I believe it was Einstein who suggested that “we cannot solve our problems with the same thinking we used to create them”. And with us today, we have a very special guest who has done what many of us might think impossible, taking something as abstract as credit and money and turning it into a reality that we can all relate to.
Lynnette Khalfani-Cox is known as The Money Coach® has done more than just expose the soft-underbelly of everything financial – she has performed surgery. Her efforts as a personal finance expert, television and radio personality, and the author of numerous books, including the New York Times bestseller Zero Debt: The Ultimate Guide to Financial Freedom has created a wealth of information for those who face the incredible hurdle of mastering the income they earn. Lynnette once had $100,000 in credit card debt and in three years, did what many of us might consider impossible: paid it off.
This article written by Paul Petillo originally appeared at Target2025.com
Jimi Hendrix once wrote: "I used to live in a room full of mirrors; all I could see was me. I take my spirit and I crash my mirrors, now the whole world is here for me to see." When it comes to the reflection staring back at us, our retirement, like those images, are a search for imperfection. We don't look at ourselves to admire how good we look; we look for flaws. We don't imagine a future; we see the relics of past decisions.
If you consider yourself a Baby Boomer, the reflection in the mirror is an image that polarizes: we are comfortable in the what the future holds or we are worried. There is good reasons for this feeling of either hope or dispair, with no real middle ground. This group has seen the demise of the defined benefit plan (pensions) and the introduction of the defined contribution plan (401(k)). You have seen the greatest bull market in investing history and witnessed two major crashes that have rattled your confidence in the decade following. You are the first generation to realize that your future is in your hands and you were not ready for the responsibility.
If you are younger than a Boomer, you are the first generation to have never seen any other opportunity to finance your future than with a 401(k). And you have come to realize that this is not the plan it was intended to be. 401(k) plans were not designed to be the one and only vehicle for retirement. We were sold a notion that this was the end-all-to-be-all plan that would afford us a better retirement than our parents only to find out that it hinged on two extremely volatile concepts: your ability to consistently earn money and your level of contribution. Your 401(k) became your anchor and your wings.
I imagine that many of you will look back on the highlights of 2011 and find yourself in either one or two camps: you were able to hold onto your job, pay your bills and put some money away for retirement or you will be looking back at a year of indecision, regret and the promise to do better in 2012. You may be celebrating simply getting through it or wishing it never happened. To that, I offer some simple resolutions to embrace in 2012.
One: Revisit your idea of retirement. You can promise to save more money for your future, increasing your contribution to your plan or perhaps, in the absence of a plan, begin one of your own using IRAs. But you do this without really looking at that future. Retirement will not be the same of any two of us. For some it will be a life of struggle, an ongoing effort to make ends meet when they may never met while they were working. For some it will be the realization that the balance between the now and the future relies on a level of personal sacrifice we were smart enough to embrace while we were working. For others, it will simply be a resignation of sorts, a belief that it will never happen.
Retirement is three things: A time when we find new opportunities outside the confines of what we called a career, a place of unimaginable risk and/or a chance to take a breather. It is not a place of no work and all play. It is not a time spent waiting for the end to come. It is not what we imagine because, if we looked closely at that image we see flaws. So we don't look as closely at those who are retired, examine how they live and ask if this is what they had planned. In revisiting the idea of retirement, your concept of that future, consider looking closer. If you don't like what you see, resolve to change it. But don't look away.
Two: Don't reflect on what you've done. You made mistakes; we all have. Some of us took too much risk, some not enough. Some contributed as much to their retirement as their budgets allowed, others did not. Some of us made poor mortgage or credit decisions, others did not. No matter what you did or didn't do, looking back will not improve the look forward.
Looking forward doesn't mean turning your back on on any of those events. It means focusing all of your energy on fixing them. This is a twofold effort, the first being getting the budget you may not have in line with your paycheck and focusing on paying down your mortgage (keep in mind that even if your home is underwater - meaning your mortgage is greater than the value of the house itself - the interest you pay on than loan is eating away at your future invest-able or save-able dollars). Does this mean you should not put money away in a 401(k) plan and redirect every dollar to the day-to-day? Not at all. Keep in mind that a 5% contribution will, in almost every instance, not impact your take home pay.
