The Road Through Retirement!!!

We have all heard about the Technology “Super Highway”

As a result of the events that have occurred and those that are still occurring, the road through retirement looks more like a West Virginia winding back road.  Around every sharp turn lying in wait are the villains: market volatility, inflation, healthcare costs, taxes and the housing market.

According to a study by the Center for retirement Research atBostonCollege, a couple retiring in 2011 at age 65 will need an estimated $197,000 in savings to pay for their lifetime healthcare costs – $260,000 if you include nursing home costs.

1. For retired couples, the Urban Institute estimates that 1 out of every 5 dollars spent each month on expenses goes toward healthcare.
2. The Bureau of Labor Statistics showed that healthcare costs from 2000 to 2009 rose 149%.  Four times more than the average income.
3. The Social Security Administration states the maximum Social Security retirement benefit that could be earned by an individual reaching full retirement age in the year 2011 (i.e., at age 66) is $2,366 a month.

Where will you get the income to help address the rising healthcare costs you will face in retirement?  How can you bridge the healthcare affordability gap?  The Bureau of Labor Statistics also stated that the average income from 2000 to 2009 rose just 37%.  Healthcare is the second largest expense in retirement (after housing) and could be the biggest risk to the success of a retirement income plan.

One possible solution is to create a guaranteed income stream that can be dedicated to healthcare expenses in retirement.  In your situation, it may also make sense for you to purchase long-term care insurance.

An Article by Todd Harrison June 17, 2011 8:00 am

The New York Times featured an article earlier this week that offered, “In Greece, Some See a New Lehman.” That’s a pretty scary concept, and one that deserves a deeper dive.

In February 2010, I drew a parallel between the five widely accepted stages of grieving and the potential for a “sovereign sequel” to the first phase of the financial crisis. The evolution went a bit like this:

Denial

In April 2007, US policymakers assured an unsuspecting public that sub-prime mortgage concerns were contained. Six months later, the stock market began a slide that ultimately would shave 50% of its total value.

Last year, Greek Prime Minister George Papandreou insisted thatGreecewas being victimized by rumors and denied seeking aid from European partners to finance the country’s burgeoning budget deficit.

Anger

Populist uprisings, rejection of wealth — and icon LeBron James — and emerging class wars are symptomatic of this dynamic, as are the overseas riots in response to proposed austerity measures. That specter of discontent has gone airborne and theMiddle Eastis now infected with social strife, revolutionary wars, and cross-border conflicts.

Bargaining

By the time it was obvious that sub-prime mortgages weren’t contained, the damage was already done. Our government responded by consuming the cancer — buying toxic assets from the banks — in an attempt to stave off a car crash (avert a stock market apocalypse).

 As European officials wrestle with how to address the sovereign mess, our financial fate can be drilled down to one very simple question: What ifGreeceis Fannie Mae,Portugalis Freddie Mac,Spainis AIG (AIG),Hungaryis Wachovia Bank, andIrelandis Lehman Brothers?

Sadness

If society is a sum of the parts, can we surmise that if more and more folks feel financially depressed, that mindset could evolve into a financial depression? Social mood and risk appetites shape financial markets; the Crash didn’t cause The Great Depression, the Great Depression caused the Crash.

Acceptance

Contagion arrives in phases andGreeceis a symptom, not the problem itself. Regardless of the European “solution,” it’ll simply buy time, much like the bearded nationalization of Fannie Mae and Freddie Mac pushed risk further out on the time continuum.

Generational opportunities will present themselves; our goal is to navigate the journey and be in a position to prosper when they arrive.

Market-Linked Certificates of Deposit

Market-Linked CDs offer investors the potential to earn enhanced returns compared to those available with traditional CDs.

These CDs combine the features of a bank CD and a traditional investment product.  Rather than a fixed return, they provide a variable return linked to the performance of an underlying market asset.

What are the features and benefits of Market-linked CDs?

 100% principal protected when held to maturity

• Security of FDIC insurance when held to maturity
• Qualifies for FDIC insurance up to the applicable limits
• Linked to an Equity Indice or basket of securities
• Investment horizons of one to seven years
• Focused exposure to a specific financial view
• Linked to the performance of specific underlying assets

What are the concerns to look for in Market-Linked CDs?

