Monthly Archives: March 2012

7 retirement-planning myths to dispel


We all know by now that retirement planning requires careful and calculated steps that will ensure that you achieve the desired target. But there are some of us that start planning for their retirement with a few misconceptions about retirement in mind, for example, Social Security or the 4% withdrawal rule. While there may be some truth in some of these myths, depending on them entirely when coming up with a retirement plan can lead to a financial disaster when you finally retire. The following article by William J Lynott uncovers some of the myths about retirement, and goes on to give the views of what financial advisors recommend the best course of action with each myth.

Planning for retirement is tough enough these days; living in retirement can be even tougher. That’s why it’s important to avoid being misled by the growing number of myths surrounding the difficult job of preparing for and living in a financially comfortable retirement.

Bankrate spoke to several financial professionals to get their perspective on those old chestnuts about retirement.

$1 million will be enough

It sounds like a lot, but a million bucks is not what it used to be.

“With people living longer and the continuing rise in the cost of living, a million dollars no longer guarantees a five-star retirement,” says ReKeithen D. Miller, a CFP with Palisades Hudson Financial Group in Atlanta. “Most people will need to have enough money to support them for 25 to 30 years in retirement. Depending on the lifestyle you want to maintain and where you live, $1 million may not go that far.”

Of course, for many people, a $1 million retirement nest egg may be well out of reach.

“First of all, you have to start with the realization that all you have is all you have,” says Mickey Cargile, CFP with Cargile Investments in Midland, Texas. “Less than 5 percent of our population has $1 million. One has to work with what they have.”

You’ll spend less money after you retire

In the retirement-planning phase, many people expect to reduce their spending once they quit their jobs for good.

“In my experience, this is not always the case,” says Nicole Rutledge, a CFP with Resource Consulting Group in Orlando, Fla. “Typically we see clients spend more money when they initially retire. This is the time in their lives when they are still healthy and full of energy. They travel more, focus resources on hobbies and other interests and do many of those things they have been putting off during their working years. We call this the ‘go-go years.'”

Rutledge says people usually decrease spending in the later retirement years. “That’s when health issues, energy and just the general desire to travel the world and focus on hobbies just aren’t what they used to be.”

Social Security will take care of you

During their careers, some people don’t save much for retirement because they expect Social Security to carry them through retirement.

“When Social Security was introduced in the 1930s, it was never meant to be the primary source of income for retirees,” says Miller. “It should be viewed as a safety net, not the foundation of your retirement plan. Currently, the average monthly Social Security benefit for a retired worker is approximately $1,200. That yearly income would put a single person just over the federal poverty line if they had no other source of income.”

Even current Social Security benefits may be on an unsustainable path. To deal with the issue, the government may have to raise the retirement age for eligibility, cut benefits or take another course of action. While most people believe Social Security will be around for many generations, unless action is taken to address future shortfalls, it may become a reduced source of income for retirees in the decades ahead.

Put all your money in bonds and CDs

All investments have a trade-off, including so-called safe investments that offer principal preservation.

“When it comes to retirement investing, most people would agree that being too aggressive is not good,” says Miller, “but being too conservative can be just as risky. Putting all of your money in bonds and CDs is not necessarily safe when you consider the effects inflation can have on a retiree’s purchasing power.”

College education should be top savings priority

We all want our children to become productive members of society, if for no other reason than they will no longer be dependent on us.

“I think it’s admirable for parents to want to fund their kids’ education so that they graduate debt-free,” says Miller, “but it should never come at the expense of their retirement. It’s much easier to borrow for an education than to borrow for retirement.”

Further, if parents were to spend most of their money on their children’s education, they could wind up depending on their children for support during their retirement years.

Medicare is all you need in retirement

The federal health care program is a lifesaver for those older than 65 and also younger people with disabilities. But its coverage is hardly comprehensive.

“While Medicare does help with medical costs, it does not pay for everything,” says Rutledge. Many times, it covers only a portion of your doctor visit or treatment. There are co-pays and/or deductibles for most treatments.”

Because of this, most retirees will need a Medicare Supplement policy to help cover what Medicare does not. These so-called Medigap policies can be quite expensive, and annual increases in cost have become the norm.

4 percent is a safe withdrawal rate

A pervasive belief is that if you withdraw no more than 4 percent per year from your retirement funds, your money will last for your lifetime.

“The 4 percent rule sounds logical on the surface,” says Pete D’Arruda, president of Capital Financial Advisory Group in Cary, N.C. “Still, there are two glaring issues with this theory. First is market volatility, which has battered retirement portfolios several times during the last decade. The other issue, inflation, is the silent force that erodes purchasing power year after year.”

Many financial planners agree those highly variable factors render such rules of thumb unreliable.

Working from Nine to Five, at 75


For majority of Americans, the idea of working beyond your 70th birthday was to a certain extent, unimaginable. But with the dawn of the financial meltdown, everything changed, including continuing to work on a 9 to 5 job in your seventies when you should be busy enjoying retirement. The financial crisis changed the face of retirement in America, before 2007, most baby boomers had planned on having a retirement filled with lots of relaxation and traveling. Then came the financial meltdown, and the equity market headed south, followed closely by the house prices. Most retirees and would-be retirees lost almost their entire retirement portfolio and now majority have been forced to go back to work because of the uncertainty brought about by the equity market which still has no clear direction. As Anne Kadet discusses in the following article, it has become common scene to find people well into their seventies in the workplace, working on the 9 to 5 job.

