Many of you are in the red zone right before retirement, or you’ve already retired. No doubt your number one fear is running out of money in retirement. You’re part of a very large and growing demographic force: 35 million over age 65, 50 million drawing Social Security and 78 million baby boomers now turning 62. This means the future demand for everything used by the “retirement set” will increase, and “retirement prices” will rise dramatically. Many of you may have accumulated a retirement nest egg in a pension account, will draw a company pension and/or have other savings and investments earmarked for retirement. Where should you keep your retirement money?

If you’re keeping up with economic and financial developments, here’s what you’re seeing: sub-prime credit meltdown that has destroyed housing and is now spilling over into automobile debt and credit cards; highly volatile stock and bond markets; a weak dollar fueling higher prices for oil and other goods; more unemployment and rising inflation; retail sales, consumer confidence and new jobs creation in sharp decline; drastic interest rate cuts by the Federal Reserve to avoid a recession; a money giveaway stimulus package from Washington to prop up the lagging economy; widespread talk of recession and stagflation. These all add up to troubled economic times which should prompt you to review where you have your retirement money.

You’re told the stock market is the best long term, but “long term” has a different meaning in retirement. Didn’t the dot.com stock market meltdown in 2000-2002 send many retirees back to work and prevent others from retiring? Aren’t the current inflation-adjusted stock market indexes below their previous peaks? Regardless, the loud voices of Wall Street and investment companies are advising you to buy now at bargain prices. Are the markets headed higher or is their advice self-serving? Who can forecast the economy or the stock market?

If the stock market craters as it did in 2000-02 and 1973-74, and you lose some of your retirement money, how will you replace it? Since there will be no second chance, I encourage you to think carefully before you commit your money. If you’ve been told that you’ll do just fine over the longer run (generally meaning ten years), make sure you can wait this long for a market rebound. Also remember that a rebound is not certain!

What about fixed rate places like government bonds, bank CDs and money market accounts? These are rock-solid safe unless your greatest fear is outliving your money. Since current fixed rates are lower than inflation, you’ll be losing purchasing power with these choices. The potential loss of purchasing power will only add to the risk of outliving your money. What about real estate, collectibles and non-market investments? These are not only risky but generally illiquid. Before committing your retirement money, ask yourself this question: “How will I handle the worse case outcome?”

There is one savings place that offers an “opportunity” to make an above-market rate of return without the risk of loss if held to term. It is guaranteed by some of the world’s oldest, strongest and largest financial companies. The rate of return is determined by stock/bond market indexes with owners sharing in the upside potential but avoiding downside losses. The worse case outcome is a guaranteed positive rate of return. The earned interest is income tax deferred until actually withdrawn and there is no mandatory age when the money must be used. Additionally, it can be turned into a guaranteed lifetime income that can be started, stopped and stored. What’s more, it offers penalty-free partial liquidity for emergencies and bypasses probate if the owner names a beneficiary. It can be opened for a small or a large amount, and sometimes more money can be added later. There is no law which limits the amount of money that can be placed in it. It is truly a safe place to keep retirement money.

It is maligned by Wall Street and bankers because it competes with their products. The financial press doesn’t like it either – primarily because they are uninformed, misinformed or just plain biased. I’m talking about fixed index-linked annuities that are offered by insurance companies: the same companies that insure your home, live, health, business and other valuable assets. The worse case outcome is a positive, albeit small, rate of return if held to maturity, but there is an opportunity to do much better. Fixed index-linked annuities are not for everyone, but you need to consider them as one of your safe options for retirement money. Where are you keeping your retirement money in today’s uncertain and troubled economic climate? If in risky places, now is a great time to review your options.Shelby J. Smith, Ph.D.

March 2008

Learn about safe money places – check out the Retirement Pros website http://www.theretirementpros.com/ I’m also doing free monthly video seminars online sign up at: http://www.theretirementpros.com/Tele-Seminar-MRM.php

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Taking too much risk with your investment: We all want the highest interest rate possible and the lowest risk possible – unfortunately these are competing objectives. High rates always spell high risk BUT high risk does not always spell high rates. You should know that risk and reward are traveling companions: if you want low risk you’ve got to settle for low rates and if you want the chance of making high rates you’ve got to accept high risk.

Most people work a lifetime to save enough so they can have a comfortable retirement – the last thing in the world they want is to lose their retirement nest egg in bad investments. So why is it that most retirees have all their money in mutual funds, stock, bonds, a diversified portfolio of securities, variable annuities, etc.? All these things carry the risk of loss – yeah I know that “in the long run” you’ll do a lot better than with a safe money alternative. BUT, in retirement you don’t have a long run. A great economist once said, “in the long run we’re all dead”.

