You Can Retire In A Recession

written by Mark P. Cussen,CFP®, CMFC

At long last, after years of toil and sacrifice, planning and saving, retirement plan contributions and stock option purchases, you have finally reached the end of the rainbow. Your retirement party was last week, and you have just rolled over your company plan over into a self-directed IRA with your broker.

Then, you wake up Monday morning and realize that you have retired in the middle of a recession, with a volatile stock market, fluctuating energy prices and low interest rates. Should you go and ask for your old job back? Maybe not. There is more you can do about your predicament than you think. Let's take a look at some measures you can take to keep stormy economic conditions from drowning your retirement plans.

To Retire, Or Not To Retire

Whether or not you should consider postponing retirement will ultimately depend on several factors. One of the first issues to consider is whether you want to stop working completely or perhaps take a part-time job after you leave your full-time employment. At first this idea may seem unbearable, but your new job doesn't have to be drudgery and toil.

This is a good time for you to get some sort of job related to your interests or hobbies; for instance, if you've always wanted to play with model trains, then you could get a job working in a local hobby or model train store. Or, you could get a job related to some worthy cause that you've always believed in.

If you were to work 20 hours a week at a job paying $12 per hour, you would earn $960 per month or $12,000 per year. This is equivalent to a 12% annual distribution on a portfolio valued at $100,000. Work-at-home jobs are also becoming increasingly viable. Those with writing ability may be surprised to discover what they can make a living in front of their own computers, particularly if they are knowledgeable about any kind of subject that would be of interest to others. If you've spent a long time in any certain field, you could be the expert some company is looking for to provide articles and discussion for the new class of workers.

Key Benefits
Working some sort of part-time or freelance job after you "retire" can provide two other key benefits in addition to the actual income earned.

• First, it may enable you to postpone receiving your Social Security benefits or other retirement account distributions for a few years, which means that your monthly checks will be larger when you do begin receiving them. Therefore, if you were to work for another five years after quitting your current job, it could mean thousands of dollars more in Social Security money for the rest of your life.
• Second, working part time could give your portfolio time to recover if you have sustained substantial market losses over the past few years. If the $200,000 that was in your 401(k) plan a year ago is now worth only $150,000, then consider socking it away in five-year CDs while you continue working. If the CDs pay 5%, your portfolio would be worth over $190,000 at maturity with no market risk.

Time to Buy?

History shows that those who are brave enough to jump into the financial markets during periods of recession can reap big returns over the following years. Those who bought into the S&P 500 index on October 20, 1987 - the day after the big crash - would have been up just over 50% two years later. Those who invested in the index late in 1982 at the outset of the market's recovery from recession would have seen a 61% gain in two years. The 11,000 to 7,700 drop in the Dow after the World Trade Center disaster in 2001 also provided a huge opportunity for those willing to buy fear and sell greed.

Therefore, if you have some savings in cash or cash equivalents, you may want to seriously consider investing at least a portion of it in one of the broader indexes, such as through an index fund or a unit investment trust (UIT) that owns the 10 most undervalued stocks of the Dow. Of course, this strategy is not for the risk-averse, and should be considered carefully before any action is taken.

A judicious investment into a bear market may do wonders for your overall portfolio value over the next few years. For example, assume that a retiree in the situation described above has an additional $50,000 in money market fund. If he or she invested the amount in an index fund and earned a return similar to the aforementioned examples, then much of the loss sustained previously could be recouped in a relatively short time. Of course, the money used for this type of rebound investment should not be drawn upon as income; other, more stable funds or a part-time job should be used for this purpose.

Other Investment Strategies

Buying the market at or near the bottom isn't the only option for those seeking to bolster their portfolios. Many variable annuity carriers offer dollar-cost averaging programs for new money, such as IRA rollovers.

