Protecting Your Finances

Investing for retirement requires a different piggy bank



Illustration by Stephen Sauer

There's a reason you don't see many sky diving Grannies falling from the sky. That kind of behavior is more attuned to 20-somethings. That's not to say there aren't exceptions to the rule - seniors have been known to jump out of airplanes. And there are plenty of younger folks who wouldn't even dream of going on an airplane, let alone jumping out of one. But for the most part, as you get older, you tend to be more risk-averse.

The same can be said for retirement savings: when you are younger, you can afford to take more risks. If your savings portfolio takes a hit, there's time to recover. The older you get - and the closer you are to retirement - the more foolhardy it is to be daring in your investments.

"When you're saving for retirement, volatility can be beneficial," says Jason Jagatic, vice president of product management for Fidelity and an expert in retirement planning. "The challenge is when you get to retirement you need to take a more conservative view if you're depending on that for income," he says. In other words, you can't afford to be short for your mortgage just because the market takes a turn for the worse with your investments.

"Life happens to people at inconvenient times," says Thomas Brueckner, president and CEO of Senior Financial Resources in Nashua, a firm catering to retirees. "What I encourage people to understand is that they shouldn't have 80 percent of the money it's taken them 40 years to save exposed to this stock market, because Wall St. has, in the eyes of many retirees, become a casino."

Brueckner emphasizes that there's an age-appropriate percentage of their money that should be at risk in the market, but not all of it. The Rule of 100 is a simplified investing rule of thumb that says when you subtract your current age from 100 you will get the percentage of your investments that should be at risk in the stock market. So, say you're 75 years old. You shouldn't have more than 25 percent of your money at risk in the market, says Brueckner. "The other 75 percent should be in a safe and guaranteed place. Next year that number is going to become 24 percent, so that as we age, we should have less and less of our money in the market, not more and more."

According to Jagatic, 2011 marked the first year that Baby Boomers reached the traditional retirement age of 65. While not everyone drops out of the workforce right at 65 - some may retire early, some may stay in the workforce longer - it still means that roughly 7,500 Baby Boomers retired daily in the U.S. last year (about 3 million altogether). And Jagatic says they're an uneasy bunch.

"One of the things we did last year was to take a poll of Boomers, and what we saw was that 62 percent of investors who are 55-plus were highly anxious and stressed about the shift into retirement," he says. "It's a big emotional change for people, if for 40 years you've been socking away and then you start tapping into that money, it's a stressful thing. People often say, 'You've been telling me not to touch it for the last 40 years - how do I know I'm not withdrawing too much?'"

Often what also contributes to a person or couple's anxiety is that they don't have a formal plan in place, Jagatic adds, which is the first thing you need to take you into retirement. If you are one of the organized ones who has a plan that is tailored for your particular situation, the next thing you have to do is to make sure you don't run out of money once you do retire.

"This longevity piece is a major concern for two reasons," says Jagatic, because people are living longer than ever (often into their mid-90s): not only does the money have to last for more years, but it also needs to keep up with inflation.

In addition, no two people have the same needs or expenses, says Jagatic. You want to look at how much income you can generate, he says, but you don't want to look at that in a vacuum. "If I told you you had $1,000 a month in income, is that a lot or a little for your situation? It's important to have context," he adds.

At Fidelity, Jagatic encourages clients to cover essential expenses with guaranteed sources of income: Social Security, pension plans, an annuity that's paying a regular amount - "something you can be comfortable in knowing that you'll be able to meet your expenses independent of the market. And then you can look to cover the remaining with income that is invested with more opportunity for growth." That way, he says, if you do have some down years, you can choose to travel less or cut down on expenses that aren't essential.

Nowadays there are so many different options for investing - and while that can be confusing, it also means that retirees can tailor a retirement savings plan that is right for their specific situation. Preferences play a huge role, says Jagatic: do you want to leave money for your children or do you want to spend it down? Are you healthy or do you have a terminal illness? Your unique situation gives a different perspective. Investors can help make sense of all that, says Jagatic. "By mixing and matching different types of properties we can come up with a collection of investments that are right for you," he says. Fidelity offers not only online tools to help start the process, but clients can also call up their offices in Merrimack or go in and speak to a representative.

Brueckner's clients tend to come to him because a friend or family member has recommended his company's approach. "We've done very well over the last 11 years by moving people out of risk into safe harbor instruments," says Brueckner. These "savings platforms" - also known as Fixed Index Annuities - have been around since 1994, according to Brueckner. "They became popular in 2000, 2001 and 2002, and have been all the rage ever since," he says.

Like mutual funds, which weren't around before 1949, says Brueckner, it took some time to develop these savings platforms, and industry marketers are always coming up with new concepts such as these. "It's innovation, improvements over time in the way we save and grow our money - making it unnecessary to risk your portfolio in order to grow it."

"Think of it as a CD [certificate of deposit] only instead of with your local bank it's with a major insurance company. Our clients earn market-linked interest that cannot be lost to a market decline, on a tax-deferred basis," says Brueckner. "It's interest. It's not a capital gain. It's not a dividend. This is not a security, meaning it's not a risk-based investment in which you can actually lose money."

"Brueckner adds Senior Financial Resources' services go beyond just these safe harbor investments, but they are the things that everyone wants to solve first. "Clients tell me, 'We'll talk about maximizing wealth transfer to our heirs, we'll talk about long term care planning, we'll talk about all these other things that you guys do, but first just stop the bleeding.'"

FYI

Fidelity Investments
Merrimack
(800) 343-3548
fidelity.com/incomeguide has information, data and graphics about retirement, as well as videos of customers who have moved into retirement

Senior Financial Resources
Nashua
(603) 595-4990
seniorfr.com

“The Safe Money Hour” with Thomas Brueckner is a weekly radio program covering the financial markets, the economy, politics, current events and government policy as they impact the financial needs of New England retirees over the age of 50. The show can be heard each Friday at 9 a.m. on AM 1370 WFEA, the sister station of WZID in Manchester.

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