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02.09
Investing
in Turbulent Times
By George W. ZOBRIST
“It
was the best of times, it was the worst of
times…”
– opening line
of A Tale of Two Cities
Considering the devastating
impact the current economy is having on U.S.
workers, the current economic climate could
certainly be considered the worst of times, or
it could be viewed more optimistically as the
best of times, if you are able to take advantage
of some of the once-in-a-lifetime “bargains”
that are likely available in the stock market.
Most, if not all of us, have
seen our finances reach new lows, with no
apparent bottom in sight. There has been a
severe drop in 401Ks, IRAs and other retirement
and non-retirement monies which we have
accumulated over our lifetime. Our first
inclination is to sell and salvage as much of
the residual as possible. This may or may not be
a wise choice at this late date. Pulling money
to the sidelines after a severe market drop may
allow you to sleep more soundly, but you may
also miss out on the inevitable rebound in the
market. It’s not a question of if it will
rebound, it’s when. Of course, no one
really seems to know when that will be – it
could be weeks, months or years.
Pre-retirement Strategies
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more
thoughts on retirement...
John Bogle of Vanguard was
quoted recently as recommending
that for asset allocation the
percent in bonds or other fixed
income assets should be roughly
equal to your age. That's a
simple rule of thumb. It gets
more complicated if you allocate
the equity portion to large cap,
small cap, and foreign stocks.
A problem with 401(k) and
similar DC plans is skittishness
—
pulling out (or cutting back on
contributions) when the market
falls. That defeats dollar cost
averaging.
The Fidelity Investor's
Quarterly (May 2008)
discusses the market timing
trap. A $10,000 investment in
the S&P 500 in January 1980
would have earned more than
$300,000 by December 2007.
However, missing out on the
best-performing 30 days during
this period would have reduced
the portfolio to roughly $83,000
—
about 70 percent less
than a portfolio fully invested
during the whole period.
Missing out on only the best
five market days in this period
would have cost $76,000; cutting
growth to just $224,000.
-----------------
There may be the option to
retire later, if the nest egg
has dropped in value. The
Congressional Budget Office has
analyzed this. The CBO paper on
The Retirement Prospects of the
Baby Boomers (March 2004)
points out, near the end, that
people retiring at 62 can expect
to live another 20 years. Each
year that they postpone
retirement reduces their need
for retirement savings by about
5 percent. If you want a
mortality table, see the IRS pub
590, Appendix C
—
used for calculating
required IRA distributions.
www.irs.gov
Another 46-page CBO paper finds
that the nest egg can be cut by
20 percent (for a couple) for
each added year of work that
delays retirement. See the table
in: "Baby
Boomer Retirement Prospects: An
Overview" (Nov. 2003) .
Note that this is 2003 data, and
inflation is assumed to be 3
percent/year so the real return
is also 3 percent.
AARP has done
studies about prospective
retirees' attitudes to
continuing to work at least part
time. A majority expect
to, either for volunteer work to
fill their time or for
supplementing their retirement
income. If they retire before
age 65 (when Medicare kicks in),
health care benefits are a
concern. Sometimes, at least one
spouse finds work that includes
a benefits package. Gradually
reducing the work hours with a
long-time employer over a period
of three to five years is called
phased retirement.
Means-testing has already
started for paying Medicare Part
B premiums (for doctor visits).
There may be means testing in
the future to adjust the size of
the SS benefit, according to
your other income.
|
 George
McClure is
government relations
editor for IEEE-USA
Today's Engineer,
and a member of the
IEEE-USA Career &
Workforce Policy
Committee. |
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There are some investment
strategies that experts recommend for people who
have not retired yet, such as dollar cost
averaging. With this strategy, the
individual invests the same amount of money each
month (or some other regular time period) in a
stock(s), mutual fund, or the like. Over time,
you will acquire more “resources” for your buck
when the market is down, and less during “boom”
times. Financial gurus have shown that this
may result in a lower average cost, compared
to buying when the market is at the top or
bottom, or by buying at random times in a
fluctuating market. Most importantly, dollar
cost averaging teaches a disciplined approach to
investing.
