What If You Can’t Afford To Retire?

““Cessation of work is not accompanied by cessation of expenses.”” – Cato the Elder (2nd centuryB.C.)

Aging baby boomers are starting to realize that there is very little chance most of them will be able to retire at 55 or 65 and live off their savings. That’s because most of those closing in on retirement don’t have enough saved. A recent survey conducted by The Insured Retirement Institute found the following:

* Only 60 percent of baby boomers report having any retirement savings
* 36 percent said they plan to retire at 70 or later
* 27 percent are confident they will have enough for retirement

The survey found that 27 percent of baby boomers are confident they will have enough money to last through their retirement, down from 33 percent a year ago and 37 percent in 2011. Only 6 in 10 boomers report having any retirement savings, down from roughly 8 in 10 in previous surveys.

Of those who were willing to answer, about 40% have an investable net worth of less than $50,000, 60% less than $100,000, and 80% less than $250,000.

If you figure on making 6% on your money, this means fewer that one out of five Americans who are nearing retirement age have the wherewithal to enjoy a passive retirement income of more than $15,000.

How well can you live on $15,000 a year?

And it’s only getting worse. During the Great Recession, government numbers showed that Americans were in a net spending rather than saving mode. Fortunately, that has turned around but the vast majority of Americans are not rich enough to retire and they are getting less rich every year.

I'’ve made the argument that retirement,– the idea of not working, of living off passive income – was a short-lived phenomenon in this country. It was sold to us by the government and by the banking and the insurance industries, yet it only worked (and only partially) for one complete generation:– the parents of the baby boomers, who benefited from the appreciation of their homes.

Other than that, most Americans have worked most of their lives,– just as most Europeans, most Asians, and most Africans have done since recorded history.

Still, it’'s a great fantasy and one you should not give up on entirely.

If you work hard and invest your savings, you can still retire comfortably. But you’'ll have to do those things over a long period of time,– which you may not have. (Or you’'ll have to get lucky, which you shouldn'’t count on.)

But even if you are able to stop working and live off your savings, retirement may turn out to be less than the wonderful experience you’ve imagined. A former colleague of mine retired with a personal net worth in excess of $20 million about five years ago. Since that time, he has done everything you can do in retirement:– traveled the world, spent time with his family, played a lot of golf, etc. But the other day, he pulled me aside and said, “Ray, let’s do something together. I’ve got to get my blood moving again.”

He wasn’t talking about golf. And he’s not alone. The golf courses of America are full of lonely retirees fantasizing about the good old days when they were involved in something meaningful.

And they are right. There is nothing more rewarding than working on something you think is important. And there’'s nothing less satisfying than whiling away your time with distractions, waiting for your body to shut down.

Someone smart once told me that they should invent a new period of life for Americans today. After the working years, there should be something called the Semi-Retirement or Post-Daily Grind or the Golden Working Years, during which you get to (a) do something you really enjoy doing, (b) do it as many hours as you wish, and (c) get paid good money for doing it.

In the Internet age, I believe this is going to be possible for many of us,– and it will definitely be possible for you if you start planning on it now. It doesn’t matter if you are 55 or 35, there is a way to shift the course of what you are doing now toward some rewarding activity that meets all your needs:– intellectual, physical, emotional, and financial.

The trick is to do work that you love. And it may be that the work you are doing now isn’t lovable. A  Rutgers University study found that 70% of those asked would be OK with working into their “retirement years” if they could find some part-time work they could do outside of their current employment.

Work that’s enjoyable (probably something different from what you are doing now) and work that can be done part-time (20-30 hours a week). Does 't that sound like good “unretirement” work to you?

Let’s add two more qualifications:

* The work should be in a desirable location.

* It should enable you to associate with agreeable people.

That meets my three standards –to enjoy what you do, where you do it, and with whom you do it.  

If you can find work that meets those requirements and pays you a reasonable financial reward, you will probably be very happy to forget about retirement altogether,– at least for a while.

In future messages we will talk about how to go about finding such work. Right now, I'’d like you to think about it. What would you do if you could do anything? Where would you do it? What kind of working relationships would suit you best?

It may be that you will decide to become a free-lance copywriter. Or maybe you will work as an Internet artist, or a cyberspace interior decorator. Your love of horticulture may be transformed into a part-time source of income for you. Anything is possible.$

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10 Tips for Retirement Savings

Retirement just kind of happens. If we live long enough, we’ll eventually reach a point where we either leave our careers, opt for another, less intense work life, or finish working for a living altogether. There was a time when companies included pension plans in their compensation packages and employees could look forward to receiving a percentage of their salaries to live on for the rest of their lives. Social Security benefits used to be enough to offset the cost of living, so that a person could retire based on Social Security income alone. In the 21st century, neither of these hold true any longer.