Three: Don't over think the process. From every corner of the financial world you will hear: rebalance your 401(k). If you chose a minimum of four index funds spread across four sectors, or four ETFs that do the same thing, rebalancing is a waste of time. You diversify so you can capture ups in one market and downside moves in another and your contribution doesn't allow you to buy more when one market moves up and allows you to buy more when it goes down.
We want to think we are in control when in fact, the only thing you actually control is how much money you want to put in. Markets will do what they do best: move. It might be up one day and down the next. It doesn't really matter. What matters is that you do something and in 2012, it should be significantly more than you are doing now.
Four: Stop being selfless. One of the hurdles we are told, for women investors specifically, is their inability to put themselves before their family. This is a cause for concern of course but not a disaster in the making. Take a good long and hard look at your family and ask yourself: could I spend my retirement years living with any of them? Do they want you to?
Five: Embrace the truth. Now there will be an increased amount of pressure from every financial professional to get advice on your investments. This educational effort will evolve in the next several years from long, drawn out seminars on how your 401(k) works to short, ADD friendly videos that last several minutes and offer key points on what to do. The truth still relies on your ability to put more money away. Five percent will net you 25% of your current take home in retirement. A ten percent contribution over the average working career will pay you about 50% of what you earn today in retirement. Fifteen percent contributed to a 401(k) plan with average (modest) historical returns will allow you to live on 75% of your current income. Can you handle that truth?
Six: Stop worrying about it. According to HealthGuidance.org, you are killing yourself with worry. Michael Thomas writes: "Worrying leads to stress and stress has been linked with a number of health problems. People who suffer from high levels of stress are much more prone to cardiovascular disease, gastrointestinal issues, weight problems and there has even been a link made between stress levels and certain cancers." Instead resolve to do more saving than you have ever done, spend less than you did last year and embrace the reality of what fixed income is. Retirement is fixed income. Resolve to live like that now.
Nothing that is good for you can be considered bad and vice versa. Except perhaps when asking a five-year old about broccoli. But the vast majority of adults, fifty years hence wouldn't even consider an annuity for their retirement and if they did, would almost certainly regret the decision at some point soon after. How can annuity be both regrettable and not, good and sometimes bad, bad and almost the best option?
First, a disclaimer: I am not a big fan of annuities - too complicated and too costly and too much insurance. Secondly, as if that weren't enough of reason to dislike them, they are quickly becoming an idea with a certain allure, almost mystique. They have done little to reinvent what they are - aside from some product tweaks along the way, they are essentially exactly what they always were. So why the sudden interest? Okay, it's not really sudden. The thought that is currently being bandied around by many of my cohorts is worth considering. After I tell you what they are.
If I were to offer you a "guaranteed income for life" that grew at 4%, you'd think to yourself that this was too good to be true. If it were free of fees and locked in penalties and all sorts of hidden costs, it would be too good. But this is an insurance product. And I'd be willing to wager you have never met, over the course of your lifetime, an insurance product that is free of some small print just waiting to rear its ugly head the moment you need it. Then they tack an investment portfolio into the mix and you have a recipe for problems. Kinda sorta.
First off, you need to buy the product. When you buy it has more to do with it than the actual need or desire. Annuities come with salespeople in tow and when they begin talking, most of the information you might need to know later gets pushed to later. What stands out is the fixed number, the income for life. Secondly, you will not be the same person ten-years from now and this makes this sort of purchase subject to those shifts in not only who you are but where you are financially.
MetLife explains the difference between the two most common types: the fixed and the variable. A fixed annuity "earn[s] a guaranteed rate of interest for a specific time period, such as one, three, or five years. Once the time period is over, a new guaranteed interest rate is set for the next period. A fixed annuity guarantee is subject to the financial strength and claims-paying ability of the insurance company that issues the annuity."
In other words, you know exactly what it is your are getting into - if only it were that simple. The fixed rate often offered is just barely beating inflation and won't beat taxes. Yes it will be fixed but this also depends on your age and your sex. If you are a woman, you will receive less compared to a man because you will live longer - the insurance side of the deal in the equation.
If you meet a retiree who regrets their decision once they have bought and annuity, it will be because the stock market is doing well. Studies have shown that if the markets are good in the months preceding retirement, the retiree will more than likely opt for investing on their own; if they are bad, they buy an annuity.
