A Boomer POV: Retirement

This is the point where two facts collide. You hear a lot of white noise about the so-called delayed retirement, the I'll-have-to-work-longer-because-my-plan-was-undone tales. Those headlines create anxiousness amongst even those who are prepared to retire as planned. This group second-guesses the plan they have in place even if it is viable. And then you also hear the unbelievable number of retiring Boomers that do take the leap, a number that doesn't seem real: 10,000 Boomers are reaching retirement age each day.

Who are these people? The unprepared and the prepared hurtling headlong into older adulthood. They both had expectations of retiring based on what can only be considered now as unrealistic math. They set goals and they weren't met as planned. A few got it right. Remember, there's no shame in that miscalculation. Folks have been doing it for decades. But your plan is all you really care about and if it hasn't met your expectations, which in many instances were a bit lofty, you resign to work longer. This is where the facts collide.

You know all too well that simply working longer will add to the amount of retirement income you will have but only if you significantly increase your contributions. Few resign themselves to do both.

But the other half of the equation, the Boomers who do retire, are often caught in the same anxiety ridden place. They question whether they made the right choice and more importantly, whether the money they have amassed will serve their purpose, remains hanging over every plan as an unknown.

That purpose is often clouded with not only the unpredictable cost of longevity but whether they might have enough to take care of their heirs - a serious consideration among a wide swath of retired adults and those about to retire. This last consideration is entertained by women more so than men, statistics have uncovered, which is often surprising. Why? This same group of women approaching retirement has often saved less, another unfortunate statistic concerning women and retirement.

Those that do retire should consider where they retire. And while there are many suggestions as to what to do and how to go about it, but a quick survey of your current surroundings will offer a great many answers to your dilemma.

For instance, seniors or those about to become seniors often fail to inventory the services they may need. Once retired, your daily life will require things you had previously not considered. More than just the availability of medical services, more than the infrastructure of city services such as public transportation and well-lit and well-patrolled neighborhoods, your current location needs to stimulate you or at least have accessible stimulation to keep you mentally sharp and involved. This is not how many American cities were designed. Far too many cities and their suburbs require a car. And while this may be seen by many older Americans as a freedom, not being able to drive can imprison some seniors if they find where they live too far away from these activities. Only vast sums of retirement income can change that one item and few seniors, who essentially are on a fixed income, want to reach for their wallet or purse to pay to go shopping.

To pre-Boomers or those who are still working, where you live is not often what you can afford. If you live in the city, chances are you rent. If you live in the suburbs, chances are you have a mortgage. If you have a mortgage, chances are you can't afford it. That's a lot of "ifs" but they are an approaching nightmare for those about to retire.

While many of believe that the cities we live in should adjust to us and our current and future retirement needs, it probably won't happen soon. So retirees look to communities that cater to their needs. This ghetto-izing of seniors, much like Florida and Arizona is not only unappealing to many Boomers, it is not as healthy as it first appears. Sure, these senior-only communities do provide like-minded companionship, concentrated services and accommodations that cater to gradual aging, but they are often culturally void of the stimulation that all walks of life can provide. Being isolated is not the answer.

So what is? Cities are struggling with their finances and as a result are cutting back on services that once were taken for granted. We might be living longer but in far too many instances, your health may compromise that statistic or impact the quality of that longer life. And the cost of where you live - assuming your mortgage is paid off before you retire - is not getting cheaper. Add inflation into the mix and you have eliminated all but the most obvious choice: you have fewer options.

Of course, you can stay put in a house that might be too big and too costly to maintain. This will gradually eat away at your fixed income and reduce your opportunities to engage with the outside world. Now one plans on spending their day at McDonalds sipping bad coffee with fellow seniors, no matter how well-lit, no matter how inexpensive the house brew and no matter if the loitering rules don't apply. But take away any portion of that spendable income and you limit the choices.

Where is the right place? While there is no firm answer, you do have options. For instance, if family is important to you, be sure your family shares this thinking as well. The dynamic of marriage - and I am speaking of your children's marriage - can create some confusion. Deciding that you can rely on your children and their spouses for the help you might need is something you need to discuss well in advance of retiring.

At some point, one of your kids or their spouses may find you in their care. Perhaps not in the day-to-day sense or even the long-term care situation, but in the need to check-in, help with errands or assume a financial role. This needs to be discussed in advance, a discussion that should be instigated by you. This is no easy discussion.

You do need to tell your children what you expect from retirement, even if you are unsure. Answer the hard questions (can you afford to stay in your house for instance) and when the time comes, unfold your finances for them to see. Let them know where you stand and what your plan is.

Boomers will be sold a retirement that is unlike any other before them. If you live longer as the statistics suggest you will, what do you expect of your surroundings? What role does your community play in the decision? What role will your kids have? Retirement is much more than simply amassing cash. It is amassing support. And believe it or not, that is old school thinking, a throwback to the time when retired family members depended on their kids for everything. But those kids, who may not be thinking along the same lines as you need to be involved now, rather than later.

Leverage and Retirement

Over the years I have written about the topic of retirement planning, I have witnessed some incredibly crazy thinking. Many of those thoughts have come home to roost often too late for the investor to do anything to fix the situation. We plan, we tell ourselves, to retire at a certain age with a certain amount of money based on a certain withdrawal rate.  But those plans are often dashed by unforeseen events that, in hindsight we should have anticipated.