•   Are not equivalent to investing directly in the underlying assets
• May not always reflect the actual performance of the underlying assets
• Have different risks than traditional CDs
• Prior to maturity, may redeem at less than the original amount invested
• May be subject to US taxes on the interest income that has not been paid during the tax year
• This is not to be considered as a liquid asset

Who should look at Market-linked CDS?

•  Traditional fixed income buyers
• Bank savers
• Baby boomers
• Conservative investors
• Retirees
• Investors desiring access to emerging economies
• Investors who want to put cash balances to work in an FDIC insured, 100% principal protected investment
• Fixed income investors seeking potentially higher yields
• Those who’ve suffered during recent market downturns and now seek some degree of equity upside participation with FDIC protection

This can be an excellent alternative to traditional Bank CDs, particularly with Banks offering and paying such low rates.  You should absolutely look at Market-Linked CDs.

EGADS!!!!!!! Batman

Almost 70% of post-WWII babies (The Boomers) say Social Security is necessary for them to retire.

 Over half are concerned whether they can retire comfortably.  The one thing Boomers do well is spend money, far better than any other generation.  They have begun to retire and almost half say they are not financially ready to retire.

 Approximately 65% of them got hammered in the last bear market which means they are even less likely to retire and not run out of money before they die.  However, all of this may not be an issue because boomers think they are going to live forever.

 Many are putting off retirement.  They were invested in the market; trying to flip houses; or had their retirement plans take a hit in the last downturn.  Most were not invested as though they would be retiring soon.  More than half are becoming increasingly worried about their finances.  They feel they have not put enough aside to sustain them in their retirement years.

 As you approach retirement, your investing strategy should change.  It is much more important not to lose money than it is to make the highest possible return.

 Boomers are placing way-way too much dependence on Social Security to finance their retirement.  Our politicians will begin chipping away at the programs Seniors currently rely on for their needs during retirement.  Democrat or Republican will have little to do with it.

 I would like to suggest you develop a strategy to lessen the impact these programs have on your individual retirement.

Lessons Learned!

Some things to implement or at least give them some thought.

 Let’s say you have made the hard decisions and the tough choices.  Also, you have adopted a strategy that is aligned with your beliefs, your goals and our changing world and your expectations are correct.

 Now what?    You have to contend with the BIG 3.  Inflation, Taxes and Healthcare.

 One strategy is to have four separate income “investment buckets”:

 First, a short-term bucket.  One which contains the money you will need for one or two years (your call).  With this investment(s) you are not looking for any return.  Besides where can you invest anything for one or two years and get anything but a pitiful rate of return.

1. The next bucket contains the money you will need for years two – five or six.  Here you are looking for an investment(s) to give you some small rate of return.
2. The third bucket is for years five or six through ten or eleven.  Now you want your investment(s) to give you some level of return.
3. The fourth bucket has the money you use to replenish the first three or the investment(s) that will provide you with lifetime income.

 

Lastly, you must have a realistic approach to the healthcare issue.  Commit yourself to a healthy lifestyle.  Now I didn’t say not live!  Make life enjoyable. 

 In the grand scheme of things, money is not that important.  Money is important only to the extent that it allows you to do what is truly important to you.

Lessons Learned!

Greater than 20% of those already retired have over 90% of their investments in stocks.  The first decade of the new century was not kind to stocks.  These retirees have had a tough ride.

Almost 35% fled to NOW Accounts and CDs.  We are all aware of the paltry rates these investments have been ‘paying.’  Last part of 2007, all of 2008 and the first part of 2009 were just devastating to the 60% stock – 40% bond investors.

It’s time to reconsider new strategies going forward or at least how you invest for your retirement.

Ben Franklin’s famous philosophy on how to change a bad habit can be applied to the issue (bad habit) of how you invest.  Mr. Franklin believed it took 21 days to change a bad habit.  But you started slowly and taking small steps.  You can set yourself on an investment strategy to help prevent the repeat of the last decade and the last bear market.