In the closing years of the 1900’s and up until 2002 the stock market was roaring upward – would-be-retirees were making loads of paper profits and looking forward to retirement next year. Out of the blue came the dot.com bust and a market meltdown – over the next two years the S&P lost half its value, the DJIA sank like a rock and the poor NASDAQ stocks lost 80% of their value (that’s where most of the dot.coms were traded). Instead of retiring, or continuing to be retired, many “risk taker” had to change plans or go back to work as Walmart greeters, taxi drivers or whatever they could get in the depressed employment environment. Can this ever happen again?

Look around you: sub-prime problems, foreclosures shore to shore, the dollar losing ground at an alarming rate, inflation picking up, real estate activity grinding to a halt, economic recession being mentioned often, bank stocks losing half their value, major corporation turning to China and the UAE for capital infusion to stay solvent, record federal deficits, commodity prices shooting upward and lots more of gloom and doom. I don’t want to be negative…but there are storm clouds gathering and you don’t have an risk umbrella if you’ve put your retirement money in the market.

The first big mistake retirees (or would-be-retirees in the red zone before retirement) make is they have taken too much risk with them retirement money.

What can you do? Find a financial adviser quick if you don’t know how to lower your risk without one. Examine every retirement investment you have and make sure the money you’ll be using in the next 10-15 years is in rock solid saving places like bank CDs (for use in years 1 – 5) or fixed annuities (for use in years 6 – 15). If you don’t like either for-the-first-half-of-your-retirement money, you can continue to keep your money at risk and hope for the best.Putting your money only in short-term bank CDs: Many of you have all your retirement money in 6-months CDs because you want safety and are afraid you’ll need it all very soon. The good news is that you’ve got safety and ready access…the bad news is that this is costing you a king’s ransom.

Generally, the longer you commit you money the higher the rate of interest you’ll earn – that’s why 5-year CDs pay more than 3-months CDs. You should space, or ladder, your money so that it comes due at about the same time you think you’ll need it. Yes, you may guess wrong sometime but the penalty will be a lot less than if you always keep your money short and liquid.

Let’s say you now have $150,000 in short-term bank CDs that you’ve earmarked for retirement. You think you’ll need about $15,000 a year of this money to cover expenses above your Social Security, pension (if you have one) and other income. Here how a CD ladder could work. Put $15,000 in a money market account (can get anytime you want without penalty), $15,000 in a one, two, three and four year bank CD. You now set so that every year for the next five you’ll have access to $15,000 (plus interest which will keep you up with inflation) to cover your needs.

What do you do with the other $75,000? Why not look into a five year tax-deferred fixed annuity? You’ll pay no taxes on the interest you earn in the annuity until you withdraw it (that means triple compounding: interest on principal, interest on interest and interest on money you would have paid in taxes) and you’ll have rock solid safety because your principal and interest is guaranteed by a major insurance company. The same insurance company that insures you home, life, health, business, car and everything else of value. Oh yes, you’ll probably get a much better earnings rate than if you put the money in a bank CD.

Yes, you will lose the opportunity to hit it out of the park with a high flying stock your brother-in-law told you about but you’ll also avoid the risk that goes with that high flying stock. When you annuity matures in five years you an annuitize (take an income) over the next five years or do another 5-year bank CD ladder.

Retirement is a time to keep what you’ve got rather than trying to double or triple your money in a short period of time. But, you can err by being too safe and too liquid with everything in short-term bank CDs. Retirement is also a time to reassess your risk and make sure you can afford the worse case outcome. That’s why money in the market don’t make sense unless you’ve got a lot more money than you’ll need for retirement.

If you think the market can’t turn around and bite you, check out the following links:

www.fool.com/investing/dividends-income/2007/03/21/a-market-crash-is-coming.aspx

mutualfunds.about.com/cs/history/a/marketcrash.htm

finance.yahoo.com/expert/article/richricher/26878For more info on Retirement Planning go to the Retirement Pros at http://www.theretirementpros.com/. Learn more from topics such as “Managing Your Retirement Money”, “Guide to Social Security – How to Pay Fewer Taxes”, “Risk and Reward are Traveling Companions”, “Retirement: Your Greatest Financial Challenges” and more. Free Calculators, eReports and online video seminars each month.

