Baby Boomers to Financial Advisers: We Need Income not Wealth

According to this article, financial advisers and wealth managers are realizing that they are in the early stages of a huge paradigm shift. Baby boomers are less concerned about growing their retirement nest egg and more concerned about preserving what they have. More particularly, they want to be told what they can do to avoid outliving their money. If their adviser doesn’t have a good plan for that, the client will find someone else who does.

No doubt some advisers will move their clients into annuities. If so, let’s at least hope they will be indexed to inflation. Otherwise, they may not outlive their income, but they surely can outlive their spending power. Inflation is a deadly sure killer of spending power.

You don’t need a financial adviser to tell you how to construct a plan that will provide retirement income that is both guaranteed and inflation protected. Frankly, there aren’t a lot of options for providing that income. The most affordable option is an income plan constructed from TIPS and I-Bonds. That’s the direction I’m heading. How about you?

Searching for New Retirement Income Products

I read an interesting opinion piece today from the Retirement Income Industry Association. The author was noting how industry members thought only about the products they offer themselves to provide retirement income.

Mutual fund companies think that their funds are the way to satisfy the need for retirement income. Insurance companies on the other hand are all about annuities.

The author went on to say this:

Given the importance of retirement income to baby boomers, the challenge to financial firms is that new players may enter the market, ignore today’s product categories and give many consumers what they’re looking for: a pension substitute and an easier way to keep track of the different pots of money most of us accumulate over the years.

I agree that many boomers are looking for a retirement income plan that works like a pension, assuming that the income benefit is indexed to inflation. Right now, Social Security is the closest to that ideal. The other option: a FAILSAFE RETIREMENT plan.

10 Year TIPS Auction Next Week

For those interested in adding some Treasury Inflation Protected Securities (TIPS) to their retirement income plan, there will be a Treasury auction of TIPS with a ten-year maturity in Monday, October 5. The actual maturity is 9 years and 9 months. The interest rate (coupon) will be 1.875%. Remember that this is the permanent part of the interest. The inflation adjustments will be added to the redemption value of the securities on January 15 and July 15 of each year until maturity.

The last ten-year TIPS auction was in July. The interest rate at issue was 1.875% and the auction results produced a yield of 1.920%.

Here is the actual TIPS auction announcement from the U.S. Treasury.

There is no time like the present to get yourself educated in the entire TIPS auction program so that you can learn how and when to buy them yourself.

Avoiding the Retirement Postponement Strategy

A standard retirement planning recommendation heard these days from financial advisers is to postpone your retirement and work longer.

Who wants to hear that? That “strategy” is almost as bad as unretirement. The folks who are telling you to delay your retirement are the same “experts” who put you in high risk investments to begin with.

Here is a story about a physician who has twice changed his retirement plans. The first delay was caused by the post-9/11 market crash, which caused a 50% drop in his retirement investments. That moved his planned retirement age from 55 to 60. Now he is delaying his plans again because of the 2008 market crash.

What if it happens again? And again?

There is a better way. Use at least part of your retirement savings to fund a guaranteed income plan. Fund that income plan with investments that cannot go down in value and that cannot be damaged by inflation. Then when your planned retirement age arrives, you retire, no matter what has happened to the market. Bingo.

Maybe the process of designing your guaranteed income plan will cause you to adjust your retirement income expectations, but so what? It’s a lot easier to do that than to sit by and watch the value of your conventional stock and bond investments fall off a cliff, completely destroying your plans.

Don’t be a victim. Take control. Think about it.

The Fear of Inadequate Retirement Income

The Principal Financial Group conducts regular financial surveys of working adults and retirees to arrive at a “Well-Being Index.” The surveys are conducted quarterly and the results are then published for general distribution.

The Well-Being Survey for the third quarter of 2009 was recently published and covers responses received between July 30 and August 11, 2009. The results are interesting but not surprising.

When asked to name the one single financial issue that caused them concern (as in keeping them awake at night), the most common answer for both employees (35%) and retirees (25%) was being able to afford and pay for the basic necessities of life.

What is the only way to eliminate this concern over insufficient retirement income? You must have a plan for generating a guaranteed retirement income that will cover your basic lifestyle needs. The solution is that simple. Creating the plan can also be simple, using the correct tools such as the FAILSAFE RETIREMENT™ System. Completing the plan may be more challenging. But having no plan at all is a sure way to keep yourself up at night with fear and dread.

Stock Picking Can Ruin Your Retirement Plan

Many stock brokers, financial planners, and even DIY investors believe that picking individual stocks is the key to avoiding massive portfolio losses as experienced in 2008 and early 2009. That’s a variation on the theme that managed funds are superior to indexed funds. There is abundant evidence that disproves that notion.

