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My Retirement Blog
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Social Security & Medicare in Financial Distress
May 15th, 2009 | Published in Retirement

Earlier this week Treasury Secretary Timothy Geithner revealed that the Social Security trust fund might be exhausted as early as 2037, which is four years earlier than the estimate last year! The main reason for this adjustment comes from the rising unemployment rate, which affects how much is being paid into the trust fund, tax breaks in the stimulus package, and an increase in demand for benefits. By definition, the Social Security trust fund is exhausted when they can only pay 76% of benefits.

It’s not all that surprising when you consider that since January 1, 2008, approximately 5.7 million jobs have disappeared and another 4.3 million jobs are now part-time. That’s going to hit the Social Security collections pretty hard.

Medicare is worse off than Social Security and it’s forecast to be exhausted by 2017, two years earlier than was estimated last year. For Medicare, exhaustion means they can only pay out 81% of costs. The cause is again rising unemployment, since it’s funded from payroll deductions, and what’s especially shocking is that it has paid out more than it collected starting last year.

Experts say the only way to fix it is for broader healthcare reform…

Recession hits Social Security hard [CNNMoney.com]

No COLA Adjustment for Social Security in 2010
April 28th, 2009 | Published in Social Security | 3 Comments

There’s a great US News & World Report article on the 5 Big Financial Changes for Retirees in 2010 and the first one listed is a doozy. It’s widely believed that there will be little to no near term inflation which means that Social Security cost of living adjustments will likely be zero in 2010 and beyond.

No cost-of-living boosts for Social Security. Forecasters widely predict that a slowly recovering economy will produce little or no inflation in the near term. That’s generally good news, but not for Social Security recipients, whose annual increases are tied to consumer price changes in urban areas. Health care, a major retiree expense, is not expected to see the same price moderation as will other sectors of the economy. So it’s quite possible that Social Security beneficiaries will be seeing flat payments, but still face higher prices.

401(k) Fee Disclosure Bill
April 23rd, 2009 | Published in 401K

This week the House Education & Labor Committee introduced the Fair Disclosure for Retirement Security Act of 2009, a bill that would require your 401(k) plan to clearly state all fees that it charged. Currently, the law doesn’t require your plan administrator to disclose all the fees and it’s often very difficult to find this information.

The bill requires 401(k) plans to include all fees in “basic investment information,” as it would disclosures on risks, returns, and investment objectives. The fees would include but not be limited to administrative fees, investment management fees, and transaction fees.

Plans would also be required to offer on low-cost index fund and disclose any financial relationships so that the company can determine if there are conflicts of interest.

Review Your 401(k) Fund Fees
April 10th, 2009 | Published in 401K | 3 Comments

This week, I analyzed my wife’s old 401(k) and learned that she had around $7,000 spread across nine funds at T. Rowe Price. Fortunately for her, and most other 401(k) participants, she’s not charged for having so many funds; it’s just a bit of a mess whenever you open up her statements because you have nine balances, nine bar graphs on performance, and nine discussions of the fund’s prospectus.

The only tangible negative about having those nine funds is that it becomes very difficult to figure out what your composite expense ratio is. An expense ratio is how much you’re paying a mutual fund to manage your money. A composite expense ratio is the average expense ratio across all your funds after you take your balances into consideration. It’s what your expense ratio would be if you were to treat all the funds in your 401(k) as one fund.

Anyway, her composite expense ratio wasn’t too bad, a 0.6946%, but we consolidated it all into two funds - a S&P 500 index fund and a PIMCO bond fund. This cut her expense ratio in half and gave her the kind of diversity she probably was looking for in the first place. It’s not as diverse as it was before but this is easier to manage from an information perspective.

This also fits better with her overall diversity plans because integrating an old 401(k) with 2 funds is easier than integrating 9.

Tipd 2.0 Launches
April 7th, 2009 | Published in General

Tipd 2.0 launched today with some fanfare, announcing over 6600+ total users, 12,000 news submissions, and over 70,000 Tipd votes. It’s growing by 60 new users a day with more than a hundred new stories being submitted every single day. The site has grown by leaps and bounds and it’s clear that this is a social news site that has gained some traction and will be sticking around. They’ve doubled their monthly traffic since the launch of 1.0 and with the addition of new tools, it’ll certainly grow even more.

There are a few new features that you all may find interesting. The first one is SocialTickers, which is an amalgamation of standard stock market ticker information (price, P/E, highs and lows) and social information from blogs, bookmarks, tweets, etc. It’s really the next step in the evolution of tickers and including the social component is really brilliant. You’ll have to sift through the noise to get to the news but until now you didn’t have the option. The really big news stories aren’t just breaking on sites like CNN Money or Forbes, it’s through tweets and blog posts now and SocialTickers gives you the opportunity to find it. Another neat feature is the introduction of video. So much of the financial news is now in video and introducing video stories will only increase the number of valuable news articles you’ll see on the site.

I’ve been an avid fan of the site since the launch and I’m glad to see it’s been doing well statistically and increasing the number of features it has.

401(k) Employer Match Cancellation
April 1st, 2009 | Published in 401K

If you work at a company that has stopped 401(k) contribution matching by your employer, you should be happy, rather than upset. I’ve been talking to a few people, over email, about how they should respond to their company canceling their 401(k) match. Some are upset that their companies did this (one of them had it coupled with a 5% cut in salaries), but I reminded them that the alternative was the fire some of their co-workers. They understood that logic.

The next question was whether they should continue to contribute to their 401(k) and I said Yes! The recent drop in the stock market might give you reason to consider pulling back a little, the slowing of the economy might give you another reason to pull back a little, and the prospect of losing your job may have you wanting to bolster your emergency fund.

