Tag Archives: planning for retirement

Can There Be Guarantees in Retirement?

  By petillo | July 12, 2010 - 5:41 am | financial planning, Repercussions: A Retirement Review, Retirement Planning Target 2025
Leave a comment

Can there be guarantees in retirement? Can we hope to be able to know how much retirement income we will need, whether we have invested enough in those retirement accounts to outlast our finite number of heartbeats and whether the costs while we are working will be worth the payoff in the end?

In a recent poll conducted by InvestmentNews of 500 advisors and 500 investors, some of whom were under advisement and some of whom chose to go it on their own, “Retirement income emerged as an overriding issue in our poll, which examined investor and adviser attitudes across a broad spectrum of financial and investment concerns.”  Keep in mind, the potential client base that is developing over the next 10 years, projected at 100 million has these folks very excited.  Finding the next best selling point to get those so far uninterested in advice interested will be an ongoing topic of surveys for some time to come.

It is widely believed, and many of these kinds of surveys point towards this conclusion that we have changed, in some instances, dramatically. What was once believed by a vast majority of us to be a market without retreat turned out to be one that could and did what was completely unexpected.  Riding decades of positive or near positive returns lulled us into the expectation that this was the norm and would go on forever.  Markets we thought, always go up.  They sputter, sure, but these sorts of pauses were simply ways for investors to catch their collective breaths before the next climb up the charts.

Now advisors don’t have it so easy.  Everyone’s portfolio fell in tandem in the 2008-2009 crash.  Those with advisors blamed their advisors and those without had no one to blame but themselves (and a whole host of emotional decisions and Wall Street to main street missteps).  But those that did it on their own had not shelled out for advise that in many cases proved worthless.

So advisors are worried that there message needs to be honed.  Regrettably, “The “magic bullet” for retirement income remains elusive” according to the IN survey.  And the answers the advisors can draw from this exercise don’t suggest they have reached any concrete conclusions.

Diversifying bond portfolios away from the comfort zone of Treasuries is one interesting idea.  In the face of what could be a maturity wall next year in the fixed income world and the rising sentiment that the deficit needs to be addressed, unusually low inflation, and the continuation of the global recovery make this suggestion somewhat suspect – if you have to pay for the advice.

Advisers will also be focused on the Social Security aspect of retirement income.  Running through the various scenarios – as many people are opting for the early retirement benefit – will be at the top of their conversations with clients.  there hope is that with these efforts they can “effectively maximizes the lifetime value of Social Security benefits”.

According to Frank M. Porcelli, managing director of U.S. retail at BlackRock Inc.: “Advisers traditionally help[ed] clients plan a retirement income stream based on a withdrawal of a fixed dollar amount and an anticipated asset growth rate.” Now they are advised to take a more fluid approach, changing withdrawals frequently based on current needs and potential income streams that could be altered by market situations.

In all of these instances, the income stream, both for the client and the adviser is guaranteed, more for the later group than the former.

To read the full article, click here.

The Nuanced Retirement: Age, Work and Benefits

  By petillo | June 24, 2010 - 6:31 am | commentary, Repercussions: A Retirement Review, Retirement Planning Target 2025
Leave a comment

This morning, the news from France was projecting that over a million people would be taking to the streets to protest a change in their retirement age.  Americans, who are facing some retirement challenges of their own, are probably wondering why.  According to the Associated Press, “Many French trains stood still, schoolchildren played instead of studied and post offices were shuttered as workers nationwide went on strike Thursday to protest President Nicolas Sarkozy’s plans to raise the retirement age to 62.”  Sixty-two?

The dream of retirement or in the European fashion, the dream of enjoying retirement is often dashed stateside by the concept of working as long as possible.  We are told in numerous instances, that the only retirement that is enjoyable is one where we are fully financed with enough available fixed income to allow us to live the lifestyle to which we were accustomed when we were working.  But is that a realistic approach to retirement?

There are basically two types of workers in the US.  There are those who labor and those who labor without much of a physical toll on their bodies.  Those that labor may not be able to continue to work and in fact, may be a danger in the workplace to both their co-workers and themselves.  This argument is often overlooked in favor of the academic approach to living where your mind is the most important element of your workplace contribution.  (Applying this concept to teachers may not be feasible either and may even be harmful to students.) But this last ideal is not what statistics portray as the norm, or even reflective of the working populace as a whole.

Even among the college educated, which might surprise you as the number of Americans with bachelor degrees is less than a third of the high school graduates, the number of workers able to continue doing what they are doing is still in the minority.  While America boasts a high degree of educated workers (based solely on the number of high school graduates compared to other industrialized countries) the cost of creating a better educated workforce is continuing to rise.  Also, ironically on the rise, is the number of high school dropouts.

There is no doubt that, and the Census Bureau points this out in dramatic fashion, the college educated worker will earn nearly double what those who have only a high school diploma will.  There is also no doubt that a college educated workforce will enter into that first job with more debt than they are likely to be able to pay-off that loan in a timely fashion – the end result of which means you have squandered the best years for retirement investing paying back the loans that got you the better job.

But this isn’t about the cost of college, the inability of younger workers to begin to contribute to their retirement plans while saddled with huge debts from school or even for the worker who enters the job market with a lower paying job because they did not get more education.  It is about the ability to work for decades beyond that first day on the job.

Mike, writing for College Confidential writes the following scenario for one of those workers who may, because of the choice of professions, be able to work well into their seventies.

“Let’s construct this scenario, shall we?

Say your parents do not pay any tuition and you do not get any financial aid, but that they do cover your living expenses. Or some combination which gives you the right result.

