Let’s Talk About Retirement

Shelby Smith asked:


Taking too much risk with your investment: We all want the highest interest rate possible and the lowest risk possible - unfortunately these are competing objectives. High rates always spell high risk BUT high risk does not always spell high rates. You should know that risk and reward are traveling companions: if you want low risk you’ve got to settle for low rates and if you want the chance of making high rates you’ve got to accept high risk.

Most people work a lifetime to save enough so they can have a comfortable retirement - the last thing in the world they want is to lose their retirement nest egg in bad investments. So why is it that most retirees have all their money in mutual funds, stock, bonds, a diversified portfolio of securities, variable annuities, etc.? All these things carry the risk of loss - yeah I know that “in the long run” you’ll do a lot better than with a safe money alternative. BUT, in retirement you don’t have a long run. A great economist once said, “in the long run we’re all dead”.

In the closing years of the 1900’s and up until 2002 the stock market was roaring upward - would-be-retirees were making loads of paper profits and looking forward to retirement next year. Out of the blue came the dot.com bust and a market meltdown - over the next two years the S&P lost half its value, the DJIA sank like a rock and the poor NASDAQ stocks lost 80% of their value (that’s where most of the dot.coms were traded). Instead of retiring, or continuing to be retired, many “risk taker” had to change plans or go back to work as Walmart greeters, taxi drivers or whatever they could get in the depressed employment environment. Can this ever happen again?

Look around you: sub-prime problems, foreclosures shore to shore, the dollar losing ground at an alarming rate, inflation picking up, real estate activity grinding to a halt, economic recession being mentioned often, bank stocks losing half their value, major corporation turning to China and the UAE for capital infusion to stay solvent, record federal deficits, commodity prices shooting upward and lots more of gloom and doom. I don’t want to be negative…but there are storm clouds gathering and you don’t have an risk umbrella if you’ve put your retirement money in the market.

The first big mistake retirees (or would-be-retirees in the red zone before retirement) make is they have taken too much risk with them retirement money.

What can you do? Find a financial adviser quick if you don’t know how to lower your risk without one. Examine every retirement investment you have and make sure the money you’ll be using in the next 10-15 years is in rock solid saving places like bank CDs (for use in years 1 - 5) or fixed annuities (for use in years 6 - 15). If you don’t like either for-the-first-half-of-your-retirement money, you can continue to keep your money at risk and hope for the best.

Putting your money only in short-term bank CDs: Many of you have all your retirement money in 6-months CDs because you want safety and are afraid you’ll need it all very soon. The good news is that you’ve got safety and ready access…the bad news is that this is costing you a king’s ransom.

Generally, the longer you commit you money the higher the rate of interest you’ll earn - that’s why 5-year CDs pay more than 3-months CDs. You should space, or ladder, your money so that it comes due at about the same time you think you’ll need it. Yes, you may guess wrong sometime but the penalty will be a lot less than if you always keep your money short and liquid.

Let’s say you now have $150,000 in short-term bank CDs that you’ve earmarked for retirement. You think you’ll need about $15,000 a year of this money to cover expenses above your Social Security, pension (if you have one) and other income. Here how a CD ladder could work. Put $15,000 in a money market account (can get anytime you want without penalty), $15,000 in a one, two, three and four year bank CD. You now set so that every year for the next five you’ll have access to $15,000 (plus interest which will keep you up with inflation) to cover your needs.

What do you do with the other $75,000? Why not look into a five year tax-deferred fixed annuity? You’ll pay no taxes on the interest you earn in the annuity until you withdraw it (that means triple compounding: interest on principal, interest on interest and interest on money you would have paid in taxes) and you’ll have rock solid safety because your principal and interest is guaranteed by a major insurance company. The same insurance company that insures you home, life, health, business, car and everything else of value. Oh yes, you’ll probably get a much better earnings rate than if you put the money in a bank CD.

