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retirement income

Five "Get Ready" Rules for Retirement

There continues to be no lack of pressure on American's to get to work on building a prosperous retirement. 

Study after study, article after article, report after report continues to show what most advisors already know, American's are woefully unprepared for retirement. 

There are a lot of reasons that this is the case, lack of savings and investment, poor estimates of what post retirement spending will actually be like and the paralysis of just not being able to get started on "planning" for your golden years in any meaningful way. 

"Numbers scare me. I'm not alone in this. Scientists who study math anxiety say that the anticipation of crunching numbers can lead to the kind of agitation that, on a brain scan, looks a lot like the perception of physical pain." So said John Schwartz in his March 2015 blog post titled "Retirement Reality is Catching Up With Me" which ran on the 11th of that month in the New York Times. 

And, there are a lot of numbers to be crunched to get it right. If that weren't bad enough, the numbers need to be crunched on pretty much a regular basis, year-over-year.  We have family and life issues that change the pattern of spending and it's timing, we have market issues that impact the value of assets as well as their ability to provide either an income source to supplement us or a pool of funds we can draw on when needed to adjust to changing circumstances. 

Many an investor has been duped by the notion that "making 8%" on their portfolio means that they'll make 8% every year. Little do most pre and post retirees know that "averaging" 8% can be woefully different than earning 8%.  I mean, if the top half of your body is put in a freezer and the bottom half in an oven, we can surely figure out what the temperature of each could be to get you to your ideal 98.6 average temperature. But I'll bet you're going to be pretty uncomfortable no matter how that plays out. Averages and how we actually arrive at them can be at mathematically daunting to say the least. 

Investing for income, another notion that on it's face seems to work, inadvertently becomes an "income straight jacket" as investors allocate assets towards dividend paying stocks and long-term bonds. That's good for generating income, right?  Well, it might be, for at least a period of time. Once the Fed starts raising rates and inflationary pressures kick in we have a problem. Our dividend and interest payments from our investments are more or less locked in so now our "income" isn't keeping pace with inflation and the gap between "what we get" and "what we need" is ever increasing. In addition, both dividend paying stocks and longer term bonds are susceptible to interest rate swings, driving down the value of most investors holdings. Hamstrung, they won't sell because of depressed prices to improve their overall "income" return and they can't live any longer only on what's coming in. 

Is it any wonder that nationally the Pension Rights Center motes that the nation, as a whole, is almost $8 Trillion short in funding retirement. An increase of $2 Trillion from just five years earlier.

So what to do? Here's five things that should hold you in good stead as you move toward and through your retirement time;

  • Your magic number isn't about what you accumulate. It's about what you plan on spending during retirement. Five million dollars in banks, brokerage and retirement accounts isn't enough money if you plan on spending six million 
  • Build a long-term investment strategy and stick with it. As a sage market observer once said, "If they ain't ringing a bell to tell you when to get out of the market, I can assure you that they ain't ringing one to tell you when to get back in."  Market timing is akin to pipe dreams and tooth fairies, it'd be wonderful if it worked, but it doesn't, it won't and it never has
  • Don't forget randomness. The likelihood that a series of investment returns won't deviate from it's expected return is ZERO.  Any plan, no matter how well thought out, no matter who the provider of it is that portends that the way you average 8% is by earning 8% every year has a probability of success equal to ZERO
  • Follow the money. In 2015 everyone's asking, where to put their money when things are most uncertain. If you can't make money on cash (which you can't) and you can't make money on intermediate term bonds (bonds with maturity/duration periods of 3-7 years) then the only result is....it goes back into the market. In 1986 you may have been able to get 9% on government bonds or; ride the market tumult out.  Government bonds at 9% were a good alternative in 1986. The paucity of a 0.15% return on cash isn't an option for you, nor is it for any investment banker, mutual fund manager, endowment or any other living creature who might derive their compensation in whole or in part on making market type returns
  • Get your head out of the sand.  Unless immediate death is your post retirement plan, get comfortable with the fact that as medical technology improves so does your chance of living longer. I know you think that you can pull this one out of the fire at the last minute, but you can't. Taking more investment risk, working longer, downsizing etc. all seem like real options but there's two little problems there, which are [1] sometimes you can't and [2] they all begin from the premise that retirement will then be "based on a lifestyle less bountiful than you had envisioned and less hopeful than you'd planned for."  Those aren't good things. Plan ahead, well ahead for this goal. 

