At 45 years old, after 15 years at her current job, Mary received a notice that her employer was discontinuing it's defined benefit pension plan. She would not lose the accumulated value up to this point however, the company would no longer be contributing to the plan. This meant that Mary and the other employees were now wholly responsible for funding their retirement.
Mary had counted on that pension; the expense of raising a family, managing a household, and saving for college made it difficult for her and her husband Joe to commit money towards their retirement. They had hoped Mary's pension income along with Social Security, the small amount of savings in their 401k, and part-time work would cover their expenses during retirement. Would they have to work forever just to pay their bills? What would happen if they ran out of savings, or felt they were no longer able to work?
The defined benefit pension provides a benefit at retirement; an ongoing stream of income, often based on a formula of compensation and length of employment. The employer funds the plan, calculated to determine the amount needed to provide the benefit. Several options for distribution are usually available including a single life distribution that ends at the death of the pensioner or a survivorship option that provides a reduced benefit that continues through the lifetime of the surviving spouse.
The income is usually a percentage of actual compensation during the years of employment. Some plans have cost-of-living adjustments to safeguard against rising costs while others are vulnerable to the loss of purchasing power caused by inflation. Personal savings, IRA's and 401k's are still important to help fill the gaps between income and expenses, as well as providing for lump sum withdrawals and emergency resources.
The responsibility of making sure the plan benefit is available at retirement is the responsibility of the employer. The value of the plan is subject to periodic review by an actuary to ensure it is on track to meet the obligations. During prosperous times with strong investment performance, the plan might become over funded, exceeding the obligations due. Other times, poor performance could cause the plan to become underfunded. The employer would be responsible for bringing it back to funded status.
During the 1990’s a shift began to occur regarding retirement benefits provided by employers. The costs of funding and the complicated administration caused many employers to begin freezing these plans and offering only defined contribution (401k) plans. These plans do not provide a defined benefit, it is unknown; only the contribution has a value. Investment performance and contributions determine the plan value; it may be more or less than the contributions at any time, including retirement.
By making the move from a defined benefit plan to a defined contribution plan the security of a no-cost continuous income stream escapes us. The responsibility of funding retirement moves from the employer to the employee. The employee makes pre-tax contributions to the plan through payroll deductions and directs it to the investment sub-accounts offered. The employer may or may not choose to contribute to the plan.
There is much discussion at this time concerning new retirement options; the decline of the pension, concerns about the longevity of Social Security, and the cyclical market declines will require us to be pro-active towards our retirement. Working longer, saving throughout our career and more employee education concerning retirement planning are steps in the right direction.
Thursday, June 25, 2009
Tuesday, June 2, 2009
The Mike Bonacorsi Show
My radio show based on my award winning book "Retirement Readiness; Creating Your Vision, Knowing Your Position, & Preparing for Your Future" is broadcast every Tuesday at Noon til 1 pm EST on WSMN Radio AM 1590.
To hear my broadcast live go to http://www.wsmnradio.com/ Tuesdays at Noon.
You can also listen on PodBean.com at http://mikebonacorsi.podbean.com/
The podcast is new so check back for updates as I will be adding more shows to the list.
To hear my broadcast live go to http://www.wsmnradio.com/ Tuesdays at Noon.
You can also listen on PodBean.com at http://mikebonacorsi.podbean.com/
The podcast is new so check back for updates as I will be adding more shows to the list.
Monday, June 1, 2009
Financial Planning is More Than Money: How strategies fit into Plans
What is the difference between a strategy and plan in charting your course for retirement? Strategies are the options you might follow to meet different goals. A plan is a global document that encompasses a number of goals equally and consists of action steps that help you to meet those goals.
I was reminded of this difference recently when reviewing the “plan” created by Lou, a friend of mine. Lou asked if I would, “take a look” at his plan and offer an opinion. He handed me a document that was several pages long, which contained the results of a risk analyzer and portfolio recommendations. I could see that he had spent some time creating this.
I immediately thought of the difference between strategies and plans and said, “This is interesting as a strategy, but lacking as a plan.” He looked puzzled at my comment and I went on to explain, a true financial plan is a life plan. It starts with a vision of how you see your future, creating goals, setting priorities.
Once your goals are set, then you develop strategies. These should consist of more than building a portfolio. Strategies are the engine that drives you to your vision. They are the action steps that lead you to meet your goals. They must be comprehensive to be truly effective. Like an engine, which cannot run efficiently on a few cylinders, throwing together various strategies, without a global plan, will only get you spotty results and ultimately misfires. Strategies include creating timelines, understanding all areas of money management, insuring and protecting against catastrophe, and creating a Plan B for the unexpected.
A plan is an active document--an evolving project--which requires monitoring, tweaking and updating. Changes in your job, relationships, health, and financials will necessitate updates and adjustments. When priorities change, one goal may be accomplished, while another is added to replace it. For instance; the birth of a child or grandchild, may add college planning to the plan, or health issues may require additional care costs. Changes in relationships may require revamping your estate planning goals.
