There have been massive changes in the retirement landscape and understanding how these changes will affect your retirement planning is essential. How you plan for retirement during these uncertain times can make the difference between a comfortable retirement and a retirement filled with the fear of outliving your retirement savings.
What most people may not realize is that they are no longer “savers” for retirement. Instead, with the advent of the Qualified Retirement Plan, most people turned into investors for retirement. Reluctantly.
ONCE UPON A TIME
There once was a time when your loyalty and hard work were rewarded. After working for your employer for 20, 25, or 30 years, you retired with a gold watch, a retirement party, and most importantly, a guaranteed pension check for the rest of your life with spousal benefits. Add in Social Security, and your retirement was set for life.
It really was an amazing deal. Your company did everything for you, making contributions, managing the money, and ensuring your pension. You might think that “nothing that good could last forever,” and you would be correct!
Over the past few decades, employer-sponsored pension plans faded away. From the 1980s onward, these pension funds were hemorrhaging cash. Companies realized their pension plans no longer viable and hard to manage.
Employees were sold on the fantastic, wonderful new Qualified Retirement Plans – the IRA, 401k, 403b, TSP. They got to be in the driver’s seat, “in charge of their own retirement.” Yet, many didn’t understand the memo explaining their new responsibilities – determining contributions, employer matching funds, and overseeing how their money is invested. The burden of saving for retirement shifted from the company and to the employee.
Professionals are hired to manage the retirement plan, ensuring it will meet retired and retiring employees’ obligations. These professionals have years of experience in investing and managing funds. Presumably, they know what they are doing and earned the large fees they charge. Employee retirement funds are subject to market volatility and the performance of the plan managers.
The truth be told, the employees are responsible for making retirement investment decisions yet have little or no investment experience. Some are doing well, while others lost fortunes due to bad timing, uniformed investment choices, and market crashes, as we saw in 2008.
Timing and making informed investment choices can make the difference between a comfortable retirement and struggling to make ends meet.
WHAT RETIREMENT LOOKS LIKE NOW
Let’s review some recent history. After four decades in financial services, I have some observations about 2020 – a year straight out of a horror movie, the craziest, most uncertain year ever.
- Over 50 million workers were laid off due to the COVID pandemic.
- The federal reserve printed trillions of dollars to head off an economic meltdown and plans to spend even more.
- More businesses filed for bankruptcy than during the 2008 market crash.
- Interest rates fell to an all-time low hurting the growth of retirement savings.
- Central banks added close to 200 tons of gold to their stockpiles.
- The value of the dollar dropped compared to a basket of other currencies.
- There was unchecked rioting in the streets.
- The COVID pandemic hit hard and reached every corner of the globe.
- To top it all off, it was an election year with a deeply divided country.
Now that 2020 is behind us, it is time to focus on the future and learn how to grow and protect our retirement savings.
The big question we all must ask ourselves is should we continue to roll the dice and pray that the market will continue to grow, or is it time to take some chips off the table?
That brings us to the Bears, the Bulls, and the Wise. Wall Street has opposing mindsets about growth, risk, and market loss. The Bulls are all about growth and chasing the next big market gain. The Bears see turbulence ahead and predict a correction that could lead to investors losing a big chunk of their retirement savings – especially troublesome for people near or entering retirement.
Let’s begin with the Bears. This is the group that believes that we will see a catastrophic correction in the markets. They focus on twelve reasons why the market will take a nosedive. Many are predicting that the next correction will make 2008 look like a picnic. Here is a list of potential events that the Wall Street Bears believe could drive the market into a freefall and wipe out the recent market gains and crush your retirement accounts:
- The Money Bubble – There is approximately $200 trillion in debt and unfunded liabilities. Who will pay for this? You guessed it; we will.
- Massive Increases in Taxes – The administration will tax everyone and everything, crippling our economy.
- Unprecedented New Regulations – This will affect many industries and could choke the economy.
- Attack on the US Dollar – China now has a central bank and its own cryptocurrency.
- Inflation – Why will it happen, and how will that affect our purchasing power.
- Unemployment – Due to Covid, many jobs are gone and are not coming back because thousands of businesses shut down for good.
- Commercial Real Estate Crisis – Nationwide, we have empty office buildings, and some will remain empty.
- The Tech Bubble – Tech stocks are overpriced and are likely to correct and may not bounce back.
- Housing Bubble – The Real-estate market expects massive foreclosures, and many renters are unable to pay their rent.
- The New Green Deal – Will strangle the economy and cost the states billions.
- The Massive Amount of Money being Printed – The unprecedented amount of money printed will cause a loss of confidence by foreign nations.
- Sub Prime Business Loans – Many of the same banks responsible for sub-prime mortgage loans that caused the crash of 2008 are now making sub-prime business loans.
The frightening thing about the Bear’s perspective is that any one of these events can cause a market correction, and investors will pay the price. Imagine if half of these predictions occurred. The point that the Wall Street Bears are making is a market correction is both likely and overdue.
