Jan. 17, 2013 at 8:00 AM ET
Bad advice becomes all the more damaging when opportunities to correct it are scant. Fact is, problems in your golden years are quite hard to solve once you retire.
Discover that someone’s advice on the perfect portfolio composition stinks, or that savvy insurance strategy turns out a dud, and there’s quite little to be done. You’re likely no longer earning at peak levels, meaning precious little opportunity to replenish your bank account. Health care and other costs, meanwhile, steadily climb as we age. Soon, those dreams of that picturesque condo you and your spouse spotted on your second honeymoon can begin to fade.
To prevent this aged anguish, Forbes dispels some faulty retirement advice.
Some might have come from a financial adviser. Others perhaps were passed to you over a lunch from a well-intentioned, but sadly misinformed friend.
No. 1: The stock market’s risky. Avoid equities as much as possible
Sorry, retirees, you won’t be able to get away with staying totally in the fixed-income world. The returns simply aren’t meaty enough on bonds or CDs or any traditionally safe asset. “Investors always thought they could save for 30 or 40 years, and then put it into a very conservative portfolio. They thought they could get out of the stock market,” says Peter Disch, a wealth manager overseeing $120 million from 90 clients in Boston. “A portfolio made up of fixed income is not going to meet your income needs. That’s a big change that a lot of my clients are having trouble coming to grips with.”
Disch solves this problem with a little hand-holding—to make sure clients don’t sell in a panic—and to put as much as they can stand into equity. Example: For 65-year-old Joe, who is fairly tolerant of a little risk and wants to draw down 2 percent annually on his $5 million nest egg, Disch would suggest at least 50 percent in equities.
No. 2: Use 100-minus-your-age to find your allocation
The need to invest more in stocks means the death of an ages-old maxim. You know it, right? Subtract 100 from your age and that’s how much you invest in equities. The rest goes into bonds.
Such cut-and-dry asset allocation no longer has a place in today’s low-interest rate environment. “100-minus-your-age as your stock-to-bond ratio is not the rule anymore. You need to have a much larger nest egg,” says Frank Nargentino, a Plainview, N.Y.-based certified financial adviser at JHS Capital Advisors. Consider: The 10-year Treasury pays about 1.9 percent, less than half what it paid five years ago. 100-Minus-Your-Age applied when the benchmark T-bill paid out 9 percent or 10 percent, like it did in the 1980s. Hopefully, you’ve looked at your retirement plan since then.
The rule worked best, Nargentino says, when retirees expected to earn 6 percent to 7 percent annually on their investments. Now, you must work backward to solve the loss of that rule-of-thumb: To earn at those same rate today, you will need more stocks and possibly a venture into lower-grade credit. Nargentino advises a tough conversation with yourself (and your family) about your risk tolerance. Resign yourself to the fact that the uneasiness left from 2008 will probably linger, though there’s little to be done about it.
Assess how far you can go into lower grade credit, which will carry relatively higher yields and help add to your nest egg. True, you can only go so far down the credit ladder before the risks outweigh the potential gains. Edward Altman, an elder statesman of the credit world and a New York University professor, suggests staying north of B-rated junk bonds. Now, high-yield debt does not mean necessarily putting money with a rinky-dink company stuck in Backwater, USA. Some higher-profile companies exist in that spectrum, like Ford Motor, Sprint Nextel, United States Steel and Chesapeake Energy.
No. 3: You absolutely need an annuity
An annuity acts as income security. It’s guaranteed to pay out long after that final paycheck. You’ll pay for that, though—annuities can be expensive, as well as dangerously murky. Tales of grandparents bankrupt by misleading products, or salesmen, abound.
If you’re short on cash, you probably shouldn’t buy. Best not to tie up your funds like that. For folks with flush, multiple income streams, avoid the high fees that accompany many annuities. Says wealth manager Disch: “If you’re only taking out like 3 percent, you really end up just giving your money away to really expensive products. The annuity business is always becoming more creative to help people feel more secure in their financials—and for that, they’re charging a lot. And if you’re not taking high withdrawals, why would you pay to insure something that doesn’t need to be insured?”
A final word to the wise: Many advisers favor the low-cost annuities offered by Vanguard and Fidelity.
No. 4: Skimping on your 401(k) makes sense in an emergency
There’s little greater than the compounding power of your boring, basic 401(k). Keep stuffing it, and it’ll help you toward your retirement goals. Sometimes, though, there can be a desire to skimp. Perhaps Junior is college-bound. Or wife Peggy suddenly runs up a hefty hospital bill. Starving your 401(k), even in tough financial times when money’s tight, can seriously haunt you for years to come. Besides, you might be able to withdrawal that money from your 401(k) without risking the 10 percent penalty. “We always tell people to plan for retirement before anything else,” says Nargentino, the Plainview, N.Y., financial planner. “You can always take out a loan to pay for all of college, but you can’t take out a loan to fund all of your retirement.”
