The Next Step After Frugality: Preserving Capital With Low-Risk Investment Vehicles

At the outset of the Subprime Mortage Crisis during 2008, I had a fascinating conversation with two successful business professionals.  Both were their early 50’s. One was a partner in a large Real Estate investment firm in Chicago, and the second was a Physician who owned his own medical practice.  During the course of our conversation, both of them communicated to me that if they had invested all of their net worth in T-Bills for their entire professional careers, both would have been able to retire early.  I was shocked!  They had each experienced such massive losses in the market throughout their career, and then oftentimes got out at the worst of times, that they would have been much better off if they had simply invested in low-interest, but extremely safe, T-Bills.

This exact story is why many investors are currently adjusting their portfolios by adopting a lower risk investor profile.  Preservation of capital is the number one priority for many investors in the current economic climate of uncertainty that is present in most developed nations around the world.  As rumors of a possible double dip recession surface in various news publications, the one thing people one more than anything is to not lose money.

Savings Accounts

Savings Accounts offer the smallest rate of return in comparison to other low-risk investments.  While they are the most liquid, they also have the weakest return.  Furthermore, when the Federal Reserve lowers interest rates in the United States due to economic recession, the rate of return on a Savings Account will likewise fall.  This very low rate of return, sometimes even below 1%, is why many investors do not like to keep funds in a Savings Account for very long.  However, if liquidity and preservation of capital is your goal, a Savings Account is an excellent place to park funds.  Also, they are considered extremely safe because if a bank were to fail, the FDIC insures against loss.

Money Market Accounts

Money Market Accounts are similar to a Savings Account.  Investors deposit funds in a Money Market Account at their banking institution, but they are offered a return that is slightly higher than a savings account.  The risk on the investors side is still very low, but they are subject to different terms concerning the minimum amount deposited and how often they can deposit and withdraw funds.  For this reason, Money Market Accounts are seen as less liquid than a standard savings account, but they do offer a higher rate of interest.  This investment vehicle is great for an investor who knows that the investment funds will not be needed for a longer period of time.

Certificates of Deposit

Certificates of Deposit (CD’s) are a favorite amongst investors seeking to preserve capital with a low risk investment vehicle.  While CD’s are also issued by banking institutions, they offer a higher interest rate than a standard Savings Account of Money Market Account.  They are the highest returning investment vehicle that the FDIC still insures against loss.  The downside to CD’s is they are much less liquid.  In fact, depending on the CD, funds generally cannot be withdrawn for several months up to several years.  Funds withdrawn before the maturity date are hit with various fees.

Bonds

Bonds are issued as debt by a company.  Thus, when you purchase a corporate or sovereign bond, you are essentially loaning that company or country money.  For this reason, bonds are seen as a relatively safe investment.  Bonds do, however, vary in their risk profile.  Bonds are generally rated with a letter sequence, such as AAA, that signifies how risky they are.  A bond issued by a company such as Microsoft is regarded as extremely safe, with little to no chance of default.  An investor can take more risk in search of greater reward and invest in junk bonds.  These bonds will return a higher rate of interest, but the risk of default is also much higher.

T-Bills

T-Bills are seen as the safest form of investment for very large players in the financial world.  When investors want to protect their capital, but still want to get a small return on their investment, they will oftentimes purchase Treasury Bills.  Treasury Bills are debt issued by the U.S. Government.  When an investor purchases a T-Bill, he or she is essentially loaning the U.S. Government money.   This investment vehicle is seen as extremely safe, since the probability of the U.S. Government defaulting on its debt is extremely low.  T-Bills will also typically return less than a bond, since the risk is less.  In currency trading, when there is a large amount of T-Bills being purchased during times of economic uncertainty, the U.S. Dollar will often rise in value due to this great demand for U.S. safety.

The are serveral types of low risk investment vehicles, but it is up to you to decide which one is best for you. Always preform a 3rd party check before commiting to an investment broker, and take the time to do a little research. Part of preserving your hard earned money for retirement is making sure inflation doesn't eat away at it slowly underneath your matress.

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.

Married to Debt

Boomers may have already been married for decades by the time you read this.  Or perhaps not.  But in all likelihood you know someone who is marrying for the first time, blinded by the love they are in and at the same time, unable to see the future because of it.  Do you offer them advice?

Eventually, in the course of a serious relationship, the topic of marriage is discussed.  Because marriage is more than just being able to "kiss whenever you want to", the topic of money enters into the conversation.  This might come very early on as one half of the couple reveals their ability or inability to handle their own finances. Should it be a dealbreaker? Should you still consider the union of two people, which is more than love and compatibility but a business agreement when you are picking a spouse? Will it affect your retirement goals? Will you be able to buy a house, secure a lease or have a baby?

There was a time when the look of love was enough.  Now, couples consider each others attitudes towards frugality, their outlook for their monetary future and how much debt one or both bring to the union.  The focus on a far-off distant future has come to the forefront of many conversations in the recent downturn and with good reason.  The inability to handle a budget could restrict the ability to buy a house (for a reasonable interest rate), whether or not children are financially feasible, and should the relationship end for whatever reason, who gets left with what debt obligation.

