Do You Know Where Your Retirement Plan is?

Ask any psychiatrist what worrying is and you might get this sort of response: it is " the ubiquitous human practice of imposing suffering upon oneself. Worry is a good example of self-inflicted suffering."  A layman might characterize the worrying as simply being not-so-positive, having crossed some imaginary line between what is feeling good and not so much.  If that is the case, we have become a nation of worriers, inflicting suffering on ourselves about a future we don't know about, preparing for a time when we have absolutely no certainty about inflation, taxes or the eventual returns that our retirement plans might yield.

Personally, I tend to characterize worrying as an activity that suggests lack of preparation or planning.  You can't possibly prepare for every contingency, life has things that simply aren't subject to any sort of plan, but you can make the effort.

Retirement planning, something I have described as a whole life effort at looking at all of the possibilities and making arrangements to address each, offers us the ability to have some control.  Worriers will still worry.  But at least they will worry less and begin to straddle that fretful line separating positive and negative.

There are several things that you can do, in the short-term to help alleviate any worrying that might be haunting you.  There will always be those who say save (although I prefer the word invest) for retirement.  I am one of them and in many instances, those with 401(k) plans will have the easiest time in accomplishing this first and most vital step. But those who don't will need to develop a discipline that isn't quite there or if it is, not fully formed.

Those with a 401(k), who have been on the job long enough to have access to the plan, should contribute 5% of their pre-tax income. To further alleviate the worry - and you will once you are faced with the choices in the plan, many of which are not that great - simply put it in an index fund, either one called Total Market or one that tracks the S&P500. (You can learn more later, after you tackle the next problem.)

Those without a 401(k) (and now that those that have a 401(k) have begun to invest) should begin to focus on what they can do in the short-term.  In the vast majority of instances, your household spending needs to be reexamined. As much as I want to avoid saying so, if you are living paycheck to paycheck, it is not the size of the check that is the problem, it is what the check is paying for.


Credit may be the great social equalizer, giving everyone the impression that you are worth more than you are able to pay for but debt is an economic destabilizer and a very serious threat to your ability to remain positive.  This is and should be the short-term focus for those who wonder what life will be like in retirement.

Oddly, you may always have debt of some sort and even more oddly, some of it will be considered good. Good debt is fixed at a certain rate for a period of time with a pay-off date when the balance will be zero. This includes a house payment and a car payment.  Credit card debt is not considered good debt. It can be paid off although and this is where you will develop the discipline to take the first step towards retirement.

Using a sliding scale plan, your credit cards could be paid off in full in a much shorter time than you imagined.  Try this: Suppose you have three cards - and most of us carry a balance from month to month on this amount - list all three cards in terms of their minimum payments.  It might be $15, $25, $50.  Take the lowest minimum and pay double on it while paying the minimum of the other two (paying double the minimum on all three is better, but we are dealing with manageable amounts here).  Do this until it is paid off.

Now roll the minimum payment you doubled onto the next card's minimum making that payment $55 ($15 x 2 + $25) and continue the $50 minimum on the other card.  Once that accelerated paydown is complete, roll the $55 to the remaining card.

This could take several years to accomplish but what it will do is keep you from stepping backwards each time you try to move forward. While investing for your future is always a priority, the longer you have this sort of debt, the markets where you have invested your retirement dollars will have to outperform to a degree that may not be possible.  They would have to return almost twice as much as the interest rate you are paying your creditors to get to even.

Yes, you will still be behind in the pursuit of retirement but you will know be able to look at the discipline you have created as a new found way to keep worry at bay and begin to build the next phase of your retirement plan: the emergency fund.  having solved this problem and the next will be giving you the ability to resist using credit in times of crisis and tapping your retirement in times of emergencies.  For those of you that have a 401(k) and began your investment plan at 5% of your pre-tax income - a level of investment that in most cases does not alter your take-home pay, your focus on debt and then your emergency account is critical as well.

These remain the two biggest problems facing your future retirement.  I'll never suggest you stop worrying.  But getting these tow things - your debt and your family's emergency fund - under control will put you on a wholly different path, one you will never have to worry about again.

