Your Retirement Guru!

2012 - 3rd Quarter Economic Update

2012-10-19T11:00:00.001-04:00

W.A. Smith Financial Group - 3rd Quarter Economic UpdateFeaturing Bill Smith and Chris Bertelsen Information contained in this economic update recording are from 10/17/2012 and are for educational purposes only. It does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk, and unless otherwise stated, are not guaranteed. Past performance does not indicate future results. Be sure to first consult with a qualified financial professional or a tax professional before implementing any strategy stated within the recording.

Evaluating gold in today’s retirement landscape

2012-06-27T12:38:00.000-04:00

When a habit begins to cost you money, it becomes a hobby. So goes the saying with mostly any investment in your portfolio. Whether you are apt to investing in bonds, or financial stocks, or you simply like to put your money into gold – following your normal routine on an investment that has “treated you well” in the past can be dangerous. In fact, in the science of behavioral economics, this is called “anchoring”. According to Gary Belsky and Thomas Gilovich, the authors of Why Smart People Make Big Money Mistakes and How to Correct Them, anchoring refers to the tendency we all have of latching on to an idea or fact and using it as a reference point for future decisions. This idea is especially important when in or nearing retirement. As 10,000 people turn 65 every day for the next 19 years, you can fully expect millions to trillions of dollars being pulled from riskier investments and funneled into safe havens that produce peace of mind. After all, everyone keeps saying the #1 fear that today’s retirees have is running out of money before they die. So, it is only reasonable that people will develop a lesser tolerance for losing their nest egg. So brings the conversation to the topic of investing in gold. According to SmartMoney.com, gold has been up for 11 years in a row. That’s a decade of growth for an asset that buys and sells like any typical stock or mutual fund. That decade of growth had investors dumping as much as 25% or more of their portfolio into gold and gold funds by the year 2010. However, feelings are beginning to turn for many. The typical argument most gold buyers give is that gold serves as a hedge to inflation for their portfolio, and some even believe that gold is a true safe-haven for your money. Still others buy the precious metal as a diversification measure. Safety, however, could be the furthest thing from the truth. Probably the most extreme excuse for owning gold relates to the idea that if or when our government were to fail, U.S. currency could revert to the gold standard again. Gold is what I call the “Armageddon” trade.

The fact of the matter is that gold has been touted as a safe place by the people who sell it to you. While arguments can be made for the benefits of holding small amounts of commodities or precious metals, touting gold as the ultimate hedge for inflation or a “safe” place for your portfolio is quite simply false and ludicrous at best.

In recent weeks and months, gold has begun to rise and fall similarly to stocks with some frequency. In May of this year, gold fell 6%. Just a few weeks ago, gold rebounded and rose 3.7%. That kind of volatility usually does not correlate with the traditional safe haven and inflation hedge type of investments. Look at the graphs to the right. Gold saw a steady growth over the past decade, and until recent months, rarely ever experienced the type of volatility the asset class is now experiencing. Data suggests that gold may have seen a high between July and October of 2011, and many believe investors should be poised for a major commodity and gold bubble that is set to burst in the near future. After all, if you bought gold at its high in September of 2011, you are down approximately 14%! If you own gold-based stocks or funds, most appear to be among the market’s weakest, with gold funds trading far below the 200-day-moving average. As an investor, and specifically an investor nearing or in retirement, my best tip for you when it comes to buying gold, is to maintain course. In my educational workshops, I make a comparison to the sinking of the Titanic and the sinking of someone’s retirement portfolio or “retirement ship.” It is important to maintain focus on what is most important when it comes to your money in retirement. Investing with the herd (making a decision because someone else did it) or investing based on familiarity (investing in gold because the last 10 years have seen gold go up) could be the iceberg that causes your retirement ship to sink. Maintain course. If producing a retirement pension from your portfolio is most important, develop a portfolio that allocates a portion of your investable assets into protected and reliable assets that provide contractually guaranteed income for life. If you do not need income, but you want to develop a more conservative portfolio, develop a plan to reduce the risk and fees you are paying. We can show you how to do one or the other, or more commonly a good balance of the two. For more information, visit WASmithFinancial.com to request a free consultation with one of our retirement advisors over the phone or in one of our three office locations in Ohio. You can also visit NoIncomeWorries.com for more information about my book, Knock Out Your Retirement Income Worries FOREVER.

2nd Quarter Economic Update Conference Call

2012-05-10T15:00:00.000-04:00

The following call was held on Wednesday, May 2, 2012. It featured retirement planning expert Bill Smith, elder law attorney Margie Karl, and Chief Investment Officer at Global Financial Private Capital, Chris Bertelsen.

For more information on Bill Smith, the author of Knock Out Your Retirement Income Worries Forever, please visit NoIncomeWorries.com

The "New Age" of Income Investing

2012-04-19T15:07:00.000-04:00

Do you remember what it was like in the 1980’s and the 1990’s? During that time period, the United States saw the largest bull market run in the history of the stock market. After a while, things became easy. You could virtually throw a dart at a list of mutual funds and expect that your money would grow 15%. When you experience extended periods of good fortune it is easy to begin taking things for granted. Unfortunately for most investors, the 80’s and 90’s became comfortable… Traditional advice says that you should “buy stocks during a bear market.” The thinking is that the stock market “always comes back.” At least that’s what most accumulation financial advisors tell their clients. If you were among these investors, your results over the past 10 years have been ugly. In the past 10 years, the Dow Jones shows an annualized rate of return at -4.68%. Research shows over the long history of the market, the shortest bear market run spanned over 17 years. Now I do not have a crystal ball, so I can’t truthfully predict that we have 7 more years of bear markets ahead of us. However, my question still stands: do you or your friends and colleagues have the time or the money to wait it out? According to Bill Gross (the co-founder of Pimco who manages over $1 Trillion dollars), investors should be prepared for what has been coined as the “new normal”: a prolonged period of slow growth, narrower profit margins and lower investment returns compared with previous decades. With that being said, I want to stress the importance of safety and income-driven investing. Due to the level of uncertainty with the stock market and our economy moving forward, traditional income investment methods cannot be relied upon. For the 10’s of thousands of baby boomers rushing into retirement every single day, guaranteed income vehicles should be top of mind. I want you to think about the difference between investing for cash flow vs. investing for a rate of return. Take this example into consideration using the highly-touted 4% withdrawal rule. If you have a portfolio worth approximately $500,000, and you need to generate $20,000 a year in income to sustain your lifestyle in retirement, the $20,000 a year represents 4% of your portfolio. If you are investing in vehicles that focus solely on generating the highest rate of return, you have to consider what the market could potentially do to your nest egg throughout the course of your retirement. Consider this: a 65 year old man is expected to live to almost 81 years old, while a 65 year old woman should live to 85. That is potentially 20 to 25 years of income you will need to fund. If the current market and the “new normal” show us anything, it is that we might not be able to expect the returns, dividends and yields of the old days. In fact, if the market dips again and you lose 30% of your $500,000 portfolio, your $20,000 annual withdrawal now represents 5.7% of your portfolio. Are you spending $20,000? Or, are you spending the 4%? The answer is that you rely on $20,000 per year to live. Percentages and dollar amounts are two different things. The rule of thumb states that as long as you do not withdraw more than 4% of your portfolio, you should (key word should) have enough assets to last throughout your retirement. But, because of the market, we now have to withdrawal 5.7%, which drastically increases the chance that you will run out of money before you die, especially if we have 7-10 more years of the secular bear market we are currently in. With the slew of new guaranteed income products that are available on the market today, retirees and pre-retirees have the ability to focus on cash flow of their money rather than market returns. Think of it this way, by investing a portion of the $500,000 in the above example, the 65 year old would be able to guarantee a 5.5% cash flow of whatever amount they invest for the rest of their life, no matter how long they shall live. Let’s put it in retrospect. By investing about $365,000 of the $500,000, the 65 year old man or woman could contractually guarantee a cash flow of $20,000 per year for life. The kicker is that they can do this using 100% protected accounts, which means the $20,000 a year will never go down nor be affected by the results of the stock market or what the government decides to do.

