If you're getting the same economic news I am, you're probably nervous. You're not worried about losing your job because that is something you used to do before you retired. But bad economic news also means retirement worries. To sidetrack a recession our government has printed a lot more money to bail out the bad boys, pay for imported oil and more, and spur demand for everything from apples to zucchini. More money is now chasing the same, or fewer, things to buy. The inflation rocket is set for launch. Rising prices means fixed retirement income will buy less and you'll have to make adjustments. The double bogey is higher prices with lower interest earnings on your savings [looked at CD rates lately?]. Once the elections are over and your Congressperson is safe for another term, the triple bogey will be higher taxes across the board, including your Social Security benefits, to arrest a ballooning federal deficit. Not to add insult to injury, but if you happen to have your money exposed to risk - say in mutual funds, stocks, real estate, or anything else that waxes and wanes - you could be in for times-two double bogey if not a quadruple bypass. What can you do to recession proof your lifestyle?
Let's start by dividing your retirement money into three categories:
(1) money you'll need during the next five years;
(2) money you'll need during years six through about years 15;
(3) money you'll not need for at least 15 years.
Each category is special and "the time of planned use" will determine where to put the money. These categories can vary slightly between individuals and I recommend you get professional help from a financial advisor to help you determine what is right for you and your family.
The first category should be kept in "super safe and super liquid" places. The appropriate investments, or savings places, are: cash, money market accounts, bank CDs, money market mutual funds, savings accounts and high quality bonds that mature in less than five years. I know the rate of return will be depressing but if you take risk or invest in longer terms, you could lose part or all of your money. The price of the liquidity is the lower interest rate you'll suffer. I know you want a higher rate of return along with low risk, but risk and reward travel together. By working with a financial advisor you can get the proper mix of this low-rate, super-safe investments. Your retirement income is now covered for five years.
Category two is the places you need some liquidity - just in case there is an emergency - and tax deferral would be nice also and you'll want great safety. But, since market cycles can't be counted on to be less than 10-12 years, we don't want this category to be invested in investments whose value is determined by markets. At this point in history there are not many options in this category other than fixed and index-linked annuities. While you may not know anything about annuities now, you need to "get educated" by self-learning or working with a financial advisor who understands annuities. By the way, you'll want to avoid advisors who don't understand annuities because they'll recommend against them. To tell the difference, you'll need to help yourself get the basic knowledge about annuities by reading my "Is Your Annuity Good or Bad?".
The last category is, unfortunately, where you currently have most of your retirement money: market investments like mutual funds, stocks, long-term bonds, REITs and other investments that Wall Street proclaims, in a very loud voice, that you should own. All these have one thing in common: risk. To offset this risk, you should be prepared to leave your money in these investments for a minimum of ten years and probably fifteen to be cautious. For example, as this is written the last peak in the market indexes (DJIA, S&Ps, etc.) adjusted for inflation was in 2000. We are coming up on ten years and the markets have not yet recovered from the dot.com bust of 2000-2002. How long will the sub-prime and mortgage bust keep the markets depressed? No one knows - they may say they do, but no one can see the future. While you still have some risk with this category, you odds are pretty good for your longer-term retirement money you'll need fifteen year or more from now.
What was covered above is called an investment ladder for the retirement-minded. It is not sexy or risky, but it does position your money to last you for full retirement. Since each family's circumstances are different, I strongly recommend that you engage the services of a financial advisor to help you craft a personalized retirement plan. Good luck.
Shelby J. Smith, Ph.D.
April 17, 2008
Learn about safe money places - check out the Retirement Pros website http://www.theretirementpros.com/ I'm also doing free monthly video seminars online sign up at: http://www.theretirementpros.com/Tele-Seminar-MRM.php
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