NewRetirement Retirement News Digest : Bonds and Investments

Fidelity Says 401(k) Accounts Recover From 2008 Drop

jberman — Sat, 21 Nov 2009 10:33:00 GMT

Bloomberg, November 19th, 2009

Fidelity Investments said the average balance on customers’ 401(k) retirement accounts has returned to September 2008 levels on contributions and third- quarter investment gains.

Account balances in plans for U.S. workers benefited from the 22 percent year-to-date gain in the Standard & Poor’s 500 Index along with continuing employee contributions, the Boston- based firm said in a statement today, after reviewing 11 million accounts managed by Fidelity.

“The third quarter actually moved us into positive territory,” said Michael Doshier, vice president of Fidelity’s workplace investing group. “I think that surprised, if not everybody, a lot of people.”

Average account balances rose 13 percent to $60,700 from June to September, Doshier said, and are up 28 percent from $47,500 at the end of March. The gains include investment returns, employee contributions and employer’s matches. A typical 401(k) holds a mix of equities, bonds and cash.

The average balance was $58,400 at the end of September 2008. The S&P 500 Index lost 42 percent from Oct. 1, 2008, until touching a low on March 9. The latest figures are 12 percent below the average balance of $69,200 at the end of 2007, according to an earlier Fidelity survey.

Twenty-seven percent of companies that suspended their 401(k) matching contributions are beginning to make those payments again, according to Fidelity, the largest U.S. administrator of 401(k) plans. Companies have either reinstated the match or plan to do so in the next 12 months as the economy recovers, Fidelity said.

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The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation

jberman — Tue, 17 Nov 2009 10:31:00 GMT

Social Science Research Network, November 15th, 2009

Many consumers make poor financial choices and older adults are particularly vulnerable to such errors. About half of the population between ages 80 and 89 either has dementia or a medical diagnosis of "cognitive impairment without dementia." We study lifecycle patterns in financial mistakes using a proprietary database that measures ten different types of credit behavior. Financial mistakes include suboptimal use of credit card balance transfer offers, misestimation of the value of one's house, and excess interest rate and fee payments. In a cross-section of prime borrowers, middle-aged adults make fewer financial mistakes than younger and older adults. We conclude that financial mistakes follow a U-shaped pattern, with the cost-minimizing performance occurring around age 53. We analyze regulatory regimes that may help individuals avoid making financial mistakes. Some of these regimes are designed to address the particular challenges faced by older adults, but much of our discussion is relevant for all vulnerable populations. We discuss disclosure, nudges, financial driving licenses, advanced directives, fiduciaries, asset safe harbors, ex-post and ex-ante regulatory oversight. Finally, we pose seven questions for future research on cognitive limitations and associated policy responses.

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Stocks: Five Market Mistakes to Avoid

jberman — Tue, 10 Nov 2009 10:21:00 GMT

Business Week, November 8th, 2009

Markets may have rebounded in 2009, but individual investors are still edgy and shell-shocked.

Even as the broad Standard & Poor's 500-stock index remained up 56% since March, the U.S. unemployment rate crept above 10%, according to a Labor Dept. report released Nov. 6. "I don't think many people are feeling very relieved," says Milo Benningfield of Benningfield Financial Advisors in San Francisco. Many people believe the "[stock market rally] can't last," he says.

These remain risky times, and the last few years have demonstrated to investors the high cost of doing the wrong thing. Against that nervous backdrop, BusinessWeek asked financial advisers what common mistakes investors are making, and how to avoid them:

1. Don't Jump In All at Once
A little optimism can be a dangerous thing. Individual investors are notorious for selling stocks when markets have already dropped and buying after they have risen. And, says Susan Elser of Elser Financial Planning in Indianapolis, "Selling low and buying high is the worst thing you can do for your returns."

Among those who stayed away from stocks and other risky investments for the past year, many are irked to have missed out on the recent rally. But is now the right time to buy again?

