The stock market fluctuates wildly some days – 300 or more points, representing a change of 3% or more, is common. For a retiree with $500,000 of her retirement money in “the market”, losses could easily be $20,000 in one day, even if her portfolio is diversified. Wall Street’s recommended withdrawal strategy is 4% annually; thus, our hypothetical retiree could be running on empty for the next 300 or more days after one bad day in the market. What might the future bring? Another meltdown or a sustained rally! History will tell but there is one certainty: money in the market is at risk.

The current market outlook is far from clear. America is suffering a continuing economic malaise with unemployment alarmingly high. Deficit spending is out of control and Congress is hopelessly deadlocked over what to do. There will likely be no long-term solution without responsible fiscal policy that addresses Social Security, Medicare and defense major tax increases. The Democrats refuse to talk about cutting government spending and the Republicans are dead set against higher taxes. Federal elections are a year away and so are economic solutions given the current Congressional stalemate.

The new book Boomerang by Michael Lewis analyzes the deplorable financial condition of several European countries and California – concluding that all are on the brink of financial Armageddon. Global economic stagnation and the fiscal imbalance of many U.S. states & municipalities augurs poorly for an economic recovery near-term. Meanwhile homes continue to lose value in many communities, unemployment is stuck on high, the business sector is hunkered down, local & state governments are nearing panic, the banking industry is sick and Congress is adding to the economic damage.

Given the foregoing it’s hard to be optimistic about an improving market. Yet, many retirees are hoping and praying their investments will get back to breakeven so they can sell and put market risks behind them. Of course, there is no assurance the market will recover past losses nor is there a guarantee against another meltdown. Nonetheless, Wall Street continues to broadcast its favorite myth: “don’t worry about short-term market changes you’ll be fine in the long run”. Really! While the market has seen record peaks and valleys in the past decade, today’s level is roughly the same as a decade ago. Parenthetically, a decade is about half of the typical retirement. If the U.S. is today where Japan was in 1990, the market is in for a long slide to one-fourth its current level.

If you cannot afford the risk of the market, there is never a good time to “get in” nor is there a good time to “get out”. If you’re at risk of losing what you’ve saved to support you and your loved ones in retirement, now is a good time to measure your market risk. My advice: first, find a financial advisor that offers something other than market options and second, make doubly sure you understand the downside of his or her recommendations. You should never take risks with retirement money you cannot afford to lose. Retirement is the longest & most expensive journey you’ll ever take, you can’t borrow money to pay for it and you’ll have one chance to get it right; therefore, proceed cautiously and prepare accurately by working with a professional advisor.

Shelby J. Smith, Ph.D.
December 2011

Many Americans spend more time planning a vacation than they do planning for retirement!  That maybe a small exaggeration, but is closer to the truth than most would admit.  Retirement is the biggest purchase you’ll make in your life – bigger than your home and the cost of every vacation you’ve taken.  Retirement will last many years and there are numerous unknowns.  For a married couple both age 65, one is expected to be living at age 90…and reaching 100 or more is no longer rare.  No doubt you’ll face many financials risks.  Let’s discuss the seven I think most important. 

Number one is outliving your money – this is the greatest fear of most retirees and is called longevity risk:  the risk your retirement money will fall short or be depleted before you’ve run out of time.  What can you do if you face this risk? 

1. Plan the use of your money and make sure you’re not taking undue risks that might result in losses – retirees have no way to recover financial losses.
2. If you have equity in your home, find out about reverse mortgages that allow you to cash in your equity without selling your home and without having to make mortgage payments in your lifetime.  A reverse mortgage is not for everyone and you should not use the money for investing and speculating but rather for living expenses or to implement an estate planning strategy.
3. Make sure you get your Social Security right – most retirees don’t.  Time the start of your SS benefits to save future taxes and have up to $225,000 more benefits during retirement.  I encourage you to read my “Guide to Social Security” – you can get a copy from www.retirerx.com.
4. Investigate “insuring your longevity risk” by arranging a guaranteed lifetime income from an insurance company.
5. Control your expenses as best you can, don’t pay taxes if they can be legally avoided and get the best return you can without risking your principal.

Fighting longevity risk is best done by working with a financial advisor – something that most retirees don’t do and generally a very costly mistake.

