In 2012: What Boomers Can Expect

"Time is free, but it's priceless. You can't own it, but you can use it. You can't keep it, but you can spend it. Once you've lost it you can never get it back." Harvey MacKay

One of the key elements in any financial transaction is time. If you want to retire, you must consider the amount of time. If you want to borrow, how long you have to pay it back can be translated into dollars and cents. Investing; timing they suggest can't be down but is important nonetheless.

If you are twenty, time is on your side. If you are thirty, there is time left. If you are forty, time is of the essence. If you are fifty, time is running out. If you are sixty, where has the time gone. And older than that, time is no longer on your side. It accompanies us through life like some dark passenger. It reflect back on us from the mirror. And when we look at our retirement plan, it stares at us without guilt or shame. Time is the truth.

When I first began writing these predictions, and I've been churning out these year end ditties for over a decade, many were laced with optimism, some with an urging that we learn the lesson and move forward armed with knowledge of past mistakes, and still others were exercises in reality. In 2012, we have some opportunities and some problems awaiting us, left on the table as we symbolically turn the calendar wiping out 2011. But it won't leave quietly.

So I have a few thoughts about what you can do - resolutions of sorts but not the drastic sort we make and break almost within hours of promising ourselves at midnight.

Increase your contribution I start with this obvious chant for two reasons: you aren't making a large enough contribution and two, I would be remiss in not telling you this right from the start. And I'm not just speaking to those with a 401(k).

There are the millions of you who are forced to (and because of that are not likely to) finance your own retirement through an individual retirement account. We lament at the worker who literally only has to sign up at his workplace and doesn't. And far too often, we say little about the person who has to sign-up (after finding a fund), commit with a fortitude that is somewhat lacking and to contribute some of their paycheck via direct deposit every week or month. That effort, it seems is a much more involved hurdle.

In 2012, the investment world will be little changed. It will roil and confuse and gyrate and possibly even nose dive - just as it has for decades. It will react to news - if not from Europe form China or even the presidential elections (which ironically tend to be excellent years to invest). This will have you second-guessing your investments. But this will only apply if you have no idea how much risk you can take.

Pay attention to diversification You may not be capable of rebalancing, the act of making sure that your investments are directed evenly across many investments. This is much harder than it seems. As long as you are involved - and that is YOU in capitals - the struggle to keep balance will not get any easier.

For the vast majority of us, mutual funds will be the investment vehicle of choice. These investments will see more movement towards fee reductions. Which is a good thing. Fees will and always have been a subtraction of gains. This makes an excellent argument for indexing.

Choosing six index funds across the following cross-sections of the markets will not solve the problem of rebalancing (some will do better than others) but it will provide diversification. Index the largest companies (an S&P 500 fund), a mid-cap fund (the next 400 companies in size), small-caps (the next 2000), an international fund (an index of the largest countries (those with established banking systems even if they are currently troubled and will continue to be so in 2012), an emerging market fund (after international funds, the most risky) and a bond index (one that covers as much fixed income as possible).

Some of you will wonder if exchange traded funds (ETF) wouldn't be just as good if not better than simple indexing. In 2012, ETFs will continue to drill down ever deeper into sectors of the markets that add risk along with the illusion of an index. ETFs will become more actively managed in 2012 offering you more risk at a lower cost. Cheap doesn't mean better. 2012 will be year of the ETF. If you are unsure what these investments are, consider this conversation I had with David Abner of Financial Impact Factor Radio recently to help explain what these investments are and how they work.

Focus on your financial well-being This refers to your credit score. It continues to impact your financial future and will become increasingly harder to ignore. A new credit rating service agency will add to the difficulty in 2012 and not only will the current scoring impact costs such as insurance, it will seek to trace the breadcrumbs of your financial life more thoroughly that the big three do.

There is little likelihood that the job market will increase as many of our returning troops will flood the marketplace, taking numerous jobs from your kids just out of college. Which means another year with your kids at home. The only answer to this problem is to continue to tighten down your budgets in 2012. As I mentioned earlier: "If you are forty, time is of the essence. If you are fifty, time is running out. If you are sixty, where has the time gone."

