Monthly Archives: July 2011

Why the Debt Crisis Is Even Worse Than You Think


As the nation is gripped by what is happening in Washington regarding the debt-ceiling debate, we may be facing a bigger problem than we think. Ok, getting an agreement on the debt-ceiling will help cool the nerves of our creditors, but what about the debt burden we are placing on the future generation. The debt that keeps on piling will have to be repaid sometime in the future, and hopefully we will get past the current impasse, and congress can decide how to tackle the bigger issue, that is, the national debt, currently at $ 14.3 Trillion, which will come to haunt us some day. As we are about to celebrate a deal on the debt-ceiling crisis, lets stay focused on the big picture as explained in the following article by Peter Coy, Bloomberg Businessweek’s Economics editor.

If Washington is deadlocked now, how will it deal with the much bigger debt problems that lurk in the decades to come?

There is a comforting story about the debt ceiling that goes like this: Back in the 1990s, the U.S. was shrinking its national debt at a rapid pace. Serious people actually worried about dislocations from having too little government debt. If it hadn’t been for two wars, the tax cuts of 2001 and 2003, the housing meltdown, and the subsequent financial crisis and recession, the nation’s finances would be in fine condition today. And the only obstacle to getting there again, this narrative goes, is political dysfunction in Washington. If the Republicans and Democrats would just split their differences on spending and taxes and raise the debt ceiling, we could all get back to our real lives. Problem solved.

Except it’s not that way at all. For all our obsessing about it, the national debt is a singularly bad way of measuring the nation’s financial condition. It includes only a small portion of the nation’s total liabilities. And it’s focused on the past. An honest assessment of the country’s projected revenue and expenses over the next generation would show a reality different from the apocalyptic visions conjured by both Democrats and Republicans during the debt-ceiling debate. It would be much worse.

That’s why the posturing about whether and how Congress should increase the debt ceiling by Aug. 2 has been a hollow exercise. Failure to increase the borrowing limit would harm American prestige and the global financial system. But that’s nothing compared with the real threats to the U.S.’s long-term economic health, which will begin to strike with full force toward the end of this decade: Sharply rising per-capita health-care spending, coupled with the graying of the populace; a generation of workers turning into an outsize generation of beneficiaries. Hoover Institution Senior Fellow Michael J. Boskin, who was President George H.W. Bush’s chief economic adviser, says: “The word ‘unsustainable’ doesn’t convey the problem enough, in my opinion.”

Even the $4 trillion “grand bargain” on debt reduction hammered out by President Barack Obama and House Speaker John Boehner (R-Ohio) — a deal that collapsed nearly as quickly as it came together — would not have gotten the U.S. where it needs to be. A June analysis by the Congressional Budget Office concluded that keeping the U.S.’s ratio of debt to gross domestic product at current levels until the year 2085 (to avoid scaring off investors) would require spending cuts, tax hikes, or a combination of both equal to 8.3 percent of GDP each year for the next 75 years, vs. the most likely (i.e. “alternative”) scenario. That translates to $15 trillion over the next decade — or more than three times what Obama and Boehner were considering.

You start to see why, absent signs of a serious commitment to deficit reduction, the rating services are warning they may downgrade the federal government’s triple-A rating even if Congress does meet the Aug. 2 deadline. Fortunately, our debt hole is escapable. But digging out requires that leaders of both parties come to terms with just how deep it is.

The language we use is part of the problem. Every would-be budget balancer in Washington should read “On the General Relativity of Fiscal Language,” a brilliant 2006 paper by economists Laurence J. Kotlikoff of Boston University and Jerry Green of Harvard University (available online from the National Bureau of Economic Research). The authors write that accountants and economists have something to learn from Albert Einstein’s theory of relativity, about how measured quantities depend on one’s frame of reference. Terms such as “deficit” and “tax,” they write, “represent numbers in search of concepts that provide the illusion of meaning where none exists.”

The national debt itself is one such Einsteinian (that is, squishy) concept. The Treasury Dept.’s punctilious daily accounting of it — $14,342,841,083,049.67 as of July 25, of which just under $14.3 trillion is subject to the ceiling and about $10 trillion is held by the public — gives the impression that it’s as real and tangible as the Washington Monument. But what to include in that sum is ultimately a political choice. For instance, the national debt held by the public doesn’t include America’s obligation to make Social Security payments to future generations of the elderly. Why not?

Suppose that instead of paying Social Security payroll taxes, working people used that amount of money to buy bonds from the Social Security Administration, which they would redeem in their retirement years. In such an arrangement, the current and future cash flows would be identical, but because of a simple labeling change the reported debt held by the public would skyrocket. That example alone should generate a certain queasiness about the reliability of the numbers that are taken for granted by budget combatants on both sides of the aisle.

A more revealing calculation is the CBO’s measurement of what’s called the fiscal gap. That figure is conceptually cleaner than the national debt — and consequently more alarming. Boston University’s Kotlikoff has extended the agency’s analysis from 2085 out to the infinite horizon, which he says is the only method that’s invulnerable to the frame-of-reference problem. It’s an approach used by actuaries to make sure that a pension system doesn’t contain an instability that will manifest itself just past the last year studied. Years far in the future carry very little weight, converging toward zero, because they are discounted by the time value of money. Even so, Kotlikoff concluded that the fiscal gap — i.e., the net present value of all future expenses minus all future revenue — amounts to $211 trillion.

