Staying Home: For some, Retirement moves on

I have to wonder what people sometimes think. Confidence is down but spending is up. The recession isn't really a recession but for many it seems like one.The media talks of millions of homeowners looking for mortgage relief, being foreclosed or worse, are feeling the crush of owning a home adversely impact their retirement plans. And yet, some people are still planning a future with their house as part of the process.

Could be a sign of the times and then again, it might be the progression of where we would be in our retirement plan. If the results of the latest Associated Press-LifeGoesStrong.com poll are any indication, we have reached a pivotal point in retirement planning. Should I stay or should I go?

A great many retired couples have told me over the years that the biggest mistake they may have made was selling the family home. They have opted for a dream instead and chased it with their new found retirement freedom. But many failed to take into consideration that a place is more than just a shelter. It can be proximity to children and grandchildren, services such as health care facilities or other seniors and often, in communities that are growing with younger cohorts. And almost equally as many have found the size of the house they own in their pre-retirement years is simply too large to accommodate - or worse, afford.

Should it be a surprise that we begin making post-work plans in midlife? Or is the surprise the decision we make? According to the recent Associated Press-LifeGoesStrong.com poll, three out of ten midlife retirement planners are suggesting that they will look elsewhere when they do retire. And according to the poll, they are resigned to sell the family home for less than what they had thought it was worth a decade ago.

But that is understandable for two reasons: those out-sized estimates of property worth have been adjusted to fit a lackluster economy and there is a greater chance that the equity they may have calculated has shrunk due to refinancing. Folks in the midwest are more likely to stay put, more so than their east coast neighbors.

The poll also suggests according to Barbara Corcoran: "more than four in 10 want a smaller home, 30% would like a different climate, 25% will look for a more affordable home, and 15% will pack up our bags for the sole purpose of moving closer to family." And when they do move these people dream of a one-level home with enough room to accommodate the occasional visitor, close to medical facilities and not in-city. And those that stay put waste almost no time converting their children's rooms into something more focused on their evolving interests.

Oddly, the question of taxes didn't come up in the poll, something of major interest to older people planning on a fixed income lifestyle. A larger home requires upkeep and maintenance that might not configure into a retired income. And the thought of a second home was not amongst the wishes this group had either. In fact, only about 12% want to feel the sea breeze in their graying hair.

The question is: how much of a role should your home play in your retirement plan? Many people have factored in the equity in their plans - or at least they used to - and the mistake made by these folks is twofold. One, you need to live somewhere and two, unless you own your home and have considered the chance that you might reverse the mortgage at some point. this equity is nothing but paper dreams.

A harsh reality but more true than not. If you are factoring in your home as part of an estate, then no doubt you have made all of the considerations, tax and otherwise, surrounding that decision. But if the home will become unmanageable (how hard is the upkeep now?), then looking for the opportunity to sell it, no matter how much you might "love" the house, the location, the neighbors, should be weighed.

As retirees approach that magical time when you either cutback or stop working altogether, the best advice woud be to begin to stage the sale of the property now while your income is less fixed. If you don't sell, you will have a slightly improved place. If it does sell, it will help you get the price, or closer to the price you might think it is worth.

Commentary: Tweaking Social Security

Bring up Social Security to just about any American, Boomers included and you will get one reaction or the other. And it doesn't really matter whether you are young or old. You feel something is bound to happen to the program and although you may have no idea how it works, you believe that the way it currently does can't go on. Now opinions differ on the health of the program and the long-term sustainability of it but few argue that there aren't problems looming in the future. Is there?

The first reaction most feel is that the program can't continue on the way it has for decades to come. Bankruptcy, running out of funds, too many Baby Boomers, all get the blame for the demise of this important program. Whomever lit the match to this topic (someone on Wall Street I suspect with a keen eye on the potential windfall privatization would provide his/her business) has got to be pleased. A simple tinder of an idea has caught the public's attention and now we have a full-on brush fire.

So here's the rub: I'm not going to argue with those who have their mind's set on the end of the Social Security program as we know it. Let them think that it will not be around.

Let them believe that what is essentially a program to provide insurance that poverty won't grip those less fortunate, the disabled, the children who have lost parents or spouses who have lost loved ones, and those who did not have access to any additional cash to invest or save for retirement won't be penniless is worth tossing to the curb. Lawmakers seem to think that their suggestion that by simply telling the average American to save and invest more, work harder and longer, and in the process, feed their fear of not being able to retire in a lifestyle that is not sustainable on a single dollar less than they are currently making, that they are moving the country into a more prosperous future. They are not.

The bottom line is that the program will continue to exist. And so will the talk of its end. Why that conversation persists is puzzling. Even as fewer people contribute into the plan, those few actually contribute almost more than eight times as much as the post-WWII generation did. As Merton C. Bernstein, the Walter D. Coles Professor Emeritus at Washington University in St. Louis School of Law recently suggested, it is because of production. Workers are not only producing more output than previous generations, the work they are doing is better compensated. And that increased compensation according to Bernstein has closed the gap sufficiently. Is that simple equation likely to improve in the coming generations? Without a doubt. Yet little consideration is focused on that economic anomaly.

