Global turmoil and retirement planning
The global economy is once again on the brink of financial catastrophe. Instead of the U.S. housing market and Lehman Brothers in 2008, the epicenter of turmoil this time is the seemingly never-ending Euro crisis. The economies of China, India and other major emerging markets are also slowing, as is the U.S. economic engine. The volatility in the market is nerve-wracking.
So, what should investors -- especially those in their 50s and 60s -- do with their already diminished retirement savings? In this article for Next Avenue (an online magazine targeted at baby boomers and created by a group of public television people and journalists), I argue for revisiting the investment basics.
My suspicion is that many savers are fine, and only need to make perhaps a tweak here and there in their 401(k) and IRA portfolios. Since the 2008 downturn, we’ve suffered through five brutal, turbulent years, including a bear market, the worst labor news since the 1930s and an anemic, jobless recovery. So many retirement savers have likely already adjusted their portfolios to reduce exposure. The experience of the past several years has only reinforced the wisdom of time-tested investment advice for long-term investors. That’s hardly surprising, since the bedrock concepts were forged during previous catastrophic episodes, like the Great Depression of the 1930s and the Great Inflation of the 1970s.
While reporting the story, I had a fascinating correspondence with Henry "Bud" Hebeler, the always insightful founder of the retirement planning website, Analyzenow.com. The former president of Boeing's giant aerospace unit is enjoying a wonderful second career. Savings and safety lie at the core of his financial advice. I like various retirement programs on his website, as well as his book, Getting Started in a Financially Secure Retirement.
Here is his perspective on how people in their 50s and 60s might think about their finances in retirement:
I would say that the three most important things that are independent of what happens to the economy are:
- Maintain good health practices. You've got to minimize future health expenses and maximize the activities that you'll want to do over the last quarter or third of your life.
- Save big-time! This is the time that your savings potential is the greatest. Kids have left home and income is the highest of your lifetime.
- Plan on working longer to maximize benefits from additional savings, pension plans and drawing Social Security at higher amounts.
The things that will happen to the economy have the greatest effect on what your savings and pension are worth, as well as what will happen to your taxes and the prices of things you consume and medical care.
I personally think that the boomer generation is going to face the most difficult economic conditions since the Great Depression. We have been on a consumption binge since the late-'80s at the expense of savings.
Government has behaved the same way and generated ongoing bills that can only be satisfied with higher taxes and reduced entitlements. To make the debt relatively smaller, the government is going to have to increase inflation, which also means it can pay it off with cheaper dollars.
The biggest effect the economy has on retirees will be inflation for three reasons:
- It reduces the relative value of the savings they then hold and the subsequent buying power.
- It reduces the real value of their fixed income. I lost 30 percent of the value of my fixed pension within the first 10 years of my own retirement.
- It increases the cost of almost everything they need, especially their ever-growing need for medical services and medications.
I've written about my own personal investment approach to economic problems on Analyzenow.com. I converted my 401(k) to a Roth, feeling that taking the tax hit now was well worth what may happen to tax rates in the future. Within the Roth, I have prepared for both extremes of depression and high inflation. I hold laddered TIPS, some CDs and REITs.
Outside of the Roth, I have bought the most Savings I Bonds that I could for many years. (I saw the handwriting years ago when I looked into what was happening to the national savings rate. From 1985 to 2005, it went from its historical level of 9 percent down to 0 at a time it should have been increasing to perhaps 15 percent, because employers were dropping defined benefit plans.)
I still own several low-cost stock index funds as a percentage of my investments, a little above 100 minus my age because in the VERY long run, the prices of stocks will increase with inflation as well.
This is a long answer to your question, but it's not an easy one to answer with a sound bite.