Thursday, March 31, 2011

Insuring Our Retirements

A great many of you already know what the Pension Benefit Guaranty Corporation is and what it does. The PBGC basically insures pensions and uses the premiums paid to it by employers to guarantee that no matter what happens to the pension an employer might have, the benefit (referred to as a defined benefit plan) will be there, perhaps in total, when the worker retires. This organization was born out the need to protect workers from company defaults, mergers and acquisitions and other business practices that essentially took a lifetime of retirement income away.

The PBGC is a government agency that does not rely on tax revenues to conduct its business. According to their site, the explain how they pay for what they do as: "financed by insurance premiums set by Congress and paid by sponsors of defined benefit plans, investment income, assets from pension plans trusteed by PBGC, and recoveries from the companies formerly responsible for the plans." There a limits to how much you can collect if the PBGC steps in and takes over your pension (such as a limit of $4500 a month) but the benefit far outweighs the total loss of your plan.

Now there is a movement in Washington, spurred on by the Government Accounting Office (GAO) to create a similar type program for those who have 401(k)s. If we have learned anything since these defined contribution plans made their debut 30 years ago is that they are still under-used and those who do use them, are still unsure what they are doing. Even as the predictions of these plans growing in the coming years by a third by 2015, this doesn't necessarily mean that the plans have improved or the still-as-yet-to-embrace the plan participants will do a better job funding and/or planning for their future on their own.

The hearings center around the introduction of some sort of insurance, much like the insurance the PBGC offers to pensions, for 401(k)s or what banks offer as deposit insurance (FDIC). The GAO is pushing for such protections and the plan sponsors are pushing back, suggesting that the efforts they have made in education and plan improvements are enough of a guarantee.

The current set-up of these 401(k) plans is still, as one participant in the hearings suggested, too murky with too much leeway given to the plan sponsor, too little transparency into how those underlying investments are chosen and whether they are the right fit for all plan participants. Robert Reynolds, president and chief executive officer of Putnam Investments stepped into the fray with his suggestion of something similar to the FDIC involvement with bank deposits.

Mr. Reynolds called on Congress to create a new Lifetime Income Security Agency. In a speech given at the 2011 Retirement Income Industry Association, Reynolds outlined the need for this sort of protection. He suggested: "As the oldest Baby Boomers reach the traditional retirement age of 65, we need to go beyond helping Americans accumulate assets for retirement to helping them draw those assets down to provide reliable income throughout retirements that could last 20 to 30 years or more. It’s even more challenging to draw assets down sustainably as it was to accumulate them in the first place,”

Subjecting these plans to rigorous standards would allow for the denial or approval of products such as annuities in these plans designed to guarantee income for these retirement investors, market downturns or not. He believes that this sort of insured confidence would spur more people to embrace the plans and give those who currently use them additional incentive to increase their participation. The restrictions put in place by the 1986 reform measures passed by Congress did more harm than good.

Reynolds believes: "With Baby Boomers now in or approaching retirement, the stakes are much higher now than they were 25 years ago." That change is needed and needed now. By creating some sort of protection, he suggests a domino effect that would begin with "encouraging savings that fuels investment, business formation and job creation."  Any focus on the deficits without a focus on increasing personal and workplace savings would be misdirected and he suggested that "Congress should dismiss such ideas out of hand."

Auto-enrollment, savings escalation and guidance to wise asset allocation improved the current state of 401(k) participation but did not go far enough. These provisions in the Pension Protection Act of 2006 did not include workers without access to traditional employer sponsored plans. Reynolds suggested that some sort of auto-enrollment into IRAs woud be a good first step. But guarantees would be far better and instill a sense of future promise and retirement income safety where, for many Americans, there is little or none.

Paul Petillo is the managing editor of and a fellow Boomer

Thursday, March 24, 2011

Boomer Retirement: You probably have the solution

Yes, you can retire to which you answer: "how?" All of the pundits from every corner of the planet suggest that this is simply not possible, you continue adding that the retirement you envision will simply not be possible. And I listen intently looking for signs of your willingness to compromise. Oddly, you don't mention anything of the sort despite having accustomed yourself to years of doing just that.
Granted, the compromises you made throughout your life were, at best minor ones. You may have come to grips with numerous economic realities that gave way to great stories at the Christmas dinner table or perhaps among friends and family that shared those experiences. Many of these financial tales do not begin with 'remember when we had money' but more like 'no one knew how poor we were'. That's because pulled by the bootstraps stories are far more interesting to the listener and the teller of the tale when there is some drama, some obstacle to overcome.

