The House and Senate have voted, and President Obama has signed the new Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act of 2010). The new law includes a number of tax breaks for many taxpayers. Here are some highlights to discuss with your tax professional or attorney:

Current tax rates and certain tax breaks extended for two years

The Tax Relief Act extends the tax rates of 10%, 15%, 25%, 28%, 33%, and 35% for another two years.
The new law extends for two years the repeal of the phaseout of personal exemption for certain high-income taxpayers.
The new law also extends for two years the repeal of the limitation on itemized deductions for certain high-income taxpayers.

Capital gains and dividends

The Tax Relief Act sets capital gains and qualified dividends tax rates at 0% and 15% for another two years.

AMT patch

The new law increases the AMT exemption amounts for two years.

Estate tax

The Tax Relief Act sets the estate tax exemption at $5 million per person and $10 million per couple for estates of decedents dying in 2011 and 2012.
The new law reunifies gift and estate taxes. The gift tax exemption increases to $5 million per person for gifts made in 2011 and 2012.
The new law also caps the tax rate at 35% for estates, gifts, and generation-skipping transfers.
The new law provides a choice for estates of decedents who died in 2010 to use the new estate tax exemptions/rates with a stepped-up basis rule, OR to use the existing 2010 law with no federal estate tax but a limit in the amount of basis step-up that is allowed.
The new law allows for “portability” of the estate tax exemption, meaning that any unused estate tax exemption of a deceased spouse can be carried over and utilized by the other spouse who dies second.

Other points of interest:

The employee withholding portion of the Social Security payroll tax will be reduced by 2.0% for 2011 (e.g., 6.2% withholding is reduced to 4.2%).
Extends for 2010 and 2011 the ability of taxpayers age 70½ or older to exclude from gross income up to $100,000 of qualified charitable distributions.
Extension of unemployment insurance benefits for 13 months.

New Worries for 401(k) Investors

Retirement savers have already learned how much damage the markets can do to a nest egg. But for anyone with a 401(k) plan, stock market performance may be overshadowed by other worries: fraud and theft.

In the last three months, the Labor Department has launched 191 investigations into 401(k) fraud and theft, and secured 20 indictments – a whopping 43% more than the department has secured annually, on average, since 1995. The millions at stake in recent cases may seem small in the context of the $3 trillion 401(k) market, but observers say the indictments point to larger issues in the 401(k) marketplace, from lack of oversight and an understaffed enforcement agency to the larger risks that have shifted over time to individual participants. The cases, says Brandon Reese, deputy director of the office of investment at the AFL-CIO, “expose a more systemic problem in the defined contribution retirement system.”

The Labor Department beefed up its enforcement efforts this fall in response to growing indications of trouble with retirement plans. There were more reports of fraud, said Phyllis Borzi, the assistant secretary of the Employee Benefits Security Administration, the division of the DOL that’s leading the charge. There were more cases where the perpetrators apparently intended to keep the stolen money, as opposed to the more sympathetic case of a struggling business owner juggling funds to meet immediate business needs. And the department is seeing more repeat offenders – perpetrators who have raided employee benefits plans two or three times before, says Jeffrey Hinman, EBSA’s deputy director for criminal enforcement. These, and other “badges of fraud,” like behavior that went on for a long time, or a perpetrator who lied to employees about what was happening with the plan, make a criminal case, as opposed to a civil one, he says.

Given the recent economic climate, the increase in cases is not entirely surprising. In tough times, employers are more likely to raid their employees’ retirement funds, observers say, whether for personal gain, or to stretch to cover business expenses. This is especially true at small, private companies, where 401(k) plans are often run by a single person, like the company’s president or accounts manager. “In a larger setting, you have more eyes on the plan,” says David Certner, legislative policy director for the AARP. Publicly-traded companies also face stricter regulation on their accounting procedures under the Sarbanes-Oxley Act.

Typical, then, was the Labor Department’s investigation in Savannah, Ga., where Benjamin Eichholz, the sole trustee of the retirement plan for 19 employees of his law firm, was accused of stealing more than $950,000 from the plan. Eichholz ultimately pleaded guilty to obstruction of justice for providing false documents and statements to investigators. A grand jury indictment had accused him of writing checks from the plan as if employees were taking loans, but depositing the money in his own accounts. According to that indictment, one of the false statements he made was that the $56,000 he spent on Flora Danica fine china was an investment on behalf of the plan, even though, investigators said, it was displayed in a china cabinet in his home. (Eichholz’ attorney did not return calls for comment.)

