Minimizing how the economy impacts retirement plans
By Mitchell Kauffman
Kauffman Wealth Services
So, what do you do now? With portfolio and home equity values having fallen by one-third or more throughout the past year, many planning for or already in retirement are asking this painful question as they hope to enjoy their Golden Years. Sadly, more than 65 percent of workers aged 45 years or older expect to delay retirement and work longer as a result of the current economic turmoil.
Even before the economic meltdown, psychologists have long described retirement as one of the top 10 “life stressors”. This is due to the obvious financial and emotional challenges that must be addressed. Our current economic dilemma may have moved this up the scale considerably.
There are a number of key strategies that can make a significant difference as you and your clients plan for or reevaluate retirement during these tumultuous times. Be sure to offer consumers the following tips:
Review your living expenses: Categorize your outflow into three groups; 1) Survival, i.e. essential areas, such as food, housing and health care; 2) Desired, which are discretionary lifestyle extras like entertainment and vacation; and 3) Legacy, which include gifts and inheritances to others. This prioritization will be valuable should your income decrease, and as a basis to project your retirement needs.
Don’t time the market: While this strategy is tempting, studies show that timing only accounts for 1.8 percent of total portfolio performance (adapted from Financial Analysts Journal). Another study by ICMA-RC (www.ICMARC.org) showed that if you missed just 10 of the top performing days over a 20 year period (1/1/88-6/30/08), your portfolio would have underperformed by almost 5 percent per year! Remember, by the time you see performance, it is usually too late.
Re-balance your portfolio: During any business cycle, there are winners and losers. Make sure your investments are balanced and diversified according to your risk tolerance, timeframe, growth and cash flow needs.
Be skeptical of doomsayers: Especially during tough times, prognosticators abound. Economics is a “soft” science at best, wherein even the brightest Nobel Laureates are wrong a significant percentage of the time. There is an old saying: “Put five economists in a room and you’ll get 10 different opinions.”
Seek objective expert advice: Many blame Wall Street’s “sales” mentality for some of its economic woes. Just as surgeons don’t operate on their own family members, it is good to have an outside opinion. Get advice from an independent Certified Financial Planner who has no bias from their employer’s proprietary products. A “client-centric” model that focuses on your needs first and foremost, and integrates investments with the rest of your financial picture, may be the best road to success.
Update your retirement plan: Everyone can benefit from having a plan that provides lifetime income and establishes the feasibility of their retirement goals. If you don’t have one, get one. If you have one, update it to see what adjustments may be needed. Remember, those who fail to plan, plan to fail.
Consider getting a second opinion: Just as in medicine, a qualified second opinion can never hurt, even if you believe you have all your bases covered.
Dollar cost average: If you have extra cash, consider investing a specific amount each month. If you are eligible for a 401(k) or other retirement plan through your employer, keep funding it. The DCA automatic process is a disciplined method that helps you buy fewer of the expensive shares and more of the cheap shares as markets fluctuate. While no guarantee, over time, it can lead to a lower average cost and the potential for more profit.
Keep the long term perspective: Despite what you may hear, we are nowhere near another Great Depression, where unemployment exceeded 25 percent at its height. (Our current unemployment is just over 7 percent by comparison). The reality is that we are at or near the trough of a business cycle that has been exacerbated by an extended period of economic growth. Just as when we were in the midst of the “good times” and no end seemed in sight, it is tempting to see the “tough times” as going on forever. The unprecedented, worldwide government efforts to stimulate our economies will pay off and we will get through this.
Remember the pendulum principal: Investor behavior is prone to excesses and deficiencies, in the same way that a pendulum often over-swings its mark. One need only look at the current near zero or negative yields on Treasury Bills to realize that the flight to safety may be overdone. Just as we had the “tech bubble” and the “real estate bubble”, we are most likely currently in the midst of a “panic bubble”. Resist the temptation to follow the herd in making emotional decisions that you may regret later.
The irony is that people are not naturally wired for investment success; they typically sell low and buy high because of emotional reactions. Study after study cites this as the number one factor in explaining why individual investors chronically underperform the markets. It is another reason why it is critical to have an objective plan that can provide guidance during unnerving times.