Is it Magic?

I wanted to talk a little bit today about illusions and our brain. No doubt most of you are familiar with magic. We call falling in love with the right person magic. We think of good fortune as magical. Yet, magic is based on three key principles and these are best illustrated with the simplicity of a card trick.

Although I am not a magician I do know that every kind of magic hinges on the ability of the magician to create something your brain wants to believe. And this precarious attempt to fool you depends on you wanting to be fooled. In fact, every magic trick is based on this belief: that the magician can fool you. But noted magician Penn Julliette of Penn and Teller fame also is quick to point out that any sort of illusion, designed to fool the brain is a disaster waiting to happen. Surprisingly, attitude has everything to do with the success of any trick – not you attitude, but that of the magician.

Mr. Julliette explains that in a simple card trick, the key is for the magician to act as if he doesn’t care. He could care less whether or how much you shuffle the deck and his attitude portrays exactly that. Then, when you return the deck of newly shuffled cards to the magician, he or she then offers you a card, any card. You do and this also doesn’t matter. But where you put the card upon returning it after memorizing of course, it does.

Now the magician’s job isn’t finished. He or she does care where you put the card and uses any number of techniques to get the card back to the top of the deck. But your brain believes that it has controlled everything up until this point. In effect, the unwilling suspension of disbelief has taken over our thought processes. Even when the magician offers to have you re-shuffle the deck, you won’t.

Now I have been writing about the state of personal finance for over thirteen years. Which means I have spent a great deal of time with people who are looking to achieve the same financial success in their post-work life as they may have in their pre-retirement life. But our brains are working and I fear that we aren’t doing a very good job talking to those brains.

As financial educators, we are well aware of what the people we focus on do with the information we have. In fact, most of us find some sort of information, latch on to it and actually look for confirmation of that thought. In 2007, researchers at the University of California – San Diego found that once we expose ourselves to information, it becomes an acquired memory. Not permanent mind you. Your brain doesn’t work that way. Instead it seeks out information that permanently fixes it in our heads. This is what brain folks call spaced repetition. Given the right info your brain performs impressively. Given the wrong information, and your brain still performs impressively.

Another bit of research points to what is called retrieval. Seems your brain performs better if the memory you have stored there is pulled and examined. Each time we do, the memory gains some importance. We as financial people fail here as well. We do make those we deal with think about what they want and how they think it should be once they get it. But inevitably, we add to the problem by giving them something they hadn’t considered. The memory of what we thought we knew is still there. But now we have something else to remember.

The last problem we encounter is as financial educators is the act of dumbing down. We fail to do what some educators have found is the most important of functions: interleaving. We try to explain things in so simplistic a way that we actually confuse more than teach. We tend to piecemeal our lessons, a bit about debt here, something about insurance there and perhaps a little estate planning antidote thrown in for good measure. Yet we define them as parts of a whole instead of a whole. They are intertwined and we make the mistake of suggesting all too often that they are somehow pieces to be taken at their own worth, an approach that doesn’t seem to help according to the journal Applied Cognitive Psychology.

Those we are hoping to help, according to this august publication would do better if we lumped it all together, somehow tying it up in a neat bundle of problems and issues instead of giving the whole process a linear feel. It can’t be helped in books, as as any editor or writer knows. One thing needs to lead to another.

And far too often, we break that linear explanation of money into something like this: hope, fear and confidence.

Unfortunately, hope for something better is dashed by the fear of what we don't know and ultimately, your confidence begins to wane. This is problematic for anyone who attempts to try and describe what they know, How do you parse the necessary information amongst the thousands of messages out there and make it meaningful across all readers?

Perhaps boiling it down, removing the illusions, forgetting the magic might work. Personal finance is no magic trick. It involves challenging what you know; not simply believing what you need to know. You need to save and invest and yet, even as you commit to those hopes, you are challenged by what you hear and this creates fear. Fear that perhaps you haven't done all you could do. Perhaps confidence stems from doing what you can with what you have to achieve what you are capable of. Lofty goal setting aside, you are the magician looking at the trick. Tell yourself what the magician tells you.

You are probably better off than you realized. You are probably capable of fixing the small things which in turn lead to the bigger solutions for the problem. Be the magician against the markets. All you need to know is how to your card on top.

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

Are You Asking: Now What?

