Be Prepared: Getting Ready to Get Ready for Retirement

If you think about it, you went to school for probably nearly a quarter of your life to prepare you for your career--a big investment of time and money.  But beyond just making sure we do not run out of money, it does not seem that we spend the same proportionate amount of time getting ready for the retirement phase of life.  With that in mind, I thought I would dedicate this week’s blog entry toward creating a checklist of items to prepare for transitioning to retirement.  Here are a few thoughts on getting ready to enter pre-retirement transition years: 

Debt: The 3 “No’s” of Preparing

•  Borrowing from Retirement Accounts—Accessing funds in an IRA comes with the sting of a 10% excise penalty tax, but many company plans allow you to borrow from them and “pay yourself back” over a specified time period.  Sometimes these loans come with record-keeping fees, and you could be missing out on potential appreciation on investment markets.

• Racking up Credit Card Debt—The interest paid to credit card companies is lost leverage in critical pre-retirement years.  Savings rate is quite important as you near pre-retirement years, and carrying balances on credit cards not only serves as impediment to saving, but also drains more money through interest costs.

• Accessing Equity in your Home—Home ownership is a critical key issue for the pre-retiree because your home will either serve as your retirement residence, or as a large piece of re-investable savings if you choose to sell and access built-in equity.  For those people carrying large loans into pre-retirement & early retirement, this key cash-flow item could force the need for more income sooner, or the need to downsize earlier.

Health:

• Not only is it no fun being in poor health in retirement, but it can also be costly.  While much of this may be out of our control due to genetics, having a healthy diet and engaging in reasonable exercise can boost general health. 

 Saving (Tax-Advantaged):

• Pre-Tax Savings Plans—For most of us, the pre-tax retirement savings plan(401k, IRA, etc.) will provide the best tax advantage; reducing taxable income now.  This is the primary place to engage in savings until you hit your limit.  Pre-retirees should aim to put as much in this bucket as their budget can bear because once earned income stops, so does their ability to use these plans.
• Roth IRA Saving—After you have max-funded your pre-tax savings and funded an emergency fund, funding a Roth IRA would allow those assets to compound tax free.  Some people may not be able to save in a Roth due to their income tax situation.
• Tax-Sensitive Savings—Saving in taxable accounts can be different to tax-deferred funds because of the requirement to pay capital gains and income tax “as you go”.  Being tax-sensitive with individual securities sometimes makes sense, as does funding cash value life insurance or annuities.  These choices are highly dependent on the goals set forth for these savings account

 Planning (not just financially):

• Just as having a vague idea about “what you wanted to do with your life” was a decent idea as you entered the working world, having some thoughts on what you want your retirement years to look like is also a good idea.  Whether it’s travel, taking up golf, or volunteering, this will give you some idea of lifestyle, which in turn gives you some idea of income needs.  Also, giving this some serious planning will help you to time your exit from the everyday workforce with what is right for you.

As I have written before, I believe that the retirement transition years are the most important in setting yourself up for the rest of your life.  It is important to be ready to start getting ready to transition.

Within the Volatility: Viewing the Positives?

Sometimes it’s hard to stay positive about the economy as you watch investment markets jerk downwards, upwards, and generally dance with volatility over a protracted period of time.  When almost every headline & television news show tells us that we are headed to recession (based largely on a leadership vacuum in world politics), I think it is important to also look at the economic underpinnings beneath the noise as well. 

A recent research report from Bank Credit Analyst Research – one of the world’s leading providers of global investment research since 1949 – listed a number of positive economic points that are worth noting when trying to determine the direction of the economy:

Oil prices have fallen sharply over the past four months. Oil is down nearly 25% from its high in late April of $113.93. This will provide relief to consumers and, combined with a bottoming in the market when we get there, will be a nice boost to potential economic growth. 

Real bond yields have fallen to extraordinari­ly low levels. Since many home­owners can therefore refinance to take advantage of better interest rates, consum­ers may begin to cash-flow relief.  

The Chinese economy continues to grow, and policymakers there have a lot of ammunition to deal with any slowing that may appear. Ear­lier this year, the fear was that the Chinese economy was trending dangerously, as policymakers at­tempted to give the people what they want in terms of economic growth to support China’s grow­ing middle class. Recent policy action in China suggests that policymakers there are moving away from a “growth at all cost” mentality to a more sustainable growth mentality. 

Treasury yields are low, indicating global confidence in the U.S. as a safe haven, despite the recent S&P “downgrade”. Now is a perfect time to have the political debate on spending and taxes. The difficulty is that, with the 2012 election cycle upon us, answers will probably not be coming forward from our lead­ers in Washington. We are on a low budget in the U.S., but that doesn’t mean that fiscal reform has to be a destroyer of our economy. Sensible spending restraint and some tax adjust­ments can allow the U.S. econo­my to expand at a healthy pace going forward.

Stock prices and interest rates are currently so low that we do not need economic growth to justify the purchase of equities. I do not think that the stellar prof­its many companies reported for the second quarter is a surprise to anyone by now. It is also en­couraging to note that earnings per share can still grow in a low economic growth environment. Firms will likely use the earnings that they do not pay out as divi­dends to repurchase shares since it is not likely that companies will continue to sit on ever-growing cash balances if they are not in­vesting for growth. It is likely this type of earnings growth will add support to the mar­kets. 

The index of leading economic indicators (LEI) rose for a third consecutive month in July. Admittedly, an advance in Au­gust will be a bit more difficult to achieve given the recent market volatility and negative sentiment. However, Fed accommodation still allows for a steep yield curve despite some recent flattening, which should provide some lift to August LEI. Unemployment claims holding in around the 400,000 mark may support LEI, and that level is not indicative of a reces­sion.

·        On Wednesday, August 24, dura­ble goods orders blew away ex­pectations.

o       A monthly surge in new orders for motor vehicles and parts – the best in eight years – headlined a strong durable goods report for July. Another economic measure that implies that the economy may not be what it appears--or at least may not be as bad as re­ported by the talking heads.

·        The Baltic Dry Index – the index measures the price of transport­ing raw materials by sea and is often cited by economists as a bellwether of global economic activity – most recent release revealed that it is now up 21 per­cent from its recent lows. Maybe those of us who think the global economy, while slowing, has not fundamentally changed are not misfits after all. While the index certainly has its critics, in an envi­ronment where investors are be­ginning to price in a global reces­sion, the increase in the Baltic Dry Index is one piece that calls that view into question.

      ·       Unemployment claims holding in around the 400,000 mark may support LEI, and that  

           level  is not indicative of a reces­sion. 

While there are certainly some fundamental issues that need to be addressed in the economy (particularly the level of government debt in Developed countries), not all news is bad news either.