The Rules Have Changed

The Rules Have Changed:

We are now on our own financially

Old rule: You were loyal to your employer in return for the promise of a pension and health care in retirement.

New rule: Supreme Court (2008) decides that employers don't have to honor those promises and can stop paying health care any time. Pensions of retirees are cut by employer operating in bankruptcy. Pensions of current workers are cut by buyouts and job outsourcing. Social contract ended. CEO as "LORDSHIP" period begins.

Old rule: Pension plans used low interest rates to calculate how much to they paid and how much you got. If you took the lump-sum instead of the payments, you got a greater amount than you can now. Congress passed pension-reform legislation in August that raised the assumed interest rate. Now, some retirees have learned that their retirement payout will be cut by about $200,000. The new legislation is expected to reduce the pensions of millions of Americans as they retire in coming years. Companies are allowed to pay less. Currently underfunded pensions will be called OK. Some 22 million Americans working at private-sector companies participate in defined-benefit pension plans, about half of whom have the option to take the benefit as a lump-sum payment. Pension experts say most do so, though figures aren't available.

New rule: Some retirees will keep working in order to receive the same retirement lump-sum. They will need to learn how to manage it better. The calculations assume a higher rate of interest and that means retirees will need to invest their nest egg wisely to maintain their planned retirement. Forced “retirement” like airline pilots experience will mean a new career at 55.

Old Rule: Withdraw order: First RMD from IRA pensions accounts. Then, taxable account gains should be neutralized if possible. Then accounts such as long-held Roth IRAs from which withdrawals are tax-free should be the last to be touched so the money keeps growing tax-free. However, that way does not minimize tax long term, which is the objective. For instance, a middle class couple retiring at age 65 reduced their annual tax bill from $5,346 to a mere $260 by mixing withdrawals from both the husband's deductible rollover IRA and the wife's tax-exempt Roth IRA, rather than taking them all from the rollover IRA. The Roth IRA withdrawals do not count as income when determining how much of Social Security benefits are taxable, but withdrawals from traditional IRAs do.

New Rule: The goal of a wise tax withdrawal strategy is not necessarily to keep next year's tax bill as low as possible, but to lower taxes over the long term. It may make sense to start taking money out of deductible IRAs before you need it, and pay taxes on it, to avoid a larger taxable mandatory withdrawal later on. "With the same nest egg you may be able to extend your retirement income three to five years, just by how your withdraw the money" to minimize taxes, said W. Van Harlow, managing director for the Institute. www.fidelityresearchinstitute.com.

Old Rule: A couple should plan on replacing 70 percent to 85 percent of pre-retirement income in retirement. The press perpetuates this myth from a study that is repeated at regular intervals at Georgia State University for an insurer. Suppose you earned $100,000 a year and paid $25,000 a year in taxes. Your joint Social Security benefits could exceed the $30,000 a year you spend on living expenses. That means your standard of living would rise when you retired. Unfortunately, the study did not consist of asking people who retired already.

New Rule: Each couple knows individually they will not be spending and saving the same amounts later. The expenses will be different. You may have the house paid and saving may become a thing of the past. You will use savings to pay for expenses. They will move from expenses to income. You will not spend 25 percent on taxes if you are living on savings and not on income.

Life insurance dates only to ancient Rome; "burial clubs" covered the cost of members' funeral expenses and helped survivors monetarily. called Fratres (burial clubs). These were set up by the poor to pay for the funerals of the members and to help the surviving family members financially. Corporation for Relief of Poor and Distressed Widows and Children of Presbyterian Ministers in 1759; Episcopalian priests organized a similar fund in 1769. Between 1787 and 1837 more than two dozen life insurance companies were started, but fewer than half a dozen survived.

We are living longer, requires more money to live on: either work longer or have larger nest egg. The old rule: keep the percentage of your investments in stocks and real estate that matched the number left when you subtracted your age from 100. Put the balance in CD’s or bonds you hold to maturity for income of a specific return.

Problem: Rule does not work. We are living longer so we need the growth of an investment that surpasses inflation longer. Only stocks provide the security of inflation-busting gains over periods over 10 years. Bonds and CDs can lose money in the short-term since inflation can run over 3%.

More responsibility, more choices, more insecurity The internet placed top as the single primary source of information when planning a vacation, cited by more than 35% of respondents, in a recent telephone survey conducted for the U.S. Tour Operators Association. That number increased to 46% of those with college educations. Personal debt acceptable, more spending

Why permanent insurance is no longer appropriate Old rule: Buy universal life or whole life when you are young to lock in affordable coverage for life. You will always have cash value to borrow against. You will earn interest on the forced savings portion of the premium. You will never have to worry about not qualifying for coverage. New rule: It is easy to set up an automatic investing plan with a low cost mutual fund. A stock market fund contribution will guarantee that you will have more “cash value” than a policy. Compare 30 years of paying for insurance versus investing in a market index fund. A 21 year old male may pay $47.77 monthly for $200,000 permanent coverage. Cash value after 30 years is about $48,205. A 30 year term policy may cost $19 monthly. Investing the difference, $29.25 over 30 years produces $103,250. Since our life expectancy is over 80 years, we need to keep paying for the $200,000 insurance for another 30 years. However, if we stop investing and paying for term at age 51, our “self-insurance” fund grows to $3.7 million at age 80, $12.2 million at age 90. Permanent coverage is not appropriate anymore.

