Tag Archives: starting early

Starting Early with Retirement Plans and then Stopping

  By petillo | March 8, 2011 - 5:41 am | 401k, college, financial planning, index funds, IRA, personal finance, Repercussions: A Retirement Review, Retirement Planning Target 2025
Leave a comment

Signs of economic recoveries usually come with signs of increased hiring. Increased hiring usually spells opportunity for those among us who are young and either unemployed, unlaunched or worse dissatisfied with the job they have. Older workers share the same needs and even similar emotional tugs as younger workers but they tend to have different agendas when involved in the job search. Yet optimistic employment numbers also give way to mistakes when those opportunities present themselves as a chance for new and/or different employment.

Let’s start with those that are currently unemployed or underemployed. If you have failed to find the job of your dreams, chances are the news about an uptick in hiring has you feeling a great deal more optimistic about your prospects. Probably your parents feel that way as well. Even though most of the experts I spoken with suggest that just getting a job, any job is preferable than trying to be selective, that doesn’t mean you should approach the subject as if you were desperate. There is a very good chance that if you land the position, you will be employed with that company for at least five years.

Five years is the blink of an eye in terms of your youth. But it can be critical for your retirement plan. While some college graduates think about this aspect of the job, few would turn down a position if the employer did not offer some sort of retirement plan such as a 401(k). Currently, only about 59% of the employers do and if small business is the engine of job creation, you probably will be finding your next job amongst those employers.

So should your job choice depend on the presence of this sort of plan? Experts say no. Take the job that is offered, applying the get-a-foot-in-the-door attitude. But it doesn’t hurt to ask if they have a plan and if so, can you see what is offered. This, many experts suggest is not only prudent but shows foresight.

What should you be looking for? While the underlying investments are important, at the application stage you are most interested in the Investment Policy Statement. Contained in this document is the vesting schedule. This schedule varies widely but most offer a period in which you will be able to contribute to your plan, a time frame of when the matching contributions begin and more importantly, how much you get to keep before you are fully vested.

Some vesting is locked into a five year schedule. The first year may come with no matching contribution. The second with a matching contribution but should you leave the company, you would only be able to keep 25% of the match. And in this sort of plan, with each year you stay, the vesting schedule adds another 25% until you hit 100% in the final year. Some give you matching contribution that fully vests in the final year of the five year period. In other words, the match won’t be yours until you stay for five years.

Why is this important? If you leave that new job so much as one day before you are fully vested (or even partially in the case of the graduated vesting period), you will lose every penny of your employer’s contribution to your retirement plan. Yet, knowing about this also has consequences. For instance, far too many new hires are finding out (often after the fact) that their employer doesn’t match any contribution in the first year don’t contribute to the plan either. It’s your money and you get to take it with you should the job not work out. So investing even before you are vested is still a good idea. Put 5% away no matter what.

 

Even of the employer match is not what you had in mind, you should contribute. Actually, you should be contributing up to twice what the employer contributes as a rule. If they contribute 3%, you should be putting away 6%. If they offer 6%, which is about the maximum  most employers offer, you should be putting away 12%.

Suppose they don’t have a plan? Don’t squander these wonder years just because your employer doesn’t offer a plan. Most smaller businesses want to but simply don’t feel as though they can afford to. This doesn’t make them bad employers or even not worth applying to; it means that you need to negotiate enough of a salary to allow you to find an Individual Retirement Account (or IRA) on your own.

Suppose you have a job and another one comes along? You can avoid the three biggest mistakes of this decision by doing the following: do not cash out your 401(k) plan (in many instances, if the balance is below a certain level, usually $5,000, they will make you take it with you), do not necessarily accept the rollover plan offered by the old 401(k) (the funds in these plans are often more expensive than the ones tucked inside your 401(k) – buy a Vanguard S&P 500 index fund until you decide what to do and even if you don’t decide, you will have a good fund for the long-term) and lastly, make the rollover in a timely fashion (in many cases, your new 401(k) will accept your previous plan’s balance – if not, roll it over as instructed in the previous scenario).

