Happy New Year's Boomers: Your Retirement Resolutions

To be a Boomer means many things. Even as our bodies age and our eyes lose some of their focus, one thing we can all see clearly, is our retirement. Are we really looking though?

Jimi Hendrix once wrote: "I used to live in a room full of mirrors; all I could see was me. I take my spirit and I crash my mirrors, now the whole world is here for me to see." When it comes to the reflection staring back at us, our retirement, like those images, are a search for imperfection. We don't look at ourselves to admire how good we look; we look for flaws. We don't imagine a future; we see the relics of past decisions.

If you consider yourself a Baby Boomer, the reflection in the mirror is an image that polarizes: we are comfortable in the what the future holds or we are worried. There is good reasons for this feeling of either hope or dispair, with no real middle ground. This group has seen the demise of the defined benefit plan (pensions) and the introduction of the defined contribution plan (401(k)). You have seen the greatest bull market in investing history and witnessed two major crashes that have rattled your confidence in the decade following. You are the first generation to realize that your future is in your hands and you were not ready for the responsibility.

If you are younger than a Boomer, you are the first  generation to have never seen any other opportunity to finance your future than with a 401(k). And you have come to realize that this is not the plan it was intended to be. 401(k) plans were not designed to be the one and only vehicle for retirement. We were sold a notion that this was the end-all-to-be-all plan that would afford us a better retirement than our parents only to find out that it hinged on two extremely volatile concepts: your ability to consistently earn money and your level of contribution. Your 401(k) became your anchor and your wings.

I imagine that many of you will look back on the highlights of 2011 and find yourself in either one or two camps: you were able to hold onto your job, pay your bills and put some money away for retirement or you will be looking back at a year of indecision, regret and the promise to do better in 2012. You may be celebrating simply getting through it or wishing it never happened. To that, I offer some simple resolutions to embrace in 2012.

One: Revisit your idea of retirement. You can promise to save more money for your future, increasing your contribution to your plan or perhaps, in the absence of a plan, begin one of your own using IRAs. But you do this without really looking at that future. Retirement will not be the same of any two of us. For some it will be a life of struggle, an ongoing effort to make ends meet when they may never  met while they were working. For some it will be the realization that the balance between the now and the future relies on a level of personal sacrifice we were smart enough to embrace while we were working. For others, it will simply be a resignation of sorts, a belief that it will never happen.

Retirement is three things: A time when we find new opportunities outside the confines of what we called a career, a place of unimaginable risk and/or a chance to take a breather. It is not a place of no work and all play. It is not a time spent waiting for the end to come. It is not what we imagine because, if we looked closely at that image we see flaws. So we don't look as closely at those who are retired, examine how they live and ask if this is what they had planned. In revisiting the idea of retirement, your concept of that future, consider looking closer. If you don't like what you see, resolve to change it. But don't look away.

Two: Don't reflect on what you've done. You made mistakes; we all have. Some of us took too much risk, some not enough. Some contributed as much to their retirement as their budgets allowed, others did not. Some of us made poor mortgage or credit decisions, others did not. No matter what you did or didn't do, looking back will not improve the look forward.

Looking forward doesn't mean turning your back on on any of those events. It means focusing all of your energy on fixing them. This is a twofold effort, the first being getting the budget you may not have in line with your paycheck and focusing on paying down your mortgage (keep in mind that even if your home is underwater - meaning your mortgage is greater than the value of the house itself - the interest you pay on than loan is eating away at your future invest-able or save-able dollars). Does this mean you should not put money away in a 401(k) plan and redirect every dollar to the day-to-day? Not at all. Keep in mind that a 5% contribution will, in almost every instance, not impact your take home pay.

Three: Don't over think the process. From every corner of the financial world you will hear: rebalance your 401(k). If you chose a minimum of four index funds spread across four sectors, or four ETFs that do the same thing, rebalancing is a waste of time. You diversify so you can capture ups in one market and downside moves in another and your contribution doesn't allow you to buy more when one market moves up and allows you to buy more when it goes down.