Furthermore, the man or woman could take the remaining portfolio and invest it into the market if they wanted to allocate some of their savings towards long-term growth or riskier investments. Certainly taking risk on your remaining dollars will be a bit easier to stomach as long as your $20,000 annual income paycheck is steady and reliable in all economic situations. The traditional investor tends to focus on the wrong thing when investing their retirement dollars. Chasing market returns often leads to an unreliable income stream, an upset stomach, and the possibility of having to go back to work. I challenge each and every one of you to make sure they are not making the same mistakes. Everyone deserves to have the retirement lifestyle they envision for themselves. Proper planning is the first pivotal step in achieving just that. William "Bill" Smith, RFC CEO and Founder, W.A. Smith Financial Group For further educational information or to attend one of Bill's workshops, please call toll-free, 1-866-417-4156. You may also email us at Jarrett@WASmithFinancial.com Investment advisory services are offered through Great Lakes Retirement, Inc., an Ohio registered investment advisor. Please consult with a qualified financial professional before acting on any investment advice given within this blog. Past results are not indication of future gains.

2012 Economic Outlook

2012-02-02T09:42:00.004-05:00

The following conference call was conducted on Wednesday, February 1, 2012. It features retirement expert William "Bill" Smith, RFC and estate and elder law attorney Margie T. Karl.

For more information on W.A. Smith Financial Group, please visit www.WASmithFinancial.com or call our office at toll-free, 1-866-417-4156. This call has been removed. To hear the call in it's entirety, please email Jarrett at Jarrett@WASmithFinancial.com

William "Bill" Smith, RFC
CEO and Founder
W.A. Smith Financial Group

For further educational information or to attend one of Bill's workshops, please call toll-free, 1-866-417-4156. You may also email us at Jarrett@WASmithFinancial.com

Investment advisory services are offered through Great Lakes Retirement, Inc., an Ohio registered investment advisor. Please consult with a qualified financial professional before acting on any investment advice given within this blog. Past results are not indication of future gains.

Did the "Great Recession" ever really end?

2011-12-23T08:50:00.004-05:00

The recession that “officially” lasted from December of 2007 through June of 2009 has been dubbed the Great Recession. Many believe it was labeled appropriately this way due to its eerie similarities to one of the worst economic times our country has ever dealt with, the Great Depression. After all, the unbelievably high unemployment rates that continue to be a drag on our “recovering” economy surpass any other episode the United States has dealt with since the Great Depression. It might also be the collapse of housing prices and the large scale number of foreclosures, two factors that exceed all other records since the Great Depression.

However blatant those factors are, I believe another factor is driving the lagging recovery: the general public’s confidence. According to TradingEconomics.com, the consumer confidence index has fallen from approximately 145 points (it’s high in January 2001) to around 55 points (the measure we currently sit at in December 2011). That fall represents an approximate 62% drop over the last 10 years.

Considering that three of the main factors that drive the U.S. economy are consumer spending, unemployment and the housing market, you can see why things haven’t really turned around for our country yet. The so-called recovery that we are experiencing is now more than 2 years old. So, I beg to ask the question: What proof have you seen that points to a true recovery?

I read a recent article on Forbes.com that provided a nice analogy of the current situation we face. It went something like this:

People tend to think our country has an illness similar to the flu. We will be sick for a few days, and then we will recover and get better. However, we have something more like diabetes and severe obesity. This type of problem isn’t easily fixed, nor quickly fixed. We are going to have to manage our health for a decade or more before we might show signs of being healthy again.

Many economists describe this recovery period as a “decade or more of long-term, low average growth.” Two years into this recovery, consumer confidence is still low. The housing market suffers from a lack of confidence from all parties (buyers, sellers, and lenders). The unemployment rate may be the largest indicator of a lack of progress.

Some of the smartest minds in the country believe that we are in for a lengthy recovery unlike anything we have seen before. In the new economy, many believe a 4-5% average return could be the new normal for stocks.

Often times, investors who focus on rate of return and timing the market get burned, not only in a recessionary time, but also when times are good. Instead of focusing on investments that might make the most money, you should be focusing on products that will keep the money you need to live off of in retirement protected. This portion of your nest egg should guarantee an income that you can rely on year in and year out.

For those of you who are in the retirement red-zone (you plan to retire within the next 10 years), or for those of you who recently retired, you are entering a brand new phase of your financial life. In the new economy, the accumulation method of investing could devastate any real chance you might have of making it through retirement without running out of money. If you need to use your accumulated savings to provide extra income during retirement, it is crucial that you protect the portion of your dollars that you simply can’t afford to lose.

I have created some excellent tools for consumers who are in that “retirement red zone” or have already retired. You can request a copy of the Consumer’s Guide to Retirement Income Planning and a free copy of my brand new book, Knock-Out Your Retirement Income Worries FOREVER, by visiting my website at www.WASmithFinancial.com .

In the Consumer’s Guide to Retirement Income Planning, there are 6 educational pamphlets, a short quiz to assess your current investment portfolio, a DVD explaining the importance of working with a retirement income specialist, and an introduction to our proprietary planning process, The Financial G.P.S. – Guided Planning System. This tool along with my book will help you get off on the right foot for retirement.

William "Bill" Smith, RFC
CEO and Founder
W.A. Smith Financial Group

For further educational information or to attend one of Bill's workshops, please call toll-free, 1-866-417-4156. You may also email us at Jarrett@WASmithFinancial.com

Investment advisory services are offered through Great Lakes Retirement, Inc., an Ohio registered investment advisor. Please consult with a qualified financial professional before acting on any investment advice given within this blog. Past results are not indication of future gains.

The choices you have when investing your money!

2011-10-27T15:07:00.002-04:00

Throughout my career, I have talked to a countless number of people who are looking for the “ultimate” investment. Most people want to find a place where they can stash their money and achieve all three of the main objectives of investing: growth, liquidity, and safety. In a perfect world, we would be able to invest our money to achieve a nice return (growth), be able to access or spend our money at any point in time without penalty (liquidity), and not have to worry about ever losing any money due to stock market losses (safety).

Here’s the problem: that golden investment simply doesn’t exist! Unfortunately, you can only pick two of the three investment objectives when choosing a place to invest your money. You can’t have all three. If you want growth and liquidity, you’ll have to sacrifice safety and take a little bit of risk. If you want safety and growth, you won’t be able to find something that is very liquid. And finally, if you want liquidity and safety, your rate of return will usually be very minimal.

Let me share some examples of what I mean. A growth and liquidity investment would be something you invest in the stock market within a brokerage account. This could be mutual funds or stocks. They have high growth potential and you can sell them and access your money at any time, but you will never ever be able to call your money safe.

In a safety and growth vehicle, such as an indexed CD or annuity, you can achieve a better rate of return than most traditional protected vehicles earn. Your money will also be protected from losses. However, to get a better rate of return on safe money, you have to sacrifice liquidity.

Safety and liquidity is easy to achieve. Almost everyone in the United States already has accounts set up this way. You’re checking and savings accounts follow this model. A money market does the same. To keep your money fully liquid, and protected, you have to sacrifice return. You never see bank accounts or money markets with attractive interest rates!

So, in retirement, what option do you choose? Are you supposed to go with one over another? Is a combination of two or even all three strategies the best option? Rather than thinking about it that way, it is better to assess your goals and objectives in retirement, and then choose. In my experience, most retired individuals need the safety on their money so that they never run out of money. A good financial plan will allow you to put your money in different categories with different objectives.

Ultimately, a combination of the above examples usually fits most situations. The percentage of how much of your money you allocate to one or another depends on what you want your money to do for you!

William "Bill" Smith, RFC
CEO and Founder
W.A. Smith Financial Group

For further educational information or to attend one of Bill's workshops, please call toll-free, 1-866-417-4156. You may also email us at Jarrett@WASmithFinancial.com

Investment advisory services are offered through Great Lakes Retirement, Inc., an Ohio registered investment advisor. Please consult with a qualified financial professional before acting on any investment advice given within this blog. Past results are not indication of future gains.

How are you paying your investment fees?

2011-06-13T09:16:00.003-04:00

When it comes to assets that involve risk, you cannot escape fees. The fees also become more difficult to find. Unfortunately, investing in securities often carries both disclosed and undisclosed fees and commissions. However, by understanding what you are paying now, you will have a better idea of the type of value you are receiving. Let’s dive into some of the more common risk-type investments so that I can show you what you are really paying to own each investment.

