The New Game Plan

I believe that we’re currently in a long-term bear market and it may take several years before a long term bull market cycles returns.  Until then, we most likely will see a continuation of a choppy, sideways environment similar to what we have experienced in the last decade.

Since 2008/2009, there has been a fundamental shift in the marketplace to invest for shorter time horizons.  We need to recognize this shift and explore specific ways of investing on a more active basis where positions are evaluated daily, if not more frequently.

In order to produce actual cash flow from your investments in the new market economy, you could consider integrating a part of your total investment portfolio of stocks and bonds with alternative investments, so that you could protect the remaining part of your portfolio from the possibility of a downside risk.

The old ‘buy and hold’ strategy is fading out for many.  It may not hold up in the new market environment.  What I see is that we’ll be seeing a new model of investment allocation; moving away from the traditional 60% stock (equity)/40% bonds (fixed-income) model to a 33% stock, 33% bonds and 34% absolute returns portfolio.

This approach includes a variety of non-correlated alternative strategies such as commodities, real estate investment trusts, derivatives, and  other non-traditional investments.  Many hedge funds can also fit into this category, too.

One of the advantages of using these kinds of strategies for absolute returns is the very nature of diversification. It minimizes the risk in a portfolio by holding asset classes that are non-correlated, and so it reduces the exposure of individual asset risks.  You can utilize these non-correlated investment strategies in order to neutralize the risks, which can be attributed to the decline in valuations, so often seen in traditional stock & bond portfolios.

But, of course, the rate of allocation does depend on several factors such as your time horizon, liquidity requirements, risk tolerance and your general investment objectives.  Make sure your advisor is well versed in these new alternative strategies and can recommend money managers that have a proven track record managing these asset classes.

59½

Oh, the magic age that will give you the green light to withdraw from investments that you’ve made into 401(k)’s, Simple IRA’s, SEP’s or regular IRA’s, without the penalty of 10% for early distribution.  Though, don’t forget, you’ll have to pay income taxes on both the state and federal levels once the funds are withdrawn.

62

Now’s the time that you can start claiming your Social Security early, but the downside is that up to 30% of your benefits will be reduced for the rest of your life.  If you can hold off until full retirement age when you reach between 65 and 67 years old – depending on the year you were born – you can collect the entire amount.

65

Even up to three months before you turn 65, you can sign up for Medicare Part A (inpatient care) & Part B (outpatient), to make sure that it kicks in on the day of your birthday.  Part A is for those who are eligible for Social Security and Part B is a voluntary option for a monthly premium.  Medicare Part C, a managed care plan, gives you a broader healthcare coverage than the regular Medicare Part A & B.  And, as we know how prescription drugs can get expensive, Medicare Part D is a plan that helps reduce your costs on prescription medications.

70½

You’ve now reached the maximum age.  Once you hit 70½, you are required by law to withdraw a minimum amount from your retirement IRA account every year by December 31^st or you face penalties.  This is a hefty penalty of 50% on the shortfall.  The withdrawal is considered part of your adjusted gross income (AGI) on your taxes.  Wondering what the minimum withdrawal amount is?  It’s calculated as the balance of the IRA divided by the joint life expectancies of your account beneficiaries.

Happy Birthday!

Reasons for Bankruptcy

• Reduced Income – typically, Americans find themselves with a smaller income after retiring, based on Social Security or a pension to keep them afloat.  But, Social Security most likely won’t help ends meet.
• Credit Card Debt – because Seniors are living on a fixed income, many are living beyond their means and debt begins to mount.  Credit card use rises, in order to supplement income or expenses.
• Health & Medication Expenses – because of the skyrocketing costs of healthcare and medicine, many expenses are hard to keep up with increasing medical debt.
• Declining Stock Market – as we’ve seen in recent years, the stock market has been volatile and retirees had been banking on living on the gains from the market to live on, during retirement.   Many have since found themselves with significantly less and are having a hard time supporting themselves.