Yes, you will lose the opportunity to hit it out of the park with a high flying stock your brother-in-law told you about but you’ll also avoid the risk that goes with that high flying stock. When you annuity matures in five years you an annuitize (take an income) over the next five years or do another 5-year bank CD ladder.

Retirement is a time to keep what you’ve got rather than trying to double or triple your money in a short period of time. But, you can err by being too safe and too liquid with everything in short-term bank CDs. Retirement is also a time to reassess your risk and make sure you can afford the worse case outcome. That’s why money in the market don’t make sense unless you’ve got a lot more money than you’ll need for retirement.

If you think the market can’t turn around and bite you, check out the following links:

www.fool.com/investing/dividends-income/2007/03/21/a-market-crash-is-coming.aspx

mutualfunds.about.com/cs/history/a/marketcrash.htm

finance.yahoo.com/expert/article/richricher/26878

For more info on Retirement Planning go to the Retirement Pros at http://www.theretirementpros.com/. Learn more from topics such as “Managing Your Retirement Money”, “Guide to Social Security - How to Pay Fewer Taxes”, “Risk and Reward are Traveling Companions”, “Retirement: Your Greatest Financial Challenges” and more. Free Calculators, eReports and online video seminars each month.



MARYLOU

Albert William asked:


As high numbers of people reach retirement age, long term financial security is becoming a major concern.  With the view of plummeting social security advantages, pension plans and volatile 410K retirement plans getting non-existent, most of the people are looking for other retirement options. Now, they believe that they are left with only one viable option retirement investment.

With modern day economic recession and rising food, and fuel prices, it has become almost impeccable to save for the future years. Individuals expecting their retirement within 10 to 15 years go for high return retirement investment, but at the same time are skeptical whether it would be safe and secure or not. In most of the cases, average people do not have enough cash required to earn high rate of interest, which on the other hand wealthy people enjoy.

Both long-term and short-term retirement clubs have emerged over the internet, which helps quite a lot in removing the road blocks for numerous entrepreneurs. These programs are very efficient and present their member with the chance to understand dividends, which at times is well beyond the average investor’s reach. Besides, they provide you with a viable retirement income option, which you need the most after retirement.

The profit incurred, here, is distributed and divided amongst the members. At the same time, profits are also spread across different long-term ventures and projects, so that the club could stay stable for a longer period of time. Though there are some risks involved with this type of funds but you do not have to worry. The risks are minimized by spreading investments and pooling funds across a diverse array of opportunities.

Contrary to the illegal and unauthentic HYIP or High Yield Investment, which uses the contribution of one investor to pay the commission of other; the long term retirement clubs are clean and legal. Here, the investments from the member are combined with private and personal portfolios, which in turn pays high rate of return. While different country has different view on private retirement investment forums or clubs and foreign investments, most of them operate just according to law and norms laid by their respective government.

Moreover, certain programs would also offer you substantial amount on referrals, referred to as referral commission. But, generally you would be able to achieve financial independence and retirement income without any third party’s help.

However, there is always a dark side of a bright picture. We have shown you the bright side of the picture but you should also be well aware of the dark side of this, while you are planning to have your retirement investment done. The mushrooming of these clubs and forums has lead to growth of some of the fraud long term investment clubs. They would try to fool you out with hidden clauses and some other tricks and traps.

Hence, it is better recommended that before going for any such type of retirement investment policy ask someone who knows about them. Also, make sure that you do not invest anywhere without proper retirement planning. No doubt, after retirement you need some funds for the smooth functioning of your life but why take risk.



BOBBIE

Pete Miguel asked:


Surely, all of us want to someday enjoy a wealthy retirement. Although the thought of retirement may give you images of being able to chill out, relax, and sleep without calls and emails, it may not be as easy if you do not have the financial capacity to back you up. This is why really planning for your retirement is always an essential thing to consider.

These days, more and more people are finding themselves looking for ways wherein they can better prepare for retirement. Some companies easily make this available as a benefit to their employees. They can help automate the process of saving by collecting from the employees’ salaries and then give it to them as retirement period kicks in.