The funds are initially placed in a guaranteed fixed account that pays a relatively high rate, which is usually higher than CDs or standard fixed-income investments. The contract owner will then examine the selection of mutual fund subaccounts within the annuity and create a set portfolio commensurate with his or her risk tolerance, investment objective (which is most likely long-term growth) and time horizon. A set portion of the account balance is then systematically transferred into the subaccount portfolio over a set period of time, usually six to 12 months.

A variable annuity is a sound way to profit from market volatility while earning a decent rate in a fixed account at the same time. But once the entire balance has been transferred into the market, you can continue to enhance your return by periodically rebalancing your portfolio. This service is now a standard feature inside most variable contracts, and functions as a continuing dollar-cost averaging strategy by systematically investing the same amount over time, allowing more shares to be purchased when costs are low, and fewer shares to be bought when costs are higher. This strategy effectively keeps the initial portfolio allocation constant over time and increases your overall return on capital as well.

Look to Other Asset Classes

Real estate is also usually on sale during a recession, and purchasing a rental property may be an excellent way to generate some reliable income as well as the potential for a substantial capital gain when the economy recovers. If you are averse to the idea of a part-time job, buying and rehabbing a run-down house or two and finding some tenants can net you a decent monthly income in fairly short order. Furthermore, this income will be far less susceptible to market volatility than your retirement portfolio, although prevailing economic conditions may impact your tenants' ability to pay rent on a timely basis.

Profit From Your Losses

Finally, this can be a good time to reap some capital losses if you have any depreciated securities outside your retirement plan. Even stocks that you plan on holding for the long-term can yield some capital losses if you are willing to part with them temporarily, and of course paying special attention to the wash-sale rules. But a substantial capital loss that is realized now can provide a $3,000 carryover deduction for the next several years. This strategy can be used with any type of individual security, although municipal bonds are most commonly used.

Conclusion

Although retiring during a recession or bear market is never fun, there are several things retirees can do to shield their portfolios from long-term fallout. Realizing capital losses, dollar cost averaging and portfolio rebalancing are just some of the strategies you can use to keep yourself afloat in choppy market waters. Staying calm and making rational decisions is also of paramount importance during this critical time. Those who think with their heads and do not act out of fear can often profit substantially during these periods.

Mark P. Cussen has over 13 years of experience in the financial industry, which includes working with investments, insurance, mortgages, taxes and financial planning. He has two years of experience in writing and editing insurance and securities test training manuals, as well as other financial topics. He has also worked in in retail, discount and bank brokerage systems and been involved in a venture capital enterprise in the oil and gas sector. Cussen has a Bachelor of Science in English from the University of Kansas and completed his CFP®; coursework at the Bloch School of Business at the University of Missouri-Kansas City in August of 2001.

Retrieved on 28^th September 2009 from http://www.investopedia.com/articles/retirement/08/retire-in-a-recession.asp

Common Concerns for Retirees

written by Denise Appleby,CISP, CRC, CRPS, CRSP, APA

While many of us worry about similar things, some areas are of greater concern to certain age groups. In this article, we focus on some common financial concerns for retirees, most of which are centered on maintaining independence. A retiree's level of financial independence determines his or her ability to maintain independence in other areas, as well as maintaining dignity during any long-term illness.

Making Your Nest Egg Work Smarter and Longer
The Worry

• Many retirees are concerned about whether they will outlive their savings, and in seeking ways to ensure that this does not occur, they look for savings and investment options that will produce earnings that are sufficient to cover their living expenses.

The Risks

• With income usually being limited to earnings on investments, retirees are often tempted to put their savings into investments that produce guaranteed rates of return. While these investments usually guarantee the principal and earnings, the rates of return are usually relatively low when compared with other investments.
• Unfortunately, there are some sales representatives that are more interested in meeting sales goals than matching clients with suitable products. As a result, investors are often locked into unsuitable investments and don't realize it until it's too late. For example, suppose you are persuaded to purchased a variable annuity because it includes an annuity payout option that provides guaranteed income for as long as you live. Depending on your situation, this investment may not be suitable because, in the event that you need to liquidate the annuity or make early withdrawals, you may be charged large penalties.

