The Great Recession was a game changer in many ways, including retirement planning. Some long standing rules and traditions became obsolete and others held true. What lessons did the Great Recession teach about retirement planning that will help future retirees?
A house is not a retirement strategy
“Real estate has seen a significant shift. Before, many seniors were thinking of their homes as investments they could sell in retirement. Now, many have found out the hard way that a home is not a retirement strategy,” says Dan White, a financial advisor with Dan White and Associates. That said though, making smart choices about where and how you live in retirement can go a long way toward securing your golden years, he says.
Retiring at 65 is not a given
There has certainly been a change in the perception of the retirement age. In the 1990s, the buzzwords were “early retirement”, while today, more and more people are moving from full-time to part-time work, stepping back gradually. Others are delaying retirement altogether. While the old model of retiring at 65 was certainly appealing, there are many advantages to working later in life, especially if it's on your own terms, says White. “Seniors can benefit financially from delaying social security and individually from ongoing pursuits that keep them engaged and fulfilled,” says White.
The main difference right now are people's anxieties, says Grant Moore, a financial advisor at Savant Capital Management. After living through 2007-2009, many investors are on edge, watching all the various market commentary and reading about the global economy in an effort to protect themselves going forward, he says. “This anxiety is causing volatility in the equity markets. In addition, if you look at company valuations, on average, most of the global indices are still undervalued,” he says. This is another sign, he says, that although there are opportunities for investment gains, many folks simply hope to sleep at night and are hoarding more cash than they previously have.
Annuities look pretty good now
There's one word that comes to mind that sums out how retirement planning has changed since the Great Recession, “guarantee,” says Roy Laux, president of Synergy Financial Services. If it's not guaranteed, then it should not be the basis of the guaranteed fixed income clients need to pay their monthly expenses and deal with future inflationary considerations as well, he says. How one accomplishes this is where things are now different for retirees today; and that may be the most important key to successful retirement planning, he adds.
“Incorporating lifetime benefit provisions that adjust to inflation and provide income based on both spouse's life expectancies has evolved to a point stronger than at any other time in my 30 years in this industry. Many are now singing the advantages of income planning using annuities. There are riders available to guarantee income regardless of longevity,” says Laux.
There is indeed a big focus on retirement income. “In the past, people were more focused on the wealth building aspects of their portfolio. More than ever, especially for people approaching their 60s, they want to know how they can create sustainable income for the period they are retired,” says Michael Fliegelman, a financial advisor with Strategic Wealth Advisors Network. Income needs to be generated in spite of the low interest rate environment and to be protected against eroding factors such as increased taxes, inflation, health care costs, and market volatility, says Fliegelman.
Four percent isn't a magic number
“How about the 4% rule that said you can safely withdraw 4% of your assets annually, adjusting the amount upward for inflation every year?” asks James Poe, founder of Texas Retirement Specialists. “That one died when the stock market crashed 40% in 2008 alone. If you took 4% out of a declining account long enough, you saw your account fall by that 40%, plus the amount of your withdrawal,” says Poe. That rule didn't quite work out.
Okay, so now that many axioms have been upended, and the game has changed, what steps should you take? Moore's advice remains the same as before the Great Recession. “Have a sound investment strategy, which is globally diversified across equities, fixed income, REITs and commodities. Those investors who determine a sound investment strategy based on their risk tolerance and cash flow needs will be much better positioned to weather any future bear markets,” says Moore.
The biggest mental change that needs to be made for many people, he says, is that for virtually all investors, their nest egg has a long-term horizon and should be invested accordingly. “Paying too much attention to the day-to-day 'noise' surrounding the financial markets and making investments based on emotions is a recipe for disaster.”
Poe advises searching for “non correlated” assets. Those are things that don't rise and fall with the markets. He suggests things such as Master Limited Partnerships (MLPs). These are companies who own the buried pipelines and associated equipment that move gas and oil from the well to the terminal. “They are essentially, toll takers on the gas and oil highways. They should be unaffected by the price of the minerals because they just charge to move them through their pipes. The index of the biggest MLPs is MLPL. Check them out,” he says.
He also says to consider non traded public REITs. These are Real Estate Investment Trusts that buy commercial property, shopping malls, medical offices, data centers and the like. They earn rental income, which is paid out to the investor as dividends. “You can expect a capital gain from many of them when they resell their holdings. Non traded looks like no volatility because these holdings are not being pushed around by speculators and momentum players.” Says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling, “People previously took advice blindly. Now they take it with eyes wide open, that's a very positive difference. The reality of being in charge of your financial destiny may feel uncomfortable at first, but it's where you are whether you know it or not, as not making a financial decision is actually making a decision.”