And you must do this understanding that inflation - not the reported number but the real number in your grocery bill - will still chip away at your wealth. This means you will move in two opposite directs in 2012: saving and investing more for your fleeting future (at least 6% but 10% would be best) and spending less in the present (easy of you don't use credit).

And the housing market will improve for those who have repaired any damaged credit or who have saved enough of a down payment to buy a house. people are still buying and selling. These people have found that while the market is not accessible to all, it is for those that have done right by their personal finances.

Do all of that this may not seem like a new year - but it will be a better year!

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.

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 Definition of Retirement has Changed: Yet Another Survey

There is no argument, from Boomers to their offspring, that the word retirement has a different definition. Rather than a single concept, it has morphed into a series of ideas and possibilities and that, as these things tend to do, creates surveys to tell us so.

Many of you may not be aware of the Unretirement Index published by SunLife Financial. Based on a phone survey of over 1200 households, this wonder of a poll offered most of us a peek into the world of retirement that, unless you were living under a rock for the last couple of years, comes as no surprise.


What retirement boils down to, based on this survey and my own taking of the online version: one, what retirement was previously though of as, will change, two, we never gave retirement a serious thought until we found out we didn't really focus on it, and three, if you have a pension or as it is known in the financial business as a defined benefit plan (rather than 401(k) or IRA), you are much more likely to think of retirement in terms of what it used to be rather than what it has morphed into of late.

The SunLife Unretirement Index does not paint a very pretty picture of the concept of retirement. It goes so far as to report that for the vast majority of us, the concept of retirement means working longer to recoup investment losses, never stopping working in some way, or simply working as long as we can to achieve a state of living well. If you read the report, you will think that there is no difference between living well and living within your means.

We still have a preconceived notion of what retirement should be. We think of it as the old, production era idea of retirement as simply having toiled as a laborer until you were physically unable to continue. Without some retirement in place for this group of workers, the country would have spiraled quickly into poverty. Now, pensions do still exists and in many cases, for just this sort of worker. At not surprisingly, it is this group of workers that tend to respond favorably to their retirement outlook.

But the workplace dynamic has changed from industrial to service and with it, the belief that pensions are a way of rewarding the worker. Once the IRA or 401(k) became the commonplace, which has taken about two decades, the worker was given the tools to invest and it was widely believed, that was all that was needed. And many did.

But just having hammer doesn't make you a builder and more than half of us simply did not heed the call, buy the sell of these plans or were otherwise restricted by long vesting period, unattractive investment choices or low incentives. Did I mention that we didn't get it either?

If we had we would have been among the elite ranks of the investor class, the group that has few members and even fewer winners. Expecting the average person to grasp the nuances of the stock market, the convoluted thinking of fixed income, or the ability to balance the two in the right proportions as we aged turned out exactly as most would have predicted it would - had they been able to foresee a downturn: badly. We either assumed too much risk or we didn't assume any.

We either invested or we didn't invest enough, if at all. So where does that leave us?

There are basically three consideration in retirement: the ability to meet the basic needs to survive, the cost of health care, and defining quality of life. Most of us can't understand the cost of the basic needs to survive. We think of this in terms of what we have now instead of against what we absolutely need in terms of income flow to keep what we have now. That is simply skewed financial thinking. If you were to retire today, and were expected to live only another twenty years or so, on an income that was 40% smaller than your current one, could you do it without making some changes? Of course you couldn't.

But most respondents to these surveys believe that nothing should change. You should be able to keep your home (even if it will eventually be too big, too costly for upkeep and perhaps taxed right out of the reach of even a working family with growing income potential). This group also believes that restricting how much you consume will negatively affect that quality of life and among those restrictions are less debt, fewer toys and what some may see as an otherwise boring post-work life.

