Retirement Plan Clean-up

Unlike cleaning up some of the small things that can have great effect, cleaning up a retirement plan is not so easy. And unlike the stat I mentioned on homeownership previously (how 80% of will be in the same house 10-years from now) we change jobs far more more frequently. And for the vast majority of us, this is why we sell our homes.

Looking back, you probably have had numerous jobs, some which you stayed at for more than five years. It usually takes a person that long to become dissatisfied enough to earnestly begin looking elsewhere. Add to that the current job market, which may have pushed you to stay longer than you would have liked. And when you did, you might have money left behind.

During that five years, you became vested in the 401(k) plan. This process of setting a timeline for when those company matches actually match is considered reasonable by law. You may have been enrolled through auto-enrollment and had contributions made on your behalf. Perhaps you made some yourself. That money should come with you. And often it doesn't.

Small companies are often as sloppy with their accounts as you are. If your account reached a certain balance, it might not send a red flag to the plan sponsor to cash you out. Cashing out, I should mention just because I brought it up, is not a good idea for even the smallest amount of money. Under 59 1/2 and you not only pay income tax but a 10% penalty - if you don't roll it into an IRA.

And this is why, even if they still have your money in their accounts, you should roll it over as well. IRAs have two distinct benefits for most retirement planners (not the professional kind, I'm referring to you), the first of which is much more favorable terms for distribution (eventually that 401(k) at retirement will do exactly the same thing: give you a lump sum). And secondly, in many instances, the fees are far less.

That doesn't mean all the fees. But the fees for the 401(k) plan itself which as it turns out, are the real culprits in the battle to have enough to retire. Many plans have shown major improvements in fund selection and investment options. Many more, particularly the plans at smaller companies, have a long way to go. Yet as the funds got cheaper, the administrative costs may have actually risen.

Yes there is an outcry about these costs and most people will tell you to pay attention and even question the plan about these costs. Few will get much in the way of relief though. It costs money to run these plans and unfortunately, the smaller plans have less participation and participation lowers fees. The more money under management, the lower the cost of administering the plan.

So recover those orphan plans and do it as soon as possible. Where you roll it to is not that difficult. Most plan sponsors will offer you options from the same fund family and will facilitate the process. Once you leave though, this door may be closed. You get the money but it would be up to you where to put it.

Wherever it goes, choose the lowest cost option that would still keep you invested, something like an index fund. You may already been re-employed and beginning to vest in another plan. And if that's the case, you will want to keep what fees you do have control over as low as possible.

The other quick fix to your retirement comes with a quick fix to your personal finances. Why do you suppose 28% of 401(k) plan participants have borrowed against their 401(k)s? Is it because they get a no credit check loan at very reasonable rates? Is it because you essentially pay yourself the interest? Is it because of you don't lose your job before you pay it off, it becomes a no-harm no-foul? While each of those answers does suggest that 401(k)s are good for quick emergency loans, they shouldn't be touched.

Do you suppose that of those 28% with outstanding loans, all of them had emergency accounts? Probably not and the 401(k), their precious future livelihood was their only source for cash in times of trouble. An emergency account is not that tough to build and worth the effort even if it does create some sacrifice.

Most financial sages suggest three to six months but suggest it be at your current spending. Done correctly, with everything pared back as far as possible, a single month's worth of emergency cash might actually be worth two additional weeks. So six months might actually get you by as long as nine.

Doing so requires that you figure how much needs to go out (absolutely needs to go out) each month to keep a roof over your head and food on the table. It requires a budget. But one quick glance is about all you need to see all of the additional holes that could be filling up your emergency account, the single most important stopgap measure you could have.

Doing these two things - and continuing to contribute to your plan on a regular basis - will give you a boost that was just waiting to happen.

Paul Petillo is the managing editor of BlueCollarDollar.com/Target2025.com and a fellow Boomer

Your Personal Finances: Like Cleaning out the Garage?

Sometimes, it's the little things that add up to the big things. or perhaps better put, what Henri Fredric Amiel suggests much more aptly: "What we call little things are merely the causes of greater things". So it goes with most of what we consider personal finance. It is mostly a collection of little things, some missteps, some untapped with potential, others forgotten. So in a season where most of us toy with the idea of cleaning out the garage, I thought we'd look at a few personal finance tips to clean up those accounts.

Who are you?
One of the first things every self-help book will ask you for is some sort of self-assessment. Which is fine but in almost every instance, you already know what is wrong.

You want to know how to fix it with the least amount of effort and perhaps embarrassment. If you cringed when I made the off-handed remark about "cleaning the garage", you probably have pockets of money laying around you didn't know you had.

