Archive for March, 2010

Bust-Proof Investing For Boomers

Wednesday, March 31st, 2010

We’ve been focussing on the “senior bust” that many baby boomers will face as they approach retirement. 

So how can baby boomers avoid the senior bust?

The starting point is to understand your finances.  You’ll need to know your current assets and have a good idea of how much you’ll need to live off during retirement.  Assuming your current retirement is not adequate, you’ll need to save more and invest wisely.

Some alternatives include:

Delay retirement.  The longer you work, of course, the more you can save and the longer it will be before you need to draw off of your retirement funds.  Assuming your children are grown and your expenses are minimal, you can probably save a great deal more for retirement than you could when you were younger.

Delay Social Security.  Annual cost-of-living increases are calculated using the initial year’s Social Security income as a base, so delaying the start of Social Security for even a few years can raise annual income significantly.  While individuals are eligible for Social Security at age 62, they must wait until age 65 if they want “full” benefits (67 for those born in 1960 or later) and age 70 if they want “delayed” benefits.

Manage risk.  Keep in mind that what your investments earn from day to day or even year to year is not nearly as important as what they earn long term.  Most investors concentrate on short-term returns and don’t spend enough time focusing on avoiding losses.

An investor or investment manager can do much to avoid risk, without sacrificing growth.  A few examples include:

  • Diversify.  Virtually anyone who manages investments recommends that investors invest in a mix of many different types of investments.  For example, the stock portion of an investor’s portfolio may include growth and value stocks; small-cap, mid-cap and large-cap stocks, and international and domestic stocks.
  • Pay attention to the market.  Using technical as well as fundamental analysis can alert investment managers about potential market changes.  Adjusting your portfolio based on these potential changes can help minimize losses.
  • Use stop losses.  Stop losses are used to automatically sell securities when they drop to a certain price.  This allows investors to avoid potentially large losses.
  • Consider convertibles.  Convertible securities combine features of both stocks and bonds.  The income they produce provides downside protection.  In addition, they are typically not as volatile as stocks.

Of course, among the worst mistake investors can make is to sell their stocks when the market is bottoming out.  “Selling low” is also among the most common mistakes investors make.  Those who sold a year ago because they couldn’t tolerate any more losses should learn from their mistake and hopefully will avoid selling at the tail end of the next bear market.

Boomer Budget Busters

Saturday, March 27th, 2010

In our last post, we demonstrated that baby boomers will not be inheriting the trillions that experts predicted would create the wealthiest generation of retirees in history.

Even worse, boomers face enormous expenses, even without considering the potential cost of healthcare reform,   

The U.S. Census Bureau says there are more than 77 million baby boomers, defined as those born between 1946 and 1964.  By 2030 all boomers will be over 65 and will represent an estimated 20 percent of the population.

The addition of that many retirees is bound to put a strain on both the Social Security system and Medicare, not to mention the long-term care industry.  And that strain will be exacerbated if boomers live longer than previous generations, as expected.

Long-term care.  Consider the cost of long-term care, for starters.  Many of today’s boomers have parents receiving long-term care and it’s costing, on average, $72,270 a year, based on national statistics from the 2009 MetLife’s Mature Market Institute.  Long-term care is not covered by health insurance, Medicare or any other government program, so most baby boomers will have to use their personal savings to pay for long-term care.

The National Clearinghouse for Long-Term Care Information estimates that 70% of people over age 65 today will need long-term care services.  If baby boomers live longer that today’s seniors, the percentage needing long-term care may be even higher.

Social Security.  Social Security is a pay-as-you go system, meaning that the money you have been paying into the system throughout your working life is paying for someone else’s retirement.

When boomers retire, a greater percentage of the population with be retired and a smaller percentage will be working.  That means fewer people will be paying to fund Social Security for a much larger population of retirees.

In addition, when people live longer, they collect Social Security for a longer period and that puts further pressure on the system.  When Social Security was created, retirement typically lasted only a few years.  Today, a person may live for 20 years or more during retirement.

In 1950, there were 16 workers to support each Social Security beneficiary.  Today, only 3.3 workers are supporting payments for each retiree so, not surprisingly, the Social Security tax is 70 percent higher than it was in the 1950s.  The Social Security Administration projects that the ratio will drop to 2.2 workers per retiree by 2025 and to 1.8 workers per retiree by 2070.

Medicare.  Medicare is “headed for a financial abyss,” according to The New York Times, which notes that the trust fund that pays hospital bills will likely run out of money by 2019, “leaving Medicare to limp along with payroll tax collections that would cover only 78 percent of estimated hospital expenditures.”

The Times adds that the trust funds that pay for doctors’ services and prescription drugs is also face rising costs that will drive up premiums and require more funding from general tax revenues.

Will healthcare reform solve this problem?  Don’t count on it.  To keep the overall cover of reform in the $1 trillion range, Congress is proposing a reduction in Medicare funding by up to $500 billion over the next 10 years – just as boomers are retiring and signing on for Medicare coverage.

Baby Boomer Retirement May Be A Bust

Sunday, March 21st, 2010

Unless they take action, many baby boomers are heading for a senior bust.

Many of the boomers we know have not saved sufficiently for retirement.  Spooked by the last two bear markets, they took their money out of the stock market, selling off when the market was near its low point.  Now they’re looking for the high returns necessary to produce the income they’ll need when they retire – yet they also want to avoid risk.

Unfortunately for risk-averse investors, there is an inverse relationship between risk and reward.  Investments that offer the potential for high returns usually also carry high risk.  Many investors who need high returns are keeping their money in money market funds or certificates of deposit, which carry almost no risk, but offer returns that fail to keep pace with inflation, let alone provide a real return.

While the investment outlook is admittedly tough for shell-shocked boomers, there are many reasons doing nothing should not be an option.

Don’t Count On Inheritance

Back in the 1990s, many were predicting that baby boomers would inherit trillions of dollars.  A study by Cornell University, for example, famously predicted that boomers would inherit $10.4 trillion.  And in those days, $1 trillion was still a rarely considered sum of money.

Yet it appears that the reality will be far more modest.  Parents of boomers are living longer, their healthcare costs are more expensive than predicted and they’ve also suffered through the same bear markets as their children.  Their inheritance, in many cases, is gone – and they may even be relying on their children for help.

A recent study by the American Association of Retired Persons (AARP) found that only about one in five boomer households has received an inheritance and only 15 percent of remaining boomers still expect to receive one.  Of those who received an inheritance, the median value has been about $64,000 – nice to have, but not enough to sustain another generation during retirement.

Boomers face other problems, too, which we will discuss in our next article.