Over the past few years I’ve repeatedly pointed out in my retirement blog, web posts and publications that “risk and reward are traveling companions”.  This means that the promise of high returns invariably carries increased risk.  There are no exceptions to this immutable law of investing, yet savers/investors constantly forget this truism.

In recent months the alleged Madoff Ponzi scheme has been front page news.  The attraction was the promise of higher than normal returns, yet those who entrusted their money to Madoff were shocked to learn they may lose their money.  In recent days another alleged multi-billion dollar scandal involving Stanford Financial Group is capturing the headlines.  Again, the attraction was the promise of high returns when other safe investments were paying just a fraction of those offered by Stanford.  In both cases there were years of above-average returns reported.  It is amazing there were no regulatory investigations and no whistle was blown by sophisticated investors.  Thus, not only do average savers/investors forget about the risk-reward equation but so do government regulators, watchdog agencies and supposedly savvy financial professionals.

The following point can’t be made to strongly:  when rates of return, promised or actually realized, are higher than you should otherwise expect, so is the risk.  No doubt you’ve heard individuals brag about high returns from investing in gold, trading foreign currencies or astutely picking good stocks, yet seldom do they mention – or even realize – that the risk was comparably high.  Just because they “lucked out” does not diminish the risk.  If you frequent horse races, you know that betting the long odds (high risk) may result in high pay-offs (return) but mostly such bets lead to losses.  Why is it that horse racing handicappers make the connection but investors don’t?

Do some astute investors do better in the market than others? Yes they do because of better analytical skills, a knack for finding hidden values or interpreting emerging trends…but to my knowledge there is no one that can avoid losses one hundred percent of the time. For example, Warren Buffet has a lifetime record of successful investing, yet in the current downturn he has not escaped paper losses nor has he during his career always avoided mistakes.  If your broker or financial advisor says you’ll make above-market returns by following their advice, just remember that the traveling companion of high returns is always high risk.  If you think that government regulators or the Financial Institutions Regulatory Authority (“FINRA”) will protect you, just remember Madoff and Stanford.  There are no exceptions to the risk/reward truism and you are foolish to rely on someone else to protect your interests.  So when you hear “high reward”, caveat emptor.

Shelby J. Smith, Ph.D.
February 2009
TheRetirementPros.com

Related Topics by Dr. Shelby Smith: Risk and Reward are Traveling Companions (eReport PDF & Video Seminar), You, Taxes and Retirement (eReport PDF & 10min Video), Fixed Annuities: A Good Option for Bad Times (Video Seminar).

As I mentioned in my retirement blog, we’ve spent our adult life working for retirement.  We’ve scrimped, cut corners, saved and managed our savings so we can enjoy a secure retirement.  Mostly, we’ve avoided bad investment choices.  The dot.com bust in 2000-02 and the market meltdown of 2007-09 were big setbacks, but we’ve survived.  We’ve made it this far with most of our retirement savings tucked away in a pension plan like a 401(k), 403(B), 457, etc. managed by others.  Our payroll deductions going into our retirement account were boosted with employer matches and profit sharing, making the losses less painful.  We’ve escaped the dangers of medical problems, un-insured losses and other unexpected events that could have derailed our retirement.  Overall we’ve done well, but entering the retirement zone is still daunting.

In the retirement zone, we’ll be responsible for the management of our money.  We’ll continue to face life’s lottery regarding our health and other emergencies in retirement.  Our greatest fear is “outliving the money we’ve saved” and having to rely on the children, government or charity.  We’re not fully prepared to make the array of bewildering financial decisions we’ll face like “where should we keep our retirement money?” because we lack the training, experience and understanding. While a bank is rock solid safe, interest rates are low, and we’ll pay taxes on the earnings even if we don’t withdraw them.  Putting our money in the market, even mutual funds and variable annuities, is risky because the market can be brutal as we know from 2000-02 and 2007-09.  We’ve been told that “in the long run we’ll do better in the market” but that hasn’t always been the case. In fact, the market averages in 2009 are the same as in 1997.  We might have to wait half of our retirement for the market to recover and in the meantime, inflation is eroding the value of our money.  We simply cannot afford market losses because we have no way to make them up. What’s more, our annual withdrawals become a rising percentage when losses reduce our savings.  So, the market is not for us.