Recent reports have pointed towards an increase in employee contributions to their 401(k) plans. These upticks, however slight lead many to conclude that we are starting to get the message. But which message are we holding on to? Is it the need to simply save more because we know the chances are we will need more or is it the result of some other encouraging news? I'm inclined to go with the second choice.

Retirement planning is a whole package endeavor. In other words, simply putting money away for retirement is not enough. Numerous other pieces of the puzzle come into play and this is what is often ignored. The effort is noteworthy only if you have developed a budget that is actually less generous, forcing you to face the reality of an income in retirement that is not the same as the one the you had while working.

This income reduced budgeting is practiced by too few close-to-retirement planners. At no time in the history of retirement planning - and I'm going way back to the generous days of the defined benefit plan or pension - was the payout at retirement designed to replace 100% of what you live on now. The number was actually closer to 70% replacement and that was only if you had worked within the confines of that pension for thirty years or more (and it was not impacted by changes from the company). The remainder was to be supplemented by Social Security.

But with advent of the defined contribution plan (401(k), 403(b)), with the responsibility for funding your retirement placed squarely on your shoulders, we were forced to face the possibility that 70% of our current income would not be replaced. In order to get those kinds of post-work rewards, we would have had to invest 12-15% of our pre-tax income, every year without fail, in good markets and bad. For too many people with this plan, that sort of budget-busting restriction was simply too much to embrace.

We are to be forgiven for our human-ness however. We make mistakes and follow the herd - when they sell, we sell and when they pile in, we follow. In both instances we turn our backs on the whole concept of retirement planning: steady and ever-increasing contributions without consideration for what the overall market is doing.

Our employers didn't help much either. They gave us matching contributions, took them away or reduced them, and when they re-introduced them, they were far smaller. And we misinterpreted this as a sign that they knew something we didn't and mimicked their actions: we reduced our contributions when the matches were lowered and increased them when they were raised. As I said, we can be forgiven this tendency but we won't be absolved of this sin of remission when we begin thinking about retirement.

One of the other keys to the seemingly good news about an increase in contributions in 2011 is backlit with some additional news. Auto-enrollment helped to raise the account balances of the overall plan (and as employment improves, so will the news that we are using the plans in a more robust way). But those auto-enrolled new hires were placed squarely in the plan's target date fund of choice.

Long-time readers know about my reservations with these funds. New readers should note: target date funds are often less transparent than stand-alone funds, the underlying portfolio can be suspect, the target date may not be far enough in the future to be realistic and to date, the rebalancing implied in the fund is not determined by any specific guidelines. In other words, those who are put in a target date fund via auto-enrollment would be wise to get into an index fund (or four raging across a variety of markets) as soon as possible.

Those folks, the youngest among us who are the most likely candidates for these auto-enrollment options can make changes that will get them much closer to the goal. Older workers, however don't. And they know it. But they have some advantages, at least in their mind that the younger worker doesn't: equity.

And that equity in their homes, combined with the historically low interest rate environment has given many Baby Boomers a second option: to borrow against their homes and take the refinanced money and put into their retirement accounts. Is it a good idea or one that is bound to backfire?

Three things make it risky. One the equity in your home may not recover. Older homeowners who tap their home's equity are doing so at the risk of increasing their mortgages at a time when additional debt, no matter how inexpensive is not prudent. Two: They are eliminating a safety valve that could be used if retirement got too rough: the reverse mortgage. And third, if they are forced to or simply want to sell, the equity in their property is not there to give them a downpayment for new housing.

Leveraging your home to finance your retirement account does come with some tax advantages though. Just because one account increases as one is leveraged doesn't necessarily give you a balanced approach. In other words, there are "veiled risks".

You will still need to allocate your portfolio to perform better than the cost of the new loan and the interest rate you pay. This means that year-over-year, you will need to do much better than you may have calculated. A four percent mortgage added into the cost of the refinance (another one percent) added to the rate of inflation (another three percent if it holds steady) means your portfolio will need to return north of eight percent year over year - without fail.

The only way to give your retirement income any sort of sure footing is to increase your contributions by a much wider margin than what has become known as the average - 8% - and pay down your mortgage.

Fifteen percent is still the optimum contribution rate and even that number will give you only 75% of your current income in retirement - provided you saved for twenty years or more. Paying down the mortgage reduces your overall cost of debt service while increasing your equity.

How Going Back to College Impacts Your Retirement

When you send your son or daughter off to college this year, the person sitting next to them in that lecture hall is more likely now than ever before to be your age, or close to it. If the rates of college borrowing are any indication, forty year olds and older are finding themselves back in school. While attending college has been touted most recently as a way to add ten-years to your life, or at least your mental health, these students are more interested on improving their chances at getting a job. Not a better one; any job.

The stress facing an older worker or recently unemployed person turned student can be monumental. There may be numerous reasons why you didn't complete college in the first place or find yourself with a worthless piece of paper from your previous go-around. None of those matter. You have decided, and the experts suggest that this is correct, that getting more training is better than not.

But college at forty or older comes with its own unique problems. Not the least of which is the worth of the education. College tuitions are increasing as parents of children in the typical age group know all too well. When you make the decision to return to school as an older worker, the cost may be offset by some prior attendance experience or work-life experience.

One of the easiest ways to offset the tuition cost is to challenge the course, suggesting to over 2,900 accredited colleges that you know what that course offers and don't need to take it for the credit. This challenge not only save money but time that could be better spent getting the education sooner to allow you to get back in the hunt for employment.  CLEP, the College Level Exam Program, is the most widely accepted "life experience" challenge exam program and the one every older student should use. The CLEP program features 32 single-subject college exams and five general exams. (For more information about CLEP exams, contact: The College Board, 800-257-9558.)