When MetLife describes variable annuities, they roll their eyes and shrug their shoulders, knowing that even as the markets are doing better, you still want safety. They describe these products: "Variable annuities typically offer a range of funding options from which you may choose. These funding options may include portfolios comprised of stocks, bonds, and money market instruments. The account value of variable annuities can go up or down based on market fluctuations. Your purchase payments and earnings are not guaranteed; they depend on the performance of the underlying investment options."
But believe it or not, there is a place in your retirement plan where these products belong: inside your 401(k). When asked about them in 401(k) plans: "Eleanor Blaney, consumer advocate for the Certified Financial Planning Board, is blunt, "This is categorically a bad idea."" Of all people, women benefit the most from annuities in these plans. They don't discriminate based on sex. They give women the conservative approach many say they want - and the knowledge of knowing what they will have - and it gives them the opportunity to educate themselves about other potential investments available to them. Plus, it eliminates the choice at retirement that most people can't make. Stuffing them in every 401(k) can help men make the right choice for their wives - who will live longer and benefit from them.
Here is an interview the author had recently with Reuters. And below that, I'll examine some of things Mr. Buffet has said and wonder if they could have been said by a woman. Two things you must know if you don't already: I think women make excellent investors and two, I haven't read Ms. Lofton's book.
Like all quotes, they can and will be taken out of context. And the standalone quotes are just that, standalone, without the surrounding text to bring them to life. Nonetheless, do these next five quotes attributed to Mr. Buffet as Ms Lofton suggests, reveal something about the man investing like a woman, or perhaps as she should?
"A public-opinion poll is no substitute for thought." Study after study has suggested that women value the opinions of others whereas men seldom do. Not to say men don't look to the successful or experienced for information to help them invest, but given the choice, men will continually say they arrived at a decision on their own, after much thought and consideration. In fact, men look at investing as the result of much "thought" even as they gained lots of opinions along the way.
A woman's ability to network, seek advice, even consult a mentor is at the heart of the every effort to get women to invest more. They value public opinion and make decisions based on what those opinions offer. Could Mr. Buffet simply be suggesting the circle of wise friends, a class of like-minded individuals or simply the educational sources women seek akin to putting too little thought into the process? Score One for Warren investing like a man.
"I always knew I was going to be rich. I don’t think I ever doubted it for a minute." Single-mindedness, bullheadedness, even the slight hint of braggadocio are more than evident in this statement. There are women who have all of these traits and are driving the statistics that suggest women are on the upswing as investors. But the problem remains and was pointed out recently by Sheryl Sandberg, COO of Facebook when she offered this piece of advice to the graduates of Barnard College.
She suggested that women make small decisions along the way that eventually lead them” to a bigger decision, one that leads them to want more balance. Her message to this class of 2011 was “do not leave before you leave. Do not lean back; lean in. Put your foot on the gas pedal and keep it there until the day you have to make a decision, and then make a decision. That’s the only way,” she said, “you’ll even have a decision to make.” As long as women approach the world in this manner, the gap between who women investors are and what their male counterparts have become will persist. Score One for Warren investing like a man.
"I buy expensive suits. They just look cheap on me." Suits, like armor are all in the wearer's ability to pull the look off. Investing is like that as well. It's illusory and easily-lied about trait make it best suited, no pun intended, for men.
Women on the other hand like the research but not the sort of information that is clustered around numbers and charts. Instead, they want to invest and look good when they do. This keeps them from taking any investing (fashion) chance and as numerous studies have shown, means women take far fewer risks. Investments are needed and retirement is a must. But it will never be fashionable because no matter how hard a woman tries, the act feels cheap. Women need to get over that and too not over-think the process. There are some excellent ways to get to what needs to be done when it comes to investing and retirement planning and much of it comes from learning how to budget and creating a debt-less lifestyle. Score One for Warren investing like a man.
"I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over." Women have been stepping over 1-foot bars for quite sometime. And this slow and easy approach to investing is definitely a plus for their chances to be successful when they invest. But the investor we think about, the ones I have spoken to have all pointed to a single investor philosophy: sell before you get hurt.