That's not to say that the program couldn't use a few additional tweaks. But preparing for the worst is not worth considering. And recent attempts by the GOP would actually create more debt not less should they try and change the program. It's a complicated and sort of odd way to think about it. The reality of what some of these proposed changes would bring about point to a flaw that cannot be overlooked: changing Social Security in the name of dealing with some future debt obligation we would leave our children would actually increase the debt limit we leave those kids.

Without getting into the vitriolic debate about the cost of government, the ridiculous ideas for reining in costs while two, possibly three wars are under way (and no talk of slowing spending down there) all while a recovery is under way, seems absurd. The bottom line still falls back on your ability to have enough to feel comfortable in retirement. If you exclude Social Security from your retirement calculations, then the onus of financing your retirement is on you. While I do not like the idea of a back-up plan (it suggests that the original plan has the potential to fail), Social Security not only acts as one, it is one that cannot be touched.

And surprisingly, despite all of the talk about its end, it will still be there for my grandchildren. Perhaps snot as robust. But doing the same thing it does now: providing insurance against poverty.

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

Boomers: As you turned 60, Your 401(k) turned 30

It seemed like a good idea. But you have to consider where we were in terms of retirement when the line in the tax code was uncovered. We had pensions and companies didn't much like the idea. These defined benefit plans were designed to keep employees in one job over an entire career and add to that, they were costly and unpredictable. For the employee, the time needed to vest was often long, sometimes as much as ten-years, and the pension once vested, although it was yours, could not be brought with you should you find a better job somewhere else.

The pension also represented the ability to increase your retirement income as your pay increased. This trade-off from human capital in the first years of employment to retirement capital in the later years, made the company liable for the investments and the guarantees that the money would be there. Higher paid workers, often in much higher tax brackets than we have today, were allowed to also save money after those taxes.

When Ted Benna found this line in the tax code (section 401(k) 30 years ago, he realized that this was the answer to what his higher paid clients were looking for: the ability to put money away on a pre-tax basis and if the company so chose to do, it could match those dollars. Business saw this as a way to shed those obligations of managing their pensions and shift the obligation of retirement to the employee.

Sure, the company said, we'll help. We'll hire some experts to set up a plan, we'll load it with a bunch of investments and we'll act as fiduciaries. Heck, they said, we'll even provide the incentive of a match - even though these companies would lace it would all sorts of caveats much like the vesting period of the pension. Yet it would, in their minds, be the answer to a question they had not asked but possibly should have.

Even better, these new plans would be portable. You could take the money you had put aside with you when you left. Once again, this was more a win for the company than the employee, who often left before they got the fully vested match and was forced to roll the money into their own IRA. The fully vested match is often something that happens over time, sometimes as long as ten-years, more commonly over five years.

It can work in a number of ways and this information is part of the Investment Policy Statement that every plan has and few people read. During your first year, you might get the company match - in theory - but if you were to leave, it would not go with you; only the money you had invested would be yours. Perhaps by year two, the company would allow you to take 25% of the company match, and each successive year, a little more. Some companies give the full 100% after five years. So consider the employee who finds a new and better job opportunity and decides to quit a week before the five year waiting period is up. They would lose five years of company matching funds simply because they didn't wait.

This line in the tax code also created a multi-layer business to accommodate this plan, from mutual fund houses to insurance companies to brokers at the investment level to third party administrators and lawyers to help with the legalities. This line in the tax code also created some huge problems for the worker.

Now they needed to find investments in those plans to give them the best retirement. They needed to participate beginning as early as possible and stay involved as long as possible. They needed to get historic returns and be disciplined in an endeavor they had little or no knowledge about prior to this shift. It was a great social experiment in self-help that has failed many people. It also helped a great many people who might not have had much otherwise.

But the plan has problems that have never been suitably addressed, in part because of the belief that people wouldn't allow these provisions. One problem that should have been better adressed was the portability part of the plan. Mr. Benna in a recent interview with the Baltimore Sun bemoaned this ability to "take the money with you". He knew that our natures would get in the way of the right choice. Too many people would cash the plan out, pay the penalties and the taxes and squander the early start that these plans depend on. He thinks that the employee would be better served being forced to leave the money at the old employer.

He also knew that if the 401(k) allowed for a borrowing provision, people would use it. Mr. Benna's redesign of the 401(k) would include auto-enrollment and auto-deductions that would begin at 4% and increase until they reached 10%. He also admits to the problems in target date funds (which we have discussed here in previous essays) but thinks the idea is right. People make emotional choices with their investments and target date funds are designed to take that emotion out of your hands.

Of course you could opt-out but history has shown that few people do. He also suggested that this plan should be, in a perfect world, a supplement to a pension plan. But he was quick to point out that companies still have problems with the predictability of pension costs. Much the same way 401(k) investors have difficulty with investment risks.

In either case and even if you are fortunate enough to have both types of plans, the responsibility of your retirement is still with you. Arriving as close to it debt free is still the best approach to retirement. Investing as much as you can and then more, perhaps twice what you think you can afford, is a better plan. Think of retirement as a storm that is approaching. You wouldn't gather enough supplies to last for a day or two. You would get more than you need. Most folks have not filled their retirement pantries with much more than a loaf of bread and a jar of peanut butter. How prepared are you for a storm that is likely to last for thirty years?

