Tag Archives: defined contribution 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
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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.

As We Enter 2012: A Few Thoughts on Retirement

  By petillo | December 30, 2011 - 6:43 am | 401k, Boomers, financial impact factor radio, financial planning, Paul Petillo, personal finance, Profitable Investments, Repercussions: A Retirement Review, Retirement Planning Target 2025
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It’s true, the calendar change from 2011 to 2012 is not that big of an event. Granted, we will celebrate as if it were, thinking that “out with the old” and “in with the new” can be impacted by some arbitrary date. It is often this short-term thinking, the hopefulness that this year will better than the last, that is at the heart of why we never seem to feel confident in our retirement plans, our investment decisions and how we manage our money. All of these are long-term efforts that exist in the absence of short-term events like a change in the date.

If you look back on 2011, you might find your personal finances in better shape than the years past. You may have saved more. You may have invested more. But chances are, this is not the case.

Cavett Robert once suggested: “Character is the ability to carry out a good resolution long after the excitement of the moment has passed.” And that moment for most of us, the excitement just past will begin showing up as the bills for Christmas. Many of us will make a promise to do better with little or no plan as to how we can improve the state of our personal finances.

Review why you made them
Timothy Pychyl, a professor of psychology at Carleton University in Canada, says that resolutions are a form of “cultural procrastination,” an effort to reinvent oneself. Among the most common resolutions – and only 50% of us engage in this exercise are the obvious: weight loss, exercise more, stop smoking. And quite a few of us make some promise to ourselves that involves better money management. Unfortunately, these promises create what is known as a false hope syndrome: a belief that you are a better person than the one looking back in the mirror.

A successful resolution requires a rewiring of the brain, which is no easy task. So no matter what the resolution, the only way to make it succeed is to focus on only one promise to do better. The goal should also be specific and done in small steps.

Don’t let the bills from Christmas derail the promise
Even before the Christmas holiday had passed, the news was reporting that we had spent more than in previous years and did so without a significant increase in pay. We either tapped into our savings or we tapped the plastic. Which means that the promise we make to improve our personal financial situation will face its first test once those bills arrive from Christmas.

The best way to keep your resolution is to take small steps. Make the hurdle too high, psychologist say, and you will not make the leap, become discouraged and do what you have done for years: break those promises to do better.

Every resolution you make ironically deals with money. Weight loss usually means fewer restaurants which means money saved. Stopping smoking will put more money in your pocket as well. Exercising for many people might end up saving them money on their health insurance.

But the easiest and most direct way of increasing your personal financial wealth is to increase your contributions to your retirement plan 401(k). Once again this an be done in baby steps. Because the most successful resolutions are done with small changes, celebrated as milestones, increasing this contribution can be as easy as setting a goal of increasing the contribution by 4% over the course of the year by doing so in one percent increases every four months. This of course assumes you are making a contribution now.

If you aren’t, then begin with 5%. This level of contribution, in almost every situation will not impact your take-home pay. So nothing really changes. But increasing it by 1% every four months will begin to take a little bit away from your spending. By the time next year rolls around, you will have adjusted to 9% – if you have kept your promise.

Enlist your family
The best resolutions involve some sort of help. Psychologists call these people accountability buddies. And there is no better system in place than your family. Go on a diet and your family usually goes on one too. Go on a financial diet and tell your kids that not only will there be less to spend, but that you are saving it for the future.

Because the goals are not too difficult, you can take the opportunity to teach your kids about why you are doing what you are doing and if you don’t really know, the education will be a shared experience.

2012 can be a game changer for you financially and if you do this, it will pay huge benefits later in life. Everyone has a little wiggle room in their budgets and few of us are willing to remove them. Increasing your contribution is the easiest, the least intrusive and actually gives you a better result.

On another note: we begin the second season of Financial Impact Factor Radio on 01.03.12. The conversation will continue to focus on the things you can do to improve your financial present and more importantly, your financial future. As many of you already know, we changed the format slightly towards the end of 2011, switching from a weekly one hour show to a daily format of a half hour. We also changed the time we broadcast to 6am in the west/9am in the east. Join us as we continue to build that long-term foundation with discussions that will help you understand this complicated world of money, retirement and investing.

Happy New Year!

