Monthly Archives: August 2011

Fear of losing money can set investors back


It is a well-known fact that one of the factors that contributed to the fall of the stock market during the financial meltdown of 2007 was FEAR. Ok, I’ll admit it, even I fear whether I will be able to achieve all my goals before I retire, but sometimes this fear we have can be a major setback to our achievement. Once again, take the example of the stock market, whenever there is a bear market, most investors usually dispose all their stock holding as a way of cutting their losses and abandoning the goals they had set for themselves. And as we all know, this is the best time to invest since you can find very valuable stocks selling at very low prices. As Sonya Stinson explains in the following article published on the website, fear of losing money can set investors back.

The fear of losing money has been on investors’ minds lately — as well as in their guts. This common human trait is captured in the movie “Wall Street,” when Gordon Gekko says, “Nothing ruins my day like losses.”

Behavioral economists have a name for this normal psychological phenomenon: loss aversion. If finding a dollar on the sidewalk gives you a momentary thrill, but losing 50 cents through a hole in your pocket bugs you all day, you’ve experienced it firsthand.

When investors come under the influence of this trait, behavioral scientists and financial experts say it can lead to poor investment choices.

“People naturally have this fear of losing money, and it affects what would otherwise be rational judgment,” says Robert Koppel, author of “Investing and the Irrational Mind.”

Losses weigh more heavily

Koppel defines loss aversion as the natural preference for avoiding a loss over acquiring a gain. Behavioral economist Daniel Kahneman won the Nobel Prize in economics for his research with Amos Tversky that showed the psychological impact of a loss is two and a half times as powerful as that for a gain.

Koppel recounted one test the researchers did in which they asked people on the street to bet on the flip of a coin for a chance to win $10. Everyone was willing to bet $1, but people thought twice as the stakes rose, and they were rarely willing to wager as much as $6 — despite having a 50-50 chance of winning each time.

One subject who adamantly refused turned out to be a professional stunt man. “This guy routinely threw himself in front of moving cars, jumped out of second-floor windows and off of moving trains. But to bet $6 on a coin flip to make $10 was outside his risk parameters,” Koppel says.

Running from the bear

Joel Larsen, principal of Navion Financial Advisors in Davis, Calif., says loss aversion definitely reared its head during some of the most recent bear markets.

“This is why a lot of people bailed out at the bottom of this last meltdown in ’09 … and never got back in,” Larsen says.

Statistics from Morningstar show just how volatile the market has been — and how panic could have caused some investors to lock in their losses. For example, a $10,000 investment made on Oct. 1, 2007 in a Standard & Poor’s 500 index fund would have plummeted to just $6,492 by the end of October 2008, a traumatic time for investors following the bailout of Bear Stearns and the collapse of Lehman Brothers, among other calamitous events.

The stock market continued its downward slide through February 2009, at which point the investment’s value dropped to $4,983. An investor in a panic who sold at that point would have taken a loss of more than 50 percent. But in March 2009, the S&P 500 began to show signs of life. Had that investor stayed the course, the value of his or her money would have reached $9,396 by the end of June 2011 — still not a full recovery, but close to breaking even.

The tactical solution

When you consider that from the peak on Oct. 9, 2007, to the trough on March 9, 2009, the annualized return for the S&P 500 was a heart-stopping minus 43 percent — it’s no wonder many investors were emotionally distraught. But financial advisers say that emotional reaction is exactly what caused a lot of investors to dump all of their stock positions, even though doing so worked against their best interests in the long run.

Larsen stresses that he’s no advocate of the simple “buy and hold” posture.

“We’re tactical asset allocators,” he says. “Buy and hold works in a secular bull market, like the one we had from ’82 to 2000, which was when a lot of (today’s investors) came of age. … We’re not in secular bull market now. We’re either in a sideways market or a secular bear market.”

David Hefty, CEO of Hefty Wealth Partners in Auburn, Ind., says his firm applied tactical analysis to cope with the stock market during the 2008 financial crisis. “During that time we were putting hedges on our equity exposure and increasing cash,” he says.

A rational approach

The fear of losing money isn’t always a bad thing, especially if, like most of Certified Financial Planner Michael Reese’s clients, you are fast approaching retirement or already retired. In those situations, the tendency to avoid the risk of losing your assets makes sense, because you have less time to recover from any losses you incur. But otherwise, Reese says, buying stock in a down market is like “investing on sale.”

“When you see a market crash, as a younger person investing, that’s an outstanding opportunity,” says Reese, founder and principal of Centennial Wealth Advisory in Traverse City, Mich. “It feels bad to see your portfolio falling in value, but you should also remember: ‘I’m buying all these shares so inexpensively that down the road these shares are going to represent some of the best investment returns I’ll ever have.'”

In Koppel’s view, the best antidote to loss aversion is to study the markets and develop a strategic investment plan, actions that he says “support rationality.” Patience is essential, too.

