Baby Boomers: Are Your Denying a Time when You will be "Old Old"?

Baby Boomers face all sorts of challenges when it comes to retirement. Are we ignoring the most obvious of those challenges when we refuse to think that we will one day be old - not just older, but old old.

It is a relatively well known phenomenon amongst the soon-to-be retired. You are jettisoned from your 401(k) with a large chunk of money, a lifetimes' worth of hard earned cash. You are forced to make a decision about what to do with it. Kept in its present form would require you pay taxes on it as it is. Rolled into an IRA allows you to hold off on distributions, possibly until you are 70 or begin to take money out. But some folks fall into the annuity trap.

This choice, the annuity, in whatever flavor you are sold by the insurance company is often picked when the newly retired person does so in the midst of what would be a bear market.

For those not versed in that term, this a period of lower stock prices; the reverse of which would be a bull market. Most folks fall back on the same logic, perhaps not fully tested or vetted, that retiring in a down market is hardest on your retirement account because you have far less than you might have has had you retired when the market was on the upswing.

On paper it might look bad. But the bear market might be your friend, especially if you are the counterintuitive type not prone to believe the conventional wisdom. What is the conventional wisdom? To be upfront, something I disagree with in most cases in large part, because I don't think pat formulas work. We evolve and so does our thinking. Why, if that is true of us and we are the markets, do we insist on being harnessed by stringent parameters?

Because they provide comfort, a point of reference, a goal. No matter what name you assign them, they are prevalent and with so many personal finance and retirement "gurus" saying the same thing, you tend to fall lockstep into the same thinking. Withdraw 4% you chant and you will never run out of money.

I've disputed this notion in the past as not very wise or thoughtful. Two things helped me arrive at this conclusion. Long before Susan Jacoby wrote her new book about old age (Never Say Die: The Myth and Marketing of the New Old Age, Pantheon Books), which provides a no-hold-barred look at the distinct, perhaps inevitable slide the human body takes on its path to death, I was suggesting that we might live longer but what will living longer mean. Oh, we may live to 85, but our arrival signals the end of cognitive independence for more than half of us.

She blames the baby boomer, the reinventor of what life is as the culprit in this thinking. We may have changed the way our youth unfolded and we may have upset the norm throughout our working careers. But when it comes to old age, it doesn't matter whether you have some sort of can-do attitude, you won't be able to change what is going to happen to you. You may envision a life of vigor and vitality, volunteerism and travel. We all need something to keep us moving forward. But Jacoby says we are ignoring the hard facts of life. We'll still get old. And with age comes the maladies of that time. Still there and still the same unsolvable mysteries.

So we will reach a point somewhere in the future - and the odds are in favor of this thinking - when you will no longer be the person you are right now. The years that you believed would be full and vital are now gone and you are collecting in the form of equal - possibly inflation adjusted - income that you can't spend. You scrimped in the early years of your retirement, downsized, even counted every penny. And then later in life, it doesn't matter. My suggestion was to start out big and taper back. Perhaps gradually easing back from a 6-7% withdrawal rate in the first ten years of retirement to a paltry 2-3% by the time you are 80 years old.

The result would be more or less the same with you using the money in the early years to do what you thought you could do and scaling back as your new sedentary lifestyle takes hold, an inevitability we can't avoid. "Young old" is easy to imagine. "Old old", not so much.

But the choices we make right at the moment of retirement may have a greater impact on how well that retirement is financed than we may have previously thought. Those bear market retirees, the ones who graviate towards annuities more so than their cohorts who retire in the midst of a bull market, may end up doing better over a longer period than their more optimistic cohorts.

I am of course referring to the studies done by Wade Pfau, an associate professor at the National Graduate Institute for Policy Studies in Tokyo who has suggested that retiring during a bear market is actually the best case scenario. His thinking is that a bear market provides more upside potential than a bull market would. On this point, he may be right. Our penchant to follow the herd during a bull market gives the impression that markets will always go up.

And there is some proof that for a time, they will. There is also proof that if you retire during a robust bull market, you will be more inclined to believe that you possess some sort of powerful ability to manage your money better. But bull markets fall and this causes confusion among those who may have deluded themselves into thinking they were more skilled than they were.

Professor Pfau thinks that a 60/40 stock split is optimal and if you invest over the course of 30 years at a rate that is close to 17% of your pre-tax income, you will be able to have 50% of your pre-retirement income, inflation adjusted, throughout your retirement. Staring earlier will mean less needed to get to the same mark. And of course this excludes any other money you might receive in retirement.

You are probably saying to yourself, 'that's a lot of income to sock away' and you'd be right. But this is one thing that hasn't changed: if you think you haven't been putting enough away, you are probably right. If you think old age is something that will resemble the first day of retirement for the next 30 years, you would be wrong.