Numerous couples are now considering the long-term effects of poor financial management as an insight into the future of the marriage.  While you might feel as though you have a bright future, shedding a light on how your potential spouse handled their past financial obligations has become the new pre-nup.

It was just a few short years ago, when everyone held bright and optimistic outlooks for their futures, that these sorts of financial considerations took a place on the back burner.  You understood the downside of poor money habits.  But the feeling that things would eventually work themselves out has diminished. Now, the prudent saver and investor is examining the financial statement of their partner, something you only did when one of the couple was rich.

Now, no one wants to marry debt.  With the current unemployment rate at unacceptable levels and many of those out-of-work folks in possession of large, unwieldy student loans, people are wondering if marriage is such a good idea.  Your outlook may dim your love somewhat as you try to see the future.

Financial responsibility is a learned art.  If you have found the right person for you, is there any proof that your influence over financial matters couldn't be taught?  Chances are, your experience has given you the financial outlook you possess now.  Can you teach someone who may not have had the same experiences, the same parental guidance, or the same lessons you have learned?

I'm inclined to believe it can happen.  In many marriages, this realization that one member of the couple does not possess the money management skills needed to achieve the hopes and dreams that helped you decide you could spend the rest of your life with came after-the-fact.  In those instances, one of you has stepped up to the responsibility of running the household finances.  This didn't stop the other half from committing financial infidelity (and some marriages have ended because of it).

There are a couple of things you need to keep in mind before you tie that financial knot.  Your spouses student loans are theirs - should the relationship end badly.  But while you are married, you should assume they belong to both of you.  If they have spent tens of thousands of dollars on higher education, the hope that they can eventually find work with enough income to handle those debts still remains.  We won't always be in a  downturn.

But your spouses credit record can have a downside effect on any money you might borrow as a couple.  Outstanding credit card debt will need to be handled and in many instances repaired.  And the frugal half of the couple needs to calculate just how long this might take.  To understand this timeframe, you should ask.  Money may not be able to buy you love yet on the other hand, love doesn't solve money problems.

Ron Lieber, writing in the New York Times suggested: "One advantage to prenuptial agreements is that they force the issue, even if it does turn the talks into a negotiation. “At least half the time, people are shocked at what the other person’s attitude is,” said Susan Reach Winters, a matrimonial lawyer with Budd Larner in Short Hills, N.J. “You ask how they’d handle it if someone wanted to stay home after having a baby, and at the same time they give completely different answers.”

These are worthwhile considerations, even if you are decades away from your retirement. And they need to be asked.  Student debt doesn't necessarily show that one of you is not able to handle money.  But it does put long-term pressure on many financial decision you might want to make.

To read more of Mr. Leiber's article.

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

Early Retirement Choices: Which one is the right one?

Boomers will be faced with some decisions as they near retirement.  Should you take it early, wait it out, work longer?

Never one to shy away from jumping into the fray, which is a little different than jumping to conclusions, I have bumped into more than one conversation about the wisdom of drawing on retirement income too soon.  These folks argue that everyone should plan on working longer (and not just to rebuild retirement accounts - or in many cases, build them from scratch) because they are going to live longer. That sort of argument makes me cringe.

Truth is, not all of us do what we want to do, like what we do and simply can't see ourselves spending one more day doing it beyond the point we have to.

But when it comes to Social Security Benefits and when to draw them, something entirely different comes to mind. Bruce Bartlett offered his opinion on early retirement with several other invited guests in the August 21 New York Times. Mr. Barlett, who is former Treasury Department official in the George H.W. Bush administration and columnist for The Fiscal Times, continued that argument at the blog WallStreet Pit claiming limited space in the paper didn't permit him to make two other points on the topic. (You can read those added opinons here.)

The problem is, this sort of discussion has many nuances: fear, health, security, poverty.  Picking one over the other doesn't reduce the impact of the other.  Sixty-two has become the new retirement age because of fear (that the program will not be there after decades of contributions) and diminished retirement investments (we all know why all too well the reasons, and there are many, for that).  They take it whether they need it or not.  But many need it.

Instead of increasing the age for early retirement benefits, something Mr. Bartlett suggests as actuarially adjusted, SS could offer a program that secures those benefits at 62, sort the same way you need to sign up for medicare at 65 whether you need it or not, and guarantees the benefit without paying out anything until the person actually retires.  A healthy individual could continue working knowing that the benefit is secure and increasing each year they wait.  This would work the same way as the payback program already in place where someone begins withdrawal at 62, saves all of the benefits and then pays it back at full retirement age to receive the higher benefit.

I think the income limit currently in effect does two things: keeps the retiree from working too much which keeps the job market growing.  Benefits are only taxed once all of the income is added in and the threshold is breached - $25k for singles, $32k for married filing jointly.  Suppose a married couple calculated their taxable retirement benefits, their taxable income and the SS benefits and found they could live comfortably on $32k, they would be still well above poverty.  If they had used a Roth IRA or a Roth 401(k) to hedge against this tax issue, they could increase their income substantially without any impact on the benefit. And secondly, it taxes those that can afford to be taxed and in all likelihood, they are the very ones who will ladder their retirement income, drawing on accounts as needed - perhaps pensions first, deferred investments later and SS last.

