US News& World Report published a list of the most important risks to your retirement. In the article below I took what I think to be the top 7 risks and have added my comments to each of the risk – http://tinyurl.com/USNews
1. Boomers turn 65 unprepared for retirement. Hope springs eternal and so do our best wishes for aging baby boomers. Every year, the Employee Benefit Research Institute and other think tanks issue research documenting how poorly Americans are prepared for retirement. We haven’t saved enough money. We don’t do a good job of investing the meager retirement funds we have scraped together. We don’t know how much it will cost us to live in retirement. Then we repeat the exercise the following year, and the next, and the next. Seriously, are you prepared for retirement? Think about what this means for you and your family. Make a plan and carry it out.
Marc’s Comment: There is not much more for me to add to this risk in addition to the fact that I created a whole program around it called The Retirement Fitness Challenge™. My program helps people determine how prepared they are for retirement and puts a plan together detailing how they are going to have a successful retirement. I have a seminar scheduled for Monday, July 18, 2011 at the Wood-Ridge Library to talk about taking on the financial challenges of retirement. The article talks about repeating a process year after year, I would take it one step further and say we will soon have an epidemic with people not being prepared for retirement.
2. Americans don’t understand finances and investments. Instead of studies about how unprepared we are for retirement, maybe we should spend the research money on financial literacy education. Without signing up for a Ph.D. curriculum, there are countless strong sources of financial education online as well as at a nearby college or community center.
Marc’s Comment: Managing your own finances can be daunting. Most people do not have the time nor the education to take on things like inflation, rising health care costs, market volatility, and most importantly how to prevent outliving your money. I agree that Financial Literacy should be pushed more and the first place I would start would be our grammar schools. By teaching basics like budgeting and the benefits of investing future generations will be in much better shape financially than we are currently in.
3. Huge federal deficits threaten our way of life. Everyone is waiting for the shoe to fall on this one, but the joke may be on us. The shoe has already begun falling. The plummeting value of the dollar, which has worsened the oil-price hike, is directly linked to falling international confidence that the U.S. government will find the will or the way to seriously tackle our deficits. Our energy and economic futures are already being sapped a little bit every day. For many retirees, deficits will mean lower growth and a reduced quality of life for the rest of their lives.
Marc’s Comment: If you go back in history you would see that the stock market has averaged an annual return of 11-12%. With all of the issues in the economy mentioned above it will be hard pressed to achieve those returns going forward. Another thing that will sap our economies growth is the fact that 2011 was the first year that Baby Boomers turned 65 years old. There is going to be a daily rush to the exits and the population decline of working Americans will reduce the pace at which our economy grows. One economist I follow who is very vocal on how the changing demographics will impact our economy is HS Dent (http://hsdent.com/)
5. When should I begin taking Social Security? In the meantime, the decision about when to begin taking Social Security tops the hit parade of financial issues that confront nearly all Americans approaching retirement. For people who are not in poor health or have family histories of early deaths, the best answer is usually to wait. Taking benefits as soon as possible at age 62 locks in payments that are only 75 percent of what they would be at age 66, which is defined as the full retirement age for the current wave of retirees. Delaying benefits at age 66 will raise them by 8 percent a year until age 70, after which benefits do not increase with age.
Marc’s Comment: Even though most people begin taking benefits once they hit 62, it often makes sense to delay the start of collecting your benefits. By delaying the start of collecting your benefits you are locking in a bigger monthly paycheck from Social Security. Of course there are factors that go into whether or not it makes to delay or not.
6. Get ready for inflation. We have been seeing inflation around every corner for so many years that we’ve just about run out of corners. Core rates of inflation have been very low, and that’s still the case despite the current run-up in food and energy prices. However, if the recovery gathers any steam – and we’d all better hope it does – we can expect inflation to become more than the specter it’s been in past years. Retirees must plan for inflation. This means that the buying power of fixed incomes will erode over time. It means the real return of investments, after inflationary factors are considered, may decline.
Marc’s Comment: Some asset classes (gold, inflation protected securities, real estate, commodities, …) are better suited for inflation than others and it often makes sense to include those in your portfolio. The advance of Exchange Traded Funds makes it much easier to include these asset classes in your portfolio. What’s ironic is that anyone who buys food or gas has already felt the bite of inflation over the past year. It’s only the government who claims that inflation is not rising. They make that claim, because they measure “core inflation”, which does not include the measurement of oil and food prices because they claim they are too volatile and would not give a true sense of inflation.
7. Look carefully at retirement fund fees. It can be very hard to determine how much you actually pay the firms that manage your retirement accounts and mutual funds. Often, the firm with a higher fee does not do a better job of managing your money. Because fees are charged year in and year out, they can have a big impact on long-term investment returns. The funds’ prospectuses provide some information and federal disclosure rules are being strengthened. Morningstar has solid information as well, although some of its best tools are reserved for people with paid subscriptions.
Marc’s Comment: One thing for certain is that you are paying a fee for every investment that you own in the portfolio. The fees may be small in the instances of index funds, or very large in the cases of some annuities. These fees are tough to undercover; however they will eat away at the money in your portfolio. Some people that I have worked with were shocked to learn what they were paying in commissions and fees for their investments. Disclosure laws are slowly improving, but often you have to look through hundred’s of pages of a Prospectus to determine the true fees you are paying.