Although there certainly are various available programs being offered in planning for retirement, you should not just blindly join or sign up with any of these programs without first studying very eagerly the details and process involved within any particular program.

However, simply saving money or joining a retirement plan program will not be enough to reach your goal of someday enjoying a wealthy retirement. The true secret in retiring wealthy is having more than enough money to sustain your day to day needs. Meaning, you have more than enough resources for yourself that you even have extra resources to share with others and possibly be of big help to their needs as well, most particularly in the financial aspect.

So then, what better options are there available in planning for a wealthy retirement aside from saving and joining retirement programs?

The best solution so far in planning to retire wealthy is to be able to establish your own business. Having a stable business gives you so much potential in increasing your financial resources not only during that time while waiting for your retirement age to arrive, but also during your retirement period itself. Remember if you are allotting just a fraction of your time with your business now then just imagine how much profit will you be making when you allot your full time in managing your business come your retirement period.

Another great solution in achieving a truly wealthy retirement is by placing your money on highly valuable investments. One good advice is investing on real estate properties. Real estates are considered to be extremely good investments for the reason that real estates’ value appreciates continuously overtime. And there are various other options on how to wisely create and manage investments. You just have to do a careful study before coming up with a final decision.

The challenge of achieving a truly wealthy retirement

There is only one thing you need to consider when planning to someday enjoy a wealthy retirement - and that is the fact that it is no ordinary goal to successfully accomplish. However, if you have that strong desire and faith coupled with strong persistence in putting your plans into action then really, you have everything that you need already into making this goal an actual reality.



BERNARD

dipendra asked:


Most of the people I have met have not planned for their retirement as they say ‘future is unpredictable and we need to live in present’ but my dear friend’s future is the outcome of present, our present will decide our future. When we think of retirement we generally think of old age, a period when you have to give up the job and sit at home doing nothing. Contrary to the fact, most of the retiree lives a very active life. We need to seriously consider out planning towards retirement because once we retiree our income stops coming but our expenses remain as it is and in some cases it rises with the rising inflation.

In this regard mutual fund has turned out to be the right answer for making retirement planning easier and safer. Mutual fund being managed by professionals is a key to effective retirement planning.

Some people like it. Some people don’t but the fact is that retirement is a reality for every working person. Most young people today think cannot think of retirement as reality as they believe in ‘living at present’. However, it is important to plan for your post-retirement life if you wish to retain your financial independence and maintain a comfortable standard of living even when you are no longer earning. This is extremely important, because, unlike developed nations, India does not have a social security net. In India people still depend upon bank savings and fixed deposits for retirement purpose, which is unfortunately inadequate.

Retirement Planning acquires added importance because of the fact that though longevity has increased the number of working years haven’t, so you end up spending the last phase of your life without earning.

In simple words, retirement planning means making sure you will have enough money to live on after retiring from work. Retirement should be the best period of your life, when you can literally sit back and relax or enjoy your life by reaping benefits of what you earn in so many years of hard work. But it is easier said than done. To achieve a hassle-free retired life, you need to make prudent investment decisions during your working life, thus putting your hard-earned money to work for you in future.

With the special features of mutual funds like Systematic Investment Plan, Systematic withdrawal plan, systematic transfer plan in addition to other unique features of different funds, the investor can easily plan for its post retirement requirements and ways to achieve it.

Unlike many other countries of west, in India we do not have state-sponsored social security for the retired people. While you may be entitled to a pension or income during retirement, but will it be sufficient post retirement.

Although the compulsory savings in provident fund through both employee and employer contributions should offer some cushion, it may not be enough to support you throughout your retirement. That is why retirement planning is extremely important for every one. More over with mutual funds the investors can actually plan for themselves and also achieve their planned objectives. As compared to direct equities this option of mutual fund is much safer for planning your retirement corpus.

There are many reasons for the working individuals to secure their future emergence of separate families and its attendant insecurity, increasing uncertainties in personal and professional life, the growing trends of seeking early retirement and rising health risks are among few important risks. Besides falling interest rates, also the sustained increase in the cost of living make it a compelling case for individuals to plan their finances to fund their retired life.