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

Who Are You? Advisers want to Know

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

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

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

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

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

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

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

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

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

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

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

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

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

A Look at the Middle Class Boomer - in Two Parts

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

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

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

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

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

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

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The Boomer Bummer: Many of Us are Still Not There

Boomers take note: we still aren't at the enviable position of having enough money in our retirement plans to allow us to outlive those reserves. Should it come as a surprise that our retirement plans have not made us comfortable enough to suggest that we won't run out of money?

In the July 2010 EBRI Issue Brief, written by EBRI Research Director Jack VanDerhei and senior research associate Craig Copeland detail the travails of various cohorts in the pursuit of outliving your retirement nest-egg.

What they found was a "don't-feel-bad-for-yourself" moment we should all take note of: the rich can become less so in retirement, just like us. Okay, most of us have a greater chance of outliving our money as compared to the highest income brackets.  But the thought does have some comfort but few lessons.

The EBRI Retirement Readiness Rating™ is based on EBRI's Retirement Security Projection Model® (RSPM), which the institute first used in 2003 to evaluate national retirement income adequacy seeks to portray where we are in terms of retirement in the hope that we can make the changes we need to our plans (such as 401(k)s) while we are still working.  It is also designed to show advisers which steps to take to protect their clients.

The latest version of the survey includes auto-enrollment and auto-escalation of contributions in 401(k) plans, which have come as a result of changes on the legislative level.  It also includes updates for financial market performance and the often chaotic state of employee behavior.  The report is based on a database of 24 million 401(k) participants.

By simply looking at how much has already been accumulated across this wide swath of workers, they were able to determine when the money will run out.

The results after 10 years of retirement:

Lowest-income quartile: 41 percent are likely to run short of money.

Next-lowest quartile: 23 percent.

Third income quartile: 13 percent.

Highest-income quartile: 5 percent.

After 20 years of retirement:

Lowest-income quartile: 57 percent are likely to run short of money.

Next-lowest quartile: 44 percent.

Third quartile: 29 percent.

Highest-income quartile: 13 percent.

But what does "running short of money" actually mean?  The ERBI study used a combination of basic expenses based on information obtained from the Bureau of Labor Statistics' Consumer Expenditure Survey.  This also includes the biggest unknown but the highest projected retirement costs: health care.  By adding the cost of some health insurance and out-of-pocket health-related expenses, plus expenses from nursing home and home health care expenses, at least until the point they are picked up by Medicaid, the nest-egg most of us have will be under serious stress in a relatively short time.

While there have been some improvements in how much money we have currently accumulated, the group referred to as the early Boomers, those aged 56 to 62, the likelihood of running out of money has improved since the survey began.  But it still sees 46% of this group with less than adequate assets to cover the basic needs in retirement.  Late Boomers are only slightly better prepared with 44% likely to run short.

In short, we haven't put enough money to work for our plans to be successful.  We haven't allowed the plans to use the risk available to grow the plans the way they need to be nurtured.  And we have not harnessed our own budgets in such a way as to alleviate the pressures that accumulated debt takes away from our ability to save and invest more.

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

Annuities in Retirement

I have never been a fan of annuities.  The plain and simple truth to this belief rest on the fact that an insurance company should not be involved in your retirement future, past or present.  These businesses do have a role in protecting you from unforeseen problems and the possibility of those issue delivering a financial blow that could derail your plans.  Insure your life, your house, your car.  But insure your retirement?

First, an annuity is as I wrote, an insurance product with an investment aspect that offers to mask the true identity of what it is.  Now annuities have been gaining traction in the retirement discussion as a way to guarantee a lifetime income for those who feel as though they may run out of cash.  Just like every guarantee you are offered (on many items that at the time would be too expensive to repair on replace), the cost is built into the offer.  In other words, you are paying upfront for something that you may never use.

To read about this interesting subject more from Paul Petillo, managing editor of Target2025.com and a fellow Boomer, click here.