Rethinking Risk Posted by host on 6/2/2010 1:05:30 PM When you reach age 59 ½, attitudes toward investing typically change. You start to realize that little new money will be added to your nest egg going forward. The bulk of the money you have to live on has been accumulated – if you are 59 ½ and intend to stop working soon.
The first baby boomer was born January 1, 1946. On July 1, 2005, the first baby boomer turned 59 ½. What is so magical about 59 ½? A door opens to your IRA or qualified investments. You gain control to access your retirement funds without the 10% pre-59 ½ penalty under current IRS tax codes. There are a few exceptions, but for most people, 59 ½ is the magic age.
How will this age impact you? Actuaries are reporting that a couple ages 65 have a one in four chance that at least one of them will make it to age 97. Thirty-three years (age 65 to 97) is a long time to live off a block of money. Most people don’t think about the potential of spending up to 35% of their lifetime in retirement. With the gradual increase in retirement age for obtaining full Social Security benefits, the retirement age is creeping up to age 68 for the boomer generation.
When you reach the age of 59 ½, attitudes toward investing typically change. You start to realize that little new money will be added to your nest egg going forward. The bulk of the money you have to live on has been accumulated – if you are 59 ½ and intend to stop working soon.
As 1980 dawned and moving forward, our first baby boomer was turning 35. Approaching those golden years seemed very far away. Being aggressive with one’s investments was very much in vogue. Did this contribute to the “excess exuberance” of the 90’s? Quite possibly.
Here’s a hypothetical example: Let’s assume Mary has suffered a 25% capital loss in one of her accounts. Allowing ten years for a hypothetical recovery of a 25% capital loss – with 6% being a desired rate of capital appreciation – “How much greater risk would Mary need to expose her portfolio to in order to obtain the hoped for rate of return to put her back on track?” Let’s say she started with $1 million and her account balance following the down year was $750,000.
| 6% return for 10 years on the original $1 million would be worth $1,790,850 in 10 years. To get from the $750,000 to $1,790,850 would require more than a 9% compounded return or a 51.6% greater return over the next 10 years to get back onto the desired “6%” track. To achieve higher returns, Mary believes she must take higher risk. |
That reality, coupled with a desire to reduce risk as one ages, mathematically means that a 60-year old suffering a 25% capital loss at age 59 ½ who is taking income off the capital would have essentially no chance of recovering.
So what does the popular press say about approaching this retirement dilemma? “Work longer” or “Spend less.” For a person who has desired to retire by a certain age, that is not very welcome advice. At SMART Group Houston, we have faced this challenge with many soon-to-be retirees. We have solutions that are often “beyond the majority thinking.”
No matter what your age, have the last twenty-five years gone by quickly? If you are one of the boomers who is turning 59 ½, in twenty-five more years, you will be in your mid-eighties.
Is now a good time to “Rethink” your attitude toward your capital? We have an exercise that will help you evaluate your current attitude towards risk and your investor profile. If now’s a good time to “rethink” your investing focus, select the “Rethink” form on the Resources - Our Forms page of our website, print it out, complete it and fax it back to us at 713-984-8048. We’ll use it to evaluate where you are and any adjustments you might want to make. We’ll apply our Money in Motion Solutions® strategy to help you stretch your retirement capital.
No specific investment is implied. Investments in the stock market are subject to market fluctuations and returns used as examples are for illustration purposes only.
SMART Group Houston
5151 Katy Freeway ste 208
Houston, TX 77007 713-984-8044
Securities offered through Resource Horizons Group, L.L.C. Member FINRA/SIPC
1350 Church St. Ext. NE, 3rd floor, Marietta GA 30060 770-319-1970
Advisory Services offered through Resource Horizons Investment Advisory
April, 2010
