Your Retirement Plan in 2012

This article originally appeared at BlueCollarDollar.com and was written by Paul Petillo

"Time is free, but it's priceless. You can't own it, but you can use it. You can't keep it, but you can spend it. Once you've lost it you can never get it back." Harvey MacKay

One of the key elements in any financial transaction is time. If you want to retire, you must consider the amount of time. If you want to borrow, how long you have to pay it back can be translated into dollars and cents. Investing; timing they suggest can't be down but is important nonetheless.

If you are twenty, time is on your side. If you are thirty, there is time left. If you are forty, time is of the essence. If you are fifty, time is running out. If you are sixty, where has the time gone. And older than that, time is no longer on your side. It accompanies us through life like some dark passenger. It reflect back on us from the mirror. And when we look at our retirement plan, it stares at us without guilt or shame. Time is the truth.

When I first began writing these predictions, and I've been churning out these year end ditties for over a decade, many were laced with optimism, some with an urging that we learn the lesson and move forward armed with knowledge of past mistakes, and still others were exercises in reality. In 2012, we have some opportunities and some problems awaiting us, left on the table as we symbolically turn the calendar wiping out 2011. But it won't leave quietly.

So I have a few thoughts about what you can do - resolutions of sorts but not the drastic sort we make and break almost within hours of promising ourselves at midnight.

Increase your contribution I start with this obvious chant for two reasons: you aren't making a large enough contribution and two, I would be remiss in not telling you this right from the start. And I'm not just speaking to those with a 401(k).

There are the millions of you who are forced to (and because of that are not likely to) finance your own retirement through an individual retirement account. We lament at the worker who literally only has to sign up at his workplace and doesn't. And far too often, we say little about the person who has to sign-up (after finding a fund), commit with a fortitude that is somewhat lacking and to contribute some of their paycheck via direct deposit every week or month. That effort, it seems is a much more involved hurdle.

In 2012, the investment world will be little changed. It will roil and confuse and gyrate and possibly even nose dive - just as it has for decades. It will react to news - if not from Europe form China or even the presidential elections (which ironically tend to be excellent years to invest). This will have you second-guessing your investments. But this will only apply if you have no idea how much risk you can take.

Pay attention to diversification You may not be capable of rebalancing, the act of making sure that your investments are directed evenly across many investments. This is much harder than it seems. As long as you are involved - and that is YOU in capitals - the struggle to keep balance will not get any easier.

For the vast majority of us, mutual funds will be the investment vehicle of choice. These investments will see more movement towards fee reductions. Which is a good thing. Fees will and always have been a subtraction of gains. This makes an excellent argument for indexing.

Choosing six index funds across the following cross-sections of the markets will not solve the problem of rebalancing (some will do better than others) but it will provide diversification. Index the largest companies (an S&P 500 fund), a mid-cap fund (the next 400 companies in size), small-caps (the next 2000), an international fund (an index of the largest countries (those with established banking systems even if they are currently troubled and will continue to be so in 2012), an emerging market fund (after international funds, the most risky) and a bond index (one that covers as much fixed income as possible).

Some of you will wonder if exchange traded funds (ETF) wouldn't be just as good if not better than simple indexing. In 2012, ETFs will continue to drill down ever deeper into sectors of the markets that add risk along with the illusion of an index. ETFs will become more actively managed in 2012 offering you more risk at a lower cost. Cheap doesn't mean better. 2012 will be year of the ETF. If you are unsure what these investments are, consider this conversation I had with David Abner of Financial Impact Factor Radio recently to help explain what these investments are and how they work.

Focus on your financial well-being This refers to your credit score. It continues to impact your financial future and will become increasingly harder to ignore. A new credit rating service agency will add to the difficulty in 2012 and not only will the current scoring impact costs such as insurance, it will seek to trace the breadcrumbs of your financial life more thoroughly that the big three do.

There is little likelihood that the job market will increase as many of our returning troops will flood the marketplace, taking numerous jobs from your kids just out of college. Which means another year with your kids at home. The only answer to this problem is to continue to tighten down your budgets in 2012. As I mentioned earlier: "If you are forty, time is of the essence. If you are fifty, time is running out. If you are sixty, where has the time gone."