We want to think we are in control when in fact, the only thing you actually control is how much money you want to put in. Markets will do what they do best: move. It might be up one day and down the next. It doesn't really matter. What matters is that you do something and in 2012, it should be significantly more than you are doing now.

Four: Stop being selfless. One of the hurdles we are told, for women investors specifically, is their inability to put themselves before their family. This is a cause for concern of course but not  a disaster in the making. Take a good long and hard look at your family and ask yourself: could I spend my retirement years living with any of them? Do they want you to?

Five: Embrace the truth. Now there will be an increased amount of pressure from every financial professional to get advice on your investments. This educational effort will evolve in the next several years from long, drawn out seminars on how your 401(k) works to short, ADD friendly videos that last several minutes and offer key points on what to do. The truth still relies on your ability to put more money away. Five percent will net you 25% of your current take home in retirement. A ten percent contribution over the average working career will pay you about 50% of what you earn today in retirement. Fifteen percent contributed to a 401(k) plan with average (modest) historical returns will allow you to live on 75% of your current income. Can you handle that truth?

Six: Stop worrying about it. According to HealthGuidance.org, you are killing yourself with worry. Michael Thomas writes: "Worrying leads to stress and stress has been linked with a number of health problems. People who suffer from high levels of stress are much more prone to cardiovascular disease, gastrointestinal issues, weight problems and there has even been a link made between stress levels and certain cancers." Instead resolve to do more saving than you have ever done, spend less than you did last year and embrace the reality of what fixed income is. Retirement is fixed income. Resolve to live like that now.

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

Can the 403(b) what it should be?

Labor Day has passed and the passing of that date signals the beginning of the school year with crosswalks filled with school aged kids - so be cautious out there. But inside the building, there are teachers in the crosswalks of retirement and their caution can cost them in terms of what future they envision.

Unlike the private sector workers with the 401(k) plan, a self-directed tax deferred plan the sometimes comes with a company match, teachers have the 403(b) plan. Also tax-deferred and almost always void of any school district matches, the 403(b) does a poor job of mimicking the attributes of the 401(k). So I thought I'd take a moment and make current and potential teachers (and those in no-profit institutions) aware of some of the pitfalls that await them.

In theory, as most things are when the thought materializes for the first time, the 403(b) plan should have been just as good as the 401(k). Of course, most 401(k) plans lack many of the features that would make them more worthwhile and yet, even with those problems, the retirement grass does seem greener in those plans when compared to 403(b)s. The reasons boil down to the same problems facing 401(k) plans.

Fees are always an issue. In 401(k) plans they can come from two directions: the cost of the investments and the administration of the plan. It is no different in the 403(b). Often it is worse. The administrative costs of running these plans is an haphazard affair. Unlike corporations who might assign a person to oversee the plan's direction, choosing from different administrators as they search for the best one, school districts often do not. Because of this, 403(b) plans often have numerous administrators and no real trained inner office personal to watch over the process.

In other words, the single most important aspect of the plan is often neglected. Without prudent guidance from the person in charge of the plan at company level (or in the case of a school, the district level) the investment houses they hire often charge whatever they feel the market will bear. They mask this effort with investments they claim are designed for the group but are often not suitable for any investor.

And the choices you have can be so vast as to be daunting. In California, teachers can pick from over 3,000 investment options spread amongst six providers. It is often common wisdom that choice is good. And it is often warned that too many choices is quite the opposite. Confusion and investing make awkward bedfellows. The average 401(k) plan could serve most of its participants with as little as 20 choices, most of which will come as index funds followed by some target date offerings. Too many choices actually raises the costs of administration and stifles active participation.