Yikes! Douglas J. Holtz-Eakin, a former director of the CBO from 2003 to 2005, says he doesn’t favor the infinite-horizon calculation because the result you get depends too heavily on arbitrary assumptions, such as exactly when health-care cost growth slows. But directionally, he says, Kotlikoff is “exactly right.”

Which means we’ve been heading the wrong way for years. Even in the late 1990s, when official Washington was jubilant because the national debt briefly shrank, fiscal-gap calculations showed that the government was quietly getting into deeper trouble. It was paying out generous benefits to the elderly while incurring big obligations to boomers, whose leading edge was then 15 years from retirement. Now the gray deluge is upon us. As Holtz-Eakin, now president of the American Action Forum, a self-described center-right policy institute, says: “We’re just in a world of hurt.”

The U.S. is in danger of reaching a generational tipping point at which older Americans have the clout to vote themselves benefits that sap the strength of the younger generation — benefits that can never be repeated. Kotlikoff argues that we may have reached that point already. He worries that the U.S. could become Argentina, which went from one of the world’s richest to lower-middle income in a century of chronic mismanagement.

Senior citizens are being told by their own lobbyists, repeatedly, that any attempt to rein in the cost of Social Security and Medicare is an unjust attack on earned benefits. “Stop the liberals from raiding the Social Security Trust Fund once and for all!” says a recent mailing from the National Retirement Security Task Force. Similar messages aimed at Democratic voters make the same charge against Republicans. No wonder Obama and Boehner were rebuffed by their own parties for putting entitlements on the table. In the end neither the House nor the Senate debt-ceiling proposals touched Social Security or Medicare. Not pretty.

In April this magazine ran a cover story featuring an alarmed rooster and the headline, “Don’t Play Chicken with the Debt Ceiling.” Washington clearly did not listen. The months of wrangling have dispirited the nation and concerned investors who lend money to the government. The cost of protecting against a U.S. sovereign default in the credit default swap market, while still low, is up 70 percent in the past year. It’s now nearly twice the cost of protecting against Swiss default.

A long, loud debate that produces a meaningful deal would be worth the pain, but a debate that produces next to nothing is worse for the nation than none at all. It simply calls investors’ attention to Washington gridlock. On July 14, Standard & Poor’s made that point when it placed U.S. sovereign debt on CreditWatch for possible downgrade, citing “rising risk of policy stalemate.” S&P said that “U.S. political debate is currently more focused on the need for medium-term fiscal consolidation than it has been for a decade. Based on this, we believe that an inability to reach an agreement now could indicate that an agreement will not be reached for several more years.”

Economists at JP Morgan Chase said on July 26 that continued deterioration of the U.S. government’s finances (not just a debt downgrade) might increase Treasury bond yields by 0.6 to 0.7 percentage point over the “medium term,” adding $100 billion a year to the government’s interest expenses. “That’s money being taken away from other goods and services,” said Terry Belton, the global head of fixed income strategy.

While Washington is absorbed in the composition of a budget deal — how much in spending cuts vs. how much in tax increases — that’s of secondary concern to macroeconomists. The more important figure to them is the size of the deal. The reason so many of the plans aim for $4 trillion in budget balancing is because that’s the amount that would (at least temporarily) stabilize the debt-to-GDP ratio and calm the bond market vigilantes. The downside, of course, is that if such a retrenchment is phased in too quickly it would drag down growth at a time of 9.2 percent unemployment.

Some economists, such as Holtz-Eakin, say any hit to growth would be small and worthwhile. “Weak-kneed Keynesians — I’m not one of those,” he says. Others would favor shifting the balancing until after 2013, when the economy presumably will have strengthened. “In our view, the U.S. does not need an aggressive near-term fiscal tightening,” Ian Shepherdson, chief U.S. economist of High Frequency Economics, wrote to clients on July 21. A third group, led by Princeton University economist and New York Times columnist Paul Krugman, says the economy needs more stimulus in the short run, not less. The logic: Getting the economy back to full speed would increase tax revenue and shrink the fiscal gap more effectively than draconian cuts. Of course, this fiscal debate is moot if the deal on the debt ceiling is just a stopgap that’s too small to have a real impact on the macroeconomy — a prospect that’s pretty depressing all by itself.

If America’s long-term budget problems were small, they could be fixed entirely by the Republicans’ preferred method, which is spending cuts, or entirely by the Democrats’ favored fix, tax increases. The challenge is not small, however. That’s why nearly every bipartisan group that’s looked at the problem — including the Bowles-Simpson and Domenici-Rivlin commissions — has concluded that some mix of the two will be required. The precise mixture is a political matter, but one would have to place an exceptionally high priority on the well-being of upper-income taxpayers to conclude that none of the adjustment burden should fall on them.

Republicans in Congress, not wanting to appear to defend the rich, have attempted to block any deal that includes higher taxes on the grounds that tax hikes are “job-killing.” But experience shows that in a period of slack demand like the present, tax hikes are no more job-killing than spending cuts, and probably less so. Cutting spending — say, by firing federal employees or canceling procurement — removes demand from the economy dollar-for-dollar. A dollar tax hike, on the other hand, especially one aimed at upper incomes, cuts demand by less than a dollar. Those who pay the tax cover part of it from their savings and only part by reducing their spending. If lawmakers insist on using the phrase “job-killing,” Roberton Williams, a senior fellow at the Brookings Institution-Urban Institute Tax Policy Center, wrote in a recent blog post, “they should apply it equally to both tax increases and spending cuts.”

