Wednesday, October 27, 2010

The Definition of Retirement has Changed: Yet Another Survey

There is no argument, from Boomers to their offspring, that the word retirement has a different definition. Rather than a single concept, it has morphed into a series of ideas and possibilities and that, as these things tend to do, creates surveys to tell us so.

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 and a fellow Boomer.

Saturday, October 23, 2010

Social Security: To Draw or Not to Draw (too soon)

I am going to tell you right from the beginning: there is no easy answer for when to begin to draw your Social Security. But there are some things you can do to help make the decision easier. And if you have done your retirement planning homework (saved, invested, planned),  the decision will come as one of the many you have to make to as you approach this crossroad and if you have, it wil be much easier.

Drawing early is technically a bad move for a lot of people. It limits how much you can get monthly. Yet on the other hand, retiring at 62 years old is not an option for some. In this instance, the early retirement draw on Social Security usually suggests less optimism for a long life. If you have experienced a hard-scrabble career, one that was not done at a desk job, the lure of getting a little respite is often the only consideration. Knowing that you can still earn some additional income while drawing an early benefit is often a comfort to this group.

There is no denying that this decision is a highly personal one. And there is no right answer for everyone. But there are some things to consider. For instance, if you are going to be the first to retire in your household, and your spouse is eligible or capable of waiting until full retirement age (which could adjust your benefit slightly when they do), you should have a Roth IRA or a Roth 401(k) to get you through the lean years. This already-taxed account will help with the tax considerations - and there are many.

Taxes play a huge and significant role in your decision. You will definitely want to consult as well-recommended tax professional a year or two prior to retirement. They may advise a tax strategy that could net you a higher benefit (if you are drawing early, your benefit is based on the last and highest income year) and give you options for increasing that benefit through another sort of plan that is little heralded by the SSA: paying it all back.

This is done by paying your benefits back in full at your full retirement age to net the maximum allowable benefit. Retire at 62 and pay them back at 66 would require a payment of about $36,000 (based on the average payment of $750 a month for four years). This cash might come from the sale of a home, the lump sum payment of a 401(k) plan or simply from the Roth you have. It will however, close a $250 a month gap - which might be more than your Roth could guarantee.

Another potential consideration is how much you make in your final year of work. If it is your highest earning year, your benefit will be adjusted to reflect that income. You may be eligible for benefit increases when your spouse reaches retirement if their benefit (and this is also based on the decision of when you begin to draw your own benefits).

You could fund your Roth with those SS payments, withdraw the already taxed deposits and pay it back for the higher SS benefit. Rough calculations on this sort of move - remember, get tax help - could look something like this: $750 to your Roth taxed at 15% with a modest return of 5%; $36 returned to SSA with the investment return remaining in the Roth; taxes adjusted and the new higher benefit, which acts as a 25% return on the four years you invested/saved the money, works out to be a net profit for those that are able to do so.

But check with your tax person to see whether this is feasible or not.

Paul Petillo is the Managing Editor of and a fellow Boomer

Thursday, October 21, 2010

Legislating Retirement

"On Oct. 13, the Employee Benefit Research Institute released a study showing that 54.4% of full-time, full-year wage and salary workers participated in a retirement plan in 2009. In 1999, that figure was closer to 60%. And the rate of employer sponsorship of plans dropped to 61.8% in 2009, from 69.4% in 1999." And this has Congress concerned enough to take the drop in retirement planning by individuals and the plans offered by employers seriously.
There are numerous reasons. But one that comes to mind is the future health of Social Security. The fewer folks who direct their own retirement increase the dependency on this plan. Not that I don't believe it will be available for all Americans in some shape or form, no matter how old you are. It is that "shape or form" which has me worried - and apparently Congress as well.

Senate Health, Education, Labor and Pensions Committee, Chairman Tom Harkin, D-Iowa, indicated that he was zeroing in on retirement issues. he remains a fan of defined benefit plans or pensions even as defined contribution plans (or 401(k)s dominate the retirement investing/saving landscape.

