eventually take time off to begin a family. This false start often gives them fewer chances to achieve a robust retirement and to ask for the money they think and should deserve. Ms. Koplovitz suggests they take the reins of their plans "first, harder, and faster". Taking time off: use an IRA to keep invested.


Consider this: The auto-enrollment of new hires, the majority of which seem to be women, has seen the participation levels in 401(k)s increase. But studies have shown that these new participants invest too conservatively when they are young, giving up some of the much needed risk they should be taking in the early stages of their careers.


Consider this: Women will live longer and even more frightening, may live longer alone.
There are no easy remedies. Yet some come to mind. Yes, women need to invest more and more often. They shouldn't let any career interruption keep them from investing. They should be requesting their employers add annuities to their 401(k)s in part because these products, tucked inside these plans cannot discriminate based on the sex of the contributor. This isn't so outside the plan where actuaries step in and calculate this potential longer life into their equations.

Yes, first, harder, faster is a good mantra to embrace when looking to the future. But women need to ask for better pay, more education about the investments they need, a little more risk and more importantly, retirement plans tailored to their specific needs.

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 at 20-years-old

Retirement saving is best done early and consistently. Retirement planning, the roadmap to how you will spend your after-work life is not as easy ­ especially when you are in your twenties.

Alyce P. Cornyn-Selby once wrote, "Procrastination is, hands down, our favorite form of self-sabotage." And who can deny that this is the single biggest hurdle we will need to jump in retirement planning.

As twenty-year olds, fresh out of school, whether it be high school, trade school, or college, we see the world in terms of the here and now. We are young and that youthful exuberance gives us the false sense that time is endless. We are undeterred, full of hope and rich in the belief that time is on our side. And in a way, it is.

We have our first job and with it, our first taste of financial independence. We divvy up our paychecks in terms of what it will buy: x-amount of dollars for rent, transportation, clothes and entertainment and not always in that order. Few twenty-year-olds are able to see the value of saving at this age. There are simply too many opportunities to seize and fun things to experience.

And your retirement plan should not take away from that time in your life. It should compliment it. But there are three things you must confront first before you begin the party that twenty is.

First, you need a financial mentor. This can be your parents, an uncle, aunt, grandparent or even a co-worker. This person will need to be older and wiser than you and someone you can trust.

This person will be nothing more than a sounding board for your financial decisions. They will, if they do the job correctly, play a sort of devil's advocate. Many of the big financial decisions we will make at this age will involve the use of credit. A financial mentor will allow you to ask yourself, while asking them, "do I need this now or can I wait until a time when I can afford it?" They will offer you a look at the mistakes they have made and what they would have done differently. Their experience becomes your lesson plan.

The second element of a retirement plan requires a clear understanding of how compounding works. When I am explaining compounding to beginning investors, I often tell use the story of the "Sultan'.

President Jackson once gave a gift to the Sultan of Muscat (now called Oman) after the ratification of a treaty between the two nations.

The gift was a silver coin with the minted date of 1804 (although the coin was actually struck in 1834) that was "sneaked" out of the country via secret emissary. Remarkably, the coin remained in its original condition for almost 150 years before it was purchased by the family of the late Walter Childs of Brattleboro, Vt. in 1945 for $5000.

The coin was then placed in a vault for the next 54 years. Until, of course, it was auctioned off for 4.14 million dollars!

Despite the "wow" factor of that fortune, many of you would be just as surprised to know, had that $5,000 been invested in a simple index fund that follows the S&P 500 (the 500 largest companies trading publicly in the US), you would have made $400,000 more than Mr. Child's family did when they took the coin to auction.

The key to compounding is beginning small, doing it consistently, and starting early. If your first job offers a 401(k) plan, a tax-deferred investment plan, sign up for at least a 5% deduction. In all likelihood, that small of an amount of pre-tax income will not affect your take-home pay.

• What is a 401(k)?
  

• What is an IRA?
  
  
• What is an index fund?

The last thing you will need to do is avoid using credit for purchases under $500. That's right. Put the cards away until you absolutely need it.

At this level of borrowing, the purchase in more likely to be financed with a fixed rate, more apt to come after serious consideration, and it will probably be more of a necessity than a whim. A purchase of that size is much easier to add to your budget ­ the available money you have to spend on your life¹s necessities.

The best thing you do at twenty is develop a retirement philosophy that let¹s you live within your means ­ cash for everything that costs less than $500 to avoid unnecessary and unsustainable debt. When you do this while investing a small portion of your paycheck each week ­ just a 5% deduction from your payroll, you will be on the right road to retirement. If your employer doesn¹t offer a tax-deferred plan, have $25 a week automatically deposited into a savings account that you can set-up for automatic deductions to an IRA.

We will return to our retirement glossary next week.