Instead, it’s up to the individual to create a comfortable retirement for him or herself. Luckily, those who still look forward to retirement will have the longest post-retirement life spans, thanks to continued advances in health care. In other words, it’s a good idea to do as much as possible to ensure that you will have a secure and enjoyable retirement.

Learning precisely how to do that can be daunting. Speaking with a certified financial planner or advisor can certainly help, but there are steps you can also take to help create a bright future after your working life ends.

10.) Make a Plan for Retirement

Saving for retirement can be a bit difficult to figure out at first. If you need to get a handle on what you need to do to create a large nest egg, you need to begin with a plan. The U.S. Department of Labor recommends that you start by determining your net worth — the total value of your assets minus the value of your debts (things like the value of your house minus the value of what you still owe on your mortgage). You want this number to be positive, with your assets worth more than your debts. Don’t be disconcerted if that’s not the case. Even if you find your net worth is negative (as many people do), start there to figure out what you can do to make it positive.

First, determine what you’ll need to contribute to reach your retirement goal. You want a nest egg that can annually deliver between 70 to 90 percent of your pretax, pre-retirement salary. How much will you need to contribute to reach that goal? More importantly, how will you ensure those contributions are made?

Next, you need to create a budget of your recurring expenses and include your savings contributions as a monthly expense. A budget will also clearly show you where your money’s going and should also provide some insight into what debts should be dealt with first. Now that a plan’s in place, you’re going to need to change your mindset in order to stick to it.

9.) Get in the Saving Mindset

Saving up for years just so you can make 70 to 90 percent of your old salary annually when you retire sounds like a mind-boggling idea. How can you save that much while you’re still living your life before retirement? Fortunately­, there’s compound interest — small amounts of money contributed to a retirement savings account like a 401(k) or Roth IRA that can grow by leaps and bounds over the course of a few decades. Still, you have to plant a seed to grow a tree, and when it comes to saving for retirement, it can be difficult to have the discipline necessary to pay now in order to benefit later. This is where a savings mindset comes in.

Look at the budget you prepared as part of your plan. Is a significant portion of your monthly income being sent off to credit card companies? Then you need to become an attack dog, bent on aggressively paying off your credit card debt. One of the great ironies of saving well is that it often entails doing some serious spending, at least at the outset.

You should designate an amount of your pretax income to contribute to your retirement savings on a monthly or bi-weekly basis and have it taken out of your paycheck, just like your taxes. It’s easiest to save money when you don’t have it in your hands; you’re effectively taking the decision of whether to save that money out of your control.

Take on the outlook that the money you save for retirement doesn’t exist, except for in the future. In other words, stay out of your savings account.

8.) Take Advantage of Retirement Plans

It may seem like a no-brainer to take advantage of a program at work where your employer matches your retirement fund contributions, but not everyone sees it this way. In fact, about one-third of people who have a 401(k) plan available at work don’t contribute. You should consider doing so, especially when employers offer contribution matching programs. Under these programs, not contributing is like turnin­g down free money — with compound interest.

There are a number of types of retirement savings account plans that employers can offer. Among the most popular are the 401(k) plan and the IRA (individual retirement account). Both have their advantages (see Tip 6) and disadvantages, and are widely available at most mid-sized to large companies.

Those who work at small businesses have options as well, as do the self-employed. Check with your employer, a financial consultant or the federal government about various available retirement savings accounts. You might also consider contributing to more than one account. Diversification is an essential ingredient to saving a nest egg.

7.) Diversify, Diversify, Diversify

The saying, “Don’t put all of your eggs in one basket,” couldn’t apply more to saving for retirement. Financial advisors, investment bankers and economists will all tell you that the more diverse a portfolio, the safer it is. A person heavily involved in just one type of investment is more vulnerable to financial problems if the markets associated with that investment tank.

The most common diversification suggestion is to divide a portfolio among stocks (which can offer big pay-offs but can also be high risk) and bonds (Treasury bills that offer little to no risk, but pay out less than stocks). Depending on who you talk to, you’ll hear different percentages for splitting your portfolio between stocks and bonds. One good rule of thumb is to keep your bond percentage close to your age adjusting as life goes on; so if you’re 30, about 30 percent of your portfolio should be in bonds. By the time you retire, 60 to 70 percent of your portfolio should be in bonds.

Don’t stop with just stocks and bonds when diversifying your portfolio. Look for other ways to spread risk among your investments. Investing in largely unrelated sectors, like pharmaceuticals and telecommunications, is a good idea. You should also consider investing in economies throughout the world, rather than companies in just a handful of countries or a single region.

6.) Consider a Roth IRA

There’s long been a debate over which is preferable — a Roth IRA, where savings are taxed when they are contributed, or a 401(k), where contributions aren’t taxed until they’re removed, or until the account matures.