Planning for retirement is as important as planning your career and marriage. We need to take conscious and careful decisions to prepare for our retirement. Life takes its own course and from the poorest to the wealthiest, every one gets older with time. We get older every day, without realizing. With our coming old age we tend to become more understanding to the facts of life and realize the importance and impact of retirement. The future depends to a great extent on the choices you make today. Right decisions with the help of proper planning, taken at the right time will assure smile and success at the time of retirement.

In my words, retirement planning means making sure you will have enough money to live on after leaving your work. Retirement should be that period of your life, when you can sit back and relax. Retirement should bring more of enjoyment in your life by reaping benefits of what you earn in so many years of hard work. But it is easier said than done. Most of the people live their worst life during retirement. To achieve a hassle-free retired life, you need to make right investment decisions during your working life, thus putting your hard-earned money to work for you in future. If you are not very aware of the investment that you need to undertake then you can easily take help of online advisers to help you with your retirement plan through mutual funds. The earlier you start the better it is for you.

Now retirement planning can be done with a single click and with the advice of a registered mutual fund advisor by Association of mutual funds in India (AMFI). Fill this retirement questionnaire to know your current financial situation and your investor profile which will help you plan for a worry-free retirement.

This is a no obligation free mutual fund advisory; investors can make informed mutual fund investment decisions with the expertise of our advisors.



DONALD

piscesgurl310 asked:


I am 21 , going to school, and living with my parents. I plan to put $200 to start a retirement account and then add roughly $83 a month to make it $1,000 a year for the next few years till I get a better paying job.

My question is can I open an online retirement account? Right now my bank is bank of america. I also wanted to know if I started a 401k with my current employer how does that transfer to future employers. I do NOT plan on staying at this job much longer.

Until I learn more about stocks and other investment tools I just want to focus on retirement accounts.

MALLORY

Pete Miguel asked:


The question of how to retire wealthy can be answered much easier than you think. It all starts with you evaluating your actual situation and then beginning to craft a financial plan. For most people, the quest for retiring wealthy is something that needs hard work, discipline, and patience - that’s unless of course you have been born from a rich family and the prospect of inheritance is always there.

One of the usual mistakes committed by people is that they think retirement comes with age. There has always been this perception by many that retirement is only for those who already reached their 50s and above, and that retirement signifies an age when one no longer has the capacity to work as fully as before, therefore retirement becomes the best option.

If truth be told, anybody can choose to retire when they feel like it. Age should not be the basis for retirement but rather, the financial resources that you have. Even as early as in your 30s, you can retire. It’s not a question of when but rather how.

Here’s a quick list on how to retire wealthy which includes some of the most practical ways in setting up a good financial plan:

1. Make a solid retirement plan

If you wanted to save up for retirement, then you should also allow yourself to know the things you are saving for. Outline which aspects of your life would you need sufficient funding for in order for you to live comfortably during retirement. Consider a healthy balance between essentials such as utility bills and those for personal pleasure.

2. Create a financial system

The next step would be to seek a system that would help you facilitate your retirement plan. Most companies offer this as a benefit by automatically deducting a part of your salary for your retirement plan. You can also get in touch with your personal banking account to help you set up a retirement plan.

Ask them to automate obtaining at least 10% of your monthly salary into a retirement plan. Usually, this goes under the guise of a time deposit account because time deposits cannot be withdrawn unless it reaches a specified period. As it is kept safely within the bank, it earns higher interest rates since time deposits are usually being used by banks for corporate investments.

3. Put up your own home based business

Have you ever considered putting up your own business on the internet? If your answer is no, then you better start thinking on considering this option. With the internet technology soaring up high and fast, if you start preparing yourself and do the necessary learning today, then in a couple of years time - it won’t be surprising for you to have one pleasant retirement while having your own business right at the comfort of home.