While a great many of the respondents suggested mental activity as reason to remain working, this is only part of the reason. The real reasons are the financial implications of retiring after having not given it much if any of a consideration. Some jobs are rewarding. But no job comes without performance stress and if this is the sort of mental activity they believe will keep them young, they should think again.

Marcelle Pick, OBGYN NP in Portland Maine recently wrote that "The World Health Organization estimates that by the year 2020, psychological and stress-related disorders will be the second leading cause of disabilities in the world." This sort of flies in the face of "we will all live longer, happier and healthier lives" and points to "shorter, stressful and ultimately less robust lives".

Back in the day, the benchmark for financial health, the one the bank often used during the mortgage process was 60/40, obligations to unencumbered income. This is the template we should all be using for retirement. It is a bit more complicated than that but like all templates, it focuses on what you need to get by.

Those who are older than 50 can count on most of the current support programs such as Social Security and Medicare being in place. This time frame also provides you with some time frame in which to hunker down so to speak, and save more, spend less and begin to experience the 60/40 lifestyle.

Those in their 40's can expect some of the social support programs to still be in existence but not as they were for the retirees a decade before you. But on the flip side, you will have a full decade longer to begin financing your 60/40 lifestyle. What retirement will look like in 20 to 25 years is anyone's guess. But if you assume the worst and plan for it, you should be at least cautiously optimistic about where you will be.

Those in their 30's or younger should never forget the look on your parent's faces post-2008. No one can say with any certainty what your retirement will look like or whether such a concept will even exist. One thing does remain constant, even in these seemingly inconsistent times: the longer you have to prepare, the better your financial outlook will be.

If you would like to take the SunLife Unretirement survey, something I did and they suggested that I was a cautiously optimistic, which seemed to be an odd conclusion considering you either are or you aren't. Click here unless you already know who you are and what you have to do.

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.

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

Boomer Generosity

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

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

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

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

The impact Of The Financial Crisis On The Retirement Savings.

Some question whether the boomer generation has lost most of their savings in this recession. The new brief by The Center for Retirement Research at Boston College, Return on 401(k) Assets by Cohort (March 2010, Number 10-6) report that early baby boomers, those born between 1944 and 1950, may have already recovered up to nearly half of the $1 trillion or so that were lost in the recent recession. While those with balanced portfolios may have fully recovered.

The cohort at the greatest risk appears to be the Late Boomers, who have experienced a less favorable investment environment over their careers and will need extraordinary returns just to end up as well off as the Early Boomers are today. Generation Xers, given their shorter careers, have faced the worst environment, but they have more time to catch up.

The center analyzed the potential returns and losses sustained by IRAs and 401K plans by ten-year age cohort. The matrix of internal rate of return on lifetime contributions showed how your 401(k) or IRA would look at the time you actually retired.

To see the full brief, visit the Center web site.

http://crr.bc.edu/

http://crr.bc.edu/images/stories/ib_10-6.pdf

The problem with the retired Boomers (and their retirement savings) stem from the fact that they are on a fixed income and they stop contributing to their retirement accounts. They lost the ability to maintain their standard of living after they stop working, and they were not able to adjust their lifestyle and spending habits. The time frame from the peak of the market in 2007 to the trough in March 2009 and up to 2010, these Early Boomers have lost a lot of money as well as the ability to replenish their retirement funds. They have also lost the ability to be able to take advantages of current opportunity for these long term investments such as stocks and real estate.

Your Retirement Plan Directed by You

Today we are going to tackle the self-directed IRA. We all know what an Individual Retirement Account or IRA is. Briefly, it is the retirement tool for those of us who may not have access to a 401(k) that defers taxes for retirement. The deferring part is not really as complicated as it seems. In a 401(k), you have your contribution taken out before you pay taxes; in an IRA, you pay with after-tax money and then take the deduction when you file, basically subtracting the taxes from your contribution to be paid later.

How is a regular IRA different than a self-directed IRA?
The differences are not as obvious as the title of these products sounds. An IRA is an investment chosen by you and you direct the funds to it for your retirement. It seems like this should be called self-directed but in reality, it is very different from what the IRS views as a self-directed IRA.

