Do You Have Retirement Doubts?

There is absolutely no doubt that the retirement planning horizon is as diverse as those who are attempting to navigate it. In other words, there is no set formula for one group that can be used for another. On one side of the equation, we have those who can see the chance that they might retire and on the other, are those with doubts.

Those doubts exist in both groups. Older workers have seen the deterioration in their defined contribution account balances, the gradual and systematic elimination of pensions and the growing pressures that being sandwiched between both children and parents who are beginning to accept what they see as inevitable. That inevitability has been translated into simply working longer than they had previously anticipated to get the retirement that resembles that of a generation prior.

This group knows that they will need to invest more for their future at a time when they can't seem to free up any extra income to do so. They run calculations. They do math. And then, with all of this somewhat depressing information in front of them, they seem to be doing what would be counterintuitive: they become conservative in those investments.

The younger group, the college graduate, the young workers just entering the workplace and those who have been struggling with new families have a unique opportunity that has long since past the other group. They have time.

Many of these workers will enter the workforce where there is no pension, where they anticipate the benefits of Social Security will be limited and attainable farther away than that of their older cohorts and a marketplace that served the older workers with longer bull markets that are not likely to exist in the future. That bull market, a term defined as positive movement in the stock market, helped their parents in ways that will not be there for them. From 1982 to 2000, most of those in 401(k) plans saw balances rise without limit - or so it seemed. Since that point, we have seen two bubbles burst, stock market returns become more volatile and faith that this investment vehicle has stalled.

Yet those 401(k) plans still offer the best opportunity to do better than their parents at battling the potential of increased taxes, rampant inflation and that volatility. these 401(k) plans are shifting, often in dramatic fashion. Matching contribution are less than in those bull market years and for this group, they can expect that they will stay that way. But there are some changes taking place that could help this group more so than their older counterparts.

These changes include the increased presence of Roth 401(k)s in those defined contribution plans. Whereas older workers would need to calculate their taxes when making a change into these sorts of plans from a traditional 401(k), younger workers can begin at this point. The Roth 401(k) allows for after-tax contributions, which for most younger workers means that earning less (being taxed less) is a hidden benefit. Rollovers from a traditional plan comes with a tax bill. Beginning at this point, as younger workers can do, will not have any taxable impact.

But the best way for younger workers to avail themselves of this opportunity should be done in a tandem approach to the plan. If you contribute 5% of you pre-tax income, you will not in most instances, impact a dime of your take-home pay. At this point, finding an additional 5% to put in the Roth 401(k) side of the plan not only hedges against taxes in the future but gives you the ability to know this money is yours, the taxes you paid at a younger age will be less than at rate you might receive as you age, get pay increases and promotions.

This group should also know that this should be the time of your most aggressive investment strategy. Yes it will be a rough ride. But having time to recover is worth the risk. You have to contribute and stay in it through thick and thin to benefit. You can retire doing this even if you have no idea what your retirement will look like.

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

Retirement Planning and the Whaling Industry

I begin chapter 15 with a story of Nantucket. While for many, the first thing that comes to mind are those bawdy limericks, the village in Massachusetts was once the third largest city in the state behind Salem and Boston.



Whaling was an important source of income for the city and as the video below shows, allowed the world to see after dark. Whale oil was a superior product. The quest for the riches it would provide to those willing to take the risk was often paid for with the lives of the men (and sometimes women disguised as men) who boarded the ships. But when the hunt was successful, everyone was entitled to a lay.



A lay was a fraction of the proceeds of the catch. In Nantucket, the average whaler would receive 1/175 of the proceeds. The Merriam-Webster Dictionary, in an entry dated 1590, describes the nouns as “terms of sale or employment : price b: share of profit (as on a whaling voyage) paid in lieu of wages”.

Elmo P. Hohman wrote an article for the “The Quarterly Journal of Economics” (Vol. 40, No. 4 Aug., 1926) titled “Wages, Risk, and Profits in the Whaling Industry” where he described the method of payment as singular to the whaling industry.

He wrote: “The whaleman was not paid by the day, week or month, nor was he allowed a certain sum for every barrel of oil or for every pound of bone captured. Instead, his earning consisted of a specified fraction share known as a lay, of the total net proceeds of a voyage.” The amount was determined by the skill and efficiency of the person hired.