And the choices they do get include annuities. This escalates the concern for fees amongst retirement plan advocates. These plan participants could be paying not only upfront sales charges of the annuities they are purchasing, deducted directly from savings. But also could be faced with higher than anticipated surrender charges. While some 401(k) plans would do well to offer some annuities to their plan participants, the 403(b) has been doing so and with little success for the participants.

Even as the government has mandated that these plan be better monitored, you the investor needs to stand-up and complain. It often works in these plans. Asking for low cost alternatives is serving to cull some of the bad plan providers from the mix.

And you the investor, once you get the low cost you seek, need to invest more often, with or without the match.

With only 10% of the school districts throwing a match their way, and expect that number to go down, not up, retirement investors need to make up the shortfall. If the typical match is 3% and you planned on investing 6%, you will need to make your investment 9% of your pre-tax income to come even. And even the best of calculations, over a thirty year career will not give you more than 50% of your current income in retirement worth that investment contribution.

If you do get a low cost plan, invest with diversity. Even as we hear stories about how the S&P 500 essentially was flat over the last decade, investing in six different index funds including that large cap fund would have given you over 8% - provided you didn't panic in 2008-2009 and held tight.

If the plan is not low-cost enough, consider investing in an IRA (which is tax deductible) or a Roth IRA (which is funded with after-tax contributions). But you must do something.

Yes it might put a crimp in your current lifestyle. And yes, it won't be easy to bring not only your retirement outlook into focus while reining in your financial house at the same time. And yes, try as it might, 403(b) plans won't ever be 401(k) plans. But no plan is worth its while if you don't use it.

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

Retirement Plan Clean-up

Unlike cleaning up some of the small things that can have great effect, cleaning up a retirement plan is not so easy. And unlike the stat I mentioned on homeownership previously (how 80% of will be in the same house 10-years from now) we change jobs far more more frequently. And for the vast majority of us, this is why we sell our homes.

Looking back, you probably have had numerous jobs, some which you stayed at for more than five years. It usually takes a person that long to become dissatisfied enough to earnestly begin looking elsewhere. Add to that the current job market, which may have pushed you to stay longer than you would have liked. And when you did, you might have money left behind.

During that five years, you became vested in the 401(k) plan. This process of setting a timeline for when those company matches actually match is considered reasonable by law. You may have been enrolled through auto-enrollment and had contributions made on your behalf. Perhaps you made some yourself. That money should come with you. And often it doesn't.

Small companies are often as sloppy with their accounts as you are. If your account reached a certain balance, it might not send a red flag to the plan sponsor to cash you out. Cashing out, I should mention just because I brought it up, is not a good idea for even the smallest amount of money. Under 59 1/2 and you not only pay income tax but a 10% penalty - if you don't roll it into an IRA.

And this is why, even if they still have your money in their accounts, you should roll it over as well. IRAs have two distinct benefits for most retirement planners (not the professional kind, I'm referring to you), the first of which is much more favorable terms for distribution (eventually that 401(k) at retirement will do exactly the same thing: give you a lump sum). And secondly, in many instances, the fees are far less.

That doesn't mean all the fees. But the fees for the 401(k) plan itself which as it turns out, are the real culprits in the battle to have enough to retire. Many plans have shown major improvements in fund selection and investment options. Many more, particularly the plans at smaller companies, have a long way to go. Yet as the funds got cheaper, the administrative costs may have actually risen.

Yes there is an outcry about these costs and most people will tell you to pay attention and even question the plan about these costs. Few will get much in the way of relief though. It costs money to run these plans and unfortunately, the smaller plans have less participation and participation lowers fees. The more money under management, the lower the cost of administering the plan.

So recover those orphan plans and do it as soon as possible. Where you roll it to is not that difficult. Most plan sponsors will offer you options from the same fund family and will facilitate the process. Once you leave though, this door may be closed. You get the money but it would be up to you where to put it.

Wherever it goes, choose the lowest cost option that would still keep you invested, something like an index fund. You may already been re-employed and beginning to vest in another plan. And if that's the case, you will want to keep what fees you do have control over as low as possible.

