Asset allocation is something of a mystery to most of us although no writer worth her/his mettle would bypass the opportunity to tell you it is one of the keys to investment success. You will hear those who use index funds as a primary driver in their portfolios selling the notion that once you embrace this passive sort of investment, asset allocation becomes second nature. It certainly becomes easier.

To allocate assets is to take and spread risk across many different stocks and bonds. The idea here is that no market performs in tandem. Some corners will remain sluggish while others shoot for the moon. Asset allocation keeps you in both but keeps you involved in a measured way.

Too much of any asset class usually means that asset is doing really well. This is where the tough part comes in. If that asset is doing so well, you probably should begin selling some of it in favor of the assets in your portfolio that aren’t doing so well. This sounds sort of counterintuitive and I’ll explain why it shouldn’t. Even if afterwards, it still does.

Because we are talking mutual funds and not individual stocks, and we will for the sake of the argument, use index funds as an example. A large cap index fund may be in favor with investors because investors are looking favorably upon the companies in the index. But you also hold an index of small-cap companies that seem to be lagging behind – at least as a comparison. To continue to send money to the ever-rising fund, you should take some of the profit off the table and transfer it to your other allocations, balancing your investments at the point you began.

But, you stammer, that fund could go higher. Why sell a winner? Because that is what you do to make money: sell winners. But in order to keep your allocation in balance you shift those dollars to the other funds in your portfolio, buying shares in those funds when they are less expensive.

Should you consider using actively managed funds in this process? Depends on your age and whether you plan on focusing on the balance among the funds in your portfolio. If you have a fifteen year or longer time horizon until you estimate you will begin to tap your account for income, feel free to take your chances.

Index fund users will never stop stressing the importance of fees and the low cost index funds have. And this is important. But fans of the actively traded mutual fund are also focused on fees and equate performance against this measure. But the comparisons are difficult and calling this type of investing successful depends on numerous variables. (From which benchmark is being used to how many funds are spread across how many asset classes, the variables can astound and compound.)

The importance lies in keeping that balance and maintaining it. The only risk you can add to your portfolio is not adjusting your allocations at lest once a year. We are in for a volatile decade, as unemployment strings out, debt continues to be an issue and the tax debates continue and that is not without some pressures in the stock and bond markets. This balancing act wil take time and effort. But the person who bothers will end up with more years of positive returns than someone who fails at this decidedly unsexy task.

That is a healthy discussion to have even if you are covered through your workplace or purchase it from a private insurer, on your own or otherwise. The costs have continued to rise for these insurers even as they siphon off only the best, charging exorbitant premiums for those most likely to use the system more often than they deem cost-worthy.

Although the insurance lobby, American Health Insurance Plans denies this adamantly, its president, who is also the CEO of HealthNet is guilty of exactly these types of practices. Jay Gelbert’s company has paid hundreds of millions of dollars in damage to clients who were treated poorly by offering employees rewards for dropping all but the most insurable from the roles.

The ranks of the unemployed has risen and fortunately at a much slower rate, so has the rate of the uninsured. The American Recovery and Reinvestment Act of 2009 offers those that are unemployed a 65% premium on the cost of continuing their health coverage through COBRA. The Department of Labor defines the Consolidated Omnibus Budget Reconciliation Act (COBRA) which “gives workers and their families who lose their health benefits the right to choose to continue group health benefits provided by their group health plan for limited periods of time under certain circumstances such as voluntary or involuntary job loss, reduction in the hours worked, transition between jobs, death, divorce, and other life events.” Keep in mind that these premiums, even with the help you might receive, are still high and force the unemployed worker to choose between continued coverage and other basic human necessities.

Yet, one uninsured American is still too many. The argument against a broad based, government sponsored health coverage runs the gamut from forcing out competition to ruining the ability of the market forces to take control and eventually dole at the best care at the best cost. But this market-based coverage has fallen short. Once a patient has lost coverage and possibly exhausted or could not afford COBRA extensions, the chances of re-enrolling in a private plan fall to near zero. This is not an efficient market but instead an efficient business model. The pricing that accompanies pre-existing conditions, many of which exists in often the slightest of forms once a patient reaches middle age, is calculated as a risk not worth assuming.