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

Retirement Planning: Companies are Still Trying

Such is the conundrum of the 401(k). Your retirement planning tool is showing signs of increased balances even as some of the experiments to get people to invest more - via auto-enrollment - is as Aon Hewitt suggests, somewhat sub-optimal.

Auto-enrollment was supposed to get all boats to rise. New workers who knew little about this sort of plan to help them save for retirement were automatically enrolled in their new employer's defined contribution plan. But these new investors did not respond as the industry thought they would. Pamela Hess, director of retirement research at Aon Hewitt suggested in a January 26th press release from the company: "Auto-enrollment is a relatively simple and effective way for companies to help workers plan for retirement—especially younger workers who may not feel the immediate pressure to save for retirement." And yet, once in the plan, these new workers, often referred to as the Gen Y investor, failed to follow through on the effort with interest of their own.


Companies are still trying
It is not as if the companies aren't trying. Designed to simplify the investment decision process, more than half of the companies surveyed attempted to educate these new workers, appealing to this younger investor with the offer of online investment guidance coupled with online investment advice and managed accounts. Compared to 2010, when just 28 percent of employers offered managed accounts, this is a noticeable increase in what is often considered the most basic of fiduciary responsibilities.

Plan sponsors are undaunted by the lackluster use of these plans and continue to offer additional levels of services which include investment modeling and even attempts at profiling how what you have accumulated will be spent down once their employees do retire. Younger employees seem to accept the target date fund, the primary choice for the auto-enrollment effort despite the questions surrounding the viability and transparency of these funds.

Reinstating the matching contribution has helped some of these plans. By the end of 2010, in the wake of the Great Recession, 23% of the companies had stopped or lowered the amount of money the plans contributed. Over half have decided to add these matching contributions back to the plan in 2011 with about 18% of the 23% who stopped toying with the idea of bringing the matching contribution back.

Other incentives to get these workers to contribute more to their 401(k) plans are not so much incentives as elimination of other benefits that future retirees once banked on for their retirement. Fewer companies offer medical benefits to their employees and some have even raised the current cost of health insurance to employees to offset the cost of helping with retirement, a trade-off that seems counterproductive. Others have simply frozen their pension plans pushing workers to seek the alternative self-directed method of ensuring a secure retirement.

Some of these moves have actually forced the employee to invest more and the latest numbers published by Fidelity point to an increase in the average balance in these plans. yet the average balances, now estimated at the 2010 year end were still far below where they actually needed to be. If you had invested steadily over the last decade, your balance, according to Fidelity is around $180,000. If you are within fifteen years of retirement, you are still hundreds of thousands of dollars away from what is often considered the optimal balance.


The 14, 16, 18 Rule
For most investors - I prefer this term to overused "saving for retirement" - the accumulated balance in these plans should equal 14 times your last year's salary. Aon Hewitt points to a need for 16% of the salary of the 31 to 45 year old group as the goal, which includes the total amount of available benefits such as Social Security and any pension plans they might have. Because the youngest workers can count less on these additional sources of income for retirement, they will need 18% of their salary to make retirement comfortable.

If plan participants at Fidelity are any indication, these plans are moving in the right direction. Over a million people involved with the Fidelity offerings have accessed their online tools or simply called for advice. According to Beth McHugh, vice president of market insights at Fidelity, the answer to how much you will need still depends on the worker taking control of the plans. She suggests "At the end of the day saving at appropriate levels, saving continuously and ensuring that you have the appropriate asset allocation are the most critical components to help ensure that you have sufficient savings for retirement."

But contribution levels still remain lower than they should be. The average participant has increased their contribution, but from a paltry 4% to a better 7%. Yet this increase is still far from what the investment and retirement community would like to see workers contribute. Add to that the lack of portfolio diversification once they are in the plan, little effort by the participants to rebalance on a regular basis and for older workers, adequately defining the risks they are taking with those investments all increase the chances that these plans are not doing as well as they could.

Some of the uncertainty of retirement needs may be the problem. Not knowing the impact of taxes (although there has been an increase in the amount of Roth 401(k) options in many plans) and the negative effect of inflation. workers are underestimating what they might need and if they are making educated guesses on that number, taking too many risks too close to retirement to try an offset those issues.


The Selfish Approach
Perhaps the worker should instead frame the plan in a more realistic way. Most advice offered on how these plans should be spent down once you retire involve a suggestion that returns on the plan in a post-employment environment should be all that the retiree tap. This avoidance of using capital - in other words protecting the balance in the plan at all costs, may have created a greater worker angst than is needed.

Focusing on preserving wealth as an heirloom is not how these plans should be calculated. In a era of less, the retirement planning employee should be focusing on what they will need first and not so much on what they might leave to their heirs. While prudent lifestyles are still a great help - both prior to and after they retire - being selfish in your projections is not necessarily a bad thing.

Tell Me a Lie: Retirement Planning and the High Net Worth Boomer

You would like to think that we are all truthful. But that may not be the case. Are Baby Boomers, more specifically those considered high net worth, telling a story about their retirement that isn't quite truthful?

Oscar Wilde probably said it best: "What we have to do, what at any rate it is our duty to do, is to revive the old art of Lying.” Nowhere is this resurgence in the falsehood more prevalent than when we tell a surveyor about our finances. When they look extremely bleak, we tell them they look even worse. When they look okay, we tell them they are really good. It is in our natures to tell lies considering we do it when we smile.

