Retirement Income Blog

Maintain a Steady Keel

If you are at the outset of your retirement and are counting on your savings for income, you may be a bit disconcerted about the economy and seek some retirement planning advice. A dipping stock market and housing market, rising crude prices, and the government’s refusal to make meaningful moves, make fears of another recession real and have you worried. What you do not want to do is panic – especially in your investment approach.

A Panic Move
There are some who will pull all their equity investments and put them into a money market fund or CDs. They do not want to lose any of their previous years’ gains or, at least, any more than they have to this point.  They plan to live off their money market interest and count the time until equities begin to rise – perhaps after declining. Unfortunately, neither they nor I know when the worst will occur. That’s acting like a speculator which is only for day traders and specialists.  This is not good retirement planning advice to be short term oriented.

At 65 years old, you have n additional life expectancy of twenty one years. That gives a lot of time for inflation to undermine the dollar’s value. Inflation will cut sharply into the value of your nest egg – and its yearly returns if you are completely invested in CDs and money market funds.  Better retirement planning advice is to have a long term view consistent with a 21 year life expectancy.

A Better Plan
After setting aside one year’s living expenses in a money market fund, split the balance of your nest egg equally between income and stock market investments. You require those income investments to generate some of your retirement income. Choose a good income generating mutual fund or buy some bonds (more about the differences of individual bonds and bond funds in a later post). Be sure to ladder your bonds (i.e. some for 2 year maturity, some 4 years, some 6 years and so on)  so that you can take advantage of rising interest rates over the next few years as the shorter term bonds mature. Laddering will likely smooth out your bond income from interest rate gyrations that may occur.

Do your preparation on your equity investments.  Look for stocks or mutual funds that have a history of increase in good times and hold their value in bad (Fortune magazine does an annual ranking of such funds). It is your equity investments that should offset inflation to maintain the overall value of your retirement funds. Be sure to allocate your equity investments so all your eggs are not in the same basket under any economic outcome (i.e. diversify among several industries).  Note that mutual funds and stocks are open to risks, including the potential for principal loss but the best retirement advice is to maintain a long term perspective and not react to anything you see or hear on TV or what the market did this week.

Now sit tight and be frugal. Make use of savings tips to stretch your money. Be sure to re-balance your long term investments annually (so that you have half in income/bond investments and half in equities/equity funds) and maintain your ‘12 month’ living expense fund refilled.  You’ll be around for at least 2 decades after retirement so take some good retirement advice and plan your portfolio for the same long time horizon.

For financial advisors seeking tips on how to help clients and maintain their business during an uncertain economy:

Annuity Leads
Lead Generation
ProspectMatch
Prospecting System

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You mess up your own retirement investing

While it seems that the economy, interest rates or the stock market has much to do with your retirement financial success, your own actions may account for more of your success or lack thereof, then you care to admit.  Morningstar, the well known mutual fund research firm, estimates that investors sacrifice a lot of return by buying and selling at the wring time.

To estimate the impact of poor timing, Morningstar calculates a figure that it calls investor returns. This represents how much the average dollar in a fund actually returns. If investors buy at the peak and sell at the trough, the investor return will be low. In contrast, total returns indicate how much you would have gotten if you invested at the beginning of a period and stayed put. To appreciate the importance of investor returns, consider that CGM Mutual returned 4.1 percent annually during the decade ending in May. But individual investors, because they bought at peaks and sold at troughs, the investor return for the fund was only 2.6 percent.

So in the above example of CGM mutual, investors would have had 57% more return had they not traded and just held the fund.  People trade too often and make these timing mistakes for two reasons:

1. Investors (you) get too much useless information–they listen to CNBC, read the Wall Street Journal, listen to their friends opinions and act on all of this information while it should all be ignored.  Not only is ignorance bliss, it can make you money.  Realize that all of this input is OPINION, not fact, and there are no “experts” in the financial arena (okay, maybe we can call warren Buffet an expert) .  While these people who position themselves as experts may have years of experience or degrees from great schools, they cannot forecast the future any better then you.

2. Investors (you) react emotionally.  Even if investors attended only to the facts such as unemployment data, trade flows, currency exchange rates and other hard data, they don’t have any system or model for their decisions and will buy or sell based on how they feel.  Using emotions to make investment decisions will make you poor

If you would like a comfortable retirement, reduce or eliminate your exposure to financial opinions. Additionally, if you receive any factual economic information, wait 48 hours before you make any financial decision. Last, never look at the direction of the market to influence your decisions.

Get Bob Richards Retirement Financial Guide to keep you on course
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 If a recession becomes severe, dollars may suffer from deflation rather than inflation. This would change the rules you have for retirement investing over the past 30 years. What should retirees consider doing if deflation sets in?

We’re familiar with the effects of inflation. Our dollars just don’t buy as much as they used to. Too much ‘easy money’ from too much credit puts more dollars into everyone’s hands so each dollar is worth less than before. So too many dollars are chasing too few goods and the prices of goods are bid up. In this typical inflationary environment, retirement investing rules are to get rid of cash and hold hard assets like real estate.

But when recession occurs, everyone becomes afraid of consuming. Businesses feel the pinch and people lose jobs. Government may try to ‘prime the pump’ by offering and instigating low interest rates. That reduces the cost of credit and hopefully to get people to begin borrowing and ‘consuming more’.

But if the turn down is too severe, very few people will be enticed to spend money. The money supply actually contracts. The results in a low demand to buy most things and can force prices down. And deflation is the general decrease in the prices of goods. Your dollars are worth more!  Rather than get rid of dollars, you want to own them and convert them selectively to assets that have fallen in value (real estate, stocks, etc).

Most retirees have no job to lose. They’re living off Social Security, pensions and their investment earnings. Most of this  retirement income may be fixed income.  Those in such a circumstance can actually benefit from deflation – mostly from the benefit of lower prices for things.

But under deflation, dollars become more valuable and debt – i.e. owing a fixed amount of dollars – becomes more of a burden. So retirees should reduce the cost of their debt by reducing payments or restructuring.

As deflation sets in you’re paying off debt in more expensive dollars. So any way to reduce the dollars you must commit to debt payments is beneficial.

Restructure your debt payments. With recessions comes falling interest rates. Take advantage of lower interest rates to restructure debt payments you can’t pay off quickly.

Refinance your home. If you have a mortgage, refinance at lower interest rate to cut your monthly costs – or to pay it off over a reduced time period.

Since the value of cash is increasing, holding it will increase your wealth – but only during deflation. Aside from preserving your emergency funds, you’ll want to hold dollars for retirement investment opportunities at low prices.

If you do have extra cash, stay aware of overly depressed investment prices and commodity prices (oil and gold)that will recover after the recession ends and present low risk retirement investing opportunities. Real estate investments – especially condos – are a typical case. It may even be worth a small remortgage of your paid off house for some investments (this strategy is not suitable for everyone as any borrowing will incur a fixed payment commitment while the return on investments is not assured).

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