Objective information about retirement, financial planning and investments

 

Retirement Investors: Poor Timing and Short Memories?

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A recent Wall Street Journal article Retirement Investors Flock Back to Stocks (not behind their paywall as I write this) discussed how retirement savers are putting more money into stocks.  Nothing like waiting for the stock market rally to pass its fifth anniversary, with many of the major market averages in record territory, to get retail investors interested in the stock market.  Two excerpts from this article:

“Stocks accounted for 67% of employees’ new contributions into retirement portfolios in March, according to the most-recent data from Aon Hewitt, which tracks 401(k) data for 1.3 million people at large corporations.” 

What cash I have, I’m going to use to buy more if the market dips,” said Roy Chastain, a 68-year-old retiree in Sacramento, Calif., who put an extra 10% of his retirement account into stocks in September, bringing his total stock allocation to 80%.  Mr. Chastain, who had put all his retirement assets into cash in May 2008, has gradually rebuilt his stockholdings.” 

If I understand Mr. Chastain’s situation, he sold out about half way through the market decline, he likely missed a good part of the ensuing market run-up, and now he’s bulking up on stocks 5+ years into the market rally.  I sincerely hope this all works out for him.

 What’s wrong with this picture? 

Part of the rational cited in this article and elsewhere is that stocks appear to be the only game in town.  At one level it’s hard to argue.  Bonds appear to have run their course and with interest rates at record low levels there is seemingly nowhere for bond prices to go but down.

Alternatives, the new darling of the mutual fund industry have merit, but it is hard for most individual investors (and for many advisors) to separate the wheat from the chafe here.

But a 68 year old retiree with 80% of his retirement investments in stocks is this really a good idea?

I’m not advocating that anyone sell everything and go to cash or even that stocks aren’t a good place for a portion of your money.  What I am saying is that with the markets where they are investors need to be conscious of risk and at the very least invest in a fashion that is appropriate for their situation.

Can you say risk? 

With the stock market flirting with all-time highs and in year six of a torrid Bull Market I’m guessing things are a bit riskier than they were on March 9, 2009 when the S&P 500 bottomed out.

Let’s say an investor had a $500,000 portfolio with 80% in stocks and the rest in cash.  If stocks were to drop 57% as the S&P 500 did from October 9, 2007 through March 9, 2009 this would reduce the size of his portfolio to 272,000.

Not devastating if this investor is 45 years old with 15-20 years until retirement.  However if this investor is 68 and counting on this money to fund his retirement this could be a total game changer.  Let’s further assume this occurred just as this investor was starting retirement.

Using the classic 4% annual rule of thumb for retirement withdrawals (for discussion only retirees should not rely on this or any rule of thumb), this investor could have reasonably withdrawn $20,000 annually from his nest egg prior to this market decline.  After the 57% loss on the equity portion this amount would have declined to $10,880 a drop of 45.6%.

Assuming this retiree had other sources of income such as Social Security and perhaps a pension the damage is somewhat mitigated.  Still this type of loss in a retiree’s portfolio would be a disaster that could have been partially avoided.

Am I saying that the stock market will suffer another 57% decline?  While my crystal ball hasn’t been working well of late I’m guessing (hoping) this isn’t in the cards, but then again after the S&P 500 suffered a 49% drop from May 24, 2000 through October 9, 2002 many folks (myself included) felt like another market decline of this magnitude wasn’t going to happen anytime soon.

Diversification still matters 

I agree with those who say investing in bonds will likely not result in gains over the next few years.  But given their low correlation to stocks and relatively lower volatility than stocks, bonds (or bond mutual funds) can still be a key diversifying tool in building a portfolio.

When I read an article like the Wall Street Journal piece referenced above or hear “experts” advocating the same thing on the cable financial news shows I just have to wonder if investor’s memories are really this short.

Individual investors are historically notorious for their bad market timing.  Is this another case of bad timing fueled by greed and a short memory?  Are you willing to bet your retirement that the markets will keep going up?  Or perhaps you think that you might be able to get out before the big market correction.

Perhaps you should consider doing some financial planning to include an appropriate investment allocation for your stage of life and your real risk tolerance.

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How Confident Are You About Retirement?