Go forth and find the job you always wanted (and your parents wanted you to have). But don’t forget that these are key years for earning solid footing for a future you may not even be able to imagine.

 

The Retirement Wonder Years

  By petillo | July 17, 2010 - 1:33 pm | 401k, Boomers, financial planning, personal finance, Repercussions: A Retirement Review, Retirement Planning Target 2025
Leave a comment

The older you get, the more apt you are to think about your retirement.  And according to some recent indicators, you are also thinking, perhaps even worrying about your children’s retirement.  The dilemma is not easy to answer and in some instances, will not truly unfold until many of are able to anything constructive to fix the problem.

The difference between your kids and you, and I am referring to “your kids” as the generation now known as Y and you, the group widely spread over Early and Late Boomerhood, is that the older you are, the better the chances that you had some help with your retirement along the way.  The Gen Y’ers are the first group to have had any help from a pension.

Pensions, as I have often suggested are the great economic equalizer.  While many people bemoan the state of public pensions (an argument that seems to be spiraling into a jealous rage with unsustainable and unrealistic as the buzzword), along with the private pension system, has allowed numerous people the opportunity to do what their defined contribution cohorts are unable to do: spend.

Without the worry of a future retirement benefit, the pension-ers have been able to control their personal financial considerations (homes, mortgages and debt) with less sleepless nights.  Unlike their 401(k) counterparts, not making deductions or worse borrowing from the plan to make ends meet or even worse, cashing these plans out has thrown the whole system into disarray.

Is it any wonder that the youngest workers among us worry to the point of inaction?  These are the retirement wonder years and they are being squandered.  The first DIY investors simply refuse or underfund their futures, a problem that will play itself out decades removed.

Not only to the rank among the highest group for unemployment but they are also the least likely to seek advice or help for their problem.  In part, because, if you buy into the most recent chatter coming from the world of retirement, they know they will never be able to.  So why bother?

Parents of these future realists worry that their retirement will be impacted, even infringed upon by their children’s lack of interest in the concept.  But their version of the future is to be expected when you consider the following:

Older workers are working longer and even are being encouraged to continue working, presenting not only employment issues but also the potential of losing those necessary “early investor” years.

Older workers had the advantage of pension at some point in their careers or were able to take advantage of the epic bull market from 1982 to 2000, which gave them just enough of a head start to make all the difference in the world in terms of retirement.  Without it, they would have been faced with two market crashes in ten years and a recovery that seemed robust only to seem to have never existed.

Older workers have become scared and this fear has translated into early investment conservatism.  Which is sad considering your children will probably come to you for advice.  Your new-found skittishness will warp any sense of risk they should be taking in large part, because of your fear of loss.

Older workers are focused now on how much they will need to offset health issues, debt, and the increasing cost of living longer than we may have calculated and have made this astronomical number the goal. Each market downturn leads to another step back in their eyes.

Does this mean that pensions should make a comeback?  It’s not likely. Most people have bought into the argument that pensions aren’t portable – they aren’t but numerous first time workers may find the job they find now may be one they will keep for decades which is long enough to make pensions viable – or people want control over their investments – a worthwhile conversation but not a very good one in light of how well people do with that control – or pensions don’t have the benefit of borrowing – which is the worst argument of all.

So what can we, as older workers do to fix this problem? Lie.  Tell them to take risks, the same risks you may have become adverse to taking.  Tell them to invest more than they think they will need, which might force you to fib somewhat about why this is a good thing. Hide your worry about your own future.  By this point you have made some unsavory decisions about your future and are still somewhat fearful.  Scaring them won’t help. And lastly, don’t pretend you know what you are doing when far too many is don’t have a clue.  In spite of all of the education available on the subject, we still make very human mistakes.

You can find some additional reading here.

