Fed Up With The Fed
It‘s 2012 and although the stock market as measured by the S&P 500 has rallied over 100 percent from its March 2009 lows, gas prices hover near all-time highs, food prices seem to go higher with every trip to the grocery store, and yet the Federal Reserve continues to maintain interest rates near historically low levels, impacting those who need income the most–retirees.
In today’s Fed-dominated economic climate, investors are essentially being forced to take on considerably more investment risk than would be appropriate for their risk profile, specifically retirees. The traditional conservative income-generating investments, typically considered to be government bonds, CD’s and money markets/cash are yielding hardly enough to allow retirees to live comfortably. There is even speculation that these once-conservative investments are becoming risky bubbles. Unlike the recent real estate bubble when the Fed inadvertently fueled the real estate market by lowering interest rates, today it is doing all it can to intentionally keep rates exceptionally low. By keeping rates low and rendering the classic income vehicles of government bonds and CD’s virtually futile, the Fed is playing a game of chicken with investors, enticing not only the more aggressive investors but the conservative ones as well to buy riskier assets. While the more aggressive typically have longer time horizons and can recoup losses in the long run, those entering the golden years have far more on the line.
According to a recent study, every day for the next 18 years, more than 10,000 Baby Boomers will retire. A recent “Money Across Generations” survey commissioned by Ameriprise revealed that Baby-Boomer confidence in achieving their important financial goals has plummeted in the past five years. In 2007, 64 percent of Baby Boomers were optimistic regarding their financial future. Today, it is 49 percent. Five years ago, 39 percent of Baby Boomers were VERY optimistic…today it is 17 percent. There are certainly a number of factors that can be correlated with this significant decrease: increased unemployment, the crash of the stock market just four years ago and increases in the cost of living, but more importantly the drop in interest rates. Five years ago the 10-year Treasury bond was yielding approximately 5 percent; as of the end of April was yielding less than 2 percent, leaving those living off income-generating vehicles struggling to keep up with the increased cost of day-to-day living. If you are one of the 79 million Baby Boomers approaching retirement or already there, what can you do?
First off, there is always addition by subtraction. It’s important, especially for retirees, to create a financial plan that lays out a budget. We all spend money, but most people don’t track how much they spend. There are numerous ways to track your expenses, whether it’s with a pen and paper, through various online and mobile applications or with a professional financial planner. Simply monitoring and reviewing your expenses can help you identify where you can cut back or modify your spending habits. Review your phone bill for new plans that might be more cost effective. Review your insurance policy premiums: homeowners, car insurance, even life insurance. The insurance industry is constantly changing and some of these changes may actually help reduce your costs without adversely affecting your coverage.
In addition to monitoring your expenses, there are also preventative measures that should be considered. Research from the U.S. Department of Health and Human Services shows that about 70 percent of people age 65 or older will need long-term care services at some point in their lifetime. Women need care longer (on average 3.7 years) than men (on average 2.2 years), mostly because women usually live longer. Long-term care is the type of care you may need if you have a prolonged physical illness, disability or severe cognitive impairment (such as Alzheimer’s disease) that keeps you from living independently. Long-term care insurance can help protect retiree’s nest egg without depleting years’ worth of savings and jeopardizing their retirement income.
Annually, Genworth surveys 437 regions that cover all Metropolitan Statistical Areas defined for the 2010 U.S. census. Looking back at the past five years of survey results, Genworth recognizes emerging trends across the long-term care services landscape. Overall, the cost of care among facility-based providers has steadily increased. For example, in 2007 the median annual rate for a private nursing home room was $65,700, compared with the 2012 median annual rate of $81,030. This means that Americans can expect to pay approximately $15,330 more per year today for a nursing home than they had to pay in 2007. This increase represents a 4.28 percent compound annual growth rate over that period. More importantly, the financial impact the cost of long-term care can have on a household is severe. Genworth reports that 88 percent of people surveyed claimed their household income was reduced by an average of 34 percent due to their long-term care event. Sixty-three percent reported that their savings were reduced by an average of 61 percent. Unforeseen occurrences such as these can easily derail years’ worth of saving, investing and planning. It’s important to prepare and protect against the unexpected.
Additionally, creating a financial plan will also help define goals, objectives, investment time horizons and risk tolerance. While it’s important to control your spending, it’s equally important to generate enough income to cover your monthly expenses and hopefully even generate enough of a cushion to have some discretionary funds to play with as well. When investing for income, it’s critical to diversify into numerous income-yielding investments. With interest rates as low as they are, some potential alternative income-generating investment vehicles such as real estate, floating-rate corporate bonds or even annuities might fit in well as part of an overall portfolio. Since no two investors are alike, and some are willing to assume more risk than others, a financial plan will help determine your individual risk tolerance. Alternative investments may not be suitable for all investors and should be considered as an investment for the risk-capital portion of the investor’s portfolio.
While the current Fed policy aims to keep interest rates low for an extended period of time, possibly into late 2014, investors, specifically retirees, need to plan accordingly. Creating a financial plan can help define objectives and spot pitfalls in your current investment strategy. The plan can be utilized as a retirement road map, allowing you to review your expenses and control your liabilities, prepare and protect your funds from unforeseen future events and even allow you to explore alternatives to diversify your risk and potentially attain your income goals.
The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. CD’s are FDIC Insured and offer a fixed rate of return if held to maturity. Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. Past performance is no guarantee of future results. John Petrick is a Registered Representative with, and Securities offered through, LPL Financial. Member FINRA/SIPC. CA Insurance Lic. #0E03441. He can be reached at (310) 445-2581.