There are other ways to help in getting your degree quicker and for less cost. Your employer might have in-house programs designed to finance higher and continuing education. If you are not employed, research and study what you know as much as possible before taking these tests.

You have three things that are to your advantage and three things working against your success.

The three things in your favor. First: you probably have the focus to do well. College isn't your first experience with independence. Of course I'm not suggesting that all-students entering or in college aren't focused; they just have a higher degree of potential available distractions to take them off course. Two: you know how much this is really costing. You have a better concept of what these dollars cost against what they can return. Three: Your work ethic comes from actually working and should be transferrable, at least in your head, to a better framework of organization. In other words, you can place the most important tasks first and that ability to prioritize is probably something you didn't even realize you possessed.

The three things working against you. One: Your focus to do well may actually overload your ability to do as well as you would have hoped. Taking on too much will find you in conflict with the rigors of what your daily life has become. This is certainly not insurmountable. Experts agree that you should get as much sleep as possible and find a scheduled time to study and prepare. That advice is given to twenty year olds as well. But it is doubly important for the older student.

Two: You have a much firmer grasp of time and the time you have left to not only pay back the loan but to do so with enough of an income to make it worthwhile. And like younger students, you need to balance the loan to potential income. According to the STudent Loan Network: "By keeping your borrowing to one year's salary, you're effectively dedicating 10% of your future income to repayment, which is a manageable amount of debt. Statistically speaking, graduates who have 10% or less of their income dedicated to debt repayment are able to manage their debts; those who exceed 15% of their income tend to default." And for the older worker, this calculation is incredibly difficult to make. There is no guarantee that you will get adequate compensation when you do get a job upon graduation.

Three: Your work ethic will actually work against you. You may have previously sleep-walked in your previous job, focused on  the daily grind with the least amount of energy. Re-prioritizing your life will come without the usual support groups afforded the younger student, you will need to build a self-centered support and wedge it into your regular routine. College for the older student requires an enormous amount of focus. There are some things that can help you keep the objective in reach and not lose your forward momentum. They include: staying organized, getting more sleep than you afforded yourself when you were working, and studying. The last may take a little re-learning so be sure to give yourself time to learn how to learn again.

If you are still working, don't become complacent. Continue to improve your chances and opportunities even if life has become somewhat complicated. Spending a little at a time is far wiser than borrowing a huge sum to attend college full-time. If you aren't working, keep in mind that even the best degrees don't always end up in the best paying jobs. Get as much counseling as you can before picking a course of study. Some job choices are fleeting or don't return in salary what you expect them to pay.

The popular notion is that we will work longer than our parents, postponing retirement beyond the age of 65. If that's the case, choose a career that gives you longevity in the workforce and not just something that provides a paycheck. And even if all it does is add ten-years to your mental health, it might be worth considering.

Remember When a Million Dollars was the Goal?

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

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

Is a goal worth having?

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

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

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

So what is the number?

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

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

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

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

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

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

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

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

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

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

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

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

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

Retirement Planning and the Lessons we can Learn for those Who Know

Retirement planning is a process. It is also investing. 

Perhaps you think it is too late to learn how to invest. The act, for most of us is filled with frustrating moments that are hinged on losses. But if you listen to what famed investor Bernard Baruch suggests, losing is only part of the experience and the best teacher available.

Baruch refused to join any trading house, hence his moniker the "Lone Wolf of Wall Street". He made a fortune by 30 - investing in sugar - and served as not only a park bench statesman but an advisor to presidents. He was a man of rules and when it comes to investing, too few of us possess such stringent parameters.

• Baruch believed that act of losing was actually the best teacher. While we mostly abhor the idea that we can actually lose invested money, he embraced the experience. He admits to not having enough knowledge in the beginning to separate himself from his cohorts, starting out as most traders do - losing lots of money.  Experience and eventually discipline taught him: "You have to lose money in order to better yourself."
• While most of think that timing and the ability to invest are keys to success, he thought that real success in the market takes time and money. Why then do we harbor what Baruch suggested when he observed that "most people view the market as the place where the miracle of great and quick riches can be performed with little effort."
• Baruch believed in simplicity. He thought that most people fail when the over-traded and held too many positions. This taught Baruch the lessons of going broke - which he did many times before he developed the discipline to succeed.
• Investing is different than speculation. But those who consider themselves investors often blur those lines. In his opinion, asuccessful speculation is "a man who observes the future and acts before it occurs." Acting swiftly in the market is important.
• Who you listen to can be blamed for what you do. And we all listen. Baruch admitted that after losing money from the recommendation of others, the facts were all that was needed. "One must search through a maze of complex and contradictory details to get to the significant facts.....Then he must be able to operate coldly, clearly, and skillfully on the basis of those facts." Speculation is not every man/woman's game and it is beyond the ability of most. So that leave the challenge for the successful speculator in learning "how to disentangle the cold hard facts from the rather warm feelings of the people dealing with the facts. If, as he suggested you do, " get all the facts, your judgment can be right; if you don't get all the facts, it can't be right."
• The person that stares back at us in the mirror is not always honest. And without this honesty, he believed that you can expect to be wrong as many times as you are right. "If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong." Can you honestly suggest to that reflection that you will cut losses quickly? In his opinion, this is the most important trading rule.
• Taking the time to think is something we believe we can not always afford. But it is one of the most profitable luxuries we can use. He suggested that, "During my eighty-seven years I have witnessed a whole succession of technological revolutions. But none of them has done away with the need for character in the individual or the ability to think."