To be sure, even increased incidents of 401(k) plan theft and fraud do not make these common worries. The Labor Department’s investigations touch fewer than one out of every 2,600 of the 401(k) plans nationwide, and an even smaller fraction of the 60 million participants. It seems so small to some that the department has been criticized for spending time and money on such cases. But Borzi defends the effort, noting that an employer who raids a 401(k) plan typically ends up also siphoning funds from employees’ health care or life insurance premiums and other benefits. And, she adds, the dollar amounts might not be big in the grand scheme of things, but the outcomes “could be fairly cataclysmic for an individual worker and his or her family.”

Even with the added attention of regulators and investigators, it’s impossible for government employees to catch every irregularity. Many cases begin when workers call to complain about problems with their plans, Borzi says: If one person has noticed, it’s typically part of a larger problem. A particular red flag for Labor investigators is a report of a lag in employee contributions. Companies have just seven business days to forward an employee’s contribution (a new, tighter standard imposed recently) to the company that runs the plan; taking longer is in itself illegal, and something employees should watch out for – and report.

Warning Signs

So what does it take to catch a 401(k) thief? It’s easy – if you check your account balance regularly and read the statements you get in the mail, says Scott Holsopple, the president of Smart401k, a web-based retirement service for retirement plans. Make sure you know how much money should be flowing into your account and how it’s supposed to be invested. “If you’re actively involved, it’s going to be a lot harder for your employer to take money from you,” Holsopple says.

The Labor Department’s top 10 warning signs:

1. Your 401(k) or individual account statement is consistently late or comes at irregular intervals

2. Your account balance does not appear to be accurate

3. Your employer failed to transmit your contribution to the plan on a timely basis

4. A significant drop in account balance that cannot be explained by normal market ups and downs

5. 401(k) or individual account statement shows your contribution from your paycheck was not made

6. Investments listed on your statement are not what you authorized

7. Former employees are having trouble getting their benefits paid on time or in the correct amounts

8. Unusual transactions, such as a loan to the employer, a corporate officer or one of the plan trustees

9. Frequent and unexplained changes in investment managers or consultants

10. Your employer has recently experienced severe financial difficulty

Article originally appeared on www.smartmoney.com

Middle class falling short on retirement funds
Most plan to work in retirement to meet needs, survey shows

By Helen Kearney

NEW YORK — The average American has saved less than 7 percent of his desired retirement nest egg and will likely have to keep working in retirement to supplement his income.

Middle-class Americans think they need $300,000 to fund their retirement, but on average have only saved $20,000, according to a survey released on Wednesday by Wells Fargo & Co.

“Middle class” is defined as those aged 30 to 69 with $40,000 to $100,000 in household income or $25,000 to $100,000 in investable assets and those aged 25 to 29 with income or investable assets of $25,000 to $100,000.

“Too many Americans have their heads in the sand in the face of obvious savings deficits,” said Laurie Nordquist, director of Wells Fargo Institutional Retirement Trust. “Barring a miracle, a winning lottery ticket or a big inheritance, they’re going to be forced to dramatically cut back their lifestyles after retirement.”

Even those fast approaching retirement age are not well-funded. Respondents aged 50 to 59 have saved an average of only $29,000 for retirement.

Consequently, more than a third of respondents believe they will have to work during retirement in order to afford the things they want or just to make ends meet.

Many are also still relying on Social Security to fill the gap, though confidence in this funding varies considerably by age.
Seventy-seven percent of respondents aged 50 to 59 believe that Social Security will contribute to their retirement income, while only 22 percent of 30-somethings thought there would be enough left in the pot to fund their retirement.
The vast majority of respondents admitted they need help figuring out how much money they need to live on in retirement and picking investments for their 401(k)s. But in a negative twist for financial advisers, more than two-thirds said they were not willing to pay for this advice.

This puts more responsibility on employers to offer advice and planning tools through their workplace 401(k) plans, said Nordquist. “If people aren’t willing to pay for advice they are going to get a more vanilla approach to planning,” she said. “But a simple plan is better than no plan.”

Article appeared on www.msnbc.com.

This originally article appeared on the Daily Finance website.

10 Investing Facts You Probably Don’t Know — but Should

By DANIEL SOLIN

The securities industry spends hundreds of millions of dollars a year in advertising, but that doesn’t mean the general public is getting the straight scoop. Nor does the blanket coverage from the financial media ensure that the public is shielded from misinformation. So, as you contemplate investing for the New Year, here are 10 facts you probably don’t know (but should):

1. This wasn’t the “lost decade”: All the talk about the “lost decade” is complete nonsense. Investors who bought and held a globally diversified portfolio of low-cost stock and bond index funds did just fine. Dividing that portfolio into 60% stocks and 40% bonds, while not suitable for everyone, is an average asset allocation and is routinely used by defined-benefit retirement plans. The annualized return for that asset allocation for the past decade was approximately 6%. Investors in a portfolio of 100% stocks, invested in the same globally diversified manner, had an annualized return of almost 8%. But, yes, it was a “lost decade” for those who invested all of their assets just in the S&P 500. I don’t know why anyone would do that. I also don’t understand why any “expert” would use that index as a benchmark for the entire market. It isn’t.