Don't rush back into the market because you worry you've missed the rally. "The biggest mistake is [to try] to make everything up at once," says Micah Porter, president of the Minerva Planning Group in Atlanta.

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For Financial Planners, a Year of Tough Questions

jberman — Thu, 05 Nov 2009 10:06:00 GMT

The New York Times, October 16th, 2009

If you think you’ve had a hard time reckoning with your own finances in the last 18 months, try putting yourself in the shoes of the financial planners who’ve been answering to scores of unhappy clients.

The planners, after all, were the ones who were supposed to help their clients avoid trouble in the first place. “I feel like I’m finally able to leave the witness protection program,” said Ross Levin, president of Accredited Investors in Edina, Minn. “There has been a loss of confidence in us and in the world, and a sense of betrayal. They did everything we told them to do, and it seemed like it didn’t work out.”

Though markets have improved, they are still far from where they once were, and that has made for some difficult discussions between financial professionals and their clients.

I wanted to find out more about those conversations. How much were clients pushing back, for example, and what were they saying? That was the main reason I moderated a discussion last Sunday at the Financial Planning Association annual meeting in Anaheim, Calif. (I received no compensation for my role there.)

While the planners were resolved and well rehearsed in front of hundreds of their peers, it was also clear that they had been severely tested in the last year. During the hourlong session, I quizzed five of them about the toughest questions their clients had asked. Here are those questions, along with the planners’ responses.

PREDICTING THE FUTURE So why didn’t most financial planners see all of this coming? Weren’t the signs obvious?

“This question actually presumes that there is something wrong with not having seen this coming,” said Elissa Buie of Yeske Buie, with offices in Vienna, Va., and San Francisco. “We live in a chaotic system, and chaotic systems are not predictable. But we know the range of possibilities, and this was always a possibility.”

Though most clients tend not to remember it years later, good financial planners will generally sit down at the beginning of a relationship, after clients have declared the sort of risk tolerance they think they have, and remind them how bad things can get in a truly outlying year. Well, 2008 into 2009 was one of those years.

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Return Your IRA, 401(k) Distribution

jberman — Tue, 27 Oct 2009 01:10:00 GMT

The Wall Street Journal, October 25th, 2009

A measure that allows older adults to skip required withdrawals in 2009 from tax-deferred retirement accounts hasn't always worked as smoothly as Congress intended.

Now, a new tax ruling can help people clear up some problems linked to the original law -- but you'll need to act in the next several weeks.

Uncle Sam requires that people age 70½ and older take yearly minimum withdrawals from traditional individual retirement accounts and 401(k)s, based on their life expectancies, and pay income tax on those withdrawals.

Last December, however, Congress suspended the withdrawal rule for 2009.

But many people took their distributions anyway. Some couldn't afford to leave their nest eggs alone. Others took withdrawals before becoming aware of the suspension. And some 401(k) custodians -- concerned about violating the documents that govern employer-sponsored plans -- required participants to withdraw their money regardless.

In a ruling released Sept. 24, the Internal Revenue Service is allowing many people who took unwanted distributions at any point this year to put the money back into a tax-deferred account by Nov. 30 -- and avoid paying income taxes on the money. Normally, the IRS gives account holders 60 days to change their minds.

But there are some potential complications. An individual who took more than one distribution from a traditional IRA in the last 12 months -- for example, many people take regular monthly payouts -- can put back only one of those withdrawals, says Natalie Choate, an attorney at Nutter McClennen & Fish in Boston.

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Ways to Ease the Pressure of a Cash Crunch

jberman — Thu, 15 Oct 2009 08:30:00 GMT

The New York Times, October 14th, 2009

MANY retirees are in a cash crunch — with a lower income stream from their investment portfolios, personal expenses that are higher than expected, or both.

While most assets can be used to generate liquidity, deciding what to do requires careful deliberation; there are many pitfalls. Here are the most commonly used approaches for people who find themselves coming up short during retirement, and an analysis of their pros and cons.