And you must do this understanding that inflation - not the reported number but the real number in your grocery bill - will still chip away at your wealth. This means you will move in two opposite directs in 2012: saving and investing more for your fleeting future (at least 6% but 10% would be best) and spending less in the present (easy of you don't use credit).

And the housing market will improve for those who have repaired any damaged credit or who have saved enough of a down payment to buy a house. people are still buying and selling. These people have found that while the market is not accessible to all, it is for those that have done right by their personal finances.

Do all of that this may not seem like a new year - but it will be a better year!

The Pursuit of Retirement

Ask any psychiatrist what worrying is and you might get this sort of response: it is " the ubiquitous human practice of imposing suffering upon oneself. Worry is a good example of self-inflicted suffering."  A layman might characterize the worrying as simply being not-so-positive, having crossed some imaginary line between what is feeling good and not so much.  If that is the case, we have become a nation of worriers, inflicting suffering on ourselves about a future we don't know about, preparing for a time when we have absolutely no certainty about inflation, taxes or the eventual returns that our retirement plans might yield.

Personally, I tend to characterize worrying as an activity that suggests lack of preparation or planning.  You can't possibly prepare for every contingency, life has things that simply aren't subject to any sort of plan, but you can make the effort.

Retirement planning, something I have described as a whole life effort at looking at all of the possibilities and making arrangements to address each, offers us the ability to have some control.  Worriers will still worry.  But at least they will worry less and begin to straddle that fretful line separating positive and negative.

There are several things that you can do, in the short-term to help alleviate any worrying that might be haunting you.  There will always be those who say save (although I prefer the word invest) for retirement.  I am one of them and in many instances, those with 401(k) plans will have the easiest time in accomplishing this first and most vital step. But those who don't will need to develop a discipline that isn't quite there or if it is, not fully formed.

Those with a 401(k), who have been on the job long enough to have access to the plan, should contribute 5% of their pre-tax income. To further alleviate the worry - and you will once you are faced with the choices in the plan, many of which are not that great - simply put it in an index fund, either one called Total Market or one that tracks the S&P500. (You can learn more later, after you tackle the next problem.)

Those without a 401(k) (and now that those that have a 401(k) have begun to invest) should begin to focus on what they can do in the short-term.  In the vast majority of instances, your household spending needs to be reexamined. As much as I want to avoid saying so, if you are living paycheck to paycheck, it is not the size of the check that is the problem, it is what the check is paying for.

Credit may be the great social equalizer, giving everyone the impression that you are worth more than you are able to pay for but debt is an economic destabilizer and a very serious threat to your ability to remain positive.  This is and should be the short-term focus for those who wonder what life will be like in retirement.

Oddly, you may always have debt of some sort and even more oddly, some of it will be considered good. Good debt is fixed at a certain rate for a period of time with a pay-off date when the balance will be zero. This includes a house payment and a car payment.  Credit card debt is not considered good debt. It can be paid off although and this is where you will develop the discipline to take the first step towards retirement.

Using a sliding scale plan, your credit cards could be paid off in full in a much shorter time than you imagined.  Try this: Suppose you have three cards - and most of us carry a balance from month to month on this amount - list all three cards in terms of their minimum payments.  It might be $15, $25, $50.  Take the lowest minimum and pay double on it while paying the minimum of the other two (paying double the minimum on all three is better, but we are dealing with manageable amounts here).  Do this until it is paid off.

Now roll the minimum payment you doubled onto the next card's minimum making that payment $55 ($15 x 2 + $25) and continue the $50 minimum on the other card.  Once that accelerated paydown is complete, roll the $55 to the remaining card.

This could take several years to accomplish but what it will do is keep you from stepping backwards each time you try to move forward. While investing for your future is always a priority, the longer you have this sort of debt, the markets where you have invested your retirement dollars will have to outperform to a degree that may not be possible.  They would have to return almost twice as much as the interest rate you are paying your creditors to get to even.