2. “Great” companies can be lousy investments: Consider Lehman Brothers, WorldCom, General Motors, Conseco and Chrysler. Companies that are “great” one day can tank the next. There’s no way to tell who’s next.

3. The S&P 500 Index is very unstable: While most investors understand that companies enter and exit the S&P 500 index periodically, few understand just how unstable it is. In the 41 years from 1957 to 1998, only 74 of the original 500 companies were still in the index.

4. Most investment clubs underperform the market: An extensive study of the performance of 166 investment clubs showed 60% did worse than the market. There are many reasons for joining an investment club, but superior investment performance shouldn’t be one of them.

5. Mutual fund out performance can be explained by luck, not skill: This is the big one. When mutual funds tout their great performance over the past five years, they want you to believe their fund managers have superior stock-picking skills. Not true. A recent study found no evidence of skill in the performance records of over 2,100 funds. The study’s ramifications are profound. If outperformance is based on luck, there is no way to predict the next lucky fund. Investors should avoid all actively managed mutual funds and invest in a globally diversified portfolio of low-cost stock and bond index funds instead.

6. Most investors should not hold individual bonds: Most investors would be far better off selling their individual bonds and buying a low-cost, short- or intermediate-term bond index fund. They would get greater diversification, superior management of their bond portfolio, more liquidity and lower cost. A study by Vanguard summarizes these advantages.

7. Most investors should not hold individual stocks: An individual stock has the same expected return as the index to which it belongs, but it can have up to twice the risk. That’s because holding an individual stock entails risks that are unique to that stock, like corporate dishonesty or the death of a key executive. You can get the same expected return, with less risk, by investing in the index. Same return, less risk. You would think it would be a “no-brainer.” Yet investors, egged on by their brokers and looking for the next monster stock, continue to gamble with their money by investing in individual stocks.

8. Warren Buffett does not “beat the market”: I’m a huge fan of Buffett. Most investors believe his company, Berkshire Hathaway (BRK.A), has consistently beat the market. Not true. The index with approximately the same standard deviation (a measure of risk) as Berkshire Hathaway is the Emerging Markets Value Index. For the 10 and 20 years ending Dec. 31, 2005, Berkshire Hathaway stock underperformed that index.

9. Warren Buffett advises investors to invest in index funds: Over the years, Buffett has repeatedly recommended that investors stick to low-cost index mutual funds. He even prefers them to ETFs, as he explained in an interview on CNBC in May, 2007.

10. Chasing big returns causes the brain to react just like snorting coke: Both activities are addictive. This explains why investors act so irrationally and fall easy prey to brokers and advisers who claim they can “beat the markets.” The brokers are drug dealers, and the investors are addicts.

The next time you’re confronted with an investment decision, take a look at these 10 facts. Then fundamentally change the way you invest.

This article originally appeared at “The Big Picture”

Read more: Dear Uncle Sucker… http://dailyreckoning.com/dear-uncle-sucker/#ixzz15lO8czKC

Dear Uncle Sucker . . .

Posted By Barry Ritholtz On November 17, 2010

For many years, I’ve been a fan of Warren Buffett’s long term approach to value investing. Understanding the value of a company, regardless of its momentary stock price, is a great long term investing strategy.

But it pains me whenever I read commentary from Buffett that glosses over reality or is somehow self-serving. His OpEd in the NYT today – Pretty Good for Government Work [1] – paints an artificially rosy picture of the Bailout, ignores the negatives, and omits his own financial interest in government actions.

What might he have written if Sir Warren was dosed with some sodium pentothal before he sat down to pen that “Thank you” letter? It might have gone something like this:

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DEAR Uncle Sam Sucker,

I was about to send you a thank you note for bailing out the economy . . . but then some nice men dressed in Ninja outfits came in and shot me full of truth serum. That led me to make one more set of edits to my letter thanking you for saving the economy.

It also helped me recall some things I seemed to have forgotten in my other public pronunciations about the bailouts.

I suddenly recalled who it was who allowed the banks to run wild in the first place: You. Your behavior before, during and after the crisis was the epitome of a corrupt and irresponsible government. You rewarded incompetency, created moral hazard, punished the prudent, and engaged in the single biggest transfer of wealth from the citizenry of the United States to the Wall Street insiders who created the mess in the first place.

Kudos.

Before I get to the bailouts, I have to remind you that in:

• 1999, you passed the Financial Services Modernization Act. This repealed Glass-Steagall, the law that had successfully kept main street banking safely separated from Wall Street for seven decades. Even the 1987 market crash had no impact on Main Street credit availability, thanks to Glass-Steagall.

