Advice: Investing & Portfolios
Beating the 7 Threats to
Your Financial Security
Investors are becoming more optimistic about the economy and the stock market. But they could be setting themselves up for a rude surprise. There are forces building that threaten the lifetime income security of most investors. I’ve been monitoring the threats to lifetime income security for more than 25 years. I’ve identified seven trends as the key obstacles to your financial freedom, and they’re forming a strong wave now.
1. Ben Bernanke and the Federal Reserve are keeping interest rates historically low to bail out the big banks and their creditors. They say they’ll do that until at least mid-2014. To “save the financial system” they’re punishing the people who acted responsibly. Only a few billionaires can live off the interest from the investments that used to be the bedrock of most Americans’ financial security.
Chairman Ben says, if you want a higher return you have to take more risk. He really wants your money in the stock market.
2. Investment markets are more volatile, thanks to the Fed’s easy money and the instability in the economy and financial system. Quantitative easing, the European debt crisis, the housing crash, and exploding federal debt all roil the markets and make your portfolio’s value rise and fall more than it used to.
3. The old adage that stock offer the highest long-term returns hasn’t been true for some time. Buy-and-hold investors have nothing to show for more than 10 years of following the conventional investment advice. Stock returns for the last 10 years and longer are around 0%, and investors earned these pathetic returns while enduring a violent rollercoaster ride. There’s little reason to think returns from major indexes are going to improve any time soon.
4. Inflation continues to eat away at the income investors earn, and it’s likely to get worse. When global central banks pump money into the system, prices for essentials rise. Even modest inflation means after 15 years you need twice the income you’re earning today to have the same purchasing power. Thanks to all the money pumped into the system over the last three years, we’re at risk for higher inflation in the coming years.
5. Taxes at all levels are high and rising. You used to be able to count on taxes decreasing as you got older. Not any more. Governments are spending more, and they need money to pay for all that spending. Now, taxes across the board are likely to rise, and you aren’t likely to get a break the way previous generations did.
6. People are living longer and need to finance those additional years. About 10% of those who were 65-years-old in 2011 will live past 90. A 65-year-old male had a 50% probability of living to 85, and a 25% probability of living to 90. A 65-year-old female had a 50% probability of living to 88, and a 25% probability of living to 93. In a married couple when each spouse was 65, there was a 50% probability at least one spouse would live to 91, and a 25% probability at least one spouse would live to 95.
7. Medical expenses are the wild card for everyone. Medicare pays for only about half the care incurred by beneficiaries. You pay premiums, copayments, and deductibles – and there’s a long list of medical care it doesn’t cover at all. Studies estimate the average 65-year-old couple needs about $200,000 just to pay their uncovered medical expenses for the next 20 years.
That doesn’t include the biggest wild card of all: long-term care. Medicare covers almost no long-term care costs. Full-time care in most areas costs over $70,000 annually, and costs a lot more in many parts of the country. And the cost has been rising faster than the general inflation rate.
You don’t have to stand there meekly and let these trends run over you and destroy your nest egg. You can fight these threats. Consider these strategies.
Maximize your Social Security retirement benefits. This is the only source of inflation-adjusted guaranteed lifetime income for most people. By knowing the rules, you can increase substantially the payouts to you and your spouse. I lay out the strategies in my report, Secrets to Boosting Social Security Benefits.
Consider adding more guaranteed income. An immediate annuity is an efficient way to ensure you never outlive your income. If you prefer, you can consider alternatives such as variable annuities with guaranteed lifetime withdrawal benefits or indexed annuities.
A relatively new option you should consider is longevity insurance. You pay a lump sum now and begin receiving benefits at age 80 or 85 that last the rest of your life. The advantage of longevity insurance is that the rest of your assets have to last only to age 80 or 85. Then, the insurance kicks in to supplement Social Security.
You should abandon conventional investment advice. If you have a buy-and-hold investment portfolio, be sure it is one that has true diversification. You want some assets that benefit in each type of investment environment. Traditional portfolios are tightly linked to the stock market and depend on rising economic growth and falling inflation.
Another good strategy is to abandon buy-and-hold for at least part of your portfolio. Change your allocation tactically to take advantage of market volatility. Buy the undervalued unloved assets and sell the ones that are making headlines with strong returns.
You also need to protect your income from medical expenses by making the best choices for Medicare for you and having a plan to pay for long-term care expenses.
Finally, reduce your income tax bill. Learn which assets are best owned in taxable accounts and which in IRAs and other tax-advantaged accounts. Spend down your different accounts in the most tax efficient way. That will make your wealth last at least a few years longer.
Most importantly, keep up with the changes. Personal finance issues change regularly. You can’t simply learn a rule of thumb and follow it for 20 years or longer. A retirement plan is a process, and it must be dynamic.
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