Yes, you will still be behind in the pursuit of retirement but you will know be able to look at the discipline you have created as a new found way to keep worry at bay and begin to build the next phase of your retirement plan: the emergency fund.  having solved this problem and the next will be giving you the ability to resist using credit in times of crisis and tapping your retirement in times of emergencies.  For those of you that have a 401(k) and began your investment plan at 5% of your pre-tax income - a level of investment that in most cases does not alter your take-home pay, your focus on debt and then your emergency account is critical as well.

These remain the two biggest problems facing your future retirement.  I'll never suggest you stop worrying.  But getting these tow things - your debt and your family's emergency fund - under control will put you on a wholly different path, one you will never have to worry about again.

Paul Petillo is the Managing Editor of BlueCollarDollar.com/Target2025.com

Retirement Planning for the Next Generation

Most of us are barely able to accumulate enough wealth for own retirement let alone thinking about providing for generations far removed from the event.  But if you could, would you?

The assumptions you make about how much money you will need in retirement are probably the most difficult exercise in the whole of retirement planning. The unknowns are so numerous that simply thinking too much about it gives many people the incentive to simply ignore the question. Taxes and inflation play a role in how much money we will need along with the condition of our health, our portfolios and our living arrangements. Who could possibly guess with any accuracy what those costs will be?

Yet, some of us can with certain investments. If you can wait until you are 70 1/2 years-old to begin taking your distributions from an IRA, and you take only the minimum amount needed, you may be in a position to make that IRA last much longer, across generations. Called a Stretch IRA, the sort of planning can create untold wealth for a child or grandchild.

More on the Stretch IRA from Paul Petillo, managing editor of Target 2025.com

Can Actuaries Make a Good Retirement Prediction?

When we do retire, we do tend to spend more during those initial years.  And because of that, we try an calculate just how much is enough so we won’t outlast our funds.  This is often based  on the 4% rule, an initial distribution that is adjusted upward as retirement continues based on inflation.

Because no one, not even the actuaries know how long we will live, whether we want to perserve some of those funds for our heirs, what the tax rate will be over those years and whether inflation will begin to rise significantly, this decision is incredibly difficult to make, even when you are close to retirement.

You can read the full article here

The Future of Your 401(k) Withdrawals

I am asked quite frequently how much you should have in your 401(k) when you retire.  The real question is how much will I need to have to withdraw a certain amount of income from the plan when they retire. 

These seem like the same question, at least on the surface.  Determining your eventual distribution from your plan depends on how much is in your plan.

The problem lies in an unknown future filled with financial events that are largely beyond your control.  We can’t predict inflation.  It could be mild as it is currently or it could skyrocket.  We can’t predict taxes. 

They could remain stable and if the popular theory of being taxed less in retirement holds any validity, we can make educated guesses as to what that rate will be – but not much more.  We can’t predict the markets.  We tend to be an optimistic sort projecting past historic returns as a measure of future results.

So if inflation doesn’t cooperate and taxes could rise and the markets continue to be volatile, where does that leave us?  And with what controls?

Read more here.

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

Your Retirement: The Double-edged Sword of Inflation

No one among us dislike lower prices for basic goods. If gas is inexpensive, our sentiment on the economy improves in tandem. If food prices fall, our personal budgets rejoice with the addition of some financial breathing room. Inflation has this effect like no other measure available in the economy.

And although the measure is of a basket of items (goods and services, ironically with food and fuel removed because of their volatile nature), it is a lagging indicator and open to refinements and adjustments. Yet it is still the number we associate with spending. How far each dollar will go is especially important in tougher economic times (and they don't get much tougher).

The inflation rate over the last nine years picked a year ago last month at 5.60% due in large part to the cost of oil - not the commodity itself but the effect it was having on the "goods" in the basket of measurable items. But since then, as oil prices fell, so has inflation. Last month it had turned negative at 2.10% (Here are the rates since January 2009 by month: 0.03%, 0.24%, -0.38%, -0.74%, -1.28%, -1.43%, -2.10%).

