Tag Archives: defined benefit plans

I Resolve: Six Resolutions for Retirement Planning in the New Year

  By petillo | December 31, 2011 - 7:49 am | 401k, Boomers, commentary, debt, ETFs, exchange traded funds, financial planning, index funds, IRA, Paul Petillo, Repercussions: A Retirement Review, Retirement Planning Target 2025, risk, women and finances, women and retirement
Leave a comment

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

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

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

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

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

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

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

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

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

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

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

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

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

The Pensions of Yore and the 401(k) of Today: A Hybrid Thought

  By petillo | June 14, 2011 - 5:52 am | 401k, economics, financial planning, index funds, personal finance, Profitable Investments, Repercussions: A Retirement Review, Retirement Planning Target 2025, social security, women and finances, women and retirement
Leave a comment

Is the pension plan, the dinosaur retirement plan of times gone by the answer to getting the older worker to retire at the historic retirement age and the answer to all of the economic problems facing the country right now?Possibly. Monique Morrissey, an economist and Ross Eisenbrey, the vice president of Economic Policy Institute recently offered their thoughts on why the pension offered the older worker the kind of security that is mostly absent in the 401(k).

Are pensions dinosaurs?

The idea has legs but not based on how they believe it could be achieved. While the authors suggest: “workers with only 401(k)s are better off than the nearly half of full-time workers with no retirement plan at all. The impact extends beyond older workers, their families, and younger workers waiting in the wings.” They believe that adjustments made at the legislative level to make health insurance more affordable would be enough to give older workers the needed nudge to retire on time.

If, as many people I have spoken with admit, we’ll never go back to pensions, perhaps we should instead look to some sort of hybrid idea. The 401(k) had the net effect of shifting risk to the worker, allowing for worker mobility and giving the employer a cost savings not present in the pension plans many were managing. Now, we pine for the days of the pension.

The birth of the 401(k)

Not that this was how it actually happened, but you can picture the backroom thinking: we’ll shift the burden of retirement (and risk) on our workers and force them to buy into the stock market. The market will boom (see the bull market that coincided with the advent of the 401(k)) and everyone will be happy. We’ll have a mobile and disposable workforce that can take their money with them when we no longer need them. No pensions, no loyalties, no ties that bind for decades, no human capital trade-offs in the early years. Genius. As I said, not that this actually happened. And furthermore, I believe that when Ted Benna, the father of the 401(k) and discoverer of the line in the tax code introduced the notion, this wasn’t what he envisioned.

Fast forward three decades

And then the housing crisis crippled the mobility part. Too many people want to move to another city for another job but won’t or simply can’t. Older workers who have work are focused on being sure that they can retire and as a result are clogging the system of job turnover, necessary to accommodate the growing workforce.

Rather than shift the burden on the government by making benefits more accessible, why not use a pension trick. If employers offered an incentive like the five best, older workers might be willing to move on. Here’s how it would work. In most instances, older workers earn the most in the final years of work. Why not reward them for their loyalty and expertise by offering a double or even triple contribution to their 401(k) if they also max-out their contribution. Rather than pushing the burden of catch-up onto the employee, the employer would also step-up their matches as well. It would probably require a tweak of two to current law to allow it. But the change would be worth it.

Three things would happen.

The older worker would get this massive incentive to save more in the final years and although they wouldn’t be forced to retire, the contribution bonus could end at 65. The worker could stay on but the catch-up period would be over. This would allow the older worker to see the advantages of saving more sooner and capitalizing on the contribution bump. And the employer would see an offset in cost with a new hire, often employed for far less than the older worker.

The best of pensions combined with the self-direction of 401(k)s and the incentive to retire seems to be a simple tweak, a proverbial gold watch and a more secure older worker entering retirement. And the job cycle would, at least in theory, get moving again. And while Washington is legislating, how about requiring index funds in all 401(k) plans and annuities (which are forbidden to consider sex when tucked in these plans – which is a benefit for women in particular and men as well).

Your Retirement is a Multi-Faceted Plan: The Baby Boomer Dilemma

  By petillo | January 1, 2011 - 12:09 pm | 401k, Boomers, debt, economics, financial planning, mortgages, personal finance, Repercussions: A Retirement Review, Retirement Planning Target 2025, social security, taxes, women and retirement
Leave a comment

Baby Boomers have chased an ideal all of their lives. It wasn’t the same ideal as their parents in principle. But in concept, it was the same. They wanted to retire, retire well and never really worry about where the money came from. But they believed that what was old wouldn’t work as well for them. So they changed the way retirement was approached.

