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Retirement Adventure and Discovery


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Retirement is a great time for adventure and discovery, but you need to make sure you’re prepared for the challenges you will face over those 20 to 40 years.  Some people feel like the Great Recession ended years ago, while others feel it’s still in process. Retirees are determined not to be financially strapped when the time comes to retire.

Now that retirement is here (or near), how do you create an income plan from your savings?  Put money into your 401(k), contribute to your individual retirement accounts, and one day, when you are ready to retire, that savings become income for you. How does that actually happen?

The go-to method of retirement saving for most white collar American workers these days is the company-sponsored 401(k) plan. Workers benefit from an easy, tax-favored way to sock away money. But the plans are not fool-proof, and they’re full of pitfalls that could trip up the novice investor.

The basic concept of retirement accounts such as IRAs and 401(k)s are an “on-your-own adventure”.  While you work, you put money in; when you retire, you take money out. For maximum benefit from your retirement income, though, you need a withdrawal strategy.

Figure out how much income you need your savings to generate every year. The amount is your total estimated expenses minus your Social Security, pensions or real estate income. Once you know how much you need each year, you can then begin to formulate a distribution strategy.

An ideal system would create a reasonable amount of retirement income that a person could actually count on, without becoming an expert on the financial markets. It would require the money to be set aside and invested in assets managed by the best in the business, and all of it at low cost.

However, a crippling combination of stagnant wages, stock market crashes, and poor savings habits have tarnished Boomers’ so-called golden years.  Pensions and similar defined benefit plans are becoming extinct.  Baby Boomers, those born between 1946 and 1964, were already well into their working careers when retirement planning started to focus on 401(k) plans instead of defined benefit plans.

The fundamental concept behind fixed income investing, especially for retirement investors, is that you are trying to preserve capital while generating enough interest and dividends to enhance your income.   The strategy is also designed to allow you to at least keep pace with inflation.

There is a growing mistrust of the financial system.  A perception that the last recession was to some extent caused by financial services industry missteps underlies the suspicion of financial advisors.  You will need to be able to cope with financial shocks.

The stock market crash in 2008 and ensuing deep recession left many Baby Boomers who were close to retirement shaken.  While 2008 did not end up taking (the Great Depression’s) path, it could have. You’d think the Great Recession would still be fresh enough in everybody’s minds that we’d be going out of our way to avoid putting ourselves through the financial wringer once again.

Having the wrong asset allocation can limit your ability to grow or protect your nest egg.  Providing a retirement plan is a generous perk for employees — not only because of the time and expense required to run the plan. Retirement plans can also be a huge liability for employers because they come with a tremendous amount of responsibility for at least some of the people acting on behalf of the plan.

Last year was a struggle for most stock pickers looking to beat the S&P 500, even more than the year before.  With so many funds struggling to beat their benchmark index, dollars have increasingly gone to those that simply try to mimic stock indexes. Index funds also have lower costs.

For the person with a day job outside of finance, trying to divine truth from the daily machinations of the stock market is at best a waste of time. At worst, it increases the odds you will be trapped by all the behavioral biases that cause people to make the wrong investing decisions – and become the dumb money of Wall Street.

If people are going to be successful in retirement, not only do they need to put away sufficient funds, they need to grow sufficiently. The key factor is what you are paying in terms of investment or management expense.

Each year, funds tally the gains and losses they made from selling stocks. They then pass on those gains to shareholders, usually in December. Investors who own funds in a taxable retirement account must pay taxes on these distributions, even if they don’t sell any shares of the mutual fund.

Fund managers struggled to keep up with their respective index. The majority of small-cap U.S. stock managers failed to keep up with the benchmark both last year and over the last decade. Same with managers who focus on mid-cap stocks. And emerging-market stocks. And real-estate investment trusts. Most large-cap fund managers fell short of the index.  The last time the majority of them beat the index was in 2007.

In all fairness, it’s been pretty easy to overlook the prime rate of late, because nothing’s happening. It’s been sitting at a rock-bottom, near-zero level for years now, with any increase contingent on the Federal Reserve raising its benchmark rate, a move they’ve been reluctant to make — until recently.

An important deadline is fast approaching for people required to tap their retirement savings for the first time.  If you turned age 70½ at any point in 2014, you must take — by April 1 of this year – your first “required minimum distribution” from your retirement accounts – generally those with tax-deferred contributions. These include, among others, IRAs, 401(k)s, 403(b)s and 457(b)s.

(There are two exceptions. The rules don’t apply to the original owners of Roth IRAs. And if you continue to work beyond age 70½, you can generally delay withdrawals from your employer’s retirement plan until after you retire.)

If you need to top up your secure income, you could use some of this pot to buy a lifetime annuity. This is an insurance policy that in return for a lump sum guarantees to pay you a regular income for life regardless of how long you live. You can arrange for this income to rise over time so that its value is not eroded by inflation. This income is secure so there is no danger of it drying up.

If you have contributed to an employer 401(k) pension where you built up your own pension pot, for those that are retiring with a defined contribution (DC) pension plan (a plan that has a fixed dollar amount and not a defined monthly payment amount), rolling your plan proceeds into an annuity is a great option.

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Sunday, March 22nd, 2015 Wealth Distribution

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