Even the experts are acknowledging problems with traditional ideas of risk vs. reward equity investing. In this story, one financial manager puzzles over why Apple stock took such a tumble in 2008. Finally, he concludes that “The macro influence will dwarf individual stock situations.” In other words, when the economy itself is suffering, nervous investors will flee all sectors and cause otherwise “good” stocks to fall in unison. At that point, it doesn’t matter how smart you are, your smart picks will be punished. If those “smart stock picks” are intended to provide your basic income in retirement, you are in trouble.

Along the same lines, this recent article questions whether investors can rely on the financial planning advice from advisors tied to the retail investing industry. This columnist’s thoughts are summed up this way:

After the financial meltdown that gutted some portfolios by up to 50%, after Bernie Madoff, Earl Jones and this week’s Ponzi scheme fraud charges against two men in Alberta, investors are understandably questioning the basic relationship between them and the industry, to the point that financial advice itself is under fire.

Though stock portfolios are looking better now than six months ago, some people are thinking that the financial advisors who stood by and watched as two stock crashes in a decade wiped out trillions of retirement savings might be, say, surplus to requirements.

Entrusting your retirement income needs to those who are motivated to sell you investments can be dangerous indeed.

The Truth About Stocks and Retirement

What an interesting coincidence that in the same week that I launch the FAILSAFE RETIREMENT™ System, Zvi Bodie is interviewed in Money Magazine. In an article entitled “You Can’t Handle the Truth About Stocks”, Prof Bodie makes the case once again that the risks inherent in equity investing do not decline over time. He sums it up this way:

The standard models that are used to give investment advice to millions of Americans are fundamentally wrong. We’re told that over time, stocks get less risky, but that’s bull. Stocks are always risky — whether in the short or long run. Prices dropped by 37% last year. While improbable, there’s nothing to say they couldn’t drop by that much again next year or the year before you retire. And diversification doesn’t take away that risk. That’s why retirement money belongs in truly safe assets whose value won’t go down — not in stocks.

The article provoked a lot of comments on the CNN/Money site, many of them critical of Bodie’s position. I think many of the criticisms are based on a flawed understanding of what Bodie is trying to tell them. They say that there is risk associated with many aspects of life and that equity investing is just another one of them. Risk is not to be avoided, they say, but carefully embraced.

The assumption of risk is fine in many circumstances but only in when you can recover from a losing bet. If you choose not to insure your car against collision loss, you can probably recover from that. If you choose to gamble $1000 in Las Vegas, you can probably recover from a series of losing bets.

On the other hand, if you choose to work without disability insurance and become permanently disabled, you and you family will more than likely end up a charity case. So it is with retirement income planning. If you put your  retirement income baseline in the hands of the equity markets, there is a real chance that you will lose. Losing means you will not have enough money to support yourself in retirement. This means unretirement or worse, becoming dependent on others.

This is Bodie’s point. Investing for a baseline retirement income should be free from two risks: risk of loss and risk of diminished spending power caused by inflation. Equity investing does not fully address either of those risks, either in the short term or long term.

It is hard for entrenched interests in the investing industry to accept the hard truth in Bodie’s arguments and data. The same goes for investors who have bought into what the retail investing industry has been been selling.

Take care of your essential retirement needs first. Then take your risks in the stock market.

The FAILSAFE RETIREMENT™ System is Now Live and Ready for Download

After receiving helpful feedback from several beta evaluators, I made a few adjustments to the formatting of the System Worksheets. I also updated and finalized all of the User Resources on this site that are accessed from links inside the System.

I then uploaded the System file to e-Junkie, the service I am using to fulfill download orders and to pass payment instructions through to PayPal. The System can now be downloaded by anyone willing to make a small investment into a more secure retirement future.

The stock market continues to move upward which may ease some investor concerns. I’m a long way from being unconcerned. I remain committed to this System for creating a secure baseline retirement income plan.

I also note that gold has moved to record territory which gives you some idea as the overall lack of confidence in our economic future. Owning gold is fine for that part of your retirement portfolio that that you can afford to risk, after you have provided for your essential retirement spending needs.

I want to extend a special thanks to the following veteran personal finance bloggers who took the time to test an early version of the System and to provide me helpful feedback:

Mike at Four Pillars, John at the Mighty Bargain Hunter, Evan of My Journey to Millions, and Pinyo at Moolanomy.  Thanks guys!

Welcome to the Home of the FAILSAFE RETIREMENT™ System

This blog section of this site is where I – your humble developer, owner and publisher of the FAILSAFE RETIREMENT™ System – will periodically share thoughts and announcements about the System and about retirement planning in general.

The System is currently in beta evaluation mode. Other folks who are knowledgeable in matters of personal finance are looking at a beta version and giving me helpful feedback.  I will be officially thanking them in a future post.

Additional user-only Help resources are being created. The System is not quite ready for public release and download.

If you are interested in being a beta evaluator, please contact me at mjp[at]failsaferetirement[dot]com.

Please come back often. And tell your friends!