Reuters Money
Most Americans find their retirement goals unattainable: study
If you’re feeling discouraged about reaching your ambitious retirement goals, rest assured you are not alone.
According to the newly-released study called Shedding Light on Retirement, 55 percent of Americans don’t know how to achieve their retirement goals.
The ING-sponsored study, which polled 2,630 retirement investors, also revealed that while Americans want to be in control of their money, they’re also overwhelmed because of lack of guidance.
In an interview with Reuters, Lynne Ford, CEO of ING Individual Retirement, pointed out some of the major take-home points from the survey.
Looking at the big picture, what exactly does this survey tell us?
A: It tells us a couple of things. We’ve seen for many years now that Americans are getting the fact that they are responsible and accountable for providing for their retirement. The two new things that come out of this survey are, first, just the overwhelming sense of confusion and anxiety people have about getting it done. They say, ‘We don’t have a roadmap, we don’t have a recipe,’ and there are so many moving parts (to investing) because people are saving at the work site and then they’re saving away from the work site.
The second thing that’s interesting about the survey is that it really points to a paradox. The American participant has conflicting desires: they want to be in total control of their money and they want to be empowered to do it their way, but then they’re also saying ‘We don’t have a roadmap and we don’t have the guidance.’ So this paradox around wanting control but needing advice is where we’re finding people today. I think it’s good news because it means people are moving down this path of accountability.
8 crucial tips for last-minute tax filers
There’s just two weeks to go till tax time, and Bill Fleming, managing director in the personal financial services division of PricewaterhouseCoopers, has been cranking hard on his clients’ returns, but has yet to start the one he’ll file for himself and his wife. “I know all about procrastination,” he laughs.
If you haven’t finished your taxes — and fear waiting in line at the post office on April 18th — you’re not alone. In fact, this year tax season may be moving a bit slower than usual because the last-minute, year-end tax agreement delayed the usual timetable for the Internal Revenue Service to get its forms and systems ready. “We are probably a week behind last year,” Fleming says. “Everything has been pushed back a week or so.”
The mad dash to the finish could cause extra problems this year because of the feds’ push for electronic filing; e-filing is now mandatory for accounting firms that do at least 100 returns a year, and there’s no precedent for how the government’s e-filing system will do under pressure.
If you’re among those who are just now struggling through your taxes, here’s a quick guide to the things you need to know now:
IRA contributions. Making a contribution to your IRA is a necessity for a secure retirement, and if you fit the rules for a tax-deductible contribution, it will also lower your tax bill. The deadline for making your 2010 contribution (even if you get a tax extension) is April 18th. You’re allowed to contribute up to $5,000 ($6,000 if you’re 50 or older). The $5,000 contribution limit can go to either a traditional IRA or a Roth IRA, or be split between the two. If you want more in a Roth than you’re allowed by income limitations, you could set up a non-deductible IRA and immediately convert it, as there are no income limitations on conversions.
HSA contributions. If you were covered by a high-deductible health insurance plan in 2010, you have until tax day to make a tax-deductible contribution to a Health Savings Account. You can deduct that contribution even if you don’t itemize, and the money in your account will grow tax-free — and you can withdraw it tax-free, too, if you use it to pay uninsured medical expenses. Maximum contributions are $3,050 for singles and $6,150 for families (with an extra $1,000 if you’re over 55).
Roth conversions. If you converted an IRA to a Roth last year, as many people did to take advantage of the new rules that removed income limitations on conversions, you’ll owe taxes on that move starting this year. You get the option to pay the taxes, on 2010 conversions only, over two years; unless you expect to be in a higher tax bracket next year, that’s likely a better deal. Also, note: Your 1099 form won’t necessarily say that it’s for a conversion, so you need to be sure that your accountant knows.
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Social Security cuts annual statement mailings
Here’s a chicken-or-egg question for you: is Social Security’s future really imperiled, or do Americans just think it’s falling apart because Washington keeps shooting the program in the foot?
