Behind the Retirement Curve

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.

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

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: Companies are Still Trying

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

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


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

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

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

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

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


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

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

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

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


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

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

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.

It's Time for Some Retirement Housecleaning

Every Friday morning, Paul Petillo of Target 2025.com offers his take on the world of finance and investing on MomsMakingaMillion radio.  This informative show offers listeners a unique look at the journey of retirement, the task of wealth accumulation and some simple explanations for those of us who are utterly confused.

Here is a brief excerpt from the show on 04.02.10 with a link to the entire script below.


MomsMakingaMillion: For some reason, spring is the time of year when we want to clean out the winter dreariness and usher in the new season.  This is also a good time of year to take a look at your financial house and see whether it too needs a little sprucing up.  Today, we are going to discuss the how-tos and what-fors of that task.

Paul Petillo:  There is nothing like the feeling of spring.  And we should use it to trigger some financial house cleaning.  A lot like figuring out what in your closet you should toss or give to charity, using this spring-cleaning feeling to look at your finances can and should become a regular habit.

MomsMakingaMillion: The toughest thing is figuring out where to start.

Paul:  Surprisingly, it doesn’t take that long.  None of us goes a day without thinking about where we are in terms of how much money we have, where it is going and how do I get more.  So we already know some of the answers to the question: does this old financial plan still fit?

It probably doesn’t.  Most of us are mid-career and probably have a house, kids, a job or a business (which is like a job only you get to pick the sixty hours a week you work).  Some of us have parents who may or may not live with us.  So basically, this spring financial cleaning is a way to reorganize that closet, reprioritizing what your will need to do sooner rather than later.  More...

Paul Petillo is the Managing Editor of Target2025.com

The Tax Day Prompt: Review Your Retirement Plan

Most of us like to be reminded of the things we often forget. For instance, changing the batteries in your smoke detectors is often prompted by the change of the clocks. And despite numerous reminders to do these sorts of regular reviews of our retirement plans, specifically those of us who have the defined contribution sort, we seldom do.

Right around the end of the year is bad and not because of Christmas; because many mutual funds make distributions. Right around the beginning of the year is bad because we tend to break resolutions before we even have a chance to do anything. But doing so around tax-time may be the best solution. Your 401(k) after all, is a taxable (or should I say, tax-deferred) event.

Read more here