The Top Reason We Can’t Understand Retirement

  By petillo | July 11, 2010 - 8:28 am | commentary, financial planning, personal finance, Repercussions: A Retirement Review, Retirement Planning Target 2025
Leave a comment

Boo! There we got that out of the way.

Are all financial writers actually horror writers who don’t know it?  Why does every conversation about retirement and investments and mutual funds and Wall Street, almost everything concerning money seemed tinged with fear, some unknown fright that is just around the corner, or ten years from now, or twenty?  Is scaring you to do the right thing for yourself any different than when your mom warned you about running with sticks?

We all point out the consequences, lay out the scenarios and for the most part try and shine some sort of light on the shadows.  But by our own admission, we can’t make you do anything.  So you do what people often do when faced with these sorts of choices: find someone who agrees with you or do nothing. So most of us try to scare you.

We try to scare you into understanding that not investing enough money now will mean you will have to work longer or retire poor.  We trot out statistics and white papers backing up our arguments.  We show you graphs and charts and numbers projected out into the future based on the evidence from the past.  We compound and cajole, cheer and discuss downsides and ups, fees and performance and mostly wonder why people don’t get it.

We all suggest that retirement is a whole life experience that when started young can offer untold yet throughly calculated wealth.  Yet most us wait and begin late and struggle with the game of catch-up.

We warn about the negative impacts of debt.  We talk taxes and suggest moves to offset or even bet against their future consequences.  We evaluate insurance costs.  We tell you to get healthy. We tell you to plan, plan, plan.

Yet the scariest of all the retirement conversations revolves around your future health. You can do everything right and this can fell you in the worst way, siphoning off hard earned cash faster than you can imagine.  So a lot of us have begun looking at protecting those assets against the frightening possibility that we will need long-term care.

Mary Mullin is a vice president and wealth management adviser for Merrill Lynch in Boston who does a column for the Daily News Tribune.  Her latest effort took a (scary) look at the options that could face you in retirement.  By suggesting that you have about a one in four chance of dodging the need for some medical care in retirement, she sets the stage for the ways to protect your assets.

The first options finds Ms. Mullins waffling over whether you might need this type of product.  You might but you might not,  Buy young but pay more over the course of the policy, assess your risk and tolerance and then weigh in the concerns of a surviving spouse.

As she explains variable annuities, she does successfully warn potential buyers that the best use for this type of product may be for those who are able to segregate a specific dollar amount just for the possibility that it might be needed.  The estimated costs of healthcare in retirement runs anywhere from $200,000 per person on up.  Most of us are not able to do that and fund a retirement.

By the time you reach retirement, you should have long since  done without a life insurance policy.  The protections that term life provide us as we build our lives will have outlived its usefulness and costs (and although your agent will try to offer a permanent form of this policy, the money is better spent on your retirement accounts) – at least that is the thinking.  Ms. Mullins does dangle the long-term care rider benefit, which in insurance parlance means higher premiums and as she aptly points out: “the policy can provide your heirs with a guaranteed death benefit” and then wisely suggests that this is “subject to the claims-paying ability of the insurance company.”  A nice way of forcing to ask yourself the scary question: “will my insurer still be in business when I need them?”

The last of the four possibilities she warns against is hoping your assets will be enough to cover the possibility. Guilt plays a role in this decision which scares you into considering your heirs and any plans, such as a charity for instance which could receive whatever you don’t use.  medical bills associated with long-term care will not be cheap, we have been warned, so do you try and do-it-yourself?

If you have been dutifully scared, we have done our job and you can opt for the DIY method of managing long-term costs.  Incredibly wealthy people will use financial advisers along the way.  The rules that apply to how costs are paid for change with the amount of assets you do or don’t have. For most of us Medicare will cover most of our costs with supplemental coverage coming from our assets.

She is right though: “Even the most prepared investors with a sizable nest egg can be impacted by these rising costs.”  Boo again!

To read the whole article, click here.