The bad news for seniors (and any other contract pay raise linked to COLA or cost of living adjustments), their benefits (or wages) will not increase in any noticeable fashion. Some seniors, if they pay for Medicare with a deduction from their Social Security, due to the increase in premiums, this lack of inflation will be easily mistaken for a cut in benefits.

Now, for some reason, which we will speculate on a little further on, the IRS is attempting to index your 401(k) deduction to this rate. If they are allowed to do this, and Congress can intervene before it takes place in 2010 tax year, your maximum contribution you are eligible to make will fall $500 to $16,000.

For most, this is a mote point. Far too many people are unable to make the maximum contribution in a time when employers have slowed, if not ceased matching employee contributions. But for those who can, this is a backdoor tax that could be the first step in drawing additional revenue for the government, at a time when it is needed most.

Exactly how much potential revenue is not known. There is still some legal wrangling to even see whether this can be done - it never has before - but I would be willing to wager that Congress will not act.

Folks who max out their 401(k) on salaries of $60,000 or less will need to have the rules rewritten in their workplace to allow for a contribution of that size to be made. Contributing 33% of you pre-tax income to your 401(k) would leave with a small paycheck (if you contributed just 5%, you would take home about $220 more than someone who made a maxed out contribution - which also includes some room for the employer to make their match) but a huge retirement nest egg, particularly if you have an early start of the process.

This will, without a doubt, have the biggest effect on high wage earners. Even with 14 million workers idle due to layoffs or other economic situations, the US work force totals 154,504,000. If the IRS is permitted to enact this change in deductions and assuming that the top 10% of the wage earners, the folks most likely to make that sort of sacrifice and you use the lowest tax bracket in the group, the government would, in theory, net an additional $2 billion in revenue.

So for the vast majority of wage earners, setting aside and investing any available pre-tax cash into your 401(k) plan is worth doing. Even if your employer has suspended their match or significantly altered it from the year prior, continue to use this type of plan.

And while I have you, I need to re-emphasize the difference between savings and investing. When you put money away in a retirement account, be it a self directed contribution or an automatic withdrawal via payroll into a 401(k) plan, you are NOT saving money. You are investing. My belief is that this may have been part of the problem with these plans; folks thought that they were saving when in fact they were investing.

Investing comes with certain obligations such as knowledge of risk and your tolerance to it as well as a keen sense on how to use that information over a long period of time.

If I could get everyone to call this what it is, I think we could approach this whole retirement situation with a more clear goal and calculated approach.

Retirement Planning: Making Realistic Assumptions about Retirement

The act of assuming is much like the act of predicting. It is subject to unknowns and is based on what we know happened, with a healthy dose of optimism thrown in for good measure. In retirement planning, the assumption of what you will need to live long enough to outlast your money can be a recipe for disaster that will not materialize until you are no longer able to do anything about it. In other words, you will be too old to fix the problem of not having enough money.

It is a common practice among advisers to suggest the following: You will have $20,000 in Social Security benefits annually; you will withdraw 4% of your retirement income per year; your retirement account will grow by 8% during the years you contribute and continue that pace after you stop working; the inflation will remain relatively stable at around 3.5%; and you will have no other source of income available such as a pension.

Each of these assumption may be wrong and this rate of incorrectness can lead to problems early into your retirement but late enough in it to do anything about it.

Let's begin with Social Security. The assumption that it will somehow go away is just not accurate. It will be there. But the earlier you tap into those funds, say at sixty-two instead of your mandated full retirement age, a target that is guaranteed to move further away as time passes, the smaller amount of those estimated funds can be assumed. So assume the worst and that you will not be able to tap that social program until you are well beyond 65. And if you do, it might be less than you had previously assumed, even if you will not outlive the benefit.

Now for the withdrawal rate. This is key to the long-term health of your retirement plan. I, along with numerous other people in this field have suggested that 4% is the rate you should chose when attempting to outlive your retirement savings. This however is based on a fully funded retirement plan that has you entering into retirement debt free.

