Join me in an interview with Curtis Smith CFP®, a fee-only Financial Advisor,
to find out how a Roth IRA works and if it is right for you.
You can listen in at
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6. Retirement Planning
Are you worried that your pension plan won’t be around when you need it? Do you know what to look for if it it failing?
Traditional pension plans are defined benefit plans in which the employer promises to pay a specific amount, usually monthly, based on years of service and salary in the last years before retirement. It is a great asset to build wealth. In the wake of the recent stock market decline, the defined-benefit pension plans of many private and public employers are underfunded, and some may not be able to meet their pension obligations. Several bankrupt companies have shut down their pension plans, and other corporate and public plans are cutting back benefits.
The Pension Benefit Guaranty Corporation (PBGC), a federal agency that insures private pension plans, paid out $5.6 billion to participants in failed pension plans in 2010 , and it’s annual deficit increased 4.5% to $23 billion. The PBGC, by the way, insures only private pension plans, not public pension plans or defined contribution plans such as 401(k)s, nor does it insure retiree health care coverage.
How do you find out if your employer’s pension plan is failing, and what do you do if it is in trouble?
First, don’t panic. While many pension plans are technically underfunded, it doesn’t necessarily mean they can’t or won’t meet future obligations. A plan is considered underfunded if for three consecutive years its assets are less than 90 percent of what is needed to fund current and future obligations (or one or two years at less than 80 percent). Plans have several years to make up any shortfalls. Companies with strong cash flows are putting extra cash into their plans, and a market recovery, whenever that occurs, may also help shrink the gap. In fact, in the late 1990s, at the peak of the bull market, many pension plans were overfunded.
For those corporate plans that do falter, the PBGC will step in to continue payments to retirees. But here’s where employees and retirees need to start paying special attention. The PBGC will keep most retirees whole, but the PBGC caps payments at $43,977 a year, or $3,665 a month, per retiree, so higher paid retirees, and in some cases other employees, likely won’t receive all they were promised by their employer.
If you haven’t already read about your employer’s pension woes in the newspaper—airlines, steel companies, auto manufacturers and some state pension plans have been among the most publicized—you can take some steps to see how your plan is doing.
Start with what’s called a Summary Annual Report. This states, among other things, how the plan’s investments have fared since the last report (SARs generally are issued annually, though smaller plans only have to do it every three years). The investment statements don’t give a full picture, however, because they say nothing about liabilities. The real key is the Minimum Funding Standards section, which contains an actuary’s statement indicating whether the plan does or does not meet current minimum funding standards.
For a more complete picture, request a copy of the plan’s Form 5500. To learn what to look for in these documents, go to the Employee Benefits Security Administration’s Web site (www.dol.gov/ebsa/) to get an online copy of its booklet, Protect Your Pension. For more information go to the Pension Benefit Guaranty Corporation.
What if you find out your employer’s plan is in trouble? If you’re already retired, there’s not much you can do except tighten your financial belt, possibly adjust your personal portfolio and hope for the best.
Those about to retire who are worried about the future financial health of their employer may want to consider taking their pension payments in a lump sum instead of in guaranteed lifetime monthly payments, though many plans do not allow the lump-sum option. The downside to this strategy is that you must invest and manage the lump sum well enough to be sure it generates at least the equivalent payout you would have received from the employer’s annuity.
Workers with years to go before retirement might want to beef up contributions to a 401(k) or similar plan if offered in addition to the pension plan, or use other vehicles such as an IRA, Roth IRA, or annuity to build wealth fast.
But before doing anything, consult with a fee-only Financial Advisor to review your options.
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As part of a strong retirement plan to build wealth, you hope to achieve income from taxable (401K plan), tax-free (muni-bond type), and tax advantage funds (capital gains) in addition to social security. Many people with depleted resources are trying to squeeze every drop of income from what they have and the Social Security reset option is ideal for some.
Very few people know about the Social Security reset option. As more people are wary of stock market investments to build wealth, this is becoming a valid option for additional social security income. This is how the social security reset option works. You basically withdraw your original application for benefits and refile at age when you would be able to receive higher income (say age 70). When you refile you have to repay all the money Social Security has paid you. Then your new benefit amount is based on your current age not the age at which you originally applied for social security.