While I am going to score this one for women, because I do advocate the slow and methodical approach to gaining wealth, there is still too little money being directed at these 1-foot step-overs. But that is a topic hinged on pay and until women reach income parity, they will not feel as well-invested as men. Score One for the women.
"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well." and "Our favorite holding period is forever". This emotional behavior, the herd mentality mentioned in the first quote and the patience to keep with something that has long gone out-of-fashion don't seem to be reflective of the women I have met. Granted, I usually tap the sources closest to me, professional women in my network and the research done academically to form some sort of a conclusion, albeit a moving one,. But I wouldn't be far off the mark to see women (and men) chasing the chance to follow the rest of the herd if the herd seems convinced. Remember, it takes one to turn the tide in a direction and in most cases, the rest will follow. What appears to be a sale or the in the case of men, the next new thing, is in fact a display of our susceptibility to what the crowd suggests we need.
Keep in mind, I'm extrapolating here when I use the activities of everyday life to suggest that this is how we invest. But taking the emotional animal out of the equation is difficult to do and behavioral economist know this as well. As to buy and hold and Ms Lofton's suggestion that his investment style is "girlish", I offer one word: redecorate. Score Tie
I do applaud Ms. Lofton's effort at addressing this topic. Women have a great deal of ground to cover and while doing so, men could benefit from what they are learning. Better 401(k) plans with index funds, higher IRA contribution limits and requiring annuities in every 401(k) would have a leveling effect for both sexes, but much more so for women. It's just too bad, at this point so far along in the history of these markets, that the icon a woman wants you to look at is a man.
There is still a great deal of discussion surrounding the fact the women are further behind the retirement curve than they should be. It is estimated that women will need $240,000 in retirement funds compared to $170,000 needed by men. These estimates, in my opinion need some fine tuning. Nonetheless, even if current 401(k) balances are taken into consideration, both groups are still far behind where they should be. Consider this: Amongst the facts available concerning retirement, one number stands out. The cost of healthcare, the unknown possibility that at some point during your retirement you will need much more than Medicare can provide, will be close to $100,000. This means that both men and women will be left with far fewer dollars to subsist on than they have anticipated.
Consider this: Women still face individual hurdles in the workplace. This gap in pay is closing but not for the reasons you might think. Men faced the biggest problems during the recent downturn and women saw the biggest opportunities in landing any newly created jobs. But were those jobs as good as they should have been?
It has long been a fact that the vast number of women entering the workforce do so at a lower pay grade than their male cohorts. They will find more jobs in smaller businesses and because of that and those employers, they may find the options to save for retirement smaller. In many instances, these smaller businesses have less than adequate 401(k) plans, some merely a shell of of what larger corporations offer.
It is also a problem for women employed in larger companies with adequate 401(k) plans in part because the plan matches are smaller and are not expected to return to pre-2008 levels anytime soon.
It is also well-known that women will not be paid as much as men are or have been paid for similar jobs. USA Network founder Kay Koplovitz suggested recently that women simply don't ask for what they feel they deserve. It might have something to do with the fact that women "lean back" in the initial stages of their careers, looking toward the possibility that they will eventually take time off to begin a family. This false start often gives them fewer chances to achieve a robust retirement and to ask for the money they think and should deserve. Ms. Koplovitz suggests they take the reins of their plans "first, harder, and faster". Taking time off: use an IRA to keep invested.
Consider this: The auto-enrollment of new hires, the majority of which seem to be women, has seen the participation levels in 401(k)s increase. But studies have shown that these new participants invest too conservatively when they are young, giving up some of the much needed risk they should be taking in the early stages of their careers.
Consider this: Women will live longer and even more frightening, may live longer alone.
There are no easy remedies. Yet some come to mind. Yes, women need to invest more and more often. They shouldn't let any career interruption keep them from investing. They should be requesting their employers add annuities to their 401(k)s in part because these products, tucked inside these plans cannot discriminate based on the sex of the contributor. This isn't so outside the plan where actuaries step in and calculate this potential longer life into their equations.
Yes, first, harder, faster is a good mantra to embrace when looking to the future. But women need to ask for better pay, more education about the investments they need, a little more risk and more importantly, retirement plans tailored to their specific needs.