After Ailika Thomas woke up from a snooze, her husband brought her coffee in bed. It was 7 p.m., and the 73-year-old was facing a long, moonlit drive from her rural Indiana home to Chicago; Dean wanted to make the journey as easy as possible for his wife. As she dressed, he warmed the car (a red Buick named Carmen) and stocked it with snacks — containers of sugar peas, blueberries and her favorite, raw turnips. When Ailika emerged from the back door in a pink-and-white pants combo accompanied by her two Yorkshire terriers, Dean gave her a warm goodbye kiss and made her promise to call at journey’s end.

It was a touching scene, but a familiar routine: Thomas’s destination was her job. Five nights a week, she drives 90 minutes each way to work the midnight shift as a research supervisor for a big company downtown.

Thomas can’t afford to retire. She’s not complaining. The job keeps her connected, the benefits are generous, and there’s still time to volunteer at downtown theaters and enjoy camper trips with Dean. But the commute! Sometimes, even the latest Dean Koontz thriller on tape can’t keep her awake. She mists her face with a water fan, gulps 5-Hour Energy shots (bought by the case at Costco) and yells in the car. When the urge to nod off proves irresistible, she pulls off the interstate and naps in a supermarket parking lot.

Some might suggest that after 56 years in the labor force (she got her first full-time job in 1956, working for Encyclopaedia Britannica) and nearly two decades at the firm, it’s time for Thomas to take it easy. But employers in nearby Michigan City don’t pay nearly as well, and good luck finding a new gig when you’re 73. Ask how long she’ll continue, and Thomas says it’s not her call: “I don’t know how long God’s going to let me live.”

Commutes like Thomas’s might be rare, but working well into one’s seventh decade is a scenario that has become — seemingly overnight — relatively commonplace. For millions of workers, retirement has been delayed for years; others say they may never retire. Thanks to the nation’s massive asset meltdown — sagging retirement accounts, plunging property values — an enormous swath of the population has had to redefine their life path. Older folks who assumed they’d be retired by now are struggling with the need to work long after the passion (not to mention the brain and the body) has started to fade. And the result of all this turmoil is a little-noticed but profound shift in the workforce. Some academics say we may well be reverting to historical norms, returning to pre-New Deal conditions in which most Americans had to work until they, well, dropped. The number of working people over age 65 reached an all-time low in 2001, when just 13 percent held a job. Now that rate is rebounding, and fast; last summer, it hit 18 percent, a level not seen since Kennedy faced the Cuban Missile Crisis.

Of course, plenty of folks still have enough money to retire comfortably. But many boomers, facing a bipolar stock market and a pathetic return on their savings, feel deeply insecure; in one recent Associated Press survey, one in four predicted they’d never be able to retire. And between those two extremes, millions of workers in their 50s and 60s have quietly given up on the dream of an early retirement or the launch of an “encore” career as an underwater dolphin photographer. Instead, they’re resigned to meeting the new demands of a work world they thought they’d bid farewell. Facebook and LinkedIn? They were supposed to be playthings for the junior executive. Brain exercises? They were pitched as preventive medicine for senility, not a job requirement. Cosmetic surgery? Laughable — until your career depends on it.

Labor experts say this first wave of delayed retirees will face the biggest challenges. They weren’t prepared for the sharp reversal in expectations, or the difficulties of working while elderly — nor were their employers. But for better or worse, this group is blazing a trail that subsequent generations of workers may wind up walking.

The decades-long retirement is actually a relatively new invention. In the early 1900s, nearly 80 percent of Americans over the age of 65 had a job. Folks expected to work for as long as they lived, says Dora Costa, an economic historian at the University of California, Los Angeles, and they’d generally stop laboring only if they became too ill or frail to keep going. The average retirement lasted three years. That began to change, of course, with the introduction of Social Security and private-sector pensions — both designed to free older workers from the need to choose between work and starvation. By the latter half of the 20th century, longer life spans meant people could count on living well past retirement age, and an evolving financial-services industry was pitching products like annuities to help people fund a long retirement. The result: By 2007, right before everything went to hell, the average retirement lasted 20 years.

Now, Americans are once again working well into their winter years, but they’re facing a very different challenge. Thanks to the nation’s transition from manufacturing powerhouse to service economy, the demands facing senior workers today tend to be mental rather than physical. U.S. jobs, on the whole, require more brain power than they used to. And while some mental abilities hold steady with age — verbal skills and job know-how, for example — others are subject to an inevitable decline after the age of 50. This slowdown affects nearly everyone: The typical senior takes twice as long as a youngster to complete a simple number-sequencing test. “There are dramatic differences,” says Bill Beckwith, a Naples, Fla., neuropsychologist.

Bill Horne of Clearwater, Fla., started to notice his brain slowing down two years ago. The 62-year-old says that if he were retired and playing golf, he wouldn’t mind. But as Clearwater’s city manager, he oversees 1,600 employees and a $375 million budget. He was spending more and more time preparing for meetings, rereading reports and juggling notes. He found himself telling the mayor and city council, “Sorry, I’ll have to get back to you on that.” His doctor, Steve Scranton at Brain Fitness Centers of Florida, one of a growing number of physicians who specialize in “cognitive rehab,” prescribed a daily regimen of mental drills, such as memorizing number sequences. Horne says the exercises, combined with a better diet (more salads, fewer carbs), produced a marked improvement: “I overcame the sluggishness.”