CASH FROM YOUR HOME Mortgage rates are so low that many financial planners say the best way to raise money is to take out a conventional mortgage or a home equity line. But reverse mortgages, which allow homeowners who are at least 62 to borrow against the equity in their homes and receive regular monthly payments, are often seen as a last resort. Some financial planners even advise retirees to sell their investment portfolios or cash in their life insurance policies before taking out a reverse mortgage.

Unlike traditional mortgages or home equity lines, a reverse mortgage requires no payments until the borrowers die or no longer use the home as their primary residence. Then the mortgage must be paid in full. Closing costs, fees and interest rates are also generally high, reducing the amount of money that borrowers can leave to their heirs. Yet if retirees have exhausted other options, a reverse mortgage may be worth considering, especially for those with high medical expenses, said Alicia H. Munnell, the director of the Center for Retirement Research at Boston College. “If you’re not planning on leaving your house to a child, then this is an option, rather than depriving yourself during your lifetime,” she said.

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Market risk can and should be pared from retirement portfolios - but often it’s not

jberman — Thu, 24 Sep 2009 06:41:00 GMT

Boston Globe, September 23rd, 2009

It has been a year since the music died on Wall Street.

What have people done to protect their life savings from events such as the collapse of Lehman Brothers Holdings and the ensuing financial pandemic? Next to nothing.

Market risk can and should be pared from retirement portfolios, but millions are just as vulnerable as they were a year ago. Most people have left their dominant stock allocations untouched. The key is to add more bonds.

The conventional wisdom - that the historical returns of stocks beat bonds - is misleading. If you are retiring during or immediately after a bear market, long-term returns are irrelevant.

Let’s take 1999 through last year. You would have lost money in large-company stocks in four of those years (2000, 2001, 2002, and 2008). What if you retired in 2003 and had most of your money in big companies?

The chances are slim that your retirement plan has access to sophisticated portfolio insurance strategies available to institutional investors.

Because options for individuals are limited, you have to buffer your portfolio with an equal mix of stocks and bonds. The single-worst year for this formula was 1931, when such an investment would have lost about 25 percent.

Compare the 1931 stock-bond mix with a 43 percent decline for an all-stock portfolio in the same year, according to Ibbotson Associates, a research firm.

In 2008, the 50-50 mix would have lost about 10 percent, in the second-worst year on record for major stocks. Had you reduced your equity portion to 30 percent and raised bonds to 70 percent, you would have been in the black - up 3 percent.

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How to make your money last

jberman — Tue, 22 Sep 2009 07:39:00 GMT

CNN Money, September 21st, 2009

Once you have your Social Security strategy down, there's just one little retirement question left to consider: How can you make the money that you've so diligently saved provide the life you want for as long as you live? Oh. That.

Figuring out how to draw secure retirement income from a portfolio is a challenge in the best of times; today it's made more complicated by fear. Having seen the worst-case scenario unfold in the past year, you've probably gone into loss-avoidance mode. But deflecting market risk leaves you vulnerable to inflation risk -- and the risk that you'll outlive your money. So hiding in cash won't save you.

"No one investment can protect you from every risk you'll face," says John Ameriks, head of Vanguard Investment Counseling & Research. What you need, rather, is a basket of investments that provides:

1. Stable income you're not likely to outlive.

2. The potential for that income to grow to beat inflation.

3. The ability to access cash to meet unexpected needs.

4. Adequate protection from market downturns.

Here are three smart strategies to achieve those goals. The second offers the best chance of making your money last; however, you'll lose access to a big chunk of your savings. The others give you more control, but less certainty. There's no free lunch in retirement -- but the menu that follows presents some interesting options.

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4 Steps to a worry free retirement

jberman — Thu, 17 Sep 2009 02:21:00 GMT

CNN Money, September 16th, 2009

The stock market keeps taking a hammer to the conventional wisdom about retirement investing.