Evidently, a group of wealthy Baby Boomers told a survey group from Bank of America/Merrill Lynch that their retirement not only looked promising but was much better than their parent's retirement was. This is pretty lofty talk from a group that just a couple of years ago was not one bit happy with where their portfolios had gone in the wake of the financial meltdown. Now, $250,000 in investable asets is enough to warrant such retirement superlatives as "freedom" and "relaxation".

What changed? True the markets recovered over the ensuing couple of years. But I doubt that this had anything to do with it. many of these folks, like all age and wealth groups did, panicked at the sudden rebalancing of their portfolios by market forces. Unaccustomed to an all-inclusive debacle, many moved into much more conservative type investments and in the process, created their own mini-bubble in the bond market.

The rest of us moved into target date funds, a sketchy hybrid of funds designed to rebalance our aggressive natures for us. If you are older, the fund you plopped the remaining balance of your 401(k) is close to your age - so you too may have benefited from the updraft of conservatively invested enthusiasm. I wrote about this relationship with the bond market a couple of days ago suggesting that if their isn't a bubble in the bond market, it is because it won't pop when it reaches the end of its run; it'll hiss itself into normalcy.

It may be that this group has a better restructuring plan in place or they are simply lying to themselves - and the surveyors. Consider this: $250,000 in investable assets was consider the borderline between the rest of us schmucks and the high-net worth individual. I'm sure that this number is not even close to the actual investable assets these people had. It is our carrot.

One thing that stands out with the group surveyed is the change in attitude about what retirement is. They mostly believe working in retirement is a way to stay physically and mentally engaged. And for many, it is. For those with less than $250,000 in investable assets, it often isn't the case.

But these high-net worth folks worry about the same things you do: the cost of health care, the cost of children still living at home and that there portfolios, no matter how well managed, might not be enough. So they smile when they say they have it better than their parents and do so while lying about how much better.

And these high-net worth folks are not short on advice, even if they didn't take their own. Get a financial adviser as early as possible, they suggest and of course start early. Good pieces of hindsight advice that they were told as they began their working careers - and didn't follow.

About this advice to use financial advisers earlier. Then there was a survey conducted in 2006, when things were going great: housing values were appreciating, the markets were humming along, and early retirement was well within reach or it was assumed to be. And the results show a complete turnaround in thinking from then to now.

Back then - keep in mind these were the good times - another survey was published: In it, the following: "According to a new MyWay Investment Advisors (MWIA - an independent financial planning and investment advisory firm) survey, 98% of respondents would change the way they work with their advisor with 43% saying they wanted to change the amount they paid for the financial advice and services. This compares to only 13% of advisors who would look to improve how they currently operate, including pricing for clients.. The survey focused on how individuals would like to be treated by their financial advisor or investment professional and how they would like to pay for those services.

"The survey targeted the individuals with annual incomes greater than $75,000 and $150,000 to $600,000 in invested assets, including 401Ks. A duplicate survey was sent to financial planners, investment managers, insurance sales people and other financial industry professionals to compare responses." Why has this advice changed? Pricing and the way pricing is structured has evolved. Yet the higher the net worth, no matter what you pay, you pay more than you should.

So which is the truth? Are they happy now or were they happy then? The most telling piece of info coming from that survey: "When it comes to financial advice, however, financial advisors isn't where most of those surveyed go for information. Only 27% utilize financial advisors while over half (56%) get advice from a friend, publications or on their own.

"Of those that have a financial advisor, only 18% are happy with him or her. a whopping 56% say they are dissatisfied and 23% still have not made a decision."

This means one thing. We can no longer look to those we consider net-worth wealthy for guidance in how to become net-worth wealthy ourselves. Retirement has become a reality and an illusion. It is something we want and fear, something we strive for and are repelled by, something that is both possible and impossible. Yes it is a conundrum.

But it is your puzzle to figure out. And the simplest way to do that is figure out if you are willing to live on less than you have now. You don't need a financial adviser to tell you that you probably haven't invested enough. You know that you are probably wrangling more debt that you would like. You know that your contribution to your 401(k) is les than it should be. And you know that your goals concerning retirement are lofty than they are on paper.

Your balance sheet needs to be revisited and often. You need to double your 401(k) contribution now, no matter what age you are. There are numerous, almost painless ways of doing this including channeling the tax relief on your Social Security payroll tax (2% for the next two years) or simply increasing your contribution by 1% for every month of the upcoming year. You have the pieces to solve this puzzle. It all depends on how much you want to lie. The rich can. So can you.

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

The High Cost of Good Health in Retirement

The High Cost of Good Health in Retirement
The oddest item of all, being healthy in retirement, while less painful and more convenient than the being unhealthy, is more costly in the long run. This may have been something you have already considered had you run the numbers the way Boston College did in a recent report for the Center for Retirement Research. You may have said that health care is going to cost something and if you were typical, you went with the averages of about $220,000 per couple over the remaining years in retirement.

But good health could point to longevity. And longevity means additional years of costs and the real probability that during those added years, you will get something you hadn’t bargained on getting.

Now the knee jerk reaction would be to ask yourself: “why bother?” And this would be reasonable. If you can’t come close to estimating this cost (it is tough enough trying to figure out tax liabilities, inflation’s impact and the future of the investments you hold in your retirement accounts), what should you do?