Wages are decreasing: “In real terms, the wages of non-management employees in US are now 10% BELOW the level in early 1970’s, according to DOL stats.” NYAT BU3 10/15/6

Medical expenses are greatest cause of bankruptcy

Forty percent of workers cash out their retirement savings when they switch jobs, according to The Principal Financial. In 4 months, they are broke. Americans squeezed by higher medical costs say they've reduced their contributions to retirement. Seven in 10 Hispanic adults have saved less than $5,000 toward retirement, according to a recent study. Almost a third (29%) of companies in U.S. and Canada with defined benefit plans (pensions) that are currently active say they will either close, freeze or terminate their pensions by the end of 2007, according to a recent poll by SEI. f that occurs, 52% of all U.S. and Canadian plans polled will be closed, frozen or terminated by the end of 2007.

Old rule: Avoid stocks in retirement—buy bonds and don’t invade principal, stocks are less of a risk long term than bonds because inflation eats up fixed returns.

The first thing we have to decide the first day on the job is whether to buy or not to buy a “defined contribution plan.” Most of us don’t know what this means. It turns out to be one of the most important decisions of our lives and we don’t have clue what the HR person is talking about. Yet, this act—to buy or not to buy—signals the greatest shift in corporate responsibility onto employees in the 20th Century.

It's up to each of us alone in a room with many forms to read and comprehend to make this momentous decision about investing and saving and budgeting of our new household income. If we choose a bad investment, or we don't save enough to cover post-retirement (45 years away) expenses, our employer has no responsibility for bailing us out. Our parents could not prepare us for this since most of their pensions “defined benefit plans” were FREE--monthly pension payments came to them for the remainder of their lives. In some cases, the spouse of an employee could continue receiving those pension benefits even after the employee's death.

Unlike our parents In contrast, although many 401k (defined contribution plans) allow us to elect a monthly payment that will last for life, many of us choose not to do so or can’t because we were laid off. If this happened to us, we assumed the risk that we will outlive our savings and will become penniless in retirement without knowing it. We can’t spend money like our parents do. Job security and guaranteed pensions are gone. We are on our own.

Today most of us are forced to change jobs numerous times over our working lives. We work for a few years with any one employer. We have mistakenly thought that our retirement needs would be met. The reality is that most of us will have a thoroughly inadequate pension income. We will be on our own.

Instead of making sure we have an education about savings and investments BEFORE our first job, our Congress passed a bill, the Pension Protection Act of 2006 that gives employers the job of enrolled us in pensions automatically. We may be given help in picking investments by the salesmen who run the pension plan. This “fix” means that society thinks that we don’t have to become knowledgeable about our savings and investments for retirement.

Unfortunately, this won’t fix the lack of education. We still don’t know how much to save to ensure a retirement income, education funding and health care alternatives. We still don’t realize what living longer can do to our working life and retirement years. We will need much more money. We need to know how to get it. We need to know how to budget so we can afford increased education and health care costs, not 0% SUV financing and Plasma LCD HDTVs.

We need to learn how to take responsibility for our futures. Our corporate and political leaders have signaled the end of the social contract that used to underlay our society. They cannot promise a secure future. Only we can do that. But it takes getting to know the score: Educating ourselves. Only we can take care of our financial future properly. Our employer and the pension plan salesmen can’t help up there.

Financial education is now accessible Today, it is easy to find the answers to the questions of financial responsibility. You can talk to a paid advisor. Some give you answers that usually require you to buy a product they sell. Some give you answers that require you to fill in a lot of forms and read a lot of pages of general information. In either case, you are not usually given the lowest cost solutions or the information to make the best choice for your own situation. You simply can’t buy that situation.

To decide your best course of action, you have to understand your own particular needs and preferences. For some, the value of having a personal relationship with someone in their community is above cost. They do not want to resolve problems by phone or email, no matter what the potential savings. For others, transacting business electronically is preferable to having to work with another person, especially when they are used to doing it themselves.

New World Economy is accelerating. Young workers will not be able to depend on one company or even one career for financial security. In a connected world, everyone is competing with equally smart people in India, China, and elsewhere. In China, if you are a young person with one-in-a-million talents, there are 1500 others just like you. You are not likely to have a pension plan unless you opt for public service and teaching. Even that is suspect because many public pension plans are underfunded and voters are tired of property tax increases. Full retirement age, now 67 for those born in 1960 or thereafter, is likely to be age 70, or even later, by the time that you get there.

Maximize contributions to defined contribution retirement plans like 401(k) and various IRA plans. Build Wealth Reserve. Save early and save often. Financial independence is a do-it-yourself project.

Education is a lifelong exercise. Graduation is the start of your real education, not the end.

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