Old: Is it what you think it is?

Boomers have no problem with admitting they are getting old. They may not want to face the realities of age but the facts are there - if only in the reflection staring back from the mirror.

Remember when old was anything just a generation ahead of you. If you were ten, anyone in their thirties, more often than not, your parents and their friends, your teachers and coaches, were all old to you. It seems that as you got older, the definition of what old was was pushed back further. By the time you were 30, old was fifty. Why do we place such importance on this bookmarkers of passing time? Because each "old" has its own problems, not just health-wise as our bodies age, but financially as well.

Everyone has an answer to the conundrum of age. When it comes to money, the issues seems to double in size and complication and as a result, weigh much more on what our next stage of old will be like. You are told to invest in your retirement early and often even as the only word financial word you have any real acquaintance with is debt. In your early to late twenties, it manifests as college debt and the high cost of flying on your own for the first time. You invest little for retirement and pass up the financial golden ring to pay-as-you-go because you will never be old.

And then, a decade or so later, you are older faced with mortgages and kids and schools, saving for college, insurances and taxes and simply keeping pace with your family. You have begun to invest but in a piecemeal way. You may be auto-enrolled in your company's 401(k) if your workplace has one. If not, you probably haven't done much, at least regularly with investing for old when left to your own devices. You may have lumped summed it, which is bette than having done nothing, by dropping tax returns or bonuses in some IRA. But old costs more than you might have and debt, that first word you learned upon getting your diploma, is probably still a very real participant in your day-to-day decisions.

Forty is better and older but you now feel the bruden, mostly in the form of guilt at having underinvested. Now you struggle with older kids, college realities and aging parents. You probably have refinanced you home and if you are like many Americans, still paying for a vacation you took a couple years back all the while planning on the next. If you are like most, you haven't increased your payroll deduction in your 401(k) since you enrolled and probably haven't done much in the way of rebalancing or choosing the best age-appropriate investments.

Fifty, the real old, hits you like a ton of bricks. You may have some or all of the same problems you did at 30 (I hope not) and at 40 (kids are failing to launch, parents are a real concern) but now you grasp them to their fullest. And with a gasp and a moan, you realize that you will have to work until you are 70. the oldest person alive when you were 10.

Here are five basic things to do if you realized you are old. Or 50.

1. Get your head around any and all debt. Nothing will bring a future to its knees faster than paying interest on borrowed money.
2. Get out a calculator. Not just the physical kind but the online kind as well. As much as I dislike these tools, because one allows this input while another doesn't, just take the raw data: how much is currently in your retirement accounts, estimating that they will grow until you decide to retire at a modest 4% (this accounts for mistakes you can't know about like inflation and taxes) with a modest 4% withdrawal if asked to enter this as well and hit enter. Now take that number, usually expressed as a annual income, divide it by twelve and ask yourself, can you live on this?
3. Ask yourself is this enough? If it is 75% of what you currently need to live on, you aren't just old you're wise too. It its less than that, you will need to rethink your cost of shelter, the amount of money you spend each month and in doing so, channel every available cent to the plan you have in place. It might seem like a huge hurdle and it is. But you are running out of time. It means budget, budget, budget.

Of course, it goes without saying that starting early is best. And it also goes without saying the every age has its own setbacks financially. But every age has its potential for success and as you age, the potential doesn't go away, it simply becomes a little more challenging. Worrying about money as many surveys suggest we do, will not fix the problem. Why? Because worrying is the purview of someone who has no control over a situation happening. This one is all yours and well within your ability to control.

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

Is Your Plan in need of a Stress Test?

Baby Boomers may be acquainted with stress test and treadmills. But the importance of testing your retirement plan under certain types of stress is just as important as trying to figure out how well your heart is pumping.

The term stress test brings the fear of the unknown to otherwise stable events in our lives. The term became part of the vernacular of the financial system when the Secretary Treasurer  Andrew Geithner began asking how well the banking system would hold up under certain conditions. He knew that there were problems in how well a bank would withstand a crisis but until they tested for it, few people knew it as much more than a gimmick. Turns out, the nineteen banks that were tested, eleven failed.

Now stress testing adds its own stress. In part because we are all optimists at heart, seeing the future as brighter than it is and always believing that somehow we will survive whatever life throws our way. Even the off-handed question: "what's the worse that could happen?" never really attempts to answer the query, simply make you consider that something wrong might occur. And when it does occur, we simply suggest that we didn't see it coming.

In the world of personal finance, asking what's the worst that could happen is not the same as asking: "will I be able to afford this?" or "have I saved enough for retirement?" The worse-that-can-happen actually imagines the worst. It doesn't make plans for the worst based on optimistic scenarios. It plans for the downside and readjusts the outlook from just-in-case to what-now?

We're not conditioned to think like that. So I thought I'd give you some scenarios you think so brightly about and throw a little water on them. First: your budget. You lie about this too often. You project into the future (I'll be receiving a bonus or a raise next month) and spend money as if you had it. Otherwise you would even pull your credit card from your wallet. it is borrowed money that projects your optimistic ability to pay the money back at the end of the month. There are few of us out there who prudently deduct this cash from your available cash balances; but their number is small.