The argument for living longer is the biggest fear most average workers have.  It is not how long you live, but how livable those years are.  While we all suggest that simply working longer is the best retirement solution, it skirts the real issue of whether they want to or if they can.  I'm guessing that only a small percentage will or could work past even the full retirement age.  Some may have to.  But if the amount of people opting for early benefits is any indication, they want to make sure of some things (getting the benefit) and worry about others as they age (whether they can or should work).

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

Who Are You? Advisers want to Know

They are asking questions about you.  they are wondering if Boomers will do what they should or if they have been stung so hard by the recession, that they will never be the same.

Will we be asking the same question sixty months after the beginning of this recession as was asked at the thirty month mark?  The Pew Research Center's Social & Demographic Trends project might, as they did recently (click here for the report, downloaded as a pdf.) The question is, will it harbor the same hopes and fears as the current report, one where despite the cut in pay, the unemployment experienced by many, the switch to part-time and cut in hours available to work indicate that six in ten surveyed thought that things will be or are getting better? Perhaps.

The reports, as thorough as they may be, are backward looking.  It makes one wonder if we are looking at the same point in time (the old philosophical question of being unable to step in the same river twice) and be able to use that point in time to predict the future. I'm thinking the answer is yes and no.

Yes, because the people they are surveying cut across a wide demographic and tells us that the lower your income, the less likely you are to spend more than you absolutely have to.  This group, as well all know to well, drives the consumer numbers.

And no, because the folks closest to retirement age may have benefited in the bull market from 1982 to 2000 and although they have seen diminished balances in their retirement nest egg (about 24%), they still know what it will take to retire.

This knowledge is perhaps the worst enemy for this group even as it has become the new focus for advisers.  The 54+ group are more likely to say, according to the report that they are in worse financial shape.  But how much worse?

The report does suggest that this group will delay retirement but doesn't say why.  It doesn't suggest that they couldn't lower their expectations (there are more that now think of themselves in a lower economic class) and still retire.  The assumption is based on how they feel about their home values (although important in wealth calculations, it is still the most illiquid of measures but it is a debt that does put pressure on total assets) and the pressure the economy has put on their children (9% of the respondents moved home and 49% reported loaning money to possibly avoid the possibility that their kids move home).

Lower confidence numbers don't derail the sentiment that America is still the land of opportunity and things will get better.  Yet the folks who suggest they will have to work longer are actually at the root of the problem with unemployment.  New jobs can be created through attrition and if workers stay on and do so foregoing pay raises, toughing out lower worked hours and because they believe they have no other choice, the length of this recession will extend itself out longer than predicted.

Financial advisers, who now fancy themselves as financial managers wonder whether this group is interested in the products they sell that might help?  If, as the report indicates, they are looking at cheaper brands to buy, then as long as it costs them less to invest, they will.  But I don't think we can assume they will believe that lower cost (i.e lesser risk) financial products will deliver the same bang for the buck.  They have to know that they are getting something worthwhile for less than they paid for it previously.  If household wealth is down 24%, then perhaps that would be a baseline for product pricing cuts.

But they may be showing less trust in lower prices that rapidly increase with each new layer of protection.

I distinctly remember the relief experienced in the mutual fund industry when the 2001 downturn was no longer accounted for in their five year track records.  If that is any indication of when consumers can be convinced that things are better, then we only have four more years to wait.  (Which ironically, is about how long those surveyed believe housing prices will recover.)

So many advisers are wondering where the break line between intent and action occurs. Or worse, how to create action where there is no intent.

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

A Look at the Middle Class Boomer - in Two Parts

According to the most recent Investment Company Institute Factbook, the fund industry, based on what they refer to as emergence of fund entrepreneurs have made the middle class the money class.  With 90 million households owning mutual funds, either in their 401(k)s or some other type of defined contribution plan available n the workplace or through their investments in various types of IRAs, a picture of a mature and developed industry has emerged.

With 90 million Americans holding $12.2 trillion in assets in these investments, the ICI study, the 50th anniversary of this industry marketing factbook, points towards the ability of these funds to achieve a wide range of investment strategies that have helped 44% of households move closer to their financial goals. Admittedly, this increase in investment activity is the direct result of the creation of defined contribution plans and IRAs as pensions became less prominent in for retirement income.

While households have found the use of mutual funds to their liking, so have institutional investors and businesses found the tool a good place to park cash and short-term assets.  This increase, while not noted in the research may be contributing to the length of the recent economic downturn as business is reluctant to invest in their own operations, preferring to keep cash (which the ICI does note as a record) in money market accounts instead. Many of these entities have employed ETFs to a greater degree to keep those assets even more liquid.

But not all is well in terms of who offers these products. More here along with part two in this series.

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