The second financial risk is paying taxes you could have legally avoided.  Every dollar paid in unnecessary taxes is one less dollar you’ll have for retirement.  You should learn about tax-deferring earning if you do not currently need the money for retirement.  The longer you postpone paying taxes the more you’ll have to earn interest. In fact, deferring taxes allows your money to grow faster with triple compounding: interest on principal, interest on interest and interest from money not paid to the IRS.  Here are some ways to manage your taxes:

1. Use tax-deferred saving places like annuities – safe and convenient but many retirees are not aware of this safe money place.
2. Investigate converting some of your IRA and other qualified money to tax-free Roth IRAs.  You should do this carefully to make sure you remain in the lowest possible tax bracket.

 Again, I recommend working with your financial advisor to minimize your taxes.

The third financial risk is inflation – the constant increase in prices.  A retiree’s inflation is not the same as a working person’s because more medical care and health-related services are needed.  While inflation is largely out of our control, we can nevertheless manage it by opting for predictable, safe and reliable strategies to maintain your purchasing power.  A common mistake is thinking you can hedge inflation by putting your retirement money in speculative investments that promise to keep pace with price increases – unfortunately the risk of such strategies might leave you with less money, not more. Since your major “inflation” risk is “health related and medical” I recommend you establish an emergency fund for such contingencies. Also, guard your health by exercising, eating right and refrain from using tobacco.  Be aware that what your money buys is just as important as how much you have.

The fourth financial risk you’ll face in retirement is “the market”.  It is virtually impossible to watch TV, listen to the radio or read a magazine without an ad telling you why your money should be “in the market”.  If you now have market losses you’re told “don’t get out because the market will come back, you’ll be fine longer term or selling now means turning paper losses into real losses”.  Or if you have a profit, selling means you’ll have to pay taxes and you’ll do better by staying put.  These are myths of Wall Street designed to encourage you to keep your money “in the market” so fees and commissions will continue. The market is risky, as is obvious by what’s happened since 2000.  Two major meltdowns and many are currently predicting a third.  If you can’t afford the risk, don’t take it – losing your retirement money means you’ll run out of money before you run out of time.  Do not invest like you did when you were working even if encouraged by your broker.  Do what’s financially best for you, not what’s financially best for your broker.   Please realize that “diversified portfolios” of stocks, bonds and other investments will rise and fall with “the market” and therefore, they too, are risky.

The fifth risk is fraud.  We generally think of fraud when someone steals money – Bernie Madoff comes to mind.  But in my mind there is also fraud when Wall Street misleads you into doing something that is not suitable for your circumstances.  Of course, bad advice is not illegal but the results are the same: you and your money are separated. Always keep in mind that promises of high returns involve risk – always know this and never let anyone convince you otherwise.  Bank CDs are rock-solid safe and that’s why they’re not earning much today – high dividend stocks and some bond yields may look attractive but there is risk.  The promise of high reward and risk travel together – where you find one you’ll always find the other.  If the promised return is above market, then so is the risk…always.

 The sixth financial risk is the risks associated with reinvesting your earnings.  You earn interest, dividends, profits, collect rent, have investments mature and all must be reinvested.  To help manage reinvestment risks I advocate “laddering” retirement money so that your savings and investments come due at the time they’re needed.  Many retirees have all their money in liquid accounts that can be “cashed in” at any time whereas the smart retirees spaces maturities so money comes available when needed.  Granted this takes some planning but you’re assured money will be available when needed.  Laddering also facilitates tax-deferred or tax-free growth that means more money later.  Laddering retirement money is best done by working with your financial advisor.

The seventh and last financial risk I want to mention is “sequencing your withdrawals” to avoid spending down when your investments have losses.  Of course, one way to avoid this is to avoid “the market” except for money you’ll need late in retirement.  Other precautions like making sure you always have emergency money that can be accessed quickly if needed.  Also, guaranteed-return places like annuities that offer principal protection, tax-deferral and conversion to a guaranteed lifetime income should not be overlooked.  Once again, work with your financial advisor.

Of course there are many other risks and hazards you’ll face in retirement, but the ones we’ve talked about constitute your greatest “financial risks”.  I recommended working with a financial advisor.   It is my experience that the three biggest mistakes retirees make with their money are: (1) trying to manage it themselves without professional help, (2) keeping all their retirement money liquid as if it will be needed tomorrow and (3) taking unsuitable risk of loss.  All of these are avoided by working with a financial advisor of your choice.

Will you spend less time planning the rest of your retirement than your next travel excursion?  I hope not!  Hopefully I’ve given you some help in having a better retirement.  I wish for all of you long, and very happy, years of retirement.