Of course, not all cerebral slippage can be reversed in rehab. Doctors measure cognitive function on the horribly named Global Deterioration Scale, which ranges from 1 (doing just fine!) to 7 (needs to be spoon-fed). Most working folks, including seniors, could be classified as 1. Those who register in the 2 range experience frequent memory slips. By the time you hit 3, a professional job becomes hard to manage. Beckwith recalls one client, an accountant in his 80s, who was still keeping the books for a large department store. It took him all week to finish tasks that used to take a single day.

Researchers have identified typical areas of mental decline. First, the elderly learn at a slower pace. This isn’t a big problem in blue-collar jobs or fields like general medicine, management and law, in which professionals rely heavily on pattern matching, accumulated knowledge and expertise. In fact, people tend to thrive in these occupations well into their 70s and 80s. It can be a serious challenge, however, for an executive leader in a fast-paced industry. Multitasking ability also hits the skids. An older author interrupted by a phone call requires extra time to resume her writing, for example — if she manages to remember what she was doing in the first place. Then there’s the decline in processing speed. An older person might not absorb speech as fast as his or her young coworkers are talking, and won’t understand what’s being said, says Lisa Schoonerman, cofounder of VibrantBrains, a California-based brain-fitness coaching program. Businesses like Schoonerman’s have been gaining traction; the brain-training sector’s revenue has tripled in the past five years, to $400 million. But most seniors cope on their own, inventing little work-arounds at the office to hide their deficiencies. They take copious notes when meeting with the boss and make light of enjoying another senior moment, says Rohn Kessler, a psychologist who coaches executives at his Boca Raton, Fla., outfit Sparks of Genius. “Underneath,” he adds, “they’re scared to death.”

David Weiner’s brain is working just fine, thank you very much. Still, he’s dealing with his own little carnival of anxieties. From the outside, his life looks pretty good. His new job as a direct-mail and printing broker can pay $75,000 a year in commissions. He lives in a swanky Chicago burb, where his youngest daughter earns straight A’s at a top private school; the other is in her junior year at a prestigious East Coast art college. And he plays the part of the optimist. Frank and outgoing, with big ears and snapping brown eyes, he smiles constantly as he chatters away in his office, quoting Kerouac, Eastern proverbs and favorite historians. It’s crucial, he says, between calls with clients, to stay upbeat and focused. Because the truth is, he says, “I’ve got one foot over the edge.”

Weiner had kids late in life. The 67-year-old says that it kept him young, but he’s still paying high school tuition, while his peers collect Social Security. His retirement savings took a big hit in the stock market, his house lost a third of its value, and he burned through the remaining equity while between jobs. His younger daughter, a high school senior, has set her sights on prestigious private universities across the country, including Rice, Brown and Yale, and Weiner isn’t sure how he’ll pay the tab.

And the pressure isn’t just financial. Weiner’s best friend, Joe, died suddenly a few years ago, and that left him pondering his own mortality — and his legacy. He never was crazy about the printing business, and he’d love to start over, writing and marketing for environmental causes. In fact, his one consolation is an Eco-Tips blog he writes for his employer’s website. Every week, he posts a long, advice-driven article on pet topics like water conservation. But that doesn’t help pay the bills, and it hasn’t attracted any new opportunities. The way things are looking, Weiner faces another 10 years in the printing biz.

Like many of his boomer peers, Weiner doesn’t mind working — in fact, studies show that older workers are the happiest, and a recent EBRI poll found that 92 percent of seniors cite “wanting to stay active and involved” among their reasons for working. But the hope was that in their golden years they’d set the terms and do the work they love. What’s more, seniors coming out of retirement for financial reasons often face a massive loss in pay and prestige. Last year, folks over age 62 who took a new job saw a 36 percent cut in their hourly wage, on average, compared with a 2 percent cut for workers in their 20s and 30s. So while many seniors would like to start over at a new company or even launch a new career, they decide there’s too much at stake, says Mary Hladio, CEO of Cincinnati HR consulting firm Ember Carriers. In your 30s, you can absorb the risks of failure, she says. “In your 50s and 60s, it’s over.”

Weiner seems resigned to that notion. “I should work more diligently at upping my sales,” he says. And so every morning, he shows up at the office in a crisp white shirt and tie, takes a seat on a partially deflated exercise ball (it’s better for his back) and starts making calls. The goal: to pump his commissions back to pre-2008 levels. After all, the family needs $150,000 a year just to stay afloat.

According to government estimates, the over-65 set is the fastest growing segment of the working population: More than 7 million are punching the clock, a 27 percent increase since 2007. But they’re still rare unicorns at the office. In all, they make up less than 5 percent of the labor force, although the percentages are higher in some white-collar precincts like medicine and academia. (About one out of seven tax preparers is over 65, according to the Urban Institute.) In most venues, a silver-haired professional can stick out like a 6-foot Swede on the Tokyo subway. Take a lunch-hour look around any downtown business district, and you have to wonder: Where did all the old people go? And that leaves older workers facing yet another problem: how not to stand out.