• 1997-2010, you allowed the Credit Rating Agencies to change their business model, from Investor pays to Underwriter pays — a business structure known as Payola. This change effectively allowed banks to purchase their AAA ratings, and was ignored by the SEC and other regulators.

• 2000, you passed the Commodities Futures Modernization Act. It allowed the shadow banking industry to develop without any oversight by the Commodity Futures Trading Commission, the SEC, or the state insurance regulators. This led to rampant creation of credit-default swaps, CDOs, and other financial weapons of mass destruction — and the demise of AIG.

• 2001-04, the Fed, under Alan Greenspan, irresponsibly dropped fund rates to 1%. This set off an inflationary spiral in housing, commodities, and in most assets priced in dollars or credit.

• 1999-07, the Federal Reserve failed to use its supervisory and regulatory authority over banks, mortgage underwriters and other lenders, who abandoned such standards as employment history, income, down payments, credit rating, assets, property loan-to-value ratio and debt-servicing ability.

• 2004, the SEC waived its leverage rules, allowing the 5 biggest Wall Street firms to go from 12 to 1 to 20, 30 and even 40 to 1. Ironically, this rule was called the Bear Stearns exemption.

These actions and rule changes were requested by the banking industry. Rather than behave as adult supervision, you indulged the reckless kiddies, looking the other way as they acted out. You were the grand enabler of the finance sector’s misbehavior. Hence, you helped create the mess by allowing the banking sector to run roughshod over decades of successful constraints. (Kudos again on that).

There were voices warning about the upcoming crisis, but you managed to turn a deaf ear to them: Warnings about subprime lending, problems with securitization, against the false claim that residential real estate never went down in value, or that the models forecasting VAR were wildly understating risk. An economy driven by growth dependent upon credit fueled consumption was unsustainable, and yet you encouraged that reckless credit consumption. The compensation schemes for Wall Street were hilariously short term (ignored by you); the crony capitalism of Boards of Directors that undercut market discipline was similarly ignored. You encouraged the hollowing out of the US economy, allowing it to become increasingly “Financialized” at the expense of industry and manufacturing. What was once a small but important part of the economy became dominant, yet unproductive, with your blessing.

Bottom line: You were at a loss for understanding the many factors that led to the crisis in the first place.

When the crisis struck, you did not seem to understand the role you should play. Instead of stepping up to halt the financialization, to unwind it, you gave away the shop. You failed to extract concessions from firms on the verge of bankruptcy. Your negotiating skills were embarrassing. In the face of meltdown, you panicked.

You could have undone the decades of radical deregulation at that moment. You could have fired the incompetent management, wiped out the shareholders who invested in insolvent companies, gave the creditors and bond holders a major haircut for their foolish lending. Instead, you rewarded them for their gross incompetence.

The solutions you ran with were ad hoc, poorly thought out, improvised. You crossed legal boundaries, putting the Fed in the position of vio0lating its charter and exceeding its mandates. You created a Moral Hazard, the impact of which may not be felt until decades in the future.

Very few of your senior elected and appointed officials understood what was going on.

Rather than offer an intelligent response to the crisis, you delivered brute force: Trillions of dollars were thrown at the problem, papering over its symptoms but not its underlying causes.

Well, Uncle Sam, you delivered a motherload of cash. Considering the dollar sums involved, your actions were remarkably ineffective. What was left over afterwards was a wildly over-leveraged consumer whose credit limits had been reached; State and municipal budgets were heavily dependent upon that excess consumer spending, creating huge budget holes because of it. Net net: The resultant economy was in the worst recession since the Great Depression.

As a student of the Great Depression, Ben Bernanke should have had the best grasp – but his bailout of Bear Stearns revealed him to be just another banker, intent on saving the banks – banking system be damned. To give you a clue of exactly how lost Hank Paulson was, he spent his time praying, and creating documents that exempt himself personally for liability. He’s from Goldman, so we know that “team first” ain’t exactly his style. Tim Geithner, who did such a stupendous job overseeing the banks in the first place, was n way over his head. And while I never voted for George W. Bush, I give him great credit for hiding under the bed and pretty much staying out of everyone else’s way. I would call him clueless, but that wouldn’t be fair to the legions of clueless around the world.

Sheila Bair grasped the gravity of the situation earliest, and put numerous failed banks through the insolvency process. If we were smart, we would have allowed her to work her way through the entire finance sector, effecting a GM-like prepackaged bankruptcy for Citigroup, Bank of America, Merrill Lynch, Morgan Stanley, AIG, etc. It would have been painful as hell, but we would be much better off had we allowed her to tear the band aid off quickly. Instead, we are suffering through a death of a 1000 cuts, Japanese style.