Shelby J. Smith, Ph.D.
December 2011

The stock market is dropping in a volatile frenzy, interest rates are near zero and the economy is anemic. Will there be improvement? The fact is: no one knows what will happen, ever. If you’ve been advised that “selling now would be a huge mistake” or “all will be fine in the long run”, remember that economic forecasting is not a science. Those who forecast are guessing, and basing retirement on guessing is hazardous.

Your retirement plan is only as good as your answers to the following three questions:

1. How long will you live?
2. How will your investments and savings perform?
3. How much money is needed to support the retirement you’ve planned?

The problem is, neither you nor anyone else can answer these questions and therein lies the problem with retirement planning. What can you do? Since we cannot know exactly what will happen, planning for minimum risks and certainty is a good second best.

The danger in “how long will you live” is “you might outlive your money”. We call this longevity risk and you can buy insurance to cover it. The solution is simple: purchase an insurance policy that will pay you a guaranteed lifetime income (and also your spouse if you elect) regardless of how long you live. How much will this cost? The cost depends on how much income you want and your current age. The insurance is embedded in an annuity with a guaranteed lifetime income feature – providing an income you cannot outlive plus giving you maximum flexibility for other unknowns. So rather than guessing “how long you’ll live” ask “how much will it cost to guarantee a lifetime income that seems reasonable for my retirement plans”? Your financial advisor can provide the answer.

How much will your savings and investments earn or lose in the coming years? Again, no one knows because markets and interest rates cannot be predicted. If you put your money at risk and guess wrong, you could be “locking in” your greatest fear: running out of money before you run out of time. The same annuity that guarantees you a lifetime income also guarantees you positive earnings until your lifetime income starts. Your money is always safe. You can even link annual interest rates to market indexes that provide above-market potential in good markets and zero losses in down markets.

How much you’ll need for retirement is a function of many things: plans, health, inflation, taxes, Social Security, retirement income and much more. It is prudent to address the first two questions first because “how much” will be partially determined by “how long” and “investment performance”. If you have money left after locking up an income for life, set up a reserve for emergencies, higher inflation & taxes and “bucket list” experiences. Don’t make retirement complicated by worrying about risky investments and uncertainty. An “annuity solution” delivers certainty, predictability and peace of mind. Otherwise, answer the three unanswerable questions.

Shelby J. Smith, Ph.D.
October 19, 2011

Where do fixed annuities fit into the new “economic” climate? We know they’re safe, offer tax deferral and can provide a guaranteed lifetime income, but what impact has recent economic/political/financial events had on fixed annuities? The current economic backdrop is: the lowest interest rates in a generation, volatile and uncertain markets for equities & bonds, political gridlock preventing economic solutions, an unstable global banking industry and emerging economies challenging America’s dominance.

Since 2000 there have been two meltdowns of the stock market, a Great Recession and widespread anticipation of a third bear market and a double dip recession. The lasting scar is likely to be a generation that distrusts Wall Street to manage their money and disbelief that the stock market offers long-term potential. Wall Street and their brokers are making pivotal changes toward “safe money options” like fixed annuities. For years they fought fixed annuities with biased reporting, lobbying dollars and vigorous court challenges but suffered defeat on all fronts. They have now turned to offering fixed annuities, including the index-linked variety. Heretofore index annuity hostile insurance carriers are now developing their own varieties to satisfy demands of their sales force and customers. All of a sudden, fixed index-linked annuities are credible!

Banks have suffered a significant reputation loss among the retirement-minded public with interest rates below inflation, new fees/charges, questionable real estate dealings and greedy incompetence that resulted in taxpayer bailout. Retirees that historically looked to banks for “earned interest to supplement Social Security” are now asked to suffer higher taxes and difficult economic times fostered by banks that neglected their guardianship of the public’s money. Banks, like Wall Street, have lost the trust of the retirement-minded with only FDIC insurance remaining as their attractive feature.