Take out your utility bill and read it. Why start there? Because if you're the type that simply pays every bill without so much as a question as to how much this really costs and how can I trim this, you know who you are. Money is somewhat an inconvenience.

And then there is the you who believes in this cycle: You made it, you spent it and you went back to make more. Granted some of you whipped out your credit card, and that's worse - and a much bigger problem than what we're discussing here, but the point is, do you like being the person who simply, blindly and willfully pays for what they don't need?


Do you pay your mortgage?
Of course you do. Most of us do. Mortgages are actually not what you think they are. They are the best forced savings plan ever and an opportunity too few of us take.

Yes, your home is like saving. For a couple of reasons not the least of which is that it isn't an investment, at least in the classical sense of liquidity. You put money towards the eventual ownership of the place an believe it or not, the vast majority of us never move. Statistics have shown that in ten years, 80% of you will be right where you are now.

But there is the question of what are you really saving in your home? Yes, you pay interest and yes, you get a tax deduction and sometimes, once upon a time, we saw the value of our homes increase with each remodel. Which made us feel good even if we didn't move. And that's all well and good. But in the mean time, you are paying a portion of that mortgage payment to debt service. A big portion with most of it piled into the first years of the loan.

To get the most bang for your buck, you need to put a little bit more into this plan called home. The numbers are relatively simple and I've discussed them before. But they bear repeating. Suppose you had a $200,000 mortgage with a 6% loan. Your payment would be about $1200. If you found an extra $100 each month and directed it toward the principal, not only would you trim about five years from a 30-year mortgage, but you'd save about $48,000 in interest over that time - most of it paid in those early years.

Yes the numbers get better with each extra payment you make to the principal, not tagged onto the house payment, but directed at the loan. Some banks will offer you bi-monthly payments attempting to do the same thing. Problem is that you will pay the interest off quicker but not eliminate quick enough to make the switch - which you are locked into - worth it. Trying to make two extra payments a year will turn a traditional 30-year loan into something lasting barely over 20-years. And save almost $80,000.

Next up,  we'll take a look at what you are missing in your retirement.

Paul Petillo is the managing editor of BlueCollarDollar.com/Target2025.com and a fellow Boomer.

ETFs: Are These Investments Needed in Your Retirement Plan?

Boomers are often faced with a decision that will be framed in such a way as to make it seem the only logical choice. As the mutual fund verses ETF debate begins to gain steam, some truths need to be considered.

Mark Twain suggested: "The reason we hold truth in such respect is because we have so little opportunity to get familiar with it." This will be the selling point for exchange traded funds: you will hear that they are less expensive, that they are better than the mutual funds - many of them indexed, and that you should own them in your 401(k).

They will suggest you overlook the cost of trading them, the fact that they tempt you to trade them more frequently than ou would a mutual fund and in doing so, allow you to follow the herd on any given day, a behavioral no-no for every investor. So what exactly is the attraction that they want us to see? Are mutual funds better or worse than ETFs?

The answer depends on who you are. If the sort of investor who believes that they can make small moves to harness big gains, then you should probably avoid the lure of ETFs. Exchange traded funds are mutual funds that can be traded just like stocks. They tend to have lower fees than their comparable cohort the mutual fund but the commissions that brokers charge for these trades tend to erase the advertised returns you might get.

If you are the sort of investor who buys to hold, then the surprising choice would be ETFs. Yet you will need to harness the inner trader in you that wants to succumb to the temptation to trade. This sounds easy. But in truth, is no easy feat.

So let's run some numbers comparing a total stock market ETF sold by Vanguard and a total stock market index sold by the same company. The ETF (trade as VTI) carries and expense of 0.07%. The mutual fund version of the same thing (bought as VTSMX) levies a 0.18% fee on investors. The former has no minimum investment,; the later wants $3,000 to begin. So we'll start there and propose a hopeful return over 10 years of 4%.

In the first calculated example, the investor made no additional contributions to the investment. Vanguard does suggest that they charge no brokerage fees but they do charge a $20 annual fee for the account. This might be much higher when accessing these funds through your 401(k) and there may be additional brokerage fees. So we'll assume a $10.00 brokerage fee - as I said, yours might be lower and in most cases, the brokerage charge is on both ends of the transaction.

Based on the above numbers, the ETF, once purchased and held begins to creep past, in terms of raw returns by the third year. By the 10th year, you will have saved about $19.41 in fees giving you a net gain for your ETF of $32.82. 

But begin adding to the security on a regular basis (say $200 a month) and the differences are much more notable. To add to the ETF in equal proportions over the same 10 year period would cost you $1021 in commission costs and with this money not working for you, the sacrifice in what each would be worth at the end of the 10-year investment period used in our example in addition to the trading cost would leave you with over $1200 less in the ETF account.