Next up,  more from this investor on sleeping and self reliance.

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

The Financial Implications of Alzheimer's Disease

Search out the deadliest diseases that have plagued mankind and you will likely turn up such unsavory candidates as Small Pox (considered to have killed more people than any other infectious disease), Spanish Flu (some experts put the death toll for that single year as high as 50 million people worldwide), the Black Plague (thought to have killed 25 million people in Europe—about a third of the population—from 1347 to 1350), Tuberculosis (still kills nearly 2 million people a year and is ranked as the eighth leading cause of death worldwide by the WHO), Malaria (more than 1 million people die from it annually), Ebola (known to kill up to 90 percent of its victims), and Cholera (doesn't pose a problem when clean water and proper sanitation is available). Not on that list and not infectious as the previous maladies are but sure to be added to one of the deadliest disease is Alzheimers.

When you get Alzheimers, you will not recover. According to Harry Johns, president and CEO of the Alzheimer’s Association. "It is as much a thief as a killer. Alzheimer’s will darken the long-awaited retirement years of the one out of eight baby boomers who will develop it." Statistics suggest that over 10 million baby boomers will develop this affliction and at least as many of us will feel the emotional and financial repercussions of it.

Before we get to the financial implications of this problem, I thought I'd look at some of the information on this problem outlined on the Alzheimer's Association National Office website. Just because you are forgetful, doesn't mean that you have the disease. As one expert put it, it is not forgetting your keys that indicates the onset of this problem; it is forgetting what they are for. While memory plays a role in the gradual and always fatal disease, it is much more complicated.

These disruptions can impact what you do every day. More than just making yourself lists, asking for constant repetitive reminders for things that are consider part of your daily life - taking medication, getting dressed, even leaving the daily newspaper on the stoop might be qualifiers, if not to you to someone in your family. If you not only can't remember an appointment but can't recall why you made it, you might be in the initial stages.

You or a loved one might begin to forget certain aspects of their favorite activities, the rules to a game, what you went to the grocery store for or as one older woman I encountered on a grocery store aisle the other day. She had a list in her hand, a few odd items in her cart and was looking around at the overhead signs. Familiar with the store, I asked if I could help her. Seems I couldn't. She had written "dinner" and was searching for some sort of item to match her note. (I joked and suggested that my wife regularly wrote something just like that on lists she gave me. But you could tell she thought that there was just such an item somewhere in the store. She was dressed well which made me feel even more helpless, wondering if her family saw what I saw in just those brief seconds.)

Alzheimers manifests itself in other ways. At least this woman knew she was somewhere that might provide what she sought on her list. But not knowing where you are, having difficulty driving, or simply not understanding what was being said can also be additional signs that this cognitive slip has begun to take hold.

One of the easiest to spot signs are often the ones most often overlooked. Normally predictive reactions to every day events are no longer the ones you witness. In fact, if you are surprised by this frustration, perhaps the anger that accompanies it, you might be witnessing something worth your concern. These emotional disruptions go unnoticed with people living alone.

So what now? Your parent or relative is not acting as they always have. You show up to pick them up for a lunch date and they are still in their bedclothes without any recall of the event. You should be concerned. But simply writing it off as a sign of age is the easy way out. In fact, you are buying into one of the oldest myths. But don't be so quick to judge the older relations as the most prone. Alzheimers knows no age limit. And there is no cure.

As I mentioned there are some serious financial implications at play here. Our independence relies on our ability to take care of our financial well-being. While I regularly suggest that parents guide their children in their financial decisions, using their expertise and wisdom to help them, Alzheimers strips some of those abilities.

This can not only cost them in the short-term (losing a wallet, forgetting to pay the water bill) but in the long-term as well. They are quite often avid shopping channel customers, susceptible to scams and overly generous on a limited income.

While you may not at first witness these changes in their ability to handle money, some of their contacts often do and feel unable to do much of anything. According to the NYTimes: "The Financial Industry Regulatory

Authority, the largest nongovernmental regulator for securities firms doing business in the United States, recently met with individual financial services companies and the Alzheimer’s Association to formulate guidelines on how to deal with clients who have trouble remembering and reasoning, a problem that is not new but is increasing as the population ages."

Their doctors and attorneys have the same sort of problems in dealing with this situation. But there is something you can do and now is the time to begin to execute your plan.

Be sure their will is up-to-date. Lawyers will sometimes question whether their client is in the right state of mind when making decisions regarding this and other legal documents. And they wonder whether any changes made will be one day challenged. Your parents should include you in all of these appointments and if a living will needs to be created, now is the time to consider it. In fact, the attorney might feel as though the conversation would be worth having if you are present. (This, to the best of my knowledge, implies permission to discuss the client's issues or the lawyer's concern in front of you. Otherwise, they can't discuss the situation.)

A living will according to the National Institute of Aging "includes instructions and pages where you can specify your wishes for: (1) the person you want to make health care decisions for you when you can’t make them for yourself, (2) the kind of medical treatment you want or don’t want, (3) how comfortable you want to be, (4) how you want people to treat you, and (5) what you want your loved ones to know."