So we are beginning to tell a tale of woe long before the story is finished. The vast majority of us did not begin our financial journey with money. We may have been given a little bit of a boost by parents who spent their hard-earned money, money they probably could ill-afford to spend, to help us. But the quest for more money would become the only job many of us will have ever had. What we did should have been the great modifier of how far that quest could have taken us. But access to credit sort of screwed that dynamic up; not permanently.

So when I hear forty-year olds tell me that they know they will never retire, adding to the chorus of those who really have a problem as the approach sixty, I wonder whether they aren't telling the tale too soon. And if that is the case, are they listening to the story they are telling?

Here is the problem and the solution in three steps:

One: You probably have the resources available to live on less. I'm not suggesting you go frugal by any stretch - that would probably take some sort of intervention. Instead, understand what your money is going for and how long it took for you to get it. In the good old days, folks saved for the things they wanted. Suppose you approached each item over one hundred dollars with the same thought. Suppose you work 2000 hours in a  given year and you net about $50,000. That's about $25 an hour. So each purchase in excess of a hundred dollars would cost you four hours of labor.

In all likelihood, you throw out about one-fifth of the food you buy either as leftovers or simply because you failed to consume it. You may have worked about an hour or two for nothing, depending on your grocery bill. Each month, you probably work ten hours to pay for your cable (TV, internet, phone), a possibly ten to fifteen to pay for utilities. And that is based on $25 an hour for your work, which is above the national pay-per-hour median and mean average salary reported by the Bureau of Labor Statistics.

Now the answer to this dilemma resides in imagining you earn less. The rich do this quite often and bank the difference. It is often called a cushion, such as when there is more money being brought in but less dollars relegated to the budget, more or less forcing more austere measures on the household.

Two: The what-to-do-with-the-extra-cash basically solves the retirement puzzle. But only in part. Most of us have access to retirement plans but the quality and the cost of those plans varies widely or should I say wildly from one plan to the next. If you are married and don't work for the same employer, you have the ability to pick and choose the better of the two plans.

While many 401(k) plans have been making strides in reducing the cost of the funds being offered in their plans, they have turned around and raised their administrative costs. If you are married, fully funding the best of the two and picking and choosing with the second best plan. This is good couple time and a chance to review how your tale is beng written.

If you are single, the choices are more narrow but not without benefits. You have no co-author for your story and therefore, you are the sole writer of the ending. Even if you have never written a word, you probably have read. Good writers give you several subplots, characters you want to know and a conclusion that both satisfies and amazes.

Your subplots are already in place (kid perhaps, college debt, etc.) and how you handled each one developed your characters (were they handled well or are they going to be redeemed) and as you head towards your conclusion, will the person reading your financial life empathize, sympathize or simply suggest that had you done this or that along the way, the story could have been better.

Three: You are your own critic. Churchill once said: "Criticism may not be agreeable, but it is necessary. It fulfills the same function as pain in the human body. It calls attention to an unhealthy state of things.” being critical of your work thus far is essential in negating the pain and getting to healthy. Once you resign yourself to hear only the downside of possibilities, you entertain no hope of redemption. If you were reading your life, would you be thinking that this particular tome is not worth the time or effort.

Good writers seed this despair with hope. If you suggest that retirement is simply not possible, for instance, what is the ending going to look like? Are you the reader anxious to read further? Probably not. So you think about the positive endings that could take place, list them out and how plausible they might be and choose one. You have all of the information to finish this book by the half-way mark of your working life. You can look at your parents and grandparents and project the potential for your own life expectancy. You can look at how far you've come and know how far you need to go. All that's left is the plan to get to the end.

Yes you can retire. Yes you should retire. Yes, you have the money. This is the ending, you the reader wants.

