Commentary: Tweaking Social Security

Bring up Social Security to just about any American, Boomers included and you will get one reaction or the other. And it doesn't really matter whether you are young or old. You feel something is bound to happen to the program and although you may have no idea how it works, you believe that the way it currently does can't go on. Now opinions differ on the health of the program and the long-term sustainability of it but few argue that there aren't problems looming in the future. Is there?

The first reaction most feel is that the program can't continue on the way it has for decades to come. Bankruptcy, running out of funds, too many Baby Boomers, all get the blame for the demise of this important program. Whomever lit the match to this topic (someone on Wall Street I suspect with a keen eye on the potential windfall privatization would provide his/her business) has got to be pleased. A simple tinder of an idea has caught the public's attention and now we have a full-on brush fire.

So here's the rub: I'm not going to argue with those who have their mind's set on the end of the Social Security program as we know it. Let them think that it will not be around.

Let them believe that what is essentially a program to provide insurance that poverty won't grip those less fortunate, the disabled, the children who have lost parents or spouses who have lost loved ones, and those who did not have access to any additional cash to invest or save for retirement won't be penniless is worth tossing to the curb. Lawmakers seem to think that their suggestion that by simply telling the average American to save and invest more, work harder and longer, and in the process, feed their fear of not being able to retire in a lifestyle that is not sustainable on a single dollar less than they are currently making, that they are moving the country into a more prosperous future. They are not.

The bottom line is that the program will continue to exist. And so will the talk of its end. Why that conversation persists is puzzling. Even as fewer people contribute into the plan, those few actually contribute almost more than eight times as much as the post-WWII generation did. As Merton C. Bernstein, the Walter D. Coles Professor Emeritus at Washington University in St. Louis School of Law recently suggested, it is because of production. Workers are not only producing more output than previous generations, the work they are doing is better compensated. And that increased compensation according to Bernstein has closed the gap sufficiently. Is that simple equation likely to improve in the coming generations? Without a doubt. Yet little consideration is focused on that economic anomaly.

That's not to say that the program couldn't use a few additional tweaks. But preparing for the worst is not worth considering. And recent attempts by the GOP would actually create more debt not less should they try and change the program. It's a complicated and sort of odd way to think about it. The reality of what some of these proposed changes would bring about point to a flaw that cannot be overlooked: changing Social Security in the name of dealing with some future debt obligation we would leave our children would actually increase the debt limit we leave those kids.

Without getting into the vitriolic debate about the cost of government, the ridiculous ideas for reining in costs while two, possibly three wars are under way (and no talk of slowing spending down there) all while a recovery is under way, seems absurd. The bottom line still falls back on your ability to have enough to feel comfortable in retirement. If you exclude Social Security from your retirement calculations, then the onus of financing your retirement is on you. While I do not like the idea of a back-up plan (it suggests that the original plan has the potential to fail), Social Security not only acts as one, it is one that cannot be touched.

And surprisingly, despite all of the talk about its end, it will still be there for my grandchildren. Perhaps snot as robust. But doing the same thing it does now: providing insurance against poverty.

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

The New Retirement Question: You may want to work longer, but will your employer allow it?

We know two things in this post or almost post-recession era we are currently in: One, older workers are returning to work or not leaving the workforce at all and two, younger workers who traditionally made up the bulk of the workforce, are being crowded out by this newer pool of older workers. Delaying retirement due to economic concerns that have stymied our financial well-being has been news for quite some time. But what if the new face of the workforce is slightly wrinkled and framed in grey?

According to a study conducted by WorkplaceFlexibility.org and authored by Richard W. Johnson, Senior Fellow at The Urban Institute: "As the U.S. population ages and the number of Americans reaching traditional retirement ages increases, employers may need to attract and retain more older workers, many of whom are highly experienced, knowledgeable, and skilled." Basing the study on well-known assumptions, Mr. Johnson explores the shift in the workplace to accomodate the older worker who is increasingly choosing to hang on to their employment longer.

Among those assumptions is a longer life. As the older population reaches retirement age, they are finding the ability to continue working a possibility in large part because the work these folks tend to do is less physically demanding that many jobs were just a decade ago. While financial concerns are most likely to enter into the newsworthy conversations, the study seems to suggest that this trend is centered more on women than men.

The result is increased complications both for the company, the worker and the benefits they might or should be receiving at that age. The result is an experiment unlike any conducted prior to this where the lines blur between what is full-time work and what is full-time retirement.

Phased retirement, the new buzzword in this process involves reduced hours and responsibilities that include some perks normally reserved for women and men in the workplace who temporarily leave because of families. Among those phased perks are "flexible work arrangements, including part-time employment, flexible schedules, telework, contract work, and job sharing."

For the employer, the fringe benefits often accessible to the older workforce, such as traditional pensions could open the door to age discrimination. And this could hurt women more than men. Even as women have made great strides over the last several decades in pay, benefits and workplace populations, it is this group that is most likely to continue, or want to continue working beyond the traditional age of 65. Men, despite the reports of longer and healthier lives, choose to retire more now than when the jobs they engaged in were more physically demanding and strenuous.

Because the focus of this report is on the effects various policies and practices surrounding this transitional time of a workers life, Mr. Johnson points out some of the incentives and disincentives for working or not. Social Security has been gradually pushing back the retirement age and will probably continue to do so in the coming years. Defined benefit plans or pensions further complicate this trend by penalizing the annuitized payment should the worker continue to be employed.

The shift over the last three decades to defined contribution plans (401(k)s, 403(b)s) are much more accommodating to this segment of the workforce that wants to work longer. They can continue to contribute to a DC plan long after the traditional pension retirement age has been reached, adding the potential for greater lifetime incomes in the process. Because of these types of plans, workers reaching retirement age are more likely to work at least two-three years longer than they may have previously anticipated.