I would say that only the last reason is a valid one if you are considering lowering your 401(k) contribution. Unless you’re taking the money and earmarking it specifically for emergency savings, I think you should continue to make contributions, with or without the match, because in the long run the market will recover and you will retire a much happier person.

Earning $20,000 Equals Half Million Dollar Nest Egg
March 22nd, 2009 | Published in Retirement | 4 Comments

With the recent stock market fall, a lot of near-retirees are seeing their nest eggs fall below their “Number,” the amount they need to retire comfortably. This has, rightfully so, a lot of near-retirees worried. What should a near-retiree do? Draw on Social Security early so that the retirement assets can recover? Pull out of the stock market and lick your wounds? Continue working?

Bingo. Option 3 appears to be the most viable and least damaging, but the scariest especially if you’ve been staring at a date on a calendar for the last year or two. Drawing on Social Security before your full retirement age reduces your benefit, so that’s a hit you want to avoid. Pulling out of the stock market locks in the losses, something that probably isn’t all that appealing. Working… well, if you’ve eyed retirement, another year of work probably isn’t your cup of tea.

The answer? Maybe something part-time if you’re tired of your current job. If you were to take a job for $20,000 a year, you effectively increase your nest egg by half a million dollars. The general rule is that you should draw 4% of your nest egg each year. At 4%, your nest egg’s appreciation will slow down the draw down long enough for you to fund the remainder of your retirement years. When you earn $20,000, that’s $20,000 you don’t need to draw from your fund. That $20,000 represents half a million dollars in your nest egg.

Now the difficult part is finding a $20,000 a year job in this economy.

How To Buy Annuities
March 16th, 2009 | Published in Retirement | 1 Comment

Annuities aren’t all bad. They get a bad reputation because some of them charge high fees and are bad investments, but the idea behind an annuity isn’t bad at all. For many, it’s a way to turn retirement savings into a constant and reliable stream of monthly income similar to a pension, so that you can plan your finances more easily. The big key to watch out for when it comes to annuities are those fees - between the administrative, mortality and expense, and other fees, you could pay through the nose if you’re not careful.

Types of Annuities
There are several types of annuities. Fixed annuities will offer a fixed rate of return and variable annuities will offer a variable rate of return based on the investments in the annuity’s portfolio. Equity-indexed annuities offer a mix of both, you get a minimum fixed rate plus a variable rate based on that stock index (though the rate will be capped at less than the index’s return). In addition to the fixed and variable aspect, there’s a deferred version (and immediate version) of both. Deferred means you’re putting off the earnings until the future, whereas immediate means you’re getting a monthly cash flow today.

In addition to the deferred/immediate aspect and the fixed/variable/indexed aspect, there are add-ons you can get that will cost you even more. It’s like selecting the flavor of your ice cream and then picking the toppings afterwards.

Fees
On their own, annuities aren’t bad ideas, it’s only if you get one with big fees. Annuities will always charge an annual management fee, which according to Morningstar will average 2.37%, though you can find low cost alternatives at firms like Vanguard. In addition to annual fees, you may have a surrender fee if you sell your annuity in the first year or two. Finally, there is also a “mortality and expense” fee that pays for the insurance part of your annuity, commissions, administrative expenses, etc. The average M&E charge is 1.15% according to the National Association of Variable Annuities (NAVA).

If you keep an eye out for the fees and understand what you’re buying, annuities aren’t dangerous at all.

Annuities Not FDIC Insured
March 16th, 2009 | Published in Annuities

Your annuities are not FDIC insured. If the insurance company goes bankrupt, you would likely lose a large portion of your investment if your state doesn’t have laws protecting you. Annuities are investments and while their rate of return is guaranteed contractually, the fact is your annuity’s health is tied to the health of the insurance company that sold it to you. It works a lot like insurance, if the insurance company goes bankrupt, there’s are only guaranty associations behind them to pay out some of your claims.

What does this mean you? It means that in addition to reviewing the fees associated with your annuity, one of the biggest reasons why people warn against annuities, you have to review the financial health of the insurance company you’re buying it from.

What are guaranty associations? Guaranty associations are state-level organizations that protect you, somewhat, in the event the insurance company goes bankrupt. Every state provides at least $100,000 of coverage for annuities and some offer even higher limits (New York and Washington go as high as half a million dollars). While the insurance is nice, don’t let it lull you into a feeling of confidence. You still want to review the financial health of the company you’re dealing with.

Being Fired Doesn’t Affect Retirement Vesting
March 12th, 2009 | Published in 401K, Pensions

If you are fired, it doesn’t affect the vesting status of your retirement assets. Any funds that hadn’t vested, will expire. Any funds that had vested, are yours to keep forever. Any contributions you made are always yours, regardless of how long you’ve been there or how the vesting schedule works. Your money is always yours.

Here’s a likely scenario - you contribute 6% of your salary to your defined contribution 401(k) plan and your company matches fifty cents on the dollar, kicking in 3%. The employer match doesn’t vest for a full year, meaning the 3% they put in doesn’t become yours until after a year. If you are fired in the next year, they will deduct the 3% from your account and leave you your 6%. The 6% you contributed is always yours, they can never take that away. The vesting schedule of 1 year simply means that the employer’s contribution isn’t yours until one year.

The same rule applies to defined benefit plans like pensions. Whatever you have vested is yours to take, role over into another account, whatever.

Being fired sucks, regardless of how much you get to keep, but at least you get to keep what’s rightfully yours.

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