There is one respect in which the national debt — all $14,342,841,083,049.67 of it — is a good measure of the problems facing the U.S. It’s real money that’s owed to real creditors. (Actually, some is intra-governmental, so only about $10 trillion is owed to the public.) “The numbers are hard enough. The creditors know how much they lent and how much they expect to get back,” says former Congressman Bill Frenzel, the ranking Republican on the House Budget Committee in the 1980s.

In contrast, the fiscal gap captures commitments to future spending and revenue — and while that makes the numbers more daunting, it also means that it’s in our power to change them. They will have to be changed sometime, because current trends are unsustainable. The sooner the adjustments begin, the more gradual they can be. It’s easier to slow down from 70 mph by stepping on the brakes than by slamming into a wall.

The good news is that this speeding vehicle does have brakes — if Washington would only use them. Eliminating deductions would broaden the base of income that’s subject to taxation and increase revenue. On the spending side, it’s crucial to change the incentives that lead to overconsumption and inefficiency in health care. At the same time, cuts in benefit formulas for Medicare and Social Security are painful, but necessary. And they should apply at least in part to current beneficiaries. Given how hard-pressed young workers are, it’s unfair to put all the adjustment on them while completely insulating today’s elderly.

Sure, it’s hard to imagine a real deal now, as Washington boils over with anger and partisan differences harden. But from this bitter experience may come a realization that the only way out is cooperation and compromise in the public interest. Meanwhile, that rooster we put on our cover in April? He’s having a heart attack. Let’s not do this again soon.

How Debt Ceiling Crisis Hits Retirement Plans


With the ongoing talks on debt, there is a lot of tension in the country. Although lawmakers are reassuring the public that everything is going to be ok, people are still wondering what will happen if the government defaults on its debt. This basically shows how indebted we are as country, and how long it will take before the credit rating agencies downgrade our rating. Even though  the chances of defaulting on the debt obligations are very slim, this should be a wake up call that we seriously have to consider our way of spending. But right now, what many people are looking at is whether the debt crisis will have an impact on their retirement plan as illustrated in the following article by Seth Fiegerman.

The longer the debt ceiling debate drags on in Washington, the more worried many Americans are becoming about whether and how the debt crisis could affect their long-term investments. But according to several financial planners, the biggest thing casual investors have to fear at this point is fear itself.

“I think this is having more of an impact on people’s emotions than it is having from a pure economic perspective,” says Mark Singer, a certified financial planner and author of The Changing Landscape of Retirement. “There have been a string of really bad headlines, not just about the debt ceiling crisis, but also the euro, the NFL lockout and other events that make people think everything looks bleak.”

Singer says he’s found this to be particularly true of those who are five to seven years away from retirement and worried about whether they need to overhaul their investment formula to weather the tough economic times. But as Singer and others contend, it’s unlikely the financial world will be turned upside-down next week.

Most analysts expect lawmakers will approve one of the debt ceiling bills before the Aug. 2 deadline when the U.S. would begin defaulting on its debt payments, and even if legislators miss that date, it’s likely the U.S. Treasury would work to juggle around funds to temporarily continue making payments until a bill is approved. Indeed, the greater concern right now is not default so much as the U.S. having its credit rating downgraded unless lawmakers approve a strong plan to tackle debt and ensure the country’s long-term fiscal stability.

If the country’s credit rating were downgraded, Rose Greene, a certified financial planner with Rose Greene Financial Services, argues municipal and treasury bonds could be affected, and potentially corporate bonds as well, but the impact on investors would likely not be long-lasting.

“Even if this happens, it would be a very short-term event, which is why almost all professionals are counseling to hang in there and not act precipitously,” Green says. “When we look at the downgrading of other country’s debt, like Japan or Spain, they only witnessed a negligible change in their government’s 10-year yields, not some kind of end of the world hit.”

Needless to say, even short-term turbulence in the bond and stock market may scare those planning for retirement, but each of the financial planners emphasizes the need to stay calm and stick to traditional long-term investment strategies.

“Everyone has their own risk tolerance, and everyone’s portfolio is different, but as long as you have a good, balanced portfolio with no really volatile stocks and a little built-in hedge in there, you should be fine,” says Angela Thompson, a certified financial planner with Coast Financial Planning. “And if you’re retiring in the near future, your portfolio should already be structured with a conservative bent to it, so you wouldn’t have high-risk investments.”

For those who are particularly worried about the pending debt crisis, there are some basic tweaks you can make to your portfolio to better insulate yourself.

Singer, the author and financial planner, suggests allocating more of your funds to alternative investments such as emerging market funds, which are not as deeply tied to the U.S. stock market and may therefore fare better. On the other hand, Vanguard Group spokesman John Woerth says these investors might also be shifting some of their money out of traditional stocks and bonds and into stable value funds, which are not as subject to the ups and downs of the market during tough times.

How much you should shift around your money ultimately depends on you.

“If you are overly concerned, we would say sell down to the sleeping point, meaning that if you want to reduce your exposure to the stock and bonds markets, not dramatically but enough to help you sleep at night, you should do so,” Woerth says.

Of course, there are likely some reading this who are eager to cash out some of their investments to play it safe, but Greene cautions investors against going overboard with this strategy.

“If they are really sick to their stomach with anxiety, they can go to cash, but the problem is they will probably never come back [to the market],” she says. “And for some near-retirees, the danger there is outliving their money.”