I would be remiss if I failed to mention my personal positions in this: I made a killing in Goldman Sachs and GE. My investments in Wells Fargo would have been a disaster if not for you. Don’t even get me started with me being the largest shareholder in Moody’s – that was some clusterf#@k. And considering all of the counter-parties that Berkshire Hathaway has, we risked being just another insolvent investment firm along with everyone else had nothing been done.

So I must say thanks to you, Uncle Sam, and your aides. In this extraordinary emergency, you came through for me — and my world looks far different than if you had not.

Your grateful but wide-eyed nephew,

Warren

This originally appeared in the November 16, 2010 edition of the Wall Street Journal.

Pretty Good for Government Work
By WARREN E. BUFFETT

Omaha

DEAR Uncle Sam,

My mother told me to send thank-you notes promptly. I’ve been remiss.

Let me remind you why I’m writing. Just over two years ago, in September 2008, our country faced an economic meltdown. Fannie Mae and Freddie Mac, the pillars that supported our mortgage system, had been forced into conservatorship. Several of our largest commercial banks were teetering. One of Wall Street’s giant investment banks had gone bankrupt, and the remaining three were poised to follow. A.I.G., the world’s most famous insurer, was at death’s door.

Many of our largest industrial companies, dependent on commercial paper financing that had disappeared, were weeks away from exhausting their cash resources. Indeed, all of corporate America’s dominoes were lined up, ready to topple at lightning speed. My own company, Berkshire Hathaway, might have been the last to fall, but that distinction provided little solace.

Nor was it just business that was in peril: 300 million Americans were in the domino line as well. Just days before, the jobs, income, 401(k)’s and money-market funds of these citizens had seemed secure. Then, virtually overnight, everything began to turn into pumpkins and mice. There was no hiding place. A destructive economic force unlike any seen for generations had been unleashed.

Only one counterforce was available, and that was you, Uncle Sam. Yes, you are often clumsy, even inept. But when businesses and people worldwide race to get liquid, you are the only party with the resources to take the other side of the transaction. And when our citizens are losing trust by the hour in institutions they once revered, only you can restore calm.

When the crisis struck, I felt you would understand the role you had to play. But you’ve never been known for speed, and in a meltdown minutes matter. I worried whether the barrage of shattering surprises would disorient you. You would have to improvise solutions on the run, stretch legal boundaries and avoid slowdowns, like Congressional hearings and studies. You would also need to get turf-conscious departments to work together in mounting your counterattack. The challenge was huge, and many people thought you were not up to it.

Well, Uncle Sam, you delivered. People will second-guess your specific decisions; you can always count on that. But just as there is a fog of war, there is a fog of panic — and, overall, your actions were remarkably effective.

I don’t know precisely how you orchestrated these. But I did have a pretty good seat as events unfolded, and I would like to commend a few of your troops. In the darkest of days, Ben Bernanke, Hank Paulson, Tim Geithner and Sheila Bair grasped the gravity of the situation and acted with courage and dispatch. And though I never voted for George W. Bush, I give him great credit for leading, even as Congress postured and squabbled.

You have been criticized, Uncle Sam, for some of the earlier decisions that got us in this mess — most prominently, for not battling the rot building up in the housing market. But then few of your critics saw matters clearly either. In truth, almost all of the country became possessed by the idea that home prices could never fall significantly.

That was a mass delusion, reinforced by rapidly rising prices that discredited the few skeptics who warned of trouble. Delusions, whether about tulips or Internet stocks, produce bubbles. And when bubbles pop, they can generate waves of trouble that hit shores far from their origin. This bubble was a doozy and its pop was felt around the world.

So, again, Uncle Sam, thanks to you and your aides. Often you are wasteful, and sometimes you are bullying. On occasion, you are downright maddening. But in this extraordinary emergency, you came through — and the world would look far different now if you had not.

Your grateful nephew,

Warren

This article originally appeared in the November 2010 edition of Life & Health Magazine.

The ‘Ugly’ truth about 401(k)

by Tony Walker

My granddad retired in 1978. He and his faithful wife, Hazel, dedicated 43 years of their lives to one employer – the phone company. In return for his years of service to them, the phone company rewarded Granddad with the following:

1) A lifetime pension check – Granddad called it “mailbox money”;
2) Company-provided health insurance for the rest of their lives;
3) Free phone and long-distance service – you laugh, but remember, this was before unlimited cell and texting!

While all three kept Granddad and Hazel WorryFree – it was the “mailbox money” that really kept them out of the Poor House. Because with that guaranteed check each month, all they had to do was “budget” their monthly expenses around the phone company’s predictable monthly check. It was truly a “WorryFree Retirement.”