Also in the article written by Gina Kolota, she notes that "The bar association’s handbook for lawyers, written with the American Psychological Association, tries to provide some guidance. But the handbook acknowledges that it may not be easy to determine a client’s capacity to sign a will, execute a contract or transfer property."

Financial planners are also something that you should be in contact with. This is incredibly difficult from a distance. But often they can spot problems sooner rather than later. But not having one only amplifies the potential for problems. One of the easier remedies to this situation is to have your name placed on a to-call list. But by the time a landlord, bank or lender calls to suggest a discrepancy, the damage may be already done.

This conversation is a two way street. You need to be trustworthy enough to warrant their including you in what may among their most private affairs. Parents may appear open and honest about how they feel you should handle your finances. But the total opposite may be how they treat their own.

Your financial strength gives them greater reason to trust you in their affairs. And while you are at it, consider some of the following: Do the same for your loved ones who might be needed in the event something happens to you (living wills and wills are great start). Begin to plan for the cost their problems might have on you (without a doubt it will mean lost time at work, lost retirement contributions and lost insurance might also play a role in upsetting your financial apple cart.) Consider long-term care insurance before the symptoms begin. And lastly, realize now that your personal financial situation is so much more than just your immediate world and begin to plan for it now.

The DOL asks the Tough Questions about Your 401K

Hearings began concerning your 401(k) and the Department of Labor proposal to change the rules that currently apply to brokers. Now it’s okay to not know that there were hearings taking place at the DOL. It’s even okay that you may not have known that the DOL is even concerned with brokers. And if you didn’t know the role brokers play in your retirement plan – thinking of course that they were only traders of securities on an individual level – that’s fine too. But what the DOL is proposing is both significant and insignificant and worth noting nonetheless.

So I thought I’d give you a brief overview of what is happening, why some are enthusiastic about the change and others much less so. The DOL wants brokers and investmentconsultants to comply with the fiduciary standard of care as outlined in ERISA. This standard of care is worth noting and probably something you thought was already part of the whole package in your plan. For the vast majority of us, the 401(k) is benign tool, important but so nuanced in so many ways as to be opaque. We use it and hope for the best. (Not saying that’s the right approach but for most of us, it’s true.)

But there are people like me and institutions like the DOL who think that you should know otherwise. So we encourage you to listen to the background noise. This noise, currently being conducted as hearings has had a steady stream of industry professionals testify that they like the proposed rule changes and that they don’t.

The rules that the DOL would like to enact consist of the following: offering ERISA covered advice. This sounds simple enough but the reasons so many firms are fighting the rule changes is in large part due to the cost, which many have claimed would be passed on to the clients and then to the end-user of the plans, us.

Along with disclosure of conflicts of interest, Helen Kearney of Reuters reported recently “The standard would limit brokers’ ability to recommend their firms’ proprietary investment products to employers and prohibit them from collecting commissions from product sponsors.” Those objecting most vehemently to the rules are the smaller firms that do not offer compliance departments as part of the services they provide. And it is also quite possible that their clients don’t want to pay for that extra level of protection.

To offer fiduciary care comes with a cost. To act as such, the investment adviser/broker essentially stands with the company should their be any problems with the plan. The proposal would require that these brokers tell the company upfront that there may be conflicts of interest and the products they are selling them are the products their firm has instructed them to sell. This might not be the best analogy to use, but it is similar to buying a store brand which tends to be cheaper and a national brand, which tends to cost more. The product itself might be the same in many respects, but the differences, albeit small are there.

The biggest fear these firms have is rejection. If clients walk away, then what? That might be more ghost in the machine thinking but for some brokers who peddle in-house products, believe in commissions and don’t necessarily want to shout this fact from the mountain tops, they are balking at the notion.

Small companies usually deal with smaller brokerage houses in their 401(k). In these cases, the fees they receive are smaller than a Wells Fargo or Merrill Lynch might charge its clients. Those smaller brokers would be jeopardizing their fee base, received in addition to their charges for services are as part of the products they recommend, even if those products are the right ones for the client. So they might be forced in light of the DOL  rules to increase the fees they charge to these small businesses.

But these folks shouldn’t fear the worst. If they are doing their jobs and that, by definition is tailoring their products to the client, suggesting that if they include them in their plans, they will more likely than not, increase plan participation, they should have no worries about losing clients. And that, after all of the dust settles, is what they are supposed to be doing.

Smaller companies often use third party administrators to help with the heavy lifting and the legal issues. They can in many instances help the client choose which funds might be best.

So many brokers do not, under the proposed DOL rules, need to accept the fiduciary standard of care to stay in business. But you can bet that this will be the selling point the largest firms will begin advertising they have to offer.

According to Brian Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries: “players in the retirement industry who are more formally regulated with extensive compliance departments will comply with the rules, and those less formally regulated who know there is no practical enforcement of the rules, will choose not to comply.” It looks as if it boils down to your plan’s decision over whether to buy the store brand or the national brand. Do get the same thing or do you get what you pay for?

Retirement Planning: On Being Too Old

Baby Boomers face all sorts of challenges when it comes to retirement. Are we ignoring the most obvious of those challenges when we refuse to think that we will one day be old - not just older, but old old.

It is a relatively well known phenomenon amongst the soon-to-be retired. You are jettisoned from your 401(k) with a large chunk of money, a lifetimes' worth of hard earned cash. You are forced to make a decision about what to do with it. Kept in its present form would require you pay taxes on it as it is. Rolled into an IRA allows you to hold off on distributions, possibly until you are 70 or begin to take money out. But some folks fall into the annuity trap.