Conventional wisdom, circa autumn 2007 (Dow 14,000): You could be retired for 30 years or more. You need lots of stocks so that your money will grow enough to last that long.

Conventional wisdom, circa spring 2009 (Dow 7000): Holding too many stocks is a clear and present danger to your retirement plans. Save what's left of your portfolio and shift toward bonds. You can't afford to lose any more.

Conventional wisdom, circa autumn 2009 (Dow back up to 9500): Wisdom? Forget it. The market falls, it rises -- nobody knows why ... Can we talk about something else? Think Favre will make it through the season?

Even with the recent pop in stock prices, your 401(k) balance probably isn't where you want it to be. There are at least two natural responses to the market whipsaw. You can embrace the new momentum, going aggressively back into stocks in the hope of catching up again. Or just check out: With the market so volatile, your chance at a comfortable retirement may seem dicey no matter what you do. According to a recent Vanguard study, 401(k) participants as a group changed their allocations only slightly during the 2008 bear market.

Time to get constructive. The retirement you want may be more attainable than you think. Although you might have to save a bigger chunk of your income than you do right now, you also have resources beyond your 401(k), IRA, and Social Security.

Your home, your ability to work a few years longer, a pension if you have one (even if it's small) -- all these can have a big impact on your future income. Once you see how much they are worth, you'll be able to construct a realistic plan that doesn't force you to take huge gambles.

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How Retirees Can Spend Enough, but Not Too Much

jberman — Wed, 02 Sep 2009 09:47:00 GMT

The New York Times, August 28th, 2009

When you retire, you’ll probably want to visit your grandchildren more than once each year. Perhaps you’ll aim to give money each month to charity or your religious congregation.

The amount you have saved will clearly matter a great deal in whether you can do these things. But so will your portfolio withdrawal rate — the percentage of your assets that you take out each year to pay your expenses. You want it to be high enough to afford fun and generosity but low enough that you have little risk of running out of money.

Until a few years ago, the standard advice was that 4 percent or 4.5 percent was about the best you could do. So if you had $500,000 in savings, 4 percent would give you about $20,000 in your first year of retirement to augment Social Security and any other income. Then, you could give yourself a raise each year based on inflation. At 3 percent inflation, you’d end up with $20,600 in the second year of retirement and so on from there.

More recently, however, several studies have suggested that withdrawing 5 percent or even 6 percent was possible — and still prudent.

Retirees rejoiced.

And then the stock market fell to pieces.

In the wake of the carnage, people who hope to retire anytime soon will probably be starting with a kitty smaller than they had expected just a few years ago. So an extra percentage point on the withdrawal rate matters even more than it might have in 2007. It could be the difference between traveling to see family or not, or it could determine when you get to retire in the first place.

But could it also lead you on a path toward ruin? This week, I went back to two of the researchers who had come up with the more generous formulas to see whether they’re sticking by them. Not only are they staying the course, but one is telling his clients that they can take out as much as 6 percent of their money during the next year.

How can they justify something like this after the year we’ve just had?

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How To Beat Insurers At The Annuity Game

jberman — Fri, 28 Aug 2009 08:03:00 GMT

Forbes, August 26th, 2009

Many variable annuity skeptics are taking a second look at these complex insurance-investment hybrids that hold your money in a mutual fund look-alike, have a life insurance death benefit and offer income-for-life guarantees. The income guarantee is appealing to people whose retirement accounts have been reduced by the stock market and whose net worth has been reduced by the real estate collapse.

Annuity marketers are tapping into this trend with television ads hinting at a worry-free retirement solution: Give us your $100,000 and we'll give you $5,000 a year for as long as you live! There are solid arguments for people in certain situations to consider annuities now, but for many investors the instant income-for-life option is not the compelling benefit insurers would have us believe.