You need to keep in mind that putting up your own business can be compared to creating a good investment. The longer you stick with your business, the better you get at it. The longer your business runs, the more established it becomes. So really, it is like putting your time, money, and effort on a highly valuable investment wherein you get more value out of it as days go by.



TRACIE

Mike Kennedy asked:


Terminal wealth dispersion is the technical term that describes the variability of the future value of investment portfolios. This inevitable variability means that no one knows what the value of their investment portfolio will be when they reach retirement age or at any time during their retirement. And the uncertainty of individual’s life expectancies compounds this problem.

Hedging against the risks associated with these two factors places an onerous burden on individuals. Although this hedging could result in a very comfortable retirement, if one can afford the hedge and their timing is right, the potential downside risk is so great that it may be deemed unacceptable by many individuals. So one has to ask “Do individuals really prefer to forgo a sure but modest retirement income and play the odds with their retirement savings in hopes of being very well off in retirement?”

With individual accounts, individuals lose the benefit of the pooling of risks. The two risks that force individuals to over-save are investment risk and the risk of living beyond the average life expectancy. In both cases the outcomes, terminal wealth and life span, are highly variable. When the risks are pooled for a large number of individuals over many overlapping life spans, the average outcomes are highly predictable, which is what makes traditional pension plans work so well.

Traditional pension plans exist, for all intents and purposes, in perpetuity. This being the case, they can build reserves during good times in the financial markets and weather the bad times, thus enabling them to make consistent payouts to retirees regardless of the timing of their retirement. Unfortunately, individuals do not get to choose their holding periods or the years of their retirement and must take whatever comes along, and what comes along might be good or it might be bad. Thus individuals must set savings goals that are sufficiently high to hedge against the risk of the average return of an investment portfolio over its holding period falling well short of that which would be expected very long term.

The relatively short duration of individual’s holding periods leave them very susceptible to the effects of market cycles, which are notoriously unpredictable in amplitude and frequency. Being broadly diversified mitigates this risk but does not eliminate it, as it’s entirely possible for a worldwide bear market to occur during one’s holding period. Then at the end of the holding period for wealth accumulation, a second holding period begins, which will be the term of retirement, and this second holding period carries the same risks as the first, but at a time in life when there is no source of income to make up for portfolio under-performance.

The other component of risk that individuals must hedge is the risk represented by the uncertainty of one’s life span, which means that individuals must aim even higher when setting their savings goals. The managers of large pension plans can depend on retirees living on average for only the average life expectancy of employees who reach retirement age. The average life expectancy for someone who reaches the age of 66 is currently 82 years, and 66 is currently the age when workers are eligible for full Social Security benefits, which makes it a reasonable baseline. Based on those assumptions, the average term of retirement would be 18 years and pension plans should only have to be funded to the extent necessary to cover the cost of this average term of retirement.

Individuals, however, don’t know how long they’re going to live, so they must over-save to ensure that they don’t run out of money before they run out of time. This need to over-save is independent of the first need, thus the need to over-save is compounded, i.e., an individual needs to save enough to cover the cost of living well beyond the average life expectancy and the targeted amount of savings at retirement age must be great enough to ensure with a reasonably high level of certainty that the actual amount on hand at retirement is at least the bare minimum necessary to get by on.

A popular estimate of the term of retirement for which individuals must plan is 30 years. Saving enough to cover the cost of a 30-year retirement is a much greater burden than saving for an 18-year retirement, but planning on a shorter retirement exposes individuals to tremendous risk. It also exposes taxpayers to tremendous risk, as individuals who outlive their savings will undoubtedly require some form of public assistance to make ends meet and are likely become wards of the state when they become physically incapable of caring for themselves.

An individual who bases their retirement saving on living to the age of 96 but only lives to be 82 will have forgone a lot of pleasures in life, such as travel, fine dining and better vehicles, that they could otherwise have enjoyed. But many individuals just don’t have the level of income required to support the saving rate necessary to amass the wealth required to hedge against the downside of terminal wealth dispersion and the possibility of living well past the average life expectancy. For them it’s not a matter of forgone consumption, it’s a matter of going through life with the knowledge that they are likely to spend their golden years living in abject poverty and that that will be their reward for 40 or 50 years of hard work. And it gets worse!