The study also revealed that if the employer provides health benefits for early retirees. of which according to a 2009 study conducted by the Kaiser Foundation only 29% of the employers do, that person is more likely to retire. Take them away or not provide these benefits and the worker will stay on the job longer.

Because Social Security benefits are calculated on a 35 year work history, one that favors men who have never had any interruption in their work history, this group is more likely to take their leave from the workforce. For women, each additional year worked eliminates a zero earnings year that may have come due to family leave because of children or the need to take care of aging parents.

The question facing employers is whether to retain these workers. In most instances, the older worker is at the top of the pay scale and poses a greater cost on the health benefits provided. Mr. Johnson notes: "Another study found that employers were less likely to call back older job applicants than otherwise identical younger applicants (Lahey, 2008). And it takes laid-off workers age 50 and older much longer than younger workers to become reemployed, even though older unemployed workers appear to search just as intensively as their younger counterparts (Johnson and Mommaerts, 2010)." Even if the desire to work longer is there, the opportunities may be limited.

Employers have acknowledged that the pool of potential retirees in the coming years will have a negative impact on the skill level of their employees. Yet few have done anything to address this shortfall of talent and skill. "For example, in the Cornell survey only 26 percent of employers allowing phased retirement would provide the same health benefits to workers after they reduced their hours. About two-fifths of employers allowing phased retirement in the Cornell survey, but only 9 percent of employers in the Ernst & Young survey, would allow in-service pension benefits."

The problem will need to be addressed by Congress at some point. Women Boomers face the greatest challenge in the coming years as they attempt to make up earnings shortfalls and look to adjust their schedules to a more flexible arrangement.

Employers will also need to address the issue as well. they may say that the talent looking to retire is worth retaining. But their current policies don't suggest they are doing much in the way of providing incentives. They may say they desire the older workforce. In practice, they have yet to make substantive moves to permit this choice.

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

In a post-pension world, You are richer

What does the world really look like? Is the post-pension times we live in actually a more profitable retirement environment? Are we better off thirty-five years removed? 

Despite the metaphors surrounding what retirement planning is supposed to be: a three legged stool, a three pronged approach, whatever visual cue you need to make sense of the process, your retirement is or at least should be, a lopsided financial affair. It should be something that works as a part of whole but not in any sort of equal sense. Social Security and the state of your financial affairs at the time you decide to quit working is really only supposed to be a small part of the retirement plan. In truth, the most prudent people who plan their retirement do so without any consideration of income from any outside source.

Not so in the years following the Great Recession. The vulnerabilities are now something we have seen first hand and many of us have recoiled in horror. Instead of relearning where we went wrong, we looked for the safest rock to hide under. Perhaps that is why, when the latest report from the Investment Company Institute was released this past November, your defined contribution plan or for most of you, your 401(k) was given equal stature amongst the other two "legs" of the retirement stool.

Social Security was designed to help keep those without from becoming destitute in retirement. Not surprisingly, the report points out this use of the program by those who are the least fortunate, the lower paid worker, as more reliant on those benefits than the higher paid worker. As they look at a post-ERISA world (the 401(k) actually came nto being in 1981), they conclude that this has always been the case and if it has, then so be it.

But the study wasn't designed to be much more than a good-old-boy pat-on-the-back. The ICI sees the distance between the demise of the pension as the sole means for retirement among workers in 1974 as a trip worth traveling. Coming out on the other end of that journey finds the lobby arm of the mutual fund industry rather satisfied. they point out that the median income from a defined contribution plan per person in 2009 was $6,000; in those same 2009 dollars, the same median was $4,500 in 1974.

It is not surprise that many of the remaining firms in the private sector still maintain them. But these plans are not considered a reason to work at these companies when it comes to the younger workforce. Pension breed company loyalty while 401(k)s allow workers to shift jobs when a better offer is available. On the other hand, pensions often leave this same group of workers with no retirement benefits, essentially, at least according to the ICI report, when vesting rules and the timing of benefit accural are used as a rodbloack to getting those benefits for time worked.

But during the time frame they used to conduct the comparisons (1975 to 2009), Social Security now makes up a larger share of retirement income even among those who had assets and other income sources. Based on per capita income at either end of the spectrum, with the lowest income group using just 2% of what the study calls asset income with an 85% reliance on Social Security compared with what the higher income group employs (20% assets and 33% of income from Social Security).

While the ICI celebrates the success of the defined contribution plan that replaced the private sector pension and they point out that those with DC plans are doing better than DB plan recipients in the past, one simple fact remains: we aren't doing enough.

While the answers seem clear: you need to invest more - probably much more than you would be comfortable in making, live smaller now while you are working, and hope that your health, inflation or taxes doesn't take a toll on those accumulated finances. In the face of such daunting news, you could expect a pull back. Instead of increased focus, we would get more ennui. Instead of an emphasis on better educated investment and financial decisions, we should expect more use of what we assume of are set-it-and-forget-it investments such as target date funds.

To answer the question in the title: was your 401(k) intended to be complimentary for retirement? I believe the answer was no. It should have been the investment savior, a Wall Street miracle. Trouble is, now many people. financial professionals included are looking for a way to provide the same guaranteed income that those long-shunned pensions provided. And when they do, we will wish it was 1975 all over again because it will come at a much higher cost than we imagined.

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

Another Retirement Survey

Many of you may not be aware of the Unretirement Index published by SunLife Financial. Based on a phone survey of over 1200 households, this wonder of a poll offered most of us a peek into the world of retirement that, unless you were living under a rock for the last couple of years, comes as no surprise.

What retirement boils down to, based on this survey and my own taking of the online version: one, what retirement was previously though of as, will change, two, we never gave retirement a serious thought until we found out we didn't really focus on it, and three, if you have a pension or as it is known in the financial business as a defined benefit plan (rather than 401(k) or IRA), you are much more likely to think of retirement in terms of what it used to be rather than what it has morphed into of late.