Can You Invest Enough to Cover those Costs
You could try to add to your investments and hope that you have added enough. The problem with trying to offset insurance costs is you may never know whether you need it. But if you don’t have it, the costs can be very difficult to absorb and doubly so if you are in the fixed income world of retirement.

More here.

How Much Control over Your Retirement Plan Do You Have?

Today we are going to tackle the self-directed IRA. We all know what an Individual Retirement Account or IRA is. Briefly, it is the retirement tool for those of us who may not have access to a 401(k) that defers taxes for retirement. The deferring part is not really as complicated as it seems. In a 401(k), you have your contribution taken out before you pay taxes; in an IRA, you pay with after-tax money and then take the deduction when you file, basically subtracting the taxes from your contribution to be paid later.

How is a regular IRA different than a self-directed IRA?
The differences are not as obvious as the title of these products sounds. An IRA is an investment chosen by you and you direct the funds to it for your retirement. It seems like this should be called self-directed but in reality, it is very different from what the IRS views as a self-directed IRA.

In a self-directed IRA, you become the manager of the whole process. Rather than simply sending money to a mutual, fund company, the most common sponsors of IRAs, you direct the underlying investments. In the previous example, the institution is the middleman. In a self-directed IRA, the institution, whomever or whatever one you chose, does what you tell them to do.

Learn more about self-directed IRAs.

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Retirement Planning and Deficiency Judgments

Retirement is tricky enough without having to carry bad decisions into the future.  It is my greatest hope, particularly for those close to retirement, that your house is secure, with any luck close if not already paid for and there is no chance of foreclosure in your future.  But things happen and fates change.

Last Friday, on MomsMakingaMillion radio with Gina and Kat, the topic of deficiency judgments was discussed in the MoneyTips section of the show.  I know something about foreclosures and wondered if what was being discussed could be prevented and how.

In a previous article here, we looked at the possibility of walking away from your home. The obligation, we argued is one that involves two parties: lender and the borrower.  Every financial contract, we all know comes with obligations.  But exactly how those obligations are applied can vary from state to state.

Gina, who resides in Nevada, gave fair warning to the homeowners in her state about the pitfalls of owing money long after you have been foreclosed.  Called a deficiency judgment (the only states that have no right for the lender on the books are Massachusetts, Mississippi, West Virginia and Delaware), this action theoretically allows the lender to pursue you for the balance of the loan due after the house has been foreclosed, .  While on the surface, this seems like an additional blow to your already decimated financial world, but there are steps that must be taken and certain rules that protect you.

Do you know about deficiency judgments?


Paul Petillo is the Managing Editor of Target2025.com

Don't Forget Your Retirement Plan when Starting a Business

Many of us have the urge to take our futures into our own hands.  Rather than look for a conventional job, we strike out on our own and start a business.  While this is an exciting and sometimes frightening idea, we need to keep our retirement plans in focus.

To do this, you will need to consider a great number of options.  The sole proprietorship, the small business of choice for the vast majority of us offers the retirement planner a great deal of latitude.

To find out just what options this sort of plan offers, visit our sister site Target2025.com for the answers.

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

Why Some Company Matches Fail to Match Your Objectives

Just because there is a company match doesn't make it the match you should take.

We know about diversity.  We know about spreading the risk.  We know that we are supposed to be investors, eyeballing retirement. We should know better. Why then, do we continue to take the offering of the company's stock in our 401(k)?

There are several reasons.  First of which is how your company’s 401(k) plan in structured. When an employee becomes eligible to begin investing in the plan, they often find that the company match, the funds the company invests with you, up to a certain percentage, is often only offered in the company’s stock.  And because we are always suggesting that the employee take the company match, at the very least, they take our advice and begin to load up their portfolio with shares of their employer.

Often, when this sort of offering is available, it is one of the few buy-and-hold restrictions in the plan.  That means that if the fortunes of your company drop, for whatever reason – poor quarterly earnings, lackluster forecasts or simply a cyclical turn of events, the employee must ride out the downturn. This can be a big deal if the employee is long-term and because of that, has a huge chunk of their retirement tied up in that stock.

More on owning stock in your company.

Paul Petillo is the Managing Editor of Target2025.com

Retirement Planning: Is It More Than We Thought?

is the anticipation of retirement clouding your vision? Do you make projections about your 401(k), how much it will be worth and how much of the optimistic balance will be available to spend? Do you know the difference between accumulation and decumultation?

Probably not. Today, writing for the Boomers Retirement blog, I discuss some issues that you may not have known about your retirement forecasts. It is as much about what you enter retirement with (liabilities) as what your 401(k) balance can support.

Read the full article here.

Can You see What They See?

It Should be Easier
There are numerous obstacles that keep us from building enough wealth in our 401(k) plans. The first is as simple as beginning to invest in your retirement future. This is stressed frequently and with good reason. The earlier you begin investing, the better situated you will be for retirement in the far-off future.

The second hurdle is how much to invest. I suggests that no matter how poorly a plan you have with your employer, setting at least 5% of your pre-tax income (a number that does not have much of an impact on your take-home pay) is better than not investing at all. For first time 401(k) investors, who may need as much of their paycheck as possible, this is a good start.