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Confident retirement

The Employee Benefit Research Institute (EBRI) recently published their annual Retirement Confidence Survey.  A few highlights from the survey:

  • The number of workers who say they are confident that they will have enough money to live comfortably in retirement improved to 18% from 13% in the prior survey.
  • The percentage of retirees indicating that they were very confident that they would have enough money to live comfortably in retirement jumped from 18% to 28%.
  • Workers having money in a retirement plan such as an IRA, 401(k), or pension were more than twice as confident that they would have enough money in retirement (24% vs. 9%) than those not participating in a retirement plan of some sort.
  • Worker confidence decreased with higher levels of debt.
  • Worker confidence was higher among workers with higher levels of income. 

Surveys and overall statistics are great, but the reality is that your level of retirement confidence should be driven by your level of retirement readiness.

Retirement readiness questions 

In assessing your level of retirement readiness, ask yourself these questions:

  • How much do I have saved for retirement?
  • How much am I saving each year for retirement?
  • How much will I need to have accumulated by the time I retire to ensure a comfortable retirement?
  • How much will I spend annually in retirement?
  • What resources will I have available to fund retirement other than my nest egg?  This would include items such as a pension and Social Security. 

The impact of debt

According to the survey those workers carrying high debt loads were less confident about their ability to accumulate enough money for a comfortable retirement than those workers with more modest levels of debt.  This is no surprise in that money that goes to service your debts is money that cannot be saved and invested for retirement.

Once you are retired excess debt payments can be a real burden for those on a fixed or semi-fixed income which is a high percentage of retirees.  If the debt, such as a mortgage, is at a manageable level given your retirement cash flow, that’s fine.

What can you do to boost retirement confidence? 

There are any number of things you can do to boost your retirement readiness and your retirement confidence level.  Here are a few:

  • Manage your spending and make cuts where possible.
  • Take full advantage of your 401(k) plan or other workplace retirement plan.
  • Start and fund a self-employed retirement plan if you are self-employed.
  • Manage all of your old retirement plans as well as those of your spouse as part of your overall portfolio.  Consider an IRA to consolidate several old plans in one place.
  • Get a financial plan in place to assess where you stand and to determine any shortfalls regarding where you need to be.   

If it looks like you might come up short relative to being able to fund your desired lifestyle you have some choices to make:

  • Delay retirement or plan to work at least part-time during retirement.
  • Ramp up you savings now.
  • Revise your planned standard of living in retirement. 

In a prior post on this blog Is a $100,000 a Year Retirement Doable? I worked through the math of a hypothetical retiree.  This methodology might be helpful to you as well.

You may or may not like the answer you get when you do the planning and the math for your retirement but at least you will know where you stand.  Knowing where you stand is powerful and can go a long way to improving your confidence about your retirement.

Please feel free to contact me with your questions. 

Check out an online service like Personal Capital to manage all of your accounts all in one place.  Please check out our Resources page for more tools and services that you might find useful.

Retirement: Will You Outlive Your Money?

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If you’ve been watching the Olympics, you may have noticed several new Ameriprise Financial commercials with their star pitchman Tommy Lee Jones.  One commercial asks the question on the mind of many folks looking to retire:  

retirement

This isn’t about whether Ameriprise Financial is the right firm to help you answer this vital question.  Rather I wanted to discuss some of the factors that will go into the answering this question from the perspective of someone looking to retire.

Your resources 

A good first step is to determine your resources to generate spendable cash once you retire.  Depending upon your situation these may include some or all of the following:

  • 401(k) or similar retirement plan such as a 401(b) or other defined contribution plan.
  • IRA accounts, both traditional and Roth.
  • A pension.
  • Stock options or restricted stock units.
  • Social Security
  • Taxable investment accounts.
  • Cash, savings accounts, CDs, etc.
  • Annuities
  • Cash value in a life insurance policy
  • Inheritance
  • Interest in a business
  • Real estate
  • Any income from working into retirement  

The list above is not exhaustive and you may have other assets or sources of income that you will be able to tap in retirement.

How much have you accumulated? 

This is an important question at all ages for those saving for retirement.  It is critical the closer you are to retirement and this is certainly true if you are within 10 years or less of retirement.

How much will you spend in retirement? 

While this might vary over the course of your retirement you need to take a stab at a spending plan for retirement if you are close to retirement.  Some of the issues to consider:

  • Where will you live?
  • Will you have a mortgage or other debts as you enter retirement?
  • What types of activities will you engage in?
  • What are your costs for medical insurance and medical care?
  • Will you need to provide support for children?  Grandchildren?  Aging parents?
  • What will your basic living expenses entail?  