Mutual Funds:

Mutual funds may be the most common risk-type investment. They might also be the most expensive. The most common cost in a mutual fund is the expense ratio, the standard measure of how costly a fund is to own. In fact, according to Morningstar, the average expense ratio is estimated at 1.31%. These costs are paid to the portfolio manager.

However, it is the undisclosed costs that can make a mutual fund 2-3 times more expensive than the advertised expense ratio. Mutual funds also have brokerage commissions, bid-ask spreads, opportunity costs, and market-impact costs. Brokerage commissions are paid to the firm that sells you the securities. Bid-ask spreads estimate the gap between the lowest price someone is willing to pay for said security and the highest price. Market-impact costs are often as much as 1.5 times the brokerage commissions. As if mutual funds were not difficult enough to understand, they come with what is called a prospectus. A prospectus is usually a long-winded document that explains in great detail the investment objectives, level of risk, costs and fees, past fund performance, fund management objectives, etc. They are written by attorneys and filled with difficult-to-understand legal jargon and largely go overlooked by the common investor.

Make sure you understand whether or not your mutual funds are back-end loaded or front-end loaded. Many mutual funds will have a load attached to the purchase (front-end) or the sale (back-end) of said fund. This load is paid to the broker dealer, which means that you immediately start in a deficit. You can find no-load funds that are usually much better options than funds that have sales loads.

Commissionable mutual funds are also separated by what is called share class. There are four main types of commissionable mutual fund classes: A, B, and C-shares as well as No-Load Funds and ETFs.

• Class A Shares - Class A shares carry lower 12b-1 fees and usually require a larger initial investment. Many A shares also have front-end loads attached to them that subtract a fee from your initial investment. The commissions usually get smaller as the investment gets larger.
• Class B Shares - B shares are classified by the back-end load that they come with. Therefore, they do not have front-end loads, meaning your entire initial investment earns interest. Their yearly expense ratio is higher than Class A shares.
• Class C Shares - C shares are classified as a level-loaded fund and are usually close in similarity. They have the highest expense ratios of all three classes, carry back-end loads, and carry no opportunity to convert to a different share class.
• No-Load Funds – These funds are sold without a commission or sales charge. The main reason they do not have a charge is because shares are distributed directly by the investment company, rather than a secondary party.

They can also have an annual account fee or custodial fee. Last, depending on whom you are working with and the size of the overall fund, a management fee may also come into play. This is the cost your broker is charging you in addition to everything else listed to “manage” your mutual fund portfolio.

Variable Annuities:

VA’s are considered risk-type assets because the value of the annuity goes up and down with the value of the funds it holds. They are one of the most expensive places you can park your dollars, and brokers and bankers love to sell these fee-loaded accounts. Variable Annuities are made up of sub- accounts holding various mutual funds, stock and bond funds within them. They also carry insurance-related costs, including mortality and risk charges as well as administrative and fund expenses. In fact, variable annuities’ fees can total as much as 3.00% per year or more. Most of the time, owners of variable annuities are unaware of the total cost because common fees are located in the prospectus. They are normally purchased through a broker who does not have “Fiduciary” responsibility to the client. Most insurance agents and brokers are not required to disclose fees because they are not a “Fiduciary.”

What can you do?

Often times investors are told by their broker or advisor that they need to own riskier "stuff" because they need to hedge for inflation...or they will not have enough money to make it through retirement. Unfortunately, when people are close to retirement or already retired, they should be moving away from excessive risk and into a complete financial plan. One that develops protection for your assets while providing lifetime income that you cannot outlive.

To fully understand how much you are paying for your current portfolio, allow us to price your relationship with Morningstar and Fidelity. Without knowing exactly how much you are paying your advisor, how can you know what type of value he/she is providing?

You owe it to yourself to get a second opinion. Our proprietary Financial G.P.S. (Guided Planning System) process can help you develop total financial security. Call our office right away and take advantage of a FREE, no obligation 30-minute consultation. Toll-free, 1-866-417-4156.

William "Bill" Smith, RFC
President and Founder
W.A. Smith Financial Group

For further educational information or to attend one of Bill's workshops, please call toll-free, 1-866-417-4156. You may also email us at ContactUs@GreatLakesRetirement.com

How rising oil prices, crisis in Japan may affect the U.S. economy

2011-03-25T15:58:00.003-04:00

Recently the economy has shown signs of strength. With consumer spending on the rise and the stock market’s continued resurgence as of late, many industry experts and economists have believed that the recovery will continue. However, with the recent tragedies in Japan and unrest in Libya, our economy and more importantly the recovery sits at an important crossroads.

Many are worried that destruction in Japan will have a lasting effect on our economy and the continued recovery. However, most economists believe that, barring a nuclear disaster with Fukushima Daiichi nuclear power plant, the more relevant problems lies with rising oil prices.

Here is the bottom line: According to William Alden of the Huffington Post, for each $10.00 increase in price per barrel of oil, the price at the gas pumps in the U.S. rises about $0.25. With the possibility of some of the highest energy prices our nation has ever seen looming on the horizon, consumer spending could be on the way back down again in the near future.

The future outcome of potentially higher energy prices remains to be seen at this point. On March 18, the price of a barrel of oil cleared $116. Gus Faucher, the director for macroeconomics at Moody’s said, “A spike in energy prices to $125 or $150 a barrel is the primary threat to the recovery at this point.” Oil prices of this magnitude have not been achieved since 2008.

More importantly, a lengthy stay at prices of this level could have a large impact on our economy in the visible future. As long as explosions and a war-like state continue in the Mideast, we can expect the threat on U.S. growth to continue.

Sandra Pianalto, the president of the Federal Reserve Bank of Cleveland said in a recent Wall Street Journal article that housing will continue to remain a drag on growth. She described unemployment as a “lingering problem” in our nation. A large spike in energy prices could turbo-charge inflation. Couple inflation with the possibility of decreased consumer spending and lagging housing market, and our economy could be heading for another downturn.

In a recent study released by Fannie Mae’s Economics and Mortgage Market Analysis Group, projected economic growth for the year was lowered. The unpredictability of the oil price hike as well as the duration any price spike may last is enlisting new doubts and fears on economic growth.

In the days and months to come, the situation overseas will have a large effect on what happens with the U.S. recovery. Here we are, now more than 2 years after the start of one of our nation’s longest recessions to date, and we are still bleeding. However, we now have new wounds to go with the injuries we are still nursing from the housing and real estate collapse of 2008-2009.

What can you do? For retirees, it is important to remember to focus on the right thing when planning your lifestyle in retirement. You may be thinking about how inflation may affect your nest egg, or future market volatility, or even slower growth in our economic recovery.

However, you should be focusing on protecting your assets first. More importantly, protect the amount of money that you need to make it through retirement. Retirees should develop an income plan with safe and reliable income. Once you develop an investment plan that guarantees yours income, then you can take some risk on the money that is left over.http://www.blogger.com/img/blank.gifhttp://www.blogger.com/img/blank.gif

William “Bill” Smith

Bill Smith is a RFC and the president and founder of Great Lakes Retirement Group, a Registered Investment Advisory firm located in Sandusky, OH, and Sheffield Village, OH.

For further educational information or to attend one of Bill’s educational classes, please email ContactUs@GreatLakesRetirement.com with the subject line “Blog”, or you may visit his website, www.GreatLakesRetirement.com .

Well - taxes aren't going up -YET!

2011-01-21T12:33:00.003-05:00

As you probably already know, our administration signed into law the 2010 Tax Relief Act in December. For months, we were speculating as to whether or not the administration would continue the Bush administration’s tax cuts – a plan that dates back to the year 2000. The significance of this is rather large considering tax rates would have moved from their current levels, 10%, 15%, 25%, 28%, 33% and 35%, to the pre-Bush era levels, 15%, 28%, 31%, 36% and 39.6%. The Bush administration’s cuts will now be extended through the year 2012.

With the way the national debt continues to spiral out of control (topping $14 trillion just recently), the extension comes as somewhat of a surprise to me. No matter what the government does in the foreseeable future, raising tax revenue will be a necessary step if it truly wants to begin correcting its mounting problems. However, because the government is holding off on raising taxes, the extension shows that the economy is still not fully recovered from one of the longest recessions seen in recent history. Although the stock market rewarded people with mid-sized returns in 2010, many investors are just now getting back to their October 2007 portfolio highs.