This choice, the annuity, in whatever flavor you are sold by the insurance company is often picked when the newly retired person does so in the midst of what would be a bear market. 

For those not versed in that term, this a period of lower stock prices; the reverse of which would be a bull market. Most folks fall back on the same logic, perhaps not fully tested or vetted, that retiring in a down market is hardest on your retirement account because you have far less than you might have has had you retired when the market was on the upswing.

On paper it might look bad. But the bear market might be your friend, especially if you are the counterintuitive type not prone to believe the conventional wisdom. What is the conventional wisdom? To be upfront, something I disagree with in most cases in large part, because I don't think pat formulas work. We evolve and so does our thinking. Why, if that is true of us and we are the markets, do we insist on being harnessed by stringent parameters?

Because they provide comfort, a point of reference, a goal. No matter what name you assign them, they are prevalent and with so many personal finance and retirement "gurus" saying the same thing, you tend to fall lockstep into the same thinking. Withdraw 4% you chant and you will never run out of money.

I've disputed this notion in the past as not very wise or thoughtful. Two things helped me arrive at this conclusion. Long before Susan Jacoby wrote her new book about old age (Never Say Die: The Myth and Marketing of the New Old Age, Pantheon Books), which provides a no-hold-barred look at the distinct, perhaps inevitable slide the human body takes on its path to death, I was suggesting that we might live longer but what will living longer mean. Oh, we may live to 85, but our arrival signals the end of cognitive independence for more than half of us.

She blames the baby boomer, the reinventor of what life is as the culprit in this thinking. We may have changed the way our youth unfolded and we may have upset the norm throughout our working careers. But when it comes to old age, it doesn't matter whether you have some sort of can-do attitude, you won't be able to change what is going to happen to you. You may envision a life of vigor and vitality, volunteerism and travel. We all need something to keep us moving forward. But Jacoby says we are ignoring the hard facts of life. We'll still get old. And with age comes the maladies of that time. Still there and still the same unsolvable mysteries.

So we will reach a point somewhere in the future - and the odds are in favor of this thinking - when you will no longer be the person you are right now. The years that you believed would be full and vital are now gone and you are collecting in the form of equal - possibly inflation adjusted - income that you can't spend. You scrimped in the early years of your retirement, downsized, even counted every penny. And then later in life, it doesn't matter. My suggestion was to start out big and taper back. Perhaps gradually easing back from a 6-7% withdrawal rate in the first ten years of retirement to a paltry 2-3% by the time you are 80 years old.

The result would be more or less the same with you using the money in the early years to do what you thought you could do and scaling back as your new sedentary lifestyle takes hold, an inevitability we can't avoid. "Young old" is easy to imagine. "Old old", not so much.

But the choices we make right at the moment of retirement may have a greater impact on how well that retirement is financed than we may have previously thought. Those bear market retirees, the ones who graviate towards annuities more so than their cohorts who retire in the midst of a bull market, may end up doing better over a longer period than their more optimistic cohorts.

I am of course referring to the studies done by Wade Pfau, an associate professor at the National Graduate Institute for Policy Studies in Tokyo who has suggested that retiring during a bear market is actually the best case scenario. His thinking is that a bear market provides more upside potential than a bull market would. On this point, he may be right. Our penchant to follow the herd during a bull market gives the impression that markets will always go up.

And there is some proof that for a time, they will. There is also proof that if you retire during a robust bull market, you will be more inclined to believe that you possess some sort of powerful ability to manage your money better. But bull markets fall and this causes confusion among those who may have deluded themselves into thinking they were more skilled than they were.

Professor Pfau thinks that a 60/40 stock split is optimal and if you invest over the course of 30 years at a rate that is close to 17% of your pre-tax income, you will be able to have 50% of your pre-retirement income, inflation adjusted, throughout your retirement. Staring earlier will mean less needed to get to the same mark. And of course this excludes any other money you might receive in retirement.

You are probably saying to yourself, 'that's a lot of income to sock away' and you'd be right. But this is one thing that hasn't changed: if you think you haven't been putting enough away, you are probably right. If you think old age is something that will resemble the first day of retirement for the next 30 years, you would be wrong.

Baby Boomers should be thinking about spending more when they are healthiest. Because 'old old' doesn't give you the chance to revise your planned 'young old' retirement.

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

Retirement Planning: DCA matters - right?

There is a school of thought circulating that dollar cost averaging is not smart investing. For those of you unfamiliar with the term, it is how your 401(k) plan works and why it works so well. You essentially make a contribution determination - usually a percentage of income which is taken before taxes ore levied - and each paycheck, you buy share of whatever investment you have chosen in your retirement account.

The concept is basically simple enough for most every investor to understand, even embrace. One, the investment is steady and in many cases affordable and painless. Because of its automatic nature, you need only check your statement every quarter to make sure the money went into the account and went where it was supposed to go.

DCA also benefits the average retirement investor with some control over the numerous errors that plague most investors. By doling out money evenly, your investments are bought based on affordability and not on the decision of the herd. Herd decision making relies on following the rest ofthe investors as they sell or buy and experience with this sort of mentality suggests that they usually buy when the markets are on the way up and sell as they descend.