Apparently, what was good for Granddad wasn’t good enough for my generation – the Baby Boomers. Our question: where did all those “guaranteed” pension incomes go? How come WE don’t get “mailbox money”?
Because of the 401(k) plan – that’s why!

While employers during Granddad’s generation could afford pension plans (more specifically, they were called defined benefit plans) these guaranteed plans also cost the employers a ton of money. That’s because money that would have otherwise gone to profits, research and development, and stockholders had to be “booked” and stuffed away under the corporate mattress to fulfill the promise of future mailbox money to all of their retirees. In addition, back when pension plans were created, employers never dreamed employees would stick around long past normal retirement age (age 65) to collect all of this money.

Forced to “ease” out of these expensive plans, some wise guy (around the year of 1980) came up with the idea of the 401(k) plan. The thought: we’ll turn all the controls over to the employees by allowing them to team up with Wally World (Wall Street) while the employer would “match” the employees’ contributions. It all sounded really cool.

Fast forward 30 years and what do we have? Instead of Granddad’s guaranteed mailbox money, Americans are left with 401(k)’s and uncertainty about their future income.

In essence, the 401(k) plan took conservative, hard-working savers – who knew nothing about the products of Wally World (stocks, bonds and mutual funds) – and turned them into “speculators.”

Basically, the mutual fund industry – thanks to the introduction of the 401(k) plan – went from millions to trillions!
Bottom line: Joe Lunchbox got duped!

Instead of relying on his employer to take care of his retirement, he followed the financial herd and instead made Wall Street rich. Good for them, maybe not so good for him. No wonder folks are so worried today.
So what are we supposed to do now?

As a Registered Investment Advisor, each day I sit across the table from consumers who are dazed, confused and lost as to what to do with their 401(k) money. Here’s what I advise them:

1. Stop treating your 401(k) as the mother of all retirement plans; contribute to it only “up to” the match. If you don’t get a match, I strongly encourage you to see an outside retirement specialist to decide if you should contribute any new money to the plan. There are plenty of better ideas for your money.
2. Forget the notion that there is some magic to the term “pre-tax.” Rather, think of your 401(k) contribution as “postponing the tax,” because one day, you’ll have to pay-the-piper. Uncle Sam will want his money; it’s called taxes and you still owe them. In fact, the longer you have the plan, the worse it usually gets!
3. Check with your employer to see if you can roll over any monies within the plan. You’ll have to get a copy of the Plan Document to see if there is money that can be rolled out into your own self-directed IRA. In many cases, even if you’re still working with the employer, you can roll out previous 401(k) contributions rolled into this plan, the employer contribution, and in some cases the after-tax portion. Best of all, if you’re 59 1/2 or older, some documents let you roll out your “pre-tax” contributions as well. You might even want to spend some of it!
4. If you’ve recently quit, been fired, retired…whatever – get your money out of the 401(k) and into a self-directed IRA so you can get some different options and planning opportunities. One word of caution: if you’re not yet 59 ?, there are some cases where leaving some or all of the money in the 401(k) might make sense since money coming out of the plan is not subject to the 10% tax penalty.

So, say goodbye to Granddad’s retirement – stop putting all your hope, and your money, into the 401(k). As a retirement specialist who is actually in the financial trenches, I can assure you there are better options. Clarify where it is you want to go with your retirement and your money; assess where you are in relation to where you want to be; commit to finding other ideas and strategies for your money other than the 401(k); implement a new game plan that helps you use, enjoy and protect your hard-earned money; and finally, work with someone or put yourself under a plan that will allow you to easily monitor your progress.

Be Worryfree!

This story appeared in the Washington Post in July of 2010

By Johnathan Kem

If your junior-high soundtrack was more Bangles or Britney than Beatles, I am going to try to scare some sense into you with three words about life in retirement, based on personal experience: The paychecks stop.

I retired last year after 30 years as a broadcast journalist. Unlike most baby boomers who have retired, I do not receive a pension. This surprises and appalls my fellow early retirees, who are either enjoying income from a spouse who’s still working or receiving checks from old employers.

If you’re, say, under 40 — and especially if you’re under 30 — you probably have worked only at firms or agencies that offered 401(k)s or their nonprofit cousin, the 403(b). That means that when you finally do retire 25 or 35 years from now, you will be responsible for providing for your own income. No pension for you!

Much has been written telling you how to prepare for that day — namely, to save every cent you can.

A recent study shows that most people ignore that advice. In the wake of the recession, the Employment Benefit and Research Institute found that, among other things, fewer workers are saving for retirement, a quarter of those surveyed have nearly no savings (i.e., less than $1,000), most workers don’t know how much they’ll need to retire and more than half say their total savings is less than $25,000.