In a self-directed IRA, you become the manager of the whole process. Rather than simply sending money to a mutual, fund company, the most common sponsors of IRAs, you direct the underlying investments. In the previous example, the institution is the middleman. In a self-directed IRA, the institution, whomever or whatever one you chose, does what you tell them to do.

To learn more.

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.

New Tools for Retirement Planners

The small start-up Brightscope has done it again.  While the tool they originally introduced offered plan sponsors a look at how well their offerings served the needs of those who use the business' 401(k) and plan users the opportunity to confront those sponsors about the adequacy of those plans, a new tool puts more of the information in the employee's hands.

Designed to offer the plan participant a more in-depth look at how their 401(k) plan performs, their new tool, which Brightscope founders Ryan and Mike Alfred suggests is free because you already pay fees, takes the whole process to the next logical level.  Drawing from a database of 30,000 plans, you can, after registering for free, drill down into your personal plan.

The tool asks for your age, salary, annual contribution and plan sponsor.  From there, all that is needed to complete the analysis is the actual funds you own.  This tool profiles not only the fees, expressed as an average across all of the funds listed, but the option to roll it over (if your investments are with a company you no longer work for) to an IRA.

Even if you are not rolling your investment from an old plan to an IRA, the tool will give you greater insight into the real costs of your plan.  These costs are often overlooked, or worse, masked by the plan sponsor.  In many instances, there is little you can do about getting those fees lower short of picking lower cost funds in the plan or complaining to the plan administrator.

But knowledge, as they say, is power.  And if Messrs. Alfred keep doing what they are doing, an uprising among participants can not be to far in the future.

To use the tool, simply go to the Brightscope site and register - as I mentioned earlier, it is free.

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

The Tax Question: Roth or Traditional, 401(k) or IRA

You don't know what your taxes will be when your retire.  You don't really know whether your retirement expenses will exceed your projections or not.  In fact, your retirement picture might just be a little on the hazy side of things.  So how do you make the decision of whether to use a Roth 401(k) or the traditional 401(k)?

This can be easier than you think.  More...
Paul Petillo is the Managing Editor of Target2025.com and a fellow Boomer

The IRA Option

Some of us may be entering a new job that does not have a 401k or has one that you do not feel is as good as the one you just left. And your employer won't let you keep your money where it was. What to do?

Rolling your 401k into an IRA is another matter. This is for the investor who has some concept of what lies before them. If I were to guess, this type of investor has had an active roll in how their former employer's 401k was allocated. They paid close attention to diversity, perhaps even following conventional wisdom of limiting risk as they aged.

For this retirement investor, the IRA rollover is viable option. It allows closer control of how this money is invested with a variety of considerations weighed with each decision. Not only will this investor spread their allocation over a number of funds, they will do so with an eye on fees and expenses, a consideration of performance of the fund under both good and adverse conditions, and clearheaded understanding of the risks involved.

IRAs cannot be borrowed against and restrict a penalty-free withdrawal of money before 59 1/2 years old. But the choices are the primary attraction. This investor knows, and you should as well, the risks of building a successful IRA portfolio also increase. The biggest concern is investments that crossover.

What 401k plans are supposed to do is provide the investor with a fiduciary responsibility to provide the right tools for their employees. You, as an IRA investor are on your own.

You must monitor the funds you invested in for a change in investment strategy, style drift (when a fund manager invests on the edges of what s/he was hired to do; such as when they invest in large-caps when mid-caps are the focus), and an increase in turnover (a cost for trading repeatedly that the shareholder pays for directly, often done in an attempt to boost returns in the short-term, like at the quarter's end). You bear the burden of this responsibility to your future.

The terms of disbursement are spelled out when you leave the job in the 402(f) notice. This explains your options for handling a 401k disbursement. Even if you want to stay, your old employer really doesn't want the continued burden.

