We’re passionate about the process of developing financial plans for long term investors. The secret to doing well in the market is not in buying fad stocks or over-hyped investment products, it’s about developing a long term financial plan and sticking to it. That’s why we are a little frustrated to hear about the federal government’s latest scheme to help out middle class investors.

The US Treasury Department recently unveiled plans to offer guidance to retirees on how to invest their retirement funds into income-yielding investments like annuities. Worried that individuals may outlive their investments, the Obama administration wants to encourage retirees to consider income investment products with guaranteed life payouts.

“By emphasizing investment choices over the planning process, the federal government is doing a disservice to seniors who are looking for guidance on how to make their retirement years as comfortable and stress-free as possible.”

Ted Toal, CFP® –Senior Partner, Rockwood Wealth Management

The good news is that the feds are concerned about every day investors. The bad news is that they think they can help retirees with magic bullet investment products. What good are new investment options without a plan? Picking investments without a process in place is like trying to buy a new car blindfolded.

Investment products are only part of an investment plan. The most important part is the financial planning process, in which a long term plan is developed for each investor. Outliving  savings is a real concern for retirees, who are living longer than ever. However, by emphasizing investment choices over the planning process, the federal government is doing a disservice to seniors who are looking for guidance on how to make their retirement years as comfortable and stress-free as possible.

We believe that financial planners are best suited to helping working investors and retirees plan for retirement. The planning process that we execute is designed to help investors develop financial goals, evaluate their current financial status, and develop a road map for long-term financial stability. Most importantly, our clients get independent advice that’s not tainted by affiliation with one investment product or another. We want what’s best for each client and develop tailored financial advice based on each client’s goals, financial position, and personality.

Do you have any questions about how the government’s new pay-out options will affect your retirement plans? Let us know in the comments!

Or, schedule a no-obligation financial consultation with us.

The need for retirement income doesn’t end with the onset of retirement.

A new retiree’s focus shifts from building wealth to managing and creating retirement income. One major challenge is to make the investment portfolio supply retirement income for life—through different economic and market conditions.

Experts have studied portfolio longevity to help retired investors reduce the odds of exhausting their wealth too soon and found three main issues that drive portfolio endurance:

• asset mix
• spending level
• investment time frame

Certain parts of these issues are within an investor’s control while others are not. Let’s briefly consider them.

Asset Mix

Asset mix describes the ratio of stocks to bonds in a portfolio.

This determines risk exposure and expected performance, and is an important decision investors of all ages can make. Historically, stocks have outperformed bonds and outpaced inflation over time.

So, the larger the stock allocation, the greater a portfolio’s expected return—and risk.

Keep in mind that risk and return go together. A higher allocation to equities increases the risk of experiencing periods of poor returns during retirement.

However, growth can bring higher retirement income, inflation protection, and portfolio endurance over time.

Spending Level

Portfolio withdrawal is typically described in specified dollars (e.g., $50,000 per year) or a percent of annual portfolio amount (e.g., 5% of assets each year). Neither method is ideal, however—and for different reasons. Briefly consider each one:

• Specified dollars: withdrawing a fixed amount each year and adjusting it for inflation can provide a stable retirement income stream and preserve your living standard over time. But the portfolio may survive only if future withdrawals represent a small proportion of the portfolio’s value.

• Percent of annual portfolio value: withdrawing a fixed percentage of assets based on annual asset value makes it unlikely that you will deplete retirement assets because a sudden drop in market value would be accompanied by a proportional decline in spending.

Investment Time Frame

Investment time horizon may be the hardest to estimate, especially when your horizon mirrors your lifespan.

In this case, you can only guess how long your portfolio must support spending.

Time frame forces a tradeoff between the short and long term. Retirees with a longer investment time horizon might choose a higher exposure to equities. But they may have to offset this risk by being flexible about spending over time.

Elderly retirees and others with a short time horizon may choose a less risky allocation or a higher payout rate, although they can experience rising spending levels, too.

Considerations

Planning involves assumptions about the future—assumptions that may not pan out.

Although you cannot avoid assumptions, you can ask whether they are practical and consider how your lifestyle might change if future economic and financial conditions differ from your projections.

“I don’t have ten years to wait for the market to recover. I’m retiring next year!”

Sound familiar?

As the difficult market continues to evolve, the media doesn’t hesitate to make predictions about how long the path to recovery will be — which is why those on the verge of retirement end up petrified.

Once they dig down into the process of establishing true retirement goals and figuring out their choices, however, many near-retirees come to recognize that they can, in fact, wait for the market to recover.

Why is “selling low” such a temptation?

Many people on the verge of retirement are doing just that: selling their stock holdings, permanently locking in losses, and re-investing those deflated funds into fixed income at historically low rates.

Unfortunately, this very emotional reaction is the result of:

• Not properly defining retirement goals
• Buying into negative media forecasts – which are often based more in hype than reality
• Believing there is no time to wait out a market recovery

While your principal may be safe in fixed income investments, your purchasing power is not. The income from these investments simply cannot keep up with the rate of inflation at 3.6% in 2008 and 4.02% over the last 30 years.

What should your real retirement goals be?

Your true retirement time frame shouldn’t resemble the panicked quote at the beginning of this article. Unfortunately, many line up their retirement goals with the difference in time between today’s date… and their retirement date.

Instead, think of the day you retire as the day you begin achieving your goals. You want to prepare to:

• Generate income over 20 to 30 years or more
• This income must increase purchasing power each year

In other words, a wise retirement goal time frame extends decades beyond the retirement date. If you want to create an income stream that provides you with purchasing power every year, you’ll need to craft a diversified investment strategy.

A fixed income investment strategy will simply not work.

Can you really wait for the market to recover?

As I write this on February 17, 2009, the S&P 500 closed at 789.17, down from the October 9, 2007 high of 1565.17.

Suppose the market takes ten years to return to this level.

In order to make this happen, the market’s annualized return would need to be 7%, based on price alone, and not including dividends. The S&P 500 currently yields 3.20%. If you add in dividends, the total return is 10.20%.

That’s right — by waiting for the market to recover, you give yourself (and your retirement income) the chance to earn much more than any fixed income investment could over the next ten years.

Of course, market returns are not guaranteed and will vary going forward. But.

The truth is, you can and should wait for the market to recover if you are planning to retire.

By defining wise retirement goals, building a diversified portfolio — and understanding the deep impact of media “scare tactics” on your perspective — you’ll be on your way to a more comfortable, productive retirement planning process… and becoming a resilient investor.

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