Baby Boomers should be thinking about spending more when they are healthiest. Because 'old old' doesn't give you the chance to revise your planned 'young old' retirement.

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

The Possible Appeal of Long Term Mutual Fund Managers

One of the single toughest problems facing any investor is research. The information we seek is mostly conflicting, mostly difficult to understand and worse, readily available for the taking. The trouble is, access doesn't make the choices we need to make about where to put our money any easier.

You might consider the grocery store analogy. You may want to cook a whole chicken for dinner tonight but when standing at the meat counter you find three perhaps four different types of whole birds to chose from ranging from the very pricey organic variety to the very cheap store brand. They look alike, perhaps even clucked alike at one time. But what they are, besides all being chickens, different somehow.

Now mutual fund managers can hardly be compared to chickens. But in some ways, we have the same sort of conundrum facing us when it comes to a mutual fund selection. How much is the fund the manager and does it matter?

Mutual fund managers do have some appeal to certain investors. The longer the term some managers have, the more likely they will remain with the same investment style. Consider the long-term managers at these funds: Parnassus Fund (PARNX) which has had  Jerome Dodson as the fund's lead for 26 years,  Richard Aster Jr. of Meridian Growth (MERDX) has also put in just as many years and the grandfathers of the industry are people like Albert Nicholas who created his namesake Nicholas Fund (NICSX) and has managed it since its 1969 inception and perhaps the oldest fund manager Bernard Klawans who at 89 years old still runs the small Valley Forge Fund (VAFGX).

But is the same investment style still in style? Yes and no. Markets have remained essentially the same since they were conceived. And although we often consider them as impersonal entities, much like a Watson, they are not. Instead they are made up of people who, for want of a better term, want you to lose. There are two sides to every transaction and good will doesn't enter into the equation. Hiring a professional such as a mutual fund manager - and this is what you are doing - offers you box seats in the battle of who will win and who will lose in the marketplace.

Understanding the nuances of the markets is a timeless venture that involves understanding the players involved. Sure, computers have made the world smaller and faster and more efficient. Companies have broaden their customer bases and in the process made the oceans that separate the world seem like nothing more than a small pond. The world is at our doorstep.  But the people at the heart of every investment haven't evolved one iota since the markets were conceived.

It is still not about chasing the next new thing; it is about finding the things that no one really sees as bright and shiny, old investment ideas that have never changed. This is what older managers bring to the conversation. So that would be yes.

On the other hand, the reason these fund managers have remained at the helm for so long has more than a lot to do with who owns the fund family., The four above mentioned fund managers can't be fired from the positions they created. They can only step aside. So too long is perhaps too long.

Each fund manager must do three things. One they must create a portfolio that is sustainable and worth holding. Fund managers generally have ideas about how this is done and new fund managers will come on board and switch things around, selling one security in favor of another. So they initial year is generally a wash in terms of comparisons. By the five year mark, they should have settled in with their strategies in place. So five years is a good judge of turnover - a term that references how much of the portfolio has changed in the previous year. Less is better.
The second thing they must do is create returns that are better than an index and enough to pay the bills. If the expenses are low, this shouldn't be too much of problem provided the markets cooperate a little bit during those initial years in the lead position. Returns are tricky though. Weighed against fees, risk and a host of other obstacles, the number the fund posts can mean the difference in whether investors stay invested or turn a look for something more suitable.

Each exiting investor, aside from a no-confidence vote is a sale which forces a sale which in turn, creates some disruption to the investment plan. Get a lot of investors headed toward the door and no matter how good you think you are, you will not be able to sell enough to make ends meet for the remaining investors. This cascade effect was seen best in late 2008 when numerous investors ran rather than staying put and allowing the fund managers to keep the level head they were hired to have. So they must contend with investors and the markets.

The last thing a fund manager needs to contend with is the shareholders in the fund company. Many mutual fund companies are publicly traded entities which puts the manager in the middle of two sets of shareholders. One demands returns and the other demands returns and both consider themselves the most important part of the equation.

There are more than a handful of mutual funds that circumvent this one manager stewardship by using teams or even people and computers, the former to take the blame should things go awry. But some rules do apply across all mutual funds. New anything is not worth buying. A new fund, a new fund manager and new investment strategy are all worth giving a little time and latitude to before you invest. Let the folks who don't know any better buy first.

Three years is barely enough time to make a performance call on a mutual fund manager; five is better but ten tends to be best. Remember, the three parts to a fund manager's skill: the markets, the investors and the shareholders. Mastery of those masters is never done in a short period of time.

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

An Interview with an Investment Expert

Yesterday our guest today on the Financial Impact Factor Radio was Meir Statman, author of "What Investors Really Want" (McGraw-Hill, 2011). He explained to my co-hosts Dave Kittredge and Dave Ng of FinancialFootprint.com and me the ins and outs of his field of study, behavioral finance and why investors do what they do.

