Monday, August 16, 2010

Do You Know Where Your Retirement Plan is?

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 and a fellow Boomer

No comments: