Researchers believe that Boomers are facing Retirement Risk

Late Boomers, early Boomers, GenXers, it's all the same. Retirement will be a risk and most of us aren't taking the risk seriously.

Most of us make a flawed assumption about retirement. We save (or as I prefer, invest) for our retirement and do so based on the fact that the taxes we pay now will be the same when we retire. This sort of assumption, according to the Center for Retirement Research at Boston College, puts 51% of American households at risk of not having enough to sustain their pre-retirement lifestyle in a post-retirement world.

The CCR takes the view that if this nation stays on its current course, and nothing is done about the increased level of Federal spending, "government debt will increase from the 2010 level of 61 percent of GDP to 79 percent by 2020, 118 percent by 2030, and 180 percent by 2040." This sort of escalation will result in one of two things happening to offset those increases: the government will need to reduce spending or increase taxes - or both. Neither option bodes well for those planning on retirement.

The Center is focused on a broad-based National Retirement Risk Index (NRRI) that "measures the percentage of working-age households who are ‘at risk’ of being financially unprepared for retirement." Even if the taxes we pay remain the same as they are today, most American households will find retirement financially challenging. But what if they rise as the report suggests they will - or better will need to?

The report was issued prior to the extension of the Bush-era tax cuts, which had they been allowed to expire, would have increased the overall taxes most of us pay impacting the amount of money we currently save for retirement. As a group, we react to incentives or in the case of increased taxes, disincentives in predictable ways.

First, we tend to invest less (if the pull back of the company match following the market downturn in 2008 and our failure to make up the shortfall in the wake of that decision is any indication) as we adjust our household budgets.

Those budgetary needs are real and present. But the future needs in retirement as a result are a real and present danger most of us are ignoring. Add the possibility (or the real likelihood) that taxes will increase in the coming decades from their current levels, and you have a recipe for financial disaster brewing beneath the surface.

The CCR projects that a value-added tax (VAT) would be necessary by 2020, and this tax, once introduced would need to escalate from 0.9% to 8.1% in the thirty years following its introduction. Social Security taxes would also need to increase from the current payroll tax of 12.4% to 14.7% by 2050. The group most at risk: older workers who have little time remaining in the workforce to increase their contributions to offset that shortfall. Younger workers would have time to adjust but the need to do so might cause a natural human reaction when faced with some tough economic decisions is to recoil, not regroup.

If a value-added tax were instituted, the retired worker would face some serious financial challenges that they may not have planned for while building their nest-egg. Granted, Social SEcurity tax increases would not impact this group, but once retired, each change in the tax structure, no matter how minute would lower the available amount of money they might need (and counted on) and i doing so, increase retirement risk.

In the wake of any fiscal policy changes to make up for the growing GDP, the CCR suggests that a higher target replacement rate would be needed. There is only one way to do this: increase contributions. Doing so would have the net effect of slowing the ability of any group to sustain a lifestyle current to the one they have and if they failed to budget for tax increases, put their retirement hopes and dreams in jeopardy.

Gen Xers would need to budget to spend less and invest more at a time when college debt, families and independence impact their day-to-day financial decisions. While this group can adjust their consumption rates to make up for the shortfall, it is unclear that they will. Late Boomers, those caught between the distant retires (Gen Xers) and the soon-to-be retirees (Early Boomers) also face risks. While those risks are not as great as their older cohorts, it would require them to make drastic cuts in how they currently live to make up for the projected shortfall in retirement.

The report concludes withe following statement: "If households were to respond by cutting savings as well as consumption, due to choice or necessity, the percentage of households ‘at risk’ would be larger.  This brief errs on the conservative side by assuming no behavioral effect." But we know better.

We know that you will make some bad choices between now and then. If tax levels rise while you are still employed, the impact will be direct on how much money you take home. If you realize that your retirement calculations are incorrect, you may conclude that working longer (rather than saving more and adjusting spending habits) is the only way to make for lost ground and a diminishing timeframe.

We know that you will perceive risk as the enemy and find ways to reduce your exposure to risk by reverting to more conservative investment schemes like target date funds. This will have the net effect of protecting your money while forfeiting potential growth opportunities. The younger you are when you recoil from risk, the longer it will take to reach optimum retirement levels. Ironically, avoiding risk while you are working increases your retirement risk.