That assumption of risk, even as few as the private sector want to take, will still cost workers in employer based plans in excess of $1,000 a month. That cost can increase by fifty percent for those that are forced to buy insurance outside of a group plan. The question is: can private compete with a Medicare type plan that embraces all comers as equally eligible?

The simple answer is no. In many instances, private insurance cannot offer the same blanket of protection nor do they want to. To offer the no-compete argument is valid when it comes to comparing the two. Private insurance is focused on a profit;the government plans is focused on driving costs down and efficiency up by broadening the base of users, not culling the best ones from the persons most likely to use the system for their care.

The biggest fear the private insurers have is the price. The government will enter the marketplace, and if the current administration’s efforts are any example, it will be staffed with knowledgeable people who understand that care is more than an actuarial target. Offering urgent and well-care coverage will free up the stresses placed on emergency rooms. The lower costs for this kind of care will enable people who can ill-afford to continue with their medicinal regimes, and thus complicating the emergency room problem, and will allow greater treatment in a more timely manner. The current market place coverage forces the least insurable to the government for help.

Will the ranks of Medicare type insurance swell? Of course they will. But will the patients looking for coverage be all on the verge of catastrophic illness, further burdening the cost of coverage? Probably not. In fact, should a Medicare type plan enter the marketplace, the shift to enroll in a much better priced (and this is what competition is about) will be seismic.

And why would private health insurers complain about improvements in a system that spends $480 billion more than similarly developed countries? According an OECD survey of the top thirty nations, spending on health insurance has risen to 15.6% of Gross Domestic Product while at the same time, life expectancy has increased along with infant mortality. The 5% yearly increases in the cost of coverage (46% of the care in the US is government funded – compared with 73% in OECD countries) with fewer physicians per capita (2.7 per 1000 compared to an average of 31.% per thousand in other developed countries) and less acute hospital beds available (2.7 in the US compared to a global average among the top thirty nations of 3.9%).

This shift from complete coverage is a direct result of the private sector, which in the US offers the largest share of coverage among these nations (36%). These costs all trickle back into the taxpayers hands, exposing the weaknesses in the current system.

High health insurance costs remove potential investment dollars in any retirement plan, further jeopardize efforts by Americans to financially prosper and force citizens to make difficult choices in who should be covered and when. If this is allowed to continue unabated, we will never be able to make the strides this country needs to make in order to return its citizens to financial solvency.

As I have mentioned on numerous occasions in the past, a retirement plan is basically a worst case scenario plan, something that if you are fortunate and diligent with its construction can be so much more. But the best plans have a minimum baseline that you should be striving towards, no matter. More than that is simply, to turn a phrase, icing on the cake.

And on numerous instances in the past I have discussed the high and still rising cost of health care. Not only is this a drain on the amount of money you could be investing for that far off, sometimes distant future, it will also impact how your retirement dollar is spent. Can a lesson be learned from the current wave of unemployment about securing some kind of coverage for those who are close to retirement and might face the possibility of bridging an insurance gap?

The option to retire early can be tempting. COBRA allows you to tap your former employers health plan for eighteen months following your departure from the company. This often doesn’t come cheap. The cost to you is the full premium price plus at least a 2% set-up fee. If you suspect that your employer may be looking to downsize more than they already have, you will need to find out two things in order to adjust your plan.

If your company is self insured, then you can plan on making the full COBRA payment. Currently there are plans in place enacted by the Obama administration (The American Recovery and Reinvestment Act) to help defray the cost of that insurance. Sixty-five percent of the cost of continuing coverage through COBRA is covered for eligible applicants. (A good plan if you are getting hints that things are not going well – which the WARN Act was supposed to help with by providing sixty days notice prior to mass-layoffs at larger companies – is to begin saving at least twnety, if not 35% of that payment in advance in a separate account).