The other quick fix to your retirement comes with a quick fix to your personal finances. Why do you suppose 28% of 401(k) plan participants have borrowed against their 401(k)s? Is it because they get a no credit check loan at very reasonable rates? Is it because you essentially pay yourself the interest? Is it because of you don't lose your job before you pay it off, it becomes a no-harm no-foul? While each of those answers does suggest that 401(k)s are good for quick emergency loans, they shouldn't be touched.

Do you suppose that of those 28% with outstanding loans, all of them had emergency accounts? Probably not and the 401(k), their precious future livelihood was their only source for cash in times of trouble. An emergency account is not that tough to build and worth the effort even if it does create some sacrifice.

Most financial sages suggest three to six months but suggest it be at your current spending. Done correctly, with everything pared back as far as possible, a single month's worth of emergency cash might actually be worth two additional weeks. So six months might actually get you by as long as nine.

Doing so requires that you figure how much needs to go out (absolutely needs to go out) each month to keep a roof over your head and food on the table. It requires a budget. But one quick glance is about all you need to see all of the additional holes that could be filling up your emergency account, the single most important stopgap measure you could have.

Doing these two things - and continuing to contribute to your plan on a regular basis - will give you a boost that was just waiting to happen.

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

Paying off Your Mortgage or Financing Your Retirement

I have had numerous conversations over the past week with some financial friends of mine about the idea of paying off your mortgage or funding your 401(k). The question, which I posed with a sort of bias, suggested that carting a mortgage into retirement was among the worst things you could do. So if that is the case, what should Boomers or late Boomers do?

In spite of the bleak economic news posted last week, the economy is not as bad for the majority of us as it is portrayed in the media. It is difficult however to ignore the plight our neighbors are going through, the prolonged unemployment, the forced early retirement, the underwater mortgages that are, if anything, keeping them from getting back on their feet. But the vast majority of us understand now that we need to take care of our personal finances - seemingly much more personal now than they were in the past - and that will quite possibly help the overall recovery. The more stable footing we have, the greater the chances our impact on the economy improves.

But today, I thought I'd focus on making the decisions you may have not considered: Is paying down the mortgage better than maxing out your 401(k)?

We often focus on the 401(k), the self driven retirement plan many of us have at work as the be-all-to-end-all retirement plan. It comes close but only as close as your debt in retirement allows. If you are headed towards retirement with a home mortgage, calculating the net downside of that mortgage can give you even more pressure to work more, contribute more or simply put off your retirement until a later date.

In every calculation about retirement, money stands front and center to its success. But you need a place to live and the vast majority of Americans looking at retirement in the next ten-years have a house payment saddling their plans. So I thought I'd run some numbers and offer some suggestions.

Although the actual numbers vary on where you live, $200,000 is about the average home price. A 30 year mortgage with a 6% rate will cost you about $1200 a month in mortgage payments with taxes and insurance excluded. These are rough and rounded numbers. Now if you were able to make a $100 a month additional payment, $1200 divided by 12, and apply it to the principal, the savings in total interest would be about $48,000 and it would shorten the loan by over 5yrs. So an extra $100 applied to principal would turn your 30 year mortgage into a 25 year mortgage.

The math gets better the more you pay. For instance, make a thirteenth and fourteen month payment (and for these calculations to work, you need to do it every month, not just once a year - although that's not a bad way to use the out-sized tax return) you would save almost $79,000 in interest payments and the loan would now be for 21 years. No paper work, no refinancing, no hassle and you just theoretically made $79,000.

How much would you have made had you invested the same amount in your 401(k)? Keep in mind, your mortgage is fixed at 6% and your 401(k), no matter what you invest in will have some fluctuation over time and it may never successfully return you a steady 6%. But the numbers go something like this: Invest $100 a month for 360 months at 6% return will net you a $12,000 a year income in retirement for ten-years. This means that if you are 45 and save a paltry $100 a month in your 401(k) - and I hope you are investing more than that - you will get a monthly payout for ten-years of about your mortgage payment.