These questions just scratch the surface, but I think you get the idea.  One other point to remember is that you might spend more on travel and activities in the earlier part of your retirement and less as you age.  However, any savings here might be offset by increased costs for medical care.

Another approach is to figure out what level of expenditure your savings and other resources will support and either work backwards to a budget within that spending level, try to ramp up your retirement savings to close the gap, or perhaps plan to work a few years longer before retiring.  This can be done using any number of retirement planning calculators available online.  With any such tool it is important that you pay attention to the assumptions inherent in the calculator’s model and that you think through any assumptions that you are allowed to input.

A qualified financial planner can help you through this process and this is a key element in a financial plan.

Whatever route you take the issue of outliving your money in retirement is a vital one for you to address.  In my opinion this is the biggest risk retiree’s face and is a bigger risk than losing money in the next market downturn.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services. 

Approaching retirement and want another opinion on where you stand? Check out my Financial Review/Second Opinion for Individuals service.

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Reverse Mortgages – The Basics

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Senator Thompson in Iowa.

 This is a guest post by Gary Foreman, of The Dollar Stretcher.com one of the oldest and best all-purpose financial blogs.  I don’t know about you but I find those reverse mortgage commercials featuring Fred Thompson to be nauseating and annoying.  Gary provides some objective information for those who might be considering this route.

With approximately 10,000 Baby Boomers reaching retirement age every day, it’s not surprising that more people are asking questions about reverse mortgages.  The concept of a reverse mortgage seems complicated at first. But if you break it down into it’s individual pieces it’s not that hard to understand.

Comparing a reverse mortgage to a traditional mortgage

With a traditional mortgage the lending institution gives you a large sum of money at closing that you use to buy the house from the seller. Generally you’ll make monthly payments to the lender to repay the loan. Hopefully someday you’ll have the mortgage paid off and own the house free and clear.

With a reverse mortgage you’re borrowing against the value of your home. Just like a traditional mortgage. Naturally you need to own your home outright or have significant equity.

Most reverse mortgage borrowers choose to take a monthly check from the lender although there are other options. So instead of repaying the mortgage, each month the amount they owe increases.

Beyond the basics

There are a number of requirements to qualify for a reverse mortgage.

  • The borrower must be 62 or older.
  • The home must be your principal residence.
  • Your home must meet all FHA property standards.

Besides these requirements, there are a few other facts about reverse mortgages that you’ll want to know.

  • How much money you can borrow will depend on your age, the equity in your home and the current interest rate.
  • The interest charged on the loan is variable, not fixed.
  • The lender will charge you an origination fee that will be included in the amount that you owe.
  • After you move from your home, the loan becomes due.
  • Any equity left after the loan is repaid goes to you or to your heirs.
  • The money you receive is a loan and generally not considered as ‘income’ for tax or Social Security purposes.

Advantages and disadvantages of a reverse mortgage

First, the positives.

You have flexibility in how much and how often you receive money. You can choose a fixed monthly payment, a line of credit, a lump sum or a combination.

You will never owe more than your home is worth. So when you finally move out and sell the home you won’t need to bring money to the closing table.

You still own the home. The title stays in your name(s), just like with a traditional mortgage.

You don’t repay the loan until the last surviving borrower dies, sells the home or moves out. If you need to move into a nursing home, you’ll have 12 months before the loan becomes due.

The income shouldn’t affect your current Social Security or Medicare benefits, though you should consult with the Social Security folks or your financial advisor.

Unlike other mortgages there aren’t any income requirements.

But, there are some negatives to consider before you apply for a reverse mortgage.

You’ll be charged origination fees and closing costs. There can also be ‘servicing fees’ during the life of the loan. They’ll be included in the amount you’ll owe when you pay off the mortgage. Often these fees are quite high.

Income from the reverse mortgage may affect your eligibility for Medicaid. Contact a CPA or Medicaid planner for details.

The amount you owe will steadily increase over time, even if you choose a single lump-sum payout.

Most reverse mortgages have variable interest rates. So the amount you owe could increase significantly if inflation returns and interest rates rise from our current low rates.

Unlike traditional mortgages, you generally can’t deduct interest paid on your federal income taxes until you sell the home.  I suggest consulting your tax advisor here.

Unless you’re prepared to repay the mortgage from home sale proceeds, you’ll be trapped in your home. No moving to a retirement community or condo.

You won’t be able to give or sell your home to a child without repaying the mortgage.

You’ll still need to pay insurance and taxes on your home. The typical responsibilities of a homeowner remain.

