retirement plan

Bonds Beware – Do Your Research

Own bonds? In case you don’t closely follow the markets, bond yields recently reached the lowest level in decades. When yields drop the price of a bond rises. Conversely, when yields rise, the price of a bond decreases. Central bankers around the world have kept interest rates low for a very long time under the belief that low rates would spur investment activity. These low rates have led to years of rising bond prices. It now appears that the long bull market in bonds has either ended or is very near the end. The U.S. Federal Reserve just raised rates a quarter point in December 2016 and indicated as many as three more possible rate hikes in 2017. Rising interest rates will mean that existing bonds, paying out at lower rates of interest, will decline in value. This is due to investors wanting the newer bonds paying higher rates.

If president elect Trump is successful with his tax cuts and infrastructure spending, inflation could rise. Interest rates should follow suit to keep inflation under control, and bond prices will continue to drop. All of this sounds pretty bad if you are a long term bond holder. What should you do? First, steer clear of bonds with maturities longer than 3-5 years. Second, consider alternatives to bonds when investing for income: certain real estate investment trusts, Treasury Inflation Protected Securities, or TIPS, may be a good place to park some funds, as would be preferred stocks. Lastly, consider investing a little more in equities, preferably those whose prices are below a company’s intrinsic value.

Be sure to do your research and understand what you are investing in.

retirement plan

Low Investment Returns Require More Savings

The odds of making a 5% return on traditional investments in the next 10 years appears slim, according to a new report from investment advisory firm Research Affiliates.  For most people in or approaching retirement this means one of two things:  save more or live on less.

The company looked at the default settings of 11 retirement calculators, robo-advisers, and surveys of institutional investors.  The average annualized long-term return people seem to expect is 6.2%.  Just over one and half percent would shaved off for inflation.  So the after-inflation return drops to roughly 4.6%.  That’s before taxes.

Over the next decade, according to the report, the ubiquitous 60/40 U.S. portfolio (60% stocks/40% bonds) has a 0% probability of achieving a 5% or greater annualized real return.

One message that John West, head of client strategies at Research Affiliates and a co-author of the report, hopes people will take away is to expect lower returns in the future.

“If the retirement calculators say we’ll make 6 percent or 7 percent, and people saved based on that but only make 3 percent, they’re going to have a massive shortfall,” he said. “They’ll have to work longer or retire with a substantially different standard of living than they thought they would have.”  One reason for this is most people are not equipped to alter their investment mix.  They are either afraid to reallocate funds into different, potentially higher yielding, assets, or they are uninformed as to such options, or both.

Moral of the story:  Since most people’s risk tolerance isn’t likely to change dramatically, the amount you save may have to.

retirement plan

Get Serious About Creating Retirement Income

How important is retirement income?  Very.  In a recent survey by the American Institute of Certified Public Accountants, 41% of CPA financial planners said that running out of money was their clients’ top financial concern when planning for retirement, and fully 70% said depleting savings ranked among their clients’ top three worries, along with maintaining their current lifestyle and rising health care costs. And yet…other research shows that many people apparently aren’t alarmed enough about this risk to seriously plan for it.  According to TIAA’s 2016 Lifetime Income Survey, fully 65% of American adults haven’t even figured how much income they can expect to have each month after they retire.

Here are three key things you can do to increase the likelihood you’ll have sufficient retirement income:

  1. Begin planning early. You should start focusing on how much income you’ll need at least five or more years before you expect to retire. Many people assume that their spending—and thus the income they’ll require—will automatically drop after retiring.  But that’s not necessarily the case.  The best way to get a fix on your likely spending is to make a detailed retirement budget.

The years leading up to retirement are also a good time to begin thinking about lifestyle issues, as they can directly affect your income needs.  If you are considering selling your home and moving to a smaller residence you’ll definitely want to check out the real estate market in your area well in advance to make sure downsizing actually makes financial sense.  Similarly, if you’re counting on collecting extra income by working part-time after you retire, it’s a good idea to see what kinds of jobs are available for someone with your qualifications and what they pay.

By getting a head start on your planning rather than waiting until you’re on the verge of retirement, you’ll be better able to assess whether you’re really as prepared to retire as you think, or whether you might be better off staying on the job a bit longer.

  1. Develop a more detailed strategy as you near retirement. As you get closer to retirement, step up your planning efforts. One critical issue is whether to postpone taking Social Security benefits to qualify for the higher payment you’ll receive for each year you delay.  The answer will depend on such factors as how long you expect to live; the rate of return you think you can earn on your retirement investments; and, if you’re married, whether you and your spouse might be able to maximize benefits by coordinating when each of you claims.

Continue reading “Get Serious About Creating Retirement Income”

retirement plan

Documents To Organize And Share

What documents should you keep together and which ones should you share?  When you’re getting your estate in order, there are many accounts, policies, documents, and other information to organize—and the list of to-dos can quickly become overwhelming.  But this planning checklist can help you get organized.  Having all your most important information in one place can relieve a big burden on your family if anything should happen to you.  Here are some of the essential documents, accounts, and types of information you should organize get into your estate and financial plan.

Insurance Policies Continue reading “Documents To Organize And Share”