Your 401(k): Older, Wiser and 30

  By petillo | March 7, 2011 - 6:04 am | 401k, financial planning, insurance, IRA, Mutual Fund Investing, personal finance, Profitable Investments, Repercussions: A Retirement Review, Retirement Planning Target 2025, taxes
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It seemed like a good idea. But you have to consider where we were in terms of retirement when the line in the tax code was uncovered. We had pensions and companies didn’t much like the idea. These defined benefit plans were designed to keep employees in one job over an entire career and add to that, they were costly and unpredictable. For the employee, the time needed to vest was often long, sometimes as much as ten-years, and the pension once vested, although it was yours, could not be brought with you should you find a better job somewhere else.

The pension also represented the ability to increase your retirement income as your pay increased. This trade-off from human capital in the first years of employment to retirement capital in the later years, made the company liable for the investments and the guarantees that the money would be there. Higher paid workers, often in much higher tax brackets than we have today, were allowed to also save money after those taxes.

When Ted Benna found this line in the tax code (section 401(k) 30 years ago, he realized that this was the answer to what his higher paid clients were looking for: the ability to put money away on a pre-tax basis and if the company so chose to do, it could match those dollars. Business saw this as a way to shed those obligations of managing their pensions and shift the obligation of retirement to the employee.

Sure, the company said, we’ll help. We’ll hire some experts to set up a plan, we’ll load it with a bunch of investments and we’ll act as fiduciaries. Heck, they said, we’ll even provide the incentive of a match – even though these companies would lace it would all sorts of caveats much like the vesting period of the pension. Yet it would, in their minds, be the answer to a question they had not asked but possibly should have.

Even better, these new plans would be portable. You could take the money you had put aside with you when you left. Once again, this was more a win for the company than the employee, who often left before they got the fully vested match and was forced to roll the money into their own IRA. The fully vested match is often something that happens over time, sometimes as long as ten-years, more commonly over five years.

It can work in a number of ways and this information is part of the Investment Policy Statement that every plan has and few people read. During your first year, you might get the company match – in theory – but if you were to leave, it would not go with you; only the money you had invested would be yours. Perhaps by year two, the company would allow you to take 25% of the company match, and each successive year, a little more. Some companies give the full 100% after five years. So consider the employee who finds a new and better job opportunity and decides to quit a week before the five year waiting period is up. They would lose five years of company matching funds simply because they didn’t wait.

This line in the tax code also created a multi-layer business to accommodate this plan, from mutual fund houses to insurance companies to brokers at the investment level to third party administrators and lawyers to help with the legalities. This line in the tax code also created some huge problems for the worker.

Now they needed to find investments in those plans to give them the best retirement. They needed to participate beginning as early as possible and stay involved as long as possible. They needed to get historic returns and be disciplined in an endeavor they had little or no knowledge about prior to this shift. It was a great social experiment in self-help that has failed many people. It also helped a great many people who might not have had much otherwise.

But the plan has problems that have never been suitably addressed, in part because of the belief that people wouldn’t allow these provisions. One problem that should have been better adressed was the portability part of the plan. Mr. Benna in a recent interview with the Baltimore Sun bemoaned this ability to “take the money with you”. He knew that our natures would get in the way of the right choice. Too many people would cash the plan out, pay the penalties and the taxes and squander the early start that these plans depend on. He thinks that the employee would be better served being forced to leave the money at the old employer.

He also knew that if the 401(k) allowed for a borrowing provision, people would use it. Mr. Benna’s redesign of the 401(k) would include auto-enrollment and auto-deductions that would begin at 4% and increase until they reached 10%. He also admits to the problems in target date funds (which we have discussed here in previous essays) but thinks the idea is right. People make emotional choices with their investments and target date funds are designed to take that emotion out of your hands.

Of course you could opt-out but history has shown that few people do. He also suggested that this plan should be, in a perfect world, a supplement to a pension plan. But he was quick to point out that companies still have problems with the predictability of pension costs. Much the same way 401(k) investors have difficulty with investment risks.

In either case and even if you are fortunate enough to have both types of plans, the responsibility of your retirement is still with you. Arriving as close to it debt free is still the best approach to retirement. Investing as much as you can and then more, perhaps twice what you think you can afford, is a better plan. Think of retirement as a storm that is approaching. You wouldn’t gather enough supplies to last for a day or two. You would get more than you need. Most folks have not filled their retirement pantries with much more than a loaf of bread and a jar of peanut butter. How prepared are you for a storm that is likely to last for thirty years?