The problem with debt is not what you owe on a loan(s) - although it is definitely troublesome to any income calculation whether you are working or not - it is what you will need to finance the rest of your days. Taxes will not go away. Both personal and property taxes will continue to act as a debt on your income and will rise in the future. Insurance will also create a debt-like obligation, not only for health but for property coverage for your home, your car, and any other property you might have. Upkeep on those properties will also increase over time acting as another strain on your income.

The growth number we often assume, the 8% return we are expecting on our investments may be too high. As we all know now, if you were to retire now or worse, be drawing on retirement investments, you are withdrawing money at a faster rate than the money can recover. Based on the last decade of returns, the number may be closer to 4%.

Inflation is another major concern. It is not going away and is even expected to climb in the years to come. While 3.5% may be an workable average and a fair assumption, it is not worthy of a worse-case scenario projection. The fact that your money will be worth less in the future should be calculated closer to 5%. This allows for some reverse growth and allows you to plan much better with fewer surprises later in life.

While the pension assumption - the fact that so few of us have one and even if we do, a plan that is not currently in trouble - is safe guess to make. Less than 25% of the working population has one. If you do, assume that it will pay 25% less or more, if you are beyond the cut-off point that the Pension Benefit Guaranty Corporation or PBGC insures. Pension plans pay the PBGC to insure these plans and they will only guarantee a certain amount. If you have a pension, calculate the worse-case scenario here as well. The 2009 PBGC guarantees can be found here.

The next post here will discuss the hard numbers.

Taxes and Retirement Planning

As the late George Carlin once said, “the poor are only there to keep the middle class going to work each day.” And so it goes, we are off to work each day, hoping beyond hope to scrap by without having your life’s work stripped away by health insurance costs, lack of creditworthiness and kids and/or parents who are becoming increasingly dependent on your incomes.

And the one hidden menace, lurking in the background is taxes. Sure, I focus a great deal on the influences of the economy at large, the subtle impact of inflation and the political landscape of money, but taxes, the thing that no one likes to admit keeps the public engine running in communities across the country, are about to increase. But will you notice?


On the Local Level
Revenue for state and local governments ebb and flow with the state of the economy. When property values jumped dramatically, taxes tied to the assessed value of those home filled the coffers and made new project planning easier. But as those values decrease, those revenues will still be needed to keep the communities running even if its residents feel as though those taxes would be better kept on their own side of the balance sheet.

Some states are making swaps, using one revenue source to pay for another that may not be doing as well. A good example of these kinds of swaps is cigarette and alcohol taxes increasing as property taxes are frozen (usually at 1-3% of assessed value), capped or cut.

Expect sales taxes, if your state has them, to increase over the next several years. This does help tourist rich cities to capitalize on outside sources of revenue but for the most part, it slows the economic growth by taking spending money from the consumer.

Look for an increase in amnesty programs, events designed to get delinquent taxpayers back into the system using the lure of payment without penalties of late fees.

On the Federal Level

This is the big unknown question. Senator Barrack Obama has made I clear he believe that the families with household incomes exceeding $250,000 should be paying what he refers to as “their fair share”. Investors expect that this group, the ones most likely to support the capital gains tax of 15%, to pay more for the sale of stocks if he is elected. (The prevailing belief is that even if Obama is elected and increases this tax on the wealthiest of families, it would be capped at 28%.)

Senator John McCain on the other hand, is offering much of the same program that has been successful, but only if you ask the right people. Mr. Obama’s plan would force many folks who have not diversified, specifically those with illiquid assets, to do so before the new president takes office.

If Obama gets his way, states and local municipalities would see a huge influx in revenue from tax-exempt municipal bonds. This can be tricky territory though. Some munis trigger the alternative minimum tax (AMT) because they pay interest.

The Effect on your Retirement Plan

Unless you are among the highest wage earners, your approach to retirement planning should be focused not so much on how much is in the nest egg but how much income, less taxes and inflation, will allow you to be comfortable. That number is generally different for each of us and unfortunately is based on a perfect situation (usually calculated without considering taxes and inflation).