Paul Petillo is the managing editor of and a fellow Boomer

Monday, March 21, 2011

The Time of Your Life: Boomers Have Choices to Make

I wanted to take moment to address Baby Boomers, both early and late. Now this doesn't preclude those who fall into the various other generational groups that have emerged on the scene since that term was coined. In fact, those among you that are young(er) could benefit even more by the following retirement planning suggestion than Boomers could. But it is all about the timing.

There are two things which continue to pop up in missive such as these. Diversification is always key and should always be part of the subtle and not-so-subtle conversations about about investments. Although only a few of us actually achieve this, it is still worth the effort. Why do you ask is this simple sounding process, one described as not investing all your eggs in one basket so hard to accomplish?

Diversification is often too easy to explain away, either by the successes you may have achieved while ignoring it or simply by complacency. In other words, you know better but have an excuse why you fail to do anything about it.
Suppose for example you purchased the stock in your company's 401(k) plan because, it was perhaps inexpensive to do so (lower than open market transaction costs might be a reason) or because it is the only match the plan offers to something like I-really-believe-in-the-business you work for also believing it will always be great and therefore, worth investing in).

All good reason to buy the company. Yet we often buy so much that if something did happen and something always does, we create an imbalance in a plan that is meant to last a lifetime. You know better and often only acknowledge the fact after it is too late to do anything. Diversification could be as important as being the eleventh commandment.

The downside consequence of failing to diversify and be reversed in a number of different ways. You could educate yourself about what the plan offers and in doing so, do what you had been promising yourself you would do for a long time. You will find out that if your company is among the top 500, you probably own additional exposure in an index fund, in a large cap equity fund, perhaps in a target date fund and even some exposure in a fixed income fund as well. Combine all of those together and you can no longer claim to be diversified. If you ever could make the claim.

You have a wide variety of funds in a 401(k). Most offer about 20 options and even if those plans are costly (many 401(k)s have boasted that they have found funds with lower expenses and then turned around and raised your administrative costs), they are what you have to work with. So spread out you exposure to one stock across all of those funds. If you have more than 20% of your 401(k) in one stock, you have too much. And there are more than a few of you who have over 70% invested.

Now I mentioned this was directed towards Boomers and I also mentioned there were two things. The other is asset allocation. Diversification and asset allocation are not one in the same yet are close enough to be inseparable. Often, looking to achieve one, you will help fix the other.

Asset allocation suggest that because you can choose from so many different types of investments (stock, bonds, funds that offer both, commodities, and perhaps other investment options as well) you should be taking steps to minimize the risk you may have taken in your youth so as to protect what those risks have rewarded you with. Because there is only so much money to go around, moving from a big exposure in stocks to something more conservative, such as a fixed income investment, could help solve the diversification issue.

Not always though. I'd be willing to wager that if you do begin, perhaps as part of this suggestion to realign your assets, you will probably sell your investment in the company store last. And by doing so, you increase your exposure to one investment and by default, actually decrease your diversification - or what little you had. If you must, put a number that you are trying to get that outsized investment in your company's stock down to and sell it to get there. Perhaps 20% would be as good a goal as none.

Now back to the Boomers. You have two opportunities to help you with both your asset allocation and your diversification issue, if you have any. And it is all about the timing. Coming up in April 1st, those who are 70 1/1 need to begin taking distributions. The first wave of baby boomers officially retired this year as well. If you haven't changed your asset allocation or diversified your investment significantly to protect yourself, choosing which money to begin spending can help.

If you begin disbursements this year, sell off the stock side of your portfolio first. This keeps any failure on your part from becoming bigger as time goes on. The longer you hold on to equities, the longer your risk stays high.
Now some of you close to retirement can achieve somewhat the same effect by investing any tax return (or bonus) into a fixed income fund. You have until April 18th to do this; later if you are filing an extension.

You can also begin to redirect how your money is invested in your 401(k) as well. Less going to stock and more towards protecting what you have earned is always sage advice but few of us actually sell one thing to move into something more conservative. Particularly if there is a nice run on the stock market occurring at the time. Waiting until a bear market simply means you waited too long. Target date funds are attempting this but have yet to prove that they can achieve this.

There is only so much money to go into your retirement account and if you are maxing it out, congratulations. But if you aren't increasing your contribution levels can help you achieve both asset allocation and diversification, simply by choosing something new that fits the concept.

Paul Petillo is the managing editor of and a fellow Boomer.