Let’s move on to the Bulls. This group believes that the market will continue to grow. They recommend that you stay invested and invest more of your retirement dollars. Their view is that the market growth we witnessed from 2009 through 2020 will continue indefinitely. They also have their reasons to believe in their positive outlook.
- Stimulus Checks – This will like a shot of B-12 to the economy if those who receive the checks will spend the money and stimulate economic growth.
- Paycheck Protection Program (PPP) Loans – These business loans will allow them to continue to pay their employees while business profits are not sufficient to keep employees. Portions of these loans are forgivable and will not need to be repaid if the business follows the rules for loan forgiveness.
- The Pandemic and Vaccines – Based on the history of pandemics, this one may be over soon, and that will awaken a sleepy economy.
- Restaurants, Hotels, and Places of Social Gatherings – These venues may soon reopen, and the hospitality industry will get back to pre-pandemic prosperity.
- Social Distancing will End – The malls and other retail establishments will again see pre-pandemic traffic, and sales will get back to normal.
- We Will Fly Again – The airline industry, which has been idle for most of 2020, will again host eager business and leisure travelers.
- Cruise Ships Will Cruise Again – The vast worldwide fleet of cruise ships will fill up when Covid is under control.
- Government’s Stated Commitment to put Resources into Green Energy – This will create new jobs and opportunities.
The Wall Street Bulls and Bears make opposite predictions based on what they believe. The problem is that no one knows who is right.
This Brings Us to The Wise
What if there was a way to position SOME of your retirement savings so you cannot lose if the Bears are right and the market crashes, but you still win if the Bulls are correct, and the market continues to grow? Would that not be the best of both worlds?
This concept is called Indexed Performance. Indexing is a simple and safe strategy. Your money is not actually in the market but is tied to one of the market indexes like the S&P 500. If the Bulls are right and the market goes up, your account goes up. You will not get all the Market gain, but few investors ever do get the same performance as the Dow Jones or S&P 500 when the market is climbing. Here is the great news: if the Bears are right and we go through another market crash, you will not lose a penny.
Let’s use Jim, age 65, as an example. Jim thought himself to be an above-average investor and has done a good job picking stocks and mutual funds. Jim’s retirement accounts and 401k did well during the past 10 years, and his $300,000 investment has grown to $500,000. Now let us assume that the market drops 40% like it did in 2008. How much will Jim lose? Forty percent of $500,000 would equal $200,000 lost to a market downturn.
What if Jim decided to put one-half of his savings ($250,000) in an Indexed Performance Account and we have the same 40% market correction. Remember that the Indexed account can never lose money no matter how far the market drops. Now Jim will have only one-half of his $500,000 savings ($250,000) exposed to the same market correction. A forty percent loss of $250,000 would equal $100,000 lost to the same marker downturn. Using this simple maneuver, Jim would have cut his market losses in half.
Keep in mind that Jim is age 65 and will need his savings to supplement his retirement income sooner than later. Doesn’t it make sense for Jim to have SOME of his retirement savings in a safe place that will grow as the market grows but he cannot lose anything if the market completely crashes and burns?
The Indexed Performance Account we are describing is a Fixed Indexed Annuity (FIA). They work similarly to bank CDs; the longer the term, the higher interest you are likely to earn. According to LIMRA, a worldwide research and data provider, American savers deposited over $241 Billion into Fixed Indexed Annuities in 2019 alone.
In addition to safety, they offer many other advantages:
- Market gains without market risk
- The account can be turned into a guaranteed income for life that you cannot outlive for both you and your spouse. Americans are living longer, and many retirees are concerned about outliving their savings.
- Liquidity when you need it. Most Fixed Indexed Annuities offer a 10% penalty-free withdrawal each year.
- Additional liquidity for catastrophic illness and extra income for Long-Term Care expenses.
- Your deposit and all gains are locked in, so this account can only go in one direction – UP!
- Tax-deferred growth. You only pay the taxes when you withdraw your money.
- Triple compounding. You earn interest in your deposit, interest in your interest, and interest in what would otherwise be paid in taxes.
- Leaving money for your loved ones. If properly structured, the death benefit is not subject to cost and time probate.
Getting back to the beginning, the day of the company pension plans are all but gone, and the burden of saving for retirement has shifted from employers to individuals. We must now play the essential role of managing our retirement dollars now and during retirement.
The Wall Street Bulls and Bears disagree about the direction the market will take in the near term, but no one knows the answer with any degree of certainty. There is no shortage of reasons why the market could go up or go down, but we all need to make choices to better protect our savings and make sure we do not outlive our retirement accounts.
You may be of the Bear or Bull persuasion, and that is okay. But it is vital at this point in the game to be Wise with at least some of your retirement savings, including IRAs, 401k, 403b, and TSP plans. Being Wise will put you in an enviable position: if the market goes up, you win, but if the market heads south, you do not lose. That is the best of all possible outcomes.