Avoiding Bankruptcy

• Manage your Spending – before even going into retirement, start getting used to living on less as when having a full-time job.  By getting spending under control while you are working, you’ll keep debt levels low and increase your savings for retirement.  Make sure that you are as free of debt as possible when entering retirement.
• Diversify your Portfolio – as I’ve mentioned in other posts [link to a previous post], diversification is key to securing your portfolio during bear markets or recessions.  The general rule is to spread out your assets across several different types of investments like dividend-paying stocks, bonds, mutual funds, annuities, and certificates of deposits (CD’s).  So, if one of these types of assets performs badly, it will be supported and mitigated by the other types of assets.
• Get a Second Job – working during retirement, whether part-time or full-time, will help stretch your savings far into your golden years.  Finding work will help you supplement your income from what you are already receiving from pensions or Social Security.  Working even part-time will not have to affect lifestyle, and you won’t have to take drastic steps after finding that your savings may be running out if you don’t continue working.

Considering Bankruptcy

Bankruptcy is not only about releasing your debts, but it’s also about protecting your future.   Filing for Chapter 13 Bankruptcy allows you to restructure your debt.  One positive aspect with this kind of filing is that Chapter 13 lets you keep your home and your retirement savings.

One rule of thumb is that you should never use your retirement accounts as collateral for loans.  Doing so may put your retirement account at risk when filing for bankruptcy.

Also, it’s never a good idea to withdraw from the future to pay off for today.  Never withdraw from your retirement account to pay off debts or living expenses when you are in financial duress.  This is a sign that you may need to look into bankruptcy.  Taking out money from your retirement accounts is a big mistake, because when you file for bankruptcy, there’s no way to protect the money you have already withdrawn.  Bankruptcy protects your retirement savings you’ve worked so hard for, but only if you haven’t withdrawn from the golden pot.

I’d love to hear about your own experiences, these past few years.  Have you found yourself trying to stay out of bankruptcy or have you had to file?

Classic Cons

1. “Prime bank” programs – Despite having credible sounding names and documentation, this con offers investors huge returns by claiming that investments will be used to buy and trade “prime bank” financial instruments.  Supposedly, you’ll get access to programs at the world’s most “elite” banks in financial centers like New York, Geneva, and London, claiming it is reserved usually for top financiers.  They have become more sophisticated and have greater audacity as ever, even advertising in reputable media such as the Wall Street Journal and USA Today.   Often, they guarantee returns from 20% – 200% returns monthly, risk free.

TIP: Be careful if you’ve been invited to invest in the world’s top 100 banks, offshore trading programs, Bank Guarantees, Standby Letters of Credit, bank-issued debentures or some kind of variation of these terms or description.  Often, they will say the program is endorsed by the World Bank, Department of Treasury, the International Monetary Fund or some international central bank.  Stay clear.

2. Ponzi Schemes – named after Charles Ponzi, who conned investors in the early 1900’s out of over $10 million dollars.  Generally, you’re promised high returns or dividends, like 15%-20%, which are not available through traditional investments.  The con artist doesn’t invest your funds but pays “dividends” to the initial investors, who praise the investment scheme and inadvertently help recruit new investors.  In addition, the fraudsters also use your money to live a lavish lifestyle.  Eventually, they skip town with all the cash.

However, like Bernie Madoff who is now serving a 150- year prison sentence for a multi-billion dollar Ponzi scheme, was more sophisticated.  He did not promise an outstanding short-term investment return, but his investor’s fake account statements showed moderate, though positive returns.

TIP:  Most ponzi schemes are not as sophisticated as Madoff’s.  Be wary of investments that offer you quick returns or a very high yield.  It’s most likely a scam.

3. Email scams – here are two common scams that you may come across:

“Phishing” – these are emails claiming to be from a reputable business or organization like your bank or a government agency like the IRS.  These emails seem very legitimate by their look and feel, having the same logos and branding.  In the emails, they ask you to “confirm” your account numbers and passwords.  You could also come across phishing emails that say that your account is about to be closed or you may be a victim of fraud.  Don’t fall for this con – as many people have had their accounts emptied.

