So Baby Boomer: Life Tips

Retirement Income Investment Options

The challenge facing mutual fund companies and life insurers is to transform volatile stocks into stable investments that offer retiring Baby Boomers predictable income or protection from losses.

As if that isn't hard enough to accomplish, they are trying to do it at a low cost to investors and in a way that doesn't lock up money for years, as has been the case with many traditional guaranteed investments such as annuities.

Appetite for these products was heightened last year when even conservatively managed funds delivered steep losses to those on the cusp of retirement.  Chief among the losers were most target-date mutual funds, which offer a mix of stocks and bonds tailored to an investor's expected retirement date.  Most were loaded up with stocks, based on the idea that even at retirement as investor could live another two or three decades and needed the growth potential.  The result was that the average target-date fund lost 32% in 2008.

The bear market also took its toll on many "payout" funds, which aim to deliver steady retirement income but don't guarantee it.  Sold by giants such as Vanguard Group Inc. and Fidelity Investments, many of these funds suffered big losses last year, which led to lower payments to investors.

Although more firms than ever are trying to come up with products designed to make stocks safer for older investors, the track record of such investments is mixed, at best.

Source: The Wall Street Journal, July 6, 2009

Boomers Rethink Retirement

The expensive approach to retirement is to pile up so much money that you'll be safe no matter how long you live or what goes wrong with your health or the markets.  But for many Baby Boomers, the amount required seems ridiculously out of reach.

Boomer assets in IRAs and defined contribution plans such as 401(k)s fell more than $2 trillion last year, according to the Investment Company Institute.  The repercussions of the financial crisis will be felt for years in the retirement accounts of millions of Americans.  Those who saved industriously have watched their account balances crumble, and the recession has set back that half of employees who lack even basic savings options like their 401(k)s.

In these seemingly out-of-control times, you can actually control many of the factors that will affect your retirement.

Bad Idea: 401(k) Early Withdrawal

Early withdrawals from Individual Retirement Accounts and 401(k) plans trigger taxes and penalties that can really add up. 

There are exceptions, but only for some people who use the money to buy a first home, or pay for higher education or other items.  Many people have at least a vague understanding of all this but that isn't stopping them.

The number of companies reporting early withdrawals for hardship from 401(k) and 403(b) plans (the nonprofit version of 401(k)s) rose to 44% last month from 15% in October 2008, according to a recent Watson Wyatt study that polled executives at 141 U.S. based companies using an online questionnaire.

Rande Spiegelman, vice president of financial planning at the Schwab Center for Financial Research, says making an early withdrawal should be a last resort, "somewhere right before homelessness and/or starvation."

Early withdrawal deletes all potential for future tax-deferred compounding, to say nothing of the taxes and penalties that can wipe out more than half of the amount withdrawn.  "Better to borrow or beg (but not steal) before raiding your retirement," says Mr. Spiegelman.

Source: The Wall Street Journal, May 7, 2009

Younger Boomers & Hybrid (401)s

It is important for younger Baby Boomers to know that their spending in retirement years won't have to drop below a certain level regardless of how long they live.....if they consider to invest in a hybrid (401) today.

When pensions and Social Security provided a safety net for retirees, 401(k)s made sense as add-ons.  But with that safety net frayed, it's  clear 401(k)s in their current state can't provide a secure retirement for most Americans.  With Social Security on shaky ground and pension plans disappearing, more retirees will have to rely on their 401(k)s to support them in old age.

That's not very reassuring to anyone who has dared to tear open a recent statement and peek inside.  The market meltdown is the chief culprit.  But even if the economy were rock-solid, 401(k) plans would still be a problem.  For years, most investors haven't saved enough, allocated their assets wisely, or figured out how to draw down those assets in ways that would make them last a lifetime.

If you are in midcareer, you may soon have a chance to structure your 401(k) in a much different way.  A dozen or so asset managers and insurers are designing a new breed of retirement instrument that combines elements of pensions and 401(k)s.  These products called "Hybrid 401(k)s" have begun slowly rolling out.  And while they differ in structure, all combine annuities (essentially, insurance contracts that provide periodic income payments) with an investment portfolio.  The hybrids won't protect investors from violent market swings.  But they'll guarantee a certain amount of monthly income for the rest of your life.

Source: BUSINESSWEEK, February 16, 2009

Reliable Retirement Income Streams

Providing hordes of retiring Baby Boomers with reliable income streams without the high costs and restrictions that accompany guaranteed investments, such as annuitites, has been a challenge.

Companies that rolled out managed-payout funds over the past year or so, notably Vanguard and Fidelity Investments, stressed that the income payouts on their funds wouldn't be guaranteed--but they believed the initial payments would be sustainable.

Recently, Vanguard slashed the distribution of its three managed-payout funds by more than 15%.  And because the funds have lost money since their launch last May, 100% of the income paid to investors is actually a return of their original investment rather than earnings, says John Ameriks, who oversees the portfolios.  Vanguard's funds are designed to pay out between 3% and 7% of a person's average account value over rolling three-year periods.  And Mr. Ameriks says that goal is still attainable.