We know two things in this post or almost post-recession era we are currently in: One, older workers are returning to work or not leaving the workforce at all and two, younger workers who traditionally made up the bulk of the workforce, are being crowded out by this newer pool of older workers. Delaying retirement due to economic concerns that have stymied our financial well-being has been news for quite some time. But what if the new face of the workforce is slightly wrinkled and framed in grey?
According to a study conducted by WorkplaceFlexibility.org and authored by Richard W. Johnson, Senior Fellow at The Urban Institute: "As the U.S. population ages and the number of Americans reaching traditional retirement ages increases, employers may need to attract and retain more older workers, many of whom are highly experienced, knowledgeable, and skilled." Basing the study on well-known assumptions, Mr. Johnson explores the shift in the workplace to accomodate the older worker who is increasingly choosing to hang on to their employment longer.
Among those assumptions is a longer life. As the older population reaches retirement age, they are finding the ability to continue working a possibility in large part because the work these folks tend to do is less physically demanding that many jobs were just a decade ago. While financial concerns are most likely to enter into the newsworthy conversations, the study seems to suggest that this trend is centered more on women than men.
The result is increased complications both for the company, the worker and the benefits they might or should be receiving at that age. The result is an experiment unlike any conducted prior to this where the lines blur between what is full-time work and what is full-time retirement.
Phased retirement, the new buzzword in this process involves reduced hours and responsibilities that include some perks normally reserved for women and men in the workplace who temporarily leave because of families. Among those phased perks are "flexible work arrangements, including part-time employment, flexible schedules, telework, contract work, and job sharing."
For the employer, the fringe benefits often accessible to the older workforce, such as traditional pensions could open the door to age discrimination. And this could hurt women more than men. Even as women have made great strides over the last several decades in pay, benefits and workplace populations, it is this group that is most likely to continue, or want to continue working beyond the traditional age of 65. Men, despite the reports of longer and healthier lives, choose to retire more now than when the jobs they engaged in were more physically demanding and strenuous.
Because the focus of this report is on the effects various policies and practices surrounding this transitional time of a workers life, Mr. Johnson points out some of the incentives and disincentives for working or not. Social Security has been gradually pushing back the retirement age and will probably continue to do so in the coming years. Defined benefit plans or pensions further complicate this trend by penalizing the annuitized payment should the worker continue to be employed.
The shift over the last three decades to defined contribution plans (401(k)s, 403(b)s) are much more accommodating to this segment of the workforce that wants to work longer. They can continue to contribute to a DC plan long after the traditional pension retirement age has been reached, adding the potential for greater lifetime incomes in the process. Because of these types of plans, workers reaching retirement age are more likely to work at least two-three years longer than they may have previously anticipated.
The study also revealed that if the employer provides health benefits for early retirees. of which according to a 2009 study conducted by the Kaiser Foundation only 29% of the employers do, that person is more likely to retire. Take them away or not provide these benefits and the worker will stay on the job longer.
Because Social Security benefits are calculated on a 35 year work history, one that favors men who have never had any interruption in their work history, this group is more likely to take their leave from the workforce. For women, each additional year worked eliminates a zero earnings year that may have come due to family leave because of children or the need to take care of aging parents.
The question facing employers is whether to retain these workers. In most instances, the older worker is at the top of the pay scale and poses a greater cost on the health benefits provided. Mr. Johnson notes: "Another study found that employers were less likely to call back older job applicants than otherwise identical younger applicants (Lahey, 2008). And it takes laid-off workers age 50 and older much longer than younger workers to become reemployed, even though older unemployed workers appear to search just as intensively as their younger counterparts (Johnson and Mommaerts, 2010)." Even if the desire to work longer is there, the opportunities may be limited.
Employers have acknowledged that the pool of potential retirees in the coming years will have a negative impact on the skill level of their employees. Yet few have done anything to address this shortfall of talent and skill. "For example, in the Cornell survey only 26 percent of employers allowing phased retirement would provide the same health benefits to workers after they reduced their hours. About two-fifths of employers allowing phased retirement in the Cornell survey, but only 9 percent of employers in the Ernst & Young survey, would allow in-service pension benefits."
The problem will need to be addressed by Congress at some point. Women Boomers face the greatest challenge in the coming years as they attempt to make up earnings shortfalls and look to adjust their schedules to a more flexible arrangement.