The Solutions

• Make a list of questions that you want to ask before you meet with the financial service provider and make note of the answers you receive. Where possible, ask for the responses in writing from the representative.
• Conduct thorough research into the investment product in which you are interested and compare it with other investments. General information on financial products is available at websites such as www.investopedia.com, http://www.sec.gov/,http://www.nasd.com/ and http://www.irs.gov/. However, financial institutions often add features and benefits to distinguish their product from those of their competitors. Some will include features such as lower fees, higher interest rates and a waiver of early withdrawal fees. This allows the consumer to choose the brand that most suits his/her needs.
• Work with a competent financial planner to design a portfolio that is balanced and risk-appropriate. Most financial professionals recommend investing more conservatively during retirement, but not to the point of losing out on opportunities that could product more income while maintaining an appropriate level of risk.

Getting Affordable High-Quality Healthcare
The Worry

• The older we get, the more likely it becomes that we will need healthcare. For retirees, the concern is whether they will be able to pay for good quality healthcare when they need it. After working for a lifetime, retirees want to know that their golden years will be just that - golden, and spending some of those years in a sub-par nursing home is sure to make the experience much more difficult to enjoy.

The Risks

• According to the Genworth Financial 2006 Cost of Care Survey, living in a private nursing home can cost, on average, more than $70,000 per year. This means paying for private nursing home care can quickly wipe out a lifetime of savings.
• A retiree's ability to pay for the cost of in-home healthcare, adult day-care and nursing home expenses may determine the quality (or lack thereof) of healthcare the retiree can receive.

The Solutions

• Eligible retires may consider signing up for Medicare, which can be used to cover certain medical-related expenses. Medicare provides two types of insurance; hospital insurance for in-patient care and certain follow-up care, and medical insurancecoverage for physician services that are not covered under the hospital insurance. The hospital insurance portion of Medicare is available at no additional cost, as it is paid for as part of an individual's Social Security taxes during employment. The medical portion of the insurance is available at a premium and is optional. Medicare coverage would prevent the retiree from having to use his or her savings to pay for expenses covered by Medicare.
• Retirees can look into whether it makes sense to purchase long-term care (LTC) insurance. Not only can LTC insurance be used to cover expenses incurred from long-term illnesses, but it may also allow the individual to choose where he or she receives the care, whether in a nursing home, an adult day-care center or at home.

Becoming the Victim of a Scam Artist
The Worry

• While everyone is at risk for fraud, retirees often face greater risks, as there is a growing number of scam-artists who target retirees. These scam artists hope that the retiree is not only home most of the time, but home alone. This increases the likelihood of them being able to pitch a scam when relatives are not around.

The Risks

• According to Consumer Action, "senior citizens aged 60 and older comprise 15% of the U.S. population, yet they are estimated to make up 30% - nearly one-third - of fraud victims." The North American Securities Administrators Association (NASAA) has dedicated an area of its website to exposing schemes designed to fleece senior citizens of their savings. Unfortunately, in many cases the losses are unrecoverable. Many of the individuals who prey on senior citizens portray themselves as investment professionals with the proper licenses. However, in many cases, they are unlicensed, and/or lack the experience necessary to properly service investors.
• In many cases, retirees have paid unscrupulous contractors for work that was never done (or shoddily done), invested in Ponzi schemes and have been generally defrauded by individuals they believed they could trust.
• Sadly, family members, relatives and individuals who are supposed to be friends are also sometimes guilty of taking advantage of elderly retirees by abusing the authorities with which they are entrusted, such as using power of attorney to conduct transactions that are not consistent with the retiree's goals and objectives, or even defrauding the retiree.