Blame it on advertising, or idiocy, but the workplace now favors the young, and old folks who stick around encounter an alien universe. Underlings dismiss their ideas as dated. Most work perks — casual dress codes, boozy corporate retreats, parental leave — target young workers, says Christina Stovall, a director at Dallas-area HR consultancy Odyssey OneSource. Even corporate training is aimed at tech-savvy kids. An oldster might need extra help navigating the new expense system, but she’s supposed to make do with a webinar. And where high-level seniors of an earlier generation might have escaped the awkwardness with a generous retirement offer or a buyout deal, many older professionals today find that’s no longer an option, says New York executive representation attorney Wendi Lazar: “We’re seeing lean and mean packages for senior-level executives all the way down.” Indeed, older workers face discrimination that manifests itself in a thousand subtle ways. They’re typically overlooked for promotions and coaching because they’re considered unteachable or nearing retirement, says New York employment attorney Salvatore Gangemi. And while employers can’t fire someone for hanging around too long, they can make office life difficult: Seniors are given impossible accounts, stripped of their responsibilities or — worst of all — assigned a 27-year-old supervisor.

Put in that kind of position, few old folks complain. Instead, they try harder. Image consultants say older clients typically come in when they notice younger colleagues getting more attention at meetings. “The younger person is heard because they appear more cutting-edge,” says Gloria Starr, who charges $3,850 for her weekend makeover seminars. Some spend thousands on hair, wardrobe and glasses — not to mention plastic surgery — to update their image. Stephanie Bickle, a Chicago communications coach, says she even sees clients seeking a more youthful voice. Older folks have dried-out vocal chords, which produce that gravelly effect, and they tend to put less energy into their speech, resulting in slower, softer, monotone delivery. Yes, you can sound younger, or at least come off as “ageless,” says Bickle. She had one CEO strengthening his voice by shouting Shakespeare and singing along with Elvis every morning, though it took months to build his stamina.

Ron Cohen started feeling out-of-place in his seventh decade. A straightforward, towering 75-year-old with pale eyes and a beak of a nose, he ran his own food brokerage, consulting with chefs at some of New York’s finest restaurants, including Per Se and the Four Seasons. He could walk into the kitchen as if he owned the joint and deal with fearsome chefs on equal footing. “Unfortunately,” he adds, “I got older.”

Back in the day, chefs invited Cohen to their dining rooms for coffee and cigarettes. But the new generation of young kitchen execs is far more pressured and harried. “I had to follow them around the kitchen,” he says. And while he didn’t take it personally, he found it hard to connect with a multitasking 25-year-old: “They’re not looking at you,” says Cohen. “They’re texting. They’re e-mailing.” Two years ago, Cohen closed the food brokerage to try software sales. He did well, selling 15 systems his first year out, but he got a lot of gentle ribbing from coworkers for his poky ways on the computer. “It was, ‘Come on now, Ron, you gotta keep up,'” he recalls. “And there I am, running to keep up!”

Cohen remembers the old movies about Sitting Bull. The young braves did the hunting and fighting, but they took their marching orders from the venerable chief. Now, everything is backward. Society values technical know-how over wisdom and experience, and that’s the province of the young. Because Cohen can’t afford to retire, he’s found another part-time job. At one point, he’d considered looking for work helping fellow seniors,but instead he took a job selling a kitchen gadget that restaurants use to scour pots and pans. And he’s off to a good start, he boasts: A few months into the job, he’s already sold out his entire inventory.

Not every employer devalues the Ron Cohens of the world. Some are beginning to appreciate the unique strengths — people skills, accrued wisdom and a strong work ethic — that seniors can bring to the table. A knowledge-based business depends on older folks with experience, says Vic Buzachero, senior vice president at Scripps, the $2.3 billion hospital giant based in Southern California. To retain its best doctors, nurses, executives and pharmacists, the company offers a “staged retirement” program, which lets professionals work part-time (as little as 16 hours a week) while collecting full-time benefits, including health coverage. The program saves the hospital money, he says, because it keeps experienced workers in hard-to-fill roles. Older workers who want or need longer hours can move to a schedule of three 12-hour days, allowing them to ease into the retirement lifestyle.

Scripps isn’t the only outfit hanging on to seasoned employees. Principal Financial created a formal staffing program that brings retirees back for part-time temp work while they continue to collect pensions. “They know the culture and they know their way around,” says HR director Polly Heinen. The typical employee returns three to six months into retirement, taking short-term assignments doing clerical or administrative work for 10 to 20 hours a week. And at Cornell University, professors and staff can spend their last few years on a custom-designed reduced schedule (one semester on, one semester off, for example) if they accept a commensurate pay cut. Often, the university encourages the employee to work out a multiyear agreement that includes a specific end date: It gives both parties an opportunity to plan the transition.

Granted, such programs are exceptional. According to the Society for Human Resources Management, just 6 percent of U.S. companies offer formal “phased retirement” programs, down from 13 percent in 2006. The perk evaporated during the recession, when the balance of power swung back to employers, says Deborah Seeger, cofounder of Patina Solutions, a Milwaukee firm that pairs senior professionals with contract jobs in law, accounting, engineering and finance.