TIP: Delete, delete, delete!  Legitimate businesses and organizations never ask for your private information via email.  Dump the email and report it to the real business or organization.

Nigerian or other international emails – this is an old scam that used to come in letter form, but now they come via emails.  There’s usually a grand tale of someone saying how they can get large amounts of money but they can’t access it.  The con artist asks for your bank account number in order for them to obtain the funds and promise a cut for your help.

TIP: Hit the delete button, again!

All in all, do your homework, but if it sounds too good to be true, it most likely is, as with all “get-rich” quick programs.  From my point of view, it’s better to pass up an opportunity than to be wiped clean by a scam.

1. Putting all your eggs in one basket

Recent history shows that companies are vulnerable and are susceptible to collapse.  Many employees have invested in their company stocks and have lost a tremendous amount of their retirement savings with their employers.  Be careful to not put too much faith in investing more than 5% into your company stock, as it violates the one investment rule – diversification.

2. Not increasing contributions

The most common way to start off a 401k plan with most employers is a 6% contribution to get a full company match.  But as time goes on, you’ll hopefully be getting bonuses and raises for your great performance.  Don’t forget that you can increase your contribution level as you acquire more income, even by a percentage point or two, and still bring home the same or even more salary at the same time.

3. Cashing out

If you plan to move from one company to another, the worst thing you can do is cash out your 401k plan.  With this payout, you’ll not only owe taxes on the money but you also may be subject to a 10% penalty for early withdrawal if you’re under 55.  The secret is to roll over your 401k to a new 401k or into an IRA account.

4. Not rebalancing

When you first got on board with the 401k, you allocated a certain percentage to various stocks, bonds and cash that you’d contribute to. Depending on how the investments performed, your percentages have changed as well.  However, if you haven’t rebalanced over time to match the market fluctuations, it’s time to look at your portfolio again.  Your best bet is to rebalance every year to stay on top of the game.

5. High fees

When looking into performance rates of stocks, don’t forget to investigate how much are the fees associated with that stock.  If the fund has a high expense ratio, then your return will be cut significantly.  It’s important to keep an eye on fund expenses that are relative to the same asset class, since fees vary by the type of fund.  For example, bond funds are usually less expensive than stock funds.

Bertrand Retirement Strategies can takeover any existing employer plan and provide professional, personalized advice and assistance to all participants or help an employer start a employee retirement plan. Our open architecture platform welcomes the best funds and ETFs controlled by leading managers.

Don't Just Retire - Phase into Retirement

In retirement, our wants and needs change over time and so, we ought to be flexible to balance these expenses.   Though everyone plans for their retirement differently, we should look at phasing into this new stage in life as early, mid and final years.

The early phase in retirement brings on a transition from our main jobs and careers to something that we enjoy doing.  At this time, many are enthusiastic and often travel extensively.  But for many, the need to stay active prompts retirees to keep working part-time or even start-up a new business.  The trend is growing that most people don’t want to retire fully, so they often reinvent themselves and balance their time between work and leisure.  This kind of income will prop up investments for later, allowing retirees to continue doing things that they enjoy.

In the mid-phase, life becomes more predictable and more stable. Retirees often stay closer to home in this phase of the retirement cycle, enjoying their time with family and friends.  In this phase, about 70% of your assets should be your income.  Checking investment portfolios is key to make sure that you don’t come up short in income.  At this time, inflation will reduce your purchasing power, and this may be good time to switch over to your long-term assets, making them last as long as possible.

In the final phase, our capabilities begin to slow down, making us retire fully from working. Retirees now tend to battle physical and mental aspects of old age.  Visits to doctor’s offices are more frequent, and other medical expenses will take up a significant amount of monthly income.