Some economists now believe that within 15 years or so, 100% of Social Security benefits will be spent on medical expenses: Medicare Parts B and D premiums, copayments, uncovered expenses and medigap insurance premiums. If that becomes the case, anyone without substantial savings or a defined benefit pension will be looking for public assistance the day after they retire.

With the situation already at this state, adding private Social Security accounts to the mix would be like throwing gas on a fire, as individual Social Security accounts carry the same risks as other individual retirement accounts. Those who have tried to kill Social Security since its inception find private accounts very appealing. But, not so coincidentally, most of them seem to be in the enviable position of not needing Social Security to support their retirement. More recently, younger workers, too, have come to oppose Social Security, but not for the same reason as the traditional opponents. Young workers may be crushed by the burden of social Security and may never receive any benefits from the system. Those who oppose Social Security simply because it’s a social program should be expending their efforts on reforming it rather than killing it.

If Social Security had been managed like a pension plan rather than a pyramid scheme, its current situation wouldn’t be so dire. Indeed, it might very well be a fully funded, functional system. CalPERS and other large public employee retirement plans have operated successfully for decades, with success being defined as being able to meet their obligations, not having an adverse effect on the financial markets, no scandalous events attributable to malfeasance by the plans’ sponsors and being free of influence from elected officials. There’s no reason that Social Security can’t also be managed in such a manner. It would literally take an act of Congress to do this, but the hardest part for Congress would be letting the system run without their interfering with its operation.

Passing off the burden of retirement to individuals was a great deal for corporations but it’s a very poor deal for most individuals, and extending individual accounts to include the Social Security system would only make a bad situation worse. It’s not a poor deal for all individuals because there will be some who can afford to save a substantial portion of their income and whose holding periods will coincide with bull markets, thus putting their wealth in the upper range of their terminal wealth dispersion, and who also live a long, healthy life. They will be the ones who benefit from over-saving and living beyond the average life expectancy, but they may end up forfeiting a portion of their wealth in the form of taxes to support the less fortunate. I don’t believe that is what the public expects from a well-conceived system.



CORDELL

Michele L asked:


If I have a retirement account, say a 401k or an IRA, can I use those funds - not to borrow - but as an investment in a mutli-tenant residential apartment complex that I will be leasing to unrelated tenants to derive income? How is this done? Who do I talk to about the details?

BIANCA

poet1b asked:


Right now, boomers are preparing for retirement. Most are earning in their peak years or near their peak income levels. They are pumping more money than ever into the market to pay for their retirements.

The ratio of people pulling money out of the market to fund their retirements in comparison with the people putting money into the market to save for their future retirements is better than it will be for at least the next three generations, most likely more.

In the next five to fifteen years, the ratio of people paying into the market to save for their retirements in comparison to the people taking out of the market to pay for their retirements is going to change drastically. The draw on the market will increases drastically over the savings rate to finance retirement. This will be a historical first for the stock market.

JERI

K_Seeks4Answers asked:


Does anyone know exactly how much money the government takes from early withdrawl of your retirment funds, I’m in my 40’s. I need the cash but want to roll some over too. Let’s say I took out 35-60K, Is there any way to get around all the penalty’s, Most of this money I get will be for paying debts/creditors, so is there anyway to pay them with out being penalized? Is there a better way to take your retirement funds?
Great advise from all so far.
Retirement was funded from employer, no contributions on my part. It is actually going to be approx. 160K. But I only want to take 30-60K, sorry if that was mis-leading.
I don’t own a house, so that will not work. And have not found employment yet, so investing with another company won’t work either. I feel the only way to get out of debt and not rely on the government is to take my funds until I find work again. Your right my luck has ran out, at least for the time being, and don’t I know it!

MEAGAN