“But patience comes from being able to understand the process and your motives, to have a plan and then put that plan into action,” Koppel says.

5 Fixed-Income Bear-Market Strategies


With the stock market behaving the way it is, investors are more concerned with an investment that will more or less protect their initial capital. With the economies of most countries still shaky, this is affecting the stock market globally, and the only investment strategy left is fixed-income securities. In times when there is no clear direction of where the stock market is headed, fixed-income investment provide the safety that most investors are looking for. The best way to invest funds in a bear market is coming up with an investment strategy that  will ensure you will achieve your investment goal, and as Katherine Reynolds Lewis explains in the following article, there are five fixed-income bear-market strategies.

One of the biggest risks to your retirement is facing a bear market during the early years after you stop working. If you must sell stocks in a falling market, you risk depleting your nest egg at exactly the moment you need it — leaving you with too little savings to cover your needs for your retirement.

If you withdraw regular amounts from your portfolio to cover your living expenses during a market downdraft, you must sell more shares at a lower price. It’s essentially the reverse of dollar-cost averaging, which is what you did during the accumulation phase when you invested money at regular intervals. Dollar-cost averaging involves buying more shares when the market is down or fewer shares when it’s up.

“You’re liquidating a portion of the portfolio and locking in those negative returns and creating some very bad outcomes,” says Stephen Horan, head of private wealth management for the CFA Institute and co-author of “The New Wealth Management.”

“We call that sequence-of-return risk,” he says.

In such a scenario, it’s best to leave stocks alone to recover from the loss and to draw instead on the fixed-income portion of your portfolio. Retirement experts recommend employing one of the top five fixed-income strategies to ensure enough income in a bear market. Following are the pros and cons of each method.

CD ladder

A solid fixed-income strategy begins with calculating your bare-bones expenses and looking at what you will receive from Social Security and any defined-benefit pension. Next, choose a vehicle to ensure enough income each year to make up the difference.

One simple option is to design a CD ladder, such as a combination of one-, three- and five-year CDs, the principal amounts of which will cover your income needs in case stocks fall, says Rick Rodgers, a Certified Financial Planner in Lancaster, Pa. If the stock market is up, you can reinvest funds from the maturing CDs in higher-rate CDs rather than spending the principal.

“You’re never going to make money in fixed income; that’s not the purpose of it. After taxes and inflation, it’s break-even at best,” Rodgers says. This is particularly true in these times of low yields.

“When the market is going up, I am going to be overweighted in stocks so I will be selling some stocks and putting it into fixed income,” says Rodgers. “It smooths out the ups and downs.”

The downside of a CD ladder: low yields, no upside as the market fluctuates and continual effort to reinvest maturing CDs, says Lynn Mayabb, CFP, a senior managing adviser at BKD Wealth Advisors in the Kansas City, Mo., office.

Don’t let CD penalties prevent you from withdrawing your cash early, though. Weigh the penalty against the potential gain or need, Mayabb says.

Bond ladder

If you’re looking for a little higher yield, consider creating a ladder of bonds with sequential maturities. “Having that money come due on a regular basis eliminates the need to have a lot of money sitting in cash,” Rodgers says.

The two key risks to investing in bonds are interest rates rising and credit quality declining. “We address both of those issues by laddering it. Each one of those bonds that makes up the bond ladder is different,” he says.

It’s a good idea to stick with highly rated bonds and stable companies, and be sure to monitor your picks for any decline in quality.

One danger of a bond ladder is that you can inadvertently shift the asset allocation of your portfolio if you don’t manage carefully, Horan says. As the front of the ladder matures, the makeup of your investments shifts. On the plus side, you’ve guaranteed enough income for the critical first years of retirement, which “set the initial path” for your retirement portfolio, he says.

For an individual investor, a properly diversified bond ladder is likely to be too much work, says Carlo Panaccione, CFP and founder of the Navigation Group in Redwood City, Calif. A good financial planner can set this up for you, but you generally need a minimum of $100,000 to construct a properly diversified bond ladder.

Variants on bond ladders

“Sometimes a bond ladder doesn’t always make sense, depending on what the yield curve looks like,” Mayabb says. Often, the middle-term maturities tie up your cash longer but fail to reward you with higher rates.

Instead, she favors a barbell approach, in which you divide your money equally between short-term bonds and those with 10- to 15-year maturities, skipping intermediate-term bonds altogether. “Those are the sweeter spots for getting the rates.”

Or consider laddering the coupon payments on a bond, rather than the bonds themselves, Horan says. For instance, if you need $50,000 each year, you could buy a five-year bond with a 5 percent coupon and $1 million face value. At the end of the five years, you’d get $1 million back.

It may be more efficient to find a single bond with the desired payment structure, rather than piecing together five different bonds in a laddered structure, he says.