The third hurdle is the company match. This is used as an incentive to get you to put some money away for your future by offering to match the first couple of percentage points. Some companies do not do right by their employees when they match only with their own company's stock or if they have lowered or withdrawn the match due to the "economic downturn".

And the last hurdle to these beginners is where to put their money. Not all plans are created equal and not all investments in these plans are worthwhile. That doesn't mean you should ignore the opportunity to invest, it simply means that your choices are not as good as they could be. This is particularly troubling if you are an older investor who may have gotten a late start or if you have changed jobs and are now enrolled in a less than adequate plan.

Finish reading this post here.

A Year in the Life of Labor

I would be willing to wager that the vast majority of workers had no idea what the unemployment rate was a year ago on Labor Day. It would probably be a safe bet that most of you know now.

Our perception of what labor is has changed greatly in the short space of twelve months as we have watched the financial world shift from one of prosperity to one of uncertainty. This has affected one in ten Americans while shattering the hopes and dreams of the remaining workforce. Retirement goals have been altered. Companies have moved from prosperous thinking to cost-cutting seemingly overnight.

A year later, after the collapse of Bear Stearns and the pratfall that was Lehman Brothers, bailouts and bad investments headlined the news reports. If you had no idea who the head of the Treasury was, the evening news was there to tell you. So much financial information was suddenly dominating the news that it became pornographic: impossible to describe but easy to recognize.

For months, you got up in the morning and went to work, weighed down by the possibility that you might be among the fallen 10%, that you might be forced to take a wage cut or freeze, that your mortgage might not be sustainable and that all of the stability that kept you moving forward was no longer solid footing. But you went anyway. You didn’t need to be told things were bad and possibly getting worse; you simply felt it. It was palpable.

So a year later, as we observe another Labor Day, most of us wonder whether we will ever be the same. Will we ever get back to the days of endless optimism, hope for the future and the possibility that our children will no longer see the anxiety in our eyes?

Capitalists observe Labor Day in a far different way than those employed. Abraham Lincoln once said: "Labor is prior to, and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital and deserves much the higher consideration."

Business disagrees. And labor laws suggest that they have the lobbying power to make those differences greater, in essence creating a far wider schism between who produces and who finances that production.

2009 we will come to find out is the year when the recession has subsided. Yet, the replenishment of those lost jobs may not come for another twelve months. This will be referred to, long after it is over as a jobless recovery. This is an economic reference that flies in the face of what normally occurs. When things begin to turn around, businesses are forced to ramp up production to fill the void in inventories. No one can sell an empty shelf.

But so far, and in all likelihood, in the near future, this will not or has not happened. White-collar workers are seeing work loads increase, sometimes due to attrition (workers retiring or taking buyout options) and layoffs. Unions around the country, particularly those associated with troubled businesses such as autos or publishing have made concessions that during the good times would not even have been considered.

Rest assured, we did not create the situation we are in, despite the reasoning the many employers, economists and financial experts offer to the contrary. Their view of who we are, albeit convoluted, is based on a long history of class struggle, the belief that the poor are poor because of who they are and not what they did, and the fact that the land of opportunity, something all business suggest is applied equally to all workers, is alive and well.

The result of this type of thinking, supported by poorly written histories of labor and the struggles of unions over the last hundred years has deepened the stratification of our economy.

In 1970, the classes and the incomes associated with status in the United States closely resembled those of Canada. In the short space of forty years, the resemblance is more akin to those social classifications of Mexico. This is due in large part to how those in business (lobbying for empathetic support from the government) view the root causes of poverty, the opportunities that this land was supposedly blessed with and the chasm that has grown both in terms of incomes and jobs.

This Labor Day should be celebrated as a turning point. We have a government that is doing what no other administration has ever done in this century. And while the cost is high, the result will be a change in attitude in how labor is viewed by not only the workers but also those that employ us. It may be short in duration, as many financial cycles tend to be. But it will be a lesson worth noting long after 2008 becomes a footnote in the history books.

Retirement Planning: What the Financial Planners are Thinking

We have a multi-dimensional problem when it comes to retirement thinking. We want to pinpoint numerous factors in our retirement plan, when in fact, the effort might be wasted. Much like the physicist who wants to measure a particle, quantum mechanics explains that it cannot be done, in part because it would change the particle by trying to stop it. Making a retirement plan pause gives you no measurable assurance that where you are right now is going to be the right move somewhere down the road.

These financial planners, their opinion which many will still turn to even if their advice led us down this road in the first place, are still called upon to give direction. I have neighbors who fret over the fate of their retirement accounts yet as soon as a son or daughter wants to make a financial decision, the first step is to set up an appointment with a financial planner.

Now these planners are looking for a way to regain your trust - many still have your business but largely feel uncomfortable with the disappointed looks on your faces. To address this, they have begun offering some suggestions, which although not new, they are a shift from too much risk to finding a way to eliminate what they see as unnecessary risk.

In a recent article to financial planners, The Investment News offers some suggestions that will no doubt be taken by their lobby group to Washington. They think that Social Security will remain a part of a retirement plan. They do concede that fixing this program will require not only a cut in benefits but an increase in taxes. Not very imaginative but keep in mind, this group is not likely to waste too many braincells on a program that produces no profits.