According to a statement he made for an article in Investment News, he said: “I am going to make retirement security a priority”. Retirement security has shifted in the last decade and even more recently from accumulation to decumulation(which is a fancy word for knowing what you will get when you retire. Pensions did this; 401(k)s do not. Senator. Harkin, who quite possibly will remain in the chair he leads even if the GOP wins the House made clear that “Over the coming year, I plan to hold a series of hearings examining the crisis in retirement security from a number of different angles, and I look forward to working with my colleagues on comprehensive reforms to help workers save for retirement and ensure that they have a source of retirement income that they cannot outlive.”

This basically portrays the argument about retirement in a wholly new light: Companies want to continue to save money while suggesting that self-directed plans work. Even as employees are realizing that their participation in these plans carries more risk than they previously thought they did.

Paul Petillo is the Managing Editor of and a fellow Boomer

Friday, October 15, 2010

Make Those Home Moves Soon

Yesterday, we discussed the potential of selling your larger-than-needed home and moving to a different location. In a MoneyWatch column written by Charles Farrell called "Retirement Roadmap", he suggest that the difference in what you sold your home for and what you pay for a new home elsewhere could be used for income generation. And it could, provided you have a completely paid for home.

For the vast majority of us, this is simply not the case nor will it be. You will, in all likelihood be selling a home that still has a mortgage. This means, that in order to get some of the equity out of the home, you will need to sell into a good market. Conversely, a good market makes buying another home more expensive than it would be in a market such as the one we are in now. That's not to say it can't be done. But it needs some preparation and a little bit of luck to accomplish.

Mr. Farrell uses the example of a net profit on the sale of home valued at plus $500k and your use of only $300k in your repurchase. Focused mostly on how much this money could generate in potential income moving forward, he overlooks some of the other potential uses for the money that may not generate income. But will certainly keep you from spending whatever you may have.

For instance: Perhaps an even better use of the $200,000 would be to it set aside for future medical needs - which should just about cover the costs for a couple in retirement. There is also the tax reduction, the possibility that the house will be closer to what is really needed in retirement (services, doctors, entertainment, kids/grandkids) and if they are buying new, no upkeep costs moving forward for ten-years.

It is a win-win even if you don't use the money for additional income, you will create some as a side effect. The goal is to begin making your house as desirable as possible and do so in small increments so as to not create a great deal of debt. This will ensure the highest resale value and greatest amount of equity available when you do sell - even in this market.

Paul Petillo is the Managing Editor of and a fellow Boomer.

Thursday, October 14, 2010

The Retirement Change of Address

Boomers are often considering a move when they retire, sometimes just to get to something smaller and more manageable, sometime to simply be where they have always dreamed of being.

There is something to be said about planning for retirement that is often discussed at length, often just as quickly dismissed and in many instances,wouldn't be practical for the vast majority of us. That would be moving at retirement to some place other than the city of town you currently live in.

There are numerous considerations to any move. But at retirement, the move needs some serious thought.

Here are a few things to think about before you make the leap. First: how much of your home is actually yours. Equity valuations change and with any luck, will begin to improve.

Having enough of a dollar value built up in your home will allow you a greater freedom of choice in moving and will determine whether you will need to buy or rent in your new location. If you are thinking about a mortgage, be prepared to face some strict financing issues getting a new mortgage.

Although reports about mortgages being held up because of the potential of having a baby have been reported, none so far have been shown that mortgages are being denied to newly retired. I don't expect that to continue.

Mortgage companies and banks are going to look at your potential health problems the same way they look a income interruptions for young families. And these health issues play another leading element in your choice of a new place. Are you close to facilities you might need? Do you anticipate health issues that would require you own a car or live nearby?

This could affect your choice of communities where some amenities are limited. These small towns may be quaint. But can you get your needs met in a timely and cost effective manner? If you are thinking about a move and money is not really an issue, the following cities do offer some of what you may need - but probably not all. I can vouch for Eugene - it does rain a lot - but when the sun shines, it is truly amazing. And as an added bonus, you are only an hour or two from the coast or the high desert.

Here are some great spots to retire.