That said, pulling money out of your 401(k) for everyday sorts of bills that have piled up is unwise. You’ll be hit with income tax and the 10 percent penalty. (There are several factors that won’t trigger the penalty: unreimbursed medical expenses, home purchase, college tuition, eviction, funerals and some repair costs.) So, say John, 55, wanted to withdraw $50,000 from his 401(k). His salary puts him in the 25 percent bracket. That, plus the penalty, means he’ll only see $32,500. If John waited until he retired, he’d likely be earning less and, therefore, see a smaller bite and a lower income tax.
No. 5: Lots of insurance can invite a lawsuit
Will properly ensuring all your house and all your toys invite a lawsuit? That’s what some people have been told, says David Spencer, a vice-president at insurer ACE Group. “They believe that it will become like, a self-fulfilling prophecy,” he says. Rest assured, he says, any competent lawyer will try to hose for all you’re worth. “It’s an absolute fallacy. Don’t buy big because it makes you an attractive target? If you’re a wealthy individual, you’re going to be litigated to the fullest extent of your assets.”
Certainly, frivolous lawsuits can hit anytime. “In retirement, though, everything is even more at risk,” Spencer explains. “You couldn’t possibly replace if you had a lawsuit that wiped way a good portion of your assets.”
No. 6: Volunteering on a board is risk-free and a great way to give back
Your favorite local charity needs a board member. Now that 40-hour workweeks are yesterday’s business, you promptly agree. Did you read the charity’s insurance policy? You should have. “A lot of people like to give back to charities and trusts in retirement, that makes sense. There’s also an insurance risk,” says Spencer. Yes, you could be liable if that cash-strapped charity doesn’t extend its insurance protection to its board. “Any member of the board could be personally held liable. The good-Samaritan rule: You’re doing something for the good of the cause, but because the action of the board, you could put your life’s work at risk, so you should check out their insurance policy.”
No. 7: You’ll spend less and live more simply
By retirement, it’s probably—well, hopefully—just you and your spouse. Living for two means a simple lifestyle. Maybe a splurge or two, but nothing extravagant. Soon, the trips and the outings and the grandkids all begin to add up. “That was the nice thing about work: it kept you from spending money,” says Frank Fantozzi, a wealth manager and CEO of Planned Financial Services. “I don’t see people slowing down on their spending until into their 70s. People at 62, 65, into their 60s are seeing their spending increase.” That’s a common refrain from advisers. Marty Leclerc, who runs Bryn Mawr, Penn.-based Barrack Yack Advisors, says it’s mostly a mix of traveling more and spending more on entertainment to fill those leisure hours—and ever growing health care costs. Those costs alone are increasing by 3 percent to 5 percent a year.
No. 8: Downsize a home and enjoy that windfall
Speaking of simple, a smaller house makes perfect sense.
Wrong. More often than not, Fantozzi has found that retirees opt for anything but a cheap, tiny place. Plus, with the real estate market in its permafreeze, the equity from your first home won’t be worth as much as it once might have been. “People aren’t going straight into a fixer-upper,” says Fantozzi. “Or if you do get a fixer-upper, that’ll cost you to remodel. Or you’re going to find that cute little condo that is just as expensive as your old home, if not more.”
No. 9: You must be debt free
“We’ve always said, Pay off your debt by the time you’re retired,” says Pam Lucina, a JPMorgan Private Bank wealth adviser in Chicago. “Now, I think people are really starting to see a place for it.” Wait, debt in retirement? Absolutely. It works as an inflation hedge. With interest rates at ultralows, locking in a cheap mortgage gives you access to a sensible stream of cash. “We have a lot of clients doing a line of credit against their investments assets. Some do it as a rainy day fund. And those interest rate are hovering around 2 percent.” Lucina, meanwhile, assumes inflation increasing at 3.25 percent into the immediate future.
No. 10: You can always go back to work
If all else fails, then maybe a new gig will help. That’s a thought that sits at the back of most people’s minds, says Rande Spiegelman, Charles Schwab’s vice president of financial planning, and can help ease some of the anxiety about such a big change in lifestyle. It assumes, of course, you can stay healthy. A 2010 study by the Employment Benefits Research Institute found that 40 percent of retirees needed to leave the workforce earlier than expected—due to their own health problems or their company’s problems. Says Spiegelman: “Hopefully, you won’t be forced out of the job market prematurely, but wouldn’t it be better to plan on working longer because you want to, and not because you have to?”
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