Both make sense, and the 401(k) usually wins because enough interest has accrued over the life of that account to offset (and then some) the taxes levied against it upon maturity.

Since the recession of 2008-09, however, the assumption that a 401(k) will always pay off has come into question. Also, with the unparalleled U.S. government intervention in the markets and in banks, it’s a pretty sure bet that younger workers who have just started to save for retirement will see much higher taxes to pay for that financial intervention by the time their 401(k)s mature.

These two factors make Roth IRAs worth considering. While paying taxes up front (and thus, having less to invest) might hurt now, it’s worth crunching the numbers once more. You might find you’ll lose less money in the long run.

5.) Manage Your Mortgage

If you own a home, you’ve got both a huge debt and a very valuable asset. You can use a home to your advantage as both. If you’re a young saver and own a home, it’s a good idea to keep an eye on interest rates. If they begin to fall, consider refinancing your mortgage to a lower rate. Using any extra money that formerly went to the recurring monthly expense of your higher mortgage payment can then go towards your retirement savings contributions. It’s a good idea to do the math first, however. Paying off mounting credit card debt will likely prove a better use for the extra income, since credit cards almost always have a higher rate than a home mortgage. If the opposite is true for you, refinancing your mortgage is definitely a good idea.

Avoid the temptation of taking out a second mortgage to consolidate your debt unless you trust your spending habits have been curtailed to fit a saving mentality and the cost of paying off your credit cards and other debt is more expensive than the additional mortgage payment each month.

Ultimately, the best thing you can do with your mortgage is to pay it off by the time retirement rolls around. The loss of a recurring monthly expense in the hundreds or thousands of dollars like a mortgage payment is an instant and substantial increase in income.

4.) Cut Investment Fees

John Bogle, the founder of the Vanguard investment firm (which holds more than $1 trillion in assets), points out that investment constitutes a $600 billion industry. That’s not in investment, that’s in fees alone. To paraphrase Bogle, no matter how the markets are doing, investment firms still make more than half a trillion dollars per year.

Cutting investment fees as much as possible is one sensible way of protecting a nest egg. What appear to be piddling amounts can wreak havoc over the life of a retirement account. For example, a one-time $10,000 investment that earns 8 percent annually over 25 years will have more than $16,000 (28 percent) less at maturity with a 1 percent annual fee levied against it than it would without the fee [source: NADART].

An investor will find it difficult to avoid all fees with a retirement account. It pays to look around though; some advisors charge fewer fees than others. For example, a good certified financial advisor will charge only an annual fee, usually 1 percent of the value of your portfolio. This means the advisor has ample incentive to build your wealth. Other advisors may charge transaction fees in addition to an annual fee. Familiarizing yourself with fees before signing on with an advisor can help you save money in the long run.

Be careful going overboard with ditching fees, however. Part of what you’re paying for in an advisor is expertise.

3.) Keep Working

This is likely to be the least popular tip, but it’s the most realistic one. Increasingly, the idea of checking out of the work force at age 65 is going the way of being able to retire on Social Security checks. The good news is, we’re generally staying healthier and more active longer, which means we also can work longer. It stinks, but it also gives your portfolio the chance to continue increasing in value for a few more years. Remember, compound interest really adds up over time.

A person entering retirement age has a few options available. One is to simply stay at the same workplace. You can also undertake a step-down method, either by decreasing the hours logged at work or by finding another, less demanding job. The downside to the step-down method is that it will likely result in less income. Having paid off your mortgage and other substantial recurring expenses and being willing to live a bit cheaply for a few years works well while you’re gradually decreasing your work load. If you’re willing to trade money for free time, it will pay off.

2.) Budget on the Back End

You’ve cut corners and saved for the last couple decades. You’ve been good about not touching your nest egg. You diversified your portfolio well and weathered some economic downturns. Now that you’ve reached the end of your work life, you’ve got a substantial treasure chest that’s all yours. Don’t blow it.

Create a budget you can stick to just before you retire. After years of creating new budgets as your net worth grew more and more positive, you should be a pro at making budgets by now. This is not to say that you have to look forward to living frugally for the rest of your life, just wisely. What is it you’ve always envisioned yourself doing when you retire? If it’s travel, then create a travel category as a monthly expense in your retirement budget. If it’s spending time with your family, then create a “spoil the grandkids” category.

You can still live your retirement years the way you like; sticking to a budget will help keep you from outliving your nest egg.

1.) Purchase Long-Term Care Insurance

It’s a pretty depressing thought, sure, but we’re all going to die one day. Unfortunately, none of us can say how and when we’ll die. That’s why it’s a good idea to purchase long-term care insurance. This specialized form of insurance covers the cost of health care that extends long beyond a typical hospital stay.