But the difference is what you saved compared to what you will have to continue to pay for the loan. One allows you to enter retirement in full ownership of you house; the other gives you the ability to pay your mortgage with your retirement income. Even retirement planning neophytes can determine the benefits of having no loan and an income rather than having the income to maintain a loan.

I used an average $40,000 household income as an example and $100 as the contribution to the principal. If you were to make a contribution to your 401(k) of just $25 a week based on that income, you would come out with the results I have offered here. But if you were able to make both - a $25 a week contribution to your 401(k), which is just about 4% and make a $25 contribution to mortgage pre-payment plan, you will have only taken about $200 off the monthly budget.

The trade-off seems even but having a paid-for home in retirement gives you an great deal of economic peace of mind in terms of known worth, the potential to reverse mortgage the house and the ability to borrow against it should it come down to it. We have to live somewhere and this insures that where you live will be what you own.

Paul Petillo is the managing editor of Target2025.com/BlueCollarDollar.com and a fellow Boomer.
Be sure to check out Paul's new book available on Amazon, designed as an ongoing series. This ebook contains the Introduction and the first two chapters is on sale for only $2.99. 
Target 2025 (Ten Steps to a Secure Retirement)

Baseline Decisions about Retirement: Calling it Quits

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

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

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

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

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

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

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

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

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

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

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

The Next Investment Temptation is Three Years Old

Does being older and wiser and a Boomer make us smarter? We would like to think so. But in fact, we tend to be less patient with our investments even as we grow more conservative in which ones they are. We are worried that we won't have enough to live on - in light of our "extended lifetimes". So we look for a little risk, a little pizzazz in our investments. And the actively managed ETF might be something you are considering.

Investors are divided into two groups: those that see themselves as investors and those that use their 401(k) accounts to invest for their retirement. The latter group tends to refer to this activity as savings, a word that has long since distressed me for its inaccuracy. The other group, the ones who think they can invest, tend to fall prey to the next new thing or on the flip side, spend a great deal of time and money trying to mimic an index fund. This group wants to be their own mutual fund manager and does everything but charge the trailing fees that a mutual fund does.

So we have one group who "invests" and the other who "save".Both use essentially the same tools and with any luck, practice the same prudent practices. Tempting both groups is the ETF or exchange traded fund. When these we first introduced, about a $1 trillion worth of investments ago, they were heralded as the one thing investors needed to keep their assets where they could get to them, when they needed them.

Trading like stocks, you could buy an ETF in the morning, sell it if you wanted to at noon, and buy it back before the end of the day. This was a genius move on the part of Wall Street and began generating buckets of cash via trades. Mutual fund companies wanted a piece of the action and jumped in as well with ETFs that looked eerily similar to index funds they were already selling.

The cost of the trade was about the only thing you could toy with. So they eliminated that fee. But not to be allowing you to do something for free, they found another way to charge you. Back on January 6th, 2011, I wrote: "a Vanguard spokesman said the company believed “that the ability to attract and retain clients, particularly high-net-worth clients, will improve the bottom line and ultimately result in lower fund expense ratios.” The truth is that instead of charging for the trade, they charge you to hold the ETF in your account."

Now, three years into the first appearance of the actively managed ETF, we wonder if this will be as wildly popular as the indexed ETF (which has sliced and diced the market in such a way that no corner of the investment world is un-indexed and because of that, has added to the volatility in the marketplace, particularly at the close of trading). Perhaps but the wary investor and more than one "saver" should approach these tools with caution.

