We’ve been discussing in recent columns the importance of creating a written retirement income plan.
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Identify what is important in life and use the right investment tools to accomplish those goals by producing as much cash flow as possible. Stocks, bonds, mutual funds, annuities, bank products and alternatives such as real estate and precious metals are all various tools that investors use to accomplish their goals. Remember, there can be no retirement without income, so increasing predictable income is the goal of creating a written plan. The next step is to identify and eliminate risks that could blow up that plan.
- Will another major crash in the market destroy your financial future?
For some investors, this is one of their primary fears when it comes to their current plan. In our experience, that is an extremely valid concern. In the past 15 years, as countless current retirees and baby boomers were working in their peak earning years to save for retirement, they saw two major stock market downturns that destroyed their confidence in the financial markets.
- Is a buy-and-hold strategy the right approach for retirees?
The traditional investment approach is to buy and hold on to investments, because over time the stock and bond markets should go up in value. Often, that investment approach works out great. Yet, as people draw close to retirement or retire, does that same approach always make the most sense? In several cases, we would say no.
- Are you counting on stock market growth to fund your retirement?
In the past 117 years, there were four periods of time that the Dow Jones went years with flat to negative cumulative returns. The shortest of these periods was 11 years in the January 2000 to December 2010 stock market and the longest was 25 years from September 1929 through November 1954. Thus, if the retirement plan is based upon the growth of the stock market, can the average retiree afford to risk the lottery of the returns of the stock market?
- Use circuit breakers to try and avoid major losses.
We are not saying baby boomers and retirees should not own stocks. In fact, stocks can be a great investment and we like dividend-paying stocks. Once an income plan is created and enough predictable income is generated from Social Security, pensions, annuities, dividends and interest to cover the monthly cash flow needs of a retiree, the daily noise of the stock market becomes less important.Still, a lot of investors would want to avoid seeing a major decline in their account values due to a dramatic drop in stock prices. That is the goal behind using circuit breaker technology.
In our homes, we all have circuit breakers. Next to the sink, a GFCI switch is designed to protect someone who is washing their hands. If too many appliances are plugged in and it becomes unsafe, a breaker should trip, shutting off power to that area. Or heaven forbid there is a major problem, the main switch can shut off power to the whole house.
A circuit breaker can also be used when it comes to investing in stocks and bonds. It is designed to be a safety net with the goal of protecting investors. When risks grow too high, the breaker trips and moves the account to an area that could have lower risk, like cash. Occasionally, people think of this as trying to time the stock market. That is not the focus of our recommendation. The goal is first and foremost to limit against significant losses and protect profits based upon an individual’s risk tolerance.
- When should investors add circuit breakers?The best answer would be right before a stock market crash occurs. The problem is, no one controls the stock market and predictions by even the smartest economists are often wrong. Oil embargoes, wars, assassinations of a president, terrorist attacks, the gold rush, even back to the Black Death — unexpected events should be considered the norm when it comes to investing. Just when everything seems fine, unexpected events will shake the foundation of the economy and the markets.
Focus back on your own individual plan. Is your retirement income plan generating enough predictable income? At what point do you want to protect your accounts against a decline in value?
Using history as a guideline, as today’s markets reach record highs, now is the time to consider adding in more protection with circuit breakers.
For more information about The Retirement Guys, tune in every Saturday at 1 PM on 1370 WSPD or visit www.retirementguysnetwork.com. Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., Member FINRA / SIPC. NEXT Financial Group, Inc. does not provide tax or legal advice. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. (419) 842-0550