Insurance companies that offer safe money alternatives have stood tall and remained financially strong during the economic storms since 2000. For years they hoped and prayed for the return of good economic/financial times, all the while offering generous returns and guarantees. They are now entering a period when adjustments are necessary to protect their financial wellbeing. It is now impossible to earn profits and continue current returns to policyholders without making changes. Accordingly, you should adjust your expectations to include: lower bonuses, diminished caps, downsized roll-up rates, higher fees for riders, weaker guarantees and higher penalties for breaking your annuity contract. Expect more emphasis on “mortality” features like guaranteed lifetime incomes, death benefits and morbidity-related riders with less emphasis on rates, growth and guarantees. As we go through this metamorphosis, bear in mind that annuity carriers, unlike Wall Street and banks, have survived and prospered by judicious management and careful attention to their financial affairs. The current rush of others toward fixed annuities is proof that these “safe money alternatives” will flourish in the uncertain economic times ahead. At last fixed index-linked annuities have been vindicated.

Shelby J. Smith, Ph.D.
October 13, 2011

Retirement is a long journey full of potential hazards – the biggest one being “running out of money before you run out of time”. If this is your fear, what have you done about it? Does a lifetime income you can’t outlive sound like something that might interest you?

Okay, let’s start by talking about “conventional wisdom”. Conventional wisdom says you should keep your retirement money in a diversified portfolio – stocks, bonds, mutual funds, variable annuities and other market investments. This is a popular approach but not the only one. No doubt diversified portfolios are suitable for some retirees BUT not all. This approach has risk of loss.

How do you feel about losing money? You may be comfortable with risk of loss but is it suitable for your circumstances? Here are some questions that give you the answer:

1. If you lost part of your retirement money, would your retirement suffer? If so, then proceed carefully because “the market” is unpredictable.
2. If you lost money, do you have sufficient time to wait until the market recovers? Before you answer, remember the stock market is currently at the 1999 level – that’s 12 years, or one-half of a typical retirement, and there has been zero gain. If recovery takes 12-15 years, do you really want to risk your money?
3. Do you have more than enough money for retirement? If not, what’s your strategy if you lose part of your retirement nest egg? That should provoke serious thought!

“Conventional wisdom” also recommends that you withdraw 4% – 5% plus inflation every year to cover your living expenses. That is if you have $100,000 at retirement you’d use $4,000 to $5,000 the first year. Withdrawals in later years would be increased for inflation. To test this strategy the conventional wisdom says to consider all the possible outcomes to determine the chances of having an income throughout retirement.

This “testing” is performed using a computer based forecasting model on all the possible diversified portfolios suitable for your risk tolerance – you may know it as the Monte Carlo model. The one with the highest probability of working is then recommended. Nonetheless, there remains some probability you’ll still run out of money. If so, what will you do? By my way of thinking, this is nonsense. I’d prefer a fool-proof strategy that guarantees I can’t outlive my money. Since a diversified portfolio can’t deliver guarantees, what can?

As we’ve discussed elsewhere on the blog, there are guaranteed options that don’t involve out guessing the market. The first is an immediate annuity purchased from an insurance company that guarantees you a set income for life – including your spouse’s life if you choose and also inflation protection can be included. Immediate annuities are worry and stress free but there is a drawback: the guaranteed income depends on interest rates when you started. Low rates mean smaller incomes. Right now we have the lowest interest rates in our lifetime and immediate annuities don’t give you much bang for your buck.

Second, you could divide your money among several safe money options all having different maturities. The shortest maturity is used first to give you an income and when it runs out you go to the next maturity and so on until retirement ends. This “laddered” approach is commonly used by conservative, smart retirees. I recommend this strategy but encourage you work with your financial advisor to select safe money options of different maturities to “lock in” your lifetime income. The Ladder Strategy generally uses bank CDs, certain bonds and fixed annuities – safe, predictable and reliable.

Third, let an insurance company manage your longevity risk. Longevity risk is the risk of outliving your money: the number one fear of retirees. Insurance is used for other risks we can’t afford our: home, car, plane or boat being destroyed; health problems; long-term convalescent care; premature death and many more risks we face. Why not for longevity risk? Insurance companies specialize in managing risk and they obviously do a good job because they are among the oldest, financially strongest and operationally stable companies on the globe.

I recommend predictability, certainty and low risk when it comes to retirement planning. You’ll not be working and have no income to replace lost money. You may be okay in the long run if your money is in the market, and then again you may not be. Japan’s Nikkei 225 stock index was at 40,000 in 1990 but has steadily declined for the past 20 years and is now around 10,000 – only 25% of its former high. Can this happen in America? If so, could you still afford retirement? Do you have enough time to wait for a recovery? Many are now saying the current U.S. recession is the beginning of a long decline similar to what Japan has suffered over their “two lost decades”.