Clearly, all those thoughtful lectures about the need to prepare are falling on deaf ears.

So I’ll say it again: The paychecks stop. Every day, every week and every month of your retirement, you’ll use up some of the money you accumulated while you were working.

Specifically, imagine that every week you have to pay for food with cash from savings. And it’s the same with your electricity, cable, phone, gas, credit card and other recurring bills. Because your health care is no longer subsidized by your employer, you write a big check each month to an insurance company as well. If you earn a few bucks on the side, even the taxes have to come out of your savings; no one else withholds federal and state tax from every paycheck.

Sure, if you work until you can collect Social Security, you’ll get some money from the government, but it’s a fair bet that your No. 1 source for retirement is going to be you. If you are not saving assiduously now, you are going to be much, much poorer in retirement. Restaurants, cable TV, BlackBerry service, travel abroad — even things like beer, fast food and haircuts — all will be fond memories of youth.

Retirement does not have to be this way.

I glimpsed my own future more than 20 years ago, when my wife and I worked for the federal government. In 1987, it introduced the Thrift Savings Plan — basically a 401(k) for government employees. When we left government service, we withdrew our contributions and invested the money ourselves. My next employer offered no pension, only a 403(b).

In other words, although we are both baby boomers — born in 1946 and 1953, respectively — we are living the Gen X or Gen Y retirement.

Over the past year, I have learned a few things about how to retire successfully without a pension.

First, take a moment to think about how much money you will need each year after you stop working. Start by itemizing your usual expenses. Estimate your rent or your mortgage and property tax. Make reasonable assumptions about what you spend on food, utilities, essential travel, clothing, car repairs and so on. I assumed that my single biggest expense would be health insurance and budgeted more than $10,000 a year.

Whatever figure you come up with — let’s say, $50,000 — consider it a minimum. Divide it by 26 to come up with your biweekly retirement income — about $1,925. Your figure will probably be much less than the usual 80 percent of your current income that most financial advisers say you’ll need. We’re talking about getting by; any extra will only make life better.

So without a pension, how much do you need to get $50,000 (before inflation) each year? Simply put: a bundle. If you plan to retire at 65 and hope to have at least 30 years in retirement, you’ll probably need something like $1.5 million in today’s dollars. Even a little inflation could push that to $3 million if you’re two or three decades from retirement. For the moment, let’s leave inflation out of the calculation.

In other words, if you have saved just $25,000 — and remember, that describes about half of all workers — you are less than 2 percent of the way toward your goal. Your future definitely doesn’t include cable.

Here’s more bad news: Just saving a lot isn’t going to be enough. Let’s say you’re 30 years from retiring, you earn $100,000 now and you guess that your income will go up by about 3 percent a year. Even if you earmark 10 percent of every paycheck for your retirement and your employer adds another 5 percent, you’ll have set aside only about $713,000 by the time you stop working. That’s half of what you’ll need for that $50,000 annual income.

To live comfortably in retirement, whatever you save has to grow — and its growth has to beat inflation by at least a percent or two. Here’s where time is your ally. Take the example above, where you’re earning $100,000 a year: That first $10,000 you set aside in 2010 will have become more than $30,000 in 2040 if it grows by 4 percent each year. If it grows by 6 percent, you’ll have more than $50,000. And whatever your employer put in will have tripled or quintupled as well.

The bottom line is that the only way to ensure that decades from now you will have enough money to live on is to invest wisely.

So it’s imperative to educate yourself. You should understand what a bond is, how to select a mutual fund, how inflation affects your investments and so on. Even if you turn to a financial planner, you’ll need to evaluate the advice and make your own decisions about where to put your money. Bernie Madoff’s clients wouldn’t have been so easy to scam if they’d understood that it’s simply impossible to get 12 percent returns, year after year, in vastly different economic climates.

That’s a key point: Economic conditions change, and you will need to take advantage of those changes. If the next 30 years are even remotely like the past 30, inflation will swing from low to high and back. There will be stock market booms and crashes. As an investor, I’ve endured the crash of 1987, the bursting of the tech bubble in 2000 and the terrible bear market of 2008-09. I’ve also seen 13 percent annual inflation, which gave us 16 percent mortgages but also money markets with yields of 15 to 20 percent.

So do a little research about when it’s smart to buy bonds — and whether they should be Treasuries, corporate bonds or municipals — and when it’s better to invest in stocks, bank certificates of deposit or commodities. Learn how to recognize when investments overseas are strong. Over 20 or 30 years, you’ll want to diversify and rebalance your investments so that the inevitable market tsunamis create relatively small waves in your portfolio. You’re surrounded by this information. Read books about how the markets work, go to Web sites with primers on stocks and bonds or just watch business channels on TV.