Does an actively managed ETF cost less than a actively managed mutual fund? The short answer is yes. Mutual funds bought outside of your 401(k) - where fees tend be lower and in some cases, different - have fees for distributions and marketing. While these fees are annoying and do take away from your returns, they are needed to attract new investors, pay for research into which stock is next on the buy or sell list and to pay for the services of the fund manager. Could they be lower? Yes. Have they dropped significantly? Over the last several years, yes. But what about their ETF counterpart?

Without many of those "trailing fees", actively managed ETFs are less expensive. But few people add in the cost of the trade when they think of purchasing an ETF and each time you buy or sell, this acts as a fee - albeit right up front.

Several other comparisons come to mind. The transparency of ETFs, which must disclose what they hold everyday seems on the surface like it would be a grand idea. But when it comes to this type of investment, transparency and rules for trading tend to make this a dangerous place. In an index fund or ETF, the investments mimic an index, set and left alone for a year, sometimes longer.

In an actively managed ETF, which discloses its holdings and must disclose its building or restructured portfolio almost as it executes the trade, it allows investors outside of the ETF to "front-run" the fund and buy at a cheaper price than the fund would pay. This is not good for the ETF manager if the stock they are buying is somewhat illiquid.

Taxes are another issue. Mutual funds tax you quarterly and yearly. Index ETFs tax you only when you trade them and because they don't turnover (trade their securities often) as much, the taxes, once levied are less. Actively managed ETFs only charge you taxes when you sell the fund but, because they trade often, the taxes you will pay will be higher than indexed ETFs.

Now there is little I can say that will dissuade you from buying an actively managed ETF once they become more widely available and have logged a track record (currently, they have less than three years under their belts). If you find them in your 401(k) and they are cheaper than actively managed mutual funds, they might be worth looking at if you are looking at adding some risk.

This investor tool is not going away. And it will add to some additional volatility as traders in these funds move around much more than those that hold individual stocks and/or mutual funds. And that can't be good no matter how you view who you are: and "investor" or a "saver".

Paul Petillo is the managing editor of Target2025.com/BlueCollarDollar.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.

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.

Could Lifetime Income Benefit Boomer Women?

Boomers are faced with some immediate challenges.  Among those, after working for decades on "how much I can accumulate" for retirement, we are now asked to look at "how much lifetime income" those investments can generate.  This is not necessarily good news for Boomer women.

Those who have followed me on this site know that as a rule, I don't like annuities. For most of us, this sort of  - and I hesitate to call it such - investment is something you purchase to guarantee income.  Part mutual fund, part insurance policy and wholly too expensive on both counts, annuities, for whatever reason you purchase them, offer the buyer some peace-of-mind.  For women, annuities are particularly troubling and expensive. But the concept of guaranteed income for women in particular, is worth exploring.

When Amy Matsui of the National Women's Law Center spoke to the Senate Special Committee on Aging recently, she opened with the cold hard facts of retirement.  Women she noted tended to have smaller balances in their defined contribution plans or IRAs when compared to men ($34,000 on average compared to the $70,000 men had accumulated).

She strongly criticized the concept of these sorts of plans in part because of the self-directed nature of the plans, the feeble if inadequate investment selections available and the inherent risks these plans pose to the average, even experienced investor. Because women tend to stay in jobs for less time than men, the chances that any defined contribution plan asset accumulation would be less, even below the minimum required balance that would allow them to keep the plan at an old employer.  So they receive the lump sum payment, with the taxes and penalties and of course, the problem of starting over.

Ms. Matsui also points out that women are exposed to "longevity risk" more so than men. When a lump sum is paid by a 401(k) at retirement, the investor is left with managing that money so as to not run out. This can be a particularly daunting task for women - not because they are less savvy investors, many are more so than men - but because they will live longer and may outlive their spouses as well.