Another albeit more costly option can be found at is least expensive, like so many things, when you are young. Consumer-directed health plans (CDHPs) coupled with an HSA plan through your employer can provide an interesting alternative to the plan. CDHPs contain a high-deductible medical insurance plan (this is only beneficial if you are in relatively good to excellent health, hence the appeal to younger workers and the ability to tap the deductible) that often is tied together with another type of savings/investing plan hosted by your employer called an HSA.

The HSA allows the plan participant to use pretax dollars to grow an account that covers the employees health care needs. These plans often have well-care coverage built right in. The plan is designed to pay for eligible medical care expenses. Not only can those underutilized funds be carried forward, they can also be used for tax-free reimbursement of post-retirement insurance premiums.

The hope that insurers have for CDHPs presents some problems. It will, they claim raise cost consciousness and when it comes to health care, this is often overlooked by those that have insurance with low deductibles. Wanting the best care is not always getting the most affordable. HSAs were supposed to stem the tide of at-all-costs care. What is may do is keep needed visits to the doctor from happening now when they may be curable, chosing instead to defer the savongs into the future when you may really need it.

HSAs are still owned by more individuals than are offered through companies.

Short-term insurance offers another option and can be calculated into a fixed budget – and planned for well in advance. The policy has a fixed ending date but usually can be terminated befiore then if needed. But for some, the timing is difficult to determine (but a ballpark estimate of the cost can help you plan while you are still employed.

If you answer yes to any fo the following questions, you are not eligible for coverage.
1. Do you currently have health coverage that is not due to expire prior to your requested effective date of short term coverage?
2. Are you, or your spouse, currently pregnant?
3. Have you been declined coverage for permanent health insurance due to health reasons?
4. In the past few years, have you received treatment for heart problems, stroke, diabetes, cancer, blood disorders, diabetes, alcohol/drug dependency, or HIV/AIDS?

The essence of good plan is the ability to plan well in advance. Having some information about what that future may hold is also helpful.

Have we gone too far?

Something similar is occurring the health insurance field that should be of particular interest to retirees, future retirees, and those who have just begun to save for retirement. Health care costs have increased 50% in the short span of seven years. If this continues, the cost of insurance in 2002 will be doubled by 2012.

Your retirement will now command $240,000 of your savings just to maintain health care coverage, up from an estimated $160,000 in 2002. According to a Fidelity spokesperson: “American households, already under strain from the difficult economy, are facing another challenge to their financial security in retirement as medical costs continue to rise steadily.” Brad Kimler, executive vice president of Fidelity’s Consulting Services business, which calculated the retiree health care cost estimate also pointed out that, “with employee-sponsored retiree health care coverage on the decline nationwide, it is imperative that today’s workers begin to set aside money themselves for medical expenses in retirement as part of their overall retirement strategy.”

These cost estimated assumptions for individuals are based on employees or former employees who do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program Medicare. The Fidelity report “estimate takes into account cost sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Medicare.”

And worse still, these estimates do not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.

There are some things you can do.
One of the best options puts money aside specially for your medical needs. Most folks invest for retirement, counting on the projected income from those accounts to pay for everything they will need in a post-work world. Calculating your health care costs into this plan can prove daunting and confusing. The best option might be a separate and distinct account.

Some of us may have access to a Health Savings Account (HSA) . These accounts allow tax-deductible money to be put into a separate account that can be used for medical needs only. One of the downsides of these accounts is the chance that you will not tap this account for minor uses, such as in the case of preventative care, in order to keep the account as intact as possible for “future” expenses.

Some of you might consider, depending on where you live, the purchase of supplemental insurance. These policies reimburse individuals over 65 years old for some or all of their cost-sharing, not covered by traditional Medicare. In addition to supplemental insurance, other coverage may also be available (e.g. Medicare HMO). Medicare’s official Web site (medicare.gov), as well as many state Web sites list the supplemental health plans available, including those for Medicare Part D. As individuals approach retirement, they should become familiar with their plan options, the costs and how these vary by location.