What’s best for you is determined by your circumstances, risk tolerance, aspirations and a host of other factors. What’s good for someone else may not be good for you … so just because John and Wilma invest in the stock market or buy immediate annuities is no sign you should. Here’s my answer: If you want retirement peace of mind and no financial worries, a guaranteed lifetime income deserves a look. Why not work with your financial advisor and find a suitable solution for you and yours? If your advisor says a diversified portfolio is more suitable for you, ask them to put in writing that you’re guaranteed to always have an income in retirement. Their unwillingness will speak volumes about risk.

Be careful with your retirement money because it can’t be replaced if lost, and there is no assurance you have enough time to wait for a recovery. Retirement is a time to enjoy your money rather than stress over it. I sincerely hope I’ve helped you have a better retirement by considering all the options before you commit your hard earned money.

Shelby J. Smith, Ph.D.
September 30, 2011

The stock market’s DJIA closed at 10,922 on September 09, 2011. This current level is roughly half way between the last peak of 14,164 on October 09, 2007 and the last trough of 6,547 on March 09, 2009. The recent decline represents a grand opportunity if you have an IRA or other retirement account (on which you’ve not yet paid income taxes) in stocks or mutual funds. If you haven’t already, call your financial advisor and ask about converting to a Roth IRA. Here’s why!

You will pay taxes with your 2011 tax return on the amount you convert from an IRA to the Roth IRA UNLESS you “recharacterize” back to the IRA on or before October 15, 2012. To recharacterize is to undo the Roth IRA and go back to the traditional IRA. Why might you change your mind? If the value of your new Roth IRA loses more value you’d want to undo to lower your tax liability. On the other hand, if the value rises the gains will be “tax free” and you’d keep the Roth. Let’s look at a simple example.

Let’s say you have $50,000 in your IRA, down from $70,000 a couple of years ago. Further assume you’re in the 25% tax bracket. You decide to convert to a Roth and unless you change your mind will owe $12,500 in taxes when you file your 2011 income taxes. Let’s now assume the market rallies and your Roth grows to $75,000 by April 15, 2012 – the $25,000 gain is “tax free”. On the other hand, let’s say the market stalls and your Roth drops to $25,000 – you’d now recharacterize and not have to pay taxes. If you elect, you could re-convert again to take advantage of the lower value and pay fewer taxes. If it gains and then loses, you can still recharacterize until October 15, 2012 and then file an amended tax return to recover the taxes you paid. In other words, you get a “free look” without risk – if it rises you make tax-free gains and if it drops you’re in the same position as before.

Of course there are other considerations and you should work with your financial advisor to make sure the move from IRA to Roth is right for you. Also, if you want to lessen your tax bill you can convert only part to a Roth and leave the balance in your IRA for a possible future conversion. The current bear market is presenting you an opportunity to save taxes with zero downside. Remember, once the money is in the Roth all earnings are tax free and there is no requirement to take Required Minimum Distributions (“RMD”) when you reach 70½. You can also pass the Roth tax free to a beneficiary or spouse. For details on Roth IRA opportunity see the August 23, 2011 post titled “Falling Markets Present a Tax Savings Opportunity”.

Shelby J. Smith, Ph.D.
September 16, 2011

Let’s say you and a friend each start a long journey.  You select a sleek sailboat but your friend chooses a small boat with a modest motor.  The first day the winds are brisk and you make great progress.  Your friend, not so good!  The second day unfavorable winds caused you to give up the previous day’s gain but your friend moved forward. The third day there was no wind and no progress. Days turn to weeks and weeks to months.  You’re blown off course and lose your way but your friend arrives on time and in good shape.  This saga sounds a lot like the tortoise and hare, but it is actually the journey of retirement.

You select the unpredictable way to get there and put your money in the stock market. One day you make great gains but give them all back the next day.  Adding to your woes is what will happen tomorrow or the day after.  Will you be blown off course and fail to reach your retirement destination?   Your friend chose the dull way by putting money in safe places and makes steady, but modest progress, always in the same direction. 

In recent years the stock market has been a “risky place” where you can lose, or make, big money.  At the turn of the century it melted down in response to the dot.com boom and bust, fought its way back to a peak in late 2007 and then reversed directions as the housing collapse took hold and spawned the Great Recession.  The bottom came in 2009, thereafter inching higher until July 2011 when it again reversed after regaining about two-thirds of the previous losses.  At the current time there is paralysis in Washington, global economic and political uncertainty, mounting inflationary pressures, historically high unemployment, the lowest interest rates in a generation and a dismal economic outlook.  In response the stock market continues extremely volatile and risky. 