The Solutions

• Avoid investments that seem too good to be true - usually, they are. Retirees should also check into the background of an investment professional before agreeing to have that person manage investments. One resource is the NASAA, which hosts a Senior Investor Resource Center dedicated to educating seniors on how to protect their nest eggs.
• Check into the background of other service providers, including contractors for home-improvement projects. This information is usually available on state, county and/or town websites.
• Ensure that more than one trusted relative or family member is kept abreast of relationships with investors and other service professionals. When family members or relatives are placed in charge of financial affairs, establish a structure in which they are required to provide frequent updates to a party that has only a professional interest in the retiree's affairs, such as an attorney.

Conclusion

The need to maintain independence leads us to make decisions on our own, instead of seeking the assistance of family members. This is a natural tendency, as most individuals do not want to be considered a burden to others. However, for individuals who prefer not to rely on family and friends, other resources should be used, such as those provided by the state and federal government. Making the right decisions and investing wisely can help to ensure that your nest egg is sufficient to finance your retirement and that you have the provisions in place to provide you with any healthcare services you may need.

Denise Appleby is a retirement plans consultant, freelance writer and editor. Before starting her own business, Appleby Retirement Consulting, Denise worked for Pershing LLC for almost 10 years. While at Pershing, Denise rose to the rank of vice president, and held many positions including retirement plans product manager, manager of the retirement plans technical assistance group and retirement plans training manager. Appleby Retirement Consulting provides technical assistance to financial institutions and financial professionals; content for newsletters, websites and magazines; and technical editing services for books and other retirement plans material. Denise holds several retirement professional designations.

Retrieved on 28^th September 2009 from http://investopedia.com/articles/retirement/07/retiree_concerns.asp?&viewed=1&viewed=1

Planning For Life In The Slower Lane

written by Susan Stibbe

One day you’re working… the next you’re not—a terrifying prospect for many people approaching retirement age. The loss of a social connection and daily routine can be overwhelming, not to mention the havoc it can wreak on one’s identity and sense of purpose. In the next five years, 39% of Canada’s eight million baby boomers will start preparing for life after retirement. What will they do? Where will they go? Karen Schellinck, President and CEO of Myera, a global provider of retirement transitional programs, claims that 67% of those retirees are choosing to not the leave the workforce at all. Instead, they are gradually easing into their retirement by working part-time in order to balance their new lifestyle wants with the desire to keep themselves engaged, continue learning, or generate more income. To be more precise, the upcoming working retirees want to work on their own terms.

Nancy Millwood, who recently retired from a 40-year management career, says that after she took some time off to recharge her batteries, she felt eager to develop a second part-time career that would also allow her to spend time with her new life partner. After assessing her skill base, she chose to become a consultant. “I looked forward to reinventing myself and the skills I bring to consulting.”

Like Millwood, most retirees would prefer to cycle back and forth between work and leisure. People want to work, but they desire employment that contributes to a balanced life plan. More often than not, that plan includes leaving their current company and finding work elsewhere. Surveys show that 56% of boomers planning to work part-time after retirement hope to do so in a different position. According to Schellinck, 50% of retirees choose to start their own businesses. Moreover, 37% of aging workers wish to work as consultants, according to a July 2007 study conducted by The Centre on Aging. “Retirees are interested in using the skills and knowledge that they have acquired,” says Schellinck. “Many are interested in teaching, coaching, mentoring and consulting.” And Millwood agrees. Although she loves working, she admits that she enjoys “making a difference in people’s lives.”

Not all choices to leave a current employer to seek greener pastures are voluntary. Often, retirees are forced to leave once they hit retirement age. Employers don’t necessarily want to accommodate all of their employees in their quest to wind down their hours. Employers are worried that too much accommodation will create an “Alice in Wonderland” effect. “The fear exists that a ‘part-time on demand’ scenario will give the employee no reason to leave,” explains Malcolm Hamilton, a principal of Mercer’s retirement business. “And why would they, when they can work part-time, accrue pension benefits and wait for a severance package?” Employers are also skeptical about the productivity level of an aging worker.

According to Hamilton, several studies have shown that employees between the ages of 60 and 70 suffer from dwindling engagement and a declining desire for their work.