As with a traditional bond ladder, these variants may also suffer from a lack of diversification and need to be monitored for credit quality, says Panaccione.

Floating-rate fund

If all this seems like too much work, consider investing in a floating-rate fund — also called a bank-loan fund — which holds a variety of bonds or bank loans with adjustable rates, giving you exposure to a range of credits. “In fixed income, you have to be realistic about how closely you’re willing to watch credit quality,” Panaccione says. “If you’re not willing to review things on a regular basis, don’t buy individual bonds.”

Unlike individual bonds, floating-rate funds have no maturity date, so you can lose principal if market fluctuations cause fixed-income investments to drop in value. “I don’t like bond funds because they don’t guarantee my principal,” Rodgers says, while conceding that they can be a good choice in some cases. “For the individual investor who’s not using an adviser, they should be using a bond fund.”

Focus on the total return of your portfolio, rather than the rise or fall in a particular fund, says Anthony Valeri, CFA, a senior vice president and market strategist at LPL Financial in San Diego. Liquidity is an issue, since these bonds don’t trade on an exchange. “If we have a recession you’ll see price declines” in floating-rate funds, Valeri says.


The classic strategy for ensuring a stream of income in retirement, of course, is purchasing an immediate annuity. This insurance product guarantees that you will receive a stream of payments for as long as you live.

The downside: You pay a premium for that guarantee and lose control of your assets forever.

“I’ve done annuities this year only because of clients demanding them,” Panaccione says. The insurance companies are “probably investing in what you would’ve invested in and charging you a premium. If that’s what you need to sleep at night? Then it’s probably worth paying the premium.”

If you’re married, the question of an annuity becomes more complicated. You can buy a joint life and survivor annuity for a smaller payout, or opt for provisions that guarantee some portion of your payment goes to your spouse if you die. But it will cost you, Mayabb says.

By choosing an annuity, you lose the flexibility of changing your mind. “Once you annuitize, those assets are no longer yours,” she says. “With a bond ladder, CD ladder or investment account, if something happens and you need $20,000, you go sell something.”

After The Downgrade: 10 Steps to Protect Your Retirement


Lets face it, the downgrade of the US Treasury debt did some damage to the stock market, but the question is, will the downgrade affect any future returns from the stock market? Since the beginning of the financial meltdown, the most important priority for most investors, especially retirees, has been how to protect their investment from any further erosion on the value of the portfolio. As the market keeps on swinging up and down, many investors are left with the option of deciding which strategy will best preserve their capital, and as Janet Novack explains in the following article, there are 10 steps on how to protect your retirement portfolio.

So Standard & Poor’s has downgraded U.S. Treasury debt, and Washington is a fiscal and political mess. What does that mean for your retirement? Nothing good, for sure. But you can limit the damage with a calm, yet realistic approach. Here are 10 steps that should help protect your retirement.

1. Avoid panic selling.

As Forbes columnist Richard Ferri suggests, don’t make hasty moves when the stock market has a bad day — in reaction to an S&P downgrade or any other news. Instead, take the dog for a walk, see a dumb movie, or go out to dinner and split a bottle of wine.

2. When calm, review your asset allocation.

The idea is to find the mix of stocks and bonds that will maximize your odds of earning a good return, while minimizing the risk that you’ll require a second bottle of wine to avoid panic selling or that your holdings will have tanked just when you need money. (A longer time horizon generally argues for more money in stocks.) An old rule of thumb is to own your age in bonds. (So at 55, you’d have 55% of your money in bonds and 45% in stocks.) Many financial advisers believe that this simple rule gives too little weight to stocks, particularly considering today’s longer life expectancies.

Fortunately, there are now some sophisticated web-based tools that can help you come up with a smart asset allocation (adjusted for your age, assets and risk tolerance); determine whether your retirement plan is realistic; and even pick for you among individual mutual funds. You might have free access to one of these through your 401(k). For example, Financial Engines, the product of an independent advice company co-founded by Nobel prize winner Bill Sharpe, is offered to employees from a laundry list of big companies, ranging from Alcoa to Kraft Foods to Xerox.

3. Play tax arbitrage.

Review your IRAs and taxable accounts to see if you can at least wring some long-term tax savings out of the market’s recent decline. Now might be a good time to do a Roth conversion — or to undo one you did at the market’s peak.

4. Maintain — or increase — your 401(k) contributions.

Don’t curb your contributions (or reduce the amount you’re putting into stock funds) just because the market is down. One advantage to investing the same amount each paycheck through a salary reduction plan is that you are cost averaging — you’re buying more shares at lower prices and fewer at higher prices — thus minimizing the bad effects of market volatility or of poor market timing. If you stopped contributing to a 401(k) during the recession because your employer eliminated its match, check the current status of your plan. Many employers are restoring those matches and you don’t want to lose out. You can contribute a maximum of $16,500 to a 401(k) this year, plus an extra $5,500 if you’ll be 50 or older in 2011.

