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!

Overestimating Your Retirement Needs

A million dollars sounds like a nice round number to shot for when you discuss retirement planning. But the goal might be self-defeating for most folks as they check their quarterly balances in their 401(k) plans. In all likelihood, you contribute (but not enough) and your 401(k) plan is adequate (even a smallish 401(k) will have at least fifteen mutual funds, some of which will be passive type investments such as index funds). And even if you are average - average 401(k) balance of $20,000 and an average household income - around $50,000 - you can achieve enough wealth in retirement to do just fine.

And you can do it on a quarter of that sum, a much do-able number. But there are caveats, as there are in all things and not something you should ignore. First of which, we have briefly addressed is your expectations. Retirement savings, including Social Security is not really designed to replace 100% of your income. In fact, even in the heyday of the pension, and amongst those that still exist, the average payout is normally about 70% of what you can expect.

So working in round numbers: $50,000 in income/35 years until traditional retirement/10% contribution/4% return invested passively in index funds we have come up with the following future profile.

In retirement, you will need $35,000 a year in income. (Because of inflation, in 2046, that will be equivalent to $98,485. Inflation has the net effect of making what seems like a small amount look far larger. The flip side of inflation is that money will buy the goods at an equally inflated cost.)

Part of that income will come from your Social Security and/or pensions. To produce the rest, you should build up your nest egg (including your 401k, IRA and other savings accounts) to $251,110 by the time you retire. (In 2046, that will be equivalent to $706,590).

To save $251,110, your investments need to gain an average of 4.28% from now until retirement. If we are calculating this right, it is a safe estimate (about 99.78% chance) of this happening. But not without some effort on your part.

Even beginning at 30 can be considered young or starting early. With all of the rhetoric surrounding our longevity, the normal target age of 65 can be expected to be pushed back making 30 the new 20.

By passively investing, you have assumed as much risk as is considered advisable and even under the most modest of circumstances projected at 4% or slightly higher, the low cost of this type of investing will give you bigger gains than if you had assumed more risk at a higher expense.

And although inflation will inflate your net total, taxes based on the $35,000 a year income should remain relatively stable. And by using index funds across several markets (an S&P 500, a mid-cap and a small-cap domestic equity, an international index and a bond index) you have chosen the most tax efficient method of investing ever invented.

The remainder of the plan relies on you contributing 10% of your pre-tax income and staying out of debt. This means you will have to adhere to some sort of budget from now until the end.

The bottom line: a million might be too lofty a target for most and may spur some folks on to achieve more. But for the vast majority of us, comfort and security is enough to give us hope. More than that - strongly encouraged by the way - will simply be icing on the retirement cake.

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

The Okay Retirement is Not So Okay

Boomers are particularly vulnerable to suggesting that things are okay. In this post we will look at the okay retirement plan and suggest that your 401(k) may be trying to accommodate you with okay choices.

To see the word okay (the form I prefer over the simpler OK or the punctilious O.K.), without intonation or judgement doesn't do the word justice. Hearing it adds meaning and nuance. You need to experience it roll off of someone's lips lazily, dropped in an aggressive acquiescence or simply thrown out there for fun . It is a word, or phrase that simply is.

This is the prevailing feeling you get from hearing someone say 'I'm okay' when asked about their retirement plan, or their day at work, or their time spent in school. It becomes an answer ladled over falsehoods. Why is that? Okay is value-neutral. In fact, for it to have any real meaning, it must be spoken. What happens when okay is, well, okay?

For the last year, we have seen the markets kind of recover (I would not suggest watching the regular gyrations of the stock market these days for anyone but those strong of stomach) as they continued to deal with news from around the globe.

True, the markets are notably higher than several years ago but the structure seems rickety, unstable. This applies to more than just equities; bonds are troublesome too. Commodities have weighed in with gold becoming bubble-like in the wake of low inflation, the opposite of what usually happens. And yet, if asked about your retirement plan, you would probably answer: "It's okay."


What is happening in your 401(k) has offered the a look at what okay is when it comes to investing. Some of this is your fault. Some of it the fault of those whose definition of fiduciary responsibility has shifted. Perhpas there is no better evidence than that offered by Prudential Retirement. They have introduced okay investing to its 3.7 million customers using 401(k)s the manage. By doing so, they extend the risk avoidance to a new level: an FDIC insured bank account in your 401(k).

There are basically three things wrong with this, two are obvious, the other is speculation based on years of experience ferreting out the moves most financial institutions make.


The first has to do with risk, or better yet, lack of it. The average investor is still recoiling from the meltdown now over two years old. In all my years, I have never seen a lingering fear last so long or an industry do what it can to enable it. By this time in usual times, what happened to your investments would have been long forgotten.

A bull market somewhere would have been outed and it would start anew. This is a different era. Lingering unemployment, continued global financial strife, housing, and all the rest have made forgetfulness more difficult.

But this pendulum swing to conservative is a bit surprising.Risk is inherent in the investment world. Without it, as I have mentioned on numerous occasions, you have savings, vanilla and plain and safe.