Ok, before you say- that’s not for me, I don’t have that kind of cash around. Think about this example by Charles Ryan, a CFP who calculated the reset for a a client who was an unmarried, 70 year old female. She originally file for benefits at age 62. Now she is getting after-tax benefits that increased her income by $8,568 in the first year. Sounds good to me.
Of course, she had to replay $110,845 in benefits she had already received. When she repaid those funds, she also earned tax credits for the taxes she paid through the years on her benefits. According to Mr. Ryan’s calculation, her net repayment was only $87,290. She could have invested or purchased an annuity at that age ( the most conservative option) which would not have given her that much extra income plus the security of a USA pension compared to relying on an insurance company for extra income.
This option isn’t for everyone. If your mortality expectation is short you won’t likely recoup the added benefit. And if you intend to leave a lot of money to heirs, it wouldn’t work for you. Who knows how long this little known loophole will be around, but I think this social security reset option is definitely a tool to get more income. Look for a fee-only advisor who has access to a computer program called ESPlanner that can help you make this important decision to build wealth.
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Retirement Planning is step 6 of 7 in your do it yourself financial plan. Everyone would like to retire early and retire rich. But what does that look like to you? Some people think of old folks in rocking chairs while some think of the freedom to do whatever they want. You need to have a retirement plan for success that includes how you will pay for all that freedom however you define retirement. Those that take the time to look into the future and see what potential lies ahead will have a head start of a very successful retirement. Take these 7 tips into consideration for your own personal early retirement strategy:
1) Get the spouse or significant other on board. While your wife will be thinking a cottage close to her mother in Maine, you may be thinking downsizing and living near the beach in Florida . Don’t think about the money and how you will afford anything. Just talk and brainstorm ideas together of what you both would like.
2) If you plan on retiring before age 59 ½, then you will need savings and investments to draw on before you are able to take retirement plan money . The more you have saved up, the earlier you can retire. That doesn’t mean that you should also stop contributing to your retirement plan. It means that you will have to contribute to both.
3) At age 59 ½ and older you can draw on money from both retirement plans and savings and investments until social security kicks in. Many people may find themselves in a high tax bracket while doing this. If so, one option is to rollover your retirement plan from an IRA to a Roth IRA so you can eventually draw some money tax free. Sell shares that have long term capital gains so that you get the favorable tax treatment on the trade and create money to live on is another option .
4) At age 62 you can start taking social security . If you are fortunate enough to have enough assets to wait to take social security later, then do it. It will be approximately 20% more income if you can wait to the later date.
5) If you find that after all this your income will be less than what you expected, don’t panic. Studies have shown that retirees will spend more in the first five years after retirement and then expenses taper off. You can put yourself on an income plan that decreases as you get older and are less active.
6) Downsizing is another way to increase income after retirement is to downsize . Many people fail to realize how much money it takes to maintain a large home after all the kids have left. Downsize to a smaller home, and move to a less expensive area, and you will feel like you are living the high life with all that extra cash.
7) Even though you are retired, you have to watch your taxes . It’s not how much income you gross but how much you get to spend after tax. Instead of drawing down on one account at a time, take a little income from each account. Interest, dividends, capital gains, and a tax free income combination will keep your income high and taxes low.
Now matter what age you are, financial independence and retirement starts before you hand in your resignation. With these 7 planning tips, you can retire early and retire rich.
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The cost of an education will increase about twice of the general inflation rate. Students are finding that their parents make too much money for some financial aid and not enough for others.
Listen to this half hour interview with Fred Amrein, a fee-only NAPFA Financial Advisor with Amrein Financial who specializes in financial aid, college education funding and investment management. Fred teaches us the ins and out of the financial aid process and how to pay for college without going broke or spending our life savings.
Learn the ins and outs of the Financial Aid Process and how to pay for college without Going Broke or Spending Your Life Savings.
• College is an Investment-Focus on the Outcome of the Education
• College Financial Aide officers are limited to what they can tell you
• Saving Money is not just the financial aid process
• Be careful of Financial Advisors specializing in College Financial Aid
The financial aid process and your special family financial circumstances can be complex and confusing- get answers from a professional on this call.