5. Fund a Roth IRA.

If you want to boost retirement savings but are worried about locking up too much money in a 401(k) in these uncertain times, a Roth IRA is the perfect solution. You can put up to $5,000 a year ($6,000 if you’re 50 or older) in after tax money into a Roth, where it grows tax-free for retirement. The key point here, however, is that you can take out your original contribution (not the earnings) at any time, without penalty. This allows you to stretch and put away more for retirement, without worrying about taxes and that nasty 10% early withdrawal penalty should you need the money sooner. (Warning: married folks with adjusted gross income above $179,000 and singles with AGI above $122,000, aren’t eligible to contribute to a Roth if they have retirement plans at work.)

6. Get smart about Social Security.

Most retirement planning programs plug-in your promised benefits from Social Security under current law — but also give you the opportunity to fill in a lower number. If you’re under 55, shave the number. (It’s unlikely we’ll see any cuts in starting Social Security benefits for those over 55, but inflation adjustments could well be trimmed for older folks too. In any event, you’re just going to have to guess at the changes until warring politicians can come together on a plan to match Social Security’s promises and revenues over the long haul.) Regardless of your age, a good way to offset any cuts it to delay claiming Social Security until at least your “normal” Social Security age — 66 to 67 for baby boomers.

7. Plan to work longer.

The problem with this advice — which Forbes and others have been giving for years — is it’s easier said than done. When older workers lose their jobs, they have a hard time finding new ones. Plus, many older workers find their jobs stressful. If you think your job might be at risk or you don’t want to stay in your current position until full retirement age, consider transitioning to a second more satisfying (but probably less well paid) career. It’s not easy, or an option for everyone, but it’s worth considering.

8. Prepare for a “tax increase” in the form of higher Medicare premiums.

True, Republicans seem determined to block all tax increases, even for the rich, no matter what S&P says. But even if the U.S. doesn’t reduce its deficit in part through higher taxes, a big if, retirees are likely to face what is in effect, a marginal tax rate increase, in the form of Medicare premiums that rise with their incomes.

For 2011, singles with modified adjusted gross income of greater than $85,000 and couples with income above $170,000 are paying extra-income-based premiums for Medicare’s Part B, which covers doctors’ and outpatient hospital services, and for part D, which covers prescription drugs. At the extreme, couples with income above $428,000 (for 2009), if they take the optional Part D drug coverage, will pay an extra $8,203 this year for their Medicare benefits.

The income based Part B premiums were adopted by Congress in 2003 to help pay the cost of the Bush Administration’s expansion of Medicare to cover prescription drugs. The extra Medicare Part D premiums were added by President Obama’s 2010 health care overhaul to help finance a reduction in the notorious gap (or “doughnut hole”) in coverage for seniors with high, but not catastrophic, drug costs. Significantly, last year’s health overhaul also froze the $85,000/$170,000 cutoff for high-income Part B premiums at its current level through 2019, whereas previously it had been indexed for inflation. As a result, according to an analysis by the Kaiser Family Foundation, 14% of all seniors will pay extra income based premiums in 2019, up from 5% now.

And that’s 14% of seniors paying income based premiums before Congress makes any changes to Medicare to reduce the deficit. A plan passed this year by House Republicans would turn all of Medicare (for those under 55) into a system of subsidies to buy private insurance and those subsidies would shrink as income rose. So through taxes, or premiums, affluent seniors will likely pay more. (Consider: while Democrats are determined to keep government-run Medicare, they too have voted for income based premiums in the past.)

9. Make your adult kids pay rent.

There’s no question that today’s young adults are having a rough go of it, between high student debt and a rotten job market. As a result, the number of adult children living at home has exploded. But you’re not doing adult kids a favor if you sacrifice your own retirement security and then have to turn to them later for support.

10. Learn to play poker.

If all these other saving and investing strategies fail you, learn to play poker and then challenge Barack Obama to a high stakes game. Sorry, I just couldn’t resist.

7 retirement investing mistakes: Investment Potholes on the Road to Retirement


You have saved enough funds to cater for your needs during your sunset years, but just because you have a substantial portfolio does not necessarily mean that it can sustain your lifestyle for the entire retirement period. What many individuals do is invest their retirement funds in the stock market, and this is where some of us make big mistakes that send you to the retirement home is a flash. During retirement, the only income a retiree will earn is mainly from investments that they make with their retirement funds and income from Social Security. During this period there are blunders that a lot of retirees make than can spell doom, and according to an article in the website, there are 7 retirement mistakes that retirees normally make.

Everyone knows the secret to investment success is to buy low and sell high. The problem is most of us lack clairvoyance.

We weigh in on some of the most common mistakes investors make, and while it’s easy to see that chasing hot stocks — the most frequently cited mistake — would be an exercise in futility, there are other pitfalls to watch out for on the road to retirement.