How to Retire Without Government Programs


I have always insisted that the best retirement plan is where you are in the driving seat. This will not only give you a better control of your retirement, but you will also be in a better position to plan your future life. With the current financial environment having gone ballistic since end of 2007, more and more Americans are depending on the Social Security as a major source of income for retirement. Considering the current debt levels, this is huge gamble with your life. Thus, it is always advisable for someone to have a plan of their own, such that if anything was to happen to you Social Security income, you will always have a back-up plan that you can depend on in times of financial difficulty. Joe Mont illustrates in the following article what it will entail for you not to depend on government support during retirement.

In the unlikely event the government slashed all support for retirees, could you survive without Social Security or Medicare? How far can “self-reliance” take you?

The most conservative of politicians have advocated that Americans could, and should, develop the personal responsibility to prepare for their future needs without interference or aid from the government. That conversation has progressed with renewed vigor amid talk of the ballooning national debt and deficit.

Getting a grip on what you would need to save in a post-government retirement world is a multi-step process. You would have to determine what you need to live on and what share would normally be subsidized by Social Security and Medicare (for the sake of limiting complexity, we’ll keep our calculations to just those two federal programs). Then add back money you would otherwise have had to pay into the system that can now be invested.

The average earner in the U.S. is paid about $44,000 a year (the mean for all occupations, according to the U.S. Bureau of Labor Statistics). A single worker would pay about $7,000 in federal income tax. On top of that, there is Social Security and Medicare withholding (which rises back to 6.2% of their taxable income once a 2% “tax holiday” expires at the end of the year. In the interest of simplicity, we’ll set aside the variable of state taxes.

In a broad stroke, that leaves $34,000 to work with as disposable income for our hypothetical “average” person. Replacing 70% of that take-home pay (a frugal estimate) leaves a retirement target of $24,000 a year. A more realistic total would add in money lost from Social Security, which averages nationally to $1,179.50 a month, just over $14,000 a year.

That leaves the total target that rests entirely on a retiree’s shoulders at $38,000. Planning for a 25-year retirement means saving upward of $950,000 — and that doesn’t even include inflation.

An alternative strategy for replacing the lost share of Social Security, and to have that money preserved in a lower-risk stream, is to establish an annuity. A typical retirement-aged person could arrange to secure that $14,000 a year in income by investing roughly $250,000 in a typical annuity product (which could cost more if the annuity offers inflation protection)
No government also means saying goodbye to Medicare.

In reviewing a proposal by U.S. Rep. Paul Ryan, R-Wis., to overhaul Medicare by 2022, the nonpartisan Congressional Budget Office determined that the average American would get a “voucher” for $8,000 under his plan and be on the hook for an additional $6,150 in out-of-pocket expenses.

Lacking a “voucher” would mean seniors will have to pay roughly $14,770 out of their own savings. Added to our hypothetical retirement target, the total needed to live modestly for 25 years after working is more than $1.3 million. The cost could be even greater depending on the rate of medical inflation.

For a 30-year-old planning to retire at age 70, that works out to having to save more than $490 a month (assuming an annual yield of 6.5%) into an IRA or 401(k).

There is consolation that the percentage of your pay being withheld for Social Security and Medicare could be rolled directly into your retirement plan. Less likely is that your employers’ equal share of that tax will find its way back into your paycheck.

Every little bit helps. An analysis by Principal Financial Group(PFG_) found that a 30-year-old earning $50,000 a year who defers the extra 2% of the temporary FICA tax break into his or her 401(k) account this year would boost the weekly contribution by a little more than $19. That amount, however, could potentially grow to more than $16,600 by retirement at age 66.

What complicates the matter is that most Americans actually get more back from the system than they pay in.

Research by the Urban Institute — a nonprofit, nonpartisan policy research and educational organization — found that a single male earning $43,100 in 2010 dollars and turning 65 in 2030 would get a total of $569,000 in Social Security and Medicare benefits for the $476,000 in taxes they paid in.

The difference is even greater for a comparable woman: $627,000 in benefits compared with $476,000 in taxes.

Beyond a strong commitment to save and invest (the latter depending on the good graces and returns of the marketplace), trimming expenses would be a necessary step to make a post-entitlement retirement work.

To successfully retire on as little as possible, owning a house before retiring is crucial, even if that means scrimping and saving to pay off the mortgage in an escalated 15-year term. Some might suggest that owning a house is being trapped with a “money pit.” But rent is subject to inflation and would be a recurring cost.

Cutting costs might lead some to the option of going off the grid or back to nature — farming, fishing and hunting to provide food. One could also pull up stakes and move overseas to a country with a lower cost of living. There is also the stressful but perhaps necessary option of turning to your family for support and shelter.

How willing would Americans be to making a go of retirement on their own, and how capable?

There would certainly be a shock to the system for the many that have grown dependent on Social Security. According to the Social Security Administration, roughly a third of those over the age of 65 rely on the monthly benefit for 90% or more of their income; roughly 22% rely on it as their only source of retirement income.

The most recent Wells Fargo(WFC_)/Gallup Investor and Retirement Optimism Index found that investor sentiment has turned negative in recent months, putting a fright into pre-retirees, some of whom may be preparing themselves to say goodbye to government entitlements.

“The decline of investor optimism among average Americans is concerning and comes at a time when investors are worried about high energy prices and the federal budget deficit,” says David Carroll, head of Wells Fargo Wealth for brokerage and retirement services. “It is striking to see that retirees in the U.S. have maintained consistent optimism levels over the past quarter, with the major slide in sentiment concentrated among working Americans who continue to face the pressure of supporting day-to-day expenses in the midst of trying to plan for their future.”

The May poll found significant differences between how today’s retired Americans are funding their retirements and how those yet to retire expect to do so.