There are options. The first and most obvious is increase your contributions. This is the right choice to make but comes with a caveat: you cannot increase your debt in the process, a normal reaction to lower daily spending opportunities because your budget has tightened.

The second and less obvious choice is to assume some risk either in your 401(k) or outside. It is true that the current tax rate will be extended. So why not pay the taxes for your retirement income now in the form of a Roth IRA while rates are predictable and lower than future rates?

Here's an idea worth considering: invest in your 401(k) up to 10% of your pre-tax income, match or no match (more if you can). Use the most aggressive funds in the plan to position yourself for the greatest amount of growth (if you are younger - Gen Xer or an Early Boomer). On the outside of that plan, open a Roth IRA and focus your investments on an index fund such as the S&P500.

Because of the tax efficiency of an index, paying the taxes in the future on what your tax-free principal has earned, even if they are higher, would be less than what your 401(k) or traditional IRA owner would pay. There is no fixed time to begin taking distributions (it is possible this could change but a lot of tax analysts think this is unlikely) and your estate is better served with a Roth IRA. Because you can begin distributions when you want, this could be an added boost for your retirement income in the advent of any tax increases in the future.

No one can say for sure that taxes will stay the same or go up. We do know one thing for certain: they will go up - as will inflation. If you aren't planning for this, you should and the sooner the better.

The following article was the beginning of a series on women. because so many Boomers have been faced with the need to remake their careers and even remarket their talents, many have looked to business ownership as the road they need to travel.  Also consider the time you might devote to this sort of venture.  Conceivably, at age 55, you could create business that could need your stewardship for tow decades or longer.  That said, there are many things to consider.

I just recently began season two of a radio show with Gina Robison-Billups and Kat Bellucci.  Quite often, Gina reminds us what this project is designed to do: help women in business not only achieve their goals but to level the playing field in business. This playing field, it seems, isn't level for any of the players when it comes to retirement planning.

We have discussed numerous ways for the women in the her audience to create and maintain a retirement that is both affordable and provides the right incentives for all of their employees.  But while women (and men) concentrate their time and efforts into growing the business itself, what you don't see or accidentally ignore, could cost in terms of legal fees and quality employees.

Once the business you are in becomes big enough to consider more than just a self-employed IRA for your retirement plan, an IRA suited best for the business owner and employer of one, the decisions seem to suddenly become more complicated and costly.

You might be CEO, chief sales person, plant manager and human resource department among the numerous hats you might be donning as your business grows.  But don't forget, you will also be the chief financial officer.

CFOs are faced with numerous problems when it comes to creating and maintaining a 401(k) plan.  You will need to hire a plan sponsor. At first, you will wonder if this is a necessary step.  But there are numerous reasons why you should hire what you can afford.

In a small business situation, the simple plan is probably the best.  Often referred to as a prototype, the plan comes with some basic elements in place and some you may not have considered. The best advice in structuring your 401(k) is to separate the elements of the plan.  Mutual fund and insurance companies offer a complete package of services designed to make the plan a sort of one-stop shop sort of affair.  Now, I'm not saying that this is a bad idea and on the surface it may look as if it might be the most cost efficient.  But in the long-run, as your company expands, it might become more burdensome.

As the CFO, you need to consider compliance and regulation issues. This is almost impossible to do in-house. Hiring outside of your company may cost a little more than your typical investment/insurance company might offer, but consider asking yourself these questions when hiring them: are they capable of protecting your plan and its participants from costly mistakes, regulatory penalties, liability exposure and all nature of aggravations that will act as distractions and interfere with the operation of your business or non-profit organization?  They might say yes but the simple truth is, much of those issues fall back to you should they become legal actions.

According to CFODailyNews.com, one of the scariest parts surrounding 401(k) plans, is the participant lawsuit. Why? because if you haven't done your job, you will probably lose a lawsuit. According to the site: "Recently, there’s been a spike in employee lawsuits over excessive 401(k) fees. The scary part: If you can’t prove that your company did its best to negotiate lower fees from your 401(k) provider, courts are likely to rule against you."

One of the main reasons employers use 401(k)s, aside from their ability to create retirement wealth that is directed by the employee themselves, is the matching contribution.  This is something the employer provides and people beginning their plans should keep a couple of things in mind when deciding how much to offer or even to offer anything at all.  We have all heard news reports over the last couple of years about companies reigning in the 401(k) matches, citing difficult economic times.