All in all, keep in mind that cash flow needs will be different in each phase of retirement.  In the early and final phases, expenses will be higher due to travels and medical expenses.

Since people are living longer these days, it may be a good idea to review other investment opportunities like annuities, reverse mortgages and even charitable remainder trusts.

Are you financially ready to cover your healthcare or long-term care in your later years? Take a look at some life insurance and other products that may help cover the costs.

When estate planning, making sure that assets are mixed with high-quality bonds or blue chip stocks will leave dividends for heirs.

Most importantly, keep rebalancing your portfolios that reflect varying priorities in each retirement phase.   Make sure that you keep up with changes, needs, objectives and goals and adjust your financial investments when necessary.  Also, monitor your cash distributions from your portfolios since inconsistent returns may impact them.  Make sure that the withdrawal rates are reasonable in the long-run.

In retirement, the only thing constant is change.  So, roll with the changes and keep your investments in check in every phase of retirement.

Save money for your retirement

So, to get you thinking on how to jump start your savings and get you to invest, here are 25 ways to get you started:

1. Enroll in a 401k. If your employer matches 50 cents for every dollar you contribute, you can net well over a grand a year.
2. Do a direct deposit (auto-enrollment) from your salary into your IRA, 401k or money market account. You won’t even miss it.
3. Hold a garage sale or sell your things on eBay. You’ll be surprised of the hidden costs of having too much stuff. Invest what you make.
4. Create a budget. Write up a monthly budget plan and stick to it. This will help you keep track of your spending, and lets you see where you can cut back on expenses that are not very necessary.
5. Don’t touch! If you have a retirement account, don’t withdraw from your 401k, IRA or other plans before you’re 59.5, or else you may be subject to a tax of 10% of the distribution. With SIMPLE IRA’s, some cases may be up to 25%.
6. Go green. Get yourself a programmable thermostat that controls heating & cooling costs. But the trick is to keep it down. It will cut your bill up to 20%
7. DIY it. Do you really need to call that $50/hour plumber to turn the screw for you? Take some local workshops or buy a book on home repairs. Do it yourself and save yourself some money.
8. You can save up to $100 per year if you keep your car tuned and make sure there is enough air in your tires.
9. Invest from unused sick and vacation days. Many Americans don’t use up all their sick or vacation days at work and are compensated for it. Use those funds and invest in your retirement.
10. To earn the highest return on savings in banks, with little or no risk, look into certificates of deposit (CD’s) or US savings bonds.
11. Though your mortgage rate may be higher, you could save tens of thousands of dollars in interest charges by choosing the shortest-term mortgage you could afford. For every $100K borrowed at a 7% annual percentage rate (APR), you’ll end up paying more than $75K less on a 15 year fixed-rate mortgage than on a 30 year.
12. Go meatless three days a week. You could save up to $25 a week, $100 a month which equals $1,200 a year. Think about how much that could compound in your investments!
13. When investing, focus more on asset allocation rather than on individual picks. Make sure your portfolio is a good mix of stocks and bonds that can maximize your long-term returns.
14. Save on banking. You can save more than $100 on fees by finding a bank with free checking accounts and no minimum balance requirements.
15. Can the TV dinners. They come in tiny portions, they’re expensive and don’t taste so good anyways. Instead, go online to find healthy recipes you can make in a matter of minutes.
16. Regularly meeting up at Happy Hour after work can cost up to $25 or more every time. Saying ‘no’ a few times a month can save you over $100 or about $1,200 a year.
17. Look into stocks. Stocks often are the best for long-term growth and usually achieve higher returns over the long term, ensuring savings outpacing inflation. This will pad your retirement nest egg.
18. Quit smoking. If you spend $5 every other day, you could save over $900 a year, which could go to your savings. You’ll also save on insurance and health care in the future.
19. If you take prescription medication for the long term, look into mail-order pharmacies which often cost less than at your local drug store.
20. Cut down on the TV channels. Do you really need all of them?
21. ATM charges. Be aware of high charges when using ATM machines not associated with your bank.
22. Shop online. There are great discount websites that offer the same products but at a cheaper price.
23. Buy clothing and presents on sale. It’s the same item that was full price, but now on sale.
24. Avoid late payment fees. This will help minimize is credit card costs, and it won’t increase your interest. Also, it’s a good idea to use direct debits wherever you can, to avoid late payments.
25. Stop keeping up with the Joneses. Trying to keep up appearances is damaging to your finances. More often than not, the Joneses are more in debt than you. So, scale back and start saving.