On the surface, buying long-term care insurance doesn’t seem to have much to do with saving for retirement. Remember, however, that smart saving also involves spending at times. With long-term care insurance, you’re actually buying a policy that protects your retirement savings. Having to spend your nest egg on long-term care — which can easily reach into the tens and even hundreds of thousands of dollars, depending on the quality and length of the care — is not what you’ve been saving up for throughout your career.$

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Managing Post-Retirement Risks: The Stock Market

Stock market losses can seriously reduce retirement savings. But common stocks have substantially outperformed other investments over time, and thus are often recommended for retirees' long-term investments as part of a long-term investment mix.

Predictability

Individual stocks rise and fall based on the outlook for the stock market and the specific company. Individual stocks are more volatile than a diversified portfolio.


Stock index funds are diversified, but they still are exposed to the ups and downs of the stock market.


Managing the Risk

Stock market investors should diversify widely among investment classes and individual securities, and be prepared to absorb possible losses. Because it may take many years to recover losses, older employees and retirees should be especially careful to limit their stock market exposure.


A variety of polled investment "funds" exist, ranging from mutual funds and exchange-traded funds to managed accounts to hedge funds.


Hedge funds, which are private investment funds that participate in a range of assets and a variety of investment strategies, may offer some protection, but they can be complex and have high expense charges.


Stock funds offer opportunities to invest in both U.S. companies and international stocks.


Conclusion

Some financial products let an individual invest in stocks and guarantee against loss of principal. However, expenses on these products may be high, and the financial firm may limit losses by shifting most funds to bonds, thus reducing the stock exposure.


Younger workers can afford to take more risks because they have time to make up short-term losses and can postpone retirement. Older individuals might want to allocate a smaller proportion of assets to the stock market.


Target-date (or "life-cycle") funds gradually shift some of their assets out of stocks as the investor gets older. In target-date funds designed by different fund managers, the allocation to stocks at a given age varies. Proposed regulations would increase disclosure to consumers about target-date funds to bolster understanding of what these funds do and don't do.


When significant personal assets are in company stock, the risk of job loss is compounded by possible loss of savings if the company does poorly or goes out of business. Even if a company appears strong, it is safer to diversify those assets among other investments.$


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Managing Post-Retirement Risks: Inflation

Inflation should be an ongoing concern for anyone living on a fixed income. In the recent era of relatively low inflation, workers may not know about or remember the double-digit inflation of 1947, 1974 or 1979-81. Even low rates of inflation can seriously erode the well-being of retirees who live many years.

Predictability

Average past inflation can be calculated from historical data, although actual experience over a typical period of retirement may vary widely. Past inflation data can provide some help in estimating retirement needs, but there is no guarantee that future inflation will match historical experience.

Managing the Risk

Many investors try to own some assets whose value may grow in times of inflation. However, this sometimes results in trading inflation risk for investment risk.

Investment returns from common stocks have increased more rapidly than consumer prices in the long run. But in the short term, stocks don't offer reliable protection against inflation. The historically higher returns from stocks are not guaranteed and may very greatly during retirement years.

Inflation-indexed Treasury bonds grow in value and provide more income as the Consumer Price Index goes up. Many experts say that retirees' investments should include some of these securities.

Inflation-indexed annuities, not widely used in the United States, adjust payments for inflation up to a specified annual limit. Annuities with a predefined annual increase also are available. These kinds of annuities cost more than fixed-payment annuities with the same initial level of income.

Investments in natural resources and other commodities often rise in value during periods of long-term inflation, but the values may fluctuate widely in the short run.

Conclusion

Inflation can be a major issue, especially as retirement periods lengthen. Inflation is not highly predictable.

Retirees can set aside assets that will permit a gradual increase in consumption.

Providing for expected inflation one way or another, although costly, is needed in any realistic plan for managing resources in retirement.

Delaying receipt of Social Security will build up valuable inflation-indexed benefits for retirees and spouses.

When housing values were increasing, homeowners seemed to have a hedge against inflation, but this has not been true in recent years.

Current and future retirees who have expected to use their home equity as a source of retirement income may be sorely disappointed, especially if housing values continue to decline. Strategies that rely on increases in the value of housing and selling quickly are very risky, since the value may not rise and it may take a long time to sell the house.$

Next Risk: Interest Rates

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Fundamental Indexing: A Different Approach

Investors generally can divided into two camps: those who believe the market constantly misprices stocks, leaving opportunities for active traders to take advantage of; and those who accept the "efficient market theory" and believe that it is better to just hold index funds. But this "active versus passive" debate often leaves out a third viewpoint.

That view reflects the belief that while the market is not always perfectly efficient, it is difficult to consistently pick enough "winners" to overcome the management fees, trading expenses and income taxes associated with active stock trading.