I've been away a couple of weeks on hiatus but is seems there is nowhere in the world you can escape the marketplace concern. We have turned into a nation of economy-watchers. It's as if the voyeuristic nature of simply gazing helplessly, frozen in place or prompted by muscle memory, should force us to make investment, retirement and personal finance decisions right now even though we might just regret them at some point in the future. So I offer you a four part series on what we should do in the coming weeks as we anticipate that the previous weeks will give us more of the same.

So we begin with Now What Retirement

Believe it or not, some people, the true Boomers are actually on track for retirement. Right on the cusp of making the decision is quite possibly the wrong time to make most difficult one you will ever make. You may have second guessed your investment strategies over the last several years but had you been closer to what we consider traditional retirement age, those choices became fewer. And harder.

In fact, had these Boomers been preparing as they should have, sitting on their well-diversified portfolios and riding out the downturn in 2008 until the present, they may have actually found inaction more fruitful than shifting gears - gears that should have been set for low in the first place. And now, as the market roils for what looks to be another rise, dip and with any luck, rise again in the coming months, the nearest retirees need to make choices that are just as prudent as they are. For those of you who are not ready but at that age, the sooner you answer the following questions, the closer you too will get to the point.


What to do with your 401(k)? For this person, the choices are relatively narrow with consequences on each decision possibly impacting their income decades down the road. To leave your money in your old employer's 401(k) might be a good idea if your old employer has a good plan. They may have low cost fund options and on the other hand, have higher than needed administrative costs. If your plan had the foresight to include an annuity and you are a woman, this quasi investment (part mutual fund/part insurance plan) will give you a relatively clear look at your future income based on a unisex life expectancy. (Annuities bought outside your 401(k), will cost a woman more because of the expected longer-life span for women as compared to the same age man.)


And if I have to rollover? In most cases, you will be jettisoned form the plan which means you now have to make the choice. If you are a man, the decisions you make should always include "what if I die first" as the ultimate determination of how you take money from your retirement plan. For women, the consideration should be less about what your spouse may or may not do but what you should do should he make the wrong choice. You will need to protect your life first, and doing something that goes against your very nature: putting everyone else second.

Once again, you will consider the annuity. But you probably shouldn't commit your entire nest egg to it. You will need access to cash and keep that money invested at the same time has been the hardest job seniors have had in the low interest rate environment we have right now. A 10-year Treasury, based on inflation at its current levels, is actually considered a loss. So you will need to keep some of your money invested, perhaps across low-cost index funds.


Does Debt have an impact? It will be tempting to use this payout to get your retirement debt in order. This is generally not considered a good option unless that debt is so large that it will saddle you for the rest fo your life. On a fixed income, a debt counselor can construct a good plan and get the process moving along quicker and more efficiently. Keep in mind, you may love the house or condo you live in, but if the debt from trying to own it is too high, a debt counselor will tell you what you can't admit to yourself. If you overpaid for your home and do not expect to live long enough to recover your payment and equity, the counselor should be able to help with this as well.

Without debt, your home may be the single greatest retirement safety net you have. But don't use it until you are actually about to fall. Tapping the equity in advance of when you might have an emergency need is foolhardy in most instances. Wait as long as possible. Involve your children and your attorney (who has your will) and if you have one, a financial planner. You'll need experts.


Should I take Social Security? As to Social Security, take it when you need it. Experts are telling us to wait as long as possible. And it is sage advice. But if it is possible to take it, save it and return it at full retirement without having spent it, you can upgrade your monthly payment to the full payment due at full retirement. But you have to save it. And even if you don't, you now have the emergency medical account you might need is the interim. But if you can do it, don't calculate this income until the last possible minute. Ladder your retirement income so as to get an economic boost every several years with Social Security withdrawal being the last step.

And don't become frustrated with the argument that you could have done more. We all could have. But regret doesn't solve the issue at hand: dealing with what you have is the most important job right now.

So take your eyes of the news. Long-term issues are rarely reported on any channel. They just aren't sexy. If this reality is difficult to imagine, live the sixth months before you retire on half of your current income. Can't seem to do it? Then you need to rethink how much you will need, in part because for most retirees, even if they are beginning retired life with 75% of their current income, inflation, taxes and health care considerations will soon bring it to fifty percent. So calculate from there.

Next up: now what investments


Paul Petillo is the Managing Editor of BlueCollarDollar.com/Target2025.com

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.