One of the most cost-effective ways to approach this challenge is to consider a phased-in retirement plan. Using this method as part of an overall strategic plan should be discussed well in advance of your retirement. Your employer may offer some sort of part-time work that comes with health care benefits. This method acknowledges the fact that you will need to work to cover the gap between your full retirement age benefits officially kick in. This allows the accounts you have been using for retirement to stay in tact longer and with any luck, grow exponentially in the process.

Once you get to retirement, things change.
People often consider changing locations and resettling in another part of the country. This is all fine and good provided you do your homework – with your health insurance needs and costs in mind. More than just maintaining good health – regular and preventive care check-ups, screenings and age-related tests are required – but the best way is to control some of these issues well i advance of your retirement. Maintaining good health while you are still working may give you many added years of healthy post-work enjoyment. The longer these accounts remain untouched, the greater the chances these accounts will continue to grow.

Even if you plan on staying in the community you are currently living – and even more imprtantly, if you plan on relocating, check with the services that may be offered and the quality of that care. If you have a pre-existing condition or expect some sort of hereditary problems, check out the providers in your area first, before making any decisions. Hospital Compare can help. The information found there will help you determine which hospitals are caring for patients who have certain medical conditions or who have undergone various surgical procedures. This national database of hospitals compares the quality of care of a given hospital and a given treatment/surgery. Patients at better-performing hospitals tend to have fewer complications, which reduces the risk of future additional medical expenses.

And lastly, spend the time to review any and all health claims for accuracy. It is not uncommon for mistakes to happen in the claims payment process. These types of errors could be in many forms, including charges for services not rendered or incorrect charges for a given service. When retirees receive medial bills, they should take the time to review them and follow up with their health care provider when they have questions or concerns about billing.

Good preparation now can save you thousands of dollars later, at a time when you may not be able to recoup those losses.

According to the Investment Company Institute, the public arm of the mutual fund and investment world, “only 3.7 percent of DC [defined contribution] plan participants stopped contributing to their accounts in 2008 (up from 3.0 percent reflecting changes from January through October 2008 data).” This they point out may have been the result of having reached a contribution limit.

The report, dated March 9th also found, among the 22 million accounts it surveyed, “Most participants maintained their asset allocations: 14.4 percent changed the asset allocation of their account balances, and 12.4 percent changed their contribution mix (up from 13.5 percent and 9.1 percent respectively in October 2008 data).

Even better news was the lack of loan and withdrawal activity increases that many saw as the most problematic outcome in this current economic climate. The ICI reported that “During the course of 2008, 3.9 percent of DC plan participants took any withdrawals, with 1.3 percent taking hardship withdrawals (up from 1.2 percent through October). In addition, 15.3 percent of participants had loans outstanding at year-end.”

What Got Us Here
There were some rule changes enacted in 2006 – yes, under that president – that it made it easier for representatives of investment companies who sold products to you via your 401(k) to advise you on where to put your money. On the surface, this may have seemed like a good idea. But like so many “good ideas” from that administration, it had the net effect of blurring the lines between what is ethical and what is not, what is a conflict of interest and what is done in the investor’s best interest.

These outgoing rules have yet to implemented and before they do – they are not scheduled to take hold until May 22nd after the Labor Department delayed them from taking force – the House should strike them down. According to an article by Jeff Plungis in Bloomberg on march 24, “The Labor Department previously had restricted plan administrators to general education about investments without making specific recommendations, in part to limit conflicts of interest.” The Republican led Congress thought otherwise.

Fidelity’s president of workplace investing Scott David disagrees with the rollback of the rule.
Although Mr. David has chosen not offer individual investing advice to plan enrollees he has been pushing employers to keep adding additional incentives to their plans to keep and retain workers as well as garner increased participation.

The key is participation and Fidelity’s efforts at coaching employers offers a look at how successful plans should be run and how employees should encourage their employers. Fidelity outlines some basic strategies for employers as follows:

To get the maximum savings rate with no match, employers should make the plan available immediately to new hires, with auto increase and auto-enrollment at a 6 percent deferral rate.

To get the maximum savings rate with a match, employers should make the plan available immediately to new hires, match at least 50 cents on the dollar, and enable workers to be vested immediately, with auto increase and auto-enrollment at a 6 percent deferral rate.