Oh, and here’s bonus that I’ll throw in -

26. Don’t get divorced…

Save, save, save

There are a lot of misconceptions about retirement planning that can distort your savings efforts and even cause unnecessary worries. Sifting through what seems right, or not so right, can be overwhelming. So, to set the record straight, here are three myths to keep in mind.

Myth 1

“I’m too young to think about retirement”

Most young people make the mistake by thinking that retirement is too far into the future, and put off investing for a later time. Rather than thinking that you’re too young, why not think differently by saying, “I’ve got time and compound interest on my side”? The reality is, just delaying contributions for a few years can have a major impact on your retirement fund. It’s never too early to start saving for your retirement. The earlier you begin, the more likely you are to have a significant retirement fund when the time comes.

Let’s say you are 25 years old, you land a great job, and you can invest $5,000 a year into a Roth IRA. If you begin saving and put money in for only 10 years, stopping when you’re 35, at a 10% rate of return, you’ll have $863,417 by the time you’re 60.

Your out-of-pocket cost: $40,000.

But if you start investing at 35, saving $5,000 a year, you’ll have to keep adding $5,000 every year until you’re 60. However, in this case, you’ll have put in a total of $125,000 rather than $40,000 and you’ll end up with an account worth only $496,253.

Myth 2

“I’m too old to start saving”

It’s not impossible to amass a comfortable income if you haven’t started yet. Though, it’s best to start saving as early as possible but if you are a late bloomer, it’s better to start saving late, than never. Start putting away as much as you can from your salary, even if it hurts. You’ll be thankful you did, later.

Even if you are in your mid-50’s, say – making $80,000, you still have time to accumulate between $350,000 – $450,000, assuming you contribute the maximum amount allowable to a 401k, which is $22,000, if you’re 50 or older. It sounds like a lot, about 27% of your salary, but if your employer matches 3% of the first 6% you contribute, you’d have just around $444,000 by the time you reach 65.

Just something to think about: many pre-retirees are even pushing out their retirement, to cushion their retirement nest egg and save more money. Though you are able to get Social Security at 62, the later you wait – say to 70, the fatter check you’ll receive.

Myth 3

“My expenses will drop when I retire”

It’s true that certain expenses after retirement will decline or even disappear. Your kids are now out of the house, and you don’t have to drive to work every day anymore.

However, by itself, health care and long-term care are expenses that can drain most of your savings. At the pace as it is now, rising costs of health care dramatically outpace inflation. Health and long-term care most likely will cost you far more in your golden years than in any other time in your life.

Even after President Obama signed the new health care plan, we don’t know how exactly how it will affect us in the future. But, beginning in 2013, taxes will be imposed on investments on top of interest, capital gains and dividends to cover health care. This needs to be factored into your retirement planning & budgeting as well.

Roadmap to Retirement

20-25 years to retirement:

• Try out a few online retirement calculators and see where you stand.   Are you saving enough through your 401k’s?  It’s important to make sure the retirement assumptions are reflective to your situation.
• Are you increasing your savings as much as possible within your risk-tolerance?  If you’ve maximized your 401k, why not look into some IRA’s?  If you meet certain requirements, you may be eligible for tax-deductions or tax-deferred accounts or open up an account that’s taxable for additional savings.
• Consult with a financial advisor to see if your assumptions are on target.  A good advisor will sift through your entire financial portfolio of your assets and liabilities to give you a comprehensive report card.  The advice from an advisor may help plan the road to a more efficient and effective direction.

