Paul Ferraresi

The housing crisis and credit market upheaval that began last year have been creating a roller coaster ride for market participants with equity markets down across the globe by 30% or more in the last year. During times like these, emotions can overwhelm sound decision-making as investors panic and flee to the exits.

Ironically, this market also leads us to believe that there are now excellent opportunities in the market for investors that can remain disciplined and take the longer-term view necessary to see beyond the current economic problems.

I wish I had some eye-opening quick fixes for you, but frankly that’s exactly what got Wall Street into this crisis. We believe that turbulent times in the market are the most important times to stick with disciplined, conservative investment principles that have worked well over numerous market cycles.

By following the basics, investors can position their portfolios to outperform when the fear in the markets ultimately subsides. The flip side of volatility is opportunity for patient investors who are focused on finding undervalued assets with good growth prospects that the market will recognize in the next three to five years.

Since equity markets are near their average pullback in past recessions, we believe that the fundamental trend of rising equity markets across market cycles will pull markets upwards over three to five years. The markets will return back to their long-term trend line once it becomes clear that the negative effects of the housing and credit bubbles are diminishing.

While it may be difficult to focus beyond the latest headlines of bailouts and bank failures, with a prudent and patient approach, we believe that investors will look back at this time as one of the rare buying opportunities of a lifetime – so work with your advisor who can help you take full advantage of this great situation.

I came across an article in the November/December 2008 issue of NEFE Digest (a publication for professional financial educators) and I could not resist sharing it. It holds many of the concepts that I have taught you in this blog. The article was written by Brent A. Neiser, CFP. He is director of Strategic Programs and Alliances and chief organizer of NEFE’s Retirement Income Decumulation Think Tank. Now, although it is being written to us as financial educators, I know you will find it useful as you look over my shoulder. Enjoy and hopefully you will get a few subtle “aha’s.”

Myths of Retirement

Ever have someone tell you that after working hard for the last 40+ years they are “finally ready to retire?” Retire on WHAT, you think. They have virtually no investments, little savings, maybe a house with limited equity, and not much else.

We in the financial education community have to explode the many myths associated with living in retirement and on social security. Astoundingly, many Americans still believe that they can somehow live their life in retirement by relying almost exclusively on that monthly government check. Social Security was designed to be a supplemental income source, not the whole retirement package.

At least 50 million families are currently “undersaved” and racing headfirst towards retirement. Many soon-to-be retirees often don’t think about (or are too overwhelmed to think about) how they are going to pay for retirement. And once they actually get there, they realize they have not adequately calculated the cost of living through retirement. Alarmingly, they often overestimate how long their personal savings will last once they retire and begin spending their limited nest egg.

Too many people think of 65 (or even earlier) as the so-called “magic number” when they will stop working. Quite possible they spent their life working at a job they didn’t like, but it paid the bills. Even worse? A life spent at a job they didn’t like that didn’t pay the bills.

But absent significant health issues, there is no particular reason to retire at 65. All of us have significantly more years beyond that arbitrary date in which we can have vibrant, intellectually stimulating, and challenging lives. Regardless, many stop working, more than likely too early. Doing that and claiming Social Security before full retirement age will reduce lifetime inflation-adjusted earnings by up to a third.

So, how do we motivate people to work longer and save more? It is not an easy sell. Since the 1950s, when the retirement age was roughly 68, we’ve been marching steadily towards a younger retirement age. Right now, it is about 63 according to the Bureau of Labor Statistics.

But working longer and planning too far into the future is counterintuitive to most of us. We’ve been the target of a lifetime of advertising telling us that if you want it, buy it now on credit and worry about tomorrow- tomorrow.

Regardless, of whether someone is in their forties, fifties, or beyond, we as financial educators need to affirm that building up large retirement savings is not a luxury but a necessity. Soon-to-be retirees need to understand not only to save for the “fun” part of retirement, but also for the unavoidable. Medicare co-pays will sap their accumulated savings as they grow older. Inflation will not stop just because they have gone into retirement. As they age, just about everything will cost more, even as they draw down their accumulated savings and investments.

There are some solutions. By retiring later, people can avoid drawing down what little savings they have accumulated and actually can continue to add to their savings. In many cases, they’ll also be able to keep their employer sponsored health insurance.

An added bonus of working past 65: more time to pay off any high-interest outstanding debts, like credit cards, car loans, or personal lines of credit. The goal is to go into retirement debt-free or close to it.

As professionals, it is imperative we provide more education and retirement product options for those in or nearing the retirement phase of their life. Obviously, we also must provide comparable direction and assistance for those in the savings and accumulation phase.

In particular, we must get soon-to-be retirees to talk about annuitizing at least a part of a lump sum distribution from an IRA or 401(k) to provide a stable, secure, and predictable income. But, would-be buyers need to know to shop around and ask lots of questions, because fees and surrender provisions vary significantly.

We need to motivate people to seek out professional investment advice regardless of their current income and how little investment income they may have accumulated. A few hours and a few hundred dollars’ worth of professional advice can make a significant difference in the long run to someone with even limited savings.

As much as anything else, we need to help people understand that retirement is a goal that you can ease into, not an event that has to take place at a specific, pre-determined age. Individuals can go on “retiring” for decades. Retirement, as we see it now, undoubtedly will look different in 10 or 20 years time.

An associate of ours, Kim Barmann, in New Mexico sent this report. I wanted to share it with you to emphasize the importance of staying vigilant in saving money.

$ People Are Saving Less

• The Commerce Department reports that Americans are saving at the lowest rate since the Great Depression.
• Personal savings stood at a national level of negative $6.2 million in January.
• About 40% of Americans say they are saving nothing for retirement. One reason: Over the past year, inflation rose 4.3% while salaries rose only 3.4%.
• One in four Americans told the Employee Benefit Research Institute that they have no saving at all.

$ Retirement Is Coming Later and Later

• The percentage of Americans 55 or older working full-time increased from 54.2% in 1993 to 64.4% in 2005.
• Nearly one in four people between 65 and 74 was still in the labor force in 2006, compared with just one in five in 2000.
• A recent study indicates that 17% of workers have suffered a reduction of retirement benefits offered by their employers in the last two years. Of these, only one-third say they are saving more for their retirement as a result.

$ Student Debt Is Piling Up

• Tuition cost have climbed 60% since 2000, and the average graduating senior now owes more than $20,000, according to the National Center for Education Statistics-twice as much as graduates owed a decade ago.
• Nearly a quarter of recent grads owe in excess of $25,000.
• While student debt rose 8% from 2005 to 2006, starting salaries rose only 4%.

These are the statistics. Break away from the crowd and do NOT be one of the statistics. Call us if you want to stand out from the crowd.