Against the odds of realistic expectations, many retirees continue to hope and pray their money in the market is safe.  Wall Street and brokers are saying, “Now is a time to buy, good times will return in the long run and don’t sell”.  Here are the facts: the stock “market is a gamble because you can win or lose; you may do fine longer term but there are no guarantees; if you are in or near retirement the long term may be too long; no one knows the future; the stock market could be on the precipitous of a secular decline that could last for decades (witness Japan); if you lose your retirement money there is no time to replace it.  If you believe these facts, you may want to consider decreasing your market exposure unless you have more than needed for retirement and losses will not affect your lifestyle.  You know your circumstances, so please act accordingly.

Shelby J. Smith, Ph.D.
September 6, 2011

The number one fear of most retirees is running out of money.  What does Wall Street and their “so called financial planners,” propose as the solution?  It is always “invest in the stock market” to lower the “probability” of outliving your money.  Monte Carlo simulations and other forecasting techniques tell you the probability of running out of money but there are no guarantees.  Nor are you told what to do if the forecast is wrong.  Here are some quotes from an August 25, 2011 article from CNN Money written by Walter Updegrave.  The article was titled “How Long Will My Retirement Savings Last” and is fairly typical.

[…] many advisers recommend that you follow the “4% rule. …[y]ou can still run out of money, especially if you get hit with losses early in retirement.”

[My comment] Is there some likelihood you could “get hit with losses early in retirement” if your money is in the market?

“Maryland financial planner Michael Kitces has done research showing that you may be able to safely go to a higher initial withdrawal rate, say, 5% or more, if you’re starting out when the stock market is undervalued and thus more likely to earn above-average returns going ahead.

[My Comment] How will you know if “the stock market is undervalued”?  And, if it is undervalued does that mean you’re “likely to earn above-average returns”? 

Minneapolis financial planner Jonathan Guyton and retirement-planning software developer William Klinger have done computerized simulations showing that a retirement portfolio has a high probability of lasting 40 years even with an inflation-adjusted initial withdrawal rate of just over 5%, provided you strictly follow a series of “decision rules” that call for you to adjust your withdrawals throughout retirement based on your investment performance.

[My comment] All you have to do to make your money last 40 years is “adjust your withdrawals throughout retirement based on your investment performance”. Wow, this is sage advice – if your money runs out, just stop withdrawing!

What all these “solutions” have in common is “investing in the stock market”.  This means your money will be “at risk” which in turn means you could lose it.  The advice from these “financial advisers” is nonsense that will add stress during what is supposed to be your “worry free years”.  There is a better, and far simpler, way that eliminates the probability of running out of money: purchase a guaranteed lifetime income from an insurance company.

If you face financial risk you cannot assume, what is the answer?  Correct, you buy insurance: homes, cars, boats, health, life and more.  So why not insure the risk of outliving your retirement money?  Yes, you might do better in “the market” [your house may not be destroyed] and then again you might do worse and run out of money [but if your house is destroyed the financial loss will be catastrophic].  The law of Occam Razor says if there are several ways to reach the same solution, use the least complicated one.  Using insurance is far less complicated than trying to out guess the market.  If you run out of money, then what?  Why face risk when the solution is simple, and cheap?

Shelby J. Smith, Ph.D.
September 1, 2011

Retirement is a long journey that you should plan to last three decades. During the journey you’ll be using the money you have previously saved, earnings from your investments, government or private pension, Social Security and maybe earned income, inheritance or gifts. As the years pass the same goods and services will cost more and more as inflation erodes purchasing power. Unexpected emergencies, deteriorating health, bad decisions, rotten luck and sorry investments are also possible. It’s easy to see why the greatest fear of retirement is “running out of money”.

The stock market is known to all, but understood by few. This is the place where you can buy and sell partial ownership (shares of common stocks) in great American companies. The price of shares is a function of both short and long term influences. In the short run prices are affected by investors’ expectations about where the market & economy are headed, global developments, quarterly earnings and numerous other real or psychological factors. In the longer run stock values generally track corporate earnings with consistently profitable and growing companies going up in value and unprofitable or shrinking companies going down. Since few, if any, of these underlying drivers of values are known, the stock market is inherently risky. You can double your money if you guess right or lose it all if you guess wrong. As was witnessed during America’s Great Depression or in Japan since 1990, stocks can consistently lose value over many years, or even decades.