Before moving to a full match suspension, employers may want to consider alternative cost savings approaches such as:

• Change the match formula
• Limit the population eligible to receive the company match, (e.g., limit participation to specific groups, such as lower-compensated employees, etc.)
• Redefine what it means to be eligible for the match. (e.g., include an annual “hours” requirement, such as “must work at least 1,000 hours each year” to receive the match, or be “employed on the last day of the year” in order to receive an annual match)
• Consider moving to a discretionary match for more funding flexibility. This enables employers to change the match at any time
• Modify the frequency of the company match contribution (e.g., contribute to employee plans on a quarterly basis instead of monthly or weekly)

Charles Jeszeck, acting director of education, workforce and income security at the U.S. Government Accountability Office, believes that plan administrators have competing interests that can “cause them to breach their duty to act solely in the interest of plan participants,” And while advice is necessary, it should come from a source other than the company providing the products.

For those of you unfamiliar with what the ICI does, their mission statement reads: “The Institute engages in three core missions: encouraging adherence to high ethical standards by all industry participants; advancing the interests of funds, their shareholders, directors, and investment advisers; and promoting public understanding of mutual funds and other investment companies.”

He had already formed opinions based on what he referred to as “his research”. Analysts, or the ones he had chosen to ascribe to, do not think we have reached a market bottom and this new investor, basing his future moves on that information, was waiting for it to happen. (I, on the other hand believe that we have reached a bottom but make no predictions when we will begin the long and arduous climb back or even how long it might take.) Then, when the market reached it, he told me, he would invest.

“In what”, I asked even as I realized that he was already traveling down the wrong path, basing his assumptions on what he had heard and what he had read. He told me what he wouldn’t invest in (GM, he said was a bad investment) but like so many investors, he could not put a finger on what was a good investment. “I’m still doing research,” he replied.

Here are the five most common mistakes made by new investors and he will make each one of these, if he hasn’t already.

Believing the Narrative
Depending on who you listen to, we are headed higher or headed lower. The very analysts who cheered the rise in the stock market are looking to regain their standing as prognosticator extraordinaire by suggesting that the market still has further to fall. Savvy investors, who like him invest in individual stocks, do not care about the “markets”, only what some stocks can offer. A good investment is determined by how much you are willing to risk, how much risk you are willing to take and how well your tolerance for short-term losses is.

Setting Parameters
Few investors in this current market could predict the breadth and scope of the downturn in investor sentiment. Good investors though set their own personal bottoms (when to sell) and, conversely, their own personal highs (when to sell). Good investors rarely marry what they have purchased understanding that the reason they are in the market in the first place is to gain more than they lose. Newbie investors have little tolerance for loss and an unwillingness to sell if they believe that there is a possibility they could have made more had they simply held on to the investment. Setting these boundaries is extremely important.

Using money you DO NOT NEED
The young man I spoke with used the money he received on his tax return to open his account. This is noble but wrong-headed thinking. It is not money he didn’t need but as he reasoned, money he would have probably blown otherwise. In fact, he blew it when he failed to adjust his W-4 at work to achieve the maximum take home pay and the least amount of overpaid taxes. Allowing the government to hold your hard-earned cash, interest free for a year and then foolishly treating this “windfall” as a bonus is the first mistake he made and if you think about it, offers a window into how well he will do as an individual investor. He has, at this writing, not adjusted his 2009 earnings to fix this withholding problem.

Believing in His Own Talents
Finding the right investment in this type of market atmosphere has challenged the most savvy investors. But unlike this young man, the savvy ones have some failsafe maneuvers they can employ that are beyond his grasp. He will fail to calculate the cost of each trade (both in or out), fail to itemize those trades (logging both the purchase price and the sale price against gains) and harbor the belief that whatever he does online, in the privacy of his home, will be his business alone. He files a standard tax form that does not allow him to deduct losses but demands he report gains. Taxes are about to betray him in more ways that his investments will repay his efforts.

