Warning: A Retirement Hurricane Is Coming!
Getting ready for retirement is a lot like preparing for a major storm. If you are approaching retirement and clouds are on the horizon, you still have time to protect yourself. Here's how.
Like so many others, this summer and fall I watched as hurricanes Harvey, Irma and Maria rolled in from the tropics and caused widespread destruction in the U.S. and elsewhere.
I live in the great state of Kansas, where killer tornadoes pop up out of nowhere and with almost no warning. The ability to track a hurricane so far in advance, and to predict with some accuracy its direction and intensity, is fascinating to me.
Nearly as astonishing, I’ll admit, is the idea that people could have days, or even weeks, to prepare for a devastating storm but sometimes choose to do nothing. They don’t board up their windows. They don’t leave town. They just assume they can “ride it out.” Some even hold hurricane-watch parties.
Then I realized that inaction — whether it’s caused by overconfidence, ignorance or because they lack the help they need — isn’t all that different from what I see every day when I talk to pre-retirees.
These are people who have had decades to get ready, and yet many have done very little to prepare — or their plan is flimsy and doomed to fail. Some actually sit in our office and tell me they plan to withdraw 5% or 6% annually from their nest egg for life — and because they’ve grown so complacent during this record-setting bull market, they expect their savings will last and likely grow. They either don’t understand or won’t acknowledge the risk in their portfolio — and they refuse to heed the financial experts who see signs that trouble may be coming, including:
- The clock is ticking on today’s bull run. At 8.5 years, this isn’t the longest bull market. That title goes to the one that ran from the fall of 1990 to the early spring of 2000. But the average bull market lasts about 4.5 years … and we know the good times can’t last forever.
- Price-earnings ratios are at historic highs. As of mid-November, the Shiller price-to-earnings ratio for the S&P 500 index sat at 31.52, significantly higher than the long-term average (since 1871) of the Shiller PE, which is 16.80. Over these past 146 years, we’ve seen P-E ratios this high only three times: 1929, 2000 and today.
- Treasuries show signs of extremes. Ten-year Treasury yields were right around 2.4% as of mid-November. That isn’t unprecedented: Over the same 146-year history mentioned above, we’ve experienced rates this low 16 times. But we’ve never had stock valuations this high and interest rates this low simultaneously. In other times of extremes, they’ve balanced each other out.
No one is saying it’s time to panic, but, of course, the best time to protect your portfolio from damage is before the storm rolls in. Here are some ways you can prepare:
- Consider taking some of your earnings from this bull market off the table, and look for alternatives that could provide predictable income. For example, you may wish to purchase a fixed-index annuity that offers a guaranteed-income stream you can’t outlive. Or you may choose to go with an FDIC-insured money market account or certificate of deposit. You may not earn as much, but your principal will be protected.
- Look at moving to a managed portfolio rather than a random collection of stocks and bonds. Professional money managers are paid to research and select investment options that best fit your individual needs; they monitor those assets closely and use their experience and knowledge to decide when to sell them.
- If you haven’t already, consider hiring a CERTIFIED FINANCIAL PLANNER™ professional who is a fiduciary and will always be looking out for your best interests. He or she can help you custom-build a fiscal house that can better withstand any coming storm. Be sure to ask for a written comprehensive plan that includes an impenetrable foundation of guaranteed income; strong walls made of assets that will provide income, cash flow and inflation protection and a sturdy roof made up of assets you hope will hold on and help you grow your money but that you can afford to lose if the storm is especially rough.
Approximately 10,000 Baby Boomers are currently retiring every day in the United States. That’s a pretty dense landscape of fiscal houses that need shoring up before the next big market correction.
If you want a better chance at surviving come what may in retirement, it may be time to do some financial weatherproofing.
Kim Franke-Folstad contributed to this article.
About the Author
Investment Adviser Representative, RSG Investments
Mike "Cy" Cajthaml Sr., CFP, ChFC, CLU, is a retirement-focused financial professional, an Investment Adviser Representative and insurance professional at RSG Investments. He has 30 years' experience in the financial services industry. He is a fiduciary, and his first priority is ensuring his clients' best interest. RSG Investments is a comprehensive financial planning firm based in Overland Park, Kansas. Investing involves risk, including the potential loss of principal. Any references to protection benefits, safety, security, lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Retirement Solutions Group are not affiliated companies. 725928