This sort of partnership is at the heart of your retirement plan. Because of the structure of many defined contribution plans (your 401(k) is a defined contribution plan – you are responsible for making the deposits into the account for your future rather than receiving a set amount from a pension – a defined benefit plan). You are in it as a group, using a single captain – also known as, at least for the sake of this example, the mutual fund manager running your investment) to steer you towards profitability. In turn, each of the participants it entitled to his or her share depending on the amount they have invested.

This so-called partnership in the enterprise, according to John Randolph, who wrote The Story of the New England Whalers in 1909, this also extended to anyone involved in the ship including the boatbuilders, the blacksmiths and the coopers. Each man was working for himself and hoping that the captain was able to give them an adequate return for their efforts.



This may have been the first instance where “past performance, while not a guarantee of future success” was used as a guide to determine which vessel was the best one to sign on to.

I write in the book that like investing, “the seas can get rough, the catch can be nimble and sometimes scarce and worst of all, the world can be awfully unpredictable.”

Retirement Planning and the PBGC

As we approach the new year, we will no doubt hear the verse “auld lang syne”. The reference to the phrase, thought to have first been coined by Robert Burns (1759-1796), actually translates into “once upon a time”. When we begin the discussion on pensions in the book, we look thoughtfully back to an era when the obligation to employee was more than simply wage-based, it was a lifelong agreement with the firm.


Guy Lombardo played this song on a 1929 radio broadcast forever associating it with the passing of the New Year.




David McCarthy, author of numerous papers and as the book notes, a lecturer at the Oxford Institute of Ageing, at Oxford University (what the book doesn’t say is that he has since changed that position and is now a lecturer in the Finance group at the Tanaka Business School) studies the role of pensions in business.

His belief that pensions have an important life cycle is the cornerstone for much of his work. When the Employee Retirement Income Security Act of 1974 altered the way companies treated pensions – which are not an obligation under the law, the interaction, not to mention the relationship the employee may have had with the employer, changed forever as well.



The life cycle Dr McCarthy wrote of saw workers entering into an agreement with their employer when they were the most vulnerable cash-wise but had the most to offer from a human capital point of view. Pensions, through their conservative nature offered these employees a beginning at a future they might have ignored otherwise. When the human capital was at its lowest point, the pension was there to help.

Pensions unfortunately do not come with property rights. If a company is sold, dissolved through bankruptcy, or simply goes out of business, the employee can run the risk of losing most of their pension. This was the argument made for the 401(k) plan and was used by President Bush as the basis for his privatization of Social Security.



There are some safe guards in place. The PBGC, or Pension Benefit Guaranty Corporation insures against total loss but has not only a limited reach (companies need to participate in the program by paying premiums for the insurance guarantees.)

Here’s a recent example of how the PBGC works with smaller, lesser know companies.

”Tom's Foods filed for Chapter 11 protection in April 2005. In October 2005, it was purchased by Charlotte-based Lance Inc. for $40.2 million plus the assumption of some company liabilities. The transaction did not include the pension plan.”

Also noted in the article by Steven Taub for CFO.com was this comment about the transactions: “because Tom's Foods missed nearly $4.5 million in required pension contributions and the pension plan will be abandoned as a result of the sale of substantially all of the company's assets.” PBGC has guaranteed no interruption in pension payouts for current retirees and guarantees the pension for those that have vested.

How much pension you receive should your former employer face such events depends on when you retire. Recently, the PBGC, which was created by ERISA, raised its maximum pension payout for those retiring at 65 years old in 2008 to $51,750 (that is a 4% increase over the previous limit of $49,500 for plans ending in 2007.)

The maximum amount of payout for an individual who retires at 75 is $157,320 with a guaranteed benefit of $12,938 for those who retire at 45.

There are ways to check to see if your pension is at risk of being under funded. One is to ask for a health record of your plan. Troubled plans usually rely on optimistic projections of the underlying investments or worse and secondly, because of poor performance of the company leaving the plan with no funding to meet its obligations. Those obligations by the way are a result of actuarial tables used to determine the life span of the workers. If you sense your company is in trouble, plan for the worst – even if your pension payout is guaranteed.