There are never any guarantees when investing, but avoiding these seven missteps will better your chances of success.

1. Mismatching investment with goal

Need that money for retirement in the next couple years? Don’t put it in a hot emerging-markets fund.

Consider when you’ll need access to your money. This will help you avoid unnecessary transaction fees, penalties and risk.

For some goals, such as paying for college, it may make sense to use a mix of investments, says Gail MarksJarvis, author of “Saving for Retirement (Without Living Like a Pauper or Winning the Lottery).”

“If you are saving for college and your child is within three years of going to college, you’ve still got seven years until that last year of college,” she says.

So while the bulk of short-term college savings should probably be very safe in CDs or short-term bonds or a high-yielding savings account, maybe some of that money could be invested in stocks. “Just remember the rule of thumb,” she says, “that money you’ll need within five years shouldn’t be in stocks.”

2. Discounting fees

Fees may sound minuscule at 1 percent or 2 percent, but they can gouge your returns by thousands of dollars.

While all mutual funds have expense ratios, which cover investment advisory, administrative services and other operating costs, some are much higher than others. To complicate matters, some funds impose sales charges or loads. Load funds are only available through an investment adviser or broker who is compensated by sales commissions.

Picking no-load funds is one way to save money on fees. Instead of going through a broker, call a mutual fund company directly to purchase a fund. While it might be worth paying a load if you don’t have the time or inclination to make your own investment choices, just remember, it’s hard, even for a skilled money manager, to make up for those extra fees.

3. Failing to strategize

It’s time to pick funds from your 401(k) lineup. All you do is pick the ones that performed the best, right?

Wrong. Before you research the investment, there are a couple of things to think about. First, plan your investment strategy by determining what asset classes work best for you, and then pick the investments that are best in these categories.

Next, make sure you’re comparing apples to apples. Some funds don’t make as much money as others — by design. A bond fund cannot compete with a stock fund because of the nature of their respective holdings. However, different types of funds serve different purposes. The bond fund can have a stabilizing effect on one’s portfolio.

4. Misreading the label

You bought a bunch of different funds — so that means you’re diversified, right? Not necessarily. You don’t want to find out that you’re overexposed to a particular market sector after it hits a rough patch. Luckily, staying out of this trap is a matter of learning to read the label.

Expand your vocabulary by a dozen words and increase your assets: Check out Bankrate’s investing glossary.

Understanding the different types of asset classes will help you strategize. Different asset classes do better at different times. Bonds may do well while the stock market is suffering and large-cap firms may weather tough times better than spunkier small caps. Boring bonds will never match stocks in a hot market and small caps may be better poised to take off like a shot than their larger, lumbering counterparts.

5. Neglecting research

Psssst. Wanna hear a good stock tip?

No, we’re not going to tell you about the next Google. We’re going to tell you to do your homework. Here’s what to look for when researching funds:

  • Type of fund (large-cap growth, small-cap value, etc.).
  • How long the manager has been there.
  • How much the fund costs (expense ratio).
  • Minimum investment required.
  • Portfolio holdings (list of securities).
  • Performance information — remember, past performance does not guarantee future return.

Morningstar, an independent investment research and ranking site, offers a wealth of free information about mutual funds. Look beyond the star rating, though. Ask for the prospectus from the fund company or brokerage firm.

Get a copy of the most recent semiannual report (you’ll likely find it online). These reports frequently feature a letter from the portfolio manager. His or her discussion of the past six months will give you an indication of how he or she runs the fund.

6. Ignoring your portfolio

Buy and hold can be a smart strategy, but buy and ignore won’t serve you in the long run.

Without reviewing your holdings, you won’t know if your portfolio remains balanced, and you won’t shift your holdings to achieve retirement goals or help you cope with changing life events.

The experts differ on how often you need to do a portfolio review. Some recommend doing so on a quarterly or semiannual basis. Others meet three times a year with clients. But all agree that it’s important to review your holdings at least once a year, whether they’re within a company-sponsored retirement plan or outside of one.

7. Getting emotional

The market is ricocheting all over the place, and when the boss isn’t paying attention, you’re online buying and selling in a frenzied attempt to dodge the bullets.

Richard Salmen, a Certified Financial Planner and national president of the Financial Planning Association, describes the all-too-common trap emotionally driven investors fall into: “Most people don’t earn what the market earns. They invest too heavily in too risky investments that are doing well, then drop out when they go back down. They take all their money out of tech stocks, for example, put the money into bonds, then put money back in stocks after prices have gone back up.”

His prescription is to invest a little bit of money from every paycheck, diversify, then leave it alone.

