In 2012: What Boomers Can Expect

"Time is free, but it's priceless. You can't own it, but you can use it. You can't keep it, but you can spend it. Once you've lost it you can never get it back." Harvey MacKay

One of the key elements in any financial transaction is time. If you want to retire, you must consider the amount of time. If you want to borrow, how long you have to pay it back can be translated into dollars and cents. Investing; timing they suggest can't be down but is important nonetheless.

If you are twenty, time is on your side. If you are thirty, there is time left. If you are forty, time is of the essence. If you are fifty, time is running out. If you are sixty, where has the time gone. And older than that, time is no longer on your side. It accompanies us through life like some dark passenger. It reflect back on us from the mirror. And when we look at our retirement plan, it stares at us without guilt or shame. Time is the truth.

When I first began writing these predictions, and I've been churning out these year end ditties for over a decade, many were laced with optimism, some with an urging that we learn the lesson and move forward armed with knowledge of past mistakes, and still others were exercises in reality. In 2012, we have some opportunities and some problems awaiting us, left on the table as we symbolically turn the calendar wiping out 2011. But it won't leave quietly.

So I have a few thoughts about what you can do - resolutions of sorts but not the drastic sort we make and break almost within hours of promising ourselves at midnight.

Increase your contribution I start with this obvious chant for two reasons: you aren't making a large enough contribution and two, I would be remiss in not telling you this right from the start. And I'm not just speaking to those with a 401(k).

There are the millions of you who are forced to (and because of that are not likely to) finance your own retirement through an individual retirement account. We lament at the worker who literally only has to sign up at his workplace and doesn't. And far too often, we say little about the person who has to sign-up (after finding a fund), commit with a fortitude that is somewhat lacking and to contribute some of their paycheck via direct deposit every week or month. That effort, it seems is a much more involved hurdle.

In 2012, the investment world will be little changed. It will roil and confuse and gyrate and possibly even nose dive - just as it has for decades. It will react to news - if not from Europe form China or even the presidential elections (which ironically tend to be excellent years to invest). This will have you second-guessing your investments. But this will only apply if you have no idea how much risk you can take.

Pay attention to diversification You may not be capable of rebalancing, the act of making sure that your investments are directed evenly across many investments. This is much harder than it seems. As long as you are involved - and that is YOU in capitals - the struggle to keep balance will not get any easier.

For the vast majority of us, mutual funds will be the investment vehicle of choice. These investments will see more movement towards fee reductions. Which is a good thing. Fees will and always have been a subtraction of gains. This makes an excellent argument for indexing.

Choosing six index funds across the following cross-sections of the markets will not solve the problem of rebalancing (some will do better than others) but it will provide diversification. Index the largest companies (an S&P 500 fund), a mid-cap fund (the next 400 companies in size), small-caps (the next 2000), an international fund (an index of the largest countries (those with established banking systems even if they are currently troubled and will continue to be so in 2012), an emerging market fund (after international funds, the most risky) and a bond index (one that covers as much fixed income as possible).

Some of you will wonder if exchange traded funds (ETF) wouldn't be just as good if not better than simple indexing. In 2012, ETFs will continue to drill down ever deeper into sectors of the markets that add risk along with the illusion of an index. ETFs will become more actively managed in 2012 offering you more risk at a lower cost. Cheap doesn't mean better. 2012 will be year of the ETF. If you are unsure what these investments are, consider this conversation I had with David Abner of Financial Impact Factor Radio recently to help explain what these investments are and how they work.

Focus on your financial well-being This refers to your credit score. It continues to impact your financial future and will become increasingly harder to ignore. A new credit rating service agency will add to the difficulty in 2012 and not only will the current scoring impact costs such as insurance, it will seek to trace the breadcrumbs of your financial life more thoroughly that the big three do.

There is little likelihood that the job market will increase as many of our returning troops will flood the marketplace, taking numerous jobs from your kids just out of college. Which means another year with your kids at home. The only answer to this problem is to continue to tighten down your budgets in 2012. As I mentioned earlier: "If you are forty, time is of the essence. If you are fifty, time is running out. If you are sixty, where has the time gone."