Little Fish, Big Fish
Believing that the markets offer fair and balanced participation for all players is fool-headed. While he is working (earning a paycheck and paying Uncle Sam more than they deserve), the markets will be in progress. This demands he be able to react – but only after the fact, after the profits have been taken and the losses have abated. News will move markets and he will be on the trailing end of those reports. More importantly, he will not have access to anymore information than what the media offers. Sure, he will get “real time” quotes and when he trades, he will stand in line to make his purchases. What he fails to realize: the longer you stand in line, the difference in price points can grow making the differences in what you pay huge. Big fish always get to eat first and little fish (although the process looks democratic and every broker will let you believe that your business is important to them) will be forced to wait their turn at the table. Forgetting that brokers make their money with every trade, they almost encourage you to get in and then out and then in again as many times as possible. Big fish pay better. Little fish simply pay and pay.

The Bottom Line in Five Moves for Beginning Investors
Fix your taxes – the government does not need your money; you do.
Fix your credit – the negative effects of what you pay the creditor acts like a tax on your investments and your future wealth.
Get involved in whatever retirement accounts that may be available to you – match or no match.
Make a budget based on those changes in income.
And start a rainy day fund – no matter how old you are.

As long as they are bad for some, we empathize. We wonder if it could happen to us and if so, what would we do. The root of a plan is the preparation for disaster or worst-case-scenario. When it comes to retirement, we often overlook numerous pitfalls and potholes. With so much bad news, we no longer do. But now, we seem to be ignoring the scenery looking for potential problems.

How should you look at your plan?
Probably the most important thing is to gather together all of your potential income sources. Many of us still have pensions. Some of us were smart enough to fund IRAs alongside those pensions. Still more of us availed themselves of the 401(k) plans at work. And a surprisingly number of us have had the ability to possess all three in some form or another.

Your pension’s health is mostly out of your control. The company you work for or the union you might belong to (often in conjunction with the employer[s]) control many of the investment decisions. The law requires a minimum funding in many instances and this is where these plans are having difficulty. Less than a third of them are fully funded with many in such serious shape, they have been forced to comply with the Pension Protection Act of 2006 and the modified law enacted shortly before the new administration took office.

These modifications require a pledge to fully fund the plan, a plan outlining how they plan to do so and notification to the plan’s participants on what changes they can expect. Expect the worst. Once you get this information, attempt to figure out what would happen if the Pension Benefit Guaranty Corporation, the arm of the federal government that insures pensioned workers get something for their years of service, will pay should the pension not be able to meet those obligations and possibly even fail. (Find out here.)

You now have a more realistic idea of what that pension will pay and more importantly, when. next up is retirement investments you may have made outside of this plan. Do not count your house among you assets. In many cases, it should be counted as a liability. Some of us will enter retirement with house payments and all of us will have insurance, taxes and upkeep expenses associated with the home long after we retire.

Plans outside of pensions
401(k) plans and their counterparts, the IRA have all seen dramatic decreases in the total available funds. You may now look at this as a baseline. The best possible withdrawal number from these accounts is still 4%. This number will keep your money from disappearing entirely in your lifetime although the worry that four percent will not be enough, and as a stand alone number probably falls short of your expectations, it is still a calculable amount to consider.

How and when you decide to take this payout is key to the overall plan’s longevity. Could you survive until age seventy and 1/2 without tapping those funds? Another problem face those with these types of plans when they retire: how to receive them.

Often, these plans offer you a lump sum payment or the ability to take the money in those plans and roll it over into an annuity. This option comes with numerous choices. You could chose a life only payment plan which pays you a certain amount until your death. Keep in mind, the insurer – in almost all cases, the annuity is held by an insurance company with actuaries making educated guesses as to how long you will live and the economic viability of their payouts over time. You can beat this type of payout if you live well past when they think you will.

If you are worried about how you spouse will fair after you die, you might opt for the joint and survivor payment plan (this is also part of how a pension plan works, giving you a lower monthly payment but a guarantee that your spouse will not lose what you had coming should you meet an early demise). Annuity providers will also dangle a third option in many instances called the life and period certain. This option pays a certain amount for your life or a specific time period, whichever is longer.