Not only do we need help in keeping our retirement money safe, we also need help with tough decisions that could cost us dearly unless we choose correctly. For example, when to start Social Security benefits: at age 62 (the earliest), age 70 (the latest) or somewhere in-between.  If postponed how much will the benefits grow, how will a spouse be affected and what about taxes?  We also have the same decisions regarding our qualified retirement money.  Is there a right decision on how to coordinate these?  What are the costs if we get them wrong?

We cannot afford to take retirement planning lightly – or do none at all.  When we enter the retirement zone, we will need professional help.   Do-it-yourself investing is a big mistake for most of us.  Retirement will be life’s biggest purchase, and we can’t afford to get it wrong.  We must shop for a financial advisor just like we did when buying our home. Once a trusted advisor is found, let’s commit to follow their advice as we do with our medical doctor, accountant, attorney and minister. Good luck in the retirement zone.

Shelby J. Smith, Ph.D.
February 2009
TheRetirementPros.com

Have you ever had an idea that brought together two separate and unrelated developments? Last December Congress enacted a new law ( Worker, Retiree and Employer Recover Act of 2008, P.L. 110-458 ) which waived the Required Minimum Distribution (”RMD”) from retirement plans. This means those over age 70½ do not have to take a withdrawal from their IRA or other retirement account in 2009. The unrelated event is the fact that you cannot convert to a Roth IRA in 2009 if your adjusted gross income exceeds $100,000.  How can you connect these two unrelated developments and realize benefits?

Let’s say you are fortunate enough to have a retirement nest egg that is sufficiently large so that the annual RMD pushes your annual income over $100,000. Accordingly, you cannot now reap the advantages of a Roth IRA conversion (these are discussed below). The Required Minimum Distribution law was passed so retirees would not have to withdraw money from their lower valued “market invested” accounts and realize massive losses. The Congressional reasoning was “postpone the RMD so market values could increase” (does this economic forecast mean they know something we don’t?). Parenthetically, the market may not recover as our Congressional leader hope – no one knows the future.

When converting qualified retirement money to Roth IRA, the income taxes must be paid during the year of conversion. As I mentioned in my retirement blog, converting retirement money to a Roth IRA in 2009 makes a great deal of sense for many retirees because:

1. Investments have shrunk in value and income taxes will be lower now than they will be if the market rises and values recover;
2. No RMD is required from a Roth – it does not have to be used during the lifetime of the owner or the spouse of the owner;
3. If passed to an heir, principal and earnings remains tax-free but must be withdrawn over the expected lifetime of the beneficiary;
4. If future tax rates are expected to increase, it makes sense to pay the tax now while tax rates are lower;
5. Withdrawals from a Roth IRA after conversion do not count as income in determining the taxes on your Social Security benefits;
6. The $100,000 income limit is slated to be suspended in 2010 but this could be changed before and the opportunity lost forever;
7. The RMD waiver of 2009 may be for one year only;
8. If circumstances change you can undo the Roth conversion before filing your 2009 income taxes (as late as October 15, 2010) and avoid taxes on the conversion.

Accordingly, if the waiver of the RMD in 2009 allows you to limit your income to no more than $100,000, it might make sense for you to convert your retirement money to a Roth IRA.