A way to get the most from a variable annuity investment is to do exactly the opposite of what insurance companies want, which is for people to buy an annuity and start taking the income right away. While it may be the right choice for some investors, it's almost always the right choice for the insurance company because once you start taking the income, you lose certain guarantees on the growth of your principal and thus the growth of your income. When people choose this option, the insurance company has very little downside and the annuity owner loses most of the upside.

Instead, the longer an annuity holder waits to start taking the income, the greater the chance the advantage will shift. Many VA contracts guarantee that as long as you don't trigger the income option, your income basis will double in 10 years, a 7% annualized compound rate of return. Over time, the balance of power shifts: The insurance company ends up with the downside and the annuity holder has the upside, with the added guarantee that the contract value available for income will never decline.

This explains why some of the major insurers that bet heavily on variable annuity sales during the past few years are now suffering wicked hangovers. The principal players got into a kind of guarantee arms race that never figured on a historic market crash. When that crash came, annuity holders who had waited to take their income realized that even though the market was in the pits, the insurance company had guaranteed to pay them on the basis of the last high-water mark.

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Are fees draining your 401(k) retirement savings?

jberman — Wed, 26 Aug 2009 09:26:00 GMT

USA Today, August 25th, 2009

Quick question: How much are 401(k) fees removing from your retirement nest egg each year?

If you are either unaware of such fees or don't know their amounts, don't worry: Nearly 83% of Americans don't know, either, according to AARP.

But the coming months may change that.

Congress and the Department of Labor are working on legislation and regulation that would require employers to disclose more information about administration and management fees in an understandable way. And an independent website, Brightscope.com, seems to be gaining traction as it aims to provide workers with company 401(k) plan ratings that include fee information.

More workers are relying on 401(k) plans for retirement funding, as pension plans are frozen or no longer offered. The recession and stock market losses battered 401(k)s over the past year. But associated fees — often hidden or extremely confusing to find and understand — haven't helped.

"When money is going in every month, it's hard to keep track of the fact that your account balance might not really be growing," says Rebecca Davis, staff attorney at the Pension Rights Center. "Participants need to know that they are saving for their own retirement and not just funding the income of a third-party administrator."

The assortment of fees can suck thousands out of your 401(k).

Suppose your account with a balance of $20,000 earns 7% a year, with fees equal to 0.5% a year. Over 20 years, the balance would be worth about $70,000, according to a report from Congressional Research Service. Were the fees 1.5% a year — near the industry median, according to the Investment Company Institute, or ICI — the balance would amount to $58,000, or 17% less.

All sorts of fees exist, and it can be hard to determine whether workers or employers are paying them. Administrative fees pay bookkeepers, trustees and legal advisers; management or investment advisory fees pay those who operate and invest in mutual funds; and distribution fees, or 12b-1 fees, are charged by certain mutual funds.

Fee amounts vary considerably, especially depending on the plan's size.

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Guarantee a comfortable retirement

jberman — Wed, 29 Jul 2009 04:47:00 GMT

CNN Money, July 28th, 2009

Question: I expect to have about $50,000 in pension and Social Security benefits when I retire. Do I need to buy an annuity or should I just keep investing in stock and growth and income funds? --Michael, Columbus, Georgia

Answer: I hate to start an answer with what is probably the most overused phrase in financial journalism, but...it depends.

It depends on how large you think your expenses will be in retirement, how much money you want for unexpected expenses and emergencies and how much you want to leave to heirs.

A good start is to ask yourself how much of your expected retirement expenses you want to cover from guaranteed sources of income like a pension, Social Security and annuities. There's no official correct percentage, but one strategy is to cover as much of your essential expenses -- housing costs, food, basic transportation -- as possible from secure sources. That way, you know that, whatever else happens, you can maintain a minimum acceptable standard of living.

So if you feel $50,000 from your pension and Social Security will cover enough of your basic expenses to give you the comfort level you need, then you probably don't need any more guaranteed income, which means no annuity.