Inside a 401(k), where regular contributions rule the way you invest, ETFs can give the average investor less of an opportunity than proponents suggest they will. In a taxable account, bought without commissions such as Vanguard offers and purchased in large lump sums, ETFs slightly trump their mutual fund siblings.

Will you take the time to learn the truth about yourself before making the decision on which investment is better? You are the debate. 

Paul Petillo is the managing editor and founder of Target2025.com/BlueCollarDollar.com and a fellow Boomer.

Your Home: Is it Part of the Plan?

American dream or not, the games you may have once played with financing your home are not available for the vast majority of homeowners. And there is no doubt that this a good thing, a lesson learned that was far too painful but often, those tales are. But there is another game afoot in the world of mortgages, even as the largest lenders pull the plug on the process: the reverse mortgage.

Most of us don't envy those who are toying with this option. We know two things about these folks: one they own quite a bit of their house, referred to as equity and two, these homes are owned by cash-strapped people older than 62.

The reverse mortgage is a rather simple product with relatively simple goals. Because those who are considering this option are often older and in possession of much of the house they live in. This pool of cash is a very tempting option to a fixed income or one where retirement savings no longer is able to keep up with the cost of living. There are a variety of reasons they may need to tap this cash in their homes from medical bills to simply poor money management.

So the concept of tapping some of that equity is quite appealing. A reverse mortgage essentially gives you the money that your house is worth. Ron Lieber recently visited this topic in the New York Times explaining "reverse mortgages begin with a lender that is willing to pay you instead of you paying the bank. How much you get depends on your age, prevailing interest rates and the amount of equity you have in your home. The payout may also depend on whether you choose a lump sum, a line of credit, a regular payment for as long as you live or a regular payment for some fixed number of years."

The problem is getting a lender to do that. Many of the biggest banks have pulled away from offering the product, not because they don't think it is a good idea. But because those they lend the money to tend to fall behind on key elements of the loan agreement: paying taxes and keeping the house in sale-able condition. Aside from a check with the feds, there is no credit check on the applicants.

So banks, seeing the issue of foreclosing on granny because she opted for the lump sum payout and failed to keep current on those obligations have decided the bad PR will come with too steep a price. So enter the second and third tier lenders who will, without a doubt fill the void.

This could create several issues. The first would be fewer loans or on the flip side, loans that revert back to why this type of mortgage got its bad rep in the first place. Fees will be higher in a space with fewer competitors. Elderly will sign more complicated documents that will force them to maintain a fund for emergencies - which on the surface isn't a bad thing but could turn turn out to require higher funding balances than needed, leaving the reverse mortgager with less cash for the effort.

Another issue might be in how your heirs feel about the whole process. Often, parents,who may have mentored their children on the subject of money and financial prudence and who now find their finances in need of some review, may not be willing to or may be too embarrassed to ask for help. If there is no dialogue, the whole process might come as a surprise for kids who thought that house would eventually become part of the estate. And once these second and third tier lenders begin the process of foreclosing, it is often too late for the children to step in to help.

There are some key things to consider here. The first is what options do your parents have? Can they downsize? If not, can you talk to them about the options? Often this conversation needs to happen but it also needs to approached with great care and consideration. But once the barrier has been breached, you can move to include yourself in their financial affairs before it is too late.

This is also some tricky water to navigate. But the effort is worthwhile. If they need the money, and many older Americans will, attempt to get them to allow you to help budget the funds. In the future, HUD will probably set rules about creditworthiness and because many older Americans have little or no recent credit history, this might prove an obstacle at a time when they are already facing one too many. Helping them build some creditworthiness will enable them to be in a better position - with your help - to get the best deal possible.

Once you have gained their trust, you can include your input with their financial planners, with their attorneys and possibly with their medical doctors, all of whom may not be able to tell you what their clients or patients are deciding. You can take control of the vital payments that need to be made and keep things in good financial order.

So this summer, take a moment when visiting your parents or grandparents and have the discussion. And while you are at it, consider a plan to pay off your mortgage as well. (You can find recent articles about this topic here.)

Paul Petillo is the founder and managing editor of BlueCollarDollar.com/Target2025.com and a fellow Boomer.

Another Book-length Investment Study on Women

I'm sure Warren Buffet doesn't mind the title of LouAnn Lofton's new book "Warren Buffet Invests like a Girl". But does he really or is he just showing a sensitive side?