Best that you start actually thinking this one through. I know that finding out that there's a problem isn't a comfortable reality for anyone, but finding out early leaves time to adjust, plan, and rethink things a bit. Finding out too late, leads to chaos, bad decisions, and the severe likelihood that all you'll do at that point is compound your problem. 

Confront the issue, understand the pitfalls and gaps, develop or buy the expertise to deal with them and remember, retirement is suppose to be at least as good a time as your working years were, if not better. 

But that isn't going to happen by chance. You have to make it so. 



Living longer...Working longer.

The average age at which an American worker retires is now reported to be 62 and that's the highest self-reported average age in 23 years.  

A recent Gallup study showed that in 1993 the average age was 57 and even as recently as 2010-2012 the age hovered at around 60.

But for many, even age 62 may be too early.  No doubt that the average age has creeped up, with the lack of a reliable program of saving/investment during their lives, and/or the Great Recession "mark-down," it's not hard to understand the "need" to work longer. 

And, there are for sure, workers who are working because they love their work or they feel more fully alive and involved when they are pursuing their passion so they've chosen to continue at their life's work. And, I think,  we can be relatively certain that the extra money doesn't hurt either. Also, I'd bet that as the percentage of total jobs moves more towards "technology" and less toward, manual labor, we wouldn't be surprised to see the age creep even more in the future, just as a natural outgrowth of the societal impact on work itself. 

Ironically, about the same time as the Gallup organization was asking about retirement ages, they were also asking the American public what their biggest financial fear was and as you might image, not having enough for retirement came in at the top of the its at 59%. The harmony between "working longer" and "not having enough for retirement" is almost scary, but, this too is not to be unexpected. 

So what's the answer?

I think in the last few years I've written more than a few blogs about changes that need to take place in the workplace, whether that's that we provide new incentives for increasing investments in saving for retirement, develop a newer/better retirement plan system or some other improvements (if you're old enough you can remember when your pension might have been 66% of your highest three years average earnings).

Surely we can do a much better job on financial education, an area where we do very little in relation to what we could potentially do. Teaching people how to handle and manage money is a skill that pays benefits for a lifetime. And middle school, yes, middle school, is a good place to start. 

I think that actually planning for your future also pays substantive dividends (no pun intended) and if possible or preferred, people should commit to working with someone who can help them understand the financial structure of working toward, to and through retirement. 

What passes my understanding is how frequently we seem to refer to the retirement problem as if there's no existing means to remedy it. Odd isn't it that when we talk about childhood obesity or obesity in general we can pretty quickly come up with "diet and exercise" as steps that should be undertaken to stem the tide on weight gain. 

Likewise, shouldn't the first thing that comes to mind when we're talking about providing for our own financial security be something like, "set your goals, have a plan..?"  

So, what's the problem?

Over the thirty years that I've been in the financial services profession, there's been the often used saying that "more people plan their vacation, than plan their finances" and from what I've seen that is a true statement. 

But the key to all this may lie in the fact that we CAN plan our vacation and if we CAN plan that, then we've got the appreciation/understanding/ability TO plan anything else.  So whey don't we?

There a a host of rationale and irrational reasons we don't and a series of blogs could be written explaining, validating or invalidating almost all of them in some way. 

In the interest of brevity, let's conclude on this thought. 

"If you don't know where you're currently situated on a map, you have little idea in which direction your next step should be."

Figuring out where you are doesn't take planning it takes quantification. Figuring out where to take the next step means you've been moved to action, an often unintended benefit of the "quantification" process. This is the nexus at which we cross from "quantify" to "plan." 

Even if you're not a planner, take the first small step and "quantify."  

Knowing where you're situated is seldom ever a bad thing, trust me on this one.


Avoiding The Low Interest Rate Trap

For many pre-retirees and "in place" retirees, this extended period of low interest rates presents a financial conundrum; how to keep pace with rising costs, when your income specifically can't?

Feeble returns on safe investments such as bank deposits and bonds may hinder retirement income models for another decade according to a recent interview with Bill Gross, manager of the world's biggest bond fund. Currently the average yield on a five-year CD is about 0.8% compared with 2.26% back in 2009. 

