Monday, June 10, 2013

Financial planners May Be Giving You Out-of-date Investment Advice. Here's why.

Baby Boomer Retirement facts:
- The average women now age 65 can expect to live to age 86.
- One out of 10 Americans (women and men) will live past age 95.
- Every year you wait beyond full retirement age (66), the monthly benefit increases 8 percent until you reach 70.
- Experts are saying stocks have an unusually high probability of outperforming bonds over the next decade.
- With an 80-percent stock and 20-percent bond $1 million portfolio mix, you have only a 14 percent chance of running out of money before you die. Sources: Social Security Administration, New York Times report.

By Julia Anderson
Conventional financial wisdom has people getting more conservative with their nest egg savings as they near retirement. This formula has two parts---save like hell over your lifetime of work, then put the money in a safe place and live on it the rest of your retired life.
Safe places still being touted by many money advisers are bonds, bond funds, money market funds with only a small portion still exposed to the vagaries of stock markets or even riskier investments in individual publicly owned companies. Bank trust managers, financial advisers and others continue to give us this outdated advice. But if you've been paying attention to report after report in the past year or so, the best investment strategy for the next 10 years may be just the opposite of what you're being told by your local expert. Here's why.
The Federal Reserve Bank has forced interest rates to historically low levels: Bond payouts are in the 2 percent range, money market and savings accounts pay nothing. These low interest rates are meant to juice up the U.S. economy by making it easier for businesses, large and small, to borrow money, to put more people to work and operate profitably. But when interest rates return to normal levels (whatever that might be say in the 3 to 4 percent range in 2014) bond values will decline. Bond funds already have begun to show that weakness on the latest news from the Fed on when it might start cutting back on its aggressive (but artificial) interest rate program.
Meanwhile, millions of baby boomers are coming to terms with retirement.
The old thinking has that nest egg going into tax-free municipal bond funds with an annual withdrawal rate of 4 percent. A $1 million investment would produce about $40,000 of income, right? There are serious problems with such a plan.
According to researchers at the New York Times in an in-depth report, a couple using this plan for their $1 million nest egg has a shocking 72-percent probability of running through their bond portfolio nest egg before they die. Yikes!
"The probabilities are remarkably grim for retirees who insist on holding only bonds in the belief that they are safe," the Times quotes Seth Masters, chief investment office of New York-based Bernstein Global Wealth Management. The fundamental problem as explained in the Times article: With bond funds earning well below 4 percent a year, you can't withdraw 4 percent a year without depleting that portfolio over time. Add in an average 2 percent-a-year inflation rate and you're really up against it.
There's another challenge --- we're living longer. All of us know women who are over age 90. My mother is 98 this year. Most of the people in her assisted-living center are women who are living on and on. According to the Social Security Administration, the average 65-year-old woman today can expect to live to 86. One out of 10 people (women and men) who are 65 today will live past 95.
Meanwhile, the assets we may have accumulated over a life time may not be nearly enough to sustain us into old age. According to the Times research, only 8.1 percent of Americans have a net worth of $1 million or more (excluding home equity value). Even with $1 million it will be tough to not outlive our money.
Now that we've gotten the really bad news out of the way, here's what might help:
Bond investing likely will remain challenging for years to come, experts say. Low bond yields and rising inflation will cut substantially into our standard of living as we age. But there are ways to improve your financial situation in the long term by reversing the traditional mix of bonds and stock investments.
Consider putting 80 percent into stocks or stock mutual funds and only 20 percent in bonds, say the experts as we go forward in the new financial world. According to the Times report, an 80 percent/20 percent mix of stocks and bonds with an annual withdrawal rate of 4 percent will reduce the probability of running out of money to just 14 percent. With a 3 percent withdrawal rate the probability drops to just 4 percent. Yes, stocks are higher risk but in our new world, so are bonds.
If you've read Burton Malkiel's "A Random Walk Down Wall Street," or Peter Lynch's "One Up on Wall Street," you already know that stocks over the long term have always outperformed bonds. In the past three years of recovery, stocks have been sensational. I expect we will come back to earth in the next 12 months, but even with a 10 percent market correction, we have stocks performing well above the average annual growth of 2 to 3 percent. To be totally clear, there are two ways to benefit from stocks.....the dividend they pay quarterly on shares you own in a company and by seeing the value of those share increase over time as the company continues to add to its balance sheets.
Investing in a no-load S&P 500 index fund offers these rewards at relatively low risk since your investment money is spread over the 500 largest U.S.-based publicly held corporations. Management fees are typically less than 1 percent a year. By the way, in a previous posting here at, I suggest that a 2 percent annual withdrawal rate in retirement is the new 4 percent.
Other recommendations from the experts as you begin to plan for retirement.
1. Try to work as long as possible. Every year to delay taking Social Security after age 62 means an 8 percent increase in the benefit up to age 70. The maximum payout at age 66 is $31,000, which is the equivalent of taking a 3 percent return on a $1 million portfolio.
2. Pay off your mortgage. That way you have less expense and the opportunity, if needed, to tap your home equity.
3. Think hard about the pluses and minuses of buying a fixed annuity. They typically won't do any better than what you can do on your own. If you die, the money is gone rather than being passed on to heirs or to your favorite charitable organization.
4. And finally, something most experts don't mention: Husbands typically die before their wives. Make sure your long-term plan includes reasonable contingencies for women who will face their later years alone, and financially on their own.
Women must take the time to understand where the assets are invested and what the long-term plan is all about.

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