Still, some workforce pros think the current employment scene likely represents a bottom for seniors. The labor market’s move toward benefit-free contract work may actually favor older workers, especially those old enough to get health insurance through Medicare. Seeger, whose firm doubled its business last year, says her clients are happy to pay $75 to $150 an hour for the services of an experienced professional who can hit the ground running and is not just willing but eager to take on a short-term engagement. Already, seniors are in high demand among nonprofits and other industries, like health care, that require good people skills and the deft touch that only comes from decades of experience. (Of the 50 companies on AARP’s list of top employers for older workers, almost half are health care companies.) Not every retirement-age job hunter can find his or her way into one of these senior-friendly positions, of course. But if the stock and housing markets recover, seniors stuck in jobs they hate will likely be among the first to bolt.

In the meantime, some are learning to enjoy the fate that’s been thrust upon them. When James Mullinex took early retirement from Verizon back in 2003, he was a senior systems engineer. He had to go back into the workforce after the 2008 market collapse, and the 70-year-old spent two years looking for work before landing a $13-an-hour job driving a van for fellow seniors. He takes his peers on picnics and beach excursions around Seattle. “I actually enjoy it — the people are very nice,” he says. It feels a little ridiculous working for a third of his old wages, but he’s taking it in stride. “Some people retire in good times, some in bad times,” he says. “It’s the luck of the draw.”

Signs Your Pension Plan Is in Trouble


In these times of financial upheaval, many companies have resulted in devious ways just to survive. Of course, one of the ways a company does is to retrench some of the staff members, but if that does not bring the results desired by management, the company will look for ways to cut its cost. One of the ways a  company can reduce its expenses, is to tamper with the pension plan of employees. Just because you make regular contribution to your pension plan does not necessarily mean that your retirement funds are safe, regular check ups can ensure that the state of the company’s pension plan will be able to meet pension obligations when they fall due. As Ellen E Schultz explains in the following article, there are signs that can indicate that the pension plan is  in trouble. 

If your pension plan is underfunded, you could be at risk of losing some of your benefits. That isn’t news. But did you know that your pension can be at risk even if the plan is relatively healthy?

Something as seemingly innocuous as having a lump-sum payout provision, or even having a religious affiliation, could mean your benefits are vulnerable. Here are some red flags to look for, and some ways to protect yourself.

Your pension is healthy, but your employer isn’t.

Two years ago, the musicians at the San Francisco Symphony Orchestra got a rude shock when management, concerned about endowment losses, told the symphony board they should freeze the musicians’ pensions.

Sound familiar? This is happening in workplaces around the nation, but in many cases managers who want to freeze pension plans are choosing financial assumptions that make the pension look like a bigger burden than it actually is.

The musicians hired an actuary, who challenged the assumptions that management was using and determined the pension wasn’t that costly after all. As a result, management backed off.

“You have to push back,” says Dave Gaudry, a viola player on the musicians’ negotiating committee. “Don’t believe what anybody says.”

Your plan offers lump-sum payouts.

Many plans allow departing workers to take their pension benefits as a one-time payout instead of a monthly payment in retirement. It doesn’t necessarily hurt the plan if a lot of people take their money out at once. All things being equal, when the plan pays out $100 million in lump sums, the obligation also falls by $100 million, so it’s a wash.

It’s a different story, though, if the company offers early retirement or separation incentives paid with plan assets, as opposed to using general corporate funds. If that is the case, a pension plan can quickly become underwater.

And this can affect your own ability to take a lump sum later on. If the plan’s funding falls below 80%, federal law limits lump sums to 50% of the benefit. If the funding falls below 60%, lump sums are prohibited and the plan is automatically frozen, meaning your pension stops rising.

So keep a close eye on your plan’s health if your employer begins a big downsizing push that includes enhanced pension payouts.

Your company changes hands.

Your pension plan might be fat and happy, but if another company takes over your employer—and your pension—it can legally use the assets in your plan to top off an underfunded plan of its own. This strategy, though legal, is one of the quickest ways for your pension to go from healthy to distressed.

Similarly, if your company spins off or sells your division, plan for the worst. Many companies spin-off underperforming divisions, loading them up with retirees but without adequate assets to pay their promised benefits. Most retirees of Delphi, General Motors’s auto-parts spinoff, lost between 20% and 40% of their pensions when their plan was terminated in bankruptcy.

When Motorola was planning to spin-off its mobile-device business in 2010, it planned to leave its pension plan, covering 87,000 people, behind in the old business. The Pension Benefit Guaranty Corp.—the quasifederal agency that insures pension plans—raised concerns, and early last year the company agreed to put $100 million into the plan over five years. A Motorola spokeswoman says the contribution was on top of the normal funding requirement.

Your employer gets religion.

Over the past decade, more than 100 employers—including hospitals, schools, nursing homes, universities, clinics and religious charities—have been claiming their pension plans are actually “church plans,” a largely unregulated pension category that generally covers clergy and lay employees of churches, synagogues, mosques and other houses of worship.

Church plans are exempt from federal pension rules, including those that require employers to fund the plans and insure them with the PBGC. This puts participants at tremendous risk.

Employees at Augsburg Fortress, a publisher in Minneapolis that sells books published for the Evangelical Lutheran Church in America, lost 30% to 60% of their pensions when the publisher, which claimed the pension was a church plan, terminated it in 2010. Augsburg didn’t respond to requests for comment.

