Concerned about your retirement savings? You’re in good company. Many folks investing for or in retirement are seeing their savings shrink. Many are concerned about their inability to save more and enlarge their retirement capital.
In my book “Cash-Rich Retirement”, I argue that it’s time to take a different, much less speculative approach to enlarging and protecting your nest egg. “It’s not over-valued condos or soon-to-correct stocks you need for retirement,” I write. “It’s real income and hard returns you can re-invest.”
Here are my tips:
1. Change your automatic pilot about savings and investing.
I encourage readers to change their “automatic pilot” ¾ their beliefs, behavior patterns, and complacency about saving and investing. People can get out of the “I-can’t-save” rut, I suggest, by making savings and investing automatic. “Give instructions to your employer to automatically deduct savings before you’re paid, and give instructions to your broker to automatically invest them.”
It’s also important to become a lot more pro-active about defending your pension if you qualify for one. Many pension plans lack adequate funding and may not be able to pay out the benefits they promise.
Consequently, I encourage people expecting a pension to write to their employer requesting an independent auditor’s confirmation of sufficient funding. My book and its companion website provide model correspondence so you can do so.
2. Diversify your holdings in radically different ways.
“Forget all the mumbo-jumbo about investing in large-cap value or small-cap growth stocks!,” I assert. Instead, I urge readers to diversify their investments on the basis of different income streams ¾ interest, dividend, and rent income.
“Remember,” I write, “investments that produce real income tend to appreciate more when a market rises and sustain smaller losses when a market corrects.” I show compelling evidence that your results can be substantially larger if you hold income-producing investments.
Unlike traditional model portfolios, my model portfolio allocates on the basis of the three kinds of income, with up to 50% of your nest egg going into non-U.S. holdings and 10% going into “safe haven” investments. “It’s important to increase international holdings so that you capitalize on, rather than be penalized by, the remarkable demographic changes that are taking place.”
3. Build a portfolio with funds, indexes, and objective research.
According to my research, a mix of mutual funds, indexes, and exchange traded funds can help amplify diversification in your portfolio. I also show that so-called “fundamental” indexes ¾ those that select and weight stocks on the basis of dividends or earnings or some factor other than price ¾ may “help investors avoid being top-heavy in overvalued stocks and achieve better results with lower risk.”
What if your 401(k) plan doesn’t offer the funds and indexes that I recommend? “Let your employer know you want access to income-producing indexes and funds,” I answer. “Name specific ones. Get vocal. Speak up! Your future depends on it.” (And the book’s website provides model correspondence for this as well.)
4. Get all the professional help you can.
I believe that many investors hurt themselves by “trying to fly solo”. “In today’s world of complex tax rules, changing investment opportunities, and shrinking retirement benefits,” I write, “you need all the professional help you can muster.”
I explain what credentials to look for in a financial planner. If you can’t afford a planner, I explain step by step how to use free on-line research, and recommend on-line educational tools and the professional stewardship of actively managed funds.
5. Build income streams via a ladder of annuities.
As traditional pensions wither, it is increasingly each individual’s personal responsibility to ensure that he or she has adequate capital for retirement. The responsibility is heavy-duty. So I explain how to make gradual investments in annuities ¾ starting with as little as $5,000 or $10,000 ¾ to build multiple income streams for yourself to meet your funding needs.
I specifically encourage readers to build a “ladder of annuities”, meaning layers of different annuities that provide different amounts of income during different phases of your retirement life. I explain the main kinds of annuities and what to look for when you shop for them. It’s all in layman’s language and you don’t have to be a millionaire to enact the advice.
6. Invest in health care insurance.
Today, Medicare will only pay about 50% of your health care expenses. It’s up to you to pay the rest. I argue that two kinds of supplemental coverage are imperative: (1) so-called “Medigap” insurance, and (2) “long term health care insurance” for nursing home care. “Going without insurance,” I write, “puts your savings at enormous risk.”
Not everyone will need long-term care. “But you cannot play Russian roulette with your savings,” I warn. I explain ten features to build into a long-term care policy and the kinds of insurers to consider.
I also makes the case for avoiding over-priced markets and correction losses by using Price/Earnings ratios and rent information to judge when a market is “red hot” and perhaps poised for correction. “Reduce stock exposure by half when the marketwide P/E surpasses 27,” I suggest. And I explain reverse mortgages in detail, showing when they are a suitable funding strategy ¾ but certainly not suitable for retirees under the age of 70.
Our grandparents might have enjoyed a pension, a gold watch, and the fall-back of home equity when they retired. Today, most of us have to amass and protect adequate savings on our own. “Don’t count on home equity as your sole source of retirement income,” I advise. “Save more. Get back to income fundamentals. And use income investments, insurance and annuities to safeguard your financial future.”
Jim Schlagheck is a wealth management executive, the author of Cash-Rich Retirement, and the co-producer of “Retirement Revolution”, a public television series on better ways to prepare for retirement. He has worked with leading financial institutions and counseled super-wealthy families around the world. His book guides readers through a 6-step action plan to build savings and reduce investment losses and he has his own investment blog, “Show Me The Money” at www.invest-blog.com.