Retiring on Fear

Last week I wrote that we continue to see investors pull money out of equity mutual funds and plow it into bond and hybrid funds. Well, that trend still continues.

In July, the technical indicators I follow had all turned positive. I have been bullish since then and nothing has happened yet to change my view. Unfortunately, many investors don’t have a disciplined approach to investing and end up making snap judgments based on the nightly news or worse…whatever Jim Cramer tells them.

Last week, I read an interesting article in USA today and wanted to share some of the points it with you. Since 2003, investors had approximately $5.9 billion in bank accounts, cash, CD’s and money market accounts; by the beginning of 2012, that figure has ballooned to $9.4 billion. Keep in mind that during this time frame the interest earned on these “safe” investments has continued to fall to record lows.

Why has this happened? To understand this we need to go back in time a few years.
During the go-go years of the 1990’s, we saw investors pile money into dot.com companies with little or no earnings whatsoever. The fear of greed had overtaken the fear of loss. Prudence went out the window along with sound reasoning of what a corporate balance sheet should look like. People were more afraid of losing out on a golden opportunity than losing their hard-earned money. This investing with reckless abandon came to an end when the market corrected in 2000 when a new era of safety at all costs became in vogue. In a period of about 10 years, public perception had changed 180 degrees. This fear was reinforced by the correction of 2008.

One area we are seeing the dramatic effects of this phenomenon is in the 401-k area. Prior to 2000, 401-k participants had about 50% of the account values in equity based funds. That figure has fallen by almost half to 26%. What does this mean to plan participants? Well, they better go back and run their retirement planning calculations again to make sure they will have enough money to retire when they originally planned to. If not, they need to re-assess their risk tolerance or sharply increase the amount of money they put into their plan.

I don’t think people should take on more risk than they are comfortable with, but I do think they need to make sure they have a clear understanding of how much money they will need to retire on and when they plan on retiring. They also need to take into account how long they will live in retirement. Life expectancies continue to increase. As I like to say…60 is the new 50 (and so on). Not only are we living longer, but we are living a more recreational retirement lifestyle filled with cruises and trips. It becomes increasingly important to make sure you don’t outlive your nest egg.

I recently attended a conference at the Anderson School of Management at UCLA where we studied changes in the qualified retirement plan area (401-k’s especially). Many of these changes are being implemented by the Department of Labor and are in response to other legislation like the Pension Protection Act of 2006. We are at a significant crossroads for retirement planning for all Americans. In addition to helping retirees maintain the income level they need, I find myself helping more business owners get a handle on their own retirement plans. Many business owners face challenges to stay complaint with all the recent changes to rules and regulations affecting their plans. Many of these changes come from the Department of Labor. In 2011 alone, the DOL hired about 1,000 new agents with most of them being assigned to enforcement. My goal is to help business owners maintain a “compliant” retirement plan for their business.

Whether you’re currently retired or still accumulating assets for your eventual retirement, you need to have a focused, attainable goal. With that in mind, over the next several months, David Kover & Associates will be working on new tools to help you know what that goal is for you and your family. Stay tuned.