Most of us can expect to take home – after retirement – a paycheck that is 30% lighter than we estimate (3% for inflation – modest and hopeful guess, 15 – 20% income taxes on earnings from deferred income sources like pensions and retirement accounts, and 10% on property and local taxes).

That means you will need to save an additional 30% above what you are currently putting away for your future or, lower your expectations on how much you will need.

We can count on one thing: Your elected officials feel your pain but can do little about it. Taxes will not go down no matter whom takes the helm in Washington or at the local level. The best you can do is plan for the worst.

Retirement Planning and Your Personal Finance Skills

Retirement planning is all for naught if you don't bring some basic knowledge to the process. Below is the first of a three part quiz published by the Federal Reserve to help tally your personal finance, economic, and investing skills. There is no reward for right answers. In fact, I have taken the answers below and added explanations to help you understand why.

Part two and three come later this week.

Federal Reserve Quiz

Part One

Personal Financial Literacy Quiz:
(Answers with explanations - from me - at bottom of page)

1. Inflation can cause difficulty in many ways. Which group would have the greatest problem during periods of high inflation that last several years?

a.) Older, working couples saving for retirement.
b.) Older people living on fixed retirement income.
c.) Young couples with no children who both work.
d.) Young working couples with children.

2. Which of the following is true about sales taxes?

a.) The national sales tax percentage rate is 6%.
b.) The federal government will deduct it from your paycheck.
c.) You don't have to pay the tax if your income is very low.
d.) It makes things more expensive for you to buy.

3. Rebecca has saved $12,000 for her college expenses by working part-time. Her plan is to start college next year and she needs all of the money she saved. Which of the following is the safest place for her college money?

a.) Locked in her closet at home.
b.) Stocks.
c.) Corporate bonds.
d.) A bank savings account.

4. Which of the following types of investment would best protect the purchasing power of a family's savings in the event of a sudden increase in inflation?

a.) A 10-year bond issued by a corporation.
b.) A certificate of deposit at a bank.
c.) A twenty-five year corporate bond.
d.) A house financed with a fixed-rate mortgage.

5. Under which of the following circumstances would it be financially beneficial to you to borrow money to buy something now and repay it with future income?

a.) When you need to buy a car to get a much better paying job.
b.) When you really need a week vacation.
c.) When some clothes you like go on sale.
d.) When the interest on the loan is greater than the interest you get on your savings.

6. Which of the following statements best describes your right to check your credit history for accuracy?

a.) Your credit record can be checked once a year for free.
b.) You cannot see your credit record.
c.) All credit records are the property of the U.S. Government and access is only available to the FBI and Lenders.
d.) You can only check your record for free if you are turned down for credit based on a credit report.

7. Your take home pay from your job is less than the total amount you earn. Which of the following best describes what is taken out of your total pay?

a.) Social security and Medicare contributions.
b.) Federal income tax, property tax, and Medicare and social security contributions.
c.) Federal income tax, social security and Medicare contributions.
d.) Federal income tax, sales tax, and social security contribution.

8. Retirement income paid by a company is called:

a.) 401 (k).
b.) Pension.
c.) Rents and profits.
d.) Social Security.

9. Many people put aside money to take care of unexpected expenses. If Juan and Elva have money put aside for emergencies, in which of the following forms would it be of LEAST benefit to them if they needed it right away?

a.) Invested in a down payment on the house.
b.) Checking account.
c.) Stocks.
d.) Savings account.

10. David just found a job with a take-home pay of $2,000 per month. He must pay $900 for rent and $150 for groceries each month. He also spends $250 per month on transportation. If he budgets $100 each month for clothing, $200 for restaurants and $250 for everything else, how long will it take him to accumulate savings of $600.

a.) 3 months.
b.) 4 months.
c.) 1 month.
d.) 2 months.