The SunLife Unretirement Index does not paint a very pretty picture of the concept of retirement. It goes so far as to report that for the vast majority of us, the concept of retirement means working longer to recoup investment losses, never stopping working in some way, or simply working as long as we can to achieve a state of living well. If you read the report, you will think that there is no difference between living well and living within your means.

We still have a preconceived notion of what retirement should be. We think of it as the old, production era idea of retirement as simply having toiled as a laborer until you were physically unable to continue. Without some retirement in place for this group of workers, the country would have spiraled quickly into poverty. Now, pensions do still exists and in many cases, for just this sort of worker. At not surprisingly, it is this group of workers that tend to respond favorably to their retirement outlook.

But the workplace dynamic has changed from industrial to service and with it, the belief that pensions are a way of rewarding the worker. Once the IRA or 401(k) became the commonplace, which has taken about two decades, the worker was given the tools to invest and it was widely believed, that was all that was needed. And many did.

But just having hammer doesn't make you a builder and more than half of us simply did not heed the call, buy the sell of these plans or were otherwise restricted by long vesting period, unattractive investment choices or low incentives. Did I mention that we didn't get it either?

If we had we would have been among the elite ranks of the investor class, the group that has few members and even fewer winners. Expecting the average person to grasp the nuances of the stock market, the convoluted thinking of fixed income, or the ability to balance the two in the right proportions as we aged turned out exactly as most would have predicted it would - had they been able to foresee a downturn: badly. We either assumed too much risk or we didn't assume any.

We either invested or we didn't invest enough, if at all. So where does that leave us?

There are basically three consideration in retirement: the ability to meet the basic needs to survive, the cost of health care, and defining quality of life. Most of us can't understand the cost of the basic needs to survive. We think of this in terms of what we have now instead of against what we absolutely need in terms of income flow to keep what we have now. That is simply skewed financial thinking. If you were to retire today, and were expected to live only another twenty years or so, on an income that was 40% smaller than your current one, could you do it without making some changes? Of course you couldn't.

But most respondents to these surveys believe that nothing should change. You should be able to keep your home (even if it will eventually be too big, too costly for upkeep and perhaps taxed right out of the reach of even a working family with growing income potential). This group also believes that restricting how much you consume will negatively affect that quality of life and among those restrictions are less debt, fewer toys and what some may see as an otherwise boring post-work life.

While a great many of the respondents suggested mental activity as reason to remain working, this is only part of the reason. The real reasons are the financial implications of retiring after having not given it much if any of a consideration. Some jobs are rewarding. But no job comes without performance stress and if this is the sort of mental activity they believe will keep them young, they should think again.

Marcelle Pick, OBGYN NP in Portland Maine recently wrote that "The World Health Organization estimates that by the year 2020, psychological and stress-related disorders will be the second leading cause of disabilities in the world." This sort of flies in the face of "we will all live longer, happier and healthier lives" and points to "shorter, stressful and ultimately less robust lives".

Back in the day, the benchmark for financial health, the one the bank often used during the mortgage process was 60/40, obligations to unencumbered income. This is the template we should all be using for retirement. It is a bit more complicated than that but like all templates, it focuses on what you need to get by.

Those who are older than 50 can count on most of the current support programs such as Social Security and Medicare being in place. This time frame also provides you with some time frame in which to hunker down so to speak, and save more, spend less and begin to experience the 60/40 lifestyle.

Those in their 40's can expect some of the social support programs to still be in existence but not as they were for the retirees a decade before you. But on the flip side, you will have a full decade longer to begin financing your 60/40 lifestyle. What retirement will look like in 20 to 25 years is anyone's guess. But if you assume the worst and plan for it, you should be at least cautiously optimistic about where you will be.

Those in their 30's or younger should never forget the look on your parent's faces post-2008. No one can say with any certainty what your retirement will look like or whether such a concept will even exist. One thing does remain constant, even in these seemingly inconsistent times: the longer you have to prepare, the better your financial outlook will be.

If you would like to take the SunLife Unretirement survey, something I did and they suggested that I was a cautiously optimistic, which seemed to be an odd conclusion considering you either are or you aren't. Click here unless you already know who you are and what you have to do.

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

Retirement Planning: The Annuity Answer is a Question

You can't escape it.  You are having your choices about retirement and your plan diced and splayed and discussed in any number of forums.  None of the outcomes from these conversations are suggesting what you want to hear. So here's a flash: you're worried.

Insured Retirement Institute President and CEO Cathy Weatherford recently wrote "Unfortunately, as the promise of Social Security continues to be on unsure footing, working Americans are coming to realize that they will need more than just that paycheck to sustain them throughout their retirement." Even when the Employee Benefits Research Institute released its most recent report, concerns about retirement were, as they could only be expected to be, were the top concern.

And with that comes the numbers.  Now I tend to agree with Steven Strogatz, professor of applied mathematics at Cornell and the author of "The Calculus of Friendship when he suggests that although we are easily duped by words, numbers "brook no argument," he writes suggesting that they "are the best kind of facts."  he describes them as cold, hard, and objective. So when the EBRI reports that 69% of those recently surveyed believed that retirement accounts were extremely important, most of us agreed. Three out five the EBRI concludes from their question don't believe in Social Security and almost two-thirds say they lack confidence in the program enough to begin saving more.

Now to Ms. Weatherford's defense, she sells annuities.  So when she adds that "Increasingly, they [the working folks] are looking for ways of securing their retirement income through annuities, retirement savings accounts and other insured retirement strategies. Employers can play an important role in helping to connect employees with available benefits that can lead to a financially sound future."  I am left to ask the question: wasn't it the employers who got us to this point?

Although as the report, which was commissioned by Project 2010 suggests that 94% of the employers offer a plan of some sort, the less than surprising number is the actual participation.  With three-quarters of the employees that have access us them, it is the fourth that don't is the more troublesome number. And tucked inside these numbers is the fiduciary fib that these employers have done everything they could do to get their employees involved.

