Boomers... Do We Have Enough Gold ... for Our Golden Years?
The largest population in history is about to transition into retirement ( the wealth distribution years ) and you better be ready because you have challenges unlike any prior generation, And, guess what, every financial services company and advisor is suddenly your best friend. Why, because there are over 76 million strong boomers who control an estimated 12-15 trillion dollars, that needs to be managed to provide a lifetime of income. Every industry from diapers … to baby food … to blue jeans … to automobiles has made fortunes catering to boomers needs and desires. Now it is the financial services industry’s turn and they’re frothing at the mouth. Retirement income models are sprouting up all over the country and boomers need to pick one that will work for them. Which one will be the best …. unfortunately, no one will know until the last boomer dies.
What are boomers facing that no generation before has?
1. Broken promises …. corporate pensions are failing at unprecedented levels and a day does not go by that we wonder about Social Security’s ability to continue
2. Longevity…. Boomers are projected to live longer than any other generation before them
3. Medical costs that are bankrupting the average health care facility and passing through premiums that seem to have no limit
4. Inflation …. Remember when a new mustang was $ 3,500 and a gallon of gas was 32 cents
Yet, boomers want to be more active in retirement. And now everyone and their brother has an investment model that promises to make your money last as long as you do. So how do you choose the strategy that is best? … first and foremost, forget all the hypothetical theories and spreadsheets with future economic projections. Look for a model that has a successful history and deals with what we know that is true, not what someone is forecasting based on a lot of academic psycho babble. Makes sense? If so read on.
No matter how much we analyze, forecast and hypothesize there are only certain things that can be declared irrefutable. The following 10 points are “truths” we can be certain of as we develop our retirement income strategy.
“The Ten Truths of Retirement Income Planning”
- Historically, over long holding periods small cap stocks have outperformed large cap stocks … which have outperformed bonds… which have outperformed cash.
- Over the long term there is an expected mathematical “spread” between inflation, stocks, bonds, and cash.
- There is no empirical evidence that would suggest that bonds with long term maturities adequately reward investors over bonds with short term maturities.
- No retiree can know exactly what their income needs will be beyond 5 years.
- No retiree knows when they will die.
- No one knows what the future tax rates will be.
- Systematically adding to a growth oriented portfolio during downturns typically rewards the investor, while systematically withdrawing from a growth oriented portfolio during market downturns typically hurts the investor and could potentially destroy the portfolio.
- Greed and fear are emotions that have historically hurt individual investor returns.
- Strategies for successfully distributing retirement income are different than those for successfully accumulating retirement wealth.
- Individuals who employ personal coaches typically make more progress than those who try to do it on their own.
When your growth oriented investment is reinvesting rather than distributing income the losses don’t hurt, they get averaged out in the end. Most spread sheets assume growth is linear, when in fact it never has been, nor will it ever be. Consequently, the only reliable method of achieving higher rates of return is to leave the account alone and reinvest all of your earnings. So, where does your income com from??? AN account that has no market risk …. like cash.
Hopefully, you are beginning to understand the importance of identifying how much of your wealth is needed for income in the short term vs. how much you won’t need to tap for income until further down the road. Just how far down the road will determine the asset allocation for that portion of your money, i.e. if I don’t need the income on some of my money for 5 years, I could put that into something with a bond orientation … 10-15 years a large company stock orientation … 15-25 years could now be invested in something more aggressive like small company stocks. What should start becoming self evident is the importance of compartmentalizing or segmenting your money based on short, medium, and long term needs. Any model that would suggest differently makes absolutely no sense.
One could argue the merits of trying to strategically move money along the way between stocks, bonds, and cash. Typically, those moves are based on greed and fear resulting in miserable results. According to Dalbar and Associates 2005 study of investor behavior, mutual fund investors from 1985-2004 only achieved a 3.7% annualized rate of return and day traders actually had compounded losses of over 3%. Why … because we are humans and our emotions drive our decisions (the largest deposits into the U.S. stock market were in the spring of 2000 and the largest withdrawals were in October 2002). Keep in mind that the U.S. stock market during this same 20 years delivered more than a 13 % rate of return. Once again it’s critical that we stay on a course that we know, rather than one filled with speculation and disappointment.