3 Things 20-Somethings Can Do to Prepare for Retirement


Most of the baby boomers can remember their 20’s like it was yesterday, yeah, that’s how fast time flies. Many people hardly ever think of retirement in the 20’s, yet this is actually the best time to start saving for your retirement. This is because you have time on your side, and compound interest will do wonders on your savings. I know during this period is when you feel like you are on top of the world, and retirement planning is a foreign language. But considering the enormous advantages a person who starts saving in their twenties has over person who delays their retirement to a later date, this is an opportunity of a lifetime. Though you are in your twenties at the moment, it’s never too early to start saving for your sunset years, and as Kathryn Tuggle illustrates in the following article, there are three things a person in their twenties can do to prepare for their retirement. 

The word “retirement” often evokes images of rocking chairs and relaxation, but experts say it’s never too early to start thinking about your golden years — even if you’re still into fast cars and dance clubs.

The earlier you start investing for retirement, the longer your money has to mature and grow, and individuals who start saving in their 20s are at a serious advantage over those who wait until middle age. We checked in with financial planners who detailed three things 20-something-year-olds should do to get a jump on life after the workforce.

1. Enroll in Your Employer’s Retirement Plan Now, Especially if They Match

If you are eligible for an employer-sponsored retirement plan, such as a 401(k), start contributing a small amount each pay period, says Danny Payne, certified financial planner at Stout Payne Waner in Redlands, Calif.

There’s rarely a good reason to not contribute to your company retirement plan up to the match, adds H. Jude Boudreaux, founder of Upperline Financial Planning in New Orleans. “It’s bonus money that your company wants to pay you, and a bonus return on your investments.”

If your company offers a Roth IRA, contribute to it, says Boudreaux. Even though you’ll be taxed on contributions to a Roth now, he says the benefit of tax-free growth for 30-40 years will be enormous, not to mention the tax-free withdrawals after age 65.

A little savings goes a long way when time is on your side, says Payne, adding that people who start saving in their 20s are at a real advantage.

“Let’s assume a 25-year-old contributes $100 per month to their employer-provided retirement plan and the employer throws in $100 per month in the form of a match. If the account grows at an 8% average annual rate of return until age 65, they would accumulate $698,000,” says Payne. “If they instead delayed contributing until age 35 under these assumptions, their account would only grow to $298,000.”

2. No Employer-Sponsored Plan? Start Your Own

If your employer doesn’t offer a retirement plan, establish your own traditional IRA or Roth IRA account.

Yes, there are plenty of other financial obligations in your 20s like student loans, rent and car payments, but experts say you can’t afford not to contribute a little toward retirement given the amount of time it will have to compound and bulk up your nest egg. Individuals are allowed to contribute up to $5,000 into an Roth IRA in 2011.

“If you’re setting up a Roth IRA on your own outside of your company plan, investing directly with a fund family like Vanguard can again minimize fees and give you access to some broadly based index funds,” says Boudreaux.

Nicole Covganka, a financial planner at Retirement Planning Group in Chicago, says that Roth IRAs are a great way to save for retirement and not have to worry about taxes down the road.

“You think you pay a lot of taxes now, but chances are you will probably pay more later in life,” says Covganka. “You pay taxes now in your 20s on what is probably a lower tax bracket than what you will be at when you are in your 60s. You can’t go wrong.”

Another benefit to IRAs is that you can withdraw money from them before retirement without any penalty, says Payne. Before retirement, individuals can withdraw their contribution (up to the $5,000 annual limit) at any time for any reason without paying a tax penalty.

3. Focus on Liquidity

Once you have the income needed to sustain your current lifestyle, focus on liquidity, says Michael G. Terrio, investment advisor representative and president of The Terrio Group.

“When it comes to liquid assets, it is much more important that you have a reserve liquid rather than trying to become a millionaire overnight, says Terrio. “This money needs to be available for short-term expected, yet unexpected, events, including car repairs, short-term medical events or potential loss of income. It doesn’t make financial sense to pay 28% [credit card] interest on a car repair when they could have planned for the inevitable.”

Ideally, a 20-something investor will have three to six months of income saved in an easily accessible account. While this may not seem like a specific investment for your golden years, it avoids money being taken out of a retirement account in an emergency that leaves you being hit with hefty penalties.

If money is pulled from a retirement account, there are numerous issues including tax ramifications as well as the money pulled does not have the ability to grow, says Chris Zeches, vice president at Zeches Financial Services in Phoenix.

Covanka says the best place to save liquid assets is the bank. “Have an account close to home at your local bank with some savings in it. In the event of a job loss or emergency you can easily access this money and you will be glad you stocked away some cash.”

Retirees: 6 Takeaways From the Recent Market Drop


Once an investor, always an investor. Take the example of Warren Buffet, one of the richest men in the world and probably the best investor in the world, who has been investing in the stock market since his teens, and is still active to this day. This should be the case especially after retirement when a lot of investor tend to relax and watch from a distance the movement in the stock market. Since the investment world is forever changing, an investor needs to keep abreast of these events which might have a negative impact on their retirement portfolio. Many investors tend to ignore the performance of their portfolio, and only come to realize when it’s too late, and as the recent market drop is anything to go by, there are 6 crucial lessons we should learn from this according to Catherine Benz.

