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 Walk-Away Investment

Seems that there isn't a day goes past that I am not asked about the concept of buying a house.  These questions usually come from younger workers who may be barely into their thirties.  And the answer I offer them is not what they want to hear.  In fact, it flies in the face of everything they have ever heard about home buying, much of it now like the retirements of our parents: not something we can count on for us.

But what about you or someone you know who might find themselves underwater in their homes? Can you walk away?  Will you know why?


For more on this topic, visit Target2025.com: Is Owning a Home No Longer Smart Money Management?

Paul Petillo is the Managing Editor of Target2025.com

Retirement Planning: It is Never Too Late to Start Investing

Chances are, the lesser your wage will working, the more dependent you will be on Social Security when you retire. While at first glance this might seem a sad state of affairs in terms of a retirement plan, it is not beyond your abilities to change this outcome before you retire. If you are aged 50-years, the ability to put together a viable plan is doubly difficult. But, even considering that, it is not impossible.

Several things need to be adjusted prior to that arbitrary date.

Retire when you can
Most of us have not been very successful with our retirement planning. We have begun late in many instances and have failed to utilize our options to the fullest. Many of us have not used these plans long enough to see the benefits. Long-term investing still needs thirty years or longer to work. The vast majority who have plans have used them less than 16 years.

During this time frame, often thrust upon us as your company changed from a pension plan to a 401(k) or you changed jobs repeatedly during that period, we experienced the shock of having to educate ourselves about what our options were and then set a plan that was previously managed for us to one that was defined by us.

For numerous folks, this meant doing the wrong thing first, then, as time passed, correcting those mistakes.

Default Investing
Up until several years ago, the default investment in your 401(k) could have been anything from a simple index fund to a money market account. The later simply parked your money, and while you never lost any of it, you never were able to take advantage of market ups and downs.

Now, new employees will be defaulted into target date funds (pick a retirement year or have one picked for you). And some, after the debacle that was 2008, have switched their retirement money to just such a fund in the hopes of recovering enough invested dollars to regain some of what you may have lost and preserve what was left.

The jury is still out on whether these funds will provide what you need to get where they say they will take you. Target date funds are navigating uncharted waters with a promise to do what never has been attempted. Unlike balanced funds (usually offering a 60/40 split between stocks and bonds), target date funds re-allocate your investment over time moving from more aggressive to less with the idea that this will protect your investment over time.

Over 50 Dilemma
If you are over 50, this strategy may prove to be the wrong one. In most cases, you are entering your largest income producing years. If you are contributing more as you earn more, you may be leaving a great deal of potential on the table as these funds try and protect those invested dollars instead of growing them.

While stocks are considered risky in this period, they should not be ignored. The best structured retirement plan will separate your investments into categories. If you are currently contributing 6% of your pre-tax income to your retirement plan (and this is not enough), you need to increase that amount to the point of causing you to rethink your daily budget needs.

Each pay raise should signal an increase in contributions. And each increase should go to a more conservative investment while leaving the initial 6% fully invested in stocks. This sort of self allocation will give some risk for old money invested and less risk for new. Shifting to a target date fund does not allow for this, taking much of the potential for risk off the table.

When and How
If you can wait to take a distribution from your 401(k), it will allow it to grow further. To do this, you will need to enter retirement without a mortgage, with your financial house in order (this means adequate savings, only the minimum in credit card debt and the all important emergency account). Your expenses will not decrease in retirement. The cost of maintaining insurances as well as your property will not go away. Your health could prove to be a factor as well and should be accounted for (and worked on while you are still employed) before you retire.

Many of these costs rely on projections. While these are difficult to make with any accuracy, they are not impossible to plan for. Inflation will increase by about 3% suggesting that each year, your expenses will go up, even the fixed ones (because inflation makes your dollar worth less). Insurances might increase on average 5-10%. And taxes will depend on how much income you have but basing your projections on current income rates might prove foolhardy. Add an estimated increase of 3% per year (this includes property taxes as well).