Putting Your Money on a Treadmill

Baby Boomers may be acquainted with stress test and treadmills. But the importance of testing your retirement plan under certain types of stress is just as important as trying to figure out how well your heart is pumping.

The term stress test brings the fear of the unknown to otherwise stable events in our lives. The term became part of the vernacular of the financial system when the Secretary Treasurer  Andrew Geithner began asking how well the banking system would hold up under certain conditions. He knew that there were problems in how well a bank would withstand a crisis but until they tested for it, few people knew it as much more than a gimmick. Turns out, the nineteen banks that were tested, eleven failed.

Now stress testing adds its own stress. In part because we are all optimists at heart, seeing the future as brighter than it is and always believing that somehow we will survive whatever life throws our way. Even the off-handed question: "what's the worse that could happen?" never really attempts to answer the query, simply make you consider that something wrong might occur. And when it does occur, we simply suggest that we didn't see it coming.

In the world of personal finance, asking what's the worst that could happen is not the same as asking: "will I be able to afford this?" or "have I saved enough for retirement?" The worse-that-can-happen actually imagines the worst. It doesn't make plans for the worst based on optimistic scenarios. It plans for the downside and readjusts the outlook from just-in-case to what-now?

We're not conditioned to think like that. So I thought I'd give you some scenarios you think so brightly about and throw a little water on them. First: your budget. You lie about this too often. You project into the future (I'll be receiving a bonus or a raise next month) and spend money as if you had it. Otherwise you would even pull your credit card from your wallet. it is borrowed money that projects your optimistic ability to pay the money back at the end of the month. There are few of us out there who prudently deduct this cash from your available cash balances; but their number is small.

To stress test your budget you will need to know exactly how much meeting the so-called ends actually is. Not adding in the incidental items that can be canceled in the event of an extreme financial emergency (cable, internet, cell phones all of which are still luxuries even though we identify them as necessities), how much is your survival costs: housing, food, fuel, utilities?

A stress test would ask if you have accumulated enough in reserve to pay those basic necessities in the event of an emergency. How long could you pay for these necessary items based on what you have in your emergency accounts? My guess is not long. But once you identify this problem, you have to solve it - which is why many of us fail to do this sort of test. It adds stress. To realign this budget problem you can do three basic things: put $25 a way each week for emergencies (a cookie jar is just fine and you'd probably be surprised at how much loose change you can accumulate over time), stop spending someone else's money (try to get through a month, perhaps two without using a credit card - yes you will have to think more about each purchase) and debate the worth of every purchase (remember, just because something is on sale or looks inexpensive doesn't make it something you need.)

Another optimistic project that needs to be stress tested is your retirement. I suggest based on what I know and what I research, that most of us are not in a good position to retire anytime soon. But even these folks who acknowledge their financial shortfall are still looking at the big picture through rose colored glasses. We project investment earnings (without any real basis for these conclusions). We often think our portfolios will return 5-7% even as we switch from aggressive investments in our youth to conservative investments as we near retirement, which even a math challenged person will see as a falsehood. You can't protect money and still earn better than historic returns.

We base inflation numbers on what we know. We think of taxes based on what we currently pay. And we calculate our withdrawal based on what we think we'd like to live on. These aren't stress tests; they're optimistic projections. Stress tests give us a worse case scenario. You can also do three things here as well: contribute more, use both a before tax and after tax retirement plan (such as a 401(k) and a Roth IRA) and lastly, imagine life on half the income you currently earn.

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

The Insurance Most Boomers Overlook

Is this the insurance Boomers and pre-Boomers overlook the most? Quite possibly. Last week, we talked about the idea of disability policies in your personal finance framework. This week, we're going to take a look at some of the add-ons that you might consider when buying a policy.

Shoppers know what a value is. Except when it comes to buying cars and insurance. Then, we often lose sight of what value is by adding stuff to the purchase which can increase the cost. Want the spoiler on the car? It’ll cost more. The upgraded sound system? More. Leather, sunroof, alloy wheels? More, more and more money out of pocket. And most shoppers know they can add these extra items on after the purchase. But few seldom leave the show room with the stripped down version of the car, the basic model, with the intentions of adding on the features we think we need.