Consider the Social Security Administration’s (SSA) decision to stop sending out the annual benefit statement we all get in the mail. The agency plans to save $30 million by suspending mailings for the remainder of the current fiscal year, which ends in September, and an additional $60 million next year by restricting mailings to workers 60 and older.
Statements usually are sent out about three months before your birthday; the suspension will start in April, which means everyone with birthdays in July and later won’t get a paper statement this year. Next year, the SSA intends to resume sending statements to Americans over age 60; it’s working on an online download option for everyone else.
SSA Commissioner Michael Astrue told a Senate appropriations committee about the suspension in testimony last month; Kiplinger’s Personal Finance ace Mary Beth Franklin picked up on it with her story yesterday.
Like all federal agencies, the SSA is operating at FY 2010 levels due to the ongoing Washington budget stalemate. “We’re halfway through the current fiscal budget year,” an agency spokesman says. “We needed to start making cuts.”
Personally, I’m okay with online access to just about everything — it’s greener and saves money. But the paper Social Security statement is different. It provides a valuable annual reminder of what you can expect to receive and how benefits are calculated. It also prompts us all to make Social Security part of our long-range retirement plans.
In fact, the SSA had been working on ways to improve the annual statement, says Cindy Hounsell, president of the Women’s Institute for a Secure Retirement (WISER), a nonprofit group that works to promote financial education and planning among low- and moderate-income women. Ideas under consideration included new inserts customized for young people and women, who rely on Social Security more heavily than men stay out of poverty in old age.
Taxes: 7 tips for last-minute filers
Nearly one-third of Americans will file their taxes in the two weeks leading up to this year’s April 18 deadline. Are you one of the last-minute filers? Here are some tips from Bob Scharin, senior tax analyst at Thomson Reuters, to help make this year’s personal tax return preparation more manageable and avoid mistakes.
Two sides to the first-time homebuyer credit
If you purchased your first home in the earlier months of 2010, you may be entitled to a tax credit of up to $8,000. This credit and the eligibility requirements have received a lot of positive attention, but less publicized is an important aspect of an earlier incarnation of the credit. If you claimed a first-time homebuyer’s credit on your 2008 tax return, you have to pay extra tax now.
The credit in 2008 was really nothing more than an interest-free loan that generally must be paid back over 15 years, beginning with the 2010 return. This means a $500 repayment with your 2010 return if you claimed the maximum 2008 credit of $7,500.
Energy-efficient property credit
Purchases of energy-efficient windows, doors, or insulation for your primary home can qualify you for a 30 percent tax credit of up to $1,500. But if you made the purchases in both 2009 and 2010, you may see red when you calculate your 2010 credit for being green. The $1,500 ceiling on the credit is an aggregate for 2009 and 2010, so if you claimed the maximum credit on your 2009 return, you cannot claim an additional credit for 2010.
Roth IRA conversion offers tax timing choice
FTC gets court order to shut down timeshare scam
A telemarketing operation that preyed on timeshare owners desperate to dump their properties was shut down after the Federal Trade Commission won a temporary restraining order in U.S. District Court in Tampa, Florida, the agency announced today.
The government alleged that tens of thousands of unsolicited calls were placed by St. Petersburg-based Vacation Property Services, Inc. and two related companies since 2006 that pitched the idea the businesses could get them buyers for their properties. In exchange for getting a promise quick sale — they said they had buyers ready to make a deal — the property owners were asked to send payments of $200 to $8,000.
Telemarketers even offer phony congratulations to the victims, the government said in court filings. When they questioned the fees, they were told they were to cover sales-related costs including a title search and processing fees.
After the payments were made, the FTC said, it became clear there were no buyers lined up. When the timeshare owners complained and asked for refunds, they were ignored or rejected, the court filings said. They led consumers to lodge hundreds of complaints against the telemarketing companies.
The FTC also charged the company with making hundreds of thousands of telemarketing calls between November 2009 and November 2010 to people registered on the national Do Not Call list — a violation of federal law.