Arriving at retirement with any outstanding debt means one thing: you will have to continue to work just to keep up with the increases. The other option, of course, is to get used to these financial burdens while you are still working. Living a little bit more frugally now will offer you the opportunity to experience what life post-work will be like.

So the three basic tenets of investing apply: get your financial house in order, channel as much money as is possible into your retirement plan (without increasing the risk of creating more debt as you scrimp) and take some risks with your invested dollars. The first tow will offset any problems you might face with the last suggestion and allow your invested dollars to do some work that too conservative approach will not permit.

It's not too late. But the strategies are different.

Retirement Planning - 401(k) Transparency For Some

Your level of expertise often directly affects how well you do when it comes to investing. The financial acumen, the ability to sift through reams of documents, and to keep track of third party involvement is not usually the forte of the small business owner. They may be well versed in what they know, how to make and market their skill or product, how to keep employees loyal to your vision and how to think big. But add a broker or retirement plan sponsor to the mix, and most small business owners, thinking they have done good by their employees and themselves, don't go far beyond the handshake agreement they make with these financial firms.

And that is too bad. When a plan sponsor approaches a large corporation, chances are there are people within the company who specialize in watching for cost overruns. They are able to spend the time (or already know what to look for) sifting through the documents the sponsor has provided, looking for hidden fees that could impact not only the employees but the business itself.

Add to that, these sponsor have the ability to spread these costs over a wider pool of employees, essentially cutting the costs. But when these same sponsors appear on the doorstep of the small business, this is not often as clear to the purchasing manager as it should be.

While Congress is attempting to offer a solution, it will still require the small business owner to look at these plans in depth and on a relatively frequent basis. The impact of hidden fees can often be devastating to the invested dollars of the small business employee. It has been estimated that even a one percent fee, over a the course of a lifetime of retirement investing could cost as much as 17% in potential returns.

Changes in the way plans are sold, revising disclosure of the costs in real dollars rather than percentages would drive the small business owners to comparison shop. Recent studies have suggested that small business owners pay as much as twice what their larger counterparts do.

But these smaller employers do not have to wait until legislation comes down the pike to make changes yourself. Demand disclosure of fees. Require those fees to be listed in real dollars. And understand the importance of small 'nickel and dime' costs in the long range rewards that could be had by not only you, but your employees as well.

Happy Mother's Day: Do You Know Where Your Retirement Plan Is?

We all have mothers in common. And on this day, besides remembering her with flowers, candy or breakfast in bed, there is no better time to begin planning for her future. I mention in my book "Retirement Planning for the Utterly Confused" that women often play a very diverse role throughout their working career. The roles they play, the numerous hats they don, are often the reason Mom doesn't have the financial strength when her working years are done.

She often leaves work to have children (not always and if your are a stay-at-home Dad, you would be wise to pay attention as well) and this is first instance of retirement interruptus. Her efforts at saving for the future, at a time when every financial advice giver agrees, are the best years for saving for that far off distant future, are put on hold. That one move can have long-term damaging effects.

She may hit other bumps in the road as well. Later in life, statistics show that it is often the woman who leaves work to take care of a parent in their golden years. This creates a cycle of disaster as the lack of preparation of the parent leads to a continuance of the problem that must be avoided. Adding another work stoppage seems to make the previous break for children even worse.

There is also the issue of being single. They may wait longer to get married, but no one problem for s secure financial future looms larger than the possibility they they will face their retirement years without a spouse. While this independence might seem attractive at first glance, your Mom may be under severe financial stress, shortening her lifespan in the process.

Sons and Daughters need to unite. Today (and the next day and the next) are the best times to take all of this into account.

Sons should not only be looking at their own mothers and mothers-in-law but their wives and daughters as well. In many instances, these women default to your experience with money. In many instances this is a grave mistake. Men, as it has been shown, are more emotional about money, willing to take bigger risks, and are often not focused on the big picture.

