Retirement Income Blog

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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What Happens to Bondholders When a Company Goes Bankrupt?

Seniors and retirees like bond investments because they provide a steady income, diversify a stock portfolio, and are backed by the issuer’s financial strength. But things don’t always go as planned. Companies occasionally have financial problems and must file for bankruptcy as you well know.

Investors holding bonds in bankrupt companies can at least have the comfort in knowing that as unsecured creditors they are second in line for payment. Secured creditors, those with claims backed by collateral, such as equipment or real estate, are paid first. Stockholders come last and that is only if there is any money left after the creditors have been paid.

There are two general forms of bankruptcy: Chapter 7 and Chapter 11. With Chapter 7, the company is liquidated and bondholders should file a claim to receive a portion of the value of their bonds. In Chapter 11 proceedings, however, the process is quite different.

Chapter 11 allows the corporation to reorganize. Its bonds might continue to trade, but holders will not receive principal and interest payments. As a result, a default could occur, and the value of the bonds might decline significantly. Or the court may approve an exchange of the old bonds for new ones, which could have a lower value.   The problem is that the fortunes of corporations change.  The highly rated General Motors bond you may have purchased with an AA rating years ago may now be rated CCC as General Motors clings to financial life.

How can you find out if a company that you lent money to by purchasing a bond has filed for bankruptcy or if the safety has declined?  First, if you have a sizable portfolio and a good retirement consultant, he will keep you informed.  Secondly, LOOK at your monthly brokerage statements when they arrive.  The first hint of trouble is a decline in bond value from one month to the next.  TV reports, newspapers, and financial magazines often give an account of companies that recently declared bankruptcy or have trouble. The company will also send you information on the reorganization plan and ask you to vote on it. And if a financial institution holds the bond for you, it should forward everything from the company.

If you would like a free credit report on bonds you currently own, here are two web sites to check

http://www.moodys.com/cust/default.asp.  Register for a free account and you can return to this site periodically to check your bonds.  Should your broker do this for you?  One of the problems is that the broker gets paid a commission when you buy the bond.  he has little if any incentive to keep you informed unless you continually do business with him.
Another site with information is http://www.fitchratings.com/

Unfortunately as with stock investing where you can get a lot of information on the common shares of public companies, the transparency and visibility of bond investing information is poor.

Financial Advisors seeking to help investors with their retirement investing: ProspectMatch

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There are three big areas on which to focus your attention in your pre-retirement years.

Sufficient Retirement Capital
You likely need more than you think to provide sufficient retirement income. There are lots of “rules of thumb” you may hear like “you need 70% of your pre-retirement income.
Don’t rely on these simplistic rules. If you want to do it right, get a copy of J&L Retirement Planner software (about $100) and go through the painstaking task of entering all of the numbers permitted. This robust software allows you to enter year by year events such as the world cruise for your 65th birthday, or the fact that your deferred compensation starts when you reach age 67.5 or that you plan to move to a condo at age 72 and thereby free up $300,000 for investments and eliminate your mortgage payment. Take the time to get your pre-retirement planning done with as much precision as possible (or hire a retirement planning professional). If it’s too much of a bother, then don’t complain if you run out of money at age 85 and live on food stamps for 15 more years.

If you start your calculations and you don’t have enough for your targeted retirement date, you will find that tightening your belt pre-retirement to save and invest more has a much smaller impact than working another one or two years. During that extra work time, your retirement investments continue to grow rather than be consumed. This additional growth is likely to be much more money than you can put away in additional savings. Don’t worry about retirement investing at this point. Get to the retirement “starting line” before reallocating your portfolio to live in retirement.

Retirement plan Options
Prior to retirement, you will be asked by your employer to make choices about how to distribute your 401k or receive pension payments. This area is so fraught with rules you are unlikely to know, get the help of a retirement professional. IRS has constructed a minefield of rules and waits for you to step in the wrong place and blow up.

Health Insurance and Health Care
You may feel great now but it is naive to assume everyone else becomes an old codger but not you. You too may be shuffling across the intersection trying to beat the countdown before the traffic light changes color. Therefore, take the probability of illness and aging seriously. Not only do you need comprehensive health insurance but also long term care insurance, both of which you want to get pre-retirement. Many health insurance plans are regional and not national so before you retire, be sure you are content to remain living in the area in which you retire. Your health plan may not be portable. Buy long term health care coverage. If you don’t know anything about long term care insurance, talk to your retirement planner or do your Internet research.

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