Paul Petillo is the Managing Editor of and a fellow Boomer.

Tuesday, October 5, 2010

When Retirement Demands a Revolution

Boomers tend to be an attentive group. They have to be.  They have enormous amount at stake in every turn of the economic universe.

If you are paying attention, you or someone close to you is in serious financial decline.  And even if you have resources that you have now been able to calculate in both present and future terms, you can't help them.  But you feel their angst, understand their pain and feel very close to being in the same position.

This can be passed off to a number of different things occurring almost simultaneously.  It is difficult to pinpoint with any accuracy when a growing economy finally decides to grow faster. Is it relaxed regulation, political fair winds, exploitable tax bases or simply the belief that every man and woman, no matter who and where you enter into the system, can one day be wealthy? We knew what good times looked like and we liked what we saw.

So we acted wealthy. And with each of us acting in concert, we began the economic propulsion that became the "markets", an all inclusive term for everything from stocks to houses. Everything was marketable. And that's okay as long as all of the players in the game are playing fair.  Trouble is, no one told us that the rich don't really want us to be rich and therefore have no real interest in playing fair.  In my opinion, having us be middle class is about where they want us.

Les Leopold, writing in the Friday Huffington Post suggested that there is actually a class war in the making. "The wealthy may loathe hearing about "class struggle," he writes, "but we're in the middle of one -- and it's a doozy." He then explains the way the world worked prior to the creation of class so wealthy, their wealth no longer created jobs as it did in the past.  It simply was unimaginable in size and mostly unspendable. We hear of huge charity donations but not a single one creates a job trend. And that, Mr. Leopold suggests was where this whole breakdown began.

He's right to a point.  We do like the concept of blame. But as he suggests in a revolutionary lilt: "We just want to find a job, or keep the one we have, be with our families and cope with what life throws at us while enjoying as much of it as we can. We don't want to go to war with the richest people in the world, even though we greatly outnumber them. But we can't avoid this battle--it's coming to our doorsteps."  Or as Oscar Wilde writes: "It's not whether you win or lose, it's how you place the blame."

Perhaps it's just us.  We have a view of ourselves that even in this sort of economicsituation, refuses to alter itself. We still see us regaining what we had rather than embracing what really is. Could it be the color in the collar that keeps us from banding together?

White collar workers approached middle class as simply a staging area for something greater. Blue-collar workers tended to come to grips more with the realities of being middle class although they pushed their children to get away from the colored collar they owned. Now, we are, as Douglas Coupland described in his OpEd in the NYTimes titled Dictionary of the Near Future: "Blank Collar Workers - Formerly middle-class workers who will never be middle class again and who will never come to terms with that."

And that is a good thing. Combining the inability to be satisfied with what life has dealt you is far different than aspiring to riches and positioning yourself to get them. We have to be in it as one. As "blank collar workers" we can do what needs to be done and do it without taking it to the streets. How is the problem.  So its no wonder that last resorts be put first.

We can begin with being realists. This is the hand we've been dealt, we need to cope with it.  That is a huge hurdle but until we all make the same choice, that wanting is not the same as needing, instead it is sort of a balancing act between what needs to be spent and what doesn't. Some folks, those friends we talked about earlier are already there. You need to practice as if tomorrow you will be there to.

We have seen this sort of rebooting of the economy before and it takes time. Is it wrong to adopt the medical parlance of living every day like its your last and suggest you think of everyday on your job as your last. It is an admittedly harsh way to approach a plan. But it might be more effective than believing that things are going to get better sooner than they will.  Mr. Leopold is not alone in his thinking that it could be a decade or more before things get back to normal - whatever that may be.

I found it ironic that Mr. Leopold would invoke an old union song asking the question which side are you on. Perhaps that is the answer we are avoiding? We all need to be on the same side.

Paul Petillo is the Managing Editor of and a fellow Boomer

Friday, October 1, 2010

Playing Worry: Approaching Retirement with Dread

Baby Boomers and those that follow you age-wise through the workforce all seem to very concerned about a single thing. 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 and a fellow Boomer