Those in retirement should keep these tips in mind for positioning their bond and equity portfolios.

A bear market might be good news for young investors looking to buy stocks on the cheap, but budget-priced stocks are thin gruel for retirees and pre-retirees who are relying on their portfolios to fund living expenses. A deep and protracted down market, such as the one we encountered in 2008 through early 2009, can translate into a meaningful reduction in a retiree’s quality of life, particularly if that retiree hadn’t steered enough of her assets to relatively safe securities like cash and bonds.

The most recent market action, while not as violent or scary as the bear market that coincided with the financial crisis, nonetheless carries some takeaways for retired investors or those looking to hang up the workaday life within the next few years. Below I highlight a few.

1. Get Used to Low Yields (as if You Weren’t Already)

Don’t like the rock-bottom yields that you’re earning on your cash? Unfortunately, there’s no relief in sight. True, some market watchers (myself included) had been warning about the potential for higher interest rates at some point in the not-too-distant future. But that eventuality became even more distant on Tuesday, when the Federal Reserve announced that it will hold interest rates near zero through the middle of 2013. That’s good news for borrowers and owners of riskier assets, such as stocks, but it’s bad news for yield-starved savers.

Although there’s no substitute for true cash if you need to have money ready for near-term expenses, the currently inhospitable environment argues for a couple of tactics on retirees’ part. First, don’t hold more cash than you need to fund one to two years’ worth of living expenses (expenses not covered by other sources of income, such as Social Security), as the opportunity cost of holding too much cash is extreme. Second, don’t put up with nonexistent yields from your local bank; shop around and be willing to be flexible.

2. Don’t Be Too Quick to Cast Out Treasuries

In recent months there’s been a lot of trash-talking going on in the Treasury market. Some investors have been avoiding the bonds or even shorting them, saying the bonds’ yields are too low and the U.S. deficit is too high. There is also fear that Treasuries will get creamed in a rising-rate environment. And, in the latest bit of ignominy for Treasuries, Standard & Poor’s said they can no longer be considered a “risk-free asset.”

But the market’s recent swoon telegraphed something loud and clear: In a true flight to safety, very few assets will hold up better than U.S. Treasury debt, downgrade or not. That’s not to say Treasuries are a screaming buy at this point, and yields are more anemic than ever. But it does argue for not getting too heroic about purging them from your portfolio altogether. If your goal is to find an investment that will zig when your stocks are zagging, it’s hard to argue that Treasuries don’t deliver.

3. Handle Junky Bonds With Care

On the flip side, not all bonds have behaved well during the recent stock market swoon: High-yield bonds and bank-loan investments have posted losses, in large part because of their sensitivity to the economic cycle. When investors are feeling good about the economy’s prospects, it’s off to the races for the highly leveraged companies; if these firms’ businesses are booming, investors feel good about their ability to make good on their debts. But the reverse can happen when recessionary worries roil the market, as has been the case recently. Bank-loan and high-yield funds haven’t posted calamitous losses, but their recent weakness is a wake-up call about not using such investments as an antidote to your stock holdings. When stocks are down, bank-loan and junk bond funds will tend to move in the same direction.

4. A Well-Thought-Out Asset Allocation Is Your Best Friend

I didn’t put this point first because I wanted to hold your interest; I was afraid that you might read it and think “there she goes again.” But really, this is my most important point. If you’re retired or getting close, by far the best way to ride out periods of market weakness is to pay due attention to your asset allocation and cash reserves. If you have enough invested in the safe stuff to cover your income needs for the next several years, you can ride out weak stock market periods, both psychologically and logistically. The bucket approach to staging retirement portfolios, whereby you stash enough to cover your near-term expenses in ultrasafe securities and hold the rest in long-term securities like bonds and stocks, is an intuitive way to back into the right appropriate asset allocation.

5. Make Sure at Least Some of Your Stocks Are Playing Defense

Because the recent sell-off was fueled by fears of global economic malaise, any stocks that were perceived to be economically sensitive took it on the chin: namely, industrials, basic materials, retailers, financials, and energy. At the other end of the spectrum, stocks with defensive characteristics performed well, including consumer staples and pharmaceutical stocks. The takeaway isn’t that you should purge economically sensitive names from your portfolio; holding both defensive and more cyclically oriented companies will help ensure that at least something in your portfolio is performing well no matter the stage of the economic cycle. But if you’re retired, I think it’s perfectly fine to consider shading your equity assets toward defensive names, not just now but always. Such stocks have lower volatility than more cyclical firms; they’re also more likely than economically sensitive companies to have economic moats, or sustainable competitive advantages. Solid mutual funds with big shares of their portfolios in defensive stocks include Vanguard Dividend Growth (VDIGXNews), Yacktman (YACKXNews), and Dreyfus Appreciation (DGAGXNews).