Tuesday, March 15, 2011

Is Investing a Journey?

J.K.Galbraith once said: "The world of finance hails the invention of the wheel over and over again, often in a slightly unstable version."  Why then do we continually fall prey to the lure of something new or even the advice of those who suggest that the future is easily told?

As investors, we look for patterns where there are none. We look to others who have been down one path, boast that their way is the right way, and no matter how crooked the journey, we follow nonetheless. It is difficult to be a contrarian, to fight off the preached legitimacy of what appears to be profound wisdom and to look beyond the fact that for every buyer, there is a seller who had a reason to unload their last be-all-to-end-all decision?

We are often beset by the desire to do something, a reflex called action bias. To not do anything if often seen as indecision. We have discussed risk often in these posts as something you should understand even if once you have that understanding, it is no longer something you can logically argue as worthwhile or even worth it. James Montier suggested that: "Risk clearly isn't a number. It is a multi-faceted concept, and it is foolhardy to reduce it to a single figure." Yet we try and use the search for this tolerance as something permanent, unwavering throughout the years of our investing lives.

"This time is different" is famously ignored quote by Sir John Templeton as the four most dangerous words in investing. I leave you with a poem today, something written decades ago about the path that men and women take based on the path that men and women have taken before.

"The Calf-Path"
by Sam Walter Foss. Public Domain

One day through the primeval wood
A calf walked home as good calves should;
But made a trail all bent askew,
A crooked trail as all calves do.
Since then three hundred years have fled,
And I infer the calf is dead.
But still he left behind his trail,
And thereby hangs my moral tale.
The trail was taken up next day
By a lone dog that passed that way;
And then a wise bell—wether sheep
Pursued the trail o'er vale and steep,
And drew the flock behind him, too,
As good bell—wethers always do.
And from that day, o'er hill and glade,
Through those old woods a path was made.
And many men wound in and out,
And dodged and turned and bent about,
And uttered words of righteous wrath
Because 'twas such a crooked path;
But still they followed — do not laugh -
The first migrations of that calf,
And through this winding wood-way stalked
Because he wobbled when he walked.
This forest path became a lane
That bent and turned and turned again;
This crooked lane became a road,
Where many a poor horse with his load
Toiled on beneath the burning sun,
And traveled some three miles in one.
And thus a century and a half
They trod the footsteps of that calf.
The years passed on in swiftness fleet,
The road became a village street;
And this, before men were aware,
A city's crowded thoroughfare.
And soon the central street was this
Of a renowned metropolis;
And men two centuries and a half
Trod in the footsteps of that calf.
Each day a hundred thousand rout
Followed this zigzag calf about
And o'er his crooked journey went
The traffic of a continent.
A hundred thousand men were led
By one calf near three centuries dead.
They followed still his crooked way.
And lost one hundred years a day,
For thus such reverence is lent
To well-established precedent.
A moral lesson this might teach
Were I ordained and called to preach;
For men are prone to go it blind
Along the calf-paths of the mind,
And work away from sun to sun
To do what other men have done.
They follow in the beaten track,
And out and in, and forth and back,
And still their devious course pursue,
To keep the path that others do.
They keep the path a sacred groove,
Along which all their lives they move;
But how the wise old wood-gods laugh,
Who saw the first primeval calf.
Ah, many things this tale might teach —
But I am not ordained to preach.

Do we need to follow the same path?

Paul Petillo is the managing editor of and a fellow Boomer

Wednesday, March 9, 2011

A Birthday Not-so-jubilantly Celebrated: Your 401K turns 30

It seemed like a good idea. But you have to consider where we were in terms of retirement when the line in the tax code was uncovered. We had pensions and companies didn't much like the idea. These defined benefit plans were designed to keep employees in one job over an entire career and add to that, they were costly and unpredictable. For the employee, the time needed to vest was often long, sometimes as much as ten-years, and the pension once vested, although it was yours, could not be brought with you should you find a better job somewhere else.

The pension also represented the ability to increase your retirement income as your pay increased. This trade-off from human capital in the first years of employment to retirement capital in the later years, made the company liable for the investments and the guarantees that the money would be there. Higher paid workers, often in much higher tax brackets than we have today, were allowed to also save money after those taxes.

