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The past year has been brutal on majority of investment accounts. The sub-prime mortgage meltdown, the credit crunch have all strained liquidity out of the market and put enormous stress on businesses. The resulting macro-economic issues have worsened the pain on the average consumer. Amidst all this mess, most retirement accounts have taken a beating in stride with the market or even worse in some cases. It’s only natural to ask “How do I stop the bleeding?”. A recent article attempts to address and answer this very question.

One great call out in that article is about asset allocation or diversification strategy. We have heard it enough times already, but yet we don’t take the time and effort to implement diversification in our own accounts.

I am not an expert in the field of investing (either by professional education or licensing) but I have keen interest in investing for my own personal investing and I read a lot on the subject and talk to other experts in the field. So I couldn’t help but want to share this with our readers. You can take it for what it’s worth.

In my opinion, following is a strategy that would take us a long way

• Decide a Diversification strategy that is suitable for your risk tolerance: One needs to have exposure to stocks (domestic and international), bonds, commodity and real estate to name just a few and the percentage of your portfolio you are willing to invest in each category (To learn more about Asset Allocation from the SEC click here; or to use an interactive asset allocation calculator click here)
• Choose your picks for investing into each of the above categories. It can be individual stocks and bonds OR Mutual Funds OR Index Funds OR Exchange Traded Funds (ETFs) and so on. Each has its pros and cons. Based on my research, I prefer or recommend Index funds and Exchange Traded Funds because of their low overhead costs. There is a wide variety of these funds available. Click on the links above to find out your options and use the tools there to choose your index funds and ETFs
• Invest in the selected funds in the selected percentage amounts and
• Finally, discipline yourself to rebalance your portfolio at a pre-determined frequency you are comfortable with (For more insight on this topic, read this article on Motley Fool)

My rationale for the above approach is:

• Picking right stocks at the right time is called market timing and even the pros find it difficult to do it well consistently
• If someone’s portfolio went down a lot and they are asking how to stop the bleeding, then thinking they’ll be able (either in terms of knowledge, time or knack) to pick the winners this time around is a very big and risky assumption in my opinion 
• Funds with high overhead costs eat away a portion of your returns and reduce the amount available at retirement and can be substantial over an extended period of time
• Over long periods of time that one’s career lasts, market indices and funds based on those indices (or index funds) have returned more value to a patient investor and
• this approach limits the amount of time and energy one needs to spend doing their investing rather than enjoying other activities

This is my 2 cents on the topic. Please post your comments, thoughts and ideas on this subject.

A recent article talks about when should a Boomer retire? It provides views from experts in the field. The background to this discussion is that many Baby Boomers do not have enough saved to substitute for their main source of income. This means they either keep working longer OR reduce their standard of living. If you have enough saved to support you for the next 3-4 decades in retirement, then you can retire when you want to. For those that do not have enough saved, Alicia Munnell, Director of the Center for Retirement Research at the Boston College recommends people to work until they are 66 years. Others think this is very conservative. For example, Marc Freedman, founder and CEO of think tank, Civic Ventures suggests that people work until they are 70 years of age to make sure they can finance their lifestyles for the rest of their lives.

When the talk about retirement age comes up, invariably I think about the definition of retirement. You know, in the traditional sense, retirement is where you give up working, just stick around the house, may be volunteer a bit or travel and just spend the remaining years in solitude. There is debate whether this was ever the case, but never the less, this is the common perception of debate.

 Considering the health and active lifestyles people in their 60’s and even 70’s in many cases lead, there is a new saying these days that 60 is the new 40. For example read this article about an Australian Rider, Laurie Lever, who at age 60 is taking part in the Beijing Olympics. Although Laurie Lever began riding when he was 10 and has been a showjumper by profession, he says it took him this long to find a real ‘winner’ horse. Though he hasn’t won yet, Laurie you are a real champion. 

Coming back to our discussion, a retirement now means more like I might still work, but it will be on my terms, when I want to and how I want to. As opposed to working for someone or working long hours day in and day out. I can afford to take this approach only when I have the financial wherewithal to support myself and my family to live, enjoy and give. The more disciplined we are in our financial matters, the sooner this time will be.

So take that next step to your own financial freedom and build on and grow your discipline.

by Rita R. Robison, Consumer Specialist

Guest Blogger

Consumer Reports has a great article in its September 2008 issue on “Seven Online Blunders: These Common Mistakes Can Ruin Your Computer or Invite Identity Theft.”