Passive investors - meaning those who think that the market's pricing generally reflects the approximate current value of a company, given its future prospects - typically turn to index funds as the vehicle of choice. An index, like he S&P 500 or the Barclays U.S. Aggregate Bond Index, represents that particular small or large part of the market: If the market goes up or down, the index will move in parallel, since it is invested in the same way the market itself is constructed. Index funds are less expensive to operate, as their managers do not have to work to continually beat the market.

That said, most indexes have some disadvantages. Traditional indexes are "market cap weighted" (number of shares outstanding times their stock price). The higher the relative market value of a company, the greater portion of the index it will represent. However, when securities become over- or under-valued, market cap-weighted indices must assign a greater relative share to overvalued stocks; as a result, the market-cap indices exaggerate the market movement. For example, if a tech stock is trading at an excessive price/earnings (PE) ratio, a market-cap index will hold a larger amount of this stock than a similarly-sized company trading at a reasonable PE ratio.

Fundamental indices represent a different approach. Company size is measured by four equally weighted factors: sales, cash flows, book value and dollar value of dividends paid. These four factors are used to generate a ranking of the stocks in the sector being tracked. Note that his method completely ignores stock price, so while the market may be overvaluing that tech company mentioned above, the mispricing has no impact on how the stock ranks in a fundamental index. The fundamental methodology does not completely avoid owning "overvalued" stocks; it just holds them based on a truer measure of their value, not their stock market value. There is a large overlap when comparing the two - the names are most often the same, but the ranking is different.

Not many advisors have made the switch to fundamental indices, and we're glad they haven't. It's one more way that we can create an advantage for our clients. As we continue to scan the horizon for "best practices," we'll bring you what we find, so that there will be more and more ways for you to benefit from working with Retire Village.$

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Retirement: Five Financial Risks Ahead

In retirement, there are five major financial risks that must be accounted for. Your retirement income plan needs to have a solid strategy that helps you address and navigate these risks.

1. Interest Rate Risk. Traditionally, bonds were a great option to provide interest income to help supplement a retirees' Social Security or pension benefits. If a retiree required an extra $40,000 in annual income, and bonds were paying 4%, they would have to purchase $1 million worth of bonds. This would basically be an all-in strategy, where all of a person's savings went into bonds. That was ok when people retired at 65 and lived to age 72. Now, we have potentially 30-year periods in retirement. This leaves the retiree exposed to interest rate risk. Just what is interest rate risk? A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions. When market interest rates rise, prices on fixed-rate bonds fall. Interest rate risk is common to all bonds, even U.S. Treasury bonds. A bond's maturity and coupon rate generally affect how much its price will change as a result of changes in market interest rates. A bond's yield to maturity shows how much an investor's money will earn if the bond is held until it matures. If you have to sell your bonds before maturity, say when interest rates are rising, they may be worth less than you paid for it.
2. Market Risks. Another strategy is a mix of stocks and bonds. Bonds provide interest and stocks would give growth, providing a hedge for inflation. The problem with this drawdown strategy is that the markets have to cooperate. If you start taking income when markets are down, you are really decimating your portfolio. You're exponentially increasing the chances of running out of money in retirement. Stocks and bonds can be down at the same time. Market risk is the possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets. Market risk cannot be eliminated through diversification, though it can be hedged against. The risk that a major natural disaster will cause a decline in the market as a whole is an example of market risk. Other sources of market risk include recessions, political turmoil, changes in interest rates and terrorist attacks.
3. Longevity Risk. Individuals often underestimate longevity risk. In the United States, most retirees do not expect to live past 85, but this is in fact the median conditional life expectancy for men at 65 (half of 65-year old men will live to 85 or older, and more women will). For individuals, insurers provide the majority of products designed to help individuals manage the risk that they outlive their assets. Individuals without defined benefit plans can ensure lifetime income by purchasing annuities within their defined contribution plans and personal retirement accounts.
4. Inflation Risk. Inflation risk, also called purchasing power risk, is the chance that the cash flow from an investment won't be worth as much in the future because of changes in purchasing power due to inflation. Although the record inflation of the 1970s is history, inflation risk is still a common worry for income investors. Inflation causes money to lose value, and any investment that involves cash flows over time is exposed to this inflation risk. The ramifications of this can be serious: The investor earns a lower return than he or she originally expected, in some cases causing the investor to withdraw some of a portfolio's principal if he or she is dependent on it for income. It is important to note that inflation risk isn't the risk that there will be inflation, it is the risk that inflation will be higher than expected.
5. Healthcare Risks. Inflation on healthcare costs coupled with living longer in retirement can spell disaster if not properly managed. Compounding this issue further is the rate of inflation on items such as prescription drugs and preventive care, which have historically exceeded the 3% general rate of inflation. According to a 2011 Fidelity Investments study, a 65-year-old couple would need $230,000 to pay for medical expenses through retirement, not including long-term care costs ranging from $35,000 for assisted living facilities and home health care, all the way up to $70,000 or more for nursing home care. These are significant expenditures which show no sign of decreasing. Traditional solutions such as Medicare and Medicaid are helpful, but they aren't always enough to meet an individuals needs. Around 69% of pre-retirees are very or somewhat concerned about having enough money to afford adequate healthcare; 51% of retirees share that level of concern. Additionally, 63% of pre-retirees are concerned about having enough to pay for long-term care; 52% of retirees share that concern.