Employers are directly responsible for encouraging their employees to invest for their own futures.  Some incentivize their plans with matching contributions. Matching contributions do not have to be high in order to get their workers to participate in the plan.  In fact, studies have shown that a more modest matching contribution might actually spur the employee to put additional funds into their accounts. In the latest economic downturn, companies dropped or greatly reduced their matching contributions and are slow in returning to them.

The matching contribution does a great deal in getting the employee to do right by their own future.  But more important is the period of time between initially beginning the job and the actual beginning of their participation in the plan.  Some employers hold their matching contributions for a longer (than is necessary or even in some cases, realistic) vesting period giving the employee less incentive to invest if they feel as though they don't expect to remain at the job that long.

Some employers do offer plans that are both robust but well-supported with information and educational materials. But no plan is the be-a;;-to-end-all offering that would create the perfect scenario for everyone: employers, employees or the plan administrators. And also included in the report was the fact that 17% of the plans now offered annuities. Is this just an attempt at getting to that perfect "everything" plan?

This lack of what the investment industry refers to as a holistic approach, or decumulation, has professionals practically drooling in anticipation of of what these products can hold for their industry.  I don't really worry that my opinion about annuities will alter simply because this product has begun to emerge as the next big element in your retirement plan.  An annuity will always be an annuity and because of that, will always have more unanswered questions that concrete evidence that it is a better product as a whole instead of its parts.

Annuities are hybrids, born in the insurance industry as part insurance and part investment.  They are costly and unwieldy, ripe with fees and special ta situations for your heirs, hard to get rid of if you change your mind and don't necessarily do for women the way they provide for men.  That last part about women versus men is an actuarial adjustment for the longer lives women have. No other "investment" makes such a distinction.

Then there are the idea of guarantees. Annuities make certain promises, the largest of which is that they will never go out of business. Never is a really long time. And depending on the potential you might have for living longer than you anticipated, it would be nice to think that a company could never falter, never be affected from some unforetold expectation and never consider closing its doors for good. But it happens. It doesn't happen with your equity mutual funds and some bonds might default in your bond funds, but insurers are not forever. This is risk that is grossly understated.

What makes people so fearful about Social Security is the very thing that makes it work.  Whenever you can pool risk, you eliminate more than you create.  The fixes to Social Security are rather simple and even if you are decades from retirement, the program has the legs to continue on even in the face of the Boome onslaught (a wave that may effectively be not much more than swell in this post-recession economy). Annuities can't do what Social Security does and for good reason: there is no money to made.

In the name of fiduciary responsibility, plan sponsors will be begin to offer this sort of product with questions on cost, viability and suitability all left unanswered.  Even a simple CD could do the same sort of thing an annuity would, come with FDIC insurance and promise to never lose a penny.  A well paid CD tucked inside a retirement portfolio but outside the tax-deferred plan would help ease those fears just as well.

But the biggest fear is that when they do become available in your 401(k), they won't be one annuity, but a succession of small, mini-products, each with differing contracts. So far, no retirement plan has been able to answer the question of liquidity and security. Until those can be answered with any certainty the annuity will languish as an option, even with government support.

Paul Petillo is the Managing Editor of Target2025.com

The Choices aren't so simple

Never one to shy away from jumping into the fray, which is a little different than jumping to conclusions, I have bumped into more than one conversation about the wisdom of drawing on retirement income too soon.  These folks argue that everyone should plan on working longer (and not just to rebuild retirement accounts - or in many cases, build them from scratch) because they are going to live longer. That sort of argument makes me cringe.

Truth is, not all of us do what we want to do, like what we do and simply can't see ourselves spending one more day doing it beyond the point we have to.
But when it comes to Social Security Benefits and when to draw them, something entirely different comes to mind. Bruce Bartlett offered his opinion on early retirement with several other invited guests in the August 21 New York Times. Mr. Barlett, who is former Treasury Department official in the George H.W. Bush administration and columnist for The Fiscal Times, continued that argument at the blog WallStreet Pit claiming limited space in the paper didn't permit him to make two other points on the topic. (You can read those added opinons here.)

The problem is, this sort of discussion has many nuances: fear, health, security, poverty.  Picking one over the other doesn't reduce the impact of the other.  Sixty-two has become the new retirement age because of fear (that the program will not be there after decades of contributions) and diminished retirement investments (we all know why all too well the reasons, and there are many, for that).  They take it whether they need it or not.  But many need it.

Instead of increasing the age for early retirement benefits, something Mr. Bartlett suggests as actuarially adjusted, SS could offer a program that secures those benefits at 62, sort the same way you need to sign up for medicare at 65 whether you need it or not, and guarantees the benefit without paying out anything until the person actually retires.  A healthy individual could continue working knowing that the benefit is secure and increasing each year they wait.  This would work the same way as the payback program already in place where someone begins withdrawal at 62, saves all of the benefits and then pays it back at full retirement age to receive the higher benefit.

I think the income limit currently in effect does two things: keeps the retiree from working too much which keeps the job market growing.  Benefits are only taxed once all of the income is added in and the threshold is breached - $25k for singles, $32k for married filing jointly.  Suppose a married couple calculated their taxable retirement benefits, their taxable income and the SS benefits and found they could live comfortably on $32k, they would be still well above poverty.  If they had used a Roth IRA or a Roth 401(k) to hedge against this tax issue, they could increase their income substantially without any impact on the benefit. And secondly, it taxes those that can afford to be taxed and in all likelihood, they are the very ones who will ladder their retirement income, drawing on accounts as needed - perhaps pensions first, deferred investments later and SS last.

The argument for living longer is the biggest fear most average workers have.  It is not how long you live, but how livable those years are.  While we all suggest that simply working longer is the best retirement solution, it skirts the real issue of whether they want to or if they can.  I'm guessing that only a small percentage will or could work past even the full retirement age.  Some may have to.  But if the amount of people opting for early benefits is any indication, they want to make sure of some things (getting the benefit) and worry about others as they age (whether they can or should work).