Last fall, the Internal Revenue Service said employers must notify their employees and retirees if they are seeking church-plan status. But the rule isn’t retroactive, so if your plan has converted already, your employer doesn’t have to notify you. If you are worried, ask your plan administrator if your pension is protected by the PBGC.

What if you are a priest, pastor, rabbi or other employee and are in a genuine church plan? Pray for the best, because your employer isn’t required to fund the plan, disclose much about its health or purchase insurance.

Retirement Savings: Is It Possible to Save Too Much?


When financial advisers talk about retirement, sometimes the language they use can scare the hell out you, and some of us are scared stiff that they save more than the recommended percentage of their total income. While this may be positive move because eventually you’ll end up with a retirement fund more than you require, you may do this at the expense of your current lifestyle. Saving for retirement should be done in a way that it will not drastically change your current lifestyle, because time and time again, majority of people have abandoned ship midway through the journey. So as you embark on this epic journey called retirement savings, just make sure that you set a course which will ensure that you finish the race, and as Walter Updegrave explains in the following article, saving for your retirement depends on whether you can the handle the standards you have set for yourself.

I’m 28 and on track to save 40% of my salary in retirement and other accounts this year. I wonder, though, whether I’m focusing too much on stashing away money rather than enjoying it more at my age. Am I overdoing it? — Adam, Minneapolis

There’s no question that you’re socking away money at a much higher rate than most people are able to manage financially or would choose to do.

A 2010 Aon Hewitt survey of contribution rates to 401(k) plans shows participants in their 20s contribute 5% of salary on a pre-tax basis compared to a rate of about 7% for participants of all ages.

Clearly, you’re a champion saver. Does the fact that you’re saving so much more than your peers mean you’re overdoing it?

If overdoing it means saving more than is necessary to fund a comfortable retirement, then sure, it’s possible you’re going overboard in that sense.

Say you want to retire at age 65 on 80% of your pre-retirement salary. If you go to our What You Need to Save calculator and plug-in your age and an annual salary of, say, $40,000, you’ll see that the recommended savings rate is just over 9% — and that’s if we assume you haven’t saved a dime to date.

Of course, you’ll have to save considerably more if you want to retire early or live large after you call it a career. You can try different retirement ages and target retirement incomes using T. Rowe Price’s calculator. But it’s hard to imagine you’ll fall short of a secure retirement at any reasonable age if you consistently save 40% of your salary a year.

Ah, but is it really likely you’ll be able to continue this pace throughout your career? My guess is that as you get older and take on more financial obligations like maintaining a house and raising kids, you’ll find that it gets tougher to save.

There may also be periods where saving is a challenge. At some point over the next few decades, you could find yourself out of work due to a layoff or health issues or some other reason, for example.

If things get bad enough, you could end up having to draw down your savings in order to get by, as many diligent savers have been forced to do as a result of the recession.

Given all that can happen between now and your eventual retirement, I don’t think that saving at such a high rate today translates into saving too much. You could look at your current savings rate as a precautionary measure, a way to ramp up your nest egg while you’ve got the spare cash to create a cushion should you find it more difficult to save later on.

As for the question of saving for the future versus enjoying your money today, I suppose you could say you’re saving too much if your penchant for saving interferes with leading the life you want to live, preventing you from traveling, socializing with friends or buying a bigger home or nicer car.

It’s not as if someone is forcing you to put this money away. You’re probably saving because you derive pleasure from doing so. People who set goals and take steps to achieve them, such as saving and controlling debt, tend to be happier than those who don’t.

Bottom line: As long as your savings rate isn’t interfering with your life, then I wouldn’t worry about it. After all, the worse that can happen is that you end up being able to retire earlier.

The Keys to Managing Your Money for the Long Haul


So much has been said about managing your money, but one thing you should understand is that managing your money begins with you knowing your goals and aspirations. Because there is no point of you wanting to manage your finances, when you have no idea of how much it will take in terms of finances to get where you want to go. A lot of times, many people go about researching and reading all sort of information that pertains to managing their finances, which is a good thing, but I believe the most important step in managing your finances is to know where you stand and where you want to be in the next couple of years. Chris Farrell explains in the following article the keys to managing your money for the long-term.

To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. — Warren Buffett

When it comes to managing money you’re saving over the long-term for your retirement, how do you picture yourself? Are you a risk-seeking money manager or a risk-averse buyer of insurance? The difference represents one of the great divides in practical finance, especially in the 401(k) era. Much of the Wall Street marketing machine and investment commentary assumes you’re a risk-accepting, wealth-creating manager of your savings. The tactics of the risk-avoiding buyer of insurance is left for the proverbial widows and orphans of society. Big mistake.

The Wall Street money-management framework has held sway for much of the past three decades. Workers are encouraged to invest for wealth. That means they should embrace the volatility inherent in riskier assets to earn a higher return on their savings. Wall Street says that workers should create portfolios with a high probability of reaching a well-heeled retirement. The core investment animating the Wall Street framework is equities. Stocks are superior long-term investments compared with any other asset class, including bonds. The real risk with retirement savings is being too cautious with your money and earning a meager return.