Current retirees are more likely to depend on employer-sponsored pensions and Social Security, while future retirees expect to rely on their own savings.

Nearly two in three (65%) of the nonretired say the 401(k) will be a major source of retirement funding for them, compared with 37% of the retired. Only 30% of nonretirees expect Social Security to be a major retirement funding source, compared with 52% of retirees.

Only one in three nonretired have a “great deal of confidence” or “quite a lot of confidence” that they’ll be able to fund their health care needs in retirement beyond what Medicare offers.

5 Retirement Mistakes that Will Haunt You


There are mistakes that we make during retirement that even though at that time they may seem small, can have devastating effect on your retirement. Millions of people don’t give enough attention to their retirement, and only come to realize the gravity of the situation once it’s too late. Even in these times of financial difficulty, many are going about making grave mistakes that will come to haunt them later on. Ok, I understand that you have issues that have to be taken care of, but at what cost- your future. As Joe Mont explains in the following article, there are 5 retirement mistakes that will haunt you each time you make them.

“You’ll regret it. Maybe not today, maybe not tomorrow, but soon and for the rest of your life.”

Those words, spoken on a tarmac at the finale of the classic film Casablanca, could be stretched from the intended affairs of the heart to how we plan for retirement.

There are financial decisions we make that seem a good idea at the time, retirement moves we make half-heartedly and needed pans we sweep under the carpet. When it comes to ensuring a lifetime of retirement income, bad decisions may not hurt immediately, but once the pain arrives it can last for decades.

Here are five retirement mistakes that will haunt you, and ways to avoid the haunting entirely:

1. Guesswork, not legwork
How much will you need to retire?

That straightforward question should be a starting point for people of all ages, at all stages of planning. A great number of people, however, do no more than guess at what they should save.

According to the Transamerica Center for Retirement Studies, a nonprofit organization funded by Transamerica Life Insurance, half of workers continue to guess at the amount of money they need to save to feel financially secure when they retire and a large number (44%) of American workers do not have a strategy to reach their retirement goals.

Of those who do have a strategy, only half have factored in health care costs and one-fifth have factored in long-term care insurance, making their estimates inadequate. A reduction or loss of Social Security benefits ranks third in greatest retirement fears.

As part of its research, Allianz Life asked a segment of baby boomers how much money they thought they would need to live on.

“The average number they came up with was $60,000,” says Katie Libbe, vice president of Consumer Insights for Allianz Life(AZ_). “Then we asked them to try to calculate what that means in terms of a portfolio that’s going to deliver that for as long as they think they are going to be in retirement. They were at a loss in terms of what they would need. They said $500,000 when, if you just apply a 4% withdrawal to that portfolio, they would really need $1.5 million. They don’t know how to do even this basic calculation. You can teach them about some of these individual tactical mistakes, but they can be off even in the strategic sense of how much money needs to be socked away.”

Not only is there the danger of not ensuring the longevity of your savings; there is the temptation of being unreasonably aggressive with your portfolio to make up for maybe not saving as much as they should have.

Health care costs also need to be considered. According to research by Allianz Life, the average couple retiring at age 65 will spend approximately $285,000 in health care costs in retirement. As life expectancies continue to increase, baby boomers need to have a plan for covering some portion of managed care for an elderly parent as well as for themselves.

Health care costs, Libbe says, could “eat into a good chunk of their nondiscretionary dollars, which means fewer dollars available for all the fun things they want to do in retirement.”

2. ‘I’ll just keep working’
Most people assume they will retire at a certain age, and many look to salvage inadequate savings by working later into life.

But according to Limra, a global association of insurance and financial services companies, two in five people retire earlier than planned due to a number of factors, including layoffs or illness. For those assuming they will work part-time in retirement, many can’t due to circumstances beyond their control.

“We did some research recently where we found out that a lot more baby boomers are planning to work longer,” Libbe says. “That’s basically their backup plan for not having saved enough for retirement. The Limra statistic about two in five people retiring earlier than they expected just shows you can’t count on working longer being your plan.”

Making the prospect of retiring ahead of schedule all the more precarious is that 70% of respondents to the Transamerica Center survey agreed they could work until age 65 and still not have enough money saved to meet their retirement needs.

“Planning not to retire is simply not a viable retirement strategy,” says Catherine Collinson, president of the center. “Planning to work past age 65 is an important opportunity to continue earning income, save more and help to alleviate a retirement savings shortfall; however, it’s important that workers be proactive in setting a retirement savings goal, saving and investing for retirement, and having a backup plan if they are forced to retire sooner than expected.”

3. Taking a loan against your 401(k)
Close to one in 10 workers with qualified retirement plans from their employees took a loan out in the past 12 months, according to the Transamerica Center.

The center’s 12th Annual Transamerica Retirement Survey, conducted among 4,080 American workers, found that the majority of those taking loans (42%) did so to pay off debt; 14% did so to buy a primary residence. Only 6% did so in response to medical bills and even fewer (3%) found it necessary for tuition expenses.

Though commonly viewed as “borrowing from yourself,” those who fail to repay can be saddled with taxes and penalties. Borrowing against a retirement plan also reduces the ability of those funds to garner interest, a loss that will compound in perpetuity.

4. Not taking full advantage of benefits
Leaving money on the table will hurt you later in life.

According to the independent investment adviser Financial Engines, the recession hurt participant savings rates, with 39% of participants not saving enough to get their full employer match, up from 33% in 2008. Of participants under age 40, 47% failed to save enough to get the full employer match.