In addition to Vacation Property Sellers, Timeshare Experts, Higher Level Marketing, (dba Vacation Property Services) as well as principals Albert M. Wilson, David S. Taylor and Frank M. Perry, Jr. were named in the court order. Wilson and the same companies were named in a series of complaints and subsequent settlements with the Florida Attorney General — in which the businesses agreed to stop the the practices the FTC cited. That was in 2007 and 2008.
These types of scams have proliferated in recent years as the timeshare resales market collapsed during the economic downturn. The FTC shut down a similar operation, Timeshare Mega Media, in the fall. That outfit was operating from a Fort Lauderdale-area boiler room that took in millions from timeshare owners.
The role for DC plans in the public sector
Alicia H. Munnell is the Director of the Center for Retirement Research at Boston College and the Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management. The opinions expressed here are her own.
In the wake of the financial crisis, policymakers have been chattering about moving to defined contribution (DC) plans in the public sector. Defined contribution plans may well have a role in the public sector, but not as an alternative to defined benefit (DB) plans. Defined benefit plans should remain as a secure base for the typical public employee and defined contribution plans could be “stacked on top” of them to provide additional retirement income for those at the higher end of the pay scale.
Before the financial crisis, ten states had introduced some kind of comprehensive DC plan. Many of these states provide stand-alone DC plans, either as a requirement (Alaska and Michigan) or an option. Two states (Oregon and Indiana), however, recognizing the value of offering some secure benefit, provide a combined DB/DC plan.
In the wake of the financial crisis, three states (Michigan’s public schools, Georgia, and Utah) have introduced such combined DB/DC plans, where new employees will get some of their retirement income from each type of plan. And an additional six states are discussing DC options.
Why the enthusiasm for DC plans? Some arguments are wrong; others hold water. Starting with wrong: Some supporters highlight the magnitude of the unfunded liabilities in public sector DB plans as justification for switching to a DC. The reality is that even with a new DC plan, states and localities are still left to deal with past underfunding. A new plan only addresses pension costs going forward, it does not help close the current gap between pension assets and liabilities.
Similarly, some contend that switching to a DC plan would save money in the future. But for any given level of benefits, DC plans have higher investment and administrative expenses than DB plans. Some proponents think that even if total costs increased, taxpayers could gain by shifting contributions from the government to the employee.
Transferring the burden to the employee provided a major economic incentive in the private sector to move from DB plans, where employees make no contributions, to 401(k) plans, where employees make the bulk of the contributions. But such a gain is difficult to achieve in the public sector where employees already make substantial contributions to their DB pensions.
Defined-benefit plans are a trap. Once you have a decade in the system, you literally cannot afford to leave. You may get your contributions back, but none of the investment earnings — which after contributing 11% of your paycheck for a decade ought to be substantial.
I’ve known several tired and bitter teachers, hanging on for five more years just to qualify for their full pension. What kind of “defined benefit” is that? On the flip side, I know a couple of teachers who worked a decade BEYOND maxing out their pension. A decade in which their contributions continued to earn money for the system but the benefits stagnated.
The biggest reason why DC plans don’t accumulate as much as DB plans is that participation is not forced. DC workers can opt out. DB workers cannot — I tried and was refused. All the control in the DB system rests with the state. But have no fear! Big Brother is generous. Big Brother is wise. Big Brother will take care of you. We all love Big Brother!
Fidelity: Cost of retiree healthcare is falling
Fidelity Investments says the cost of healthcare in retirement is falling for the first time since the company began tracking health spending ten years ago — and the new healthcare reform law is getting the credit.
Fidelity estimates that a 65-year-old couple retiring this year will need $230,000 to pay for medical expenses throughout retirement, not including nursing-home care. That represents an eight percent decline from last year, when the estimate was $250,000 and the spending forecast jumped 4.2 percent.
The drop in this year’s forecast stems from changes to the Medicare prescription drug program contained in the Affordable Care Act (ACA) that reduce out-of-pocket spending by seniors. The law gradually closes the notorious “doughnut hole,” which is the gap in coverage that starts when a drug plan beneficiary’s annual drug costs hit $2,830 and continues up to $4,550, when “catastrophic” coverage kicks in.