Employers will also need to address the issue as well. they may say that the talent looking to retire is worth retaining. But their current policies don't suggest they are doing much in the way of providing incentives. They may say they desire the older workforce. In practice, they have yet to make substantive moves to permit this choice.
There is another study out this past week, this one conducted by the Hartford, on the state of retirement. Beyond knowing where you stand on the subject, a point in time that seems to defy statistical reports such as these, the feeling that we are mostly under the microscope of planners and brokers and insurance agents is becoming annoying. The Hartford study on the retirement plans of those in a post-Great Recession world reveals some interesting percentages. Yet the back story is somewhat concealed in those facts and figures.
It is nice to see that women are participating in their retirement plans with a great many of them seeking to gain some sort of comprehensive understanding of exactly what these plans are. No mean feat by any stretch and a struggle that men have seemingly come to grips with, given up on or otherwise recoiled in risk averse fear. Women it seems are on the verge of doing the same thing. And the journey might be different; then again, it might not.
The Hartford suggests that retirement plan participation rates increased among the female workforce - but fails to mention that so did the overall female make-up of the workforce. The study also fails to mention how many of these women were swept up into the auto-enrollment mandate.
The study also suggested that this group completely or mostly understood their retirement plans (401(k)s). Which I suppose on the surface is a good thing to know. But the study doesn't necessarily test that knowledge - they simply take their surveyed answers and make some educated guesses.
Comprehension is the biggest struggle facing anyone who must use their company's retirement plan. How those plans are being used, which investments are favored the most, and how well the participants understand the importance of making regular contributions is of great interest to not only the government and Wall Street but to those actively selling, tweaking or otherwise sponsoring these plans.
Comprehension and increased participation doesn't point to higher rates of investment savvy nor do they suggest that enough is being put away to make a difference. Few people are capable of completely understanding the methodology of investments, know what risk is and how to use it. Fewer people are willing to make serious financial sacrifices while they are working to maximize the potential of their retirement plans. And even fewer still, make enough of a contribution to matter.
There was a stat in that report that suggested that many participants reduced their contribution or even stopped altogether citing economic hardships (about 22%). This also correlates with the number of employers who stopped matching or reduced their matching contribution.
While the study doesn't give us the survey questions, it would be interesting to know if those surveyed were asked if they knew what vesting was, how long their employer held their contribution before they actually gave it to them and if they were aware that they could maintain their current take-home pay with a pre-tax contribution of about 4-5%?
Vesting, for those of you who may not know is the time between when you are hired and the time you have access to your retirement plan. This varies with the best plans making it available soon after your first day on the job to up to two years. Businesses do this when they fear higher turn-over (a sign that job dissatisfaction might be higher in this job and the company has reacted by trying to hold on to their contribution in the even you might flee soon after orientation).
You might be auto-enrolled in your 401(k), but it doesn't mean you own the plan or the money your employer may have contributed on your behalf. What you do own is what you put in. That 4-5% rule is often downplayed in favor of the matching contribution, which is not free money as many say it is and it is not free of strings. In the post Great Recession era, that "free money" may actually be the only pay increase you might see. It might also come at the expense of other benefits such as health care.
And auto-enrollment doesn't suggest benevolence. It suggests a fund that the company has the smallest liability in offering a new employee who may or may not have a clue. Often these "suggested" investments come in the form of a target date fund or a low-cost index fund. Neither of these is necessarily bad for the new worker. But so much attention has been devoted to reducing risk (liability) and fees (which often come at the expense of good choices for a wide demographic of workers) that these plans, even if you are automatically enrolled are much more sterile than they were just a couple of years ago.
The 4-5% rule is relatively simple and should be used match or no match. Setting your account up to have this amount withdrawn will not impact your take-home pay. Once you become comfortable with this, and perhaps have taken the hour or two needed to become accustomed to the plan you have, the only way you will be able to increase your chances of not being poor in retirement is to begin increasing your contribution.
Increasing that retirement plan contribution can be done in a number of ways. Channel your pay increases into the plan. Forward your bonus. Reduce your debt and in doing so, use the money you spent on debt service (interest) and use it to increase your retirement plan balance. Or simply live a little smaller now knowing that it will be easier to do so while you are earning money.