(Keep in mind, all of these tax-deferred pans are treated as ordinary income when you receive them. The thinking is that you will be in a lower tax bracket when you retire. Always consider how any retirement payment will impact your taxes and that bracket by consulting a tax professional prior to making any concrete decisions.)Your payments are generally taxed as ordinary income when received.

Because annuity payments are typically fixed, the impact of inflation on those payments must be considered. Inflation can erode this income over time making what you receive seem less valuable as time marches on.

You could consider taking the payout as a lump-sum distribution. This gives you a unique opportunity to invest your retirement funds but also the daunting task of finding somewhere worthwhile for those funds. If you are investment savvy, those funds could be something your heirs could look forward to or, if you are not, the lump sum could fall victim to poor decisions and be worth far less over the long-term.

The taxes you pay on a lump-sum distribution depends on how you handle it. Rolling it over into a qualified plan such as an IRA will allow you to defer any taxes until you reach the legal withdrawal limit (59 1/2) while taking the lump sum and doing nothing will subject it to your current taxable rate, possibly even penalties.

If you are calculating Social Security int the mix, also taxable but often readjusted for the cost of living, consider waiting as long as possible to apply. One method that is gaining in popularity is taking the SSA payment as soon as possible, saving the payment and reapplying when you reach full retirement age. Some paperwork is required but if you can pay back what you have already received, you can get the new higher payment.

Each of these options require you to paint a less-than-rosy outlook and learn to cope. Should you find that the markets recover, your health is good or some other unforeseen good fortune comes your way, you will at least know what your baseline retirement income will be and build your post-work plans around it.

Typical safe havens such as fixed income, municipal bonds and even certificates of deposit all run the risk of not beating inflation, defaulting, or simply having your money sidelined when the markets return to some sort of normalcy. That time is coming and this is added to the list of risks you might want to consider.

Keeping your money in cash does not return enough to beat the inflationary pressures, albeit milder right now, that your money will face. A simple savings account (which should be FDIC insured) is netting an average of one percent. There is no safer place to put your money and expect it to be there (often called liquidity), but it is hardly considered an investment.

Money market mutual funds can be had for a slightly higher rate but not by much. The rates these funds pay have been falling and if you look really hard, you might find an online bank paying upwards of 2% on a $10,000 deposit. Look for the restrictions on these types of – and hesitate to call it this – investments.

Certificates of Deposit also come with some risk. Although your money is safe, the act of tethering it to an interest rate for three to five years might not be best for a long-term approach. There is little doubt that the markets will recover and if the past few days are any indication, the event might not be as far off as many would have us believe. Keeping your money “safe” during any sort of recovery is akin to stuffing it under your mattress. (The key to investing is making your money work, assuming a little or a lot of risk and doing so for the rewards while saving is much different, safer and very conservative.)

Bond funds might seem like the next best option and for many, particularly those with close retirement horizons, this may be the only option. But these do not come without their own brand of risk. Bonds are essentially loans and the risk that the business or municipality might default on that agreement is still higher than normal. Buying individual bonds might be consideration for some but engineering a laddered portfolio, one where you have purchased bonds with different maturity dates is often difficult for the average investor. Bond funds still do a much better job than many us could on our own but the risks are not eliminated.

Fixed income has seen some rough patches over the last eighteen months and may still see a few more in the coming days. Most bond funds are not solely invested in American issues and this can be problematic as the world’s economies are not going to recover at the same rate. In fact, overseas bonds are still struggling even as US funds are showing signs that things might be improving.

Chasing dividends and the funds that own them might not be the best approach either. But many of these companies, with beaten down stock prices (in part because investors are disgruntled that these traditionally high dividend paying stocks have cut back or eliminated this portion of the profits) will begin to recover when the markets do and with it, eventually, so will the dividend. A dividend is a portion of the company’s profits paid back to the investor, often on a scheduled basis.