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

Take Risks with Your 401(k); Social Security has your Back

Far too many of us have moved into too conservative of a mindset when it comes to retirement planning.  Worried that we will lose our investments, we have chosen investments in our 401(k)s better suited for those who are much older, have greater accumulated wealth and need the protection fixed income investments provide.  Yet many younger investors have taken the same approach.  Avoiding risk is not what you should be doing.

You should consider Social Security as part of your retirement plan. For three reasons: one, the program offers those who pay into it – and you do so from the first dollar you make right up until the last one you earn – about a 5.5% return on your investment; two, this contribution, half by you, half by your employer or all of it by you if you are self-employed – up to $106,800 – is conservatively invested leaving you the opportunity to take a few more risks with your 401(k); three, no matter when you begin to collect it – and for the youngest among us, those first years will get pushed further back as we continue to assess the program’s solvency, which right now is good until 2037 – it will be there.

And that should be comforting thought for Boomers worried that they have not done well enough. More thoughts on the subject of Social Security and your retirement plan here.

Paul Petillo is the Managing Editor of Target2025.com

Retirement Planning: It is Never Too Late to Start Investing

Chances are, the lesser your wage will working, the more dependent you will be on Social Security when you retire. While at first glance this might seem a sad state of affairs in terms of a retirement plan, it is not beyond your abilities to change this outcome before you retire. If you are aged 50-years, the ability to put together a viable plan is doubly difficult. But, even considering that, it is not impossible.

Several things need to be adjusted prior to that arbitrary date.

Retire when you can
Most of us have not been very successful with our retirement planning. We have begun late in many instances and have failed to utilize our options to the fullest. Many of us have not used these plans long enough to see the benefits. Long-term investing still needs thirty years or longer to work. The vast majority who have plans have used them less than 16 years.

During this time frame, often thrust upon us as your company changed from a pension plan to a 401(k) or you changed jobs repeatedly during that period, we experienced the shock of having to educate ourselves about what our options were and then set a plan that was previously managed for us to one that was defined by us.

For numerous folks, this meant doing the wrong thing first, then, as time passed, correcting those mistakes.

Default Investing
Up until several years ago, the default investment in your 401(k) could have been anything from a simple index fund to a money market account. The later simply parked your money, and while you never lost any of it, you never were able to take advantage of market ups and downs.

Now, new employees will be defaulted into target date funds (pick a retirement year or have one picked for you). And some, after the debacle that was 2008, have switched their retirement money to just such a fund in the hopes of recovering enough invested dollars to regain some of what you may have lost and preserve what was left.

The jury is still out on whether these funds will provide what you need to get where they say they will take you. Target date funds are navigating uncharted waters with a promise to do what never has been attempted. Unlike balanced funds (usually offering a 60/40 split between stocks and bonds), target date funds re-allocate your investment over time moving from more aggressive to less with the idea that this will protect your investment over time.

Over 50 Dilemma
If you are over 50, this strategy may prove to be the wrong one. In most cases, you are entering your largest income producing years. If you are contributing more as you earn more, you may be leaving a great deal of potential on the table as these funds try and protect those invested dollars instead of growing them.

While stocks are considered risky in this period, they should not be ignored. The best structured retirement plan will separate your investments into categories. If you are currently contributing 6% of your pre-tax income to your retirement plan (and this is not enough), you need to increase that amount to the point of causing you to rethink your daily budget needs.

Each pay raise should signal an increase in contributions. And each increase should go to a more conservative investment while leaving the initial 6% fully invested in stocks. This sort of self allocation will give some risk for old money invested and less risk for new. Shifting to a target date fund does not allow for this, taking much of the potential for risk off the table.

When and How
If you can wait to take a distribution from your 401(k), it will allow it to grow further. To do this, you will need to enter retirement without a mortgage, with your financial house in order (this means adequate savings, only the minimum in credit card debt and the all important emergency account). Your expenses will not decrease in retirement. The cost of maintaining insurances as well as your property will not go away. Your health could prove to be a factor as well and should be accounted for (and worked on while you are still employed) before you retire.

Many of these costs rely on projections. While these are difficult to make with any accuracy, they are not impossible to plan for. Inflation will increase by about 3% suggesting that each year, your expenses will go up, even the fixed ones (because inflation makes your dollar worth less). Insurances might increase on average 5-10%. And taxes will depend on how much income you have but basing your projections on current income rates might prove foolhardy. Add an estimated increase of 3% per year (this includes property taxes as well).

Arriving at retirement with any outstanding debt means one thing: you will have to continue to work just to keep up with the increases. The other option, of course, is to get used to these financial burdens while you are still working. Living a little bit more frugally now will offer you the opportunity to experience what life post-work will be like.

So the three basic tenets of investing apply: get your financial house in order, channel as much money as is possible into your retirement plan (without increasing the risk of creating more debt as you scrimp) and take some risks with your invested dollars. The first tow will offset any problems you might face with the last suggestion and allow your invested dollars to do some work that too conservative approach will not permit.

It's not too late. But the strategies are different.

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.

The Social Security Solution

Its nothing new. I mean, the solution. I've been an advocate for it for years and have taken my lumps from plenty of conservatives for that stance. On the other side of the aisle, there has been a muted acknowledgment that it might work but they fear, as most rich folks do, that they will be basically paying and not receiving back. I like to call it the boomerang effect. What you put in they believe you should get back out, eventually.

Nobody who makes a lot of money, taps their ability to invest and believes in the markets will really much like the idea. Conservatives call it socialism but its more like social security. Not the name of the program but the net effect.

We all know about the impending doom of Social Security (and the other two often mislabeled as entitlement programs for the poor, Medicare and Medicaid). We have seen it coming for years as economist and actuaries have been tapped for their expertise and foresight at seeing the future. Sure they crunch numbers and look at folks who earn this or that and they can make a pretty good determination of how much will be paid out compared to how much will be going in. But is this mostly an exercise in futility? Some would call it politics? Others might even see it as polarizing.