A few final cautions

You should also consider alternatives to a reverse mortgage. There may be other sources of income that are a better fit for your needs. This is especially true if you don’t require an additional regular monthly income stream.

Before you take out a reverse mortgage on your home make sure that you understand it thoroughly. There are some aspects that are a little unusual. Take your time. Don’t be rushed into a decision.

Remember, too, that people will be making money on your mortgage. And, sometimes unscrupulous people push financial products that aren’t well suited to the situation. So tread cautiously.

But, in the right situation, a reverse mortgage can be a viable solution for Baby Boomers and seniors looking for some extra retirement income.

For additional facts regarding reverse mortgages visit the HUD website.

Gary Foreman is a former financial planner who founded  The Dollar Stretcher.com website and newsletters.  The site features thousands of articles on how to save your valuable time and money including other articles on reverse mortgages.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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Is My Pension Safe?

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Logo of the United States Pension Benefit Guar...

The city of Detroit recently filed the largest municipal bankruptcy in history.  One of the potential casualties of this situation will likely be retired city workers receiving pensions.  While pension payments are promises made by the employer, should the bankruptcy go through the city will be free to cut pension benefits as part of the restructuring of the city’s finances.  In light of this situation, how safe is your pension?

What is behind your pension? 

Your employer starts an investment fund that is designed to grow via investment returns and contributions from the employer to a level that will support the pension benefits you’ve earned based upon the plan’s benefits formula.  Pension benefits are typically earned by workers based on a formula that usually takes into account factors such as career earnings, years of service and perhaps other factors.  Each year an actuary calculates the amount that the employer must contribute to the pension plan in order to maintain an acceptable level of funding.

Sadly in far too many cases, especially in the public sector, we’ve seen employers under contribute to their pension plan causing severe underfunding.  In my home state of Illinois this is rampant and is a major part of our state’s ongoing pension crisis.  Certainly this was also a factor in Detroit’s case as well.

Let’s take a look at some of the issues with private employer pensions and those in the public sector.

Private employer pensions 

Pension plans offered by private employers (which I define as those employers who are not municipalities, state or federal government entities, etc.) are a liability of the company in much the same fashion are their accounts payable or a bank loan.  Failure to make good on these obligations can result in the bankruptcy of the firm.

Should a private employer be unable to make good on its pension obligation, in most cases the Pension Benefit Guarantee Corporation (PBGC), an independent governmental agency, will step and cover the pension obligations of the company up to its limits.  The maximum benefit they will guarantee depends upon the year in which the plan was terminated and your age among other factors.

For many workers the PBGC maximums will cover the pension payments promised via their employer’s plan.  Some highly paid retirees receiving large monthly pension payments might see their payments reduced once PBGC coverage kicks in.  A case in point occurred here in Chicago in 2005 when locally based United Airlines defaulted on its pension obligations and many retired pilots and other highly paid retirees saw their monthly benefits reduced by the PBGC.

Municipal and governmental pensions 

The issue for the retired Detroit workers is that municipal and governmental pensions have no backstop such as the PBGC.  Detroit will be the biggest test of the Chapter 9 municipal bankruptcy process but there is much speculation that current and future retirees will see cut on the order of 30%-40% or more in their monthly payments.

At the state level it is less clear to what extent that states such as Illinois would be able to reduce pension payments due the rules in place.

Steps to consider

If you are retired and drawing a pension there probably isn’t much that you can do.  One step to consider is taking your Social Security now if you are eligible and have been waiting to draw upon it until a later age to maximize your benefit.   You might also look at getting a part-time job or hanging out your shingle as a self-employed consultant if you have skills that are applicable to this route.

If you are approaching retirement and your pension plan offers the option to take a lump-sum benefit as an alternative to annuitizing this option might be even more attractive now.  As always you should look at all of the factors involved such as the financial stability of your employer, your other resources available in retirement, etc.  This might be a good time to engage the services of a fee-only financial planner who can help you evaluate your options.  While a lump-sum still needs to be managed in terms of the investments chosen and the timing of withdrawals, you do eliminate any issues surrounding future benefit reductions due to your employer encountering financial difficulties.  If you are offered an early retirement package you should give it serious consideration as well.

Younger workers should take this as a wake-up call and make sure they are saving for retirement especially if they are counting on a pension plan from their employer.  Many companies freeze their pension benefit which means that you will receive the benefit that you’ve earned but you won’t be accruing a larger benefit via increased earnings and years of service.  Take full advantage of defined contribution retirement plans such as a 401(k) or a 403(b).  Fund an IRA account.  Save and invest in taxable accounts.  Strive for financial independence as soon as possible.

