Wednesday, August 25, 2010

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 and a fellow Boomer

Monday, August 16, 2010

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 and a fellow Boomer

Friday, August 6, 2010

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 and a fellow Boomer.

Monday, August 2, 2010

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 and a fellow Boomer.