Another assumption that always tickles me is looking at long term spread sheets that delve into multiple layers of depth trying to accurately forecast our future needs and tax brackets. In over 12 years of working with retirees, I have never seen anyone spend what they thought they would and I have certainly seen a pattern of constant tax law changes. The significance of this point is that you better be in a model that allows you to re-evaluate and make changes along the way in order to adapt to what you will really need vs. some hypothetical projection of what you think you will need which at best might be close for the first 5 years. Therefore, a single product model is absolutely ludicrous. Some single product models would have you put all of your retirement assets in a single annuity and make withdrawals that stay under the typical 10% free withdrawal amount. So now you’ve locked yourself into this narrow strategy and suddenly an unplanned emergency or opportunity comes up that requires a significant withdrawal. In addition to a potential large tax (non-IRA annuities require all earnings to be withdrawn first and taxes paid) you also incur a large surrender penalty on your account balance. Single product solutions are rarely in your best interest.
Additionally, who knows how long we will live in retirement. Probability analysis is interesting information and should be taken into consideration, but once again, some models are based solely on probabilities. At some point we all become a statistic that most likely will not match the probability. So a structured model based on probabilities alone is inferior to a structured plan based on flexibility.
And finally, a do-it yourself model is nothing short of retirement roulette. When you were 25 and working with relatively small amounts of money you could make a few mistakes and learn. You had plenty of time and more to invest. When you’re 60 and making decisions with your life savings, there’s not a lot of time you can afford to spend learning and certainly no more money if you make a mistake. You only get “one” retirement and you need to get it right. Everyone thought it was so funny in the 90’s when chimpanzees throwing darts at the Wall Street Journal were getting better returns than the analysts. What we didn’t realize at the time was that these reports were making a mockery of advice. “Who needs an advisor, when a monkey is just as good?” What a costly lesson was learned as the market went south.
Whether you are trying to lose weight… make “athletic” progress or “financial” progress, those who employ coaches do better than those who don’t. Find yourself a financial advisor that can demonstrate expertise in retirement income planning. Your needs are changing as you transition to the land of “distribution”. It may require that you change advisors, just like you would doctors, if your current physician was not able to treat your condition. There will be a plethora of retirement income models to select from, but only a few that will meet your needs. As a beginning point take a few moments to answer the following questions:
- In retirement I am more concerned about the reliability of my income than I am the return on my investment.
- I would rather make periodic adjustments to my investment income in retirement (up and down) based on the returns I actually achieve, than make no adjustments at all and potentially go broke.
- Having a retirement income strategy that is flexible and liquid enough to adapt to unexpected changes during my retirement years is very important to me.
- I would prefer not to put all of my retirement savings with one investment.
- I would like to have some guarantees built into my retirement income plan.
- I understand that having an income that grows with inflation requires that some portion of my portfolio will need to be exposed to market risk.
Richard E. Reyes, a CERTIFIED FINANCIAL PLANNER professional, has been perfecting an investment model that seeks to provide continuing, inflation-adjusted income designed to last throughout retirement. Richard realized that, unless retirees invested their assets in a manner that focused on delivering reliable streams of income, they ran the risk of losing their investment principal. Richard discovered that the secret to investing success for retirees is not to be found in timing the market, but is rather a function of time in the market. He preaches a strategy called “The Income for Life Model” that keeps retirement assets invested over long periods of time in order to provide the best possible chance of achieving excellent investment results. In Richard’s work, a new type of ROI measurement became preeminent – Reliability of Income. Richard’s work is important in helping retirees maintain financial independence so that they will not have to become reliant upon their children in their later years. Richard can be reached by linking on to his website at http://www.thefinancialqb.com Article Source: http://EzineArticles.com/?expert=Richard_Reyes |
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