The Big Investment Mistakes Made in Retirement

By Shelby Smith

Taking too much risk with your investment:

We all want the highest interest rate possible and the lowest risk possible - unfortunately these are competing objectives. High rates always spell high risk BUT high risk does not always spell high rates. You should know that risk and reward are traveling companions: if you want low risk you've got to settle for low rates and if you want the chance of making high rates you've got to accept high risk.

Most people work a lifetime to save enough so they can have a comfortable retirement - the last thing in the world they want is to lose their retirement nest egg in bad investments. So why is it that most retirees have all their money in mutual funds, stock, bonds, a diversified portfolio of securities, variable annuities, etc.? All these things carry the risk of loss - yeah I know that "in the long run" you'll do a lot better than with a safe money alternative. BUT, in retirement you don't have a long run. A great economist once said, "in the long run we're all dead".

In the closing years of the 1900's and up until 2002 the stock market was roaring upward - would-be-retirees were making loads of paper profits and looking forward to retirement next year. Out of the blue came the dot.com bust and a market meltdown - over the next two years the S&P lost half its value, the DJIA sank like a rock and the poor NASDAQ stocks lost 80% of their value (that's where most of the dot.coms were traded). Instead of retiring, or continuing to be retired, many "risk taker" had to change plans or go back to work as Walmart greeters, taxi drivers or whatever they could get in the depressed employment environment. Can this ever happen again?

Look around you: sub-prime problems, foreclosures shore to shore, the dollar losing ground at an alarming rate, inflation picking up, real estate activity grinding to a halt, economic recession being mentioned often, bank stocks losing half their value, major corporation turning to China and the UAE for capital infusion to stay solvent, record federal deficits, commodity prices shooting upward and lots more of gloom and doom. I don't want to be negative...but there are storm clouds gathering and you don't have an risk umbrella if you've put your retirement money in the market.

The first big mistake retirees (or would-be-retirees in the red zone before retirement) make is they have taken too much risk with them retirement money.

What can you do? Find a financial adviser quick if you don't know how to lower your risk without one. Examine every retirement investment you have and make sure the money you'll be using in the next 10-15 years is in rock solid saving places like bank CDs (for use in years 1 - 5) or fixed annuities (for use in years 6 - 15). If you don't like either for-the-first-half-of-your-retirement money, you can continue to keep your money at risk and hope for the best.

Putting your money only in short-term bank CDs:

Many of you have all your retirement money in 6-months CDs because you want safety and are afraid you'll need it all very soon. The good news is that you've got safety and ready access...the bad news is that this is costing you a king's ransom.

Generally, the longer you commit you money the higher the rate of interest you'll earn - that's why 5-year CDs pay more than 3-months CDs. You should space, or ladder, your money so that it comes due at about the same time you think you'll need it. Yes, you may guess wrong sometime but the penalty will be a lot less than if you always keep your money short and liquid.

Let's say you now have $150,000 in short-term bank CDs that you've earmarked for retirement. You think you'll need about $15,000 a year of this money to cover expenses above your Social Security, pension (if you have one) and other income. Here how a CD ladder could work. Put $15,000 in a money market account (can get anytime you want without penalty), $15,000 in a one, two, three and four year bank CD. You now set so that every year for the next five you'll have access to $15,000 (plus interest which will keep you up with inflation) to cover your needs.

What do you do with the other $75,000? Why not look into a five year tax-deferred fixed annuity? You'll pay no taxes on the interest you earn in the annuity until you withdraw it (that means triple compounding: interest on principal, interest on interest and interest on money you would have paid in taxes) and you'll have rock solid safety because your principal and interest is guaranteed by a major insurance company. The same insurance company that insures you home, life, health, business, car and everything else of value. Oh yes, you'll probably get a much better earnings rate than if you put the money in a bank CD.

Yes, you will lose the opportunity to hit it out of the park with a high flying stock your brother-in-law told you about but you'll also avoid the risk that goes with that high flying stock. When you annuity matures in five years you an annuitize (take an income) over the next five years or do another 5-year bank CD ladder.

Retirement is a time to keep what you've got rather than trying to double or triple your money in a short period of time. But, you can err by being too safe and too liquid with everything in short-term bank CDs. Retirement is also a time to reassess your risk and make sure you can afford the worse case outcome. That's why money in the market don't make sense unless you've got a lot more money than you'll need for retirement.

If you think the market can't turn around and bite you, check out the following links:

http://www.fool.com/investing/dividends-income/2007/03/21/a-market-crash-is-coming.aspx
http://mutualfunds.about.com/cs/history/a/marketcