Older Investors Need to Earn More on Investments

Hello,

We’ve all heard that when approaching retirement, the stock market is a no-go zone. But considering that we are now living longer, this essentially means that the money you have saved for your retirement must be able to sustain you for a longer period. A lot of advisers recommend investing in fixed income securities to protect your capital, but this will usually results in low interest returns and in most cases cannot keep up with the rate of inflation. So as the years go by, your money keeps on losing value as inflation reduces its purchasing power. Recently, some advisers have started going against this advise, and are actually recommending that investing in the stock market should be done during retirement to keep up not only with the rate of inflation, but also become a source of income. Laura Bruce explains in the following article how older investors need to earn more on their investment during retirement.

Circling your personal Fort Knox to protect your portfolio from stock market fluctuations as you near retirement may seem prudent, but it may come back to haunt you. A certain amount of income-generating investments are necessary, but, too often, people go overboard on fixed income as they age and shun the stocks and mutual funds that are sorely needed to grow the asset base. Few fixed income investments will leave you with much after inflation.

Nevertheless, it’s ingrained in many people who grew up during the Great Depression, or whose parents grew up then, to become more financially conservative as the decades go by. It can be very difficult to let go a little bit and put some cash in the stock market — where it could disappear.

We spoke with three financial planners to get their ideas on what consumers should do to guard against a portfolio that is too conservative and may not meet retirement needs, much less goals. While there are common themes, each planner addresses the issues he sees in his practice.

Three financial planners give their advice:

A visit to a financial planner can provide an objective view of your financial situation. While a long-term relationship with a planner may be best, there are alternatives. Some planners will see you for a one-time portfolio evaluation. You may be charged a fee or it may be complimentary. Many financial planners volunteer their time at various seminars where no fee is charged. Be careful not to confuse this with one of those highly publicized seminars where you may get a free lunch but your wallet may get emptied.

For the die-hard do-it-yourselfer, Bankrate.com also has tools and calculators that may help you achieve your retirement goals.

Chris Cooper, CFP: In his own words

Chris Cooper is a Certified Financial Planner, owner and founder of Chris Cooper & Co. in Toledo, Ohio. Cooper’s practice specializes in working with the elderly, people who are about to retire and small-business owners. He’s a plain-speaking Midwesterner who’s helped clients shore up their assets in an area of the country that’s seen its share of economic downturns.

Helping the kids
Most people don’t realize how much money they’re going to need in retirement. Here in the Midwest, a lot of retirees skinny down their lifestyle after a few years in retirement. They might have a health issue that scares them, so they cut back on travel and the like. They’re spending less money and building a surplus. Then they think they don’t need the money and they start giving it to the kids without realizing they may live another 30 years. The middle class, especially, would rather loan their son or daughter $20,000 for the down payment on a house than have the child take out a piggyback loan. Sometimes they start depleting their principal. I find that gifting is a major problem.

The house
People pay their house off too fast and then waste the house payment. They make the mistake that the house is an investment — which it isn’t, especially in the Midwest. A house is just a shelter. They should treat it like a car; it’s not really appreciating. They would be better off taking that extra payment and investing it in the stock market. That’s the only thing that has worked the last 25 to 30 years. People only remember the stock market when it goes down. And yet they never remember houses going down in value.

When you get to retirement it doesn’t matter if your house is paid for — you’re not going to live there anyway. It’s going to be the wrong kind of house, the wrong neighborhood; maybe it has stairs and a basement that you can’t handle anymore because of bad hips or knees. People get this attitude that they want to have the house paid so they can lay in it and rot for the rest of their life. They’re investing in rotting assets. It doesn’t matter if the car is paid for, the house is paid for, the life insurance is paid for — it doesn’t matter as long as they have income. The only way you build income is invest in financial assets.

Annuities
If you’re saving $1,000 a month in a tin can, that’s an accumulation vehicle. If your tin can pay some interest, that helps. And if your tin can invest your money in stocks like a mutual fund, that helps, too. The insurance industry is trying to disguise the variable annuity as mutual funds when it’s a mutual fund with an expensive wrapper that’s sucking away about 1.5 percent a year of your money. People don’t really get anything for that expense. I would agree that an annuity can be a useful tool if it’s paying out money, but I don’t see it as a good accumulating vehicle.

I would use an annuity as an immediate annuity. It’s different from an accumulating annuity in that you put a sum of money in it and it instantly turns into a payment stream. The problem is most people are just buying annuities when they think they’re buying investments.

Assess your situation
The first thing people should do is take stock of where they are financially. How much are they spending per month? It can be very hard to do your own accounting; we have a tendency to overstate income and understate expenses. Sometimes it’s best to go to a third-party and have them do it, if you can’t be objective. If you retire and only have a fourth of the income coming in that you have now, you’re not going to be happy.

Have someone measure your resources to tell you objectively how much money you can expect from your resources in retirement — Social Security, pension, 401(k), IRA and any other assets you may use as funding sources for your retirement. Have the planner do various scenarios against different backdrops — low interest-rate environment, high interest-rate environment, high inflation, low inflation, stock market crash, etc. Anybody can make you look richer by just raising your rate of return. But raising your rate of return may not be realistic because you may be taking far more risk than you can afford to take. A lot of people say they need to make more on their money to make up for lost time. Don’t do that; you’ll crash and burn.

Estate planning
Examine your will, trust, power of attorney, insurance coverage — life insurance, health, long-term care, disability, property and casualty. You don’t want to get in a car wreck and not have enough liability insurance; you could lose your retirement because not all states protect retirement money. You also want someone in power to handle your affairs if you can’t. That’s why you need a legal document like power of attorney, which has to speak to handling retirement plans, life insurance products, annuities, filing tax returns and health care decisions.

Tony Proctor, CFP: In his own words

Tony Proctor is a Certified Financial Planner and president of Proctor Financial in Wellesley, Mass., which he founded in 1994. Proctor tells clients that they should assume they’ll be in retirement for decades and that their money needs to grow if it’s to keep pace with inflation over that span.

Don’t count on working forever
You hear people say that they’re not going to retire at the normal retirement age, and that’s really unfortunate. It’s just not possible; usually physically. I find that the people who tell me at age 55 that they’re going to work until 67 are telling me at 62 that they want to retire the next year. The time frame definitely shortens.

Methodology
I like to tell people that retirement is not an event, it’s a journey. I tell people to plan on being retired for 30 years. That means their money needs to grow for 30 years. A quick and easy methodology that someone could apply would be to take five years’ expenses and keep it outside of the stock market. Whatever is left can go in the stock market. For some people that will be a big percentage, for some it will be small.

What’s important is that it’s not age-based. I’m very much in disagreement with age-based methodologies. I don’t think they take into account the actual facts of someone’s retirement picture. Look at someone who’s 50 and is retiring tomorrow. If we use my quick methodology and they need $50,000 a year to live on they should have $250,000 not in equities. Maybe they have a $1 million portfolio, so they have 75 percent in equities and 25 percent in cash and bonds.

Now, look at a person who is 65 years old but is not going to retire until they’re 75. Their investments have much more time to ride out market fluctuations. The 65-year-old’s portfolio would have a much higher percentage of equities. He or she can tolerate the risk because they’re not spending from their portfolio. The 50-year-old can’t withstand nearly as much risk because he or she is currently taking withdrawals.

The key is you need to look not only at the level of assets, but the timing of the spending of those assets. It’s the timing part of that equation that most people leave out, but it’s absolutely relevant as to how you should build a portfolio.

You start building the five years’ worth of cash once you’re five years away from retirement. When you’re five years out, you set aside one year’s worth of cash; four years out you set aside the second year’s worth of cash, and so on.

Fixed income
I teach a retirement planning class and one data point I use is the average six-month CD rate over 25 years. At the beginning of the 25-year period the average rate was about 15 percent. If that was someone’s starting point they were sure they could get by on 15 percent interest on their money. But seeing that rate go down to 1.2 percent 25 years later is pretty brutal.

Wealth transfer
Leading-edge baby boomers seem to be doing OK with the investments they put away for themselves, but there’s this huge intergenerational transfer of wealth that they don’t know what to do with, and they’re pretty much leaving it in cash. I wouldn’t say that it’s on purpose that they’re being too conservative, but in practice that’s how it ends up because these inheritances are fairly large and make up a decent portion of their portfolio. If it’s entirely in cash, it skews the overall asset allocation.

Their parents’ generation wasn’t exactly well-versed in investing so a lot of their parents’ money was in CDs and bank accounts. There’s so much misinformation about being conservative with your investments when you approach retirement that, I think, people who are in this circumstance don’t feel an overwhelming desire to fix it. They’re approaching retirement so they think having hundreds of thousands of dollars in cash is OK.

Easing into the stock market
For people who are very conservative I recommend dollar cost averaging their money into the market. If someone is 100 percent in cash but needs to have 75 percent in equities, I would probably move their cash into the market over the next 24 months. That way they could get used to it — small exposure at first but, eventually, two years down the road they’ll be in the correct balance.

I would recommend mutual funds for these people. I think it’s irrational for someone to be mostly in cash and suddenly think they’re going to start investing in individual securities. It makes it that much more likely that they’ll get badly burned and then retreat from stocks altogether, which isn’t in their best interest. Funds will be smoother, less volatile than individual stocks in most cases.

If people are going to do this themselves, then index funds are a fantastic way to go. If they’re feeling even more sophisticated I would have them look at exchange traded funds.

Long-term care insurance
I don’t think there’s much of an unmet health expense issue, but I think there is a disability issue. People who are conscientious about planning are the ones buying long-term care insurance. The people who are not planning are not buying this insurance. They’re going to get creamed — twice. They don’t have the appropriate insurance coverage in place, and they probably didn’t have many assets to begin with, so they’re stuck. Fifty-five is a good age to begin long-term care insurance.

Eric Soiland, CIMA: In his own words

Eric Soiland is a Certified Investment Management Analyst who has been working with pre-retired and retired clients for 20 years; the last nine of them working for Citi Smith Barney in Walnut Creek, Calif.

Risk
Typically, most people look at risk as the potential for fluctuation or loss in an investment portfolio. Another risk is running out of money before they die. That could be due to inflation, health care costs, long-term care costs or unforeseen events. I try to get them to picture in their mind the best portfolio we can put together that will help them maintain their current lifestyle. Over a 20-, 30- or 40-year retirement you need to have growth to counter inflation. A lot of individuals automatically think that when they get near retirement they need to become very conservative. That may have been true many years ago when people died five or 10 years after retirement, but it’s not the case now.

I don’t twist anybody’s arm; I just explain the trade-off. If you want to sleep extremely well now then the trade-off may be that down the road you won’t be sleeping well because your portfolio hasn’t kept up with inflation. If you’re willing to take a little more risk many times you can greatly enhance the odds in your favor. I try to get the overly conservative investor to see the sense of a more diversified, more aggressive portfolio.

The zone
What is most important, in my opinion, is the five years before retirement and the five years after retirement. It’s a zone, a 10-year window, that’s very critical for most retirees.

A lot of planning goes into the five years leading up to retirement. That’s when you want to review your current assets, estimate anticipated assets, determine your expenses, check your insurance coverage and work up a plan with your financial adviser to see if there’s a gap that needs to be overcome. Then, if you can get through the first five years of retirement without any really negative setbacks to principal, there’s a good chance you can maintain your current lifestyle in retirement if you stick with a prudent withdrawal plan.

Start early
The sooner people get serious about retirement, the better. If someone has 20 years to go before retirement and they start planning now, they’re in a much better position to know what they need to save and to be able to hit that goal than someone who’s two years away from retirement and is finding out they haven’t done a very good job.

There’s more than one way to make up a retirement shortfall. They can cut back on spending, work longer, leave less of a legacy and perhaps use other assets — even their home — as a resource at retirement. They could downsize or do a reverse mortgage.

I typically don’t consider my client’s home as an asset that we’re going to use. Most people are living in their home and don’t intend to sell it. But should something come up — an unexpected death, disability, long-term care needs — I want to get clients to think about those kinds of issues and think about what kind of plan they have in place to handle those issues as they arise.

We can find the right investment strategy for them once we look at the bigger picture and figure out the best way to get from point A to point B. We want to get them the return they need to meet their goals but at the lowest level of risk that they need to take.

Plan ahead
We sometimes have to talk about several plans. Plan A is ideal, plan B might be more realistic but not as ideal and plan C might be a backup plan in case numerous negative issues come to bear. There’s no going back on your retirement when you’re 75 if you messed up.

Health care costs
I encourage my clients to consider what they think the costs will be. We try to come up with a number that we feel makes sense given what we know today. We need to discuss with them that these numbers can change and we need to update the plan as we see changes occurring and try to keep it as current as possible. If we do a financial plan for someone, it’s not a one-time event, it’s an ongoing process.

Debt
The more you can pay down your debt, the more you have left to invest or to use for day-to-day expenses. Debt is usually a burden unless it’s used for a specific reason to enhance your wealth.

Three financial planners give their advice:

A visit to a financial planner can provide an objective view of your financial situation. While a long-term relationship with a planner may be best, there are alternatives. Some planners will see you for a one-time portfolio evaluation. You may be charged a fee or it may be complimentary. Many financial planners volunteer their time at various seminars where no fee is charged. Be careful not to confuse this with one of those highly publicized seminars where you may get a free lunch but your wallet may get emptied.

For the die-hard do-it-yourselfer, Bankrate.com also has tools and calculators that may help you achieve your retirement goals.

Chris Cooper, CFP: In his own words

Chris Cooper is a Certified Financial Planner, owner and founder of Chris Cooper & Co. in Toledo, Ohio. Cooper’s practice specializes in working with the elderly, people who are about to retire and small-business owners. He’s a plain-speaking Midwesterner who’s helped clients shore up their assets in an area of the country that’s seen its share of economic downturns.

Helping the kids
Most people don’t realize how much money they’re going to need in retirement. Here in the Midwest, a lot of retirees skinny down their lifestyle after a few years in retirement. They might have a health issue that scares them, so they cut back on travel and the like. They’re spending less money and building a surplus. Then they think they don’t need the money and they start giving it to the kids without realizing they may live another 30 years. The middle class, especially, would rather loan their son or daughter $20,000 for the down payment on a house than have the child take out a piggyback loan. Sometimes they start depleting their principal. I find that gifting is a major problem.

The house
People pay their house off too fast and then waste the house payment. They make the mistake that the house is an investment — which it isn’t, especially in the Midwest. A house is just a shelter. They should treat it like a car; it’s not really appreciating. They would be better off taking that extra payment and investing it in the stock market. That’s the only thing that has worked the last 25 to 30 years. People only remember the stock market when it goes down. And yet they never remember houses going down in value.

When you get to retirement it doesn’t matter if your house is paid for — you’re not going to live there anyway. It’s going to be the wrong kind of house, the wrong neighborhood; maybe it has stairs and a basement that you can’t handle anymore because of bad hips or knees. People get this attitude that they want to have the house paid so they can lay in it and rot for the rest of their life. They’re investing in rotting assets. It doesn’t matter if the car is paid for, the house is paid for, the life insurance is paid for — it doesn’t matter as long as they have income. The only way you build income is invest in financial assets.

Annuities
If you’re saving $1,000 a month in a tin can, that’s an accumulation vehicle. If your tin can pays some interest, that helps. And if your tin can invests your money in stocks like a mutual fund, that helps, too. The insurance industry is trying to disguise the variable annuity as mutual funds when it’s a mutual fund with an expensive wrapper that’s sucking away about 1.5 percent a year of your money. People don’t really get anything for that expense. I would agree that an annuity can be a useful tool if it’s paying out money, but I don’t see it as a good accumulating vehicle.

I would use an annuity as an immediate annuity. It’s different from an accumulating annuity in that you put a sum of money in it and it instantly turns into a payment stream. The problem is most people are just buying annuities when they think they’re buying investments.

Assess your situation
The first thing people should do is take stock of where they are financially. How much are they spending per month? It can be very hard to do your own accounting; we have a tendency to overstate income and understate expenses. Sometimes it’s best to go to a third party and have them do it, if you can’t be objective. If you retire and only have a fourth of the income coming in that you have now, you’re not going to be happy.

Have someone measure your resources to tell you objectively how much money you can expect from your resources in retirement — Social Security, pension, 401(k), IRA and any other assets you may use as funding sources for your retirement. Have the planner do various scenarios against different backdrops — low interest-rate environment, high interest-rate environment, high inflation, low inflation, stock market crash, etc. Anybody can make you look richer by just raising your rate of return. But raising your rate of return may not be realistic because you may be taking far more risk than you can afford to take. A lot of people say they need to make more on their money to make up for lost time. Don’t do that; you’ll crash and burn.

Estate planning
Examine your will, trust, power of attorney, insurance coverage — life insurance, health, long-term care, disability, property and casualty. You don’t want to get in a car wreck and not have enough liability insurance; you could lose your retirement because not all states protect retirement money. You also want someone in power to handle your affairs if you can’t. That’s why you need a legal document like power of attorney, which has to speak to handling retirement plans, life insurance products, annuities, filing tax returns and health care decisions.

Tony Proctor, CFP: In his own words

Tony Proctor is a Certified Financial Planner and president of Proctor Financial in Wellesley, Mass., which he founded in 1994. Proctor tells clients that they should assume they’ll be in retirement for decades and that their money needs to grow if it’s to keep pace with inflation over that span.

Don’t count on working forever
You hear people say that they’re not going to retire at the normal retirement age, and that’s really unfortunate. It’s just not possible; usually physically. I find that the people who tell me at age 55 that they’re going to work until 67 are telling me at 62 that they want to retire the next year. The time frame definitely shortens.

Methodology
I like to tell people that retirement is not an event, it’s a journey. I tell people to plan on being retired for 30 years. That means their money needs to grow for 30 years. A quick and easy methodology that someone could apply would be to take five years’ expenses and keep it outside of the stock market. Whatever is left can go in the stock market. For some people that will be a big percentage, for some it will be small.

What’s important is that it’s not age-based. I’m very much in disagreement with age-based methodologies. I don’t think they take into account the actual facts of someone’s retirement picture. Look at someone who’s 50 and is retiring tomorrow. If we use my quick methodology and they need $50,000 a year to live on they should have $250,000 not in equities. Maybe they have a $1 million portfolio, so they have 75 percent in equities and 25 percent in cash and bonds.

Now, look at a person who is 65 years old but is not going to retire until they’re 75. Their investments have much more time to ride out market fluctuations. The 65-year-old’s portfolio would have a much higher percentage of equities. He or she can tolerate the risk because they’re not spending from their portfolio. The 50-year-old can’t withstand nearly as much risk because he or she is currently taking withdrawals.

The key is you need to look not only at the level of assets but the timing of the spending of those assets. It’s the timing part of that equation that most people leave out, but it’s absolutely relevant as to how you should build a portfolio.

You start building the five years’ worth of cash once you’re five years away from retirement. When you’re five years out, you set aside one year’s worth of cash; four years out you set aside the second year’s worth of cash, and so on.

Fixed income
I teach a retirement planning class and one data point I use is the average six-month CD rate over 25 years. At the beginning of the 25-year period the average rate was about 15 percent. If that was someone’s starting point they were sure they could get by on 15 percent interest on their money. But seeing that rate go down to 1.2 percent 25 years later is pretty brutal.

Wealth transfer
Leading-edge baby boomers seem to be doing OK with the investments they put away for themselves, but there’s this huge intergenerational transfer of wealth that they don’t know what to do with and they’re pretty much leaving it in cash. I wouldn’t say that it’s on purpose that they’re being too conservative, but in practice that’s how it ends up because these inheritances are fairly large and make up a decent portion of their portfolio. If it’s entirely in cash, it skews the overall asset allocation.

Their parents’ generation wasn’t exactly well-versed in investing so a lot of their parents’ money was in CDs and bank accounts. There’s so much misinformation about being conservative with your investments when you approach retirement that, I think, people who are in this circumstance don’t feel an overwhelming desire to fix it. They’re approaching retirement so they think having hundreds of thousands of dollars in cash is OK.

Easing into the stock market
For people who are very conservative I recommend dollar cost averaging their money into the market. If someone is 100 percent in cash but needs to have 75 percent in equities, I would probably move their cash into the market over the next 24 months. That way they could get used to it — small exposure at first but, eventually, two years down the road they’ll be in the correct balance.

I would recommend mutual funds for these people. I think it’s irrational for someone to be mostly in cash and suddenly think they’re going to start investing in individual securities. It makes it that much more likely that they’ll get badly burned and then retreat from stocks altogether, which isn’t in their best interest. Funds will be smoother, less volatile than individual stocks in most cases.

If people are going to do this themselves, then index funds are a fantastic way to go. If they’re feeling even more sophisticated I would have them look at exchange traded funds.

Long-term care insurance
I don’t think there’s much of an unmet health expense issue, but I think there is a disability issue. People who are conscientious about planning are the ones buying long-term care insurance. The people who are not planning are not buying this insurance. They’re going to get creamed — twice. They don’t have the appropriate insurance coverage in place, and they probably didn’t have many assets to begin with, so they’re stuck. Fifty-five is a good age to begin long-term care insurance.

Eric Soiland, CIMA: In his own words

Eric Soiland is a Certified Investment Management Analyst who has been working with pre-retired and retired clients for 20 years; the last nine of them working for Citi Smith Barney in Walnut Creek, Calif.

Risk
Typically, most people look at risk as the potential for fluctuation or loss in an investment portfolio. Another risk is running out of money before they die. That could be due to inflation, health care costs, long-term care costs or unforeseen events. I try to get them to picture in their mind the best portfolio we can put together that will help them maintain their current lifestyle. Over a 20-, 30- or 40-year retirement you need to have growth to counter inflation. A lot of individuals automatically think that when they get near retirement they need to become very conservative. That may have been true many years ago when people died five or 10 years after retirement, but it’s not the case now.

I don’t twist anybody’s arm; I just explain the trade-off. If you want to sleep extremely well now then the trade-off may be that down the road you won’t be sleeping well because your portfolio hasn’t kept up with inflation. If you’re willing to take a little more risk many times you can greatly enhance the odds in your favor. I try to get the overly conservative investor to see the sense of a more diversified, more aggressive portfolio.

The zone
What is most important, in my opinion, is the five years before retirement and the five years after retirement. It’s a zone, a 10-year window, that’s very critical for most retirees.

A lot of planning goes into the five years leading up to retirement. That’s when you want to review your current assets, estimate anticipated assets, determine your expenses, check your insurance coverage and work up a plan with your financial adviser to see if there’s a gap that needs to be overcome. Then, if you can get through the first five years of retirement without any really negative setbacks to principal, there’s a good chance you can maintain your current lifestyle in retirement if you stick with a prudent withdrawal plan.

Start early
The sooner people get serious about retirement, the better. If someone has 20 years to go before retirement and they start planning now, they’re in a much better position to know what they need to save and to be able to hit that goal than someone who’s two years away from retirement and is finding out they haven’t done a very good job.

There’s more than one way to make up a retirement shortfall. They can cut back on spending, work longer, leave less of a legacy and perhaps use other assets — even their home — as a resource at retirement. They could downsize or do a reverse mortgage.

I typically don’t consider my client’s home as an asset that we’re going to use. Most people are living in their home and don’t intend to sell it. But should something come up — an unexpected death, disability, long-term care needs — I want to get clients to think about those kinds of issues and think about what kind of plan they have in place to handle those issues as they arise.

We can find the right investment strategy for them once we look at the bigger picture and figure out the best way to get from point A to point B. We want to get them the return they need to meet their goals but at the lowest level of risk that they need to take.

Plan ahead
We sometimes have to talk about several plans. Plan A is ideal, plan B might be more realistic but not as ideal and plan C might be a backup plan in case numerous negative issues come to bear. There’s no going back on your retirement when you’re 75 if you messed up.

Health care costs
I encourage my clients to consider what they think the costs will be. We try to come up with a number that we feel makes sense given what we know today. We need to discuss with them that these numbers can change and we need to update the plan as we see changes occurring and try to keep it as current as possible. If we do a financial plan for someone, it’s not a one-time event, it’s an ongoing process.

Debt
The more you can pay down your debt, the more you have left to invest or to use for day-to-day expenses. Debt is usually a burden unless it’s used for a specific reason to enhance your wealth.

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About kenndungu

Live a few years of you life like most people won't, so that you can spend the rest of your life like most people can't. Anonymous View all posts by kenndungu

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