When Ted Benna found this line in the tax code (section 401(k) 30 years ago, he realized that this was the answer to what his higher paid clients were looking for: the ability to put money away on a pre-tax basis and if the company so chose to do, it could match those dollars. Business saw this as a way to shed those obligations of managing their pensions and shift the obligation of retirement to the employee.

Sure, the company said, we'll help. We'll hire some experts to set up a plan, we'll load it with a bunch of investments and we'll act as fiduciaries. Heck, they said, we'll even provide the incentive of a match - even though these companies would lace it would all sorts of caveats much like the vesting period of the pension. Yet it would, in their minds, be the answer to a question they had not asked but possibly should have.

Even better, these new plans would be portable. You could take the money you had put aside with you when you left. Once again, this was more a win for the company than the employee, who often left before they got the fully vested match and was forced to roll the money into their own IRA. The fully vested match is often something that happens over time, sometimes as long as ten-years, more commonly over five years.

It can work in a number of ways and this information is part of the Investment Policy Statement that every plan has and few people read. During your first year, you might get the company match - in theory - but if you were to leave, it would not go with you; only the money you had invested would be yours. Perhaps by year two, the company would allow you to take 25% of the company match, and each successive year, a little more. Some companies give the full 100% after five years. So consider the employee who finds a new and better job opportunity and decides to quit a week before the five year waiting period is up. They would lose five years of company matching funds simply because they didn't wait.

This line in the tax code also created a multi-layer business to accommodate this plan, from mutual fund houses to insurance companies to brokers at the investment level to third party administrators and lawyers to help with the legalities. This line in the tax code also created some huge problems for the worker.

Now they needed to find investments in those plans to give them the best retirement. They needed to participate beginning as early as possible and stay involved as long as possible. They needed to get historic returns and be disciplined in an endeavor they had little or no knowledge about prior to this shift. It was a great social experiment in self-help that has failed many people. It also helped a great many people who might not have had much otherwise.

But the plan has problems that have never been suitably addressed, in part because of the belief that people wouldn't allow these provisions. One problem that should have been better adressed was the portability part of the plan. Mr. Benna in a recent interview with the Baltimore Sun bemoaned this ability to "take the money with you". He knew that our natures would get in the way of the right choice. Too many people would cash the plan out, pay the penalties and the taxes and squander the early start that these plans depend on. He thinks that the employee would be better served being forced to leave the money at the old employer.

He also knew that if the 401(k) allowed for a borrowing provision, people would use it. Mr. Benna's redesign of the 401(k) would include auto-enrollment and auto-deductions that would begin at 4% and increase until they reached 10%. He also admits to the problems in target date funds (which we have discussed here in previous essays) but thinks the idea is right. People make emotional choices with their investments and target date funds are designed to take that emotion out of your hands.

Of course you could opt-out but history has shown that few people do. He also suggested that this plan should be, in a perfect world, a supplement to a pension plan. But he was quick to point out that companies still have problems with the predictability of pension costs. Much the same way 401(k) investors have difficulty with investment risks.

In either case and even if you are fortunate enough to have both types of plans, the responsibility of your retirement is still with you. Arriving as close to it debt free is still the best approach to retirement. Investing as much as you can and then more, perhaps twice what you think you can afford, is a better plan. Think of retirement as a storm that is approaching. You wouldn't gather enough supplies to last for a day or two. You would get more than you need. Most folks have not filled their retirement pantries with much more than a loaf of bread and a jar of peanut butter. How prepared are you for a storm that is likely to last for thirty years?