Listen to internet radio with

Paul Petillo of Target2025.com/BlueCollarDollar.com

and Dave Kittredge and Dave Ng

of FinancialFootprint.com

on

The Financial Impact Factor

at Blog Talk Radio

Is Dollar Cost Averaging Old School?

There is a school of thought circulating that dollar cost averaging is not smart investing. For those of you unfamiliar with the term, it is how your 401(k) plan works and why it works so well. You essentially make a contribution determination - usually a percentage of income which is taken before taxes ore levied - and each paycheck, you buy share of whatever investment you have chosen in your retirement account.

The concept is basically simple enough for most every investor to understand, even embrace. One, the investment is steady and in many cases affordable and painless. Because of its automatic nature, you need only check your statement every quarter to make sure the money went into the account and went where it was supposed to go.

DCA also benefits the average retirement investor with some control over the numerous errors that plague most investors. By doling out money evenly, your investments are bought based on affordability and not on the decision of the herd. Herd decision making relies on following the rest ofthe investors as they sell or buy and experience with this sort of mentality suggests that they usually buy when the markets are on the way up and sell as they descend.

DCA does something unique. It allows the investor to buy less as the herd buys more and to buy more as the herd sells. Imagine a share of a mutual fund costing a dollar. You allocate one dollar of your paycheck and you buy one share. But the market goes up and the share now costs $2. DCA restricts your enthusiasm at joining the herd and allows you to only buy one-half a share. the shares you already own have increased in value so you aren't missing the upswing. You just aren't throwing more money at something that may be over valued.

Now imagine the opposite happening. The share falls in value to 50 cents. Your dollar buys two shares and while it is true, your other shares have lost value in the process, the investment thinking here is that over the long-term, there will be more upsides than downsides. This means that you will be buying the same share at a discount.

Are there any downsides to this investment strategy? Some think so. One gentleman I was discussing this with suggested that folks using a 401(k) plan should never forget that this is investing. I couldn't agree with him more on that point. He went on to say that even the most passive investing requires some diligence and dollar cost averaging takes that diligence away. That is a downside but not an insurmountable one.

He thought that all of the money in a given year should be sent to the most conservative fund available in the employee's 401(k) and then redistributed to funds that are doing better. While this may work for some people, few of us know how mutual funds operate, whether the markets are favorable or not and often we find out after the markets have made the decision for us, and lastly, our 401(k) do supply the rapid response some of this thinking implies.

It does require a skill level and command of all of the emotions and biases that plague even seasoned investors. It obligates us to be better educated - but for most of us, we need time to get to that point. It is always my hope that we do attempt to become better acquainted with the way our money is being invested. But in the mean time, the concept of dollar cost averaging serves far too many of the average investors too well to be discarded.

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

Are Munis Next?

If you are a municipal bond investor, you have done either one of two things. Believed the recent rhetoric about the imminent bankruptcy of numerous large American cities and with thosebankruptcies, a default on the municipal bonds they have issued or do not believe that this can happen.

Those that believe have been reported as selling their investments, divesting almost a third of what was invested in these securities since November of last year. This makes less knowledgeable investors skittish to say the least and worried - as all bond investors tend to be - that you will ve left holding what are essentially worthless securities.

Volatility has been seen in this market and if Vanguard's recent withdrawal from the muni ETF market is any indication, you might be right. But some logical evidence points to other reasons why this is overblown.

Many 30-year AAA tax-free bonds now yield over 5%. )These ratings are key to the quality of these bonds. Lower ratings mean higher yield offerings and with it, an outward indication that risk exists. But if you are in the top federal tax bracket, you’d have to earn almost 8% in a taxable bond to get that kind of after-tax yield. In this interest rate environment, that’s nothing to sniff at.

Plus, municipal bond issuance will drop to $350 billion this year from $430 billion last year. If you took Economics 101, you know that decreasing supply generally firms prices up.

The extension of the Bush era tax cuts do play a role as do the slumping US Treasury rates. Some experts, Bill Gross, the man who manages Pimco investments recently declared, “I don’t subscribe to the theory that there will be lots of municipal bankruptcies.”

Panic creates the illusion that there are bubbles in certain markets, municipal bond markets not excluded. Ignoring risks make people worry more than they should. The bottom line: there is volatility in every investment and the chance you will lose money. But municipal bonds will not default  en masse anytime soon. Unless of course, the economy fails to recover.

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

The High Net Worth Boomer and the Lies They Tell

You would like to think that we are all truthful. But that may not be the case. Are Baby Boomers, more specifically those considered high net worth, telling a story about their retirement that isn't quite truthful?