But the “stocks for the long haul” mantra has become somewhat muted now that bonds have trounced stocks in the total-return sweepstakes for a considerable period. For instance, long-term U.S. government bonds returned 29.9% in 2011, measured by the Barclays U.S. Aggregate Government-Treasury-Long index. That compares with a 2.1% return for Standard & Poor’s 500-stock index. Over the past five years, the annualized total-return figure is 11% for bonds and -0.3% for stocks; the ten-year performance figures are 9.0% and 2.9%, respectively. Still, the concept of managing personal finances with a goal toward maximizing returns dominates, even if it’s leavened with a greater appreciation of the risks that go along with owning stocks.

The insurance framework for managing money isn’t new, but it wasn’t getting much of an audience until the Great Recession devastated retirement portfolios and family finances. Its proponents emphasize putting money into safe investments first. The goal is to limit the downside rather than to reach for riches.

The starting point for constructing such a portfolio isn’t the long-term expected return on various financial assets. Rather, it begins with the prospects for your job and your career over a lifetime. Stocks are too risky to be the core portfolio investment of the average worker, proponents say, even if held for the long haul. In essence, with this framework the goal is to ensure that your standard of living won’t fall below a certain level in old age. Risk becomes loss.

The emblematic investment of the insurance perspective is Treasury inflation-protected securities, better known as TIPS. U.S. Treasuries are the world’s most creditworthy securities, and TIPS offer the added advantage of hedging against inflation by offering an interest rate that’s tied to changes in the consumer price index. TIPS happen to have done well in recent years, posting total annualized returns of 13.6%, 8.0% and 7.6% over the past one, five and ten years, according to the Barclays U.S. Treasury Inflation Protected index. Investors are snapping up TIPS, despite the fact that yields have actually fallen into negative territory recently, because they’re worried that inflation will rise in coming years (which would hike the CPI-linked rate on the bonds).

Still, the goal of investing in safe assets such as TIPS, Treasury bills, FDIC-insured certificates of deposit and the like is to have the minimal sums of money you need when it’s time to pay the bills with your savings. “What we ultimately care about is meeting our goals,” writes Zvi Bodie, a finance professor at Boston University, and Rachelle Taqqu, a certified financial analyst with New Vista Capital LLC, in their new book, Risk Less and Prosper: Your Guide to Safer Investing. “You can’t eat a rate of return.”

What I like about the insurance framework promoted by Bodie, Taqqu and others is that it takes seriously the idea that how you save and where you save is all about what you want out of life — your goals, your desires, your values, your lifestyle. Their human-capital investment paradigm focuses on matching incomes and savings with the timing and costs of goals. Downside risk matters, especially with savings set aside for old age. They recommend putting money into two pots: safe savings, to cover your minimum goal-oriented needs, and riskier investments, such as stocks, for “aspirational” wants. “In general, the greater your uncertainty about future income, the more you should restrict risky investments,” they write.

I basically buy into the protect-from-downside-risk framework. However, its proponents often seem to underestimate how difficult it is to accomplish. Many of the investments that inform the approach — TIPS, TIPS ladders, I-bonds and various annuity products — are hard to understand and analyze. It also seems to be getting harder to accurately project income over the next couple of years, let alone a lifetime. Many young adults stumble out of college and struggle through their first couple of jobs seeking a career path. Job and career security, as well as industry and occupational stability, are fading, too, caught between the brutal pincers of technological upheaval and a hyper-competitive global economy.

Put it this way: How confident are you about your earnings projections considering Corporate America’s relentless drive to downsize, right-size, restructure, re-engineer and outsource jobs? No one plans on getting divorced, but many couples part ways, with devastating effect on their finances. Stuff happens. “When we imagine future circumstances, we fill in details that won’t really come to pass and leave out details that will,” writes psychologist Daniel Gilbert in the bestseller Stumbling on Happiness. “But foresight is a fragile talent that often leaves us squinting, straining to see what it would be like to have this, go there, or do that.”

Life is uncertain. You can’t escape risk. It’s the human condition. And it’s at this realization the Wall Street framework and the insurance perspective cross: We all need to save more and create a healthy margin of financial safety.

Seven Steps to a Sound Retirement


We ave all heard of the things we need to do to have the retirement life we desire. A good retirement portfolio, good financial decisions to name just a few. Living a good retirement life requires sacrifices, and one of them is to ensure that you take the necessary steps to live the kind of retirement life you desire. Taking the right steps will ensure that you have a descent retirement, and the following article by the Robert Powell outlines the seven steps that are recommended for one to live a comfortable retirement life.

There are seven keys to a lot of things in life. There are seven steps to heaven and seven types of intelligence and seven habits of effective leaders.

Now we have seven steps to retirement planning courtesy of the Society of Actuaries, which just released a 64-page report with the not-so-consumer friendly title “Segmenting the Middle Market: Retirement Risks and Solutions Phase II Report.”

“Retirement financial planning requires a methodical approach that identifies and quantifies each important component that affects the asset accumulation, income management and product selection/investment decision processes,” according to the report, which was sponsored by the society’s committee on post-retirement needs and risk and written by Noel Abkemeier of Milliman.

Not surprisingly Abkemeier says this approach is especially important for middle-income Americans who likely have less than $100,000 set aside for retirement. So what are those steps?

1. Quantify assets and net worth

The first order of business is taking a tally of all that you own — your financial and non-financial assets, including your home and a self-owned business, and all that you owe. Your home, given that it might be your largest asset, could play an especially important part in your retirement, according to Abkemeier.