Those who sell stocks to the general public make a commission each time a stock is bought or sold; therefore, it is in their best interest that people participate in the market. The “investments” bought and sold take many shapes and sizes from shares of individual stocks, mutual funds, options and more with each offering a dazzling array of choices. To keep you committed to the market Wall Street’s “representatives” have devised a bewildering language of jargon that most of us, and many of them, don’t understand. Added to the jargon are myths they spin to keep you committed. Myths like “don’t sell now you’ll miss the coming rally, in the long run you’ll be fine or don’t think losses when the market falls, think buying opportunity.” Even though these myths are consistently wrong, many retirees stay the course and keep their money in the market.

So, will the market come back? How long is the long run? Do you have the nerve to buy when the market tanks? By journeying back into the most recent past, analyzing market trends in other countries or recalling your past market experiences, you’ll conclude one thing: the market is risky. It can take your retirement money and never say sorry. Yet, the stock market is the main depository for retirement money because myths like “long term you’ll do better in the market” are simply too powerful to resist. I encourage you to resist the temptation if any of the following fits you: (a) you’ll need all your savings to get you and your loved one to the end of retirement’s journey; (b) you have no way to replace losses if you guess wrong; (c) you don’t fully understand the risks you are taking; (d) your past worries with the stock market has kept you from sleeping; (e) the broker/money manager that is telling you what to do today is the same that lost you money yesterday. If you believe the market is not potentially hazardous to your retirement well being, please study the American stock market movements over the past 20 years or review Japan’s experience since 1990. Below are the graphs of both. Is the Nikkei two decades ahead of the DJIA? Is the DJIA now at its historical peak like Japan’s Nikkei was in 1990? Will the DJIA mirror the Nikkei and fall to 2500 in the next 20 years? Looking back 20 years from now will we be looking up at the last peak in 2007 or looking down from a higher peak? Anything is possible so please be careful with your retirement money.

Shelby J. Smith, Ph.D.
August 25, 2011

Most Americans get Social Security benefits or possibly a pension, but these generally fall short of what is needed for their planned retirement lifestyle. Let’s say you’re in the middle of retirement, your savings are running low and you’re facing your greatest fear: running out of money. You have equity in your home but selling it and moving in with children, a relative or to an apartment is a dreadful thought. What can you do?

The U.S. Department of Housing and Urban Development (“HUD”) has a program whereby the Federal Housing Administration (“FHA”) and others guarantee loans made by private lenders against the equity in your home. To qualify there must be equity in your home above your mortgage if there is one, the youngest owner or joint owner must be at least age 62 and the home must be your primary residence. You do not have to make mortgage or interest payments during your lifetime. You, or your heirs, have the right to repay the loan at any time. The loan repayment amount can never exceed the home’s sales price or the appraised value if there is no sale. The shortfall, if any, is guaranteed by insurance purchased from the FHA or others. The amount of money loaned on your home equity is a function of your age, current interest rates, amount of home equity and the appraised value of your home. The loan is called a reverse mortgage and is gaining favor among retirees that want to use their home’s equity to supplement their retirement income.

Once the reverse mortgage is made you agree to live in your home, keep it in good repairs, maintain your homeowners’ insurance and pay the real estate taxes. You may use the money from the reverse mortgage however you wish. The money will be paid to you as a lump sum, installment payments or a line of credit that you can draw down as needed. Let’s say you decide to take a lump sum payment.

One option would be to purchase an immediate annuity that pays you, and your surviving spouse if you elect, a guaranteed lifetime income. The immediate annuity will pay a guaranteed lifetime income regardless of how long you live. If you use the immediate annuity make sure you choose a term certain, say ten years, with a lifetime option. This means if you die prematurely your named beneficiary will get payments for the amount of time remaining on the ten years. If you die after the tenth year has lapsed, the annuity payments will stop.

Another option is to purchase a deferred annuity with a guaranteed lifetime income rider. You may have to “hold out” enough money to provide the first year’s income unless the guaranteed lifetime income can be started immediately. The advantage of this option is that you can later change our mind and withdraw your remaining money lump sum. To take advantage of a reverse mortgage to supplement your retirement income, you should first discuss the strategy with a financial planner. For steps to a reverse mortgage see: http://www.reversemortgage.org/Default.aspx?tabid=236.

Shelby J. Smith, Ph.D.
August 24, 2011