Willingly, they allowed the idea of the defined benefit plan, the pension to go away in the name of mobility and control. And when they succeeded in driving it to the far corners of the retirement world, they under-used  this new plan or used it incorrectly. Even as the best bull market that ever existed (from 1982 to 2000) wrapped itself across the investment landscape, few of us put enough money in this new-fangled plan designed to allow you to self-direct your future. We, the financial media and pundits and experts, tried to explain how the 401(k) worked, why it was good or how it could be exploited. And we still do.  Those of us who decided to make a living on offering those sorts of explanation knew we would never be out of work.

You wanted what your parents had. Yet when you were given the tools to do it, you only kinda-sorta used them. You still wanted to retire at 65. You even toyed with the concept of retiring early – almost every one did during that bull market. Trouble was, the markets ended that dream in 2000-2001 and then again in 2007 and in the irony of time, which seems to be compressing, it ended again in May of last year.

All of those pivotal points in recent investment history should have made you realize that this was not going to be a 401(k) only retirement. What you missed as you attempted to emulate your parents and their pension-style retirement was the ugly truth around fixed income. It was fixed.

But in many instances, they planned for that moment in time and every financial interaction they had throughout their lives was done with the understanding that they would not work a day past 65. Their mortgages were fixed and ended right around retirement age. Their Social Security payments were fixed as well and when you add in the pension they may have worked 30 years for, one that grew in tandem with each subsequent pay raise, you knew, to the penny, how much you had.

It wasn’t some number they were chasing. It was THE number they had to live with, budget their lives around and hope for the best. Some dealt with the harsh reality poorly and became poor. Some, as fate would have it fared worse, some fared better. Some died young. But few if any ever ran out of money although what was left should some disaster befall you wasn’t enough to make it.

Baby Boomers wanted better or at least the same. But they failed to realize that this was a multi-faceted endeavor. You needed to reach retirement with your bills paid, your health intact and your budget aligned for worse-case as-yet-to-be-experienced scenarios. Those three things were not something your parents had much if any control over. The fixed mortgage, the state of your health and the money you had to live on when you retired were givens. For Baby Boomers, not so much.

As January 1st arrived, the first of the Baby Boomers became eligible to retire. And those eyeing the prize of a retirement that begins on schedule and provides you with enough income to last the rest of your life should know a few things now before that moment comes.

1) You still can retire. But the sacrifice is much larger than it was had you started earlier. If you are now beginning to look at your 401(k) at age 50 or 55 as something you have to max out – not want to, not hope to but have to – you are in for some serious headwinds, both financial and emotional come 65. Will it crimp your lifestyle? Yes. Is it better to sacrifice now rather than later? Yes, again.

2) You need to budget in order to do this. In other words, one sacrifice can’t lead to increased debt to fill the void left by less take-home pay. As you survey the familial landscape, you might see children who have failed to launch as planned, parents who have moved back in or are on the receiving end of financial subsidies or worse, you have a house with an underwater mortgage and/or are still feeling the ripple effects of a recession that economists claim ended eighteen months ago. It doesn’t matter. You still need to budget. Without a firm handhold on this concept, retirement, no matter what target age you choose, is out of the question.

3) No plan is perfect and no advice is foolproof. So where does that leave you? While we may look for patterns in every thing that surrounds us, our interpretation of what we see and how we might react to it will differ with each of us. In the current state of economics, large patterns don’t apply to you. So you need to consider your options carefully.

For instance, sage wisdom suggests that you go from conservative investments to less risky ones as you age. The closer to retirement, the greater the likelihood the lion’s share of your investments should be in very safe investments. Let’s consider two things: a lion’s share is just that, a share that is large but not total. And the second, if a long life awaits you, too conservative an approach before retirement means you will have missed a great deal of what you may have needed.

A lion’s share is basically the best parts. To use the best parts you need to first identify them. Your 401(k), as I have suggested on numerous occasions may not be the best part of your retirement. Your house might be. Your health might be.Whatever it is – if it’s a house that’s paid for or a health record that suggests you might just live until you are 90 and do so with few complications (look at your relatives for some indication of this sort of longevity), your 401(k) in addition to any other sort of retirement option available such as an IRA or pension can be looked at differently.

This is particularly important for women. Every couple constitutes many parts of a whole plan. You may both have 401(k)s or IRAs. But I would be willing to bet you treat them as separate entities rather than a whole. Look at which one is better and which would could stand to take on more risk. If the husband has a 401(k) that is four or five times as well stocked as his spouse or partner, then make the spouse or partner’s 401(k) a little riskier. Doing so allows for two types of bets to be made: a conservative one and a risky one.

This is out-of-the-norm in terms of wisdom.  Too many times I have seen couples act as if these are individual accounts – they are not. Over the next year, as we explore the next year of our fifteen year journey to a secure retirement, we will look at how to use all of the facets of your retirement as a sum ot their parts.