This year, the ACA mandates that pharmaceutical companies provide a 50 percent discount on brand-name drugs to seniors who enter the doughnut hole. Starting in 2012, the gap itself will be closed gradually until it is eliminated completely in 2020.
Ninety percent of Medicare enrollees have Part D coverage, and Fidelity estimates that about 30 percent of them will enter the doughnut hole in any given year.
The Fidelity study assumes no employer-provided retiree health coverage, and a life expectancy from age 65 of 17 years for men and 20 for women. It includes spending for traditional Medicare premiums (Part B and Part D), out-of-pocket drug costs and a variety of other co-payments and deductibles.
Fidelity cautions that this year’s decline likely is a one-time event; the company still expects health expenses to keep rising over time due to higher costs for services, introduction of new technology and higher utilization of services such as diagnostic testing.
This is why so many of us wrote our representative in support of the changes under the Health Care Act. We didn’t get everything we pushed for, with the biggest gap being a single payer system, but more and more people are starting to see benefits under the passed law and that will slowly change the attitude of the people so dead set against it due mostly to missinformation from groups with definite political and personal wealth agendas.
Round two is to push the single payer system to really drive down costs and improve health services for the majority of Americans and cover all of our citizens for less than we pay in total today. That’ll have to wait, though, until Obama’s second term. His re-election is looking much better between positive news on the HCA, the economy rebounding, and employment slowly recovering over the next year. The GOP knows this, too, which explains the weak slate of candidates so far. I think the GOP power brokers are going to hold back their best candidates for 2016, and let 2012 fall where it may.
It’s never too late to save for retirement
You are middle aged and haven’t saved a penny for your retirement.
Worried?
Many Americans are finding themselves cash strapped and paying down debt well into their 40s and 50s, putting aside any thought of a retirement savings plan.
But it’s not too late to start right now.
According to JB Orecchia, president and CEO of Oweing.com, a website that provides consumers with a plan that helps track and map out debt repayment, you can still move forward on your retirement goals even if you’re a late starter.
“Anecdotally, consumers from ages 55 and up find that they are going to have to work longer to pay off debt and didn’t plan very much for retirement. But there’s always an opportunity to improve your current situation,” says Orecchia.
In an interview with Reuters, Orecchia talks debt trends and retirement strategies for late starters.
I have been saving for years. My folks received a very large pension since they were in the US Defense. You can imagine it was much larger than most people’s including Senators and Congressmen. I would say since they never had a retirement account – they didn’t need it – I was left out to figure out how to save for myself. I finally got an epiphany in my late 30′s to save for my retirement. I started out only saving $50 dollars a month but increased it. Even when the market crashed I never really saw much of a loss – about 30 percent – but within a year or two it came back. Now I have some money saved, and my house is just about paid off. I got my home at a very young age. When people were going off to college, my idea was to get a house first, take in roommates to pay my mortgage and go to college later on. As crazy as it sounded, it worked for me. My home is almost paid off, and soon I can use all the money from the mortgage to put in the retirement account. I hope that helps some kids just starting out. You’re going to live with someone more than likely in college. Why not get your home first, then take in roommates, then go to college. At least you will have an income coming in, and they will be paying your mortgage. Hope that helps.
Retirement: The trouble with target date funds
Target date funds (TDFs) have taken off in recent years as more workplace retirement plans install automation options.
TDFs invest in a mix of assets and aim to reduce equity exposure as participants approach retirement. The basic idea is good, considering that many investor portfolios suffer from benign neglect when it comes to rebalancing, fund selection and reducing exposure to riskier investments as retirement approaches.
But many retirement investors don’t really understand how TDFs are allocated between equities and fixed income. Fees can be high, and some critics don’t think TDFs are structured to select the best-in-class funds for all asset groups.