Finally, even when times are tough — especially when times are tough — don’t ignore that quarterly 401(k) statement. That’s when you can see whether all your planning is working — cushioning the blow of a bad stock, bond or real estate market — or whether you need to explore different investments.

Think of all these do’s and don’ts as a warning from your (not-so-distant) future. You can’t just cross your fingers and hope that things turn out, or that someone else will take care of it. Start thinking about retirement now. Your life — or at least your future standard of living — depends on it.

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The Great Pension Lie
By Vasko Kohlmayer (www.americanthinker.com)

“More than 3 million demonstrators – one in 20 of all French people – marched … against the President’s plans to raise the standard retirement age from 60 to 62,” reported the U.K. Independent last week.

Strictly speaking, the protests are not really about France’s retirement age. After all, Frenchmen are perfectly free to retire at any age. There is nothing that holds them from quitting their jobs at 55 or 50 or even earlier should they be so inclined.

What the protests are really about is the desire of the French to begin state-sponsored retirement at one of the lowest retirement ages in Europe. For comparison, the retirement age in Germany and Denmark is 67. Britain is planning to increase pension eligibility to 68.

But the French have a problem: The government does not have the money to indulge the wishes of its citizenry. The French state is broke. France’s pension program is currently running a €32-billion deficit. With increasing life expectancy and fewer young people in the workforce, the figure is estimated to double within a couple of decades.

The fact is that the French government cannot afford to provide the kind of pensions demanded by the population. The French people, however, are apparently unimpressed by such excuses. They demand that the state provide anyway. And to get their way, they are prepared to turn their country upside-down. This is how bad things stood last week:

Rail and air services were severely disrupted … Many schools and government offices, and even the Eiffel Tower, closed. Eleven out of the nation’s 12 oil refineries were wholly or partially closed in what local union branches threaten could become an indefinite stoppage to topple the pension reform. The state railway company, the SNCF, warned last night that it expected widespread cancellations[.]

This is a truly desperate situation: The impossible is demanded, and social disorder is threatened if the impossible is not delivered. The state cannot make good on its promises and the citizens refuse to acknowledge that fact.

The coming on of this impasse was not unpredictable. It was, in fact, unavoidable. This is because no government can provide for the well-being of its citizens over the long run, be it through health care, employment, or retirement. All such efforts inevitably culminate in fiscal calamity, which then morphs into social crisis.

Experience shows that all large-scale public retirement programs sooner or later turn into Ponzi schemes whereby pensions of current retirees are drawn from taxes paid in by the working population. Due to falling demographic trends that afflict welfare countries, there inevitably comes a point when the racket runs out of money. The citizens, however, do not easily relinquish the promised goodies. The politicians in charge have to give in if they want to stay in office. The enraged populace will accept nothing less. Kicking the can down the road is pretty much the only option for politicians in modern Western democracies where people have been conditioned to be taken care of by their government. But deficits and borrowing cannot go on forever. Things must eventually come crashing down, and in a bad kind of way.

This fatal dynamic is also playing itself out in the United States, where the government has promised to provide for citizens in their old age. This is a high-sounding notion, but one that can never be fulfilled. As in France, the U.S. government is broke and in no position to deliver on its promises. Estimates of entitlement liabilities inherent in Social Security and Medicare range from $65 trillion to $200-plus trillion. Even the lower-end estimate is completely out of the realm of fiscal possibility.

Nor will anything be done about it, since it is not for nothing that entitlements are called the third rail of American politics. Politicians just keep kicking the can down the road while contracting ever greater debts. Bad though they may be, it is wrong to blame the politicians for our woes, for they ultimately only do our bidding. The idea that Social Security needs to be scrapped would not go down well with the voting public.

We set out on the road to fiscal woe when we fell for that great lie: that the state will provide for our well-being and welfare. But this is an unaccomplishable task. Despite what we have been told, the state cannot provide education, retirement, and job security over the long haul. The only way to have these things is to obtain them through our own efforts.

Self-reliance is not always be easy, but it can be done. Our ancestors showed us how. They managed to live in functioning civil society with almost no federal involvement. There was no Social Security or government health care then. It bears to keep in mind that they lived in a technologically far less advanced age, when life was much harder than it is today. And yet they did not look to the state to take care of their needs. They did what they had to do themselves.

Why can we not do the same? Why do we now instinctively turn to government the moment we encounter trouble or experience a need? It is this attitude that in the final analysis accounts for the fact that we are now broke as a country. In a mob democracy such as we have today, the state’s tendency is to promise all things to all people. Unfortunately, this can never work.

The choice we face is stark: Either we summon the strength to face the truth and choose to follow the path of self-reliance trodden by our forefathers, or we will continue on the road to doom with open eyes. The former would certainly seem the more courageous and sensible way. It would also be much less painful.