The seven blunders are:

• Assuming your security software is protecting you.
• Accessing an account through an e-mail link.
• Using single passwords for all online accounts.,
• Downloading free software.
• Thinking your Mac shields you from all risks.
• Clicking on a pop-up ad that says your PC is insecure.
• Shopping online the same way you do in stores.

See the article for details and tips on how to shop online safely.

For more information for boomer consumers, see my blog The Survive and Thrive Boomer Guide.

When it comes to our retirement accounts, especially the 401(k) plans, it is hard to figure out how our plan is doing compared to other plans. More importantly, one has to read through voluminous literature to find out the various charges and overhead fees involved. But a recent proposal by the Department of Labor, if approved, would put this information clearly in front of millions of 401(k) enrollees.

However, even if I know what are the fees and charges, how do I know if these are normal or an overkill? and how do I know which options are good and which are bad? In otherwords, how does a best of the best 401(k) plan look like, so I can measure my plan against that? This would be a natural question for anybody trying to make sense of their retirement plan options.

Well this same question was posed and answered by retirement plan experts and you can find more details about it in this recent article by MarketWatch, published in Yahoo!Finance.

Here are some of the important features of a good plan:

• Good Employer Matching
• Balanced range of good investment options
• An integrated view of your accounts, analysis and forecasting tools
• Auto-enrollment, auto-rebalancing options
• Managed accounts and
• Funds with Institutional pricing

Last week we presented Part 1 of our interview with Mr.Stanley Tomkiel III. Stanley Tomkiel is the author of two books on Social Security, namely Social Security Benefits Handbook and The Social Security Answer Book. Both the books are packed with lots of useful information in simple English.  You can read Part 1 of this interview here. Today we present you the second and concluding part of this interview.

Boomer411: Some of the questions and answers in your book imply that at times people do not claim or under-claim their Social Security Benefits. Is this correct? If yes, can you please elaborate on how and in what cases this happens most often.

ST: I have seen that many people do not claim all the benefits that they are entitled to.  Usually this occurs in the age frame from 62 to 66 because many people believe that you have to be completely retired in order to collect any Social Security benefits, and that’s not the case.  If your earnings in a given month are very low, regardless of the annual income and regardless of whether you have retired, you may be able to get a benefit for that month. 

If you have low annual earnings for a given year you may be able to collect some or even all of your benefits for the year.  Even if you are working above the yearly earnings limit, currently $13,560, it doesn’t mean that you can’t collect any benefits, only that there will be a reduction in benefits payable.  If you are under Full Retirement Age, which is now 66, you lose $1.00 of Social Security benefits for every $2.00 you earn over the limit.  So for example if you earn $25,000.00 this year, that’s $11,440.00 over the limit, so $5,720.00 must be withheld from your Social Security benefits.  But if your benefits are say, $900.00/mo, that comes to $10,800.00 for the year, (as long as you are over 62 for each month).  Only $5,720.00  needs to be withheld, so you can collect the difference, which is $5,080.  Most folks I know could put that money to good use rather than let the government keep it. 

And for the year you attain age 66, the annual limit jumps to $36,120, only the earnings in the months before the month you attain age 66 are counted, and the offset goes from 2 to 1 to 3 to1.  This means that a worker making even $100,000 a year could collect some benefits even if not retired.  And beginning with the month you turn 66, your earnings don’t count at all, and you get your benefits even if you’re making a million dollars a year! 

Also there is the monthly test that you can use in one calendar year.  You get to choose which year it will be.  Under this monthly earnings test, even if your annual earnings are too high to prevent the payment of any benefits, nevertheless you can receive a benefit for any month in which your earnings are below the monthly earning’s limit, which is 1/12 of the annual earnings test. If you are laid off for a period, or you take a long vacation, or become ill, or you just don’t feel like working, if your earnings in a given month are below the monthly limit then you can receive a Social Security monthly benefit for such months, no matter how high your annual earnings.

Another case where benefits are lost is in the case of a divorced wife or husband.  If you’re divorced at least two years from a SS covered worker, you can receive a spouse’s benefit even if the worker is still working, as long as he or she is age 62.  This is called “deemed entitlement.”  

Many people don’t realize how to take advantage of these rules.   Sadly, they lose those benefits. 

Boomer411: Approximately, what is the rough amount in dollars that might go unclaimed per year? What is one category of benefits that is usually ignored or the most unclaimed/under-claimed? If someone forgot to claim, can they go back and make a claim for retroactive benefits?