DCA does something unique. It allows the investor to buy less as the herd buys more and to buy more as the herd sells. Imagine a share of a mutual fund costing a dollar. You allocate one dollar of your paycheck and you buy one share. But the market goes up and the share now costs $2. DCA restricts your enthusiasm at joining the herd and allows you to only buy one-half a share. the shares you already own have increased in value so you aren't missing the upswing. You just aren't throwing more money at something that may be over valued.

Now imagine the opposite happening. The share falls in value to 50 cents. Your dollar buys two shares and while it is true, your other shares have lost value in the process, the investment thinking here is that over the long-term, there will be more upsides than downsides. This means that you will be buying the same share at a discount.

Are there any downsides to this investment strategy? Some think so. One gentleman I was discussing this with suggested that folks using a 401(k) plan should never forget that this is investing. I couldn't agree with him more on that point. He went on to say that even the most passive investing requires some diligence and dollar cost averaging takes that diligence away. That is a downside but not an insurmountable one.

He thought that all of the money in a given year should be sent to the most conservative fund available in the employee's 401(k) and then redistributed to funds that are doing better. While this may work for some people, few of us know how mutual funds operate, whether the markets are favorable or not and often we find out after the markets have made the decision for us, and lastly, our 401(k) do supply the rapid response some of this thinking implies.

It does require a skill level and command of all of the emotions and biases that plague even seasoned investors. It obligates us to be better educated - but for most of us, we need time to get to that point. It is always my hope that we do attempt to become better acquainted with the way our money is being invested. But in the mean time, the concept of dollar cost averaging serves far too many of the average investors too well to be discarded.

On the Radio about Annuities

Today on the Financial Impact Factor Radio show, we had as out guest, Joe Tomlinson of Tomlinson Financial Planning. Joe is no slouch when it comes to the world of finance, annuities and retirement planning products. He joined the host of the show Paul Petillo, Dave Kittredge and Dave Ng for lively discussion that traveled from a discussion about what planners/advisors/brokers were to annuities and other retirement planning products to a discussion about whether college was worth the enormous cost.

You should give it a listen. Better yet, click on the little iTunes button at the bottom of the player and never miss an episode (you will automatically be subscribed to each show as a podcast allowing you to take the show wherever you go).

Listen to internet radio with

Paul Petillo of Target2025.com/BlueCollarDollar.com

and Dave Kittredge and Dave Ng

of FinancialFootprint.com

on

The Financial Impact Factor

at Blog Talk Radio

Retirement Planning: Going out of Country

First off, this is not the kind of thing you want to sink all of your investment dollars in. That might sound like a disclaimer, but the very idea that you could own a mutual fund that acted conversely to the way you want to react, a mutual fund that sold when markets were high and feasted when the markets were in trouble, and did so in many instances without so much as your normal hands-on knowledge, seems radical. You're an investor and you act like one.

Or you're an investor who knows that you aren't rational. And that is most of us. But a new study as uncovered that if you own a mutual fund far from where you live, you will allow it to do what it should do when the time is right. In other words, the farther away from your investment, as Miguel Ferreira of the Universidade Nova de Lisboa in Portugal, Massimo Massa of INSEAD in France and Pedro Matos of the University of Southern California found out, the more you agree with the hedge fund-like attitude the fund exhibits.

Hedge funds have long since known that you need a presence in the place you invest. It wasn't until a paper by Melvyn Teo of the Singapore Management University uncovered the fact that a geographic presence is key to investment success. This sort of "boots-on-the-ground" approach does make sense. If you know your marketplace, chances are you will know all of the nuances about that investment area. But this new study suggests that the farther you are away from that sort of investment, the better the investment does.

In a diversified portfolio, you probably own a few funds that you are taking a risk with - something in the emerging markets, an international fund or a hybrid of the two. Good advice has always suggested that some limited exposure to what occurs in far-away places adds some seasoning to an otherwise straightforward portfolio. Little did many of us know until recently was that this sort of investment will do better because it is so far out of our field of expertise.

Perhaps the worst thing that can happen to a mutual fund manager is the reaction of the herd or herd mentality. Once the herd begins to move in one direction or the other, hence the description, there is little anyone can do to stop the momentum from gaining speed. I don't need to tell you that the most recent example of just such a herd reaction was during the most recent downturn. Once the well-informed investors began to retreat, other investors, via the alerts from the media, began to follow.

For a mutual fund manager, this is the worst of all possible events. Keep in mind, most mutual funds don't keep a lot of cash laying around. When the occasional investor exists, they sell something and pay them off. But when an entire herd heads for the door, the selling simply opens the market wound wider and the bloodbath begins.

Hedge funds don't allow this to happen which allows them to take a position that might be contrary to what the markets are doing. In other words, they can buy what you don't want and sell what you think is hot and make money on either end of the investment equation. But the ability to do this is made possible by the knowledge that their underlying portfolio is not affected by the herd. That's not to say that their investors don't panic, but the lock-up keeps them from mucking up the plan - for the hedge fund manager and the other investors - by trying to head for the door when they probably should be buying more.

Now what Ferreira, Massa and Matos discovered was a sort of geographic lock-up. The farther away from the fund the actual investor was, the higher the likelihood that they would allow the fund, with the local address to do what it needed to do without interference. In other words, the less you knew about what was happening, the better the fund was likely to do. Distance turned these far-away funds into de facto hedge-funds.

