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If you weren't crazy about what 2011 did for your retirement
finances, don't fret: The new year will offer some
opportunities to get back on track.
 The past year certainly didn't make saving and planning for
later life any easier. The markets resumed their manic ways.
Social Security and Medicare came under fire, raising the
specter of benefit cuts. A stagnant housing market continued
to hamper relocation plans, and older workers grappled with
"staggering jobless periods," in the words of AARP. (The
average length of unemployment for job seekers age 55-plus
was about 52 weeks, compared with about 37 weeks for those
under 55.)
No, the coming year won't solve all these problems. But 2012
should give you several chances to patch up plans for the
future. Here's what to look for:
Here a Fee, There a Fee
Employers in 2012 will be required, under new Labor
Department rules, to provide detailed information about the
fees associated with retirement-savings plans and how
expenses in various investments compare. Excessive fees, of
course, can ruin a nest egg. The Labor Department offers the
example of a young worker with $25,000 in a 401(k). Over the
course of 35 years (assuming no additional contributions and
an annual return of 7 percent), with a 0.5 percent expense
ratio, the employee ends up with $227,000 after fees; with a
1.5 percent ratio, only $163,000.
The point: Spend some time with these new numbers, and at
the very least, ask yourself whether a different mix of
investments could reduce your expenses, says Robyn Credico,
senior consultant at international human-resources firm
Towers Watson. If fees across the board are inordinately
high, she adds, use the information to lobby management to
change savings plans. "You should be asking questions and
challenging expenses," Credico says.
Lemons Into Lemonade
Yes, interest rates are low, and the Federal Reserve has
promised to keep them that way, at least through mid-2013.
This has prompted much hand-wringing about the (virtually)
nonexistent returns on CDs and other basic savings vehicles.
So take advantage of low interest rates to pay down debt,
says Greg McBride, senior analyst for Bankrate.com.
Retiring? Uh...Not Yet
With the oldest baby boomers entering their mid-60s,
retirement parties should be plentiful in 2012. But only
about a quarter of surveyed workers say they plan to retire
before age 65. Their biggest reasons for waiting:
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Poor economy 36%
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Lack of faith in Social Security or government 16%
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Change in employment situation 15%
-
Can't afford to retire 13%
-
Cost of living in retirement will be higher than
expected 10%
SOURCE: Employee Benefit Research Institute
Paying off debt gives you a "return" (in effect) equal to
the after-tax cost of the debt. McBride cites the example of
a person in the 25 percent tax bracket carrying a line of
credit at 3.5 percent. To start, the real cost of the loan
(after tax deductions) is 2.62 percent. For every $100 the
person prepays each month, that's $2.62 less in interest
that has to be paid in each ensuing year. Thus, the return
on that $100 is 2.62 percent. (Not bad, considering the even
more paltry yields on "safe" fixed-income investments.) If
you can knock out such debts before retiring, McBride says,
"that will stretch the life of your savings a lot further."
Gifts Galore
The coming year is your last chance to benefit from a big
tax break: a generous increase in the gift-tax exemption.
The Tax Relief Act of 2010 raised the exemption to $5
million, from $1 million, for individuals (and to $10
million, from $2 million, for couples). As such, you can
give away that much without paying a penny in taxes. The
catch: The deal expires at the stroke of midnight on Dec.
31, 2012. At that point, the exemption reverts to a $1
million pumpkin.
Kevin Sanderford, president of Colorado West Investments in
Montrose, Colo., says he sees a steady stream of clients,
particularly those with small businesses, moving assets out
of their estates and setting up trusts -- or simply gifting
holdings outright to children and other beneficiaries. His
recommendation: Start talking with your adviser about this
sooner rather than later -- not at year-end. "These are not
decisions to make lightly," he says.
Medicare Money
And speaking of the Internal Revenue Service...you can take
steps in 2012 to prepare for increases in Medicare taxes in
2013.
As part of health care reform, high-income households
(individuals earning more than $200,000 and couples filing
jointly making over $250,000) will see their tax rate for
Medicare hospital insurance increase to 2.35 percent, from
1.45 percent. These households will also be subject to a new
3.8 percent Medicare "contribution tax" (again, starting in
2013) on certain investment income.
This is the kind of issue that can easily fly under people's
radar, says Robert Walsh, founder of Lighthouse Financial
Advisors in Red Bank, N.J. He suggests meeting with your
financial adviser and tax attorney to discuss tactics --
such as recognizing gains in 2012 -- to help soften the blow
to your wallet.
Staying the Course
I'm taking some license here. This point applies to 2012 and
beyond. One of the most interesting studies to come out of
2011 looked at investor behavior during the market meltdown
of 2008 09. The report, from Fidelity Investments, found
that participants in 401(k) plans who dropped their equity
allocation to zero between Oct. 1, 2008, and Mar. 31, 2009
-- and kept it there -- saw their account balances increase
2 percent, on average, through June 30 of this year. By
contrast, investors who returned to equities at some point
saw their balances increase 25 percent. And those who simply
stuck with their allocations -- stocks included -- saw their
balances jump 50 percent.
If 2011 taught us anything, it's that wild market swings are
probably here to stay. If you haven't already, find an asset
allocation you're comfortable with -- ideally, one with
equities -- and hold on tight. Jumping off a roller coaster
while it's in motion is rarely a good idea.
About the Author
By Glenn Ruffenach, printed in
WSJ. You may reach the author at
letters@smartmoney.com.
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