You can get to retirement with savings. But you will have a greater opportunity to get there with more money if you invest. Trying to get folks to change this vernacular, from retirement savings to retirement investing has been a Sisyphean task. We want to think of it as savings so most personal finance and retirement writers and pundits continue to use the phrase. 401(k) plans have become the new bastion for low to no risk, offering target date funds and index funds as the go to investment for all of their participants.

I have many reservations about target date funds (from promoting set-it-and-forget-it investing, the inability of these funds to beat the market, a good target date index, and the fact that so many of these funds are simply a halfway house for orphan funds) and index funds (yes they are cheap but they are also too tax efficient for a 401(k)). Making them the default investment for new hires or advising older workers to use them and you have a recipe for an underfunded retirement - in part, because the vast majority of people who use them don't fund them with enough money to make up the low risk sacrifice they are making.

I mentioned that you could get to retirement with savings. It's possible but not within the purview of the average worker. You would need to save using a wide variety of stable vehicles like money market funds and CDs, all of which are offering so little in the way of interest that it hardly beats inflation. Bonds may seem like they offer a safe haven and in some instances they do. But that safety is accompanied by risk and one of those risks is beating inflation. Did I mention that you would probably never stop working in order to make the "savings-only" plan work?


What about annuities? This is where I am speculating. Prudential Retirement is an arm of Prudential Insurance which sells annuities. Although the vice president of Prudential Retirement Carlos Mello makes it known that his company doesn't give investment advice, the seed will have been sown with the new product.

Billed as a place to ponder your next investment move or even an account whereby those close to retirement can have access to cash when they do, putting a savings account in a 401(k) will be used as a sales tool for annuities. Insurers know that most people look back on the performance of their 401(k) in the short-term (about six months) and base their decision on whether to buy annuities at retirement or not. A market that has done well turn newly minted retirees away from the product. While with a down market in the months leading up to retirement, the purchase of an annuity is much higher.

Now imagine someone close to retirement stockpiling cash in one of these FDIC insured offerings. They are already (or will be at least) accustomed to little or no return. The upsell to annuitize that cash upon retirement, and the pitch is rather charming, may be too hard to avoid. To hear retirement planners talk, you would think they are reinventing the pension. Which in some respects they are. Without the employer's contribution.


If you were employ a three thronged approach, which is an okay way to go, you might use savings for emergencies, building up a six month reserve - a year would be even better. But do so knowing that you will need to fully fund your 401(k) in the process - not just a comfortable 10%. And you will need to hedge both of those bets with a Roth IRA held outside your 401(k) - this is where your index funds belong.

While etymologists tell us that the O and A long vowel sounds, separated by the hardness of the K is nearly universal and used in almost every language, it shouldn't be used to describe the state of your retirement plan.

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

Do You Know Where Your Retirement Plan is?

Ask any psychiatrist what worrying is and you might get this sort of response: it is " the ubiquitous human practice of imposing suffering upon oneself. Worry is a good example of self-inflicted suffering."  A layman might characterize the worrying as simply being not-so-positive, having crossed some imaginary line between what is feeling good and not so much.  If that is the case, we have become a nation of worriers, inflicting suffering on ourselves about a future we don't know about, preparing for a time when we have absolutely no certainty about inflation, taxes or the eventual returns that our retirement plans might yield.

Personally, I tend to characterize worrying as an activity that suggests lack of preparation or planning.  You can't possibly prepare for every contingency, life has things that simply aren't subject to any sort of plan, but you can make the effort.

Retirement planning, something I have described as a whole life effort at looking at all of the possibilities and making arrangements to address each, offers us the ability to have some control.  Worriers will still worry.  But at least they will worry less and begin to straddle that fretful line separating positive and negative.

There are several things that you can do, in the short-term to help alleviate any worrying that might be haunting you.  There will always be those who say save (although I prefer the word invest) for retirement.  I am one of them and in many instances, those with 401(k) plans will have the easiest time in accomplishing this first and most vital step. But those who don't will need to develop a discipline that isn't quite there or if it is, not fully formed.

Those with a 401(k), who have been on the job long enough to have access to the plan, should contribute 5% of their pre-tax income. To further alleviate the worry - and you will once you are faced with the choices in the plan, many of which are not that great - simply put it in an index fund, either one called Total Market or one that tracks the S&P500. (You can learn more later, after you tackle the next problem.)

Those without a 401(k) (and now that those that have a 401(k) have begun to invest) should begin to focus on what they can do in the short-term.  In the vast majority of instances, your household spending needs to be reexamined. As much as I want to avoid saying so, if you are living paycheck to paycheck, it is not the size of the check that is the problem, it is what the check is paying for.


Credit may be the great social equalizer, giving everyone the impression that you are worth more than you are able to pay for but debt is an economic destabilizer and a very serious threat to your ability to remain positive.  This is and should be the short-term focus for those who wonder what life will be like in retirement.

Oddly, you may always have debt of some sort and even more oddly, some of it will be considered good. Good debt is fixed at a certain rate for a period of time with a pay-off date when the balance will be zero. This includes a house payment and a car payment.  Credit card debt is not considered good debt. It can be paid off although and this is where you will develop the discipline to take the first step towards retirement.