And at minimum, you should evaluate the many ways you can create income from your home, such as selling and renting; selling and moving in with family; taking out a home-equity loan; renting out a room or rooms; taking a reverse mortgage; and paying off your mortgage.

Another point that sometimes gets lost in the fray is that assets have to be converted into income and income streams need to be converted into assets. “When we think of assets and income, we need to remember that assets can be converted to a monthly income and that retirement savings are important as a generator of monthly income or spending power,” according to SOA’s report. “Likewise, income streams like pensions have a value comparable to an asset.”

One reason retirement planning is so difficult, according to SOA, is that many people are not able to readily think about assets and income with equivalent values and how to make a translation between the two. Assets often seem like a lot of money, particularly when people forget that they will be using them to meet regular expenses.

Consider, for instance, the notion that $100,000 in retirement savings might translate into just $4,000 per year in retirement income.

2. Quantify risk coverage

Take stock of all the insurance that you might already have or need — health, disability, life, auto and homeowners. In addition, consider whether you might need long-term-care insurance, especially in light of the cost associated with long-term care and the very real possibility that you might need some assistance at some point in your life.

According to the report, those households with limited assets, say less than $200,000 in financial assets, may need to spend down their assets and rely on Medicaid, while those with more than $2 million in financial assets can cover long-term-care costs out-of-pocket. But those households with assets in between $200,000 and $2 million should include long-term care insurance in their plan, according to the SOA. And the best time to buy such insurance is in the late preretirement years.

The SOA also notes in its report the possible need for life insurance, the death benefit of which can be used for bequests or to provide income to a surviving spouse. Life insurance premiums can be expensive if you’re getting on in years. That’s why the SOA report suggests that you continue “existing preretirement coverages during the retirement period.”

Of note, there will soon be many policies that combine long-term-care insurance with life insurance and annuities.

3. Compare expenditure needs against anticipated income

The thing about retirement is that it’s filled with expenses, which according to the SOA report “can be thought of as the minimum needed to sustain a standard of living, plus extra for nonrecurring needs and amounts to help meet dreams.” What’s more, those expenses are likely to change over time.

So, to make your retirement plan work in reality you first have to make it work on paper. You need to compare whether you’ll have enough guaranteed income to cover your essential living expenses, including food, housing and health-insurance premiums, at the point of retirement and then compare what amount of income you’ll need to cover your discretionary expenses, such as travel and the like (if those are indeed what you might consider discretionary expenses).

Your guaranteed sources of income include Social Security, and possibly a pension and annuity. Your not-so-guaranteed sources of income include earnings from work, income from assets such as capital gains, dividends, interest, and rental property.

No doubt, as you go about the process of matching income to expenses, you might find yourself having to revise your discretionary expenses, especially if there aren’t enough guaranteed sources of income to meet essential expenses.

4. Compare amounts needed in retirement against total assets

So here’s where your math skills (or your Google search skills) might come into play. Besides calculating your income and expenses at the point of retirement, you need to figure out whether your funds will last throughout retirement. In other words, you need to calculate the net present value of your expenses throughout retirement.

Now truth be told finding the present value of your expenses is a bit tricky, especially since there are many factors that can affect how much is really needed, including the date of your retirement, inflation rates, gross and after-tax investment returns and your life expectancy.

But the bottom line is this: If, after crunching the numbers, the present value of your expenses is greater than the present value of your assets you’ve got some adjustments to make. And the good news is that there are plenty of adjustments that you can make.

You could, for instance, delay the date of your retirement or return to work or work part-time. Those actions might be enough to offset the difference. In addition, you might consider trimming your expenses or consider a more tax-efficient income drawdown plan.

5. Categorize assets

The SOA also recommends that assets be grouped to fund early, mid and late phases of retirement. Thus, assets for early retirement should be liquid, while mid-retirement assets should include intermediate-term investments such as laddered five-to-10-year Treasury bonds, TIPS, laddered fixed-interest deferred annuities, balanced investment portfolios, income-oriented equities, variable annuities, and the like. And late retirement assets include longevity insurance, TIPS, balanced portfolios, growth and income portfolios, laddered income annuities, deferred variable annuities and life insurance.

6. Relate investments to investing capabilities and portfolio size

This should come as no surprise; the SOA recommends that you invest only in things that are suitable, relative to your risk tolerance, investment knowledge and the capacity of the portfolio to accommodate volatility. “In short, a retiree should not invest beyond his investment skills, including those of his adviser,” the SOA report stated.

7. Keep the plan current

This too might be a bit obvious, but retirement-income plans must not be built and set on a shelf. The plan is a point-in-time analysis that must be reviewed on a regular basis.

Consider, for instance, just some of the things that could change in one year, according to the SOA. Health status or health-care costs could change; your life expectancy might change; your investment returns and inflation might be quite different than your assumptions; and your employment status and expected retirement date might change.

What’s more, you might suffer the loss of a spouse through death or divorce, or perhaps you might not be able to live independently any longer, or perhaps you might need to sell your house or unexpectedly care for dependents, or change your inheritance plans.

Said Abkemeier: “You want to keep your plan current. You need to tie everything together and go back to the start of the process each year. You want to enjoy retirement, but you don’t want to be at rest.”

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