Instead, they are focusing on readjusting their client's portfolio from (age-appropriate) risk to vanilla risk (read that as a long-term relationship with folks who seek a way to get ahead by taking a much slower vehicle). This could add as many as ten years to your working life.

The net effect of working longer - besides working longer - is a more fully funded plan. But that funding will not have realized its full potential without a certain amount of risk. Many planners, as they restructure your plan for you will move your money into more costly types of investments that, on the surface, offer less risk.

Not all index funds are created equally and the shift into target dated funds does not come cheap and in some cases, are not a proven way to soften risk. Index funds can suffer from what is known as style drift, a way to enhance the return of the index by taking on an actively managed methodology.

Target dated funds are still suspect. There is no proof they do what they promise and do it for less cost. I have had problems with fund companies selling these funds as the risk free, cost effective ways to save the retirement community. And planners have become one of the forward sales makers for this product.

Adding to the list of products this group is looking to sell to lawmakers is the right to annuitize retirement income at age fifty. The thinking here is so simple, it is almost backward thinking. They are suggesting that the investor in a defined contribution plan take their money and essentially take it off the table, guaranteeing it will be there when they retire. This would allow folks who were unsure about the future to "buy" an annuity, with its high fees and suspect growth aspect instead of switching to a lower risk platform.

The suggestion that employers begin a retirement plan for all employees that have failed to do so and docking pay to fund it, seems, at least on the surface, to be a good idea. A bit Orwellian but the strategy is worth looking at for all workers before something like this becomes law. After that, the employer may pick the plan and in doing so, may not fully understand their fiduciary responsibility. But then, they would probably hire a planner.

Retirement Planning: Bouncing Back

For previous articles of interest on how to manage this current financial crisis, please visit our previous blog entries collected here at BlueCollarDollar.com.

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The most common question asked of me these days is when the markets will bounce back. Even with numerous issues plaguing the everyday lifestyle of the average American (debt, housing, and jobs to name just a few), the strength of the markets, in particular, that of their retirement plan, is still weighing heavily on their minds. While such focus and energy would have better used in the years prior to the current downturn, it seems to be a measure of confidence that things will get better.

But tying your mood to such fickle places as the market can be difficult at best. What we hear on the evening news and through web reports on the subject is a daily moving number, sometimes up and just as often, down. But like all measures, it depends how much on where you stand as to what you see.

To simply look at the popular Dow Jones Industrial Average (a grouping of the largest industries in the US and representative of those industries) is not enough. Although when hear those numbers, they can offer hope and despair, and lately, at the same time. Knowing that the value of the Dow is down significantly from its plus 14,000 point high last year to its recent rebound to over 8100, gives the average sideline viewer hope while at the same time, dashing that hope.

But a lot goes into the making of those numbers and the theory of how long it will take this index to get back to even. Dividends play a role in how the index performs but does not show up in the index's number. Just about every member of the Dow has cut its dividend as its share price fell. This keeps the percentage of shared profit (what shareholders get in return for holding the stock is a portion of the profit, calculated as yield and divided into the share price - a $1 dividend on a $20 stock is a 5% yield). Sometimes, the drop in the DJIA does not stop the dividend payment from dropping. This increases the value of the stock even if the share is worth less - in the index.

Deflation (a decline in prices because folks aren't spending and credit is too tight to use borrowed funds to buy products) or inflation (the effect of a currency being worth less than the goods it previously purchased) can have an effect on the index but it doesn't show up in the number.

And because the Dow represents only 30 companies, it is not often indicative of the market as a whole. And because the Dow changes over time, with new companies being added while older ones are deleted from the index. One of the biggest gaffs the DJIA ever did was removing IBM, which while it was absent, performed better than the 30 in the index.

So when you hear that the market is down, don't fret. It will recover. If it does so in an historical fashion, it could take as little as four years to regain its former glory and as long as eight. But rest assured, these are simply efforts at looking back, adding in some often excluded facts and mixing it in with a little hope.

Which is why many folks who ask what they should do often here me say - do nothing but focus on fees and expenses.

Some Retirement Account Suggestions

A recent Boston Globe article offered this: "When millions of U.S. investors open their second-quarter retirement account statements soon they might be disappointed with their dividends, analysts say.

"Most investors will find their stock and bond funds in 401(k) and individual retirement accounts sank between April and June amid skyrocketing fuel prices and a slowing economy." The temptation many fear is that these individuals will begin tapping those plans, seeing the balances as better used for day-to-day living expenses rather than day-to-day expenses in the future.

You should avoid touching that 401(k), now posing more as a 201(k) after recent market turmoil for two reasons: One, if you are well away from retirement (say fifty or below) you are looking at a long time for the markets (and your savings tied to those markets) to recover.

The second reason has more to do with why. If it is for debt relief, then scale back your contribution and use the extra cash towards debt (contribute only what matches). If it is for market relief, reduce the fees in your plan and index your savings. Normally, I suggest index funds be held outside your defined contribution plans for the better tax treatment but with the markets sending mixed signals and more aggressive funds failing to offer fee relief, perhaps the switch would make the losses less painful.

These times do make pensions (defined benefit plans), those antiquated savings stabilizers (like Social Security) look awfully good. I just hope next time some politician suggests privatization, that we remember these trying times.