What you will learn:
• Understand the Financial Aid Process and your positioning
• Risks to avoid in College Funding
• The Interaction of financial aid, educational tax credits and college saving plans
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- Save
- Keep track of money
- get paid what you are worth
- spend wisely
- talk about money
- live on a budget
- invest
- exercise an entrepreneurial spirit
- handle credit
- use money to change the world
Source: Raising Financially Fit Kids- Joline Godfrey
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We can invest for our early retirement even in times like this where we are faced with economic uncertainty, collapse of real estate prices and turmoil in the finance services industry. To do so requires a disciplined, patient, unemotional approach to long term investing. Stick to these 7 secrets of investing for an early retirement:
1. Crises are Inevitable. You will be in a better position for early retirement if you avoid making drastic changes to your investment plan and don’t overreact to events. History has taught us that equities will continue to grow over the long term. The patient investor who remained invested during the 20 year period of 1989-2008 received an average annualized return of 8.4% per year.
2. Don’t Try to Time the Market- Investors who understand that timing the market is a loser’s game will be less prone to short term volatility and will stick to a long term investment plan for their early retirement. Studies show that the patient investor who remained invested during the entire 1989-2008 (20 year) period received the highest average annualized return of 8.4% per year. Those that missed the best 60 days over that 20 year period had a negative return.
3. Keep Fear and Greed out of your Portfolio. Attempting to time the market, abandoning markets that are out of favor, and chasing hot managers leads to self-destructive investor behavior. The long term wealth needed to build an early retirement plan requires you to control your emotions and stick to your investment plan. Over the period from 1988-2007, the average stock fund returned 11.60% annually while the average stock fund investor earned only 4.5%.
4. Focus on what you can control. Short term forecasts by the media and economists may be compelling but they do not hold real value. Don’t waste your time on the direction of the stock market or interest rates. A study by the Wall Street Journal of economists showed that their forecasts from 1982-2008 were wrong 68% of the time. Focus on having a diversified portfolio with realistic return expectations and time horizons so you can succeed in an early retirement investment plan.
5. Look for Opportunities. Most people will leave the market or abandon their investment strategy when they suffer from large losses. It is important to feel confident about the potential that exists when prices are low. Historically low prices have increased future returns and crisis creates opportunities. The -.2% average annual return from 1928-1937 was followed by a 9.3% average annual return from 1938-1947. Furthermore, these periods of recovery average 13% per year and ranged from a low of 7% per year to a high of 18% per year.
6. Short Term Under-performance will happen. Many people switch managers or mutual funds during down markets. Each time you switch you may incur fees or a taxable event. Most managers have suffered an average of 3 years of losses and still delivered excellent long term returns. If you don’t stick with them on the downside, you will never experience the high long term returns that they deliver and your early retirement goals may be set back a few more years.
7. Buy in times of pessimism and resist euphoria around investments that have recently outperformed. Following three years of stellar returns for stock funds from 1997-1999, euphoric investors added money in record amounts in 2000, just in time to experience three terrible years of returns from 2000-2002. In 2002, investors became pessimistic and withdrew money right before stocks delivered one of their best returns ever in 2003 (30%).
Expect to stick with your long term investment plan. If investing for the long term was easy, we would all be rich. Most people sabotage the best investment plans by letting emotions drive their investment choices, not sticking with their plan and being influenced by market news. If you are serious about making a plan for early retirement, you must have a disciplined approach to a long term investment plan.
© Fern Alix-LaRocca CFP® All Rights Reserved
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I am not a big fan of target date funds. But my colleague, Roger Wohlner, has done a great job of discussing them here:
Fidelity is one of the largest providers of 401(k) plans and like many fund company platforms it is common for their plan sponsor clients to offer several or all of Fidelity’s Target Date funds known as the Fidelity Freedom funds. These funds have target dates from 2005 every five years out to 2050 with an even shorter-term Retirement Income fund. The premise behind these and other Target Date funds is that a plan participant will choose a fund with a date close to when he or she might retire, invest their contributions and let the fund manager do the rest. The funds typically lighten up on equity investments as the target date draws nearer, at some point they go to a “glide path” into retirement typically at the target year. This means the fund at that point is geared to the typical life expectancy of someone retiring in that year, the allocation allows the fund shareholder to “glide” into retirement.
There has been much controversy as to whether Target Date funds work as advertised. My purpose in writing this post is not to comment on these issues one way or the other. Rather I want to take a look at how the Fidelity Freedom Funds actually invest shareholder’s money.