You have to make hard decisions and tough choices.  First you adopt a strategy that is aligned with your beliefs, your goals and our changing world.  Understand that the rate of return you can expect in the future will not be as robust as the 1990s.  Manage your expectations.  Do not attempt to beat the market.  Understand any losses on your investments will take longer to recover, some may not recover.  Up your savings rate.

Beating inflation and surviving the taxman and your health are the crucial aspects of a happy retirement.  What can you do to protect your assets?  You should develop a realistic strategy for the actual world we currently live in, not a strategy based on the world of the 1950s, 1960s, 1970s, 1980s and 1990s.

You will start to forget what happened and you will be tempted to return to the “old-tried-and-true” methods.  Remember Ben, it takes time and small steps.

Lessons Learned

Let’s continue from the last article.  Surveys have shown that the painful lessons of 2007, 2008 and into 2009, are not grounds enough for most investors to alter their view of the investment world.

Almost 70% believe that the market drop was a temporary happening.  “Things will be back to normal shortly.”  Hello!  Ok, they may be right.  But is it possible that “normal” may not be what it has been in the past.

All over the world things have changed and are changing.  Political unrest and uprisings; government fiscal policies have and will continue to lower the value of the dollar against other currencies; high inflation and high taxes are on their way; the USA is not the dominant economy force of the past.  The wealth is flowing towards China, India and Brazil.

One other issue is individuals investing to ‘make as much as possible’ instead of trying to achieve what is truly important to them.  This ‘train-wreck’ approach is not limited just to individuals.  Our government agencies in charge of the State retirement plans are currently using a projected rate of return of 7.5% for those retirement plans.  The investing strategy for those same plans is supposed to be conservative.  The process and the lessons are not congruent.

What has been happening and is the new and the old danger, individuals are going right back to the old tried-and-true habits.  Stocks 60% – bonds 40% or I only invest in CDs.  I will pay fewer Taxes in retirement.  Expenses will be less in retirement.  Only have to worry about asset diversification and asset allocation.  Inflation will remain low.  I will be very healthy all the time in retirement.  I will be able to work when I want and earn what I want in retirement.  And on and on.

We all need a more realistic approach.  A strategy that accounts for the probability that many, if not all, of these beliefs may turn out at least a little different than we are currently envisioning.

Happy Mother’s Day

Due to personal obligations, I do not have an article today.  We will continue next week.

I hope everyone had an enjoyable Mother’s Day.

Lessons Learned?

From July 2008 into March 2009, the financial crisis caused many to run for cover and flee the markets.  They got out of the market after the “Great Financial Disturbance”; they got out of the market at the bottom.  This has been a recurrence every bear market.  Money has been pulled out of the market at the bottom and reinvested in NOW accounts and CDs.

From March of 2009, the market has had very significant gains; but, not for those who fled to NOWs and CDs.

Many felt this period was a life-altering experience.  Like the Great Depression, this Great Disturbance will have an effect on our attitude and how we look at our finances for years to come.

Fear.  Fear of financial markets crashing, fear of losing jobs, fear of foreclosure, fear of being unable to retire as desired, fear of not being able to retire at all.

The TV pundits and the ‘experts’ are still telling us what to do.  Both of whom had been bellowing about the old tried-and-true methods of how to invest before everything lost 30, 40, 50%.  Do this, don’t do this.  Yet, we still listen to the ones that preach what we think, not what we need to be doing.

We must realize that our little hum-drum worlds have been changed for ever.  All the strategies used in the past must be altered; many will not work – period – going forward in our new world.  Those tried-and-true strategies took our hard-earned money right down the toilet along with everything else.

Old, blue-chip companies went down also, many would have failed completely without government bailouts.  Many of them should have failed.  They declared huge bonuses for the very people whose decisions and guidance put those companies in such lousy condition.  That bonus money came from us.  Why were our investments not bailed out? 

Now things have calmed down a bit.  The economy seems to have recovered from total disaster.  Have we really learned anything?

Do you think this was just a one-time occurrence?  NOT!  What will cause you to recognize these basic changes and not repeat this very painful loss to your retirement savings?

Easter …

The foundation of the Christian faith is the life, death, and resurrection of Jesus Christ.

 Wishing each a Happy Easter!!