At Fidelity, investors will also feel the bite.  Fidelity's funds are designed to pay an increasing percentage of an investor's account value every year for a fixed period of time.  But because the fund was down almost 18% last year, the dollars paid to someone who invested at year-end 2007 will be about 21% lower in 2009 than in 2008, Fidelity says.  Fidelity portfolio manager Jonathan Shelon says investors should use the funds in concert with other income sources which are more predictable, such as Social Security and any pensions.

Source: The Wall Street Journal, February 2, 2009

Retirement in another Great Depression

We're up to our eyebrows in debt--consumer, corporate, government.  The nation's debt problems are so large that the sky will fall on the majority of people.  To survive, boomers will have to save--lots.

How to invest for your retirement?

Divide your investments into three parts.  The first assumes you want to be able to live through a Great Depression.  Choices here could include money markets, CDs, savings bonds, Treasuries, and debt-free real estate--investments you can get your money out of no matter what.

The second assumes the American people will wake up to our problems, so it comprises a very conventional mix of stock and bond funds.

The third part assumes we'll have hyperinflation from all the debt we'll be trying to sell.  The choices for that scenario include leveraged real estate--real estate investment trusts and even rental homes--stocks, inflation-protected Treasury bonds, and inflation-adjusted immediate annuities.

The largest part of your investments can be in conventional, but what you keep in the hyperinflation and depression portions is sufficient to get you by, especially if the conventional part isn't wiped out.  To determine the fixed-income percentage for all three will depend on your age and how far away you are from retiring.

Source: Henry "Bud" Hebeler's free website (www.analyzenow.com) as reported in BUSINESSWEEK, February 2, 2009

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Managing Retirement Savings

With stock market values battered and the economic outlook grim, older investors can draw on a number of different strategies to keep their nest eggs from being wiped out.

Boomers going from peak earning years to retirement should consider creating a withdrawal plan.  As you begin to rely on your investments to meet living expenses, remember that your biggest enemy may be inflation--losing purchasing power.  You can dial back the risk and adjust your portfolio to generate more income.  Reduce exposure to small and microcap stocks and such volatile areas as emerging markets.  But don't shift predominantly to fixed income if that means cashing out of stocks that could recover over the next few years.

Retirees often make the mistake of raiding their tax-deferred retirement accounts first.  That generates higher taxes that can kick off a vicious cycle: Paying those taxes further erodes the value of a portfolio.

Retirement Readiness

Certified financial planner and author of "Retirement Readiness" Mike Bonacorsi, CFP, says, "I still find that people aren't taking all the information that's out there about retirement and applying it to their own lives.  Maybe it's because I'm a boomer myself that I'm paying more attention to the idea of retirement readiness.  I remember when my grandfather left the mills of Lawrence, MA.  He retired at sixty-five and lived to sixty-nine.  Retirement for him was short and uneventful.  Now, my friends and clients are getting ready to retire and are talking about a completely new world awaiting them.  Before they get there, however, they need to get ready."

Things are different now.  Between 1946 and 1964, during the postwar baby boom, more than 78 million Americans made their appearance, and now sixty years later, the world is getting ready for us.  Our retirement lifestyle will be much different from that of our parents.

How old will you go?

Americans are retiring in good health and living longer.

That's good news for operators of golf clubs and retirement villages, but a frightening proposition for many Baby Boomers and retirees, who may be surprised when they realize how long their life savings could need to sustain them.

Actuarial studies show that men who reach the age of 65 have a 49 percent chance of living to the age of 86, and a 26 percent chance of reaching 92.  Women are even hardier: by age 65, they have a 49 percent of living to 89, and a 23 percent chance of hitting 95.

Given this outlook, many Americans will need help developing retirement plans that give their nest egg a reasonable chance of lasting as long as they do--especially since missteps in retirement can be devastating to their portfolio's longevity.

As you periodically stuff money into retirement accounts during your working years, market downturns are akin to supermarket sales: They allow you to buy more merchandise--in this case securities--than you could when the market was rising.  When the market reenergizes, you benefit because you have more shares with which to participate in the recovery.

Of course, figuring out how and where to invest your money is just one part of the retirement planning puzzle; the other is figuring out how to withdraw that money in such a way that it doesn't run out before you do, given that you can't know for certain how long you'll live.

Source: The Wall Street Journal, October 4, 2008

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Raise the Age for Retirement

Actuaries are urging policy maker to raise the retirement age as the first step to shoring up Social Security and keeping younger workers from bearing the brunt of painful tax increases.

The American Academy of Actuaries issued a policy statement recently suggesting that "holding the retirement age constant is a certain prescription for future financial problems."

The normal retirement age for Social Security was last raised in 1983, from 65 to 67 over a phased-in period.  All workers born in 1960 and after have to wait until age 67 to receive full benefits.  In order to avoid major disruptions to the Social Security system, officials should raise the retirement age now, the actuaries said.

The organization pointed to figures showing that, since 1940, the life expectancy of American men who reached age 65 had increased by nearly five years.  Women who reached 65 saw their life expectancy increase by nearly six years in the same period.

Source: The Wall Street Journal, August 5, 2008