If you are nearing retirement, or are already there, you need a strategy that addresses ALL of these risks. Professional mountain climbers know that most fatalities and injuries happen on the way down the mountain, not during the climb. Likewise, you have successfully navigated your way to the retirement savings summit. Now, you need a way to safely de-cumulate. There are a lot of risks to staying retired. If your current advisor is not helping you address all, or at least most of these risks, it's time for a second opinion.$

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Managing Retirement Decisions: Designing a Monthly Paycheck

"Where's My Paycheck?" That is a common question for new retirees and near-retirees when they start mapping out the retirement journey ahead. In their working days, many had regular pay checks coming in to cover ongoing expenses. But what will take its place in retirement?

Social Security checks provide a portion of monthly income for most older people. Some also receive monthly checks from a traditional pension plan. These sources typically form the foundation of a retiree's income plan. But to maintain their standard of living, many people also need additional monthly income during retirement. How to build that additional income stream is the challenge.

For many, the discussion revolves around two questions: "Should I just take withdrawals from my savings and investment accounts whenever I need money beyond my Social Security or pension check? Or, should I purchase financial products - like annuities - that will pay me a guaranteed income stream?"

The choice between taking withdrawals and purchasing an income annuity involves many trade-offs, so it pays to look at the issue from many angles before reaching a decision.

A good place to start is to assess how much flexibility you are likely to need. Early in retirement, for example, people may have considerable flexibility to spend discretionary funds on hobbies or vacations. In the later years, however, this flexibility may decline or uncertainty may rise concerning health care costs or long-term care costs.

Early Steps

An early step in the retirement planning process is to project future sources of income and estimated expenses. Sources of future income may include Social Security, work-related pensions, or income from continuing to work.

Some income items will adjust for inflation, like Social Security, and others, like most corporate pensions, are fixed for life.

For future expenses, experts suggest splitting them into two categories: 1) required living expenses, including taxes; and 2) discretionary expenses.

Individuals who have mortgage debt at the time of retirement need to decide whether to pay down all or part of the debt. A key decision factor is the amount of assets and liquidity that will remain after paying down debt. Ask this question: Will the pay-down of debt be too constraining?

Those who have work-based retirement plans may have decisions to make before considering purchase of any retirement products.

Prior to separation from the company, retirement plan participants will likely be given a choice between: 1) Leaving your money parked in the plan; 2) Take a lump-sum distribution; 3) Roll the money into an IRA; 4) Take periodic distributions; or 5) Purchase an annuity through an insurer recommended by the plan sponsor.

Keep in mind that employer offers usually come with a fixed time frame for making a decision. Also, if the participant is married, they will have to consider the impact their choice might have on their spouse.

Products with Lifetime Guarantees

Once an individual chooses an approach and income plan, he or she will need to scope out the available products that can help implement the plan. To the extent that future required living expenses exceed future income, people may decide to fill the gap with a product containing guarantees. Some examples follow.

Income annuities. The most straightforward choice would be an income annuity. This is an insurance policy. The purchaser pays a certain dollar amount up front and the annuity pays a fixed amount per month for life. Income annuity products come with various features that make them adaptable for individual situations. For example, income annuities:

• Cover either single or joint lives. 
• Come with various refund options - for example, a guarantee that payments will last at least 10 years even in event of death of the payee. (The more attractive the refund feature, the lower the monthly payment.)
• Pay a flat monthly amount for life, in most cases, or make payments that step up by a set percentage each year. 
• May adjust the monthly payments each year for actual inflation. Not all income annuities do this. 

Other products.  Annuities, including variable annuities with a guaranteed lifetime withdrawal benefit (GLWB) , fixed annuities and fixed indexed annuities with guaranteed income riders, also 

offer lifetime income that retirees may want to consider. 

Bottom Line

When comparing regular investments versus products with longevity guarantees, retirees and their advisors will find some very attractively priced regular investment products available. These include index funds and exchange-traded funds, both of which cost a fraction of 1 percent a year. 

Some retirees and near-retirees may prefer to invest in products with guarantees. The market for income annuities is competitive, and low-cost products are available. 

In choosing these products, they will need to pay attention to the tax effects. Tax treatment varies among the different financial products, so after-tax results may look quite different from before-tax results. They should also pay attention to the financial strength of the insurance company selling the product. 