Michigan OOS is $30K/yr undergrad, for $120K. Michigan OOS for medical school is $40K/yr, for $160K. You now owe $280K.

Your residency pays you about $43K for, I believe, five years. You end up paying about $13K in taxes. If you live in the same lifestyle as your average medical student, then it’ll cost you around $26K.

So you have $4K per year to spend. You can try to buy a car, a wedding ring, Christmas presents, tickets home to see your parents, etc. Whatever. You clearly can’t pay your loans off during this time period.

So your loans have now accumulated five years’ worth of interest. At 5% per year — a pretty low rate for student loans — that’s $360K worth of debt.

So now you’re a neurologist, making — according to salary.com — about $208K. Let’s assume you’re not married. You still have no kids, no car, no computers, no wedding rings, no trips home. You do not have health insurance, life insurance, car insurance, or own your own home. Your living expenses are still $26K. You pay about $92K in taxes and about $20K in malpractice insurance premiums if you’re the average doctor. Neurosurgeons, for example, pay about $140K per year in malpractice premiums, and I suspect neurologists are closer to that figure than to the national figure. But we’ll say $20K just for peace of mind.

So that leaves you with $70,000 dollars with which to try to pay off your debt. Still assuming the 5% interest rate, if you pay it all off as fast as possible, then it takes you longer because it’s still accruing interest. That takes you six years to pay off your loans.

This is an optimistic scenario, because it assumes you immediately start making the average amount. In actuality, you’d probably start off lower and have to work your way up. And I think it underestimates your malpractice premiums.

You are now 37 years old. You have never bought a house, gotten married, had children, owned a car, gone on a traveling vacation, visited your parents, flown overseas, bought a computer, owned a pet, turned on your air conditioning, been insured, or had an expensive hobby. You have spent four years in college as a premed, four years in medical school (the toughest type of graduate school), five years as a resident/fellow at 80 hours a week, and then five years working, again probably around 60 hours a week.

And you’re broke.

But at least your debt is paid off.”

In the end, it is not how long you work, it is how you do whatever is possible to construct a healthy retirement. For the vast majority of us, the ever moving retirement age does not mean we will be able to work until we can reach it. It means we will will have less in retirement until we do.

Investing Without Risk is Called Savings

  By petillo | June 14, 2010 - 6:50 am | 401k, Profitable Investments, Repercussions: A Retirement Review, Retirement Planning Target 2025
Leave a comment

For most us, our lives are, for lack of a better analogy, painted into a corner. While we may not feel good about our need for a car we still drive, the way our mortgage might be structured or even the promise we made to ourselves to finance our children’s college education. But we have made these commitments or choices and want to follow through the best we can. And this unfortunate situation extends to our retirement plans and our effort to get our working selves to that point.

Is it necessarily wrong to accept with the hand we have been dealt, a possible comparison that plays directly into what financial advisor, entrepreneur, and coach to financial professionals Garrett B. Gunderson’s asserted recently suggesting that “401(k)s and similar qualified plans is not investing at all–it is one of the riskiest gambles for most individuals”?

He thinks that the whole scheme is basically a marketing strategy which sweeps us up and that we are mostly unaware of the motives these folks (plan sponsors, our employers, Wall Street, etc.) have. The inability for the average participant in these types of plans to grasp the true nature of the plan that, he claims is simply a one-sided profit game where we have little knowledge of what we are getting into and fewer opportunities that we should have is at the heart of what he claims is our retirement option. And lastly, using the buzzword that gets the ear of folks who think that control changes everything, Mr. Gunderson takes these plans to task, listing fifteen reasons why this type of plan is too risky.

Briefly, he believes that “Qualified retirement plans, such as 401(k)s and IRAs, do not provide immediate cash flow”. And rightly so. For the vast majority of us, the concept of evenly contributing to a plan such as this, in a pre-tax environment allows more than the stagnation of cash flow “letting the money sit allows it to compound”, it provides investment discipline.

He further posits that this method essentially leaves your money “tied up with penalties attached for early withdrawal”. Why? Because, otherwise we would withdraw it at each bump in the road we experience. The recent downturn offered us evidence of this as folks were willing to tap these funds for loans, redirect contributions to income or simply ante up the penalties and withdraw the money to cover short-term losses.

Mr. Gunderson then attacks the use of the stock market (“that most individuals do not have the knowledge nor the ability to understand or mitigate”), the free money of the employer match that he calls a myth (he doesn’t suggest exactly why, when an employer physically puts money into your account that this is somehow a bad thing), and that you are doing all of this investing without so much as the basic knowledge of how, once this money is invested, it accomplishes what you intend it to do.

Granted, there are far too many plan participants who are not as well versed as they should be. If there were, default investing efforts would not be needed for those who are either underinvested or not invested at all. But nothing comes without costs and your 401(k) will charge you for the service. How much is the right amount is debatable but those fees will always be there.

These plans were set-up based on a line in the tax code. That said, he attacks the tax incentives that are offered with these plans, the potential that these plans are “sitting ducks” for estate taxes and the most glaring assumption about plan participants is that they do not know how to get out of these plans.

Most of our problems with these plans, aside from the government’s efforts to get us more involved in what is truly our best opportunity, he worries about withdrawals and “the most destructive aspect of 401(k)s is that they cause many individuals to abdicate their responsibility, abandon self-reliance, and neglect their stewardship over their own prosperity”.

Personally, I think we are much smarter than Mr. Gunderson portrays us to be and getting smarter each day. He does conclude that using a 401(k) or similar plan is part of a whole plan. But by then, you wonder if you can unpaint yourself from the corner he claims you are in.

His article can be found here.