Whether or not a Roth IRA conversion makes sense will depend on your circumstances. A Roth conversion may not be right if you’re in a low tax bracket, pay few or no taxes on your Social Security benefits, have no aspirations of leaving a legacy to your heirs, or will need your money early in retirement. On the other hand a Roth conversion does make sense if your tax bracket is currently high, you expect future tax rates to rise, you’re paying taxes on SS benefits, you don’t need the RMD money, you’d like to leave a tax-free legacy to your loved ones, and you will not have more than $100,000 in 2009 income. The best way to learn the pros and cons of Roth IRA conversion is to (a) learn as much as possible on your own and (b) work with your financial advisor to determine how much of your retirement money should be converted to a Roth. The “window of opportunity” is going to be short-lived, so don’t procrastinate.

Shelby J. Smith, Ph.D.
February 2009
TheRetirementPros.com

Related Topics by Dr. Shelby Smith: You, Taxes and Retirement (eReport PDF & Video), Guide to Social Security & a Better Retirement (eReport PDF & 10min Video), Fixed Annuities: A Good Option for Bad Times (Video Seminar).

As I mentioned in this retirement blog, if you have money invested in the market, chances are very high that you have a loss.  In talking to savers and investors like you, I’m amazed they all tell me the same thing: “As soon as my investments get back to where they were, I’m getting out of the market”.  You should give some thought to this exit strategy.

First, by saying “as soon as” or “when” the market recovers, implies an economic forecast.  How do you know the market is going to recovery anytime soon?  People were saying the same thing in 1929 but they didn’t get their chance to exit at break even until late 1954 – that’s 25 years later”.  In case you think the great depression was an anomaly, look at the market averages in late 1969 and compare them to late 1982—the DJIA at the beginning of this thirteen year period was the same as at the end.  As this is being written in 2009 the DJIA is at roughly 8000 – the same level as 1997.   So if you say “when the market comes back to where it was”, exactly what time frame did you have in mind?  One more thing – if you adjust for inflation, the picture gets a lot worse.

So what makes you think the market is coming back during your lifetime?  Maybe that’s what your stockbroker told you … wonder if she might have an ulterior motive like losing commissions or saving face?  Regardless, you should pay no attention to her “forecast” because obviously she didn’t know it was going to melt down or you would have been warned.  So, what makes you now think your broker know when it is coming back?  The fact is: no one knows when, or if, the market will recover.

So what should you do?  Try answering this question: “What will I do if the market continues to melt down and I only have half of what I now have?” If you think this can’t happen, you can stop reading.  If you don’t like the answer you gave, then maybe you should think about getting out of the market.  I know, you’ll be turning paper loses into real losses – or maybe you’ll be avoiding more losses.  Or, if you get out now, you’ll miss the coming recovery (have you been listening – we don’t know the timing for the end of the world and we don’t know when, or if, the market will recover).  Yes, I know it would hurt to take your losses…but, if you still have enough for an acceptable retirement, you need to face realistically the hard decision you have to make. Maybe locking in a guaranteed lifetime income with what you have left is the way to go.  Yes, this is very easy to do by depositing your money with an insurance company – they are in the business of insuring longevity risk (that’s the risk of outliving your money).

The foregoing is not the advice you’re getting from those that sell stocks, bonds, mutual funds, variable annuities and other market investments because if you abandon the market, they lose commissions.  What’s more, those that sell such investments have been brainwashed to actually believe what they tell you because that is what the brokerage industry has taught them. The fact is, the “wisdom of Wall Street” is an oxymoron and the brokerage industry has been exposed: not only can’t they manage your money, they can’t manage their’s either.  Nonetheless, there is no shortage of pundits preaching that the “market is coming back” and now is the time to buy at bargain prices … and unfortunately those who least can afford the risks are among the believers.  I sincerely hope you are not “drinking their cool aid”.

Shelby J. Smith, Ph.D.
www.theretirementpros.com

Related Topics: Tapping Into Your 401(k) Money Before Retirement (Video Seminar & eReport), You, Taxes and Retirement (eReport PDF & Video), Fixed Annuities: A Good Option for Bad Times (Video Seminar).