Another strategy for saving is
to increase your contribution to your 401K or
other retirement vehicle. This has an added side
effect of reducing your current income tax and
compounding your tax deferred savings.
For most pre-retirement
individuals, saving for retirement has become
your responsibility, because most employers have
shifted from a defined benefit environment to a
defined contribution environment. In severe
market contractions, the employer may also
lessen the amount of their contribution, or
eliminate it entirely.
Another fly in the ointment is
that many pre-retirement individuals were
relying on the equity in their homes for
retirement. In many parts of the country, this
asset has vanished, or the value has been
severely reduced, especially, if you were using
your residence’s equity value as an “ATM”
machine. Many homeowners now owe more on their
homes than they are worth in the present market.
The pre-retirement group cannot
afford to treat their homes as their primary
retirement source. Just as importantly, they
should avoid:
-
getting sweet talked into
buying investment vehicles from “get rich”
seminars
-
promulgating an unrealistic
withdrawal strategy
-
swapping all their stocks
for bonds – in an unbalanced scenario
-
forgetting to plan for
longevity
Post-retirement Strategies
If you are already in
retirement, you probably shouldn’t pull all your
funds out of the stock market and sink it into
bonds or CDs. Again, no one knows when a rebound
may occur, but you’re sure to miss it if you’re
on the sidelines. Instead, keep enough cash (or
easily converted monies) for day-to-day
expenses, so that a fire-sale of funds is not
needed. With the comfort of cash in hand, you
can think about a rational strategy for
obtaining additional cash, if necessary.
According to financial managers,
some money withdrawal strategies in retirement
can yield the best odds for “outlasting” your
retirement monies. The usual rule of thumb is
withdrawing 4 percent the first year, and then
increase this amount by 3 percent each year
thereafter for inflation. Another approach, in
turbulent times, is to not utilize the 3 percent
inflation kicker, or to utilize the reduced
amount of the retirement savings for the 4
percent basis and subsequent inflation kicker.
Of course, one other obvious way
is to reduce spending, or take a part-time job.
This could be what some people call a Jobby
(i.e., a job related to a hobby you might have).
Another strategy for individuals
who have collected early social security
payments is to pay back the amount received to
date, with no penalties or interest, and then
re-apply to receive the present, higher social
security amount. This may or may not be a
feasible strategy depending upon your age and
financial situation. In turbulent times, your
finances may be limited for a buyback. One needs
to look into this carefully, if you are going to
utilize [see:
www.forbes.com/2008/02/07/retirement-roth-taxes-pf-guru-in_jn_0207retirement_inl.html].
If you have a defined benefit
pension,
rather than a defined contribution nest egg, then your
retirement scenario is probably different and
can be somewhat controlled through spending
reductions.
There are numerous reference
articles and sites on investing in turbulent
times. Mutual fund companies, such as T. Rowe
Price; magazines, such as Kiplinger, Money; newspapers, such as
The Wall Street
Journal, USA Today; insurance companies,
such as New York Life, and others.
Note: This article is
educational in nature and should not be
considered as legal or financial advice.
Individuals are encouraged to consult with a
qualified financial adviser to devise a
financial plan that works best for their
particular situation.
IEEE Financial Advantage
Program (FAP) and Grogan Advisory Services have
partnered to provide financial planning services
to IEEE members in the United States. For more
information about this or other Financial
Advantage Programs, please visit FAP online at
www.ieee.org/fap.
Dr. George W. Zobrist is
professor emeritus at the University of
Missouri-Rolla, Department of Computer Science,
IEEE-USA's Member Activities editor, and former
editor of IEEE Potentials. Comments may
be submitted to
todaysengineer@ieee.org.
Opinions expressed are the
author's.
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