ANSWERS: 1) b; 2) d; 3) d; 4) d; 5) a; 6) a; 7) c; 8) b; 9) a; 10) b

Retirement Planning and the Disgruntled Worker

You will be able to pick them out much easier in the coming months. You will see them with disappointed looks on their faces, trudging through their day wondering if they will ever be able to retire. Not just because they haven’t saved enough. Some of these folks have and were fully prepared to quit their day job in favor of a new life after work. Instead the angst they wear on their shirt sleeves is because they underestimated the volatility of the equity markets and over estimated the value of their homes.

The latest release form the Employee Benefit Research Institute portrayed an American worker who has lost confidence in their ability to save enough to retire. According to the report, “The percentage of workers very confident about having enough money for a comfortable retirement decreased sharply, from 27 percent in 2007 to 18 percent in 2008, the biggest one-year drop in the 18-year history of the survey. Retiree confidence in having a financially secure retirement also decreased, from 41 percent to 29 percent, a drop of 12 percentage points. Decreases in confidence occurred across all age groups and income levels but was particularly acute among younger workers and those with lower income.”



Those that had already retired, also part of the survey were just as concerned as though who seem to be putting off their plans until the markets recover. Among those 54 percent told the surveyors that they left the workforce because of health problems or disability. What incomes they received from pensions and savings was largely eaten up by expenses, with 44% of those who responded telling that they spent “more than expected on health care expenses”.

Once retired, the primary concern is not outlasting your savings. It is what we focus on, mostly in the abstract while we are working. But once we leave the workforce, those concerns become very real. The EBRI found that “More than half of retirees (54%) say they are now more concerned about their financial future than they were right after they retired, a 14 percentage- point increase from a year ago (40 percent in 2007)”.

While health concerns both while working and retired have deeply impacted this confidence indicator, the real day-to-day expenses have begun to erode the average workers ability to save for retirement.

Cost of living wage increases have all but ceased, with number showing that over the last seven years, the average worker has lost one percent in the category of take home pay. Premiums for health insurance, while workers were still employed have grown by an average of 6% and those number look to increase. Couple that with wage stagnation and you can see why some workers feel as though they were moving in reverse.



The housing crisis has shaken many people to the core, even if they are confident that they are well positioned with their mortgages. Even if your debt level is manageable, the economy will make its downtrodden presence known to even you. Fuel costs will make an ever-increasing impact. Inflation will erode not only your current dollar but future ones as well. And if the economy seems bad now, wait until the job market begins to deteriorate as the credit markets continue to tremble with fear. That fear is very real. Creditors wonder, almost out loud, will they get paid back?

One bright spot: those fears seem to lessen with income. The fewer dollars you gross, the report seems to indicate, the lesser the chances are you are worried about retirement. Perhaps that is because you may never know what retirement is.

Retirement Planning and Future Calculations

The internet is littered with a wide variety of calculators, many of which are designed to help you focus on a certain goal. Many are just flat out depressing.



As we have found out, retirement planning is more than just saving money. It is a strategic position, a plan for all of the possible things that could go wrong from health issues not only for you and your family but job interruptions, career changes and forces that exert a certain pressure of which we have little or no control.

Inflation and taxes play a huge role in how we plan but they are almost completely unpredictable. Nonetheless, the calculators still try to paint a picture that will best, and in most cases, sell an idea, product or company that can help you attain that dream. Charles Schwab is no different.

The company is hoping that more companies will begin offering a Roth inside of a company’s 401(k) or defined contribution plan. But is a Roth good for everyone?



Not necessarily. The differences in the two types of retirement plans are based on the way taxes are handled. If you assume that you will be in a lower tax bracket when you retire, sticking with the traditional form of 401(k) will still be the best choice. It provides you with the same contribution opportunities as a Roth 401(k) would but may, especially in the lower income brackets – below $100,000 income, provide you with a better funded paycheck.

Once you get above the $100k limit, a Roth might serve you better.

The calculator that Schwab offers can give you some indication of the differences although it does not calculate the net result of inflation on those contributions nor does it discuss investment options or the fees associated with those investments.

If you use the tool, be sure to check the box at the lower right hand corner. It might give you a more accurate read on where you might be going and whether it is worth changing. If you can take home 9% more now and use that money to control your debt and even increase your emergency savings, a Roth may not be the best option.