But what if you feel that your basic expenses are running higher than $50,000? Or maybe you want a cushion for inflation. (Yes, Social Security provides cost-of-living increases, but most corporate pensions don't.)

Guaranteed income for life

You might want to devote a portion of your savings to a lifetime immediate annuity. Annuities come in many variations, some of which (make that most) can get pretty complicated. But an immediate annuity is the easiest type to understand. You hand over a chunk of money and in return you get a guaranteed monthly payment for the rest of your life (or, if you wish, as long as you or your spouse is alive).

A 65-year-old man who puts $150,000 of his savings into a lifetime immediate annuity would get about $1,025 a month, or $12,300 a year, for the rest of his life. Assuming he was starting with $50,000 like you, that would boost his guaranteed income to more than $62,000. A 65-year-old couple, on the other hand, would get about $840 a month, or just under $10,100 a year. Yes, that's less what a single person gets, although that income would be paid as long as either member of the couple is still alive.

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Converting an I.R.A. Into a Roth? How’s Your Crystal Ball?

jberman — Sun, 19 Jul 2009 06:08:00 GMT

The New York Times, July 17th, 2009

You’ll be hearing a lot in the next six months about Roth Individual Retirement Accounts — but not as much as you should about a long-term threat that hangs over them.

Starting Jan. 1, you’ll be able to take a regular I.R.A., say, one that you have in a brokerage account after having rolled an old 401(k) into it, and turn it into a Roth. You’ll be able to do this no matter how much money you make, though you’ll have to pay income taxes at your current rate on whatever you move. Currently, you can’t make the conversion at all if your household has more than $100,000 in modified adjusted gross income. (That’s a technical Internal Revenue Service term, which it defines in Publication 590, available on its Web site).

Why would you want to make such a swap? Because you think you or your heirs could end up with more money over the long haul by investing in a Roth instead of a regular I.R.A.

With a Roth I.R.A., you pay no taxes on your earnings in most instances when you take money out; distributions from regular I.R.A.’s are taxable the same way that income is, though the basic I.R.A. does offer a tax deduction when you first deposit money into the account. The Roth offers no such deduction when you contribute money to it.

So if you think your tax rate will be higher during retirement than it is now, say if you’re fairly young for instance, making the conversion early in 2010 looks sensible.

It all seems pretty simple, until you consider this: The tax laws might change substantially, throwing all of your careful planning into utter disarray. We’re currently staring down years of federal budget deficits and decades of looming Medicare and Social Security obligations. If wealthy people convert their retirement funds to Roth I.R.A.’s in large numbers, won’t all of that newly tax-shielded money look tempting to government officials years from now?

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Does Stock-Market Data Really Go Back 200 Years?

jberman — Tue, 14 Jul 2009 07:59:00 GMT

The Wall Street Journal, July 13th, 2009

As of June 30, U.S. stocks have underperformed long-term Treasury bonds for the past five, 10, 15, 20 and 25 years.

Still, brokers and financial planners keep reminding us, there's almost never been a 30-year period since 1802 when stocks have underperformed bonds.

These true believers rely on the gospel of "Stocks for the Long Run," the book by finance professor Jeremy Siegel of the Wharton School at the University of Pennsylvania that was first published in 1994.

Using data assembled by other scholars, Prof. Siegel extended the history of U.S. stock returns all the way back to 1802. He came to two conclusions that became articles of faith to millions of investors: Ever since Thomas Jefferson was in the White House, stocks have generated a "remarkably constant" average return of nearly 7% a year after inflation. (Adding inflation at 3% yields the commonly cited 10% annual stock return.) And, declared Prof. Siegel, "the risks of holding stocks decrease over time."

There is just one problem with tracing stock performance all the way back to 1802: It isn't really valid.

Prof. Siegel based his early numbers on data first gathered decades ago by two economists, Walter Buckingham Smith and Arthur Harrison Cole.

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