Our conversation about disability insurance also has the same sort of stripped down version – the basic coverage that replaces some, not all of your income should you not be able to work. Now, we're going to take a look at the seriously upgraded policy that most of us find not only enticing, but worthwhile. These add-ons are referred to in insurance jargon as riders. Are they worth it or can we do it alone with less?

Let’s discuss what you can add-on to these basic policies and what they may cost you for this peace of mind.

The first of these add-ons is often the Cost of Living Adjustment or COLA. We know how our money can erode over time with inflation. So it can be suggested that if you have agreed to a set benefit, that benefit, the longer it is in place will be worth less with each passing year. The COLA rider is intended to protect you from this risk and usually kicks in after first full year the policy is play or even after the first year of your disability. They offer an enticing increase, sometimes as high as 6% every year that you are disabled and receiving benefits.  Sounds good but could cost you about 40% more than the basic coverage.

Most people who use a disability policy do so because they can’t work. But when an agent offers you what is called a residual disability rider, they are suggesting that even though you are hurt, you might be able to return to work in a limited fashion and because of that, this policy makes up some, not all of the difference in your pay.  It typically provides a partial benefit when your earnings are reduced by at least 15-25% as a result of an injury or illness. But it will cost about 20-25% more if your policy doesn’t have it already built-in.

Think you might need more insurance at some point down the road? While most of us either fall into one of two categories: over insured or under insured, this rider called a future increase offers a sort of Goldilocks add-on. It suggests that if at some point in the future, you might like to increase your monthly benefit, because the benefit you have “just isn’t quite right”, you can do so without re-applying and submitting to additional medical examinations. 

All you need do is pay for the rider (sometimes 10% more in premiums) and should you decide to exercise it, simply prove that you make more now by providing the right financial documentation. To do so without the rider means you will need to get another medical exam.

The catastrophic disability rider sometimes called the 2 of 6 rider (meaning you are unable because of your disability to perform 2 of the 6 basic morning duties: getting out of bed, going to the bathroom, showering, getting breakfast, brushing teeth, getting dressed) allows you to purchase an additional benefit amount that will be paid if you are catastrophically disabled. Catastrophically disabled means you have a complete and irrecoverable loss of sight in both eyes, hearing in both ears, speech; or the use of both feet, both hands, or one foot and one hand. Alzheimer's Disease or other irrecoverable forms of dementia or senility are also considered. Keep in mind that this is not a Long Term Care policy. Some policies include this; others don’t. That’s the best way to compare the true cost of this benefit against a separate LTC policy.

The automatic increase benefit is available with most carriers at no additional cost. The AIB rider will increase your monthly benefit amount by 5% of the original benefit at each policy anniversary, for the first 5 anniversaries. Your premium will be increased based on attained age at each anniversary. If you have this rider and chose not to accept the annual increase, you can do so by submitting a written request to the insurer.

The own-occupation rider allows certain occupation classes to upgrade the definition of disability to a “true own-occupation” definition. If this rider is added to your contract it will replace the standard definition of disability offered, to one that states “You will be considered totally disabled if due to injury or sickness you are unable to perform the material and substantial duties of your regular occupation”. Good luck finding this but if you do, it can be worth the cost, which is about 10% more in premiums. If you are in a relatively hazardous job, this sort of rider can also retrain you after a period to do another job.

By having a refund of premium or as it is sometimes referred to as the good health benefit rider on your policy, the insurance company will refund a percentage of the premium paid over a defined period of time that you remain healthy and not on disability claim, until age 65. This costs a lot and if you do have a claim, it will be all for naught.

This one is quite possibly the best rider available in part because it actually lowers your premium in many cases as opposed to increasing it. Called the Social Security rider It is actually a bet with the insurer that suggest that, if you should be come disabled, and Social Security coverage kicks in, the insurer is off the hook for a percentage of the benefit owed. I actually have this and should I become so disabled that Social Security kicks in, the insurer is only obligated to pay 20% or what they may have owed me. But as Social Security suggested, the next step in life if you qualify for Social Security is death.

Like all insurance policies, shop around, be sure that your employer doesn’t already cover you in some way and be careful you don’t buy coverage that might be better suited as a stand alone policy.

And one last note: the more you have saved in an emergency account, the less you have to worry about some of these riders. While all insurance is designed to never be used, an emergency account can make it easier to forego exercising the policy or adding on expensive riders you may never need.