But this becomes even more problematic for the women looking to guarantee a lifetime income.  Annuities do not favor the women who need them most. When they shop for annuities, women tend to have smaller amounts to invest and therefore are subject to higher fees and lower effective returns than their male counterpart. Add to that, as Ms. Matsui points out, unlike defined benefit plans (pensions) which are not allowed by law to use gender as a factor in payouts, annuities use what she calls "gender-distinct mortality tables".  Women, because they live longer, get paid less than men even if they purchase the same product with the same dollar amount.

Because of that she fears that Social Security has become the retirement plan women can rely on, even if it isn't for much. Yet the solutions are relatively easy.

Among those solutions is the inclusion of some sort of lifetime income investment in all 401(k) plans. Tucked inside these plans, because of the law guiding how these plans are governed, women would benefit from the gender neutral handling of those options.

Rollover requirements on small balances could be changed as well allowing women to leave smaller balances in their former employer's 401(k). And, with the help of Congress, annuity products could be changed in how they treat women who live longer.

This could alter how women participate in the plans available to them. While it is widely acknowledged that only half the workers in the US have access to defined contribution plans at their place of employment, women lag behind their male counterparts in how they utilize them (only 40% of the women who have access to these plans use them). Is it because women want to know what these investments would be worth when they retire?  If they did, participation might increase.

Ms. Matsui points to the discriminatory process involved in purchasing an annuity.  She points out that a women, purchasing an identical product offered to a man, would receive over 9% less in monthly payments. With increased participation from employees inside a 401(k), the annuity it is believed would cost less and pay more as the risk is spread across a wider, more diverse group.  This doesn't occur when purchasing the annuity as a stand-alone product.

She admitted that she understood the administrative costs associated with maintaining these low balances in an employer's plan.  But Ms. Matsui argued that these low balances can add significant value to a low or moderate income woman at retirement.  The trend towards thinking of retirement in terms of income stream is gaining momentum and small balances should be considered as well.  Some is better than nothing, in other words, and when the post-retirement account can be enhanced even slightly, the quality of the retirees life increases.

The NWLC also wants spousal protection to be among the considerations when looking at the retirement plans of women. Because of the lump-sum payout of the 401(k), the protection in retirement of the spouse is left to the discretion of the retiree.  In a defined benefit plan, the spouse can receive benefits.

When the rollover occurs, the spouse may not receive what they may have gotten once the investment is reinvested and beneficiaries are chosen.  (Wills do not govern how IRAs are distributed leaving the chance that these retirement investment could go to children, even former spouses.) A change that would guarantee 50% to the spouse, unless waived would be a great stride toward improving the spousal benefit and income.

While some of these changes would provide only minimal changes in the lifetime income stream of low- to mid-income level, women, those incremental improvements could go a long way in increasing the quality of life, offsetting the total dependence on Social Security and promote the way we look at retirement from a total return on investments to how much will I get in retirement.

You can read Amy's testimony in pdf form by clicking here.

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

Retirement Planning: We Know We Should Have Started Earlier

Baby Boomers know better than most.  We know we should have started younger.  In fact, we know we should be doing more now for our retirement now. Start in your twenties, blah, blah.  Invest aggressively blah, blah, blah.

We have wasted the following examples on the youth: If you begin in your twenties and put away $5,000 a year, every year, faithfully until you retire, you will have a 401(k) worth in the neighborhood of about $700,000.  Of course this also relies on a steady growth in the markets of at least 5%.

But what if you missed that initial decade?  What are the chances of reaching that amount?

Since the vast majority of us missed that decade, how much more would we need to get it back?  It is important to understand, this "invest in your twenties" adds the miracle of compounding to the mix. It allows markets to correct even as you are afforded more risky investments.  What goes up in other words, really goes up and when it goes down, it doesn't fall as a far.

Older folks on the other hand, witness direct changes to their invested dollars when markets recede making the pain even more real.  

To read more about how to get back that missed opportunity...

