Don’t Retire Your Retirement Plan

The financial crisis has affected everyone and caused many Americans to reevaluate, scrap and start over, or retire altogether. We’re talking about retirement plans, not retirement. It’s very unfortunate that some Americans have given up hope of retirement completely. Don’t give up just yet. Don’t become a casualty. We don’t want to discount the value of your lost assets and collapsed balances. However, we propose you should consider the downturn as an opportunity to re-energize your retirement plans and face these challenges with a new perspective. It’s time to make lemonade.

#1 – Put an End to Nest Egg Spending

Like some folks, you may have used funds from your retirement accounts to pay the bills. Protecting assets in this new economic climate starts with reducing all of your personal expenses, and that includes withdrawals to the funds you have set aside for the future. Until things get better for everyone, it is advised that you freeze all withdrawals from your retirement and savings accounts indefinitely. By taking this move, you will be able to bypass the annual inflation adjustment while the economy improves again.

#2 – Think About Income Generating Investments

You probably started investing for the purpose of generating new streams of income that could support you now and during your retirement. An important principle to retirement planning is, in fact, income.

One alternative is to invest in an annuity. A recent university study revealed that an annuity could generate an income stream comparable the income created through the investment of stocks, bonds and other assets (before the crash) at less the cost. The advantage of an annuity is that annuities are designed by financial institutions as income producing investments, and passive income is vital to the sustenance of those who have already retired or who are planning to retire soon.

There are two types of annuities, fixed and immediate.

A fixed annuity is a deferred annuity that grows at a fixed rate of interest until its maturity date. At that time, you can elect to take the money as a lump sum or in installments that will continue until the principal is exhausted. You may be advised to withdraw assets based on the assumption that you will live to life expectancy. The fixed annuity provides a stream of income that does not fluctuate. The problem is, if you die sooner than that you may have lived on less than you otherwise could have. If you die later than that, you may have outlived your income stream. And people today are living longer. Even though the Vital Statistics Reports (Vol. 52. No. 14 February 18, 2004) estimates the life expectancy of an American male born in 1955 at just under 70 years, the fact is that men turning 50 over the next year have an increased chance to live to 80 and beyond, making it all the more difficult to accurately predict how long retirement income must last and the presence of a lifetime income all the more important.

Immediate annuities give investors the advantage of a constant stream of income and are preferred to those who rely on income, and don’t we all. Immediate annuities pay a guaranteed rate of interest, resulting in a guaranteed stream of income for the rest of your life. Immediate annuities are generally bought with one lump sum payment, which is then "immediately" converted into a series of scheduled payments. For this reason, people may choose to rollover an existing deferred annuity, or maybe an IRA or 401K, into an immediate annuity.

Immediate annuities are very popular among middle–income households. According to a 2002 survey conducted by Mathew Greenwald and Associates for the American Council of Life Insurance, 64% of immediate annuity investors report annual income of less than $50,000. While the income generated by an immediate income is often modest (87% of owners receive less that $20,000 on an annual basis) according to the survey, the policy-owners believe these investments make an important contribution to a financially secure retirement, and we tend to agree.

#3 – Do Not Risk Your Retirement Funds with Fly-By-Night Operators and Would-be Friends

Recent economic data suggests things may get worse before they get better and the drastic economic situation is causing many folks to feel the heat.

My mother has since retired and here engaging personality has led her to find several compatible roommates. One recent roommate named Barbara related to me the story of a church-friend who advertised himself as a financial advisor to God-fearing retirees. He made glorious promises and outstanding claims to Barbara that he could increase the size of her nest egg by 40% to 70% in a very short amount of time.

Barbara was taken by this slick gentleman and decided to risk $125,000 of the $400,000 she had saved over several decades of living frugally. What transpired next was a whirlwind of questionable transactions and financial dealings that had evaporated Barbara’s $125,000. Instead of opening a trust account, this fellow required Barbara to sign over power of attorney so he could make financial decisions with her money without her consent, although that’s not she was told. Once he had her funds, he started trading high risk investments that no one, in the right mind, would allow a complete stranger to make for them. Within the space of 6 months the entire $125,000 was gone.

I did a little poking around the Internet and found that this financial advisor had 3 lawsuits pending against him in other states. In turns out that although this man was a licensed financial planner, he operated with a cavalier attitude void of financial principles and integrity. He was a gambler who always took a hefty fee from his clients before making any investment, but then had a miserable track record. He was a gambler.

Retired people and the newly retired are often prey to disreputable financial gurus. Don’t become a victim. Be careful who you trust with your retirement.   

The New Rules Of Retirement

In a new book by Warren Mackenzie and Ken Hawkins called New Rules Of Retirement: What Your Financial Advisor Isn’t Telling You, we learn that reputable financial advisors and planners have a vested interest in your future. Successful financial planners will care deeply about your future by taking a long-term approach instead of tempting you with short-term glory. The pair outlines a comprehensive and clearly defined argument for adjusting your retirement strategy so that you can have more income when you need it.

This and other sources of good information should be required reading for anyone who wants to prepare for retirement, you and old. As the world changes and money changes along with it, planning and education will help you prepare for your future.