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!

The Five W's of Retirement Planning

Most of you recognize those five Ws from a class on journalistic writing. Or perhaps it is simply a process of decision making that you have developed on your own. Either way, retirement poses the same questions, queries that everyone needs to answer at some point.

Who - There is no pat answer to the question of who should or shouldn't retire. For some, a career choice made decades ago will simply not allow you to go beyond the traditional retirement age. Those folks have always known that they not only should retire, But that they have to. And even as debates seem to suggest that working longer is an option, I fear that these folks who simply can't seem to muster the physical willpower to go another day are being left out of the conversation.

It is more than a simple blue-collar equation, one where your physical work life has been such that your body will fight you each morning the alarm clock rings. For others, who consider themselves white-collared but doing the mundane tasks that are mentally draining, the same sense of not being able to go on another day, the answer to the question is now.

To answer the who might be easy. But to answer the other questions, not so much. If you are fortunate enough to have some kind of career that allows you a few extra years of income production, you will benefit mightily. For those who can't, a couple of expectation adjustments will be necessary.


What - Most folks don't project what retirement will look like until they are so close that the options have been culled to the point where only few choices remain. This question needs to be answered long before the "age" approaches. This might involve a cold, hard look at where you live and if staying where you are is do-able. While it seems as if we are getting ahead of our questions, what retirement will look like is unknown and only somewhat subject to plans. Yet, some conversation about what you expect is in order as you approach fifty. Once at that age and beyond, tailoring your "what" should be the focus of your equation.


When - If you have answered who and what you are, the when would seem to be easier to answer. But often it is a coordinated affair, aligning your retirement with your spouse or perhaps with a certain work goal. But retirement doesn't and shouldn't be a stop sign on a road well lived. It should be more of a yield, a merger into into another place in the journey. It might look like work to an outsider. But to you, when should mean the ability to segue nto something you have always wanted to do. If there is a paycheck involved - great. If not, just as wonderful.


Where - For some reason, this is a very stressful decision. If you live somewhere you really like for whatever reason, where is a moot point. You will be happier staying put and living your life surrounded by those people, places and things that your pre-retirement life found enriching. But if it is the other way around, spend some time, preferably before you work your last day, examining your options.

It would probably be wise to involve your family in your thought processes if only to give them time to prepare. Why? Life happens fast and sometimes things go wrong. It will be your family that will help you through this trying time and they should know as much in advance of your decision to prepare as well.


Why - This might simply be answered by a question: why not. No one can make this determination for you but you.

The Time of Your Life: Boomers Have Choices to Make

I wanted to take moment to address Baby Boomers, both early and late. Now this doesn't preclude those who fall into the various other generational groups that have emerged on the scene since that term was coined. In fact, those among you that are young(er) could benefit even more by the following retirement planning suggestion than Boomers could. But it is all about the timing.

There are two things which continue to pop up in missive such as these. Diversification is always key and should always be part of the subtle and not-so-subtle conversations about about investments. Although only a few of us actually achieve this, it is still worth the effort. Why do you ask is this simple sounding process, one described as not investing all your eggs in one basket so hard to accomplish?

Diversification is often too easy to explain away, either by the successes you may have achieved while ignoring it or simply by complacency. In other words, you know better but have an excuse why you fail to do anything about it.
Suppose for example you purchased the stock in your company's 401(k) plan because, it was perhaps inexpensive to do so (lower than open market transaction costs might be a reason) or because it is the only match the plan offers to something like I-really-believe-in-the-business you work for also believing it will always be great and therefore, worth investing in).

All good reason to buy the company. Yet we often buy so much that if something did happen and something always does, we create an imbalance in a plan that is meant to last a lifetime. You know better and often only acknowledge the fact after it is too late to do anything. Diversification could be as important as being the eleventh commandment.

The downside consequence of failing to diversify and be reversed in a number of different ways. You could educate yourself about what the plan offers and in doing so, do what you had been promising yourself you would do for a long time. You will find out that if your company is among the top 500, you probably own additional exposure in an index fund, in a large cap equity fund, perhaps in a target date fund and even some exposure in a fixed income fund as well. Combine all of those together and you can no longer claim to be diversified. If you ever could make the claim.

You have a wide variety of funds in a 401(k). Most offer about 20 options and even if those plans are costly (many 401(k)s have boasted that they have found funds with lower expenses and then turned around and raised your administrative costs), they are what you have to work with. So spread out you exposure to one stock across all of those funds. If you have more than 20% of your 401(k) in one stock, you have too much. And there are more than a few of you who have over 70% invested.


Now I mentioned this was directed towards Boomers and I also mentioned there were two things. The other is asset allocation. Diversification and asset allocation are not one in the same yet are close enough to be inseparable. Often, looking to achieve one, you will help fix the other.

Asset allocation suggest that because you can choose from so many different types of investments (stock, bonds, funds that offer both, commodities, and perhaps other investment options as well) you should be taking steps to minimize the risk you may have taken in your youth so as to protect what those risks have rewarded you with. Because there is only so much money to go around, moving from a big exposure in stocks to something more conservative, such as a fixed income investment, could help solve the diversification issue.

Not always though. I'd be willing to wager that if you do begin, perhaps as part of this suggestion to realign your assets, you will probably sell your investment in the company store last. And by doing so, you increase your exposure to one investment and by default, actually decrease your diversification - or what little you had. If you must, put a number that you are trying to get that outsized investment in your company's stock down to and sell it to get there. Perhaps 20% would be as good a goal as none.


Now back to the Boomers. You have two opportunities to help you with both your asset allocation and your diversification issue, if you have any. And it is all about the timing. Coming up in April 1st, those who are 70 1/1 need to begin taking distributions. The first wave of baby boomers officially retired this year as well. If you haven't changed your asset allocation or diversified your investment significantly to protect yourself, choosing which money to begin spending can help.

If you begin disbursements this year, sell off the stock side of your portfolio first. This keeps any failure on your part from becoming bigger as time goes on. The longer you hold on to equities, the longer your risk stays high.
Now some of you close to retirement can achieve somewhat the same effect by investing any tax return (or bonus) into a fixed income fund. You have until April 18th to do this; later if you are filing an extension.

You can also begin to redirect how your money is invested in your 401(k) as well. Less going to stock and more towards protecting what you have earned is always sage advice but few of us actually sell one thing to move into something more conservative. Particularly if there is a nice run on the stock market occurring at the time. Waiting until a bear market simply means you waited too long. Target date funds are attempting this but have yet to prove that they can achieve this.

There is only so much money to go into your retirement account and if you are maxing it out, congratulations. But if you aren't increasing your contribution levels can help you achieve both asset allocation and diversification, simply by choosing something new that fits the concept.

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