But, for the record, the problem here lies not so much in the environment of low rates, as it does in the misguided approach that most American's take to retirement. 

It's long been said, that inflation, especially when it's lowest is at it's most insidious levels. With an average inflation rate of around 3%, retirees hardly notice year by year the rate at which their prices are rising.  When rates are low, inflation spends much less time as a topic addressed by the mainstream media, and the less that investors/retirees hear about it, the less that they factor it into their thinking in planning for their future. 

It's All In How You Look At It

America suffers from many ills as it relates to retirement. Many of those are self inflicted like the problem that low yields portend for keeping pace or actually enjoying retirement. But, many of those exact problems are caused by the perception of retirement. 

Striving to reach an artificial finish line such as "your retirement date" or turning 65 or collecting your first Social Security check, clouds our thinking.  Many retirees have a life expectancy much longer than they think that they do.  Given that, it might be best of we reframe the problem: 

"The finish line is your date of death, not your date of retirement.

I'd bet if we looked at the problem that way, we'd understand better that keeping pace with inflation and not relying on "fixed income" in a world of nothing but variables, probably isn't a wise path to take. 

The "income straight jacket" is especially concerning. 

The income straight jacket exists because too many American's believe that when they retire their time horizon for investing has now ended, they've made it, they got to the finish line. So, it would appear to be time to employ a different strategy.  Instead of investing for growth, the default becomes to position the portfolio to replace the very thing that they had when they were successfully making it (i.e., when they were working) namely income. 

Portfolios replete with high dividend paying stocks and fixed income abound. But there's a problem lurking in the shadows; when interest rates rise and the underlying value of their entire portfolio starts to drop, the decisions that need to be made become more problematic. 

Not only can't their portfolio income keep up because many of those rates are locked in; but the value of everything is declining as well, making the notion to initiate some change even more daunting. Who wants to sell as prices are dropping off the cliff?

Over the last few years there's been more than a few articles on the impact of lower than average interest rates on retirement and retirement income. But I'll submit that if you used bad math and poor judgement to build your portfolio in the first place, it's not a surprise that the "market" has found a way to make your bad decisions cost you. 

The Problem With Low Rates Is Our Reliance On Them Not To Be....

In and of themselves, lower than normal interest rates should not be much of a concern. Oh sure, they deserve some attention on how things are built and managed, but lower than average rates are not the death nell that we're hearing about. 

I'd bet that there are few people who are complaining that inflation (a number typically tied to the overall level of interest rates currently in play) isn't high enough or that you're ready to step up to the plate and have your mortgage and/or home equity loan rates move up to around 7%. 

Thinking that you're going to earn 8% on fixed income or bank investments when the inflation rate is 3% is about the same as the Client who would like to earn 10% on the stock market but just not have any risk....it isn't going to happen.  At point of fact, I'm not sure that it could happen. 

A local sports radio celebrity often comments about "mediocre" sports teams who seem to playing way better than they should be.  His comment about those teams seems true here as well; 

"The reality is that if your teams got problems, real problems, it's only a matter of time until those problems become real and your run is gonna end...."

Likewise for building a portfolio. 

Or a house, or a car, boat, sports team or business.  Weaknesses have an odd way of finding weaknesses in a relatively efficient manner. 

So stop waiting for rates to go up if for no other reason than you can't make that happen and start focusing on what you can do for yourself.

Sit down with someone who knows how to construct a plan for your retirement and your portfolio based on all the relevant factors, not just the ones we'd like to see happen. 


Fixing Social Security

In a recent article in the Sun Sentinel, the author proposes how to "adjust" Social Security by bolstering it, not cutting it as some might find more desirable. 

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Our country has undergone substantive change since the enactment of Social Security, and frankly, the program itself has done little to keep up with the changes.  The addition of retirement "ages" of 62 and 70 were instituted to address the needs of women and minor mortality adjustments but there's really been little else. 

With American households dramatically under-funded for retirement, and with the advent of the end of defined benefit pensions in favor of 401(k) plans, it's not hard to see how little even the general population has done to adjust to prepare for retirement. 

While the cries of insolvency are always a concern, the fact remains that insolvency is hardly a reality either in actual or political terms. 

