Retirement Income Blog

In economic downturns everyone tends to tighten their budgets, and that includes retirees. In fact you may find you’re actually saving in retirement after paying your regular expenses. So where should you put this ‘extra’ savings as a retiree?

You may tend to just put it into your retirement savings into a bank account. But that makes your money vulnerable to inflation and unable to participate in market upturns. Its earnings are also taxed yearly - you may as well put it under the mattress.

Better to make it work toward ensuring more for you in the future. At 65 you statistically have some 20 years of remaining life expectancy. Long before that time elapses, both inflation and economic upturns will affect your holdings.

Presuming that you’ve stashed anywhere from 1 to 2 years of easy-to-access emergency money, you should put your ‘extra’ retirement savings into investments of a longer time horizon. Here, you’re looking for equity growth – both to offset the effects of inflation and further capitalize on the eventual rebound of the economy and the stock market.

Be sure to diversify your retirement savings among a variety of equity portfolios. Although you may invest some in funds that cater to large capitalization stocks, you should try to include real estate investments, international stocks, emerging markets, and smaller U.S. stocks.

These investments will reside in your ‘taxable’ accounts since they come from investment earnings and not work earnings. And as equity-based investments, their annual earnings should be small, since you’re investing for ‘growth in principal’. They may not ‘move’ for a while, but remember, you’ve already proven you don’t need this money. 

Consider this money outside your normal portfolio arranged according to your risk profile and income requirements. This way you can afford to risk a small portion of retirement savings and wait sufficient time for it to bloom.

For the most conservative investors, consider index-linked CDs.  These are FDIC insured CDs that pay interest based on increases in the stock market.  If the market falls, you original principal is guaranteed.  If the market rises, your index-linked CD increases in value.  Similar to this alternative, are equity-indexed annuities.  The same principals hold.  If the market declines, the issuing insurance company guarantees your principal.  If the market advances, your annuity balance participates in the gain.  Consult a retirement advisor to learn about your options for saving in retirement.

Bookmark It

This article is retirement help on how you can recover the $150,000 loss in your 401k in the next 6 months (for tactics to employ now, see my post at ).  This article is about understanding how and why that $150,000 evaporated and why you will not get it back in the next 6 months or likely the next 6 years.

The recent financial crisis is NOT a temporary drop in the market, your 401k and your IRA savings. It is a PERMANENT adjustment in the valuation of assets that became overvalued.  So don’t think of your 401k as down.  It’s now about the right value.  A year ago, your 401k and your house value was artificially inflated due to excessive credit.  Valuable retirement help is to tell you the truth–adjust your retirement plans downward.

Be realistic, how can an economy survive when

1. people can buy houses with 0% down and without the income to make the payments
2. stocks of companies involved in the housing balloon trade as if those houses are worth what the appraiser says

People now see that the emperor has no clothes.  The retirement help we can provide is to advise that you adjust your retirement plans downward and not think that the market will adjust itself for you.

The house that sold for $500,000 has a true value of $250,000. And all of the people involved in the housing market–the Realtors and the mortgage brokers are unemployed.  The lenders who made these ridiculous loans now realize that the loan, carried on their books at $500,000 must now be written down to $250,000, wiping out the lender’s capital.  The person who resided in the home gets foreclosed on and he might also lose his job because the housing calamity ripples through the entire economy (i.e lenders have stopped making loans to individuals or business).  People who had been taking vacations, buying cars, buying second homes and enjoying the good life by borrowing against their home equity can no longer do so as they have no equity.

So the value of real estate and assets in generally, reflected in stock prices, has now returned to a sustainable valuation and not some value created by a mass fantasy.  We all engaged in a fantasy that life could be so good without paying for it.  Reality does not work that way.  Now that you’ve swallowed the truth, let’s get to some retirement help.

Most Americans need to adjust their standard of living downward.  If you planned to retire at age 62, that will now be 66.  That’s four years less of doing as you please and instead, reporting to work.  The 3,000 square foot house you had planned as your retirement residence, better make that an 1800 square foot condo.  Your plans to remain in high cost Southern California, better think about a comfortable community in low cost Texas.  Unfortunately, all of the visions of retirement that you thought could be must now be scaled down to reality.  The best retirement help and advice we can offer is to make your adjusted and realistic retirement plans now. The good news is that you won’t go bankrupt and you won;t miss any meals.  But the fairy-tale visions we all held about a comfy retirement must now be exchanged for the truth.

Its not so bad, it’s just reality.

Bookmark It

Let’s first state three fundamental principles and then add the details.

1.      Start retirement with sufficient retirement savings

2.      Protect your retirement savings from erosion due to taxes and inflation

3.      Never lose money

Start with your desired retirement income and expenses.  Then, you can use a retirement income calculator to determine how much retirement savings you will need. You need to know how large of a nest egg is required for a comfortable retirement.  Most people don’t like to do this rigorous exercise of charting your expenses and income over time.  If you won’t do it, then hire a retirement planner who will.  I highly recommend the retirement planning software from J&L planners as it allows you to account for detailed changes in your income and expenses year by year.  Only by doing the math do you know how much you need and when you are able to retire. 

Next, you need to take advantage of as much tax shelter as possible.  For most retirees, that means using your unsheltered money first (e.g. your non-IRA, non-401k funds) .  You want to let your tax sheltered money grow as long as possible.  The caveat here is the uncertainty of future tax rates. Future income tax rates may be higher than today. You can have a retirement planner calculate for you the tax rate at which it is better to use your sheltered funds first.  In fact, understand that the plans you make at the beginning of retirement can change because of changes in tax rates or other variables.  That’s why smart retirees will update their retirement plan every 24 months.

Last, you need to be sure your principal never declines.  That would seem impossible based on the advice in the retirement-Income.net web site that recommends you keep 50% of your funds in stocks and everyone knows stocks go up as well as down.  BUT, you will never rely on these stocks for retirement income.  Your money will always be in at least 2 baskets—your liquidity basket from which you make withdrawals for your living expenses and your growth basket which replenishes your liquidity basket at long intervals.  You will never take funds from your growth basket to live on and the long intervals create a very high probability that you will only have gains in your growth basket between transfers to your liquidity basket.  Consider for example that over the last 80 years, when stocks have been left alone for 10 year time intervals, they gained in value 97% of the time.

Of course, in terms of protecting your retirement savings, there may be other asset protection measures such as trust and estate planning that you do for your heirs.

Bookmark It