Oscar Wilde probably said it best: "What we have to do, what at any rate it is our duty to do, is to revive the old art of Lying.” Nowhere is this resurgence in the falsehood more prevalent than when we tell a surveyor about our finances. When they look extremely bleak, we tell them they look even worse. When they look okay, we tell them they are really good. It is in our natures to tell lies considering we do it when we smile.

Evidently, a group of wealthy Baby Boomers told a survey group from Bank of America/Merrill Lynch that their retirement not only looked promising but was much better than their parent's retirement was. This is pretty lofty talk from a group that just a couple of years ago was not one bit happy with where their portfolios had gone in the wake of the financial meltdown. Now, $250,000 in investable asets is enough to warrant such retirement superlatives as "freedom" and "relaxation".

What changed? True the markets recovered over the ensuing couple of years. But I doubt that this had anything to do with it. many of these folks, like all age and wealth groups did, panicked at the sudden rebalancing of their portfolios by market forces. Unaccustomed to an all-inclusive debacle, many moved into much more conservative type investments and in the process, created their own mini-bubble in the bond market.

The rest of us moved into target date funds, a sketchy hybrid of funds designed to rebalance our aggressive natures for us. If you are older, the fund you plopped the remaining balance of your 401(k) is close to your age - so you too may have benefited from the updraft of conservatively invested enthusiasm. I wrote about this relationship with the bond market a couple of days ago suggesting that if their isn't a bubble in the bond market, it is because it won't pop when it reaches the end of its run; it'll hiss itself into normalcy.

It may be that this group has a better restructuring plan in place or they are simply lying to themselves - and the surveyors. Consider this: $250,000 in investable assets was consider the borderline between the rest of us schmucks and the high-net worth individual. I'm sure that this number is not even close to the actual investable assets these people had. It is our carrot.

One thing that stands out with the group surveyed is the change in attitude about what retirement is. They mostly believe working in retirement is a way to stay physically and mentally engaged. And for many, it is. For those with less than $250,000 in investable assets, it often isn't the case.

But these high-net worth folks worry about the same things you do: the cost of health care, the cost of children still living at home and that there portfolios, no matter how well managed, might not be enough. So they smile when they say they have it better than their parents and do so while lying about how much better.

And these high-net worth folks are not short on advice, even if they didn't take their own. Get a financial adviser as early as possible, they suggest and of course start early. Good pieces of hindsight advice that they were told as they began their working careers - and didn't follow.

About this advice to use financial advisers earlier. Then there was a survey conducted in 2006, when things were going great: housing values were appreciating, the markets were humming along, and early retirement was well within reach or it was assumed to be. And the results show a complete turnaround in thinking from then to now.

Back then - keep in mind these were the good times - another survey was published: In it, the following: "According to a new MyWay Investment Advisors (MWIA - an independent financial planning and investment advisory firm) survey, 98% of respondents would change the way they work with their advisor with 43% saying they wanted to change the amount they paid for the financial advice and services. This compares to only 13% of advisors who would look to improve how they currently operate, including pricing for clients.. The survey focused on how individuals would like to be treated by their financial advisor or investment professional and how they would like to pay for those services.

"The survey targeted the individuals with annual incomes greater than $75,000 and $150,000 to $600,000 in invested assets, including 401Ks. A duplicate survey was sent to financial planners, investment managers, insurance sales people and other financial industry professionals to compare responses." Why has this advice changed? Pricing and the way pricing is structured has evolved. Yet the higher the net worth, no matter what you pay, you pay more than you should.

So which is the truth? Are they happy now or were they happy then? The most telling piece of info coming from that survey: "When it comes to financial advice, however, financial advisors isn't where most of those surveyed go for information. Only 27% utilize financial advisors while over half (56%) get advice from a friend, publications or on their own.

"Of those that have a financial advisor, only 18% are happy with him or her. a whopping 56% say they are dissatisfied and 23% still have not made a decision."

This means one thing. We can no longer look to those we consider net-worth wealthy for guidance in how to become net-worth wealthy ourselves. Retirement has become a reality and an illusion. It is something we want and fear, something we strive for and are repelled by, something that is both possible and impossible. Yes it is a conundrum.

But it is your puzzle to figure out. And the simplest way to do that is figure out if you are willing to live on less than you have now. You don't need a financial adviser to tell you that you probably haven't invested enough. You know that you are probably wrangling more debt that you would like. You know that your contribution to your 401(k) is les than it should be. And you know that your goals concerning retirement are lofty than they are on paper.

Your balance sheet needs to be revisited and often. You need to double your 401(k) contribution now, no matter what age you are. There are numerous, almost painless ways of doing this including channeling the tax relief on your Social Security payroll tax (2% for the next two years) or simply increasing your contribution by 1% for every month of the upcoming year. You have the pieces to solve this puzzle. It all depends on how much you want to lie. The rich can. So can you.

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