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

Boomer Investors Know: Mutual Fund Fees are Important

Boomer investors know better than most. They understand that no one ever said it was going to be easy being an investor. Mutual Funds, the mainstay of our 401(k) retirement plans and IRAs are no different than any other investment. They offer numerous layers, a multitude of nuances and of course, risk. And despite all of the information floating out in the public domain, the ability to tell one fund from the other is still difficult.

So the question is: Can you do the mathematical calculations required to find out how much your mutual fund is going to cost you? Chances are you might say yes, if you consider yourself a very savvy investor, able to filter all of the costs in the prospectus into a final number, understand the tax implications known and as yet unknown, and then be certain that you are right – or as close to right as humanly possible.

But chances are you can’t. Instead you fall squarely into the camp of investors who either have no clue or look at one guiding number and the vast majority of you are 401(k) or IRA investors as well. That number, widely advertised by the one group that lobbies in favor of mutual funds, Investment Company Institute or ICI comes in at an average of about 1.17% for all actively managed funds.

Most financial professionals, understanding that this is the average, suggest it as the top any client or interested investor should pay for the privilege of a little more risk than a simple index provides. Some also understand that this is more a moving target and unless they raise the cap to 1.5% as the max, they may exclude some of the better performing funds in the investment world, even at a slightly higher price.

Read the full article from Target2025.com on mutual fund math.

Boomers in Business

Many Baby Boomers find themselves in a position to start a business or grow their business from a solo effort to one where employess are involved. Without ever losing your focus on retirement, there are steps that can be taken to make sure that you are paid first.

This week on MomsMakingaMillion Radio, the last in the three part series on small business retirement plans is discussed with Paul Petillo, managing editor for BlueCollarDollar.com and Target2025.com.

Kat: Today we discuss the SIMPLE IRA for small business in the last of our three part series with Paul on small business retirement plans.  Tell us just what simple is.

Paul: The SIMPLE IRA, named because those letters stand for Savings Incentive Match PLans for Employees, are a much cheaper and far less complicated way for small employers to establish and administer than a traditional 401(k).

This type of plan is indeed easier to manage and implement but there are a few rules you need to keep in mind before choosing a SIMPLE IRA plan for you and your employees. You are required to make a contribution for every worker who receives $5,000 or more in compensation. It doesn't have to be a lot but it has to be something up to but not exceeding $11,500 for the calendar year 2010.  After that, it will be adjusted upward based on the Cost of Living.

Kat: You said the small business owner is required to make a contribution? Listen to the whole interview here.

Should You Take the Return of the Matching Contribution Seriously?

Boomers were particularly hard hit in the days following the market meltdown in 2008.  Not only were your retirement plans decimated.  But the chances of recovering those funds in the near-term seemed to be slim to none.  For every brightside; there was a darkside.

You were among the fortunate ones.  You kept your job.  You were also among the unfortunate ones.  You lost money in your retirement just at the time when your company was trying to stop bleeding cash.  They stopped matching your contribution and you, wondering if they knew something you didn't, stopped investing exactly at the time when you should have actually upped your exposure to a nosediving stock market.  No one ever got rich investing at the top.

But you were scared.  You saw your 401(k) balance nosedive and your future evaporate (or at least it seemed it was) right before your very eyes.  Hindsight tells you that you shouldn't have done a thing; simply waited.

And now, the stock market is moving in the right direction - albeit sproradically and in fits and jerks.  And behold, companies are talking about bring back the matching contribution.


When the 401(k) match returns, and it will, you might find it to be a different beast than the one that was canceled in the previous years. The 401(k) match, a perk or incentive to get you to invest in your retirement in the absence of a pension, disappeared as companies cut back on hiring, increased layoffs and looked for numerous ways to cut costs.

They knew - and in many cases still do – that those that have a job were likely to stay put. Even without the incentive that the matching contribution was, jobs weren’t readily available. In other words, folks stayed put because they had to, not because company B down the road was offering better benefits than company A.

Are we being too optimistic about the 401(k) match?


Paul Petillo is the managing editor of Target2025.com