Your retirement income investment plan starts now, right now, no matter how old or well heeled you happen to be.
Step One is to understand what a retirement plan is, and to identify the three large numbers you need to keep track of while you are developing your stash. With these three totals on your spreadsheet, it’s much easier to develop long-range retirement income goals that make personal sense. A retirement plan is an income production plan. Guaranteed retirement income – projected expenses = the gap. No gap, add parents and children to the expense number. There’s always a gap.
Employer provided pension plans, Social Security, and (always much too expensive) fixed annuity contracts, are retirement income providers. They are monthly income machines that you have paid dearly for but which may not be adequate to cover your retirement expenses— most of us will need more income than our guaranteed benefits will provide.
And we need to develop these additional income sources while we are still earning some kind of income. The retirement plan is the investment process you employ to eliminate the gap between your projected guaranteed income and a conservative estimate of your retirement expenses. The sooner and smarter you invest before retirement, the easier the transition from full employment to full vacation will be. Smart investing involves separating your security selections by purpose, and monitoring their performance in the same way. You’re never to young to start developing the income side of the portfolio.
Once you start to draw income at retirement, it is much more difficult to invest effectively and unemotionally. Since your income will need to remain secure and constant through several economic, market, and IRE (interest rate expectation) cycles, you really need to develop appropriate portfolio market value expectations if your program is to survive. You cannot afford to take your eye off the income ball, because income is the only thing you can spend without depleting the productive value of the assets in your investment portfolio.
Obvious? Yes, but only until the market value of your portfolio begins to shrink as a result of economic, market, and IRE cycles. If you invest properly, it (the income) should continue to grow in spite of changing market conditions and fluctuating market value numbers. You must learn to expect market value fluctuations and take advantage of them— assuming, of course, that you are following appropriate quality, diversification and income generation standards.
Retirement income planning became more difficult for most of us around the time corporate America realized that defined benefit pension plans were far too expensive to manage and maintain. At around the same time, the Social Security trust fund somehow disappeared (Did it ever exist at all?), and more and more of our hard earned was needed to support our aging friends and relatives. Why haven’t the myriad of defined contribution programs been able to fill the retirement income gap?
Because millions of totally investment-inexperienced people were given discretion over billions of investment dollars that could be tax detoured out of their paychecks and into IRAs, 401ks, 403bs, Thrift, Savings, Thrift/Savings Plans, etc. Self directed investment programs generated a need for an investment media; the investment media fueled the speculative juices of an emotional and naive mass of newbie investor/speculators; Wall Street created tens of thousands of new products and compound income schemes to sponge up the wayward dollars.
The Masters of the Universe were ROTFLOL while the Investment gods gaped in disbelief.
Defined Contribution plans are just not retirement plans— even if your employee benefits department, the media, Wall Street, and Uncle assure you that they are. Most plans are difficult to self-manage with a retirement income objective. Still, these benefit plans are necessary and quite capable of taking you close to where you want to be. Their only drawback is the false sense of wealth and retirement security that they promote. Either the money has to be converted into an income portfolio— a costly and time-consuming process— or far too many mutual fund shares have to be sold to produce the spending money
Most people think of savings and investment programs as retirement plans, and rationalize away the need for additional, outside development of an income investment portfolio. This is because all of the information they receive speaks to market value growth instead of to income. It’s very likely that less than half the money will ever be yours to spend! What, you say— why? Here’s an example. A NYC resident with a $3 million IRA retires with the expectation of maintaining her life style. Even invested for income alone, $15,000 per month is easy to generate. But how much more has to be disbursed to satisfy three levels of tax collection?
Next example. The same portfolio in equity mutual funds during a correction— now you’re dipping into principal!
Even though defined-contribution plans are excellent mechanisms for growing an investment portfolio with your hard earned, pre-tax, dollars, most plans and most plan participants worship the market value god to the exclusion of all others. Most people are too greedy and/or tax-averse to convert them into income producers during rallies— when they can lock in a meaningful cash flow. Additionally, the counter productive IRC encourages our use of owned assets first— a universally ignored phenomenon.
The “buy and hold” mutual fund mentality doesn’t transition well from growth to income— regardless of the fund category or description; the idea of helping people into a comfortable retirement hasn’t stopped the tax collectors; the market cycle is just as likely to be down as up when your gold watch is presented. You have to do more, and less, to secure that comfortable retirement.
Step One of the retirement plan is developing a focus on income, and understanding that spending money and market value are not blood relatives. Step Two is developing the right combination of tax deferred and tax-exempt income— among other things.