A short while back, I wrote about a company that uses a series of benchmarks and mathematical equations to determine whether your 401(k) plan is doing what it should. Brightscope's product was designed to help plan sponsors find the problems in their plans and make an effort to correct them. As noble as that effort may be, the hurdles are numerous for plan participants to get their companies to make the necessary changes to their plans.
Now we have another entrant to the market place, this one offering the plan sponsor a look a their employee's retirement readiness. Fiduciary Benchmarks, based in Kansas will provide a snapshot look at a company's plan and the chances that their employee will arrive at retirement with enough cash to be considered adequate.
Using 100% as the retirement readiness benchmark, a number that represents different things to different income groups, the report, provided free in brief and at the cost of $100 for more detailed analysis looks at the average employee. From there, the report then analyzes various pathways that employee can take, and if they did, how well the plan allowed them to reach the optimum amount in their retirement accounts.
In a downloadable pdf, they suggest that a person earning $20,000 a year will need 94% of their pre-retirement income to survive. Although the plan does take into account conservative longevity predictions and the available investments in the plan, it does not look at the statistics for this particular group and their overdependence on Social Security benefits.
Their benchmark also suggests that someone earning three times that amount would need only 78% of their working income to hit the 100% mark in the company's index. Some industries fair much better than others. But this is not reflective of the whole of the employees in the plan, simply what the plan may do for you should you use it to its fullest.
And therein lies the rub. Most employees, no matter how good the plan, do not max out their retirement contribution, leaving them with a huge gap in what they will need and what they enter retirement with. Without full participation, there is little another tool for plan sponsors can do. The vast majority of plans are adequate even if they fall short on the educational side.
While there is emphasis on educating the participant through education of the plan sponsor, it is beginning to seem a little overdone, even as this type of spotlight is still in its infancy. Most employees wonder why their plans weren't improved sooner. And still more see the incremental improvements as a way to sustain the current level of contribution rather than an enticement to increase it.
The real improvement will come from the IRS. Once they fix the expected tax rate for retiree's plans when disbursement begins, and not leave the rate the big unknown, employees will see the future through a much clearer light. Not having any idea what those future taxes will be make it difficult to determine how much will be enough.
Monday, November 23, 2009
Thursday, November 19, 2009
Retirement Planning: Vacation Time and No Money?
We have found that 2009 was not so kind to those investing in their 401(k). Employers have reduced or eliminated their matching contribution and many recent surveys have suggested that this will be slow to return. What was once considered the competitive lure for many employees has no simply become a sidebar in the search for a job. For many, and employers know this all too well, just landing employment is benefit enough.
But what about those who already have a job? What if you are a long-term employee? Many of us, as we have noted numerous times in this blog (post about matchless strategies) and on BlueCollarDollar.com, have taken the wrong path when confronted with this issue. Far too many of us reduced our contribution to our defined contribution plans when this occurred. Some have even determined that if the employer doesn't match, you shouldn't contribute either. And just as bad for your retirement future, you did nothing to help make up for that plan shortfall.
As we have noted, the best way to make up for this decrease in contribution is to increase the one you are making. For older workers, the higher salary they receive may make this possible. For younger workers, the decision becomes one of increased frugality, living well within their means and doing without some of the luxuries they may have built into their budget. If your employer contributed 3% and you contributed enough to make the match effective, your best move is to make up for the employer's shortfall.
Yet, there may be another way that your employer might be willing to allow. In an effort to get more people contributing more to these all-important accounts, the Obama administration has allowed retirement investors the option of rolling unused vacation pay or accrued sick pay into their plans.
This past year may have seen an increased workload at your job because of employee cut-backs. This may have forced you to defer a much needed vacation in favor of staying right where you were. Fear of seeming dispensable at a critical time, even though the need for vacation has been proven the best way to increase productivity. But this leaves you with an account full of unused vacation time.
Contributing this sort of payment to your 401(k) requires your employer to make some changes to their plan. Even as some have reduced the availability of their matching contributions, some have added this provision to their plans to allow exiting employees to have their unpaid time put into their 401(k) plan prior to rollovers and to allow those who did not use what they had, to use the time to contribute to existing accounts. The later can only be done if you have not maxed out your account (currently at $16,500 for those under 50 and $20,000 for those over that age).
Companies may find this incentive very alluring. Not only does it make them slightly more competitive (for one, employees are on the job more throughout the year) but it offer the illusion of a benefit increase without the actual pay increase.
If your company currently does offer this or is considering it, keep in mind that it will not come with or apply to any matching benefits the company offers. And they may also see it as a temporary offering rather than a fixed part of the plan. The only thing that is certain is the option must be nondiscriminatory.
But what about those who already have a job? What if you are a long-term employee? Many of us, as we have noted numerous times in this blog (post about matchless strategies) and on BlueCollarDollar.com, have taken the wrong path when confronted with this issue. Far too many of us reduced our contribution to our defined contribution plans when this occurred. Some have even determined that if the employer doesn't match, you shouldn't contribute either. And just as bad for your retirement future, you did nothing to help make up for that plan shortfall.
As we have noted, the best way to make up for this decrease in contribution is to increase the one you are making. For older workers, the higher salary they receive may make this possible. For younger workers, the decision becomes one of increased frugality, living well within their means and doing without some of the luxuries they may have built into their budget. If your employer contributed 3% and you contributed enough to make the match effective, your best move is to make up for the employer's shortfall.