Funds that invest in bank loans might be the highest risk among the most conservative approach but the temptation to invest should be tempered with the possibility that these loans might still be discounted and sold for less than what you paid. Pre-refunded municipal bonds, the payouts already secured with Treasuries might not beat the taxes (adjusted at 2-3%) that come with the safety.

Safety nets during these kinds of times are not always as safe as they might seem. And as much as I hate to say it – largely because I am not so much of an index type of investor – broad market indexes might provide one of the better safe havens available today. If your time horizon is ten-years or more, there is no reason not to invest, a little at a time in stock funds like an index. IF it si less than ten-years, you can expect safety with little yield – and little in the way of risk.

Think of savings this way: the owner of the horse locks up his animal and the son goes off to war.

The differences are quite obvious. Investing offers your money the opportunity of maybe while savings ignores the possibility, content with what is and feeling secure because of it.

The two words are often confused when it comes to retirement planning. That may be why we are all in shock. We assumed that saving was placing money in a 401(k) or other type of defined contribution plan and that when we did, the growth of that money would be guaranteed. Misunderstanding the risks involved and looking only at the rewards, many of us unlocked the gate and let the horse roam free, assuming that when the horse returned, it would arrive with more livestock in tow. That assumption was, as we have all found, was wrong.

Savings is the horse in the barn, safe and sound, kept from harm and protected from loss. Even now, large financial institutions are still confusing the words and misleading savers and investors alike. Fidelity is among the most recent to jumble the meanings with a new program that offers personal financial advice.

The Challenge of these Economic Times
No one can down play what has happened to our investments (what we placed in stock and bond markets for our futures) and savings (the failure to have any has left many of us feeling more vulnerable than we should).

Fidelity’s attempt at rectifying the events of the past twelve months is outlined in a new program that is based on several of Fidelity’s views on saving and personal money management. Offered as general principles, they seek to take some fiduciary responsibility and explain how they can help.

The begin with retirement suggesting it should be a primary focus. And it should but they make the mistake of misleading some of by calling it savings. It is not. Retirement planning, for those of you that have read the book I have written and the numerous posts associated with the topic in the year since its publication involves understanding that risk plays an important part in the equation. But risk can unfold in some interesting ways.

The forces that can undermine your retirement efforts can come from unexpected directions. Parents can suddenly become your burden even as the welfare of your children shifts from your care to something of their own. Insurance, taxes, and inflation all seek to undermine your efforts as they put strain on what is available to invest. And as we know, those forces can disrupt your thinking but should not disrupt your plan.

The tax breaks provided by a retirement plan make the effort much easier. We can have money taken from our paychecks, pretax, and put into the investments of our choice. Those investments might be conservative (exposure to little risk but not completely safe from market forces and the harm they can sometimes inflict) or aggressive (exposure to greater risk of loss and on the flip side, greater reward if the investment does well). Many advisers try and assess your risk assigning an age to when you should adjust your investment style, protecting assets gained while younger with a more conservative approach. None of this is savings.

Savings needs no rebalancing, no change in allocation, no shift in how you think. Savings comes with no risk. Having no savings on the other hand, does.

Fidelity makes this error on numerous occasions as they attempt to lure investors back into the marketplace. While they suggest that “saving for retirement should be a primary focus. ” Then it gets vague, blanketing the concept on old platitudes and misdirections.

If you have a defined contribution plan where you work, they suggest that, “regardless of age, all workplace plan participants should contribute at least enough to receive the maximum amount of any matching employer contributions, review their portfolio at least once a year and rebalance as necessary.” What should the employee do in the face of diminishing matches, defeated portfolios and little or no knowledge about what do to with what they have.

When they have the opportunity to suggest you save, they simply tell potential retirement planners to “set aside at least three to six months worth of living expenses as a safety net” and get control of those high interest credit cards.

Few people in this country are in a position to max-out their contributions in those employer sponsored plans but no matter. Once you do, you should look into saving (investing) more. Once you do all of that. begin a 529 plan for you kid(s).

There is nothing really wrong with their effort and I never miss an opportunity to poke fun at the misuse of those two words or to wonder how someone with a product to sell can conduct an open and frank conversation. But they do.