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Retirement Opportunity and Optimism

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2014 is called the “Year of the Boomer” as the last of the baby boomer generation will be turning 50 (those born in 1964). Known as the generation of opportunity and optimism, many boomers are worried over retirement—and for good reason. Retirement planning is an essential part of financial planning.

While millions of people strive to achieve their own vision of retirement, the chaotic investment markets of the past 20 years left many more tired than retired.

A horse in the wild is a preyed-upon animal — that’s why its eyes are placed on the side of its head. With its excellent peripheral vision, the horse takes in a wide range of sights that can cause it to move erratically.  That’s why, in times like these, when things seem to be moving up and down at the same time, it’s important to put on those blinders.

The amazing run that stocks have had over the last several years has certainly been exciting and fun for those of us who own stocks.  In retirement, you need to plan for how much money you will need for every year you are alive – but just as you don’t know how long you will live, you cannot know what rate of return you will receive from your various investments.

Surprising economic news, war or terrorism, and other unexpected events disturb the markets sense of control and often send it in a tailspin.  Despite the Dow hitting pre-crash highs, companies reporting positive earnings, and the financial media saying we are looking at the “beginning of a new bull market,” the stock market is on the verge of another historic collapse.  This is definitely the biggest stock market bubble in modern history.

  • Stocks are currently very expensive compared to their 10-year average. While stocks typically have a price-to-earnings ratio of 15, they now sit at a ratio closer to 23. That means stocks are priced 53% higher than their 10-year average, which should worry any investor.
  • Investors are extremely bullish on the market right now. The reading is nearing a 10-year high, and most of us know from experience what happens when market sentiment is too far one way or the other; a snapback occurs. If the “herd” is this bullish, it’s generally a good idea to be very cautious.
  • As the markets have rebounded over the last few years, investors have become complacent. They have priced nearly all risk out of the market, and it will only take one scary event to send volatility higher and investors fleeing the markets.
  • The last two times the market climbed this high, a severe correction took place. The first two advances were over 100%, and then followed by a crash of roughly 50%. With the latest rally topping 100%, it is very likely that the market is setting up for another drastic correction.

Most investors know that current levels of share prices are unsustainable; They are aware that share prices are high mainly because of the huge amount of money sloshing around thanks to quantitative easing (QE), not because of the strength of the underlying real economy.

It’s different this time,” are known as “the four most expensive words in the English language.” Because, too often, when investors and analysts try to justify high prices by arguing that “it’s different this time,” it turns out not to be different, and the investors and analysts end up losing their shirts.

However, stock market investors pretend to believe – or even have to pretend to believe – in those feeble and ephemeral stories because they need those stories to justify (to themselves and their clients) staying in the stock market, given the low returns everywhere else.

Stock market declines significantly affected the retirement plans of most of these individuals. In retirement, you need to plan for how much money you will need for every year you are alive – but just as you don’t know how long you will live, you cannot know what rate of return you will receive from your various investments.

Many retirees hope to gain income from their savings or keep pace with inflation by investing in financial vehicles that offer high rate of returns. The problem is that – as a general rule – investments that offer high rates of return are often the riskiest.

Boomers are creating a new life stage, post-retirement and are going to live another 30 years after they retire-they have to plan for that entire span. Modern medicine and technology have positively impacted American life expectancy rates.  People are now living longer and too many retirees are outliving their money—a problem we’ve only recently faced.”

Similar to life expectancy, the cost for health care has also seen a steady rise. Health care expenses, both foreseen and unexpected can wreak havoc on retirement savings.Some retirees find it difficult to keep up with the cost of medication, long-term care and various other entities they need to maintain their lifestyle. Additionally, simple miscalculation of either withdrawal rates or inflation can cause detrimental harm to retirement savings if used for payment purposes of health care costs.

Making “better decisions” is not as scary or as confusing as some people think it is.  The chance for a successful retirement depends on starting to save/invest early in life, being consistent, taking advantage of any employer matching plan, maxing out contributions when possible, eliminating debt, avoiding unnecessary risks with your nest egg and planning for multiple streams of income once retired (social security, pensions, dividends, part time work, etc.).

My number one rule of investing is to do whatever is in my control to avoid the “big loss.Many emotional, irrational retirement investing decisions occur when you get close to your big loss point and the feelings of fear and regret sneak up on you.

Saving enough for retirement is not always the final solution. Creating ways to generate sustainable income when unexpected costs arise is just as important.To ensure that there would be a regular flow of income post retirement, you need to start your retirement planning early. They should look at how much they can prudently take from savings and investments every year, add it to known income such as Social Security, then create a realistic budget that stays within that amount.

It is difficult to find just the right way to allocate your assets. But, it is critical to understand that you should try to plan on having enough guaranteed income to cover your basic needs should something happen to make the financial markets collapse.

A pension plan, also known as a retirement plan, is an annuity with attributes of capital appreciation.  Historically, on retirement most people bought an annuity, which pays out a guaranteed income until you die.  We just need to be careful not to encourage people to take risks with their pension savings when they aren’t really in a position to take those risks.  It is important to remember that annuities do provide that security of a guaranteed income for life.

Given concerns about market volatility, rising retirement costs and longer life expectancies, many individuals are looking for a retirement savings vehicle that can help them grow and protect their assets, while also ensuring their retirement income will rise and last for life.  Income Annuities such as Single Premium Immediate Annuities (SPIAs) or Deferred Income Annuities (DIAs) are used to capture the benefit and value of longevity protection within a retirement strategy.

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Saturday, March 22nd, 2014 Wealth Management

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