Yet, there may be another way that your employer might be willing to allow. In an effort to get more people contributing more to these all-important accounts, the Obama administration has allowed retirement investors the option of rolling unused vacation pay or accrued sick pay into their plans.
This past year may have seen an increased workload at your job because of employee cut-backs. This may have forced you to defer a much needed vacation in favor of staying right where you were. Fear of seeming dispensable at a critical time, even though the need for vacation has been proven the best way to increase productivity. But this leaves you with an account full of unused vacation time.
Contributing this sort of payment to your 401(k) requires your employer to make some changes to their plan. Even as some have reduced the availability of their matching contributions, some have added this provision to their plans to allow exiting employees to have their unpaid time put into their 401(k) plan prior to rollovers and to allow those who did not use what they had, to use the time to contribute to existing accounts. The later can only be done if you have not maxed out your account (currently at $16,500 for those under 50 and $20,000 for those over that age).
Companies may find this incentive very alluring. Not only does it make them slightly more competitive (for one, employees are on the job more throughout the year) but it offer the illusion of a benefit increase without the actual pay increase.
If your company currently does offer this or is considering it, keep in mind that it will not come with or apply to any matching benefits the company offers. And they may also see it as a temporary offering rather than a fixed part of the plan. The only thing that is certain is the option must be nondiscriminatory.
Tuesday, November 17, 2009
Retirement Planning: The Dividend Difference
This week on MomsMakingaMillion Talk Radio we are discussing the art of dividend investing.
So what are dividends?
When a company makes a profit there are basically three things that can be done. Some reinvest it, which is what newer companies or growth companies do. They take those profits and channel them back into the company in the form of research or simply hold the cash for future mergers and acquisitions. Some companies use the money to buy back their own shares. This happens when the company realizes that its share price is below what they think it should be. Some use the cash to clear up their balance sheets by buying down their debt exposure. Others share it with the shareholders.
These are all good things to do with the cash they have made but nothing benefits the shareholder over the long run better than dividends do. Why is that?
Dividends are old school. I wasn't that long ago that Wall Street considered the act of dividends the most important aspect of an investment. Now we can look to dividends for one thing: to increase our wealth.
How often do companies pay their shareholders?
Dividends are decided by the board of directors. Then they set a declaration date, which is the day the dividend payment to shareholders becomes a liability on the company's books. This is followed by the shareholder of record date. If you are holding the stock on that date, you receive the payment. They refer to this point in time as the ex-dividend price for the stock. If you buy the stock before the dividend is paid, you get the dividend. But be careful, a company considers the shareholder of record a person who owns the stock four days before the dividend is actually issued. Buying a stock in this four day period means you will not get the dividend; the person who sold it to you will. And the other important date in this process is when the company actually pays you.
Do they always pay cash?
This is the most common way of doing it. A company will declare a dividend and that amount usually is split among four quarters. So if the business offers you a dollar dividend, each quarter you would receive 25 cents for each share you own. Sometimes they offer a one time special dividend which is a lump sum payment with no other date specified when they will do this again.
What do investors need to keep in mind when buying dividend paying stocks?
Three thing investors can keep in mind when looking a dividend paying stocks: they are less volatile because the companies who pay them tend to be far more stable in terms of share price than other companies, they outperform non-paying dividend companies by almost 3%, and the are easily reinvested providing the investor with additional opportunity to buy more stock which means more dividends.
So what are dividends?
When a company makes a profit there are basically three things that can be done. Some reinvest it, which is what newer companies or growth companies do. They take those profits and channel them back into the company in the form of research or simply hold the cash for future mergers and acquisitions. Some companies use the money to buy back their own shares. This happens when the company realizes that its share price is below what they think it should be. Some use the cash to clear up their balance sheets by buying down their debt exposure. Others share it with the shareholders.
These are all good things to do with the cash they have made but nothing benefits the shareholder over the long run better than dividends do. Why is that?
Dividends are old school. I wasn't that long ago that Wall Street considered the act of dividends the most important aspect of an investment. Now we can look to dividends for one thing: to increase our wealth.
How often do companies pay their shareholders?
Dividends are decided by the board of directors. Then they set a declaration date, which is the day the dividend payment to shareholders becomes a liability on the company's books. This is followed by the shareholder of record date. If you are holding the stock on that date, you receive the payment. They refer to this point in time as the ex-dividend price for the stock. If you buy the stock before the dividend is paid, you get the dividend. But be careful, a company considers the shareholder of record a person who owns the stock four days before the dividend is actually issued. Buying a stock in this four day period means you will not get the dividend; the person who sold it to you will. And the other important date in this process is when the company actually pays you.
Do they always pay cash?
This is the most common way of doing it. A company will declare a dividend and that amount usually is split among four quarters. So if the business offers you a dollar dividend, each quarter you would receive 25 cents for each share you own. Sometimes they offer a one time special dividend which is a lump sum payment with no other date specified when they will do this again.
What do investors need to keep in mind when buying dividend paying stocks?
Three thing investors can keep in mind when looking a dividend paying stocks: they are less volatile because the companies who pay them tend to be far more stable in terms of share price than other companies, they outperform non-paying dividend companies by almost 3%, and the are easily reinvested providing the investor with additional opportunity to buy more stock which means more dividends.
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