Other major provisions of the extension include some relief for estate taxes as well as a reduction in the contribution amount workers will be subjected to for Social Security. The estate tax exemption will increase from $1 million to $5 million. The top tax rate will be reduced from 55% to 35%. As for Social Security, employees previously contributed a 6.2% tax on wages earned up to $106,800. Self-employed individuals paid 12.4%. The new act will provide a decrease in tax collected into Social Security as employees will contribute only 4.2% in 2011. Self-employed individuals will pay 10.4%.

It is clear to me that or sour economy has forced the hand of the Obama administration to extend extra relief to taxpayers in the coming years. Some believe that our country has already dug itself out from the hole the recession provided. However, if that were the case, would the government really continue to provide aid?

While maximizing your portfolio’s return may be important, retirement signifies the beginning of your 2nd financial phase of life. During Phase 2, you should first be focused primarily on the protection of your money - and then the rate of return. If you are retiring and leaving the workforce, you are going from paycheck mode to a fixed income. All too often investors fail to properly plan for an inflation-adjusted lifetime distribution from their assets.

William “Bill” Smith

Bill Smith is a RFC and the president and founder of Great Lakes Retirement Group, a Registered Investment Advisory firm located in Sandusky, OH, and Sheffield Village, OH.

For further educational information or to attend one of Bill’s educational classes, please email ContactUs@GreatLakesRetirement.com with the subject line “Blog” to receive more information, or you may visit his website, www.GreatLakesRetirement.com .

Will taxes go up? You better believe it!

2010-11-16T11:38:00.007-05:00

For months, economists and industry professionals have been predicting that taxes will rise. Among all the different options our government is considering to decrease the deficit, the most likely is an increase in tax revenue. Until just recently, however, Americans have been “left in the dark,” waiting for the Obama administration to shed some light on the subject.

In March 2010, Mark Thoma of “CBS Money Watch” said, “It won’t be possible to solve the budget problems in spending alone; at some point, government at all levels will need to find additional sources of revenue. Thus, taxes will increase.” He goes on to say that the recession and the economy will need to be on “firmer footing” before we can expect anything to happen. Through income taxes, capital gains and dividend taxes, as well as payroll taxes, the government would be able to increase their taxable revenue to aid the spending cuts they would put in place.

On Wednesday, November 10, 2010, a preliminary proposal delivered by President Obama’s fiscal commission was laid out with the goal of decreasing the current deficit our country is experiencing. The proposal would achieve approximately $4 trillion in deficit cuts over the next decade. The $4 trillion would come from government spending cuts (which would include cuts in defense) as well as added tax revenue.

When closely examining the proposal, three items stand out prominently--cuts to Medicare, cuts to Social Security, and increases in taxable revenue. As for Social Security, the plan proposes a “gradual raise” in the national retirement age from 65 to 69 by the year 2075. Cuts to benefits coupled with increased tax revenue on the wealthier population’s income would also be implemented. Medicare spending cuts are also a factor because the plan proposes to slow the growth of the program.

Most importantly, taxable revenue will increase in various ways under the new proposal. According to John McKinnon of The Wall Street Journal, “The preliminary plan in its current form would end or cap a wide range of breaks relied on by the middle class, including the deduction for home-mortgage interest. It would tax capital gains and dividends at the higher rates now levied on wage income.”

Although this preliminary plan is intended as a starting point for deficit reform, many believe that any provisions or alterations to its current model would make the situation worse. The final version of the plan is due on December 1 of this year. David Walker, the former comptroller general of the United States and an advocate for debt reduction said, “In the end, the president is going to have to decide whether to incorporate some of this into the 2012 budget.”

Parties on both sides were mixed about the preliminary proposal. Richard Trumka, president of the AFL-CIO, said “Especially in these tough economic times, it is unconscionable to be proposing cuts to the critical economic lifelines for working people, Social Security and Medicare.” The conservative American for Tax Reform also expressed its distaste, saying “[The plan] confirms what everyone has known: This commission is merely an excuse to raise net taxes on the American people.”

What we do know is that we have expected taxes would go up before the end of the year. The government is now on the fast track for deciding whether or not to extend the Bush administration tax cuts or to raise the rates. With our deficit at an all-time high-- hovering around $13.7 trillion—Great Lakes Retirement Group believes taxes will increase one way or another.

Tax-deferral-based assets will become an important tool in the years to come as our nation battles the war against the national deficit. In all likelihood, this proposal is only the beginning. As the government pushes on, they will be forced to put reform in to place if they are truly committed to lowering the deficit, fixing Social Security insolvency, and getting back on track. Taxable revenue is the first stepping stone. President Obama was quoted as saying, “Tough choices will be necessary.”

You can still do something about your retirement assets to avoid becoming a victim of future tax increases to capital gains and dividends. Many economists believe that a massive amount of debt de-leveraging and deflation could send our economy into another tailspin. If you are worried about the proposed tax rate increases and the shape of the stock market, call Great Lakes Retirement today. Allow us to help you re-position your assets in the most tax-advantageous and effective way. Call toll-free, 866-417-4156, to set up a free, 15-minute phone appointment with me.

William “Bill” Smith

Bill Smith is a RFC and the president and founder of Great Lakes Retirement Group, a Registered Investment Advisory firm located in Sandusky, OH, and Sheffield Village, OH.

For further educational information or to attend one of Bill’s educational classes, please email ContactUs@GreatLakesRetirement.com with the subject line “Blog” to receive more information, or you may visit his website, www.GreatLakesRetirement.com .

____________________________________________

Sahadi, Jeanne. “$4 Trillion in deficit cuts proposed.” CNNMoney.com (2010): Thursday, November 11, 2010 .

McKinnon, John; Boles, Corey; Vaughan. “Deficit Panel Pushes Cuts.” The Wall Street Journal (2010): Thursday, November 11, 2010 .

Thoma, Mark. “Be Prepared: Tax Increases Are Inevitable.” CBS Money Watch (2010): Thursday, November 11, 2010 .

More workers to delay retirement

2010-11-01T13:22:00.005-04:00

We meet with many people who are simply wondering whether or not they have accumulated enough assets to retire. Since the market crash of 2008, many have lost a large portion of their retirement savings. Most of you have begun to recoup the losses and may be back to where you started. However, during the time it took you to recover what you lost, you could have been planning a retirement that may not happen as quickly as you might hope.

Fortunately, there are preventative measures that you can take this time that will help "storm proof" your savings. We have published a great deal in recent weeks regarding the possibility of a "double-dip" recession and helping to protect you from another economic downturn. Because of the last downturn, many people are substantially off track with their retirement plans.

According to a recent USA Today article by David Pitt, more than 80% of workers believe they will need at least 3 more years to rebuild their retirement savings. Almost 52% of workers believe they will now have to work up to three (3) years longer than they originally planned.

The harsh reality is that if investors do not change the way they invest and protect their life savings, three (3) more years of work may be at the low end. It has taken almost (two) 2 full years for investors to recoup the losses they incurred in 2008. Many economists are predicting further stock market turmoil. Without changing your investment style, you could lose even more money and delay your retirement further.

In order to delay or come out of recession, consumer spending (among other economic indicators) must go up. According to the USA Today article, 71% of respondents will be reducing their spending moving forward. With unemployment rates still high, consumer spending slow, and the housing market unresponsive, the country may be headed for more turmoil soon.

If you lost money in the last economic downturn and you were forced to delay or put off retirement to recoup your losses, it is time for you to make a change and focus on the right moves. During retirement, you need your money to live on and you need it to last. Allow us to show you whether or not you can afford to retire and how to protect your hard-earned dollars from the next collapse.

Call toll-free, 1-866-417-4156, now to schedule a 15-minute appointment with one of our trusted advisors. Allow us to help you "storm proof" your life savings this time around.

Bill Smith is a RFC and the president and founder of Great Lakes Retirement Group, a Registered Investment Advisory firm located in Sandusky, OH, and Sheffield Village, OH.

For further educational information or to attend one of Bill’s educational classes, please email ContactUs@GreatLakesRetirement.com with the subject line “Blog” to receive more information, or you may visit his website, www.GreatLakesRetirement.com

Double-Dip Recession Coming?

2010-10-22T09:08:00.003-04:00

Recently, there has been a great deal of talk about the shape of our economy as well as the looming possibility of a “Double-Dip” recession. Everyone wants to know, “Are we headed for a double-dip recession?” First, I would like to start by defining what a “Double-Dip Recession” is. According to Investopedia, a double-dip recession is a recession followed by a short-lived recovery, followed by another recession. No technical formula exists to determine when our economy enters into this. More often it is considered a judgment call by economists across the country.