It is essential to work with advisors who are experts in this market and who understand tax effects. Advisors and individuals who use financial projection software in their planning should check to be sure the software takes tax considerations properly into account.$

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Algorithmic Trading: How Algorithms Came To Rule Our Investment World

Algorithmic trading is a system that uses very advanced mathematical models for making transaction decisions in the financial markets. The system attempts to determine the optimal time for an order to be placed that will cause the least amount of impact on a stock's price. Algorithmic trading is widely used by investment banks, pension funds, mutual funds, and other buy-side (investor-driven) institutional traders, to divide large trades into several smaller trades to manage market impact and risk. Sell side traders, such as market makers and some hedge funds, provide liquidity to the market, generating and executing orders automatically.

The main objective of algorithmic trading is not necessarily to maximize profits but rather to control execution costs and market risk.

Algorithms started as tools for institutional investors in the beginning of the 1990s. Decimalization, direct market access (DMA), 100% electronic exchanges, reduction of commissions and exchange fees, rebates, the creation of new markets aside from NYSE and NASDAQ and Reg NMS led to an explosion of algorithmic trading.

Algorithims Replacing Wall Street Analysts, Investors

Computerized algorithms are quickly replacing single-stock analysts and investors, leading to big changes in the way the stock market will value companies and increasing the chance that software glitches or hack attacks will jeopardize market stability. Algorithmic trading may be used in any investment strategy, including market making, inter-market spreading, arbitrage, or pure speculation.

A third of all European Union and United States stock trades in 2006 were driven by automatic programs, or algorithms. As of 2009, studies suggested High-Frequency Trading (HFT) firms accounted for 60-73% of all US equity trading volume, with that number falling to approximately 50% in 2012.

Technological forces - including HFT, an explosion in exchange-traded funds and the proliferation of free information via social media - are behind this shift.

The changes that started with high-frequency and algorithmic trading are just the first step to an entirely different process of determining stock prices. Computers and decimalization have chipped away at the ranks of human traders in the past decade. Now, smarter machines are taking aim at the very people who analyze a company's merits and who make buying and selling decisions based on that analysis.

These algorithms tend to see the market from a machine's point of view, which can be very different from a human's. Rather than focus on the behavior of individual stocks, for instance, many prop-trading algorithms look at the market as a vast weather system, with trends and movements that can be predicted and capitalized upon. These patterns may not be visible to humans, but computers, with their ability to analyze massive amounts of data at lightening speed, can sense them.

Boon for Individual Investors

For individual investors, trading with algorithms has been a boon. Today, they can buy and sell stocks much faster, cheaper, and easier than ever before. But from a systemic perspective, the stock market risks spinning out of control. Even if each individual algorithm makes perfect sense, collectively they obey an emergent logic - artificial intelligence. It is simply, alien, operating at the natural scale of silicon, not neurons and synapses. We may be able to slow it down, but we can never contain, control, of comprehend it. It's the machines' market now; we just trade in it.$

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Wall Street: Rise of the Machines

The Future Has Arrived - On Wall Street!

Can professional money managers still beat the market? It has always been a difficult task for investors to consistently beat their index benchmarks. Lately, it has been nearly impossible. The reason: the rise of sophisticated computer-trading programs.

There were 51 advisers out of more than 200 on the Hulbert Financial Digest's list who beat the market in the decade-long period ended April 30, 2012, as measured by the Wilshire 5000 Total Market index, including reinvested dividends.

Of that group, just 11 - or 22% - have outperformed the overall market since then. Over the past year, on average, the group has lagged the Wilshire index by 6.2 percentage points.

Chasing Performance
In other words, going with a recent market beater doesn't increase your odds of future success. Before the era of computer-dominated trading, it was a bit easier to identify wining advisers. You could more easily understand and evaluate what they were doing.

Rise of the Machines
One major reason why machines are winning is our inability to process lots of financial data, which is getting more complex and voluminous every year. Also, there used to be another human being on the other side of the trade when a stock was bought or sold . Now it's a supercomputer that is competing with traders. Even if you are a Grandmaster, you are bound to lose competing with "Deep Blue".

Man consistently loses out to machine in a wide variety of pursuits, ranging from medicine to economics, business, psychology and even things like predicting the winners of football games and judging the quality of Bordeaux wine. In each of these domains, the accuracy of experts was matched or exceeded by a simple algorithm.

Betting on the Pros
Some traders hold out the hope that they can beat the market by following the lead of an investment adviser. But it is close to impossible to identify these advisers in advance. The average reader of financial publications simply cannot identify these market-beating advisers. Repeated studies have shown that even the best institutional investors have been unable to identify them in advance.

There's another reason why it is so hard for top-performing advisers to beat the index over the long term. Once the adviser turns in impressive performance, lots of new money flocks to his fund, diluting the ability to continue performing well.