Questions: 11-18: Retirement Planning and Long Term Care: Eighteen Questions

Many policies have their own set of requirements. It is important to know when and how these criteria will be enforced. I’m skeptical of many of these qualifications. Policies issued now may have a wholly new set of hoops to jump through when the actual time you make a claim comes around. But asking the question now and including your agents (signed answers) can be helpful when you do make a claim twenty years from now.



11. Ask your agent if this policy requires the following questions to be asked if you put a claim in for nursing home care:
* An assessment of activities of daily living?
* An assessment of cognitive impairment?
* Physician certification of need?
* A prior hospital stay?
Other?
How will your potential policy cover the need for home health care:
* An assessment of activities of daily living?
* An assessment of cognitive impairment?
* Physician certification of need?
* A prior hospital stay?
* Other?

12. Surprisingly, or maybe not, insurance companies may have a small loophole built into the policy that you may not be aware of when doing your comparisons. For instance, does this policy require a prior nursing home stay for home health care coverage?
* Yes
* No

13. Once the policy is written and signed, it cannot be changed. The language is set in stone so to speak. This also should apply to the cancellation policy. If you are on good terms with the insurer, your policy should be guaranteed renewable. It may be, but ask anyway. Is the policy guaranteed renewable?
* Yes
* No



14. We have discussed some of the optimum years for getting these policies. Do it before your birthday and if possible, do it during your fifties or earlier. Here is an example of several policy quotes I received from the Federal Long term Insurance Program.

Because I am not eligible (I am not, as the site says, a Federal family), I used their calculator to determine several options. All of the policy quotes I received were based on three years of coverage, a ninety day waiting period, a daily benefit of $100, $200, and $300, comprehensive coverage (which includes both nursing and home care) and inflation protection. Here is what I found out based on my age (49 at the time of this writing), one year later, and if I had applied ten years later.

On the $100 benefit at age 49, I would pay $60.01 a month and receive a lifetime benefit of $109,500, at a daily benefit of $200, my premium and my maximum benefit would increase by twice; at a $300 daily benefit, I would pay $180.



Waiting a year until after my fiftieth birthday, I would be making slightly higher premium payments of about $4 – 8 a month. But if I waited until I was 59 to purchase the policy, the policy premium on a $100 daily benefit would increase to $89.47, at $200, it would double and if I wanted a $300 day benefit coverage, my monthly outlay would be over $265.

Ask your insurer for their insurable age ranges. It is important to understand what kind of insurance pool you are jumping into. If there is a cut-off date, this might be prove to be beneficial in terms of what kind of people are participating. If they offer a lengthy cut-off date, they may be filling the coffers with policies, many of which they will paying out on soon.
What is the age range for enrollment?

15. It is possible that your policy will no longer require you to pay the premium once the policy is activated. Find out if there is there a waiver-of-premium provision and how long must you be confined before the waiver begins?
For nursing home care
For home health care

16. The inflation portion of the policy is important and may cost you extra. Does the policy offer an inflation adjustment feature as a regular part of the policy or as a rider? And if they do:
What is the rate of increase? $ _________
How often is it applied? $ _________
For how long?
Is there an additional cost? $ _________

17. Policies can offer discounts depending on how you pay your premiums. Often, there is as much as nine percent discount if you pay the premium in full on an annual basis. Be sure to ask if you can receive any additional discounts if the money is electronically transferred. Once all of these things are asked of the insurance company, don’t expect a clear-cut view of all of the costs. But you will be able to get a general idea of what the policy will cost you and whether you can afford it.

What does the policy cost?
Per year $ _________
With inflation feature: $ _________
Without inflation feature: $ _________
(get it regardless of the cost savings that might be shown)

Per month $ _________
With inflation feature: $ _________
Without inflation feature: $ _________

18. Most policies come with a period of cancellation. You may have second thoughts. You may find, if you read further in the book, that there may be another option available for those who are diligent enough to pursue the alternative. Ask your agent if there is there a 30-day free look?
* Yes
* No