According to the National Economic Research Bureau, an organization in charge of officially declaring whether a recession has started or ended, the current recession has been over since June 2009. That recessionary period lasted from December 2007 to June 2009. Since then, America has experienced enough growth to lift it out of recession. Still, several factors have most economists leaning toward the possibility that we could dip back into recession.

One of these factors is the unemployment rate. Until our unemployment rate goes back down, we will still have the possibility of another recession. Since the growth that has begun, unemployment has hovered on the national scale around 9.6%. In Ohio, unemployment is closer to 10.4%.

The GDP is another indicator, and, more importantly, of whether or not our National GDP is growing. After two straight quarters of negative GDP, a recession can be officially declared. Although the NERB has declared the recession over, thanks primarily to four (4) straight quarters of positive GDP, the Federal Open Market Committee has said growth is beginning to slow. Some economists are worried that the stimulus plans in place will not be able to sustain further growth. Most importantly, deflation and the possibility of massive amounts of debt de-leveraging have caused the economy to begin to dip again.

Although our economy may have officially stepped out of recession, the recovery has not really begun, and it may not pick up any time soon. “There are 4 cylinders that fire to push the economic vehicle out of recessionary mud and back out onto the highway of economic growth,” says Dr. Gary Shilling, one of Wall Street’s top economists. “At present, only one--the ending of inventory liquidation-- is generating significant power. The other three--employment gains, consumer spending growth, and revival in residential construction--are sputtering at best.”

If you work with a broker or are overly invested in the stock market, you probably lack a direct plan for income and preservation of your hard-earned savings. During recessionary times and, more importantly, retirement, focus must shift from making money to not losing money. If you are losing money in the stock market, getting close to retirement, or concerned about what may happen with the economy, Great Lakes Retirement Group may be a good fit. Make sure to visit our website, www.GreatLakesRetirement.com or give us a call at toll-free, 1-866-417-4156.

Social Security and the Future of Retirement Income

2010-10-06T16:07:00.005-04:00

Social Security has been a source of retirement income for a long time. When I sit down with clients, many are relying on their monthly Social Security check for a large part of their income, and, in some cases, as their only source of income.

However, some clients have a pension in addition to what they receive from Social Security each month. In most cases, when they add their monthly pension and social security benefits together, it is a fair amount of money. Depending on their individual monthly budgets, they may or may not have what we call a retirement income “shortfall,” (the amount of money they need in assets other than Social Security and pensions to cover their needs every month).

My clients who do not have a pension are forced to rely on Social Security more heavily. If they did not receive this benefit, they would have to rely on the returns and yields or dividends the stock market produces. On a fixed income budget, this may not be the best idea for those who are in their 60s or older.

During my educational classes, I often comment on the problem that our country is facing with the current Social Security system. Each year, the government releases its annual report from the Board of Trustees. It covers the status of both the Medicare and the Social Security programs. It is normally released during March or April. This year’s report was not released until August 5! One of the reasons for the delay--the findings in the report.

According to the report found on www.ssa.gov , the annual cost of Social Security benefits will increase gradually from 4.8% of the GDP in 2009 to 6.1% of the GDP in 2035. While this may not seem like a large increase, think again. A 1.3% increase in terms of our country’s national GDP (Gross Domestic Product, the combined market price of all the country’s goods and services made) is a large increase in the overall scheme of things. The report goes on to point out that the long-range tests continue to fail.

What do all the numbers really mean? If you were to research some of the problems present with our Social Security system, you would find that the S.S. trust fund will expire around 2037. Where the trust fund leaves off, taxable income would be sufficient to pay about 78% of actual benefits. That 78% would taper off to nearly 75% of actual benefits in the years to come. Even more appalling, the “trust fund” actually does not contain real assets! According to Michael D. Tanner of the CATO Institute, the government bonds are more like “IOU’s” or a measure of how much the government actually owes the system.

What does it really mean? Simply, the system is set up to fail unless reform is put into place for this program. You may be thinking, “How does this affect me? I will continue to receive my benefits. My children are the ones who should be worrying about this.” While that may seem logical, you have to understand how any Social Security reform would affect you as a taxpayer. Traditionally, Social Security’s main source of funding comes from taxable income.

According to Tanner, when the “trust fund” exhausts itself in 2037, taxable income has to take over as the sole “bread-winner” for Social Security revenue. The government holds around $2.6 trillion in those “IOU’s” that I mentioned earlier. In total, Social Security has promised in excess of nearly $18 trillion more than it can actually pay out in benefits!

The problem arose when the government decided to begin using the $2.6 trillion dollar “trust-fund” that Social Security had accumulated as a source or income to spend on other government programs. During Franklin D. Roosevelt’s tenure as president, the United States government introduced the Social Security system. At that time, participation in the program was to be voluntary. The investment required was to be 1% of the first $1,400 of the participant’s annual income. Individual FICA payments would be made tax-deductible for income purposes, and the money the government collected would be placed in an “Independent Trust Fund.” In addition, the trust fund could not be used for any other government purpose, and the payments taxpayers received from the system would never be taxed as income.

How things have changed! As can be seen, the system has gone awry compared to the vision our government had for it when it began. When Congress voted to transfer the money from the established trust fund into the government’s general fund for use on other programs, the thought was that, because there was so much money there, we would never exhaust all of it.

As a retiree or someone who is inching closer to retirement, it is important for clients to plan for what could happen if their benefits are reduced or cut down. The problems that are being sent down from our national government and to the media are only the “tips of the iceberg.” With interest rates low and unemployment rates high, the main focus moving forward will be taxes. November elections are almost here, and taxes will be a main concern for future legislators. There is no doubt taxes will eventually increase.

Sara Siegel Bernard of The New York Times suggests that some of the proposed ideas and options that our government has to help correct the S.S. problem are the following: (1) increase Social Security payroll taxes; (2) subject more types of income to taxes; (3) reduce or cut benefits, or (4) cut cost-of-living increases (affecting our current retiree population). The days of relying solely or heavily on social security benefits as a source of retirement income are over. It is now time to think of alternatives.

Without further legislation, taxes are already slated to rise. To the right is a table that shows the tax brackets that are currently in effect and the brackets that were in effect during the Bush Administration. As of now, the 2000 tax brackets are set to return at the end of 2010. Most think that further legislation will occur between now and then; however, many believe legislation could result in even higher tax brackets than the table that is set to return.

If you are retired, soon to retire, or even in the “Retirement Red-Zone” (5-10 years from retirement), you need to be thinking about making sure your money is there for you if you need it. I would be remiss to say that I thought Social Security benefits were no longer reliable. However, I do believe that payments could be reduced and that taxes are going to increase to help remedy many of the problems our government is facing with the over-$13 trillion federal deficit it faces.

While growth is uppermost in the minds of most investors, you must avoid overlooking the importance of holding on to your money. On my radio show, “Retirement Matters,” I recently interviewed Alicia Munnell, the director of the Center for Retirement Research at Boston College. On the show, she said, “51% of working age households, ages 35 to 60, are not going to be able to live as well after they retire as they did before they retired.” She went on to say that major causes of this are the population’s increased longevity. “I don’t think people understand how long a period we’re going to have to support ourselves with our retirement assets. That is (for some, into their mid-90s) just a very long time. Even with the average retirement age, folks will be in retirement for 20 or more years for those retiring at age 65.”

With projected higher taxes, traditionally defined benefit plans disappearing, and social security in flux, most retirees will have to fund their own sources of income more than ever before. If you couple this with longer life expectancy, there is a huge need for retirees to focus on guaranteed income streams during their retirement years. For this reason, the Obama administration is promoting the use of annuities or similar vehicles that offer lifetime income or streams of guaranteed payments. Protect yourself moving forward! If you lose the money you worked so diligently to accumulate, how will you fund your retirement income?

Bill Smith is a RFC and the president and founder of Great Lakes Retirement Group, a Registered Investment Advisory firm located in Sandusky, OH, and Sheffield Village, OH.

For further educational information or to attend one of Bill’s educational classes, please email ContactUs@GreatLakesRetirement.com with the subject line “Blog” to receive more information, or you may visit his website, www.GreatLakesRetirement.com .