It is one of the few government programs that needs to be balanced and rebalanced in order to work. The accompanying suspicions that this will burden future generations unfairly and unnecessarily are always announced as someone pointed out, at the same time there is a huge get-together of the nations health insurance providers.

But what makes it so prone to future bankruptcy? Too many people withdrawing from the fund and no one replacing the missing benefits? To much borrowing? Too much debt?

When solutions are bandied about, the always seem to point to a payroll tax increase, a retirement age increase or a benefit decrease. Some even think a combination of the three might be even more beneficial. A payroll tax of just under two percent would fund the program for 75 years. Increasing the retirement age, as is currently happening, and less people can collect benefits leaving more in the fund longer. A benefit decrease is self-explanatory and might just be economically devastating to a large group of retirees.

A means test would solve everything. The current program is fair to everyone. But any changes in benefits does not distribute evenly or fairly. A means test would place the right amount of benefits where they are needed most.

Here's how it would (might) work:

We could shoot for a $15,000 a year retirement income as the threshold for full benefits; after that it would be reduced incrementally. Will this keep folks from investing for their future? Not really. If anything, it would allow people to draw on their retirement savings only as needed for longer. Add that to that threshold sum to the $15,700 estimated benefits thatand you have just enough to keep the retired person a consumer (which is really what we want them to be) and with enough cash to pay for their lifestyle. Retiring with more would only increase the quality of your retirement years and for those that focus on just such goals, they would not take their eye off of that target because they thought it might jeopardize the size of their SS check..

To make it fair, you could re-run the test every couple of years. That way, if a person with a reduced benefit (because they have so much that Social Security simply pays for pool maintenance) were to have a change in financial circumstances, they could be reconsidered.

If you consider the self-directed invested for retirement rates among all workers, most would not even come close to that mark, despite access to the markets. But many will and they will do it exactly the way they are now. But those that are not using the markets, and they number in the millions, will not be left as burden on the society you want to retire in.

The system was designed to keep the poorest from a poverty existence. We should restore it to its original purpose. It would have the net effect of keeping the economy moving and not burdening it (and their families) with poor retirees.

Some Retirement Account Suggestions

A recent Boston Globe article offered this: "When millions of U.S. investors open their second-quarter retirement account statements soon they might be disappointed with their dividends, analysts say.

"Most investors will find their stock and bond funds in 401(k) and individual retirement accounts sank between April and June amid skyrocketing fuel prices and a slowing economy." The temptation many fear is that these individuals will begin tapping those plans, seeing the balances as better used for day-to-day living expenses rather than day-to-day expenses in the future.

You should avoid touching that 401(k), now posing more as a 201(k) after recent market turmoil for two reasons: One, if you are well away from retirement (say fifty or below) you are looking at a long time for the markets (and your savings tied to those markets) to recover.

The second reason has more to do with why. If it is for debt relief, then scale back your contribution and use the extra cash towards debt (contribute only what matches). If it is for market relief, reduce the fees in your plan and index your savings. Normally, I suggest index funds be held outside your defined contribution plans for the better tax treatment but with the markets sending mixed signals and more aggressive funds failing to offer fee relief, perhaps the switch would make the losses less painful.

These times do make pensions (defined benefit plans), those antiquated savings stabilizers (like Social Security) look awfully good. I just hope next time some politician suggests privatization, that we remember these trying times.

Retirement Planning and Fidelity's Long-Term Care Insurance Estimates

Recently, Fidelity, the mutual fund giant began surveying insurance providers asking how much long-term care insurance you might need to calculate into a retirement strategy, often referred to as a plan. In truth though, it is only a strategy that if followed over the course of a great many years, develops into what looks to be a well thought-out plan. Plans seem so inflexible. (I travel deeply into this jungle in the tenth chapter of the book Retirement Planning for the Utterly Confused.)

Mark Meiners, director of the Center for Health Policy, Research and Ethics in the College of Nursing and Health Science at George Mason University says “Unfortunately, many Americans falsely believe that their long-term care costs will be covered by Medicaid, but this is true only after they’ve spent themselves into impoverishment.”
As I write in the book, “I can tell you two things for sure. Social Security and Medicare will not pay for your long-term care.

“Most insurance companies use a fairly straightforward criterion when making the decision to pay the insured for their claim. The insurer will require a certified and licensed health provider do a determination of “chronically ill”.
“What is chronically ill you ask? Generally this refers to someone who is incapable of performing at least two daily activities of living such as feeding themselves, bathing and toiletry activities or someone who requires substantial supervision. This is often referred to as an ADL or Activity of Daily Living.
“Sounds simple enough but insurance companies rarely have fixed guidelines when it comes to triggering the policy. Policies can be written to cover a variety of care situations and you must determine this at the time of policy execution. Problem is how do you know what you will need. Will your policy need to cover a nursing home stay, of which a portion of the total is reimbursed over a preset time period?”

That said, I think everyone considering this kind of a policy read the book, I will take what Fidelity has suggested and see if it passes muster.

Fidelity recommends that folks considering a long-term care policy narrow the search to six categories, each with its own characteristics.

1) A policy premium that fits comfortably within a family’s financial means.

At first glance this sounds like a relatively easy target but the main problem with retirement and the saving for it, those premiums can eat up a good deal of potential retirement cash. Finding the right balance between saving and tossing the cash to an insurance policy, that is cheaper the earlier you buy it, can be so difficult to determine that most folks who may need it will pass on the chance.

Fidelity writes that, “Investors should carefully forecast their ability to pay the premiums year after year.” I think is both bold and wrongheaded by a mutual fund company to refer to insurance as investment. Insurance is not a liquid asset.

Bottom line: Figure about $200 a month if you are fifty years old, in good health and have prioritized all of your other insurance products based on risk. A 65-year-old might pay as much as $350.