ST: I cannot approximate the amount of dollars that might go unclaimed in a year because I’m not an economist but some numbers will give you an idea of what we are talking about.  There are now 50 million beneficiaries in the United States and the Social Security Administration paid $585 billion in benefits in 2007.  In 2008 that will be closer to $600 billion.  That comes to approximately $50 billion a month; so even a very small percentage of such high numbers is very significant.  About 4 million claims are made each year. 

To put it on a personal level the average Social Security benefit is somewhere around $1,000.00 for a worker and $500.00 and change for a spouse; same for a child.  I’ve seen people lose several months’ worth of benefits because they missed a filing deadline or were unaware that they could have received something.  So, if you don’t know all the rules and don’t make the right moves, you stand to lose thousands and thousands of dollars. 

Unfortunately there are limits on retroactivity of applications, so if you file late, you can lose out.  The retroactive period for an application depends on the type of benefit.  The application of a retired worker under full-retirement age has no retroactivity if it would result in the payment of a reduced benefit.  For a retired worker who is above full-retirement age the retroactivity can be as much as six months.  Same for most survivor benefits.  For disabled workers and their dependents however, there is a 12 month retroactivity period.

One of the most important things a person can do if he or she is approaching social security time is to file a ‘Protective Filing Statement’ with the local SS office.  This can be done by mail.  Such a statement will protect the filing date without having to make the actual application.

Boomer411: In your intro to chapter 1 in the book, it says, ‘The general intent for retirement benefits was originally to provide a replacement for income lost due to age and its attendant restrictions on earning capacity. In recent years, this has been modified to become an age entitlement program’. Can you please elaborate on this?

ST: Sure.  Originally, if a beneficiary was working, his or her benefits were reduced or completely withheld because the program was designed to replace earnings lost due to retirement.  They still call the benefits Retirement Benefits.  Then the law was amended quite some time ago to allow those age 72 or older to keep all their benefits even if they were still working, no matter how much they earned.  In the 80’s this was lowered to age 70, then in 2000 this was lowered again to age 65, which at that time was Full Retirement Age.  FRA is now 66.  So retirement benefits are paid regardless of earnings once the person reaches Full Retirement Age, which doesn’t have anything to do with being retired, only with being age 66.  So instead of replacing earnings lost due to retirement, the SS program pays benefits based on age, so I call it an age entitlement program now.

Boomer411: Can you tell us about the hardest question that you were asked in your role as an SSA claims representative? And how you approached/answered it?

ST: Oh yes.  It has nothing to do with rules or forms or required documents.  The hardest question has always been: “How can I live on that?” when I would tell a retiree how much his benefit was going to be.  Sadly, the Social Security program has been oversold to many people over the years as if it would provide for a comfortable retirement income.  It was never intended to do so, being intended only to be about 1/3 of a retirement income, with another 1/3 from private pensions, and 1/3 from personal savings.  I felt as if I had hit the poor retiree in the head with a two-by-four!  Sadly, I had no answer.  The answer should have been asked long before retirement age.

Boomer411: Why should a Baby Boomer read your books? What other information can be found in the books?

ST:  Well, I have two books out, The Social Security Answer Book and The Social Security Benefits Handbook.  In the Answer Book, I compile hundreds of questions from real people, and give specific answers.  I have organized the questions by topic, so for example, if a reader wants to look at questions about Survivor Benefits, or Wife’s Benefits, they are grouped together.  I think that sometimes people don’t even know how to formulate a question because they are unfamiliar with basic concepts and terms.  So the Answer book helps not only by giving answers in straightforward words, but also to help people know how to ask questions by seeing what others have asked. 

The Social Security Benefits Handbook is more like a reference source rather than a read-through type of book.  It contains a statement of the rules and procedure of SS in layman’s language, so people unfamiliar with technical terms should be able to find out specific information.  It covers not only the applications rules and procedures, and how benefits are calculated, but also so-called “post-entitlement” issues, such as what to do if you are overpaid and the government wants money back, what you must report to SS, what happens if a check is missing or not received, and so forth. 

Folks getting close to age 62 should be familiar especially with the application process and the earnings limits rules so they can make sure they don’t miss out on receiving all the benefits coming to them.

And of course, readers can e-mail me questions which I will post on my blog along with my answers.

This concludes our interview with Mr.Stanley Tomkiel III. To learn more about Mr.Stanley and his works or to submit your own social security question to him, please visit the following links.
www.Tomkiel.com
www.SocialSecurityBenefitsHandbook.com
www.SimpleSocialSecurity.blogspot.com