In tight economic times, it is understandable that households need to cut costs in many ways. But every dollar not added to your portfolio will miss out on the matching company funds and compound interest both will accrue for years to come.

5. Not having a tax strategy
Many fail to consider the tax impact when withdrawing from their nest egg, Libbe says.

When in retirement, the objective changes from accumulation to converting investments into “tax-smart” income. A tax-efficient withdrawal plan can make a significant difference in how long your portfolio lasts. Retirees need to optimize taxable and tax-advantaged accounts to minimize tax-bracket impact and other income such as Social Security.

“You can actually make your retirement assets last longer if you know how to take distributions from them in retirement so that you are efficient with your taxes,” Libbe says. “It is not easy for the average consumer to do, but there are financial advisers and software programs who can do exactly that. They can make sure you don’t bump up into a new tax bracket and you are paying attention to required minimum distributions. It can be as simple or complex as you want to make it.”

Avoiding the pitfalls
The Transamerica Center for Retirement Studies recommends seven steps to help avoid these and other retirement mistakes that can have a life-long impact:

  • Get the conversation going with friends and family. Just 9% of workers frequently discuss saving, investing and planning for retirement with family and friends.
  • Formulate a plan and write it down. Only 10% of workers have written out their retirement strategy.
  • Get educated. The majority of workers (71%) say they do not know as much as they should about retirement investing.
  • Consider retirement benefits as part of your total compensation. Fifty-three percent of workers would select a job offer with a higher than expected salary, but poor retirement benefits over one with excellent retirement benefits and minimum salary requirements.
  • If your employer offers a plan, participate. And if your employer doesn’t offer you a plan, ask for one. Just 71% of workers report being offered an employee-funded plan at work, while 92% say a plan is an important benefit. However, almost one-quarter of workers (22%) who are offered a plan at work do not participate.
  • Make catch-up contributions. Just over half of workers (56 percent) are aware that people age 50 and older may be allowed to make catch-up contributions to their retirement plan.
  • Have a backup plan in the event you are unable to work before your planned retirement. Only 19% of workers have a backup plan.

8 Retirement Investing Essentials


When it comes to retirement, it’s not only the amount of savings that you have accumulated over the years that will affect you retirement plan. A lot of retirees are often more concerned with the preservation of their capital than growth or return of their investment, and thus will invest most of their funds in fixed income securities. But what many ignore is that, even during retirement you’ll want your retirement fund to achieve certain goals that you will have put in place, and the kind of investments you make during this time will determine whether you achieve your goals or not.Like any investment that you make, there are certain essentials  that must be adhered to so as to increase the likelihood of your investment achieving your retirement objectives. Philip Moeller explains in the following article  8 essential areas that are important when undertaking investments during retirement.

Save, save, and save some more is one of the mantras of retirement preparation. These days, it’s been joined by “work, work, and work some more.” People have responded to investment, employment, and housing shocks by deciding to continue working. Some surveys show people are typically adding a full five years onto their employment plans.

This would be a huge financial and lifestyle change for older Americans. If it happens. For years, retirement surveys have found a large gap between when people say they plan to retire, and when they actually mothball their office and factory wardrobes. Consistently, actual retirements have occurred nearer age 62, the earliest date at which people can elect to begin receiving Social Security benefits. This has been several years earlier, on average, than the dates preretirees say they plan to stop working.

So, first off, let’s wait and see what actual retirement patterns look like once the economy has settled into what appears to be a sustained period of disappointingly low growth. Before this can happen, of course, we need to get past the Congressional impasse on the nation’s debt ceiling and deficit crises, hopefully while avoiding a repeat visit to Recessionland.

But as you consider your own retirement prospects, here’s a checklist of investment and income issues you should review:

Work-retirement tradeoff.

For each additional year you work, you should be able to generate an additional two to three years of retirement coverage. There is, of course, the extra year of work itself. Presumably, you will be spending none of your retirement nest egg during that year, and hopefully will be adding to your savings. Let’s say this adds 6 percent to your nest egg (the 4 percent you didn’t spend and 2 percent in new savings). You’ll also be getting an extra year of earnings on your retirement funds. That should be worth another 6 percent. Lastly, you can extend the age at which you begin collecting Social Security. Social Security benefits rise by roughly 8 percent a year for each year you delay taking benefits between ages 62 and 70. That’s 12 percent more in your nest egg and 8 percent tacked onto your Social Security income for each year you continue working. Oh, the added income may even raise your Social Security benefit if you earn enough to raise your lifetime wage base.

Longevity and retirement.

Once you turn 65, current longevity statistics say you’ll live, on average, another 18 (men) to 20 (women) years. Your retirement savings will need to stretch over a shorter period should you keep working until age 70.

International investments.

Traditionally, diversification of retirement investment portfolios has been about asset classes. Making sure there was an appropriate balance between stocks and bonds, and paying attention to the risk and return characteristics within each type of asset. Increasingly, your investment mix needs to become focused on foreign holdings. That’s where the world’s economic growth will be found, and it’s where a good percentage of your retirement funds should be invested as well.

The U.S. dollar.

Retirement investments are affected by the dollar in several ways. If the United States is to boost its share of global trade, the dollar’s exchange rate will have to decline, at least in the short run. This will add to U.S. prices for imports, but stimulate exports and domestic economic growth. Much of our national debt is also held overseas in dollar-denominated treasury securities. Interest rates on those securities will rise if foreign investors don’t see meaningful progress in attacking U.S. deficits. This, in turn, will drive up all interest rates. Finally, the dollar remains the world’s primary medium for foreign exchange. Higher oil prices have been caused, in part, by a weakening of the dollar.