Using a sliding scale plan, your credit cards could be paid off in full in a much shorter time than you imagined.  Try this: Suppose you have three cards - and most of us carry a balance from month to month on this amount - list all three cards in terms of their minimum payments.  It might be $15, $25, $50.  Take the lowest minimum and pay double on it while paying the minimum of the other two (paying double the minimum on all three is better, but we are dealing with manageable amounts here).  Do this until it is paid off.

Now roll the minimum payment you doubled onto the next card's minimum making that payment $55 ($15 x 2 + $25) and continue the $50 minimum on the other card.  Once that accelerated paydown is complete, roll the $55 to the remaining card.

This could take several years to accomplish but what it will do is keep you from stepping backwards each time you try to move forward. While investing for your future is always a priority, the longer you have this sort of debt, the markets where you have invested your retirement dollars will have to outperform to a degree that may not be possible.  They would have to return almost twice as much as the interest rate you are paying your creditors to get to even.

Yes, you will still be behind in the pursuit of retirement but you will know be able to look at the discipline you have created as a new found way to keep worry at bay and begin to build the next phase of your retirement plan: the emergency fund.  having solved this problem and the next will be giving you the ability to resist using credit in times of crisis and tapping your retirement in times of emergencies.  For those of you that have a 401(k) and began your investment plan at 5% of your pre-tax income - a level of investment that in most cases does not alter your take-home pay, your focus on debt and then your emergency account is critical as well.

These remain the two biggest problems facing your future retirement.  I'll never suggest you stop worrying.  But getting these tow things - your debt and your family's emergency fund - under control will put you on a wholly different path, one you will never have to worry about again.

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

Boomer Generosity

What would do if you could make your retirement plan last generations?

The assumptions you make about how much money you will need in retirement are probably the most difficult exercise in the whole of retirement planning. The unknowns are so numerous that simply thinking too much about it gives many people the incentive to simply ignore the question. Taxes and inflation play a role in how much money we will need along with the condition of our health, our portfolios and our living arrangements. Who could possibly guess with any accuracy what those costs will be?

Yet, some of us can with certain investments. If you can wait until you are 70 1/2 years-old to begin taking your distributions from an IRA, and you take only the minimum amount needed, you may be in a position to make that IRA last much longer, across generations. Called a Stretch IRA, the sort of planning can create untold wealth for a child or grandchild.

More on the Stretch IRA from Paul Petillo, managing editor of Target 2025.com and a fellow Boomer.

No one, not even actuaries, knows what retirement will be

Because no one, not even the actuaries know how long we will live, whether we want to perserve some of those funds for our heirs, what the tax rate will be over those years and whether inflation will begin to rise significantly, this decision is incredibly difficult to make, even when you are close to retirement.

Arriving at retirement in good health, relatively debt-free and with some developed plans about where you live and how you intend to live in retirement can offset some of those later-in-retirement expenses that slow the consumption of that income.

Read the full article by Paul Petillo, a fellow Boomer here.

The Future of Our Retirements is Within Our Control - sort of

Boomers face retirement dilemmas of epic proportions.  These problems at first glance, seem insurmountable.  Some of the real issues are beyond our control.

The problem lies in an unknown future filled with financial events that are largely beyond your control.  We can't predict inflation.  It could be mild as it is currently or it could skyrocket.  We can't predict taxes.  They could remain stable and if the popular theory of being taxed less in retirement holds any validity, we can make educated guesses as to what that rate will be - but not much more.  We can't predict the markets.  We tend to be an optimistic sort projecting past historic returns as a measure of future results.

So if inflation doesn’t cooperate and taxes could rise and the markets continue to be volatile, where does that leave us?  And with what controls?

Read more here.

Paul Petillo is the Managing Editor or Target2025.com and a fellow Boomer.

TIPS: Danger Ahead

Most of us are aware that the Federal Reserve has said that interest rates are going to rise.  Many Boomers have moved their investments into bonds as they aged or as a knee-jerk reaction to the market decline.  But when so many people head in one direction, for whatever reason, problems usually develop.  And that is what we have here.

Some folks moved into bonds and some, thinking that inflation was the real long-term worry, bought TIPS.  Turns out, both kinds of investors might be wrong.


Treasury Inflation Protected Securities are not the same as an investment that protects you from rising interest rates. While it is easy to see how investors can be confused by this, it will be a very costly mistake if you made it. In a follow-up to our warning about the potential, even probable bubble in the bond market posted a couple of days ago, investors who sought refugee in this type of security will also find trouble on the horizon.

A good deal of you moved into bonds without really knowing what you were getting into. A portion of you went with the safest bond available, the Treasury bonds. These are purchased at face value and pay a coupon (or interest rate payment) based upon the agreed upon rate at the time of purchase. Inflation can take its toll on those “yields”, as the interest paid to you is often referred to. Real yield however is the coupon payment less inflation. If inflation is low, as it has been over the last year or so, the yield on your bond will be relatively predictable and even quite profitable.


To read more on this topic about TIPS, click here.

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