Tanner, Michael D. “Fixing Social Security.” Cato Institute. (2010): http://www.cato.org/pub_display.php?pub_id=12067.

Board of Trustees. “A Summary of the 2010 Annual Reports.” Social Security Online. (2010): http://www.ssa.gov/OACT/TRSUM/index.html.

Bernard, Tara Siegel. “Social Security Jitters? Better Prepare Now.” The New York Times. (2010): http://www.nytimes.com/2010/07/31/your-money/31money.html.

Munnell, Alicia. “Fixed Income Strategies for Retirement” Retirement Matters Radio. (2010): http://www.retirementmattersradio.com.

The Myriad of Choices: Whom Should You Trust?

2010-09-07T14:09:00.008-04:00

Throughout my career in the financial industry, I have encountered hundreds and hundreds of people seeking investment advice. Each case is somewhat different than the next. Each individual or couple has a defined situation that is unlike any other. Each has his/her own life and separate things going on in his/her personal and financial “worlds.”

Since I began my independent advisory firm, I have concentrated on treating each client who has come through my doors a part of my family. If I am to help someone properly, it is important that I truly understand their entire financial situation thoroughly. I feel strongly that if I come to know the entire situation clearly, I can provide a solution for each that coincides with his/her financial goals. Oftentimes, advisors and brokers do not do their homework. They do not understand their clients enough. As a result, consumers are sold a product or a mutual fund or a “managed” portfolio and are left wondering at the end, “What happened? Does this solve my problem?”

A huge problem exists in the financial industry. Financial professionals overlook key points that need addressing. In essence, they go for a sale instead of providing help. This occurs for various reasons. Some advisors must sell the products their company promotes. Others sell only risk-type investments. Furthermore, far too many advisors do not understand the difference between risk and safety.

In a previous blog post, I explained the Rule of 100 and the Pyramid of Investing. The basic idea is that during retirement, you really need to alter your path away from the traditional way of investing. While it is all right to have a good portion of your money on Wall Street and “at risk” during your younger years, a good rule of thumb is to begin tapering that amount as you grow older and inch closer to retirement. The reasoning behind this concept is that you now have much less time to recoup any kind of market loss or downturn, especially if you will need your money to supplement your income during your retirement years.

The pyramid of investing to the right describes the Rule of 100. On the bottom of the pyramid, you will see listed only the four (4) types of accounts that are considered safe: Fixed Annuities, CD’s, Government Bonds and Insured Deposits. The rule of thumb is that you should use your current age to determine how much of your money should be invested at this base level. Unfortunately, if you talk to a broker or a money manager about safety, they will not talk to you about these four (4) accounts. The realm of possibility for them lies in the second level of the pyramid, in what Wall Street calls “safe.” These are holdings like municipal bonds, high-grade corporate bonds, Ginnie Maes, preferred stocks, etc. These investments may be conservative but are still subject to the ups and downs of the stock market. Most of the time, when a prospective client says the word safe to a broker or a money manager, it is like playing a word association game! You say “safe”; they hear “conservative.” You see, these accounts are at the low end of the risk spectrum.

In this instance, the client is already being misled, and the relationship has begun on a bad foot. A broker/money manager may take it a step further and offer you the “conservative allocation.” You can also refer to this as the “pie.” In this example, he/she will take different allocations of stocks and/or mutual funds and “diversify you in a portfolio.” Their idea of conservative allocations is that when one stock begins to fall, another position begins to rise to balance out the loss. What happens when the entire stock market falls? Where does the offset come in?

In retirement, an investor is better off dealing with “True Diversification” as opposed to “Asset Allocation.” Rather than dividing assets within a pie and all “risk-type” positions, the investor should preserve a portion of the money in something that is safe and cannot lose principle if the rules are followed. Again, as financial advisors, we’re talking about government bonds, fixed annuities, CD’s, or insured deposits. I know what you are thinking! “But, Bill, I won’t make anything in those investment vehicles!” But guess what? You won’t lose anything, either! With the right guide, you can earn 5-8% safely!

Why would you put your money at risk in the market if you could achieve a strong return in something that can’t lose money? Ahh! It is said that things that sound too good to be true usually are, right? The only thing that is too good to be true is the lie that Wall Street tells investors about averaging 10% a year on their money. Most people pass on the safe vehicles because they want to obtain a better rate of return. According to a recent DALBAR Study, the average investor didn’t realize that if he/she would have locked himself/herself in to a CD paying 5% ten (10) years ago, it would have outperformed the stock market today. On top of that, you would have never had to check your account statement or the closing prices to determine if you lost or made money! It’s time to wake up! According to Bill Gross of Pimco, one of the world’s largest publically traded funds today, “Investors should only expect investment returns of 4-5% - ‘half-sized returns’ – in all sorts of assets for the foreseeable future.”

SO WHY DO INVESTORS FAIL?

The decisions that weigh heavily on the mind of average investors succumb to what business school professors call “behavioral economics.” According to Dr. Dan Ariely, the behavioral economics professor at Duke University, as consumers, we fall victim to certain behavior that causes us to fail in retirement. I go over some of these terms in my educational workshop, but I want to cover a few examples here. First, let’s talk about sunk cost fallacy. This behavioral nightmare will cause investors to hold on to their investment while it loses money. Many people that I see on a week-to-week basis have been holding on to their investments for extended periods of time. During that time, they have not made any money whatsoever! Even worse yet, they will hold it until it is worth nothing!

The following is an example:

Imagine an investor who owns a large amount of stock in the company he retired from 5 years ago. He has owned this stock for a long time and it makes up a large portion of his retirement portfolio. Over the last 10 years, this stock has lost value and his $1,000,000 of Stock A is now only worth $500,000. When approached about a different strategy and taking some of that stock off the table, his response is, “Well, I think I need to wait until the market comes back before I sell. I will sell it when it gets back to the price I paid for it. Besides, I have had this stock since I started working. My dad owned it; my grandfather owned it. I have had it this long; I just need to ride it out now.”

In this example, the investor is sunk in his cost. No matter what the stock does, he will ride it down until it is worth nothing before he would make a move on it! Timing the market is not an option, and he already said he wouldn’t consider selling until it was at least worth what he paid for it. Take it one step further. Let’s say the market rebounded. If his $500,000 made it all the way back to $1,000,000, do you think he would have the discipline to sell? Better yet, what if it never comes back?

Suze Orman said, “I know this subject [money] is serious stuff. Your future is riding on it. But taking control of your financial life doesn’t need to be a solitary and scary process. Fear comes from not knowing what to do or how to do it. And when we are fearful, we do nothing….”

Most people waiver when it comes to choosing a financial professional to help them plan their retirement. The myriads of choice available to them are abundant. Suze Orman says you should not be afraid to seek out help. The fear we experience stems from the lack of knowledge we have in any endeavor. When choosing an advisor, be sure he/she understands the difference between safety and risk. It could ultimately determine if you will travel down the financial path you want to go!

-Your Retirement Guru

Bill Smith

Bill Smith is a RFC and the president and founder of Great Lakes Retirement Group, a Registered Investment Advisory firm located in Sandusky, OH, and Sheffield Village, OH. For further educational information or to attend one of Bill’s free educational classes, please email ContactUs@GreatLakesRetirement.com with the subject line “Blog” to receive more information.

Re-thinking Retirement: The risk of out-living your retirement assets

2010-07-29T16:01:00.009-04:00

By Bill Smith

The “Baby Boomers” generation consists of those whom were born between the years of 1946 and 1964. Currently, the baby boomers make up about 28% of the total population of the United States, or around 76 million people. Furthermore, of the 72 million family households in the U.S., around 34 million of them are baby boomer households. Lastly, a baby boomer turns 50 every 8.5 seconds!

To say the least, the baby boomer generation is slowly but surely leaving the workforce and retiring. In a recent study done by Allianz Life Insurance Company, several key findings were revealed in regards to the preparation and expectations of retirement amongst the baby boom population. I would like to take an opportunity to elaborate on each finding separately and provide some insight as to some strategies that may help you get past these common hurdles.