2) Backing by a carrier with a strong track record of paying claims.

I have argued this topic over the past months with numerous people in the field. Fidelity offers this piece of advice: “The ability to receive policy benefits depends on the integrity of the company and its history of financial strength.” This is huge unknown since so few are actually in the position to pay out on claims. Once the baby Boomers retire en masse, it will be difficult to switch policies if your insurer turns out to be financially unable to handle a sudden increase in claimants. Like all insurance products, the gamble is on both ends, with the insurer and the policyholder.

3) Comprehensive coverage that covers in-home as well as facilities-based care.

Fidelity found that families want “flexibility in terms of the services they opt for when facing a long term care challenge.” Remember, this kind of flexibility will cost you extra. Few folks calculate in the inflation factor and/or whether the facility will keep you. Most folks would rather stay at home.

4) A benefit period of at least 2, but no more than 4 years, for each person.

Most people split the difference.

The numbers Fidelity analyzed are not so bad in terms of how they were gathered. But consider this. Most disability policies run for five years. The data they collected “on over 6 million long-term care insurance policies sold between 1984 and 2004, found that 75 percent of all individuals would not have exhausted benefits lasting 2 years. A 4-year benefit period would have been adequate 90 percent of the time.”

Sometimes, companies will separate the policy into nursing home or in-home care coverage but the lifetime benefit is easily calculated by multiplying the benefit times the policy coverage period.

Like many policies that have a wide swath of unknown territory to deal with, such as LTC policies, there is generally a waiting period before the policy kicks in. Because Medicare covers the first one hundred days, many LTC policies do not begin before 90 days. You can request a shorter waiting period but the monthly premium is often prohibitively higher.

5) Five percent guaranteed annual benefit increase except for buyers older than age 75.

Fidelity seems to have little faith in the Federal Reserve’s ability to use monetary policy to keep inflation in check. The 5% mark is well about what the nation’s top bankers deem suitable. Inflation protection usually comes via a rider on the policy. Three percent is usually the norm with the costs of this add-on rising with each percentage point in protection.


6) For joint policies, a “shared coverage” provision that enables each insured person to tap the other’s benefits if necessary.

This may be one extra cost too many.

Now consider the following. You put $180 away in a portfolio with a modest long-term return of 9% and save it for 20 years, taxed at 10% and with inflation calculated at 3%, you would have amassed $56,447. The policy paying $300 would cover only $129,600 in total lifetime cost, which, if you suspect you will be in relatively good health, will leave paying for a policy that may have been just as well been paid for in cash.

If you need cold hard facts... You will need $100,000 in savings at retirement for both you and your spouse to cover health care and insurance. From that point, you should calculate your retirement savings.

I would pass on the LTC if you were planning on leaving nothing to your heirs (but you still need to save much than you are now unless you want to spend those golden years with your kids). But if your heirs are concerned about you spending down their inheritance, ask them to chip in on an LTC policy and then it might be worth the costs.

Retirement Planning at 60-years-old

Now is the time to ask the serious questions.

Are you considering what your after-work sources of income will be? Can you live on them now? Take your Social Security payments, any pensions you might receive, and any other source of income from savings or retirement plans, add them together and create a household budget around them. Does this support your idea of retirement?

Can you afford taxes, insurance and upkeep on your home? Is it too big? Will it need major repairs to last until you are eighty, or ninety? Do you still have a mortgage? Have you created equity? Do you have debt?

It is the classic observation that George Foreman made: “The question isn't at what age I want to retire, it's at what income.”

There is an excellent chance that you will still be working when you celebrate your sixtieth birthday. The ability to remain viable and contribute something to the workplace should be worn as a badge of honor. Unless you are working for the wrong reasons.

If you are working because you failed to save enough for the retirement you envisioned, then now is the time to lower those expectations just a little bit. Many of us harbor outsized visions of what we want retirement to be. By age sixty, we will either be disappointed or overjoyed.

Perhaps you have been blessed when better than average health. If so, working beyond what many consider normal retirement age is creating wealth that will make your post-work years more comfortable.

But far too many adults are entering this time of life with less-than-perfect health and worse, the inability to pay for health insurance to cover it – if they have insurance at all.

Debt, and not just mortgage debt, has become a problem among this age group, weighing on their mental well-being and forcing many to work because they have to rather than because they want to.

It is possible that you have more than you think. If you have lived in the same house and built up a good deal of equity – the difference between what you owe and what the house is worth, this might be a solution to your problem. You could downsize, selling the property, satisfying your debts and even creating a small, but much needed nest egg to help with your retirement years.

If you do, you should consider places where the amenities meet your needs. Do you want to be close to your family? For many people thinking about retirement, this is a serious consideration. They want to be near their families, help with their grandchildren and even be closer to their own children.

If you intend to move, ask yourself if there a viable and mixed population present? Recent studies have proven that communities that cater exclusively to seniors do not fulfill many of the social needs of people entering retirement. They like the neighborhoods they live in to have a good mix of people already living there. Businesses often look for the same types of neighborhoods and in doing so, increase the livability of the area.

If you are considering working until you are seventy, you can delay taking your Social Security withdrawals until later. Any retirement savings in 401(k) plans or IRAs will need to begin distributing funds by age 70 ½. Until then, you can continue to make contributions.

Additional reading

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Retirement Planning at 50

If you are fifty right now, you are among the last wave of Baby Boomers scheduled to overwhelm the retirement system, bankrupt Social Security, and tax the health care system of our country as never before.

Unless of course you have subscribed to what author Louisa May Alcott suggests this age should be. She wrote, "Have regular hours for work and play; make each day both useful and pleasant, and prove that you understand the worth of time by employing it well. Then youth will be delightful, old age will bring few regrets, and life will become a beautiful success."

Is it that easy? In most instances, the answer is yes. At age fifty, something you could not possibly have imagined at 20, even thirty-years old, you should have a fairly good idea of what your retirement will look like.