This appears to be what contributed to the downfall of legendary fund manager Bill Miller of Legg Mason Value Trust. At the end of 2005, Mr. Miller had one of the hottest hands in U.S. mutual-fund history, beating the Standard & Poor's 500-stock index for each of the previous 15 years. His fund attracted lots of new money, and he found it impossible to continue his remarkable record.

From 2006 to 2011, he lagged the market in all but one year, and in 2012 he resigned as manager of that fund.

The Trading Trap
So, what's an individual investor to do? Where do you turn? For one thing, don't trade. Short-term trading has become so dominated by Wall Street's computers that individuals - and professional managers - almost certainly will lose out to them over time. The alternative: to buy and hold diversified index funds with very low expenses.

Age Matters
An important note: When you are young and in the accumulation stage, you can afford to be aggressive while building up your assets. You have time to ride out the market's ups and downs. But as you near retirement, it is time to go into protective mode. Time is no longer on your side to make up steep losses. Your serious money, money that you absolutely cannot afford to lose, should not be tied up in risk assets. In poll-after-poll of pre- and post-retirees, the most common retirement goals include guarantee of principal, potential for portfolio growth and a steady income stream.$

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Chickens, Pigs, Bulls and Bears: The Stock Market is a Barnyard

The great novel Animal Farm, written by the legendary author George Orwell, is about animals and how they live together in a hierarchical society. As it turns out, he may have been talking about the stock market.  The market is full of these named animals and each has a different place on the investment pole.

Pigs are greedy, chickens fearful, bears hide and sleep, bulls charge ahead. Over the years, these names have become synonymous with a person’s investment interest or view of how the market is going to move. Really, the names of the animals signify an individual’s approach or philosophical investment strategy.

Here are the animal definitions converted to investment philosophies:

Bull: A Bull Market means the economy is growing and means investor confidence and anticipation of market growth.

Bear: A Bear Market is the opposite, the economy is weakened or expected to weaken.  The stock market is expected to be lower in the future.

Pig: A Pig Market is a high risk big score (or big loss) position. Pigs are impatient, greedy and emotional towards their investments and only think of themselves.  Pigs normally get slaughtered.

Chicken: A Chicken Market is fear.  Chickens have no specific plan and are driven by fear of losing their money. Fear overrides common sense and any plan is quickly changed if a loss occurs.
If you have a plan based on reality you are probably not a pig or a chicken.  It means you have used good, available information and are heading towards your goal.  As we age, the goal can also change, from accumulation to income.

But what about this….what if you can’t afford to lose any of your important money!  How do you evolve from the barnyard descriptions with a philosophy that makes sense to you?  In other words, how does your retirement plans relate to safety, security and stability?

While no one approach makes sense for everyone, using a new financial vehicle called a Fixed Indexed Annuity with an income rider attached really works for many people.  The annuity provides total protection from any downside movement in the stock market while providing a guaranteed yield in the range of 4% to8% when used as income. (income rider)

If it is time to take a new approach to some of your important retirement funds, consider this powerful option, then maybe you will no longer be a barnyard animal, you could be soaring like an eagle.

You can request more information and a free annuity quote by filling out the form on our website.

Or you can research annuities further in our Annuities 101 section.$

www.RayBuckner.retirevillage.com

Should I Invest In An Annuity?

Should you invest in a house? An IRA? Stocks and bonds? How should you invest your important money?

The answer is actually quite simple if you can answer just one question.

“What is the purpose of your money and what do you want it to accomplish?”

Most people can’t answer that question immediately.  The reason is simple; it is a very hard question to answer.  The funds could be for a new car, a vacation home, retirement, education.  The answer is dependent on the goals of the person asking the question.

Should you invest in an annuity?

I believe that the basis of all long term investing that concern funds for retirement should be in something safe and secure and free of risk.  I also believe that a portion of your long term retirement funds should have some degree of risk.  With risk comes the possibility of gain, gain can help offset inflation and add to the retirement pot.

My father didn’t invest in the stock market; he kept his money in the bank.  Did he make a mistake being so conservative? Did it cost him money in the long term by not investing more aggressively?  No, he didn’t lose money by investing in banks; he lost the “opportunity” to make more money.  That was his downside, he lost an opportunity, but he didn’t lose his money, it was still safe and secure.

Consider a plan that includes an annuity as your choice for your safe and secure funds for one simple reason.  Insurance companies who provide  annuities do not care how long you live, they will accept the responsibility of providing you income, income you cannot ever outlive, regardless of how long you live.

Once you base is in place, then add investments which can have some risk but also some larger rewards.  Then as you age and get closer to retirement time, slowly convert your risk investments to the safe and secure side, the annuity side.  A simple and easy approach to managing your own retirement plan.

Should you invest in an annuity?  Yes, as the foundation of your retirement plan.$
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