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Baby Boomer Retirement Anxiety

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Concerns over the stock market volatility, low rates of returns on savings, and loss of company-funded pension plans in favor of worker-funded 401(k) pension plans certainly are fueling baby boomers anxiety about having enough money to retire in comfort.  A 401K is the typical retirement plan offered to employees by most companies and is funded by employee contributions that are deducted from your paycheck.

In a defined contribution plan, all risk rests with the participants who have no say in the design of the plan or the economic arrangements entered into with and among providers of services to the plan.  Generally participants pay most, if not all, the costs associated with the plan and their investment results depend upon the performance of service providers chosen for them.

The optimal time for change would have been long ago—before the collapse of thousands of corporate pensions, severe public pension underfunding and the failure of 401(k)s to deliver retirement security as promised. For sure, paradigm shift in retirement planning is long overdue.

The 401K plan has many advantages but it does have a couple of disadvantages as well. One disadvantage is that it is not easy to withdraw money prior to age 59 ½. There is a large penalty unless it is for education or emergency. Another disadvantage is that they are not insured by the Pension Benefit Guaranty Corp.

There is a federal government agency, the Pension Benefit Guaranty Corp (PBGC) that is an insurer of corporate pension plans, i.e. companies pay a premium to PBGC to insure their pension plans — the more risky the company, the higher the premium. The 401K is not insured by the PBGC (Pension Benefit Guaranty Corp).

When they existed, pensions provided guaranteed income during a person’s golden years.  Individual Retirement Accounts (IRA), 401(k)s, and 403(b)s were meant to provide income for the retiree, but too many people see them as a means to passing wealth to the next generation.  This is not the intention of these qualified plans, they were designed to generate income for the holder during their retirement years.

Longevity risk is the risk of populations living longer than expected. One half of Baby Boomers will likely live beyond age 90, while the trailing edge probably can add 10 years or more to that life expectancy if biotechnology and gene therapies fulfill even a fraction of their promises.  Overwhelmingly, the biggest risk is the risk of outliving your money.

We have been conditioned our entire lives to build that nest egg, and now baby boomers need to scramble it. If you end up living well into your 80s (a real possibility if you’re 65), the benefits of never running out of money, and never having to worry about running out of money, can be enormous.

Stock market losses can seriously reduce one’s retirement savings.  Stockmarket risk is the scenario in which you’ve amassed a healthy portfolio of stocks and bonds only to see it plummet in value because of a market crash or other disruption to the global financial system.

For example, U.S. stocks fell, wiping out gains for the year this week.  The S&P 500 retreated 1.3 percent to 2,051.75 at 12:00 p.m. in New York, falling below its average price for the past 50 days for the first time since Feb. 9. The Dow Jones Industrial Average lost 264.45 points, or 1.5 percent, to 17,731.27.

Because shares of stock don’t have a fixed value but reflect changing investor demand, one of the greatest risks you face when you invest in stock is volatility, or significant price changes in relatively rapid succession.

Sequence Risk is the risk of receiving lower or negative returns early in a period when withdrawals are made from the underlying investments. The order or the sequence of investment returns is a primary concern for those individuals who are retired and living off the income and capital of their investments.  Poor returns early in retirement are much more harmful to one’s retirement prospects than poor returns later in retirement.

However, most investors feel that the bull market in stocks is not over. The current bull market is not going to end simply because ‘stocks have gone up too much’ . We head into 2015 bullish for the 3rd straight year.  The S&P 500 has risen 200% since the bull market began in March 2009 — not unprecedented by historical standards.

Given the combination of improving economic conditions and rebounding earnings growth, everyone believes 2015 will represent another year of solid gains for US stocks. Yet, Investors have become “sick of giving back all of their gains every time the market goes down.  With the current market instability, “investors need more to be able to navigate the volatility.

Since the early 1980’s, interest rates have been steadily declining. Using the US 10-year Treasury note as a general proxy, interest rates have been declining to the present day rate of 1.68% at the time of this article. This has been detrimental to savers, whose paradigm was to invest in bonds for income.

The bottom line is if you need to make your money last longer, you’ll need the extra growth potential that continuing to invest in a mix of stocks and bonds can provide. Although that may seem to contradict the apparent logic of not taking risks with your money once you hit a certain age, relying on certificates of deposit, money-market accounts and cash could be far riskier, and may mean your retirement income won’t keep pace with inflation.

Many people with a retirement plan are asked to choose between receiving lifetime income (also called an annuity) and a lump-sum payment to pay for their day-to-day life after they stop working. An annuity provides a lifetime steady stream of income while a lump sum is a one-time payment.

A Deferred Income Annuity (DIA) 55/65 might be used to reduce investment risk in the years leading up to retirement. You put money in a DIA at 55 and you know what your income will be at 65 instead of taking the risk that what’s you’ll have at 65 depends on the stock market. With an annuity you will receive a steady income for the rest of your life, like keeping a part of your paycheck for life.  In addition, you may be able to provide a lifetime income to your spouse or to another beneficiary.

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Tuesday, March 10th, 2015 Wealth Preservation

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