Money Management & Retirement Planning Advice by Barry Unterbrink, Chartered Retirement Planning Counselor

Wednesday, March 07, 2012

Markets Hit Speed Bump - Retirement Planning Study


Retirement Income Planning - Market Linked CDs
(Risks you face in funding your retirement income)

The financial markets hit a rather nasty speed bump yesterday, as the overnight (Monday) sell-off in the Asian markets moved West into Europe and then onto our shores. Foreign markets fell about twice what we experinced (Dow off 1.4%, SP500 down 1.6% and Nasdaq off 1.4%). Financial stocks, which led the market's rather robust 2012 start, suffered 1.5% to 2% lower. Still one day's action does not dictate a trend, but it bears watching closer. Commodities followed stocks down moreso, but bonds gained some steam as interest rates fell. We are busy watching the charts and allocating to cash or stronger market areas. Your portfolio positioning is ever important now, since you no doubt have some gains to crow about this year, and you may need a strategy to hold onto a few of them. Today prices are back up 1/2% or so. Gold and silver up also.

Stock Market Doubles since 2009.

The stock market hit the level of 13,000 last week, and that marks a double in price from the bear market lows registered March 6, 2009 around Dow 6,500. With such rapid movements and swings in stocks prices, this causes people to overeact and emotionally make decisions that are harmful to their finances. Question: what were your thoughts back in late 2008-early 2009?  Did you sell, buy, allocate money to cash, reballance to a pre-determined allocation across stocks, bonds and cash? Or did you have the nerve and fortitude to just stay put and not worry about it? I reported last blog that bonds and cash do deserve a portion of your investments, especially if your are nearing retirement age. The "safe money" strategies that I've written about should be considered seriously: we never know when the next 30% - 40% - 50% decline in stocks will start, and it would be VERY ill-timed to start your retirement income plan at the depths of a nasty market bottom. Being married to your spouse is great, but being "married" to the stock market with too much risk could result in a nasty financial divorce.




Retirement Income Planning Study

There's an inside joke in the retirement planning community, "tell me when you plan to die, and I can design the perfect retirement plan for you". Kidding aside, income planning is a major concern among folks these days. About 60% of seniors polled fear losing their money more than their own death.
Ideally, diversification should help your money avoid or lessen the effects of a serious crash; like 2000-2002, or 2007-2009,  keeping your portfolio from the wild rides of up and down. A study* published by Putnam Investments, the big mutual fund company, last year concluded that the ideal amount of stocks in a newly-retired workers portfolio should be 5-20% to ensure a longer retirement income and reduce the risk of running out of money. The 'old' rule of thumb used by many for years was '100 minus your age' which made no sense to me because it took on too much risk of loss in bad market's.

Their detailed findings show that the minimal risk portfolio of stocks, bonds and cash for a 65 year old man entering retirement should be 10% for stocks, 24% for bonds, and 66% for cash or  "no risk" equiavents like CD's or money markets. Further, withdrawing 6% per year from your nest egg would have a 1% chance of running out of money. Spend 7% and the failure rate jumps to 10%. Spend 8% and you fail 33% of the time (meaning you run out of money at before your death). For a 75 year old woman, the figrues are 11% stocks / 21% bonds /68% cash, since woman outlive men and need income longer. She could withdraw 9.5% annually and have a modest 10% failure rate. This study factors in your longenvity, or risk of dying at the average age and also assumes no money left behind for your heirs (so don't share this strategy with your heirs).

I agree with their study; partly due to their rather conservative estimates of the future financial market's performance they used: +6% a year for stocks, +3% for bonds and +1% for cash (that's about where 3 year CD's are now; 1.45% at last glance).

The Big Buggaboo's

Besides not knowing when we run out of life, and the uncertainties of the markets, the biggest part of this we can change is where to allocate the biggest category - cash. With fixed interest rates very low, the value added to this strategy is to find some stable principal investments to ensure no risk of loss of principal with the potential for more than the low 1-2% returns. Not more bonds, they will decline when rates move up. Market-Linked CD's using stocks or commodities is an option for a part of your cash allocations. My thinking here is: why not hitch your horse to additional stock exposure or commodities (gold, oil, cocoa, lead, etc.) through a CD that can perform like those assets yet guarantee your principal by the F.D.I.C. insurance umbrella.

The link to my post describing these CD's is: http://moneyruminations.blogspot.com/2011/09/market-linked-cds-insured-safety-with.html . My practice now offers these F.D.I.C. insured CD's that can potentially earn 5-6-7% per year in interest. The March CD's are availble now: the rates are a minimum 6.5% cap for the six year commodity-linked CD and 5% cap for the seven year stock-based CD. Final rates may be higher and set at issue date March 28th. Call me to arrange a meeting or for further information. I will forward more details to look over in the next day or so. May all enjoy a happy and healthy long life!

Thanks for reading today.

Barry Unterbrink
Chartered Retirement Planning Counselor
(954) 719-1151

* Optimal Asset Allocation in Retirement: A Downside Risk Perspective, W. Van Harlow, Ph.D., CFA Director of Research, Putnam Institute; June, 2011

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