Sons, you need to begin the conversation. Is your wife saving as much as you are? Is she adequately insured for potential disability or even long-term care? Is she assuming enough risk to make her retirement investment grow?

Is your mother's finances in the best place to ensure it will not outlast her time with you? Are you financially prepared to deal with a health problem (has she named an executor, made a will, or otherwise let her intentions be known) or a loss of property? Have you made a plan to determine all of the possible scenarios that might play out, as difficult as something like that might be to do?

Is your wife (and daughters, if they are at least twelve years old) involved in how your financial house is structured? Are you guilty of financial infidelity, an act of risky behavior that you hide from the family's finances and fail to admit? Have you saved enough for a rainy day?

These are all tough problems to deal with. But ignoring only puts off until tomorrow what you should have planned for today.

Today is the day that Sons need to help your mother, your wife and your daughters have a better future. Daughters: Today is the day you need to get involved, open the conversation and make a plan for your future.

Oh, and Happy Mother's Day!

H is for Honesty - Retirement Planning

We all want honesty, except when it comes to our finances. We desperately want to be told what we want to hear about our retirement plans rather than what we need to hear. And the honesty we look for - or better yet, the lies we would like to be told are as follows:

1. We will have enough money to retire.
I would love to believe that you or any one has this calculated correctly. It seems that each day the free market has the opportunity to do what it does best, the number we have assumed is best case scenario, needs to be recalculated.

2. We will be able to get debt free.
Debt free is a nice goal but debt management is a more honest approach to what your future holds. We use credit at the pumps, in restaurants or any time - and this is just good advice - we lose sight of our credit cards during a purchase. So each month, we need to manage that debt.

3. We will be able to estimate the cost of insurance.
Most of can't do that now. Do you assume that it will be easier on a fixed income? think again. Fidelity suggests that a nest egg of just over a million dollars might be enough to cover your future health insurance costs.

4. Our kids and in some case, our parents will not have an effect on our retirement plans.
If you believe this to be true, you never had kids and/or your parents have since been deceased. otherwise, these two groups will cost you more than you think. A recent New York Times article suggested that inheritances that may have been expected by many near-to-retirement adults can no longer be assumed. For those of us with parents who have no inheritance to spend down, you may be the only salvation for their financial well-being. And your kids...

5. Your investments are not as honest as you once assumed they were.
Look at oil. Look at the stock market. Look at bonds. Look at your tax bill. Need I say more?

Being financially honest with yourself is step one in considering how far you need to go to get to some semblance of retirement.

A is for Asset Allocation

B is for Balance

C is for Continuity

D is for Diversity

E is for (Tracking) Errors

F is for Free-Float

G is for Gross Income

Retirement Planning: At 30

Retirement planning at age 30 puts you in a unique position. You would have done better had you started saving years ago. And yet, you are still at an age where you can capture many of the same opportunities that you may have missed.

At age thirty, life begins to seem like a game of rock-paper-scissors. You are familiar with the game. Competitors face off against each other, pump their arms and reveal a fist (rock), an outstretched hand (paper) or two fingers (scissors). Best of three wins the contest.

The game is so simple; it has been used to decide court cases and even disputes over works of art. They played it recently on the television show Survivor to determine who would go to Exile Island. Some scientists even suggest that game may govern the equilibrium of the universe.

In your thirties, the wrong move could leave you facing financial set back, one that could take years to unravel. If you are just beginning your retirement journey, you will find yourself in one of three financial positions. You will either have no debt with no savings, no savings and debt, or a family, house, car, and everything that goes along with life at this stage in the game. (Ironically, even those that have started to save, possibly through their work, still fall more or less into one of the three categories.

While the situation is far from dire, you do need to get things together quickly.