The study outlines 5 main discoveries and how each effect the steps one may make to execute their retirement goals. The main backdrop for all 5 of the concerns revolves around:
• having reduced sources of income
• the risk of longevity (outliving your money)
• market volatility

Reduced Sources of Income

In previous generations, retirees could rely on defined benefit plans as a source of income during their retirement years. These types of plans are now scarcely seen and much harder to come by in our current era. Social Security was also a much larger factor in previous years. However, as Social Security continues to erode, retirees can no longer rely on their S.S. benefits to supplement their retirement income on its own.

Increasing Life Expectancy

When Social Security was established in 1935, average life expectancy was 61.7 years and people retired on average at age 65. The projected average life expectancy has now risen to 78.3 years. People are living longer than ever before and are now forced to supplement their retirement income for a longer period of time. The hurdle comes in picking up where Social Security leaves off.

Market Turbulence

In 2008 and the first quarter of 2009, many investors lost over 30% of their entire portfolio in a very short period of time. While the market has recovered for the most part, many are still not back to where they were before. Those relying on their portfolio to supplement their retirement income are now scared that they may lose money they cannot afford to lose! For most investors, the fear of losing even more in the coming years is now larger than ever. Many believe we are still in for an extended downturn and unprecedented amounts of market volatility for the extended future.

These three problems can spell disaster for those who are planning on retiring in the immediate future. Without “re-thinking” how you might plan for your retirement, you may not make it through successfully. The findings that Allianz made were both common and alarming at the same time.

Discovery #1: The Retirement Crisis

Financing a comfortable retirement has never been an easy task, but now more than ever, retirees are facing the hard truth of knowing they must work longer and do not have enough money saved up. When asked whether or not they believed this country is in a retirement crisis, the respondents of this study answered, “Yes” at an astonishing rate of 92%. Due to an increasing ratio of baby boomers leaving the workforce and drawing on traditional sources of retirement income (such as Social Security, pensions, 401(k)’s and IRA’s), many people are now worried that these funds will begin to run out.

This idea and fear makes it all the more important that retirees and those who plan on retiring save more money and lose less. According to Jim Jubak of MSN Money, market losses get recouped in market rallies. However, what you lose that can’t be replaced is time. As we discuss in our educational workshops, it’s not about making money or losing money in the stock market, but more about the timing that is involved. When it comes time to draw on your retirement assets, you need to know that they will be there for you.

Discovery #2: The 5 Distinct Financial “Personalities”

The study identifies 5 main personalities that an investor who is retired or close to retirement can identify with. The majority of retirees (79%) fall in to one of 3 personalities: “Overwhelmed”, “Iconic” or “Resilient”.

An “overwhelmed” investor had the largest segment at 32% of those who participated in the study. This personality type feels unprepared for retirement and unsure of if and/or when they will be able to retire. They expect to rely heavily on Social Security or to simply continue working. Like we discuss in our workshops, in the financial terms, this investor would be classified in “survival mode” (spending more than 5% of your retirement assets/savings per year).

If you are an “iconic” investor (20% of the study), you are most likely receiving a pension or a fixed income retirement payment of some sort. You may be confident your source of income will last but you see that you may have to reduce some spending and make a few changes. If spending more during retirement means leaving a smaller inheritance for your heirs, you are still going to be OK.

Lastly, around 27% of investors fall in to the “resilient” category. These investors tend to be still working full-time and have only moderate asset and income accumulation. 1/5th have been affected by a job-less and remain worried about the next economic depression. While you still plan ahead, you also realize that working longer may be in the cards. Mostly, you are concerned about out-living your income.

With all three personalities, traditional investment types and stock market volatility play a huge part of your successes and/or failures during your retirement years.

Discovery #3: Outliving Your Money

USA Today’s MONEY Section recently released a study done in regards to workers’ retirement savings running out too soon. The study said that about 1/3 of middle-income workers will deplete their savings after 20 years or retirement. Furthermore, 64% of workers making less than $30,000 a year will run out of money within 10 years of retirement!

With increasing life expectancies, we are spending more time retired than ever before. This means we have to fund more years of retirement than ever before, or, continue working longer than we expected or wanted to! In the Allianz study, 61% of people surveyed said they were actually more afraid of running out of money than they were of death.

Because of the decreasing likelihood that younger, middle-aged workers will get their full due amount of Social Security, workers can no longer rely on this payment as a full supplement to their allotted savings. Many people are now forced to save longer and work longer to have enough money during their retirement.

Discovery #4: Economic Downturn

After the market turmoil and decline of late 2008 – early 2009, many investors behavior shifted. Most realized that they were not in as much control as they had thought they were. Almost every investor who had the majority of their net worth at risk reported a significant drop in value over a very short period of time. Many of those investors still do not have their entire nest egg back today.

Ultimately, the economic downturn and the newly installed fear in the eyes of those investors who had the majority of their dollars at risk in the market made for a change in investment strategy. 51% of the people surveyed in Allianz’ study realized that a comfortable retirement (regardless of pensions, Social Security, etc.) is not guaranteed. Another 46% decided that protecting their assets was more important.

While growing your assets leading up to retirement might be top of mind for most, protection of assets has become much more important as of late.

Discovery #5: Annuity-like Solutions

The top three concerns most investors have in regards to retirement are outliving their assets, looking beyond defined benefit plans and Social Security and protecting their assets from further market downturn. In terms of those surveyed, the new normal had changed from “growth” as the most important factor to “guaranteeing the protection from loss”.

80% of investors now prefer a product that would guarantee a 4% return without any risk of loss over an 8% return with market loss vulnerability. The majority of investors (77% of the mass affluent) in the study determined that they would like to choose an annuity-like product (moderate growth, monthly income, guaranteed for life, limited access to lump-sum withdrawals) over a similar vehicle that provides total liquidity but risks running out or money or losing money.

In conclusion, we see a massive shift occurring in the way retirement planning is being handled. It is important for investors who are nearing retirement or newly retired to seek professional advice in regards to their investment strategies. As life expectancies continue to rise, Social Security benefits and defined benefit plans continue to become scarcer and the market continues to become more volatile, many of the investment strategies of the past no longer apply to certain situations.

If you have worried about some of the problems that were mentioned in this study, you owe it to yourself to seek professional advice from an unbiased source. Educating yourself about your options and having a trusted financial planner assess your situation may be in your best interests. As we always say, “The journey of a thousand miles begins with the first step…and that first step in retirement is to educate yourself.”

Related Articles to this blog:

• Will you outlive your retirement capital? – AllBusiness.com
o http://www.allbusiness.com/personal-finance/investing-retirement-funds/120010-1.html
• Boomers: Don’t outlive your money – ConsumerAffairs.com,http://www.consumeraffairs.com/boomerific/2010/016_boomers_outlive_money.html
• Running out of money worse than death – AARP, http://www.aarp.org/work/retirement-planning/info-06-2010/running_out_of_money_worse_than_death.html
• Take Steps To Avoid Outliving Your Nest Egg – CNBC, http://www.cnbc.com/id/26872945/Take_Steps_To_Avoid_Outliving_Your_Nest_Egg

Cited Sources:

1. Article paraphrased and commented on from: Allianz Life Insurance Company, “Reclaiming the Future: White Paper”
2. Love to Know Seniors, “Baby Boomer Statistics”, http://seniors.lovetoknow.com/Baby_Boomer_Statistics
3. MSN Money, “Retirement Crisis: From Bad to Worse”, Jim Jubak, http://articles.moneycentral.msn.com/Investing/JubaksJournal/RetirementCrisisFromBadToWorse.aspx

Safety vs. Risk - Your Guide to Retirement Investment Vehicles!

2010-06-25T12:39:00.011-04:00

Safety vs. Risk - Your Guide to Retirement Investment Vehicles!
It is very important to understand the difference between safety and risk when planning out your retirement portfolio. In recent posts, I have discussed some other key factors involving making the important decision of "Who to invest your money with." I would now like to make sure that you understand the difference between the actual investment vehicles that are available to you. More specifically, it is highly important that you understand which products are truly safe, and which ones are not!

First, I would like to start by explaining a very simple idea that makes it easy for the average investor to understand what options are available to them. We call it the "Pyramid of Investing". Much like the normal food pyramid, there are several levels on the Pyramid of Investing. The main idea that you must understand is which levels on the pyramid will keep your money safe and which levels will have your money at risk.