Employees with a pension plan generally have a leg up in retirement.  The Detroit situation simply highlights the fact that nothing is set in stone.  At the end of the day we are all responsible for our own retirement, plan accordingly to the extent that you can.

For more background on this situation check out these two excellent pieces on the Market Watch site:

Detroit not alone; public pensions vulnerable

Will your pension disappear, post-Detroit?

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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A Bucket Approach to Retirement

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I had the privilege of participating in a panel discussion entitled Practical Solutions for a Challenging Retirement Landscape at the recent Morningstar Investment Conference.  The panel was moderated by Morningstar’s Christine Benz, one of my favorite personal finance journalists.  After our session Christine and I discussed the bucket approach to retirement, a topic about which Christine has written extensively.

Here is a video of this conversation which as I write this appears on the Morningstar site.

 

Here is a link to the interview as well.

My thanks to Christine and to Morningstar for the opportunity to be a part of their excellent conference, this is always an outstanding event.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services.  

 

 

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What Lifestyle Changes Will You Make in Retirement?

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This is a guest post by Miranda Marquit, a financial journalist and freelance writer. She contributes to several financial web sites, and her work has appeared in numerous media, online and offline. Miranda’s blog is Planting Money Seeds.

When many of us think of retirement, we focus on the nest egg. Have you saved up enough? How much needs to be set aside each month in order to reach your financial goal?

Unfortunately, too few of us consider what to do with all of that money during retirement. You know you probably need a good-sized nest egg to retire comfortably, but have you considered how you will use that money to your best advantage? Your lifestyle will change during retirement, and you need to be prepared – and know how you will spend your time, as well as your money.

Are You Emotionally and Physically Ready to Retire?

While you do want to make sure that you know how much money you need to retire, you also don’t want to neglect your lifestyle. In theory, it’s nice to say that you’ll quit working and that you’ll relax, but the reality is that many retirees don’t know what to do with themselves after they retire.

Indeed, a study in the United Kingdom indicates that mental and physical health can suffer after retirement. Without the physical activity that comes with work, and without the social interaction, many retirees become depressed and lose some of their physical abilities. If you don’t have a plan to replace various aspects of your job, the deterioration could be rapid.

Your main lifestyle change will be switching from work to trying to find something else to do. Some of the ways you can replace the social and physical aspects of your job during retirement include:

  • Work on a hobby.
  • Join a seniors group or frequent the senior center.
  • Become involved with a civic organization.
  • Travel and make friends.
  • Volunteer.
  • Learn a new skill or go back to school.
  • Become a consultant.

These activities can provide you with purpose, as well as help you feel as though you are accomplishing something worthwhile. Some retirees even decide to work a part-time job, just to remain involved with life. It can be especially invigorating to get a part-time job in a field that you might not have worked before. In these cases, it’s not about the money – your retirement savings might be more than sufficient. Instead, it’s about quality of life, and enjoying your lifestyle.

Do You Need to Downsize?

What happens if you know you are ready to retire, but haven’t quite hit your retirement savings goal? If this is the case, you need to decide whether you want to tough it out at work, or whether you want to retire now and make some lifestyle changes.

One of the ways that many retirees change their situation is through downsizing. Even retirees who have a large nest egg might be interested in downsizing. Sell your home and use the proceeds to purchase a smaller home, or pay for housing in a senior community.

You can also sell some of your possessions to reduce the clutter in your life and even raise a little extra cash. This can be a good way to retrench so that your retirement lifestyle is affordable on whatever nest egg you have. And, if you plan to travel extensively, you’ll want to downsize so that you don’t have as much stuff to worry about while you enjoy your newfound freedom.

Bottom Line 

What you will do, and how you will remain engaged are important aspects of retirement. Unfortunately, too few of us think about the lifestyle implications of retirement. Think about the changes that retirement will bring to your routine, and how you might feel with the lack of social interaction that often comes with a traditional job. Then, figure out how you can arrange matters so that you truly enjoy your retirement.

Miranda is a financial journalist and freelance writer. She contributes to several financial web sites, and her work has appeared in numerous media, online and offline. Her blog is Planting Money Seeds.

Please feel free to contact me with your questions. 

Check out an online service like Personal Capital to manage all of your accounts all in one place.  Also check out our Resources page for more tools and services that you might find useful.

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