If you have no debt and no savings, there are some simple solutions to your retirement plan. Begin to build an emergency account - $25 a week to a money market account with limited check writing abilities is often enough to get started.

A money market account generally pays a higher interest rate than regular passbook savings and checking. Access to the account is often limited to a few checks a year. This limited access but immediate availability make these accounts ideal for creating an emergency savings account

Next, if you haven't done so already, look into beginning to save for retirement with a tax deferred retirement account.

Using your employer's retirement plan, the most common being a 401(k) account (public employees often use a 403(b) account in the same way), you can begin building an account for your future. If your employer offers a match, lucky you.

A match acts like an incentive to save. Offered by your employer, your contribution, up to a certain limit, is matched dollar for dollar.

You need to contribute at least that much to the account. This is free money that is put into your account with your contributions, and when invested and allowed to grow over time, will give you a sizable jump on where you need to be.

• What is a 401(k)?
  
• How much should I contribute?
  
• What is an index fund?

Even if your employer doesn't match your contribution, you should put away 5-10% of your pre-tax income. This money is withdrawn before the taxes are taken out and in some instances, this can actually lower your overall tax by licking you into a lower bracket. The upside to this: it may have very little effect on what you take home.

If you have no savings and debt, a much more common scenario, you can also be saved and surprisingly, without too much pain. It is obvious that you are living somewhat beyond your means. You have financed your lifestyle with money you didn't have.

The simplest way for you to get back on track is to build a spending framework. That's right: a budget.

Budgets act like road maps. They simply give you an overview of where you are now ­ assets (income) minus liabilities (what you owe and to whom) equals how much you have left to spend or save in a given period of time, usually over the course of a month.

Budgets can be like diets and New Year's resolutions. You start out with the best intentions but the changes you have promised yourself to make are often too drastic to achieve. But unlike diets and New Year's resolutions, they are incredibly important for two reasons.

It allows you to see where you are financially. Your money is not working for you if you are servicing debt. Debt comes with a cost and each time you pay interest on debt, you are paying for the use of that money. This exacts a toll on your savings.

Budgets also give you some idea of what it takes to get through the month ­ real dollars. At this stage of life, it is no sin to live paycheck-to-paycheck. We have all done it. Many of us still do.

Paying off your credit cards is easier than you might think. I have developed a simple way called the sliding scale. Here's how it works.

If you have three cards ­ this about average ­ list the minimum payments of each on a sheet of paper. For the sake of example, let's assume that these minimums are $25, $35, and $50. Your plan of attack using the sliding scale is simple. Pay double the amount due on the lowest minimum until that card's balance is paid off.

The payment schedule on the sliding scale would change from $25, $35 and $50 to $50 ($25 x 2), $35 and $50 for a total of $135

This increases your monthly credit card payments ­ something you should make on time and without fail every month ­ from $110 to $135.

Once that card is paid off, put it away for extreme emergencies and roll the $50 payment over to the next minimum. You are still paying the same amount but with one card paid off and the other card getting an $85 payment instead of $35 ($50 from the first plus $35 from the second), you are well on your way to satisfying that card's outstanding balance.

When that card is paid-off, put it away as well. Now, you are paying $135 to the card with the $50 minimum payment. Without taking too much from your budget (just $25 more a month), you have begun to tackle your credit card debt in a meaningful way.

At thirty, however, you might also have a car you have financed, college bills and possibly even a mortgage. A budget will give you the opportunity to see how much money goes where.

If you fall into the last category: family, a house, a car (possibly two) and no savings, it is time to change that. Now it becomes vitally important to begin to use your employer's retirement plan (see the thirty-year old with no savings and no debt), work on living within your means (see the thirty-year old with no savings and debt), and enjoy yourself.

The attitude you bring to life is more important at this stage than ever. You can see the future and have made tentative plans on how you will get there. You need to look forward to forty, and fifty, and even sixty as something worth achieving. Making the right retirement moves now will allow you to move forward with no regrets.