6. Dollar-Cost-Average Into Inflation Protection

Amid concerns over slowing economic growth, the inflationary worries that were in the forefront of investors’ minds just a few weeks ago have been back-burnered, at least for now. True, Treasury Inflation-Protected Securities’ prices have stayed up (they’re Treasuries, after all) and commodities have also fared reasonably well. But if gloom over the strength of the global economy continues to worsen, inflation-conscious investors might be able to add inflation protection to their portfolios at more advantageous prices than when inflation was grabbing all the headlines. Dollar-cost averaging into such investments will help reduce the odds of buying into inflation fighters when their prices are lofty.

4 Misleading Pieces of Retirement Advice


Ok, you have done it all, that is, listened to what every financial expert preaches about retirement planning. Every time you check on your retirement fund, it always growing, but sometimes I wonder whether it is advisable to take this kind of advice as the gospel truth. Many a times, you will always find that the advice is sort of general in nature, and although being very helpful, does it address your particular financial circumstance? What everybody needs is a plan that is tailor-made to their particular needs and circumstances, and any advice given should be first analyzed to determine how it can be beneficial to you. Many lives have been ruined because of following advice without taking into account how it will affect you financially, and as David Ning points out in the following article, there are 4 pieces of retirement advice that can be misleading and result in disastrous consequences.

Saving for retirement can often seem confusing because everybody seems to have a different strategy for dealing with the problem. While there is really no single correct solution, we also have to deal with widely accepted theories that are not entirely true. It’s critical that we double-check all the facts before we settle on a retirement plan. Here are four widely accepted, yet misleading pieces of retirement advice.

Your house is a major investment for your retirement.

Before the housing crisis, many people felt that their primary residence was a great long-term investment. Even now, you will hear people say that the house they live in will be a good asset to draw from if it’s fully paid for. Yet, unless you can sell your house and not ever worry about where you will live, your house is an illiquid asset that won’t net you much money unless you downsize significantly because of the moving and transaction costs associated with buying and selling your house.

Let’s say your house increases in value to $1 million when you retire. That sounds great, right? Yet, if you decide to sell it, you will have to pay 6 percent on the $1 million. Add in moving costs and fixes to your house before you sell and 7 percent might be closer to reality. Part of that money will need to be used to purchase a new place to live. Let’s say a small condo in your neighborhood costs $750,000 and needs $10,000 worth of renovations and cosmetic touch-ups. When it’s all said and done, you net about $180,000. While $180,000 is a lot of money, is it enough to sacrifice the house that you’ve loved being in for decades?

The 4 percent withdrawal rule is a set it and forget it approach.

Many people plan to withdraw 4 percent of their savings each year in retirement, and slightly increase the amount each year by the rate of inflation. But this strategy isn’t even close to bulletproof. A recent T. Rowe Price study put this theory to the test by simulating a portfolio consisting of 55 percent stocks and 45 percent bonds. During the 10,000 Monte Carlo simulations the researchers ran, retirees ran out of money within 30 years in 71 percent of the scenarios if the first several years of withdrawals happened during a bear market. A consistent 4 percent withdrawal rate isn’t really safe at all. If you happen to retire during a bear market, consider withdrawing less money or simply delaying your retirement for a few years.

Your money stops growing in retirement.

People seem to forget that the only change when the paycheck stops coming is exactly that. Just because contributions to your nest egg stop, doesn’t mean your money stops growing. In a well-devised retirement plan that is supposed to last decades after you decide to quit working, your nest egg will still grow for a number of years past your retirement age. If this isn’t happening during the first few years of your retirement, you should take immediate action such as finding part-time work or mastering frugal living. Attempting to withdraw less from your retirement savings will be crucial in prolonging the time that the money you’ve accumulated for retirement will last.

Time is the most important part of growth.

Many people saving for retirement wish they had started saving younger. If you had invested $10,000 in the stock market 25 years ago and contributed to that nest egg regularly, you would likely be a multi-millionaire by now. Yet, there are lots of assumptions with this statement. Would you be able to leave all your money in the stock market through the ups and downs for 40 straight years? Would you live as frugally as you do now and be able to contribute for 25 years, even though you could have increased your standard of living? Did you actually ever have an extra $10,000 to invest 25 years ago, which would likely have been more like $30,000 in today’s dollars?

Thinking about the time value of money if you started saving when you were born is nice, but sometimes it’s just unreasonable to assume that it’s a scenario that could have happened to you. For people like us who actually live a real life, our rate of savings from this point forward (the amount that we can actually contribute to our retirement fund) is much more dependable and realistic. The best part is that our savings rate is, for the most part, controllable. For many of us, if you clip a few coupons, skip a few dinners out, and stop making impulse purchases, it’s fairly easy to increase your savings rate by a percent or two.

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