If you’ve defaulted into a TDF, check under the hood for these common problems:
Misunderstandings about risk: TDFs have come under fire for maintaining high equity allocations even in funds tailored for investors near retirement age. Many TDF investors near retirement age suffered dramatic losses in the 2008 market crash. Target funds with dates between 2000 and 2010 lost 22.5 percent in 2008, and funds with target dates between 2011 and 2015 lost 28 percent, according to Morningstar. But those are broad averages; some funds with dates as early as 2010 lost as much as 50 percent of their value in 2008.
The big 2008 losses can be discounted — to an extent — by the once-in-a-lifetime nature (one hopes) of the financial crash; the resulting liquidity crisis forced many fund managers to sell whatever they could to meet redemptions, resulting in especially large losses even in well balanced TDFs. But that doesn’t change the fact that there’s no industry standard for fund naming, or the perception gap among near-retirement investors who think they’ve adopted a more conservative posture.
The industry notes — correctly — that the glide path for most TDFs isn’t the target year of retirement, but some point beyond. “More TDFs are designed to deliver investment strategies for life — not just for your working life,” says a spokesman for the Investment Company Institute (ICI). “Few, if any, serious financial planners would recommend a 100 percent cash (or cash-and-bond) portfolio for a 65-year-old facing the potential of 30-plus years in retirement.
I want to heartily second NewsLady.
If you do your own legwork, you can build a portfolio which matches your personal needs. If you hire a professional, you’ll ultimately pay a huge amount of money for something that nobody understands (and almost certainly doesn’t fit you personally). There is no substitute for a personal understanding of your investments.
Retirement: 3 problems with automated 401(k)s
Automation of workplace retirement plans has spread rapidly in recent years. But don’t make the mistake of taking your foot completely off the gas pedal if your employer has installed retirement cruise control.
The Pension Protection Act of 2006 (PPA) set the stage for plan sponsors to step up automatic opt-in enrollment for new workers, and it’s resulted in much higher plan participation rates. Growing adoption of other automation features have helped to address the hard reality that most workplace retirement savers pay little or no attention to their contribution levels, rebalancing or mutual fund selection.
But automation comes with drawbacks that can hurt long-term performance of your retirement portfolio. If you’re using default options, it’s time to start paying attention — and watch out for these three potential potholes:
One: Low default contribution rates
More than half of large plans set initial contribution rates for auto-enrolled workers at three percent, according to a survey of large defined contribution plans by the the Defined Contribution Institutional Investment Association (DCIIA), a non-profit industry consortium focused on the institutional retirement industry. This despite the fact that survey respondents acknowledge that the optimal rate is 10 percent or more.
The disconnect stems from a PPA provision that defines three percent as the contribution rate that provides safe harbor protections for plan sponsors, says Cathy Peterson, director of retirement insights at J.P. Morgan Asset Management and co-author of the DCIIA study. “Many plan sponsors don’t want to be out of line with the industry,” she says. “The three percent rate is viewed as the benchmark.
The economy also plays a role. Eighteen percent of respondents said higher initial contribution rates would require them to make higher matching contributions that they can’t afford right now.
401k automation tools such as auto-enrollment, auto-escalation, and auto-default into an appropriate investment portfolio are merely tools that plan sponsors may use to reach a defined objective. Simply implementing any or all auto-features without a clear understanding of the desired result could actually do more harm than good to plan participants.
A number of considerations must be made when implementing auto-features because many plan features and provisions are interrelated. For example, most plan sponsors do not consider the impact of their current distribution provisions when considering a target date fund glidepath. Many target date fund glidepaths assume that a participant will stay invested throughout their retirement years. However, the vast majority of 401k plans do not allow for systematic withdrawal. Instead, once a retired participant needs to initiate a distribution, most 401k plan sponsors require the distribution to be taken in a lump sum, thereby causing disconnect between the intent of the target date fund glidepath and the plan’s distribution provision.
Automatic features are indeed terrific tools that help plan sponsors efficiently help their employees participate and invest in their 401k. However, like any tool, if misused, they can lead to unintended damage to participants’ retirement readiness.
Sanders Booze Capital Advisors, LLC