When the plan is active and not set in stone, you can easily readjust and keep moving forward. Making sure you stay on target to your goals will require vigilance. You will be updating and rebalancing your accounts, making adjustments in your strategies, and revisiting your timelines.
Try thinking of building a life, or financial, plan along the lines of taking a long journey. First, you have a vision of the trip, decide upon the various stops along the way, and then chart the route you will travel. Your vision becomes stronger, once you have that map out, the car goes into the garage for a tune-up, and the hotels are booked. Once begun, the journey is likely to follow twists and turns you didn’t plan for and yet they add to the value of the experience. The restaurant you found on the back street when you took a wrong turn, the bad weather that caused you to postpone the canyon hiking for a trip to an antique shop full of bargains, all contribute to the evolving nature of an active journey. It’s always changing and that allows you to make the best of whatever comes your way.
As you build your life/financial plan, keep these thoughts in mind:
Start with a vision.
1. Set timelines for goals.
2. Create strategies that align with your goals.
3. Monitor, adjust, rethink, tweak.
4. The destination you reach may be more wonderful than you ever imagined.
About Mike Bonacorsi, CFP®
Mike Bonacorsi is a CERTIFIED FINANCIAL PLANNER™ professional, public speaker and award-winning author of Retirement Readiness: A Guide to Creating Your Vision, Knowing Your Position, and Preparing for Your Future. You can listen to his radio show, The Mike Bonacorsi Show, at WSMN, 1590AM or on your computer at http://wsmnradio.com on Tuesdays from noon – 1:00 PM. For additional information, visit http://mikebonacorsi.com/. Reprinted with permission of the author. 2009© Mike Bonacorsi CFP® All Rights Reserved.
I was reminded of this difference recently when reviewing the “plan” created by Lou, a friend of mine. Lou asked if I would, “take a look” at his plan and offer an opinion. He handed me a document that was several pages long, which contained the results of a risk analyzer and portfolio recommendations. I could see that he had spent some time creating this.
I immediately thought of the difference between strategies and plans and said, “This is interesting as a strategy, but lacking as a plan.” He looked puzzled at my comment and I went on to explain, a true financial plan is a life plan. It starts with a vision of how you see your future, creating goals, setting priorities.
Once your goals are set, then you develop strategies. These should consist of more than building a portfolio. Strategies are the engine that drives you to your vision. They are the action steps that lead you to meet your goals. They must be comprehensive to be truly effective. Like an engine, which cannot run efficiently on a few cylinders, throwing together various strategies, without a global plan, will only get you spotty results and ultimately misfires. Strategies include creating timelines, understanding all areas of money management, insuring and protecting against catastrophe, and creating a Plan B for the unexpected.
A plan is an active document--an evolving project--which requires monitoring, tweaking and updating. Changes in your job, relationships, health, and financials will necessitate updates and adjustments. When priorities change, one goal may be accomplished, while another is added to replace it. For instance; the birth of a child or grandchild, may add college planning to the plan, or health issues may require additional care costs. Changes in relationships may require revamping your estate planning goals.
When the plan is active and not set in stone, you can easily readjust and keep moving forward. Making sure you stay on target to your goals will require vigilance. You will be updating and rebalancing your accounts, making adjustments in your strategies, and revisiting your timelines.
Try thinking of building a life, or financial, plan along the lines of taking a long journey. First, you have a vision of the trip, decide upon the various stops along the way, and then chart the route you will travel. Your vision becomes stronger, once you have that map out, the car goes into the garage for a tune-up, and the hotels are booked. Once begun, the journey is likely to follow twists and turns you didn’t plan for and yet they add to the value of the experience. The restaurant you found on the back street when you took a wrong turn, the bad weather that caused you to postpone the canyon hiking for a trip to an antique shop full of bargains, all contribute to the evolving nature of an active journey. It’s always changing and that allows you to make the best of whatever comes your way.
As you build your life/financial plan, keep these thoughts in mind:
Start with a vision.
1. Set timelines for goals.
2. Create strategies that align with your goals.
3. Monitor, adjust, rethink, tweak.
4. The destination you reach may be more wonderful than you ever imagined.
About Mike Bonacorsi, CFP®
Mike Bonacorsi is a CERTIFIED FINANCIAL PLANNER™ professional, public speaker and award-winning author of Retirement Readiness: A Guide to Creating Your Vision, Knowing Your Position, and Preparing for Your Future. You can listen to his radio show, The Mike Bonacorsi Show, at WSMN, 1590AM or on your computer at http://wsmnradio.com on Tuesdays from noon – 1:00 PM. For additional information, visit http://mikebonacorsi.com/. Reprinted with permission of the author. 2009© Mike Bonacorsi CFP® All Rights Reserved.
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