Retirement Income Blog

Whether you do it yourself or hire an asset manager, your choices of financial asset management are several.

Mutual Funds
The favorite choice of American investors for their financial asset management, mutual funds delegate the day to day decisions to a professional management team.  But the average fund charges about 2% annually (management fees, plus 12b-1 fees plus slippage costs) not including any front or back end loads.  Because the day to day portfolio management decisions are delegated, you only need to select and monitor the fund categories you select.  In recent years, asset allocation has been the buzzword to even make the selection of mutual funds easier with an allocation that looks like this (perhaps 1/6 invested into each category):

• Large US company stocks
• Small us company stocks
• Large foreign company stocks
• Small foreign company stocks
• Bond fund—domestic and International
• REIT (real estate) fund

Complexity (and potentially better performance) can be added by shifting money between the above categories annually by taking money for the categories that have appreciated and adding to the categories that have declined.

Individual Stocks and Bonds
The smaller investor has shunned the purchase and management of individual securities as a financial asset management choice because of lack of knowledge and ability to do the necessary research or lack of time or interest.  Larger investors tend more toward individual securities because on larger portfolios, the 2% fee inherent in many mutual funds gets to be expensive.  The costs to buy or sell stocks at a discount brokerage is insignificant at less than $10 per trade and there is no annual or management fee.  The burden is on the investor or his financial advisor to know what to buy and sell and when to buy and sell.

Managed Accounts
Wall Street created the managed account as a way to offer the best of both worlds (supposedly) as a financial asset management choice.  In this type of financial management account,  you have your own individual account.  Your funds are not commingled with other investors as with a mutual fund.  You appear to have personalization and an individual strategy.  In fact, you have the same portfolio as thousands of other investors (it is really not personalized unless your account is $1 million+) and depending on which type of firm you select, your fees will range from 1% to 20% annually.

There is no “right” answer to the above financial asset management choice that you make.  In all three situations, commodities are being added to the asset mix as investors realize that rising demand for commodities from China and India presents an attractive appreciation opportunity.

Note that your choice of a solution is secondary to larger strategies issues like your tax planning and retirement income needs which can be ascertained by using a retirement calculator.

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The typical sources considered for retirement funding are

• 401k and retirement plans (IRAs)
• Pensions
• Other savings
• Social security

But you have huge opportunities to gain retirement funding from other sources under your own steam, during retirement.

Part time work—what are you going to do if you don’t work—watch Oprah reruns?  Although the unemployment rate is up slightly because of a weak economy, we are heading into a labor shortage with more jobs than workers.  There will be demand for your paid time.  And don’t fret about your page—any employer would rather have a worker from the baby boomer generation than a Gen X or Gen Y employee as their work habits are not what they truly desire.
Self Employment—there are gobs of opportunities for retirement funding if you are willing to learn something new.  For example, if you want to invest in real estate but don’t have any money, there are plenty of companies that will provide money for you to find underpriced real estate and split the profits with you.  You must think like an entrepreneur to profit from the myriad of such opportunities If you are not willing to learn, forget it.  Spend a day searching the web and you will quickly be overwhelmed by work-at-home entrepreneurial opportunities–super sources for funding retirement.
Multi-level Marketing—a type of self employment not to be shunned and quite suitable for funding retirement.  There are millions of people involved in this very social way of making money.  If you are rooted in your existing opinions and not open-minded to such opportunities, don’t expect to generate more retirementnd.
Phone Sales—Hundreds of companies need people who can conduct successful sales conversations and close business. Work from home.  Don’t know how to sell?  Take a class.  Most people in sales have never taken a sales training class so you’ll be ahead of the crowd if you do.  And you can wow your peers with this very lucrative method of retirement funding.
While visits to a retirement advisor can help with tax planning, passive investments in stocks, bonds and funds, when it comes to generating your own income, the Internet will be your best source of information.  Also attend “work-at-home” expos which come to most large cities.

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You must have sufficient capital, mathematically determined before you retire. If you don’t have the knowledge to make use of a financial calculator or financial software and factor in the impact of inflation, your current expenses, changes in future income, a safe withdrawal rate from your portfolio and use Monte Carlo simulation or other tool to estimate the probability of success, then hire a retirement planner. Too many people pursue early retirement with the notion, “I think I have enough.” The lack of planning to retire early leaves people in their 80s eating dog food wishing they had invested a couple thousand dollars for a sound financial plan with an experienced retirement financial planner.

Retention of Capital
Assuming you retire early with sufficient capital, you must have a method to retain it—to limit draw downs that can be caused by a falling stock market and oversight to limit taxation and fees and expenses. If you don’t feel you have sufficient personal knowledge of retirement income planning and how to retire early, then get help. For a few hundred dollars a year you can get a retirement planner to help monitor your results and give you direction, stay on course and make early retirement a success. Alternatively, hire a fee-based money manager and pay 1% of your portfolio (a typical fee) to have it managed full time.

Expense Control
You must have a budget that you will not violate. As a retirement planner, I placed a retired couple on a budget. But the wife always had reasons for “special withdrawals” from the portfolio such as unexpected dental work and three plane trips to visit her dying brother. Even after my explanation that the couple could not afford these unplanned expenses, they continued and I resigned as their retirement planner. The couple was headed for the poor house because of their inability to understand that capital in retirement is limited and hard choices must be made and budgets adhered to. Their knowledge of how to retire early may have been sufficient, but their implementation and discipline was not.

Additionally, you must know enough about tax planning, tax minimization and minimzation of brokerage costs, investments fees and insurance costs. Many of these costs are hidden so if you don’t know where to look, get a fee based planner to help you.

Health Insurance
Anyone could go bankrupt from a single major illness without proper insurance. Make sure you have permanent coverage (i.e. non-cancellable) that you can renew for a lifetime. Note that 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. With these few areas being welled planned beforehand, your ability to retire early and successfully is enhanced.

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