Bottom Line: Once you receive that 402(f), begin to research your options. And even if you think that money will come in handy, never take the cash.

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

Time, Transfers and Temptations: The Overcomplicated 401(k)

While the 401(k) plan you have access to at your place of employment is a a "better-than-nothing" retirement plan doesn't mean that you should ignore the benefits of investing for your future.

There are three basic problems with the retirement plan (and how you use it) known as the 401(k).

First, for many of us, it has not been around long enough for us to take full advantage of what this type of investment scheme can offer. A full thirty years or more would be considered the optimum amount of time - which makes this a young investors game. The older investor probably has had less than fifteen years to date to grow a plan that they believe will provide enough post-work income to allow them to retire well.

People who do not have that much time should be attempting to max out the plan (either the most you can contribute or the most the IRS will allow) and keep more than what those sage financial planners suggest in stocks. Even if the equity exposure is spread across a variety of index funds, moving too much into a conservative investment such as fixed income too early will drive the available balance and potential earnings down.

For people who are in this age bracket, the focus should shift to getting your financial house in order while you have the time. Set your mortgage up for payoff as soon as possible. This can be done a number of ways: refinancing or paying down the mortgage in advance of the scheduled payoff date. While a refi is good, unless you are getting an interest rate reduction of one percentage point of better, the cost of a new loan and the ability to get one in this sort of slumping economy might not be the best way to spend those dollars.

Instead, begin a prepayment plan that is both safe and easy and has the most flexibility. For instance, did you know that if you pay one extra month a year (divided over twelve months payments - $1200 a month mortgage payment divided by twelve would allow you to make a $1300 payment) would shorten the length of the loan by eight years? A fourteenth month payment would bring the total length of the loan down to about sixteen years. This is without costly refinancing and allows you to do what you can if you can afford it. Avoid the lenders offer of a twice-a-month payment plan and secondly, be sure that when you do this, mark the extra payment as "for principal".

Do I need to tell you to do what you can to eliminate any and all outstanding credit? If you cannot payoff what you have borrowed at the end of each month, you have borrowed more than you can afford.

Secondly, your retirement account is not a savings account. It is an investment for your future. Not one single dime should be withdrawn for any other purpose than your retirement. When you are transferring a 401(k) due to a job loss or a new job, make sure you roll it over into an IRA and name a Trust or Trustee. Failure to do so will result in taxes charged against you as if you had simply withdrawn the money.

And lastly, you will not be able to invest as much but the opportunities are greater. IRAs will not provide you with as great of a pre-tax advantages as your 401(k) did, but the choices you will have as result of getting out of not-so-good plan are incredible. Shopping on the open market for a mutual fund or funds allows you to move your move across the full breadth and depth of the market, control the expenses and fees and allow you to set your goals (in terms of risk) far better.

Many 401(k) plans force employees to purchase company stock which make them less diversified. Getting out from under this type of plan will stand to be the best thing that changing jobs could offer. Granted, if your company matched contributions (some still do and many more will begin to do so again in the next several years) this will no longer happen. This is a big loss of free money. Use this as a criteria for your next job and insist it be part of the benefit package.

You can still set up an automatic payments withdrawals from your checking or savings account but there are limits. In 2010, the limit for your IRA, which is what your new rollover plan is called, will be $5,000 for individuals and $6,000 if you are over fifty. You could, if you can afford to do so, open a Roth IRA as well (a rollover into a Roth will prompt a tax penalty because Roth plans are after tax accounts). This will allow you an additional $5,000 contribution.

Keep in mind that you only have a sixty day window to do this. Your old employer may allow you to stay in your old plan. The 60 days begins when you start the action or they tell you they want you out.

What to keep in mind about your 401(k) plan and rollovers:
If you have a 401(k) plan use it and if possible, use it to its fullest.
Get your financial house in order while you are working, especially if you have only been in your 401(k) plan for less than fifteen years.
Rollover your old 401(k) into a Traditional IRA within 60 days and be careful with the paperwork. If you have more money to invest, open a Roth as well.

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