Nearly all but a few workers contribute 6.2% of pay to Social Security yet someone earning $400,000 a year pays 1.71% and a CEO earning $2,000,000 pays just .003%. The difference in rates is inexcusable. 

The fix then lies then not in if we index benefits, or by cutting benefits or allowing individuals to invest in the stock market, or gold or other investments. The answer lies where it has always been; funding. 

As this article portends, were we to gradually phase out the rate cap over a period of time, requiring more contributions from wealthier individuals, for the most part, the problems would be solved. 

I know, this speaks to the very heart of our shared commitment to the preservation of our economic structure.  But to my way of thinking, that's a large part of what democracy and the American way of life is about, isn't it?

The way I see it, if we can count on the greatest segment of our population to build our buildings, fix our roads and fight our wars for us, it might be nice to thank them by doing what we can to ensure that they don't live in a cardboard box during their later years. 

While to some's way of thinking, the abyss between the "haves" and "have nots" may seem like a natural order of "finance" it remains true that our "founding fathers" built a democracy based not on ramping up inequality but by doing what was necessary to prevent it. 

Here's a fix that can and should work. Which we all know means it likely won't. 

Sad as that may be. 

Entitlement Reform

One of the things that gets overlooked every time the conversation comes up about reworking the Nation's metrics for entitlement programs, is an important and seemingly ever present factor;  

"Until people actually start saving so that dependency on entitlements as a primary means of support declines, changing the programs remains all but impossible." 

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As much as we may not care to admit it, one of the "stop you dead in your legislative tracks" will always remain, "my constituents can't afford that to happen..." 

There are a myriad of reasons to plan for your future, not the least of which is that as the demand for social programs grows, and along with it, the cost of funding them, we're on a headlong journey into the realm of "it can't be stopped because we need it too bad but we can't afford to keep it going."   

At some point, someone will have to pay for it beyond what a popular notion of affordability is and it will then either come crashing to a halt, or at least an abrupt and unforeseen slamming on of the brakes. 

Let's help ourselves out this time and stop depending on politicians.  

Save for your future. The likelihood that someone else will want to pay your freight is growing painfully less likely.  

  

The Fate Of Your Predictions

Jamais Cascio in a recent posting for Fast Company Magazine may have gotten it just right in his vision about "the future" and the metaphors we use to consider it's ultimate arrival.  

The Dragon, the Black Swan and the Mule, all ring true as cautionary tales for both advisors and Clients and yet, do so in different ways.  

Here's some quick definitions;  

  • The Dragon- a segment in a topic area that is uncertain and dangerous to consider. It's something that we steer clear of, but should know much more about than we do.
  • The Black Swan- this is something we don't know much about but probably should, like the emergence of the Internet, or the fall of the Soviet Union or 9/11.
  • The Mule- this is something that we don't know much about and likely can't. It's something so far out of the realm of knowing that we can't conceive it.

I don't think that I could write any more salient a thought than the one that Jamais closes his Fast Company piece with.... 

"Here's the thing; It's easy to assume any surprise is a Mule. It's much harder--ultimately more valuable- to recognize when you are looking in the wrong direction (a Black Swan) or refusing to open your eyes (a Dragon). The task for the futurist is to be able to tell these three animals apart. Good luck." 

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The bigger question for sure, when considering personal financial matters is this; if you have no defined future (because you're not planning one or creating it) doesn't everything show up as the Mule?  And, in reality isn't the most likely of the trio to spawn an "unrecoverable event" that very thing?

Consider that spouses die, get sick, divorce or some other calamity. A Dragon to be sure but the impact of the Dragon can be measured and understood and alternative plans can be made to employ upon it's appearance. Those plans, figured out now, might well save the day. 

The stock market crash, continued high unemployment, changes to Social programs like Medicaid and Medicare? Black Swans to be sure but again, they can be measured and judged, evaluated and prepared for, at least in the realm of "contingencies" they can. 

Reality is that most people will be meet one of these intruders at some point. Be that intruder Dragon, Black Swan or Mule will largely be determined by the context it shows up in.  

Again, the admonition; "Control What You Can Control." 

You control the context if your write the context. Want to ensure that at it's worse, your unwanted "visitor at the door" is either a manageable Dragon or a less co-operative but manageable Black Swan? 

Then let your well thought out plan be your context, otherwise you're just letting the Mules in.