While we have also heard about the huge amounts of cash they are hoarding, taking something away from employees is harder to do than you might imagine.

So when beginning to offer a match, keep in mind that no match or a little match can be improved upon. Small business employees will understand your prudence and might even see it as a wise business choice made by a smart owner. If you do decide to offer something, consider selecting a match that motivates current and potential employees, increases employee participation in your plan, affectively works at appreciation of the 401(k) plan and helps reduce employer contributions needed to pass ADP/ACP tests (actual deferral percentage/actual contribution percentage).

Now you might think that no match or a low match might be considered stingy.  But studies have begun to show that the higher the match, the higher the likelihood your employees will contribute only the enough to meet the match. Another consideration when building these plans is to offer them some sort of way to see the future.  It used to be that a number goal was what we all chased.  Now, we need to know how long the number goal will last.

And most importantly, women business owners can do their female counterparts a huge service by offering a lifetime annuity in their plan choices.  Now, as a rule I am not a fan of the annuity.  They cost a lot and are sold with all sorts of add-ons.  But they are particularly treacherous for women who receive a lump sum at retirement.  Annuities consider length of life and determine the payout based on actuarial assumptions. Shopping for one after retirement, leaves women vulnerable to getting far less than they would had they had access to it while they were working.

Paul Petillo is the Managing Editor of Target2025.com/BlueCollarDollar.com and a fellow Boomer.

Boomers in Business

Many Baby Boomers find themselves in a position to start a business or grow their business from a solo effort to one where employess are involved. Without ever losing your focus on retirement, there are steps that can be taken to make sure that you are paid first.

This week on MomsMakingaMillion Radio, the last in the three part series on small business retirement plans is discussed with Paul Petillo, managing editor for BlueCollarDollar.com and Target2025.com.

Kat: Today we discuss the SIMPLE IRA for small business in the last of our three part series with Paul on small business retirement plans.  Tell us just what simple is.

Paul: The SIMPLE IRA, named because those letters stand for Savings Incentive Match PLans for Employees, are a much cheaper and far less complicated way for small employers to establish and administer than a traditional 401(k).

This type of plan is indeed easier to manage and implement but there are a few rules you need to keep in mind before choosing a SIMPLE IRA plan for you and your employees. You are required to make a contribution for every worker who receives $5,000 or more in compensation. It doesn't have to be a lot but it has to be something up to but not exceeding $11,500 for the calendar year 2010.  After that, it will be adjusted upward based on the Cost of Living.

Kat: You said the small business owner is required to make a contribution? Listen to the whole interview here.

401(k) Fair Disclosure for Retirement Security Act of 2009

This is interesting for its content. The only trouble I see is the lack of fiduciary responsibility that has, in part, infected the 401(k) plan itself. These fiduciaries are often not well trained in their responsibilities and some firms are simply too small to put the effort in to finding the best 401(k) plan for their employees.

These plans, as you will hear in this video dated 04.22.09 in support of the 401(k) Fair Disclosure for Retirement Security Act of 2009 and presented before Congress by Alison Borland, Retirement Strategy Leader for Hewitt Associates LLC are incredibly complicated. If they are difficult to manage in a large firm, you can only imagine how troublesome these plans must be to smaller enterprises.



Representative George Miller (CA - D) introduced the 401(k) Fair Disclosure for Retirement Security Act of 2009 that would require:

* 401(k) plan administrators to provide advance notice identifying each of the plan's investment options, along with its risk level, investment objective, historical returns, a fee comparison chart and other information

* quarterly benefit statements to disclose certain account activity information including fees assessed during the quarter

* 401(k)-style plans to include at least one lower-cost, balanced index fund in order to receive protection against liability for participants’ investment losses under ERISA Section 404(c)

* service providers to disclose to plan sponsors:
- fee information broken down into four prescribed categories
- any financial relationships or potential conflicts of interest
- the existence of different share classes and the basis for the differences
-in situations where free or discounted services are provided to the plan, the extent to which and the amount by which the service provider or its affiliates are otherwise compensated

* the DOL to provide model notices and review compliance with these requirements.

The bill is on its way to the House ways and Means Committee and so far, has not been scheduled.

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