Finding ways to improve what might be an unclear vista are a little harder at this age but far from impossible. You know more financial stuff than you would care to admit, made more mistakes than you would like to acknowledge, and probably regret decisions you have made along the way. No matter. They can all be fixed.

The solutions unfortunately, will be a little more severe because of it but they will not imprison you in a life without some joy.

The plan is threefold. You need to determine how long it will take to get completely debt free. There are lots of websites and blogs out there professing a debt-free existence � which if you are working is just a silly notion. Retirement is no place for a mortgage payment. It is no place for credit card bills. Do the math and find a solution. If you need to see a credit counselor, do not hesitate. Pick a not-for-profit one and stay on the budgetary diet they give you.

Then ask yourself, how is your health? Can you work until you are seventy? If the answer is yes, then begin to save as much money as you can in your employer's tax-deferred account. Remember, seventy is only four to five years beyond our current notion of retirement age. If you have chosen an occupation that allows you to continue working, consider it. If you have a job that will not accommodate you into your seventies, begin to develop some alternatives now.

It is not too late to begin saving in your 401(k) at work. You must structure it differently and contribute a good deal more (the maximum will help you catch-up and the government has allowed for additional catch-up contributions when you reach fifty), but it will prove to be better than not having one.

• What is a 401(k)?
  
• How much should I contribute?
  
• What is an index fund?
  

And lastly, begin looking at your after-work sources of income. These are generally fixed sources of cash. Take your Social Security payments, any pensions you might receive, and any other source of income, add them together and create a household budget around them. Can you live on this amount of money? Can you afford taxes, insurance and upkeep on your home? Is it too big? Will it need major repairs to last until you are eighty, or ninety?

These are hard questions. But you are not without options.

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Retirement Planning and the Fate of Social Security

Everyone it seems wants to kill Social Security. Those that don't, are rehashing old ideas that have not sold well in previous attempts.

I was thinking of another way to save the program from the defeatists and those lacking originality.

It is widely considered fact, that the recent actions of the Fed, stepping in before Bear Stearns could collapse is a good thing if, and this is a very big IF, they can hold the securities they guaranteed until maturity. I am not defending what the Fed did by any means and have been on the record as critical of most of their actions. But the guarantees they offered on the questionably valued securities might offer a glimpse into how Social Security could be saved.

Mortgage backed Securities, for those who may not know are bundled home loans that make money available to those who sold the loans in the first place to lend again. The problems began when the product was offered for sale. Since few had been sold, no one knew what they were worth and unfortunately, no one was willing to hold onto them until they matured. Because of this "thin" activity and the unfolding mortgage crisis, values plummeted. When the Fed stepped in, they secured these securities and created a value for them.

My proposal to save Social Security is this: Could these types of securities, which can be bought on the cheap, be a way to fund SS without buying Treasuries?

If the surplus in SS is be used to purchase mortgage backed securities and, if the program held them long enough, would be highly profitable. This type of purchase would remove the surplus from the hands of lawmakers with several certain side effects. The securities would attain a stable value relative to the underlying security, the home that backs the loan would be worth keeping (interest rates could be frozen on these loans once the new value of the security was established)and the economy would get the needed boost of stability.

Future MBS's could be peddled to the program and would further stimulate the economy. Folks stay in their homes and the future of Social Security would be cemented in the American Dream.

Retirement Planning and a Social Security Disability Claim

Life may come at you fast, but when you file a claim against a government agency such as Social Security, the idea that something will happen sooner rather than later is only wishful thinking.

There are many of us who feel as though health of Social Security as a retirement plan should take center stage in every conversation. But there is an increasing chance that you will be exposed to the other side of what the agency does before you reach retirement age. The chances that you will have to make a disability claim rise each year and the process does not come with any sort of speedy solution.



The patience it takes to get a judgment from the agency on your case has little to do with the quality of the lawyer you hire. In many instances, the time between the initial claim and your actual hearing can span almost three years, sometimes longer. But the process does require you to make some specific assumptions not only about whom you hire to represent you but how they are paid.

First, the myth of “dire need” no longer dictates who gets heard by the agency or how soon. Determining who needs more faster no longer is considered. No attorney worth her or his salt will make the suggestion that their services will get you a quicker hearing.

Second: the speed of those cases has little to do with the SSA itself. The sheer number of cases being brought to court has doubled over the last decade, making the process of reviewing each individual claim much more difficult. But ultimately, the claim must be brought to a judge. Depending on where you live, the process can take much longer. While it is true that nationwide, the number of judges hearing disability claims has dropped 10%, your state might have a larger backlog of cases than your neighboring state. While that is no consolation, it is also no reason to blame your attorney.



Third: attorneys do not get paid until the case is settled. According to Atlanta based attorney Jonathan Ginsberg “The first method is called a fee agreement process and the second is called the fee petition process. The fee agreement process is simple - if you and your lawyer enter into a contingency contract based on past due benefits that calls for payment of 25% or less of past due benefits, with a cap of $5,300, Social Security will automatically withhold and pay the lawyer 25% of past due benefits up to $5,300 without any need for the lawyer to file a detailed time and billing statement.

“On the other hand, if the fee contract does not provide for a contingency or if there are more than one lawyer claiming a fee, then any lawyer claiming a fee will have to file a detailed fee petition, setting out time records, expenses claimed and other billable time.”

Mr. Ginsberg also suggests sticking with your attorney through the whole process. If for some reason you are considering firing your original attorney, the SSA regardless of the previous attorney’s position in the case will satisfy the fees due at settlement.

He also warns that you should make your choice wisely and be patient. “Law school professors and our malpractice carriers advise us to avoid clients who have fired prior counsel because those clients are the ones who are most likely to be unhappy with a lawyer's work, regardless of the outcome,” Mr. Ginsberg writes.

“Therefore, unless your lawyer is clearly incompetent, ill or dead,” it would be best to stick with your present counsel.