Where You Live; What you are Worth - Retirement Planning and Credit

Do you live in a state where housing has taken a big hit? Do you live in, near or around a place where credit has all but dried up and foreclosures have appeared like so much acne before prom night?
Have you felt immune to the downside fallout of those events because you pay your bills (and more importantly, your mortgage) on time, have little or no debt and money in the bank?

The credit crisis is about to make itself known to millions of Americans who otherwise would have felt as though all of that bad financial news was not their concern. Even folks who have pristine credit, the very ones who use at it is supposed to be used and were proud of the lending power (credit limit) these credit issuers gave them. You were a good risk.

Lately though, credit card companies are estimating, or should I say, re-estimating that risk and its worth to their bottom line. Bad loan decisions and the overall tightening credit market has forced many lenders to rethink their generosity and with that, how much money you can borrow. What was previously a five figure credit limit on home equity lines and credit cards has been reduced often by as much as 90%.

What can you do?
In most instances, nothing. If the financial institution you do business with decides that there is overwhelming risk in your ability to pay off balances, even if you have done so faithfully in the past, the credit limit can and in many cases, without warning, be reduced. Primarily, this seems to be targeted towards small business owners who rely on those credit limits for business and travel decisions. But it is finding its way into the average person’s financial lives as well.

If there is so much as a hint of financial stress in your credit score, even if you don’t live in a state with a high degree of foreclosures, you will eventually come under scrutiny. Best thing to do is maintain your credit score. Do this by paying your bills on time and by communicating with your lender. In many instances, they would like to assess their risk and remedy the situation to not only their best interest, but yours as well.

They may lower or waive any fees on the account or renegotiate the terms of the current loan. Do this by threatening to shop around. There are some better risk-situated financial institutions willing to lure business away from competitors.

The last thing you can do is reconsider the project you might be starting around the house. Determining the value of a remodel has gotten more difficult with the best changes coming from structural improvements rather than upgrades to living spaces. Exterior maintenance and things like electrical, insulation, and plumbing will be more worthwhile fix-it projects than a new kitchen or bathroom.

Small businesses might reconsider the need for certain business trips in terms of return on that investment of time. In some cases, the credit companies may be unwittingly making a business decision for you.

Taxes and Retirement Planning

As the late George Carlin once said, “the poor are only there to keep the middle class going to work each day.” And so it goes, we are off to work each day, hoping beyond hope to scrap by without having your life’s work stripped away by health insurance costs, lack of creditworthiness and kids and/or parents who are becoming increasingly dependent on your incomes.

And the one hidden menace, lurking in the background is taxes. Sure, I focus a great deal on the influences of the economy at large, the subtle impact of inflation and the political landscape of money, but taxes, the thing that no one likes to admit keeps the public engine running in communities across the country, are about to increase. But will you notice?


On the Local Level
Revenue for state and local governments ebb and flow with the state of the economy. When property values jumped dramatically, taxes tied to the assessed value of those home filled the coffers and made new project planning easier. But as those values decrease, those revenues will still be needed to keep the communities running even if its residents feel as though those taxes would be better kept on their own side of the balance sheet.

Some states are making swaps, using one revenue source to pay for another that may not be doing as well. A good example of these kinds of swaps is cigarette and alcohol taxes increasing as property taxes are frozen (usually at 1-3% of assessed value), capped or cut.

Expect sales taxes, if your state has them, to increase over the next several years. This does help tourist rich cities to capitalize on outside sources of revenue but for the most part, it slows the economic growth by taking spending money from the consumer.

Look for an increase in amnesty programs, events designed to get delinquent taxpayers back into the system using the lure of payment without penalties of late fees.

On the Federal Level

This is the big unknown question. Senator Barrack Obama has made I clear he believe that the families with household incomes exceeding $250,000 should be paying what he refers to as “their fair share”. Investors expect that this group, the ones most likely to support the capital gains tax of 15%, to pay more for the sale of stocks if he is elected. (The prevailing belief is that even if Obama is elected and increases this tax on the wealthiest of families, it would be capped at 28%.)

Senator John McCain on the other hand, is offering much of the same program that has been successful, but only if you ask the right people. Mr. Obama’s plan would force many folks who have not diversified, specifically those with illiquid assets, to do so before the new president takes office.

If Obama gets his way, states and local municipalities would see a huge influx in revenue from tax-exempt municipal bonds. This can be tricky territory though. Some munis trigger the alternative minimum tax (AMT) because they pay interest.

The Effect on your Retirement Plan

Unless you are among the highest wage earners, your approach to retirement planning should be focused not so much on how much is in the nest egg but how much income, less taxes and inflation, will allow you to be comfortable. That number is generally different for each of us and unfortunately is based on a perfect situation (usually calculated without considering taxes and inflation).

Most of us can expect to take home – after retirement – a paycheck that is 30% lighter than we estimate (3% for inflation – modest and hopeful guess, 15 – 20% income taxes on earnings from deferred income sources like pensions and retirement accounts, and 10% on property and local taxes).

That means you will need to save an additional 30% above what you are currently putting away for your future or, lower your expectations on how much you will need.

We can count on one thing: Your elected officials feel your pain but can do little about it. Taxes will not go down no matter whom takes the helm in Washington or at the local level. The best you can do is plan for the worst.