When they can least afford it, retirees are being forced to take unprecedented risks with their retirement savings.
Curtis Lyman, CEO of Alpha Beta Gamma Wealth Management, discusses what they can do now to protect their nest egg.
For the past 35 years declining interest rates led to higher bond values. However, at the same time portfolio cash flows declined as bond yields declined causing retirees to come up short in meeting their cash flow needs.
Retirees are being squeezed between historically low interest rates and increasingly volatile stock markets as central banks are unable to reign in the unprecedented printing of money over the past 7 years and fund managers turn to trading to make money.
Economics and investment returns are inextricably linked as the world has "flattened" economies and markets have become more co-dependent reducing the benefits of diversification by investing globally. "When the U.S. sneezes, the world catches pneumonia" is a good expression illustrating how intertwined global capital markets (currencies, commodities, equities, and bonds) have become.
There is a "great experiment" occurring with monetary and fiscal practices around the world and individual investors are the unwitting subject matter of this heretofore untried system of economic and political manipulation of currency and interest rates. Central banks are simply "juicing the system" through the expansion of their balance sheets. No one really knows how this great experiment will end: by saving the economic world or in a big bust that makes the Great Depression of the 1920's look like a tea party.
The impact on savers and retirees has been, in many cases, devastating. Those who thought that bond yields would remain in the 3-5% range for their expected lifetimes have been severely disappointed. In 2006, for example, a retiree with $100,000 to invest could build a little diversified investment grade bond portfolio and expect to receive $4500 to $5000 per year in interest, together with the return of capital as the bonds matured.
Along came the collapse of the U.S. housing market which resulted in devastating capital losses and the reduction of interest rates by the Federal Reserve as it attempted to keep the U.S. and other economies out of another Great Depression. In the near term, the Fed succeeded, but it also succeeded in putting the kibosh on many well thought out retirement plans. While the economy was saved, that came at the expense of seniors who were in or about to retire.
What are some steps that can be taken to avoid your own personal "financial Armageddon" in the present environment?
As the CEO/President of Alpha Beta Gamma Wealth Management, a member of the HighTower Network, Curt Lyman frequently deals with these issues and has the following advice:
First, take stock of your assets and your expenses. Too frequently, we see retirees overestimate the value of their holdings and underestimate their expenses. Give yourself a wider planning "moat" by looking realistically at the liquidation value of your assets and accurately estimating your expenses.
Second, estimate what your expenses and assets will look like in 5 years. If you are digging into your principal on a regular basis for everyday expenses, you need to sit up and take note. The situation isn't going to get any better unless you take definitive action to "stop the bleeding". Sometimes that requires major surgery: significant changes in lifestyle in order to get back to balance. It may mean selling property or converting it from personal use to income-generating use. It may mean giving up a club membership and eating out several nights a week. It means tightening belt. If you don't then by the time it becomes critical it's probably too late. Other times, there are little things that you can do easily to plug up some of the leaks and improve your cash flows.
Third, if you're working, consider working longer. The World War II generation, who were born before 1943, had a much lower life expectancy because antibiotics were not widely dispensed. An American male's life expectancy was roughly 66 years of age. Retirement at age 65 looked pretty appealing and savings rates and pensions provided a secure retirement income that most people expected they would not outlive. Today, however, if you are a married couple, there is a better than 50% chance that one of the two will live to be over 90 years of age. Simply put, most people do not, and cannot, save enough during a 35 year working life to support themselves for another 35 years, especially if interest rates remain low for long periods of time.
Fourth, consider the long term composition and potential performance of your investment portfolio. Become a disciplined long term investor. When you begin investing, determine your "risk budget" which is based on how much volatility (i.e. risk) you are willing to assume, and the cash flows and capital growth you're going to need to sustain yourself. Try to avoid taking on more risk if there are other less-risky alternatives that provide similar possibilities of returns. Look outside the traditional asset classes of "stocks, bonds, and cash" and look to the many alternatives that are now available that provide protection of your principal, capital growth, and may even provide a guaranteed income, as in the case of a fixed annuity with a lifetime income rider.
Fifth, be aware of taxes. Many retirees we speak with think that their big seven-figure IRA rollover is going to be enough but they fail to account for taxes. "Bill" came to us with two million dollars and a well-designed budget. When we told him, however, that he had only $1.4 million in after tax dollars (at today's tax rates...and who really thinks taxes will go down with a $20-something Trillion Federal deficit...) he blanched. Through some creative planning techniques, however, and a commitment to work for an additional 3-4 years, we were able to show him how he should have enough, how he could lower his portfolio risk, and how he could enjoy retirement without being fearful of running out of money.
Facing one's true financial picture can be painful but it is also essential in order to fully face the challenges that the future will bring retirees. Our present low interest rate environment and historic government manipulation of the money supply and interest rates pose unknown risks for all of us. Careful planning will help retirees find the best solutions for themselves in what is becoming an increasingly dangerous financial environment.
Curtis L. Lyman is the CEO/President of Alpha Beta Gamma Wealth Management, a Member of the HighTower Network.