Here is an interview the author had recently with Reuters. And below that, I'll examine some of things Mr. Buffet has said and wonder if they could have been said by a woman. Two things you must know if you don't already: I think women make excellent investors and two, I haven't read Ms. Lofton's book.



Like all quotes, they can and will be taken out of context. And the standalone quotes are just that, standalone, without the surrounding text to bring them to life. Nonetheless, do these next five quotes attributed to Mr. Buffet as Ms Lofton suggests, reveal something about the man investing like a woman, or perhaps as she should?

"A public-opinion poll is no substitute for thought." Study after study has suggested that women value the opinions of others whereas men seldom do. Not to say men don't look to the successful or experienced for information to help them invest, but given the choice, men will continually say they arrived at a decision on their own, after much thought and consideration. In fact, men look at investing as the result of much "thought" even as they gained lots of opinions along the way.

A woman's ability to network, seek advice, even consult a mentor is at the heart of the every effort to get women to invest more. They value public opinion and make decisions based on what those opinions offer. Could Mr. Buffet simply be suggesting the circle of wise friends, a class of like-minded individuals or simply the educational sources women seek akin to putting too little thought into the process? Score One for Warren investing like a man.

"I always knew I was going to be rich. I don’t think I ever doubted it for a minute." Single-mindedness, bullheadedness, even the slight hint of braggadocio are more than evident in this statement. There are women who have all of these traits and are driving the statistics that suggest women are on the upswing as investors. But the problem remains and was pointed out recently by Sheryl Sandberg, COO of Facebook when she offered this piece of advice to the graduates of Barnard College.

She suggested that women make small decisions along the way that eventually lead them” to a bigger decision, one that leads them to want more balance. Her message to this class of 2011 was “do not leave before you leave. Do not lean back; lean in. Put your foot on the gas pedal and keep it there until the day you have to make a decision, and then make a decision. That’s the only way,” she said, “you’ll even have a decision to make.” As long as women approach the world in this manner, the gap between who women investors are and what their male counterparts have become will persist. Score One for Warren investing like a man.

"I buy expensive suits. They just look cheap on me." Suits, like armor are all in the wearer's ability to pull the look off. Investing is like that as well. It's illusory and easily-lied about trait make it best suited, no pun intended, for men.

Women on the other hand like the research but not the sort of information that is clustered around numbers and charts. Instead, they want to invest and look good when they do. This keeps them from taking any investing (fashion) chance and as numerous studies have shown, means women take far fewer risks. Investments are needed and retirement is a must. But it will never be fashionable because no matter how hard a woman tries, the act feels cheap. Women need to get over that and too not over-think the process. There are some excellent ways to get to what needs to be done when it comes to investing and retirement planning and much of it comes from learning how to budget and creating a debt-less lifestyle. Score One for Warren investing like a man.

"I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over." Women have been stepping over 1-foot bars for quite sometime. And this slow and easy approach to investing is definitely a plus for their chances to be successful when they invest. But the investor we think about, the ones I have spoken to have all pointed to a single investor philosophy: sell before you get hurt.

While I am going to score this one for women, because I do advocate the slow and methodical approach to gaining wealth, there is still too little money being directed at these 1-foot step-overs. But that is a topic hinged on pay and until women reach income parity, they will not feel as well-invested as men. Score One for the women.

"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well." and "Our favorite holding period is forever". This emotional behavior, the herd mentality mentioned in the first quote and the patience to keep with something that has long gone out-of-fashion don't seem to be reflective of the women I have met. Granted, I usually tap the sources closest to me, professional women in my network and the research done academically to form some sort of a conclusion, albeit a moving one,. But I wouldn't be far off the mark to see women (and men) chasing the chance to follow the rest of the herd if the herd seems convinced. Remember, it takes one to turn the tide in a direction and in most cases, the rest will follow. What appears to be a sale or the in the case of men, the next new thing, is in fact a display of our susceptibility to what the crowd suggests we need.

Keep in mind, I'm extrapolating here when I use the activities of everyday life to suggest that this is how we invest. But taking the emotional animal out of the equation is difficult to do and behavioral economist know this as well. As to buy and hold and Ms Lofton's suggestion that his investment style is "girlish", I offer one word: redecorate. Score Tie

I do applaud Ms. Lofton's effort at addressing this topic. Women have a great deal of ground to cover and while doing so, men could benefit from what they are learning. Better 401(k) plans with index funds, higher IRA contribution limits and requiring annuities in every 401(k) would have a leveling effect for both sexes, but much more so for women.  It's just too bad, at this point so far along in the history of these markets, that the icon a woman wants you to look at is a man.

Paul Petillo is the managing editor and founder of BlueCollarDollar.com/Target2025.com and a fellow Boomer.