Expect a lot of volatility in your investments’ performance. This argues for setting aside more reserve funds, so you aren’t forced to sell investments at a bad time. Flexibility is essential here, so don’t lock too much of your funds in holdings that cannot be changed.

Glide path.

As we age, our investment holdings should gradually become less risky, and provide better protection against market declines. The changing mix of stocks and bonds is known as a glide path. Make sure you know what the glide path is for your holdings, and do the homework needed to make sure it’s an appropriate path for you. Lots of people don’t have a financial adviser, and may not be comfortable actively managing their investments. If this describes you, consider investing in target-date mutual funds. They are geared to people of different ages and automatically shift investment holdings to achieve specific glide paths explained in the funds’ offering prospectuses.

Higher medical expenses.

The biggest failing of most retirement investment plans is underestimating out-of-pocket medical expenses. This will become even more of a problem if Medicare’s financial challenges are addressed by shifting more program costs to consumers. When you calculate how much you will spend in retirement, and thus how much money your retirement savings will have to provide you each year, don’t ignore medical expenses.

Income spigots.

Investment assets don’t pay the bills. You will need to convert those assets into regular monthly income. IRAs and 401(k)s require minimum distributions once you turn 70 1/2. There are tax considerations that can govern which investments you sell and when. Your nest egg conversion, in short, will require a lot of planning. It’s best to build your plan several years before you actually retire.

Retirement: It’s Not All a Crapshoot


The word retirement is often viewed as something that due to the fact that it will happen much later in your life, has certain aspects that a lot of people view with skepticism. Take the example of investment, many investors lost almost half the value of their portfolio during the market downfall, and experts are of the opinion that it will take probably years for some stocks to ever record the kind of prices last witnessed in 2007. Many retirees were among the big losers, and it is quite disheartening for someone to work so hard for more than 30 years so as to live a decent retirement, only for you to watch your investment lose half it value in a few months. The reality of the matter is that there are certain aspects of your retirement you won’t be able to control, but there are other more important areas that have a direct impact on your retirement portfolio which you can control. Glenn Ruffenach explains in the following article areas of your retirement plan that are directly under your control.

Want to hear some good news about retirement? You have more control over your future than you think.

So much about retirement planning today is marked by doubt: We don’t know whether our savings will see us through old age. We don’t know what might happen to Social Security and Medicare. We don’t know whether we’ll be able to continue to work for as long as we wish to (or need to). And so we fret — a lot. In its most recent “retirement confidence” survey, the Washington, D.C.-based Employee Benefit Research Institute found that 27 percent of workers are “not at all confident” about having sufficient funds to live comfortably in later life — the highest level of gloom in the study’s 21-year history.

At their worst, such anxieties can leave people paralyzed. Clark Randall, who heads Financial Enlightenment, a planning firm in Dallas, says he often sees this with his clients: “It’s easy to focus on threats they can’t control.” And that’s the point. If you’re caught up in issues that are out of your hands — interest rates, changes in government programs, the markets — you’re more likely to overlook those parts of retirement planning where you do have control.

So, “pop quiz”: How many of the following steps — for which you’re the boss — have you taken?

Setting a budget.

It’s among the most important steps in planning for later life, but less than half of workers have put pencil to paper, according to the Employee Benefit Research Institute. Why are budgets so critical? Projecting expenses and income can help you pin down your “number,” the amount of money you need to save for retirement. You could be pleasantly surprised. “Many people who have been diligent about building a nest egg find they spend less on themselves than they realize,” says Brent R. Brodeski, a managing director at Savant Capital Management in Rockford, Ill. Any number of work sheets can simplify the process. (See the Department of Labor’s “Taking the Mystery out of Retirement Planning” or T. Rowe Price’s “Retirement Readiness Guide.”)

Timing Social Security.

If you’re married, the timing of exactly when each spouse first files for benefits can translate into thousands of dollars gained — or lost — in retirement. Rather than simply jumping in the pool at age 62 (the earliest point at which you can grab a check) or trying to sort through a dozen different scenarios, take advantage of a service that can run the numbers for you. One good bet:

Reducing debt.

Between 2000 and 2008, the average debt for households headed by a person age 55-plus almost doubled to $66,000, according to Strategic Business Insights, a research firm in Menlo Park, Calif. Again, here’s where would-be retirees can take the reins. Marsha and Chris Blair, 63 and 65, both educators, were saddled with a monthly mortgage of $5,300 on their house just south of San Francisco. Knowing they wanted to travel in retirement, they recently sold it (admittedly, not an easy feat in some markets these days) and moved to a $142,500 home in Yountville, Calif. Their new monthly payment for the land lease, insurance, taxes and cable: under $800. “You have no idea how freeing that is,” Marsha says. “The first thing my husband says every time we enter the house is, ‘Home, sweet unmortgaged home.'”

Creating a pension.

If nothing else, the recent financial meltdown underscores the need for investments that throw off income, regardless of what’s happening in the markets. If you’re fortunate enough to have an employer pension, great. If not, there’s no excuse for failing to buy and hold products — annuities, dividend-paying stocks, bond funds — that generate cash.

Managing taxes.