In a nod to the hedge fund industry, they wrote: “This intuition is similar to the one proposed for hedge funds: Hedge funds take advantage of mutual fund investors’ fire sales. When mutual funds are forced to sell to meet redemption calls, hedge funds buy the assets liquidated at fire sale prices (Chen, Hanson, Hong, and Stein, 2008). The fact that mutual funds intermediate a way higher fraction of asset under management than hedge funds suggests that this effect represents a large-scale “limits of arbitrage” phenomenon, way more important for the economy.”

In other words, mutual fund managers who essentially swoop into a location, buy what they think is a good buy (not saying that their research is faulty) and fly back to the home office, lack the physical understanding that a geographic embeddedness offers. In other words, if you live there, you know better what is going on. Even in a global economy with the world seemingly wired to give you information in a split second, being somewhere is still better in terms of investments.

As I said when I began, this is not a recommendation to put whatever you have in places far away from where you live. But rather a shortfall of what we understand about where we invest. If there had been lock-ups in place for mutual funds, there is a distinct possibility that the downturn would not have been as severe. While hedge funds use lock-ups to prevent investors from forcing redemptions of what would be illiquid investments, mutual funds could use the same rule to control herd mentality and protect the patient, long-term investor in the process.

How Free is Free when it comes to Retirement Planning Advice?

Fear has become a big business in the world of retirement planning. If you're a Baby Boomer, this fear is heading towards a feverish pitch as you begin to worry that you won't have enough saved money to retire. So offers like the one we are about to from a reputable investment company will give you pause to consider whether this is right for you. After all, these are reputable companies offering what appears to be free retirement planning advice. But how free is free when it comes to retirement advice?

Vanguard has begun to offer you the opportunity to speak with a Certified Financial Planner. Based on what they refer to as extensive research supporting the need for contacting a professional, their new service focuses on those who are 55 years old or older. This is a worrisome group of late and the focus of a great deal of media attention. Being close to retirement is troublesome enough; close to retirement and worried that you will live longer than the previous generation (even if those stats rely on some very broad statistical factors) is even worse.

Being 55 years-old - which qualifies you for Boomer status - is close to retirement. But 10 years - by old school standards of retirement at 65 - is still a good amount of time to fix some problems, but not all. Vanguard studies have uncovered research that this group may be too overexposed to bonds (about 11% are totally into this fixed income investment) or too over exposed to equities (14% are 100% invested in stocks via mutual funds). This is not the idea behind asset allocation, a concept that keeps your money in a wide variety of investments in order to avoid sudden downturns that take the whole of your portfolio down in one quick swipe. Too much in stocks, as many investors were in 2008, resulted in a devastating blow to those portfolios. Too much in fixed income, some worry, could bring a similar event to these investors in 2011.

Asset allocation spreads the risk among different mutual funds within the retirement plan. For some, this suggests that you simply buy a target date fund with your retirement age goal and sit back and ride it out. But in many instances, the simplicity of this sort of investment suggests that you are not as focused (read: worried) as Vanguard would like you to be.

Target date funds are not everything they are sold to be. They can be expensive. They can be at the mercy of the basket of funds that make of the fund itself. they have managers who have never done this sort of seasonal readjustment over ten, twenty or thirty years. And not all target date funds do the same thing at the same time.

Vanguard's answer: your own personal financial planner. And Vanguard's solution to get you to use one: tell you its free. Trouble is, nothing is free including the advice, the readjustment to your portfolio or the ability of Vanguard to right decades of wrongs. the questions that this new programs suggests they will answer for you include some of the nagging questions they assume you have been asking yourself:

• When can I afford to retire?
• Will I have enough saved by retirement?
• How much can I spend in retirement?
• Which investments are best for me?

These are all good questions but basically all the same. A CFP can, according to Vanguard divine an answer following an online questionnaire  that is followed by a 45minute phone call from a CFP where they will examine who and what you are. By the time you finish filling out the form, you will know exactly how much trouble you are in and why. You haven't contributed enough, you havent taken enough risk and you will have to work longer, hope for a robust marketplace and continued low fees and taxes and a hefty dose of good fortune along the way (i.e. good health).

The problem here is that for the vast majority of Vanguard clients, the advice is far from free. In fact, it can be quite expensive in a number of ways. Up front, the cost is free fro those who are considered Flagship or Voyager Select clients. To be considered on of these investors, Vanguard ranks your use of their services in the following way: "Membership is based on total household assets held at Vanguard, with a minimum $500,000 for Vanguard Voyager Select Services®, and $1 million for Vanguard Flagship Services®." And for that you get free advice.

The client with a membership in Vanguard Voyager Services® would need a minimum of $50,000 to qualify for the advice but the cost is $250. If you are like the vast majority of 401(k) investors, both with Vanguard and without, the service will cost you $1,000. And then, the decision is still up to you.

In a recent press release, they described the service and how it could be implimented: "After you review your plan's strategy with the planner, you can implement it on your own, ask us to help you get started, or simply use the plan as a second opinion for your current investment strategy. The ultimate direction—and the investment decisions—are completely up to you." There is no fee schedule should you decide to have them help you.

So here is some basic advice that seems based in common sense but still widely ignored: contribute more. You may have your asset allocation out of whack, you may be invested in target date funds, you may be paying too much in fees for what you have. But the bottom line is you still haven't made the toughest choice of all: allocating more of your paycheck to the problem.

Once you decide to sacrifice on the real life side of the equation, I firmly believe that you will take a more nuanced interest in the retirement side. No one makes sacrifices, particularly the monetary ones that your retirement plan demands without getting involved. The more money you invest; the more you will get involved in those investments.

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