The Freedom Funds like many Target Date funds are funds of funds. Each Freedom Fund has its own mutual fund ticker symbol. Unlike many mutual funds which make direct investments into individual stocks or bonds, the Freedom Funds invest in a variety of Fidelity mutual funds. Which funds and the percentage held of each fund will vary by Freedom Fund. I made a list of their underlying holdings using Morningstar’s Advisor Workstation. I then used the Fi360 Toolkit to rate these funds based on their 11 point criteria:
• Fund inception date (at least three years)
• Manager Tenure (min. 2 years)
• Minimum fund size
• 2 measures relating to fund investment style and asset composition
• Expense ratio
• 2 measurements of risk-adjusted return
• Trailing 1,3,5 year returns
All funds are rated relative to other funds in their peer group.
In looking at the 26 Fidelity mutual funds that I found as holdings of the various Freedom Funds I found the following for the ranking period ending 12/31/09:
• Three of the funds received the highest ranking of 0. This means no deficiencies, they passed all criteria.
• An additional four funds earned a score ranging from 1-25 indicating that they passed most of the criteria. This would indicate that these funds rank in the top 25% of all funds in their peer group with enough data to be ranked.
• Four funds had scores ranging from 26-50 indicating that they did not pass in a couple of areas but these funds overall rank in the top half of their respective peer groups based upon the ranking criteria.
• Five of the funds had a ranking in the 51-74 range indicating that they were deficient in several of the criteria and overall place in the lower half of their peers with enough history to be ranked.
• One fund had a score of 87 meaning that it was deficient in most areas and ranked in the bottom 13% of its peers. A ranking in this range indicates that strong consideration should be given to replacing such a fund.
• Nine of the funds did not have enough history to be ranked. These funds are all Fidelity Series funds. This appears to be a new group of funds that Fidelity has designed for use in their Freedom Funds. The funds all have anywhere from a month’s worth of history out to about a year. They would flunk the inception date test for the amount of time the fund has been around. These may ultimately prove to be good funds over time, but as an advisor I am generally loath to invest client money in new, untested funds unless there is a compelling reason to do so.
• Noticeably absent from the underlying funds within the Freedom Funds are any of Fidelity’s low cost core index funds covering areas such as the S&P 500; total domestic stock market; international equities; or their total bond market index fund. These are by and large solid, low cost holdings. Also absent are several top Fidelity funds such as Contra, Low-Priced Stock, and others.
In their defense of the 11 numbered Freedom Funds, 10 earned a score of 0 for the most recent ranking period and the other one earned a top quartile score of 20. Keep in mind; however, these rankings are within the target date peer groups via Morningstar. All of these groupings have a small number of funds and there is not a lot of history in some cases. A really good or really bad quarter or two can skew a target fund’s relative ranking. Additionally the peer groupings have changed and been revamped at least twice in the past several years.
Should you invest in these funds? As a plan participant you need to understand the fund’s investment philosophy, the glide path concept, and the fund’s underlying investments. Remember just because a particular fund has a target date closest to when you might retire, you can go with a closer date fund if you want to be a little less aggressive or a longer-dated fund if you want to be a bit more aggressive.
Plan sponsors it is incumbent upon you to monitor the Target Date funds in your plan as closely as you would review any plan investment choice. In the case of a Fidelity plan you may or may not be limited to the Freedom Funds.
Again I am not saying the Freedom funds are good or bad. Clearly they did well relative to their peers in 2009. Participants and Sponsors need to understand these funds and what they can and cannot offer.
Posted by Roger Wohlner, CFP®
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Make the most of what you have to make the most of your tomorrow. 
Your 401K contributions are your first investment dollars. Those dollars will grow more faster than any other investment because of the tax advantages that we discuss in detail here. Take advantage of the opportunity to contribute and put the maximum amount that you are allowed in the plan. Your future depends on it.
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To find your 401k maximum contribution for 2010 and more see
To make the most of your 401K contributions, you need to know first how much you can contribute. Usually that is based on a vesting schedule. See your employer about when you “vest”. 401K contributions are also limited. You can contribute a certain amount based on a percentage of salary. The same is true of any matching contributions. They are based on a percentage of salary. For example, an employer may match each dollar you contribute to your 401k plan up to 3% of your salary.
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