10-15 years to retirement:

• Review your current investments, performance and future investment priorities.  Especially from this point, confirm the best financial structures for your proposed timeline.  Don’t forget to assess your taxation strategies.
• Take advantage of the 401k “catch-up” retirement contributions for people over the age of 50.  This is a great way to add another $5,500 over the $16,500 limit to your savings.
• Look into paying off your mortgage.  This will help relieve the financial pressure when your paycheck stops during retirement.

3-5 years to retirement:

• Carefully take a look at your asset allocation.  If you have been investing aggressively up until now, perhaps look into shifting some to more conservative assets.  But don’t forget that you will want your assets to grow for another 20-30 years, so don’t move everything into conservative accounts and put all your eggs in one basket.
• Retirement checking.  In the final years before retirement, keep returning to the process of retirement planning every year and see if you’re on track.  Make any adjustments where necessary.
• Don’t forget about health care.  Though President Obama’s latest healthcare plan is in effect by 2014, it’s not clear yet, how it will affect you.  It’s still a good idea to set aside funds to supplement the benefits you will receive in retirement.

1 year to retirement

• Consolidate any investment plans.  If you have any plans from your employers, think about rolling them over into an IRA plan.  This will help you control your planning for your retirement income.
• Talk with your employer’s benefits department.  Confirm that your retirement assets will be there when the time comes to use them.  Rolling over to an IRA can take about 90 days, but this varies between companies.  So, keep watch to make sure this coincides with your timings on when to retire.
• Make your money management easier by consolidating your assets that are spread between financial institutions.  While it is a good idea to diversify your investments, it makes good sense to consolidate them into a single or a couple of financial institutions you can trust.

As you will see, it is well worth the effort to start planning early.  While planning for your retirement may feel like a bumpy ride along the way, remember that investing your time and money now will smooth the road ahead for your retirement.

Five Retirement Risks to Consider

Here are 5 retirement risks that need to be considered when planning for retirement. Some you can control directly and some you cannot. But it’s important to understand and plan for these risks, so you can lessen their impact on the retirement you’ve worked so hard for.

• Proper retirement Instruments

Studies have shown that rather than timing the market with your investments, it’s so much more effective to spend time IN the market. The problem is over the last decade, even a well-diversified stock or mutual fund program has lost money. And although diversification will balance out your portfolio and minimize your risks of negative market forces happening all at the same time, it will not guarantee growth; especially for income generation purposes. As you approach retirement or after you retire, be sure some part of your investment portfolio guarantees growth and can provide lifetime income, when and if necessary.

• Withdrawal rate

The time to withdraw is quite different for each person, depending on your situation and your investments. If you take out from your retirement savings too much too soon, you could risk not having enough money to last throughout your retirement. But there is a general industry standard of about 4%, however, keep in mind about factors like your health, how long you may live and even inflation rates from year to year. Bear in mind, there are some financial vehicles that provide lifetime income that you can not outlive, so you’re assured you will not run out of money.

• Inflation

Proper asset allocation can help address inflation risk, but be ready to continue riding the roller coaster of the market. Remember, asset allocation does not guarantee a profit or against a loss and a diversified stock portfolio over the last decade has not performed like the prior five decades. It’s best to look for investment vehicles that provide upside potential of the market, but still provide a guaranteed growth rate for generating future income to ensure you will out-earn any inflationary erosion.

• Life expectancy

The average life expectancy is rising every decade. I think these days it hovers around 78 years old. But with the number of years spent in retirement increasing, having a lifelong income stream for retirement is more important than ever. Begin saving and investing aggressively as early as possible and try to defer retirement as long as you can.

• Healthcare costs

With medical advances and longer life expectancies, health care costs have been rising faster than overall inflation rate. Regardless of your current health and family history, health care costs need to be considered while budgeting for your retirement.