Remember, when it comes to retirement, it is important that you re-evaluate your position on the pyramid. If you have too much money at risk, you are going to be top-heavy. This is a "no-no" during your retirement years. Being top-heavy can cause problems especially if you plan to draw income off of your portfolio. In terms of a fixed income, which is what most retirees live on due to a stoppage in income coming in from work or employment, you must be able to take extra income needed from money that is safe or stable rather than money that is at risk and extremely volatile.

On the pyramid to the left, you will notice 5 different levels. The level on the bottom is the foundation of the pyramid. It lists the only 4 accounts that will keep the money that you put in to them safe. The accounts at the base are the only investment vehicles that offer safety of principal with consumer protection. You only lose principle if you choose to. As you make your way up the pyramid, the levels range from "ultra-conservative" to "high-risk" at the very top. We just mentioned that the appropriate rule of thumb during retirement and as you get older is that any money you draw off of your retirement funds or dollars should come from the very bottom levels on the pyramid, the foundation!

Taking this idea a step further, let's imagine that an unexpected event were to occur or that you needed to access your money (an investment you would like to purchase, long-term illness, etc.) If you need to take money from an investment or chunk of your portfolio that is exposed to the stock market, you may not be able to get it precisely when you need it or worse yet at the worst possible timing.

In these types of events, people who have too much risk in their portfolio can be "hand-cuffed" when they need to get their money out. If the market is performing poorly, you may not want to access the money from your investment portfolio. But, if you absolutely need it, do you really want to get it out when the market is performing poorly? In this case, you would be better off to wait for the market and "your money" to come back before you take it out. The situation is out of your control!

A good rule of thumb to follow is called the "100 age rule". As stated in a previous post, take your age currently and subtract it from 100. For an example, we will use a 60 year old. 100-60 is 40. In terms of safe money and risk money, you should now use 60 and 40 for your parameters. That means 40% of your retirement dollars could be allocated to some type of risk investment. The other 60% (your current age, or investors need to add 10 this if they are on a fixed income) could be in the foundation of the pyramid, in something that is safe and should not lose principal.

Going back to the pyramid of investing above, the 40% we are now talking about could be allocated amongst the other 4 levels of the pyramid. These 4 levels range from "ultra-conservative" (the layer just above the foundation) to "high-risk" (the tip of the pyramid). Depending on your risk tolerance and your individual situation, you may want to have some sort of risk associated with your retirement portfolio. With a strong foundation of 60%- 70% in our example, 30%- 40% of the dollars allocated to risk will not make your pyramid "top-heavy".

Taking it a step further, the 60% allocated to safety could go in one of the only 4 safe investment vehicles that are listed in the bottom layer of the pyramid. Depending on your situation, you may be able to have some of this 60% allocated in the 2nd layer, amongst the "ultra-conservative" layer of the pyramid.

I talk to a lot of people that are getting tired of the stock market. The biggest thing investors forget is that the stock market takes it away quick and gives it back slow. For example, if you lose 40% (100-40=60), it takes a 67% increase just to get back to even. When is the last time you earned 67% in a year? Better yet, if you did, were you disciplined to sell when you were up?

I am not against having dollars allocated in the right kind of risk-type investments. I have just come to respect the stock market for what it is. And quite frankly, a lot of people really have no business being in the market in their financial stage of life! The common misconception among many retirees is that they believe they have to have their money at risk in order to get a good rate of return. Well guess what? You don't as long as you are OK with a 5-8% average returns. Funny thing is most investors have no idea what their real return is on their money.

It is not lack of knowledge or not knowing about strategy or plan that causes failure. It is the illusion of knowledge that causes failure.

Stock Market Volatility and "Decision Paralysis"

2010-06-15T15:00:00.003-04:00

Recently we have seen unprecedented amounts of market volatility within the last 52 weeks. For those of you inching closer to retirement, you could have some tricky times ahead of you. Knowing which way to turn with your hard-earned retirement dollars can be a difficult task to overcome. How do you sort through all of your options?

In my educational classes, I discuss behavioral economics and the effect these topics have on consumers and the way they invest their money. I would like to talk about one of these ideas in particular called “Decision Paralysis”.
“Decision Paralysis” is the idea of having too many choices, causing the consumer to do absolutely nothing! In a recent study done by Stanford University, consumers buying jars of jelly and jam were monitored in a test. Buyers who were exposed to only 6 jams and made a purchase 30% of the time while buyers exposed to 24 jams made a purchase only 3% of the time.

What does this tell you? Too much information or too many choices can paralyze your decision-making, causing you to do nothing. The same behavior in the grocery store can fall in to your decisions with your investments and your finances. When forced with retirement or making a change, a few things can happen that will cause you to do nothing when deep down, you know it is time to do something!

In this day an age, you can find many different avenues to invest your hard-earned money. Brokers with Merrill Lynch and Edward Jones, independent investment advisors, life insurance agents, your local bank, individual self-management companies like Scottrade and Fidelity, or you can simply leave your qualified 401(k) or 403(b) right where it was – with your previous employer!

How do you make the right decision? Have you ever heard the saying, “A journey of a thousand miles begins with the first step!”? In the case and point of determining and avenue to go down when choosing a company to guide you through retirement – the first step in this journey throughout your retirement years is education. You must educate yourself about your investments! You must educate yourself about your financial phase of life! Most importantly – you must know what you want your money to do for you!

Do yourself a favor. If you are coming close to retirement and the time has come for you to begin investigating your options, educate yourself about the types of investments and strategies before you begin sitting down with people! You owe it to yourself to find someone you can trust and someone whom you have a connection with. The country’s top financial professionals provide solutions to your needs and your desire for your money rather than selling or pitching you on a product. If you are being sold a product or a type of investment, you are probably talking to the wrong person!

Understanding Your Financial Phase of Life!

2010-06-14T15:11:00.003-04:00

For those of you nearing retirement, your investment options are nearly endless. In my last post I commented on the vast amount of directions you can choose to go to invest your retirement dollars and what behavioral economists call "Decision Paralysis." While choosing the right type of guide for retirement is important, you must first understand what phase of your financial life you are in.

In my educational workshops, I cover the only three phases you as an individual can go through in terms of your financial life.

Phase #1 is called "Accumulation" and begins at or around age 20, or whenever you enter the workforce and begin to accumulate what will eventually become your life savings. The key to this phase is time. Since phase #1 lasts from age 20 until about age 60, you have the most time during this particular phase.

In terms of investing your money, you have more time to re-coup any losses you might incur from a riskier type of investment strategy. Having money in the stock market or in general, "at-risk", is more suitable during this phase of life over any other phase. Typically, brokers and money managers, such as firms like Merrill Lynch or Edward Jones, specialize in strategies that best fit this phase. These types of financial professionals are most concerned with growing your money and least interested in the protection of your assets.

Phase #2 is called "Preservation". It begins at or around age 60 and runs throughout the rest of your life. During this phase, people are beginning to live off of their life savings, pensions, qualified retirement plans, social security, etc. We also called this living off of a "fixed income" because you no longer have an income coming in from employment. You now have to live off of a fixed amount of money, or what you have accumulated during phase #1.

During this phase, brokers and money managers do not always have your best interests at hand. Considering you now have less time to re-coup possible losses due to stock market volatility, you must be more conservative with what you do have. Having a reliable income plan is key to making it through the rest of your life without running out of money. Having too much money at risk during this stage of life can be disastrous.For example, if you were to experience an unfavorable sequencing of returns later in your life during the wrong time of your life, you may never recover from the loss. Plain and simple, too much is left to chance!

Finally, phase #3 is called "Distribution". You can probably guess that if phase 2 ends with your life, then phase 3 is what happens to your money after you are gone. The goal during this phase is to have whatever money you have left over pass on to your heirs or your charity in the most effective and tax-advantageous way possible. All too often folks do not have their accounts properly titled, the beneficiary documents in order, etc.

Without proper estate planning, your assets will be subject to possibly more estate tax than need be as well as a lengthy journey through the dreaded probate. Most people simply are not educated properly on how to avoid some of these avoidable occurrences. By setting your assets up properly, you can leave your heirs or charity a legacy rather than a tax burden. Ultimately, any debt you leave behind will have to be paid. Guess who will be paying it? Your loved ones!

The three phases are designed to help you understand that with age comes a requirement to change your thinking regarding investing. You cannot always continue down the same path you have year in and year out. No matter how uncomfortable it may be to change the way you invest your money, it is a pivotal aspect to success in the game or "retirement"!