As a result, most companies are cautiously delaying the introduction of more formalized phased retirement plans, even amid growing concerns over how the mass exodus of the baby boomers from the workforce will cause a brain drain. “The interest in formal phased retirement programs is overwhelming,” says Hamilton, “but Canadian companies are still working on the presumption that (the brain drain) is just hypothetical. Most companies don’t have good visibility of where their business will be five years out. Therefore, they haven’t quite bought into it yet.”

Instead, most employers are opting to only offer phased retirement on a case-by-case basis to highly skilled, experienced employees who can transfer knowledge to the younger ones. If a phased retirement plan were to be adopted, the ability to be selective would be put at risk, as it would have to comply with any non-discrimination laws under pension legislation and/or employment standards.

While Canadian companies are slow to jump on board the phased retirement band wagon, the federal government isn’t. According to Evan Shapiro, a research lawyer at Hewitt Associates, the Federal Income Tax Act and Regulations were amended in 2007 to allow employees to receive pension benefits from a defined benefit pension plan while continuing to accrue benefits. As of January 1, 2008, harmonizing changes were made to federal pension legislation, which allow the retiree more flexibility when planning his or her transition into retirement. Prior to these amendments, a worker was unable to collect a pension while still on the current company payroll. To get around this stumbling block, employees had to retire and either return as contractors or find employment elsewhere. However, not all provinces are on board yet. To date, only Alberta, Newfoundland, British Columbia, and Quebec have amended their taxation and/or pension statutes to facilitate phased retirement benefits. In Ontario, the old rules still apply; but recently, HRSDC released its Expert Panel Report on Supporting and Engaging Older Workers, arguing in favour of adopting phased retirement legislation in the remaining jurisdictions.

Unquestionably, planning for retirement comes with many uncertainties. For some, the transition is not necessarily an easy one. Considering the financial, career, and personal aspects, it is often hard for workers to determine their retirement readiness. However, exploring one’s options is something that is a necessary first step in developing a well-defined action plan. Millward did her own share of soul searching when planning her transition into retirement. She shares some advice. “First, I would decide whether or not I wanted to stay with the same firm on a reduced work week, and then I would explore consulting options (self-employed or with an employer). I would also consider what I’ve always wanted to do, and whether I could make this passion marketable. Then I would assess how much money I am going to need in order to have a comfortable life.”

Ultimately, a pre-retirement plan is crucial to the development of a rewarding life after reaching traditional retirement age. Yet, most people face this stage in their life very ill-equipped. “There is a tsunami of employed people out there ready to retire, and few have completed any planning,” says Schellinck, “and once they retire, they find themselves very surprised by how much time they have on their hands, and they want to do something.” Some of these people end up at one or more of Myera’s specialty workshops, which provide pre- and post-retirees with the advice, resources, and ongoing support required to plan and prepare for their next era. Schellinck explains how important it is for workers approaching retirement to learn about the variety of career choices available, so that they may determine whether they require any training or further education.

The choices are plenty. Apart from consulting and starting a business, there are many part-time positions that demand the experience and dependability of the mature worker. Retirees are working at stores, substitute teaching, providing daycare, waiting tables, guiding tours, driving school buses and freelance writing. “Retirees also need to identify which career moves are appropriate and which are not,” Schellinck says. “For instance, one starting a business may not be ready for the financial and time commitments associated with it.”

However, work and finances are only two aspects of phased retirement—a lifestyle choice that may incorporate work with volunteering, travelling, health maintenance, relationships, crafts and hobbies. Whether one chooses to work a lot or work a little, retirement is about creating a balanced lifestyle. With proper planning and preparation, retirees can find a way to contribute in a meaningful manner and feel confident that they have journeyed down the proper road.

ARTICLE ORIGINALLY PUBLISHED IN VOLUME 11-1 OF YOUR WORKPLACE MAGAZINE

Retrieved on 28^th September 2009 from http://www.yourworkplace.ca/index.cfm/ci_id/2551/st_id/1010/la_id/1.htm