Paul Petillo is the managing editor of and a fellow Boomer

Friday, March 4, 2011

Missing the Target: When Investing with This Sort of Goal is a Problem

Boomers who have shuffled out of their pre-2008 investments into target date funds did so because the promise seemed real. Conservative investments with some stocks and a sort of set-it-and-forget-it type of plan that would provide peace of mind. Younger people get them via auto-enrollment when they are newly hired. Either way, these investments have yet to prove their worth. Here’s the three main problems with target date funds.
One, they are funds of funds, a collection of mutual funds that do various things in different ways. Unfortunately, very few mutual fund families are rolling their best performing funds into these retirement tools. And in truth, why should they? If the investment public is buying a fund without too much effort, why throw it into a target date fund.
Two, target date funds are often found and the most heavily used in a 401(k) plan. They have been deigned the fund of the auto-enrolled, the new hire who for whatever reason doesn’t have a clue about how a 401(k) works, wouldn’t use it if they did (statistically, this is why these plans are underused and auto-enrollment has helped boost participation with few people opting out once they were in) and probably owns no other investment. If you have found yourself in this type of fund it is because your employer has done a little napkin math and determined when you will retire based on historic norms for retirement (i.e.65 years old). Those historic norms may not be all that accurate, but it is better than nothing.
Third, because 401(k) plans, at least the vast majority of them don’t allow you to do too much shopping around, you are stuck with the fund that your 401(k) is offering. And this is where we run into trouble.
These funds are designed, at least on that napkin, to do what most of us are not too well versed in doing: asset allocation over time. The idea is that we want to go from aggressively invested in our youth to a more conservative approach in our later years. This journey from capital growth to capital appreciation inside one fund has no real track record to speak of. So at any given time, a handful of target date funds with the same target date could be at different points on this aggressive to conservative investment journey.
Enter the Government Accountability Office or GAO. In a recent report, the GAO was asked (it does not say by whom) to answer the following questions about this investment: (1) To what extent do the investment compositions of TDFs vary; (2) what is known about the performance of TDFs; (3) how do plan sponsors select and monitor TDFs that are chosen as the plan’s default investment, and what steps do they take to communicate information on these funds to their participants; and (4) what steps have DOL and the Securities and Exchange Commission (SEC) taken to ensure that plan sponsors appropriately select and use TDFs?
Without going too deeply into the 59 page report, I’ll briefly answer some of the questions. The investments can vary wildly. In one fund they examined, 65% of its assets were still in common stocks in the year prior to the target date. If the goal is to get your money to a safer place over time, this fund failed to do what it promised to do. But they can’t be faulted for trying to get the biggest return for the investment dollar – and to do that you need to take risks – and hey, their are no guidelines to follow, just a sort of linear point A to point B path.
Performance is indeed an issue. We look back on mutual fund performance three, five, even ten years to glean some information about how the mutual fund performed in good markets and bad, how long the fund manager has been at the helm and how they have weathered the various storms that blow across the investment landscape. Target date funds have no track record to boast about – some have good returns, as much as 28% from 2005 to 2009. Others have lost more than 30% of their value in the same time period. Some have only been around for five years or less.
Chances are, because auto-enrollment put you in that fund and you have nothing to compare it to, in large part because auto-enrollment might make you an auto-investor, it doesn’t make auto-smart about investments. To their mutual benefit, plan sponsors are doing what they can to educate their participants. Some do better than others. But the worker is the one who has to show some interest in where their money is going in order for those educational efforts to work.
The last question the GAO attempted to answer about target date funds, the one about the involvement of the Department of Labor and the Securities and Exchange Commission in the process presents the most problems. A plan sponsor knows their fiduciary responsibility to offer good investments at the best cost accompanied with access to information. It comes down to all parties talking about you in the following way: You can lead a horse to water but you can’t make it a duck.
You have to take an active role in what your plan has to offer. Yes, the improvements in how target date funds operate will happen, and possibly without your knowledge. But this is your money that you are counting on in retirement. Do you really believe that anything in this day and age can be set on a path that lasts 30, sometimes 40 years and not need some attending to? 
Paul Petillo is the managing editor of and a fellow Boomer.

Tuesday, March 1, 2011

Baby Boomers: Are Your Denying a Time when You will be "Old Old"?

Baby Boomers face all sorts of challenges when it comes to retirement. Are we ignoring the most obvious of those challenges when we refuse to think that we will one day be old - not just older, but old old.

It is a relatively well known phenomenon amongst the soon-to-be retired. You are jettisoned from your 401(k) with a large chunk of money, a lifetimes' worth of hard earned cash. You are forced to make a decision about what to do with it. Kept in its present form would require you pay taxes on it as it is. Rolled into an IRA allows you to hold off on distributions, possibly until you are 70 or begin to take money out. But some folks fall into the annuity trap.

This choice, the annuity, in whatever flavor you are sold by the insurance company is often picked when the newly retired person does so in the midst of what would be a bear market.