No, you can’t control tax rates, but you can practice “tax diversification,” says Randall, of Financial Enlightenment. Ask yourself: Will virtually all your money in retirement come from your 401(k) or IRA? If so, those withdrawals will be taxed as ordinary income, and you could be paying as much as 35 percent to Uncle Sam. But if you divide your dollars among more buckets — Roth IRAs, municipal bonds, even real estate — you have the flexibility to pull funds from different sources at different times. “You don’t know what your effective tax rate will be in retirement,” Randall says. “That’s why you should diversify.”

Planning for long-term care.

Yes, this is a tough one. But it’s also an area where failing to act could prove devastating. Among your options: self-insuring, if you can set aside sufficient funds. Long-term-care insurance, which is complicated and expensive, is another possibility, as are so-called hybrid policies that provide some long-term-care benefits and some life insurance (but perhaps not enough of either). Finally, there’s the Community Living Assistance Services and Support Act, the federal government’s new insurance program for long-term care (the details are still being ironed out). While it could be a case of picking your poison, just choosing means you’ve taken control.

I know: The invariable response is, “But I don’t have time.” Please. It never fails to amaze me how people will spend weeks planning a visit to Disneyland with the grandchildren, but won’t take a few hours to assemble a retirement budget that could easily last 30 years. Believe me: You can find time. Take control of what you can control — and take the anxiety out of your retirement planning.

4 Retirement Reality Checks


A lot of retired Americans are still in denial about their retirement, going by the lifestyle they are living. Major changes have occurred to the economy because of the recession, and this means that we have to make changes in all areas of our financial lifestyle, including retirement planning. Many retirees have stuck with retirement plans that they came up with 5 years ago, and ignoring the reality will only lead to your downfall. Since these economic changes will definitely have a financial impact on their retirement income and return on their investment, there are four retirement reality checks according to a financial article by that need a reality check.

The rules of the retirement game have changed, courtesy of the worst recession since the Great Depression. Confronted with dwindling nest eggs, housing market meltdowns and general economic mayhem, soon-to-be retirees are being forced to give their retirement plans a face-lift – not to mention a tummy tuck, collagen injections and a little lipo. (Learn more in our Retirement Planning Tutorial.)

However, some blissfully oblivious seniors are sticking their heads in the sand and pretending nothing has changed. Unfortunately, covering your ears and loudly singing “I can’t hear you!” every time someone utters the word “recession” will not make the problem disappear.

If you hope to enjoy a comfortable retirement, it’s time to get real. Here are four cold, hard truths every soon-to-be retiree must face in this age of economic turmoil.

  1. Your “castle” isn’t worth much.
    Your home is your castle – but these days, that castle’s worth  is probably closer to that of a cozy cottage or even a shabby shanty. It’s no secret that home values have plummeted, and sadly, real estate experts predict it could take 10 years or longer for the housing market to bounce back to where it was in 2007.What does that mean for you? It means you probably shouldn’t hang your hat on your home equity as a means to fund your retirement. It’s probably time to break out the pencil and calculator and figure out just how much equity you’ll have in your home by the time your reach retirement age. You may discover it won’t be enough to pay for a case of Ramen noodles, let alone 20 years worth of retirement expenses. Home may be the heart is, but it’s not where the money is.
  2. Your retirement plan needs an overhaul.
    As the U.S. economy took a nose-dive, it took retirement portfolios down with it. In the past couple of years, you’ve probably watched your nest egg shrink, and you’re not alone. According to a 2009 AARP survey of people age 45 and older, 79% of those with a 401(k), IRA, mutual fund, or individual stocks and bonds said they have lost money.Shockingly, even in this environment, many seniors still have not changed their retirement plans. McKinsey & Co., a global management consulting firm, recently developed a retirement readiness index to determine how financially prepared households are for retirement. A retirement readiness index of 100 means a household can maintain its current standard of living after retirement. Based on the firm’s research, the average U.S. household currently has a retirement readiness index of only 68. These households will need to cut back on basic living expenses dramatically after retirement.

    Now is the time to take stock of your nest egg (or nest crumb) and decide if you’re truly ready for retirement. Sit down with your financial advisor and come up with a new game plan. You may have to make some tough decisions … which leads us to our next reality.

  3. Don’t quit your day job.
    The thought of postponing retirement may send shivers down your spine. Unfortunately, this may be the only logical solution if you hope to maintain your current standard of living after retirement.Here’s a fairly easy way to determine if you are ready to retire: add up all the Social Security and pensions you will receive after retirement. Next, add up all of your retirement accounts and other financial assets and assume that only 4% of that amount will be available to you each year for living expenses. Does the grand total match what you spend each year right now? If not, you should probably put retirement on hold.

    So, exactly how long will you need to keep working? Forever! No, not really. Some experts say that if you’ve been working between 20 and 30 years, it would only take another year and nine months on the job to recoup your market losses.

  4. Debt doesn’t disappear after retirement.
    Yet another lovely side effect of the recession? Debt levels among seniors are skyrocketing. Faced with fixed incomes, diminished retirement savings and devalued homes, many retirees are relying on their credit cards to pay for living expenses.Average credit card debt among low and middle-income Americans age 65 and older soared to $10,235 this year, according to a study by public policy group Demos. That’s up a whopping 26% from 2005. Still, more than 60% of non-retirees say they expect to be free of non-mortgage debt when they retire, according to a Securian Financial survey. However, more than half of the retirees in the same survey say they did carry non-mortgage debts into retirement.

In other words, many soon-to-be retirees are in denial. It ain’t just a river in Egypt, you know. If you have dreams of a happy, financially secure retirement, it’s time to face facts and give your retirement plan a makeover.

A new AARP Social Security Benefits Calculator launched yesterday arrived at just the right moment.

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