To stress test your budget you will need to know exactly how much meeting the so-called ends actually is. Not adding in the incidental items that can be canceled in the event of an extreme financial emergency (cable, internet, cell phones all of which are still luxuries even though we identify them as necessities), how much is your survival costs: housing, food, fuel, utilities?

A stress test would ask if you have accumulated enough in reserve to pay those basic necessities in the event of an emergency. How long could you pay for these necessary items based on what you have in your emergency accounts? My guess is not long. But once you identify this problem, you have to solve it - which is why many of us fail to do this sort of test. It adds stress. To realign this budget problem you can do three basic things: put $25 a way each week for emergencies (a cookie jar is just fine and you'd probably be surprised at how much loose change you can accumulate over time), stop spending someone else's money (try to get through a month, perhaps two without using a credit card - yes you will have to think more about each purchase) and debate the worth of every purchase (remember, just because something is on sale or looks inexpensive doesn't make it something you need.)

Another optimistic project that needs to be stress tested is your retirement. I suggest based on what I know and what I research, that most of us are not in a good position to retire anytime soon. But even these folks who acknowledge their financial shortfall are still looking at the big picture through rose colored glasses. We project investment earnings (without any real basis for these conclusions). We often think our portfolios will return 5-7% even as we switch from aggressive investments in our youth to conservative investments as we near retirement, which even a math challenged person will see as a falsehood. You can't protect money and still earn better than historic returns.

We base inflation numbers on what we know. We think of taxes based on what we currently pay. And we calculate our withdrawal based on what we think we'd like to live on. These aren't stress tests; they're optimistic projections. Stress tests give us a worse case scenario. You can also do three things here as well: contribute more, use both a before tax and after tax retirement plan (such as a 401(k) and a Roth IRA) and lastly, imagine life on half the income you currently earn.

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

Retirement Planning: It's complicated

I'm a man. So that makes me a relative outsider when it comes to speaking about women and their focus on retirement. It doesn't necessarily mean I have a bias of any sort; simply that understanding why most women - or at least those who answered the latest ING survey about women and retirement, still haven't embraced retirement planning.

The survey uncovered a number of different bullet points that make me ponder the future retirement plans of women. For instance:

• Seventy-eight percent of women say they lack financial savvy about retirement planning. It is extremely hard to quantify savvy. It could mean the ability to approach the subject with confidence, something men only pretend to have. Men, as even more numerous surveys have uncovered, do more research but those same surveys do not suggest that men actually do better than women at investing. In fact, men tend to have a more free-wheeling approach to spending and credit, which if calculated against their ability to retire in a better financial place, leaves them somewhat behind. Or savvy could simply mean they don't focus on what they don't know because the topic is still, even after all we have been through, is not a clear as it should be.
• Thirty-three percent let their significant other make the retirement planning decisions. This is interesting because there are few women who believe that their spouse will ultimately outlive them. Numerous studies have suggested that at the point of retirement, men make decisions about what they have accumulated without taking this longevity issue into account. When some male retirees choose an annuity, they do so without considering their own demise might occur before their spouses. Instead, they look at the monthly dollar amount they will receive and take the highest figure possible. Doing so, eliminates much of the spousal benefit leaving their survivors with far less. Worse, men who chose not to take the annuity choice at retirement, believe they can invest their account and do so at the risk of drawing the balance down to a point where their spouses have little left.
• Thirty percent have no idea what their main source of retirement income will be. I can tell you with almost complete certainty: a woman will have accumulated less over the course of her working career. She will have had interruptions due to children and possibly aging parents and when that occurs, her 401(k) is usually less at the end of a working career and her Social Security, because of those missed years, will also be smaller than her spouses. It is important to keep in mind that divorce and single parenthood also jeopardize the long-term strength of any retirement accounts. Focusing on the present day, while important in terms of staying financially solvent, doesn't provide income in the future. It will however create a more financially solvent future if they have saved no matter what their situation.
• Thirty-seven percent of women blame complicated Wall Street jargon as well as trouble managing their everyday expenses as hurdles that prevent them from being savvy about investing. While women struggle searching for the truth, men fake it. Wall Street jargon is designed to be convoluted and will not change simply because you don't understand it. There are some simple steps you can take that even men ignore: keep investing no matter what the market is doing in the present tense; invest more than you can afford and adjust your daily budget to accommodate it; use index funds across a wide swath of the market; know that savings is safe and investments involve risk but using index funds lowers the risk while lowering the cost of investing.

In all, 65 percent of those surveyed described themselves as "traditional" rather than "modern" women. Of all of the statistics, this is the most gratifying. If traditional means what I think they suggest it does, then this implies prudence and pragmatism, curiosity but skepticism, and most importantly, an approach that takes the whole into consideration rather than the self-centered approach most men tend to use. If traditional means understanding the impact of credit, the belief that they will live long in retirement, and that they care more for their loved ones and want to see them do well, then this is encouraging.

All they need do is get in touch with only a few of the things men do when it comes to investing; but certainly not all. Because men don't statistically do better at investing; they simply do more of it.