For those not versed in that term, this a period of lower stock prices; the reverse of which would be a bull market. Most folks fall back on the same logic, perhaps not fully tested or vetted, that retiring in a down market is hardest on your retirement account because you have far less than you might have has had you retired when the market was on the upswing.

On paper it might look bad. But the bear market might be your friend, especially if you are the counterintuitive type not prone to believe the conventional wisdom. What is the conventional wisdom? To be upfront, something I disagree with in most cases in large part, because I don't think pat formulas work. We evolve and so does our thinking. Why, if that is true of us and we are the markets, do we insist on being harnessed by stringent parameters?

Because they provide comfort, a point of reference, a goal. No matter what name you assign them, they are prevalent and with so many personal finance and retirement "gurus" saying the same thing, you tend to fall lockstep into the same thinking. Withdraw 4% you chant and you will never run out of money.

I've disputed this notion in the past as not very wise or thoughtful. Two things helped me arrive at this conclusion. Long before Susan Jacoby wrote her new book about old age (Never Say Die: The Myth and Marketing of the New Old Age, Pantheon Books), which provides a no-hold-barred look at the distinct, perhaps inevitable slide the human body takes on its path to death, I was suggesting that we might live longer but what will living longer mean. Oh, we may live to 85, but our arrival signals the end of cognitive independence for more than half of us.

She blames the baby boomer, the reinventor of what life is as the culprit in this thinking. We may have changed the way our youth unfolded and we may have upset the norm throughout our working careers. But when it comes to old age, it doesn't matter whether you have some sort of can-do attitude, you won't be able to change what is going to happen to you. You may envision a life of vigor and vitality, volunteerism and travel. We all need something to keep us moving forward. But Jacoby says we are ignoring the hard facts of life. We'll still get old. And with age comes the maladies of that time. Still there and still the same unsolvable mysteries.

So we will reach a point somewhere in the future - and the odds are in favor of this thinking - when you will no longer be the person you are right now. The years that you believed would be full and vital are now gone and you are collecting in the form of equal - possibly inflation adjusted - income that you can't spend. You scrimped in the early years of your retirement, downsized, even counted every penny. And then later in life, it doesn't matter. My suggestion was to start out big and taper back. Perhaps gradually easing back from a 6-7% withdrawal rate in the first ten years of retirement to a paltry 2-3% by the time you are 80 years old.

The result would be more or less the same with you using the money in the early years to do what you thought you could do and scaling back as your new sedentary lifestyle takes hold, an inevitability we can't avoid. "Young old" is easy to imagine. "Old old", not so much.

But the choices we make right at the moment of retirement may have a greater impact on how well that retirement is financed than we may have previously thought. Those bear market retirees, the ones who graviate towards annuities more so than their cohorts who retire in the midst of a bull market, may end up doing better over a longer period than their more optimistic cohorts.

I am of course referring to the studies done by Wade Pfau, an associate professor at the National Graduate Institute for Policy Studies in Tokyo who has suggested that retiring during a bear market is actually the best case scenario. His thinking is that a bear market provides more upside potential than a bull market would. On this point, he may be right. Our penchant to follow the herd during a bull market gives the impression that markets will always go up.

And there is some proof that for a time, they will. There is also proof that if you retire during a robust bull market, you will be more inclined to believe that you possess some sort of powerful ability to manage your money better. But bull markets fall and this causes confusion among those who may have deluded themselves into thinking they were more skilled than they were.

Professor Pfau thinks that a 60/40 stock split is optimal and if you invest over the course of 30 years at a rate that is close to 17% of your pre-tax income, you will be able to have 50% of your pre-retirement income, inflation adjusted, throughout your retirement. Staring earlier will mean less needed to get to the same mark. And of course this excludes any other money you might receive in retirement.

You are probably saying to yourself, 'that's a lot of income to sock away' and you'd be right. But this is one thing that hasn't changed: if you think you haven't been putting enough away, you are probably right. If you think old age is something that will resemble the first day of retirement for the next 30 years, you would be wrong.

Baby Boomers should be thinking about spending more when they are healthiest. Because 'old old' doesn't give you the chance to revise your planned 'young old' retirement.

Paul Petillo is the managing editor of and a fellow Boomer