And you must do this understanding that inflation - not the reported number but the real number in your grocery bill - will still chip away at your wealth. This means you will move in two opposite directs in 2012: saving and investing more for your fleeting future (at least 6% but 10% would be best) and spending less in the present (easy of you don't use credit).

And the housing market will improve for those who have repaired any damaged credit or who have saved enough of a down payment to buy a house. people are still buying and selling. These people have found that while the market is not accessible to all, it is for those that have done right by their personal finances.

Do all of that this may not seem like a new year - but it will be a better year!

Baseline Decisions about Retirement: Calling it Quits

There is no accurate predictive tool to tell you what the next year, five, or ten will be like. You can’t even make an educated guess. You can make a few assumptions. But the real truth is you will be making those based on biases, illusions, and dreams that may or may not come true. So who do you cross the threshold of retirement with any degree of confidence? Perhaps a little real time preparation would be nice.

Most of the people (Boomers) thinking about retirement know one or two things: first and not the least, they no longer want to work. This sort of commitment will come from a sector of the working population who has felt the largets physical toll on their bodies. That doesn’t mean that they have labored so hard – although many do – it suggests physical exhaustion with getting up, going to workplace that no longer holds any interest other than a paycheck, and may be causing you more mental grief, which often translates into physical problems, than would otherwise be worth it.

The second is that you think you can afford it. In either of these two instances, the desire may outweigh the resources. But you are willing to give it a try. Here are a couple of things you should consider before you make the leap.

Refinance. If you are still paying on your mortgage, while you are working is the best time to get a new deal. If the statistics hold true, you probably do not own your house. Unlike your parents, who entered retirement in full ownership of the home they lived in, you will be entering into this time-of-no-work with a mortgage hanging over your head. Get the lowest possible interest rate possible and if you can draw some of the equity, make some improvements that will make the home more liveable and in need of less maintenance.

Now you have a baseline for your shelter needs. Your car may or may not be something you will need but I’m willing to bet, you’ll want one. While the lure of a sports car or something similarly racy is appealing as you approach second youth, keep in mind that you will need to get in and out of it and so will your friends.

You still have to eat, do stuff and be entertained. If you haven’t begun tracking your budgetary needs by now, start. Now cut them by about a third. Even if you believe that you have saved enough and have enough to live on, you won’t spend as much in the fifth year of retirement as you will in the first. And ten years into it, the number will go down further. So calculating a third of what you use now will not only take into consideration your diminishing activities, but the cost of inflation, taxes and insurance (which includes health).

Understand this: You need a will to keep things out of probate. But you do not want to think of your assets as inheritable. What some planners call capital preservation is fine while you are closing in on retirement – in other words, while you are still working – but preserving capital once retired can be a foolish and costly mistake. Preserving capital for your heirs is not and should not be part of your plan. There a two things you should know. As you age, you will spend less money on leisure and more on your health. The second thing you should know: keep your risk low but if your income needs a boost, tap your capital in reserves. Each $50,000 saved will net about $500 a month (at a reasonable 5% return) for eight to nine years. That can be a real boost to your lifestyle and help with any health insurance gaps.

Understand this, part two: If you are married, one of you will die first, Regrettable but true, one spouse will survive the other and in many instances, it will be the woman. Good financial prudence and smart decisions at retirement will make this transition much easier. When calculating pension benefits or annuity decisions, do so based on the fact that your spouse will need money after you die. You may have to live on less. BUt the peace of mind will be the legacy you leave to your partner. Don’t worry about the kids. Just your spouse and his/her welfare after-the-fact.

So the bottom line is: get your home finances in order (refinance, repair, and re-evaluate), understand the constraints of fixed incomes (cars, entertainment, health concerns), be sure you have a will and make sure your kids know your finances, have met your lawyer or financial planner and are authorized to speak with them, and lastly, do what you can to stay healthy – both before you retire and after the fact. Nothing will get cheaper. But then, it never has in your lifetime. If you have to work longer, keep in mind that $50,000/5%/$500 rule, understanding that five years more work at $6,000 a year in contributions to an IRA (more to a 401(k)) will get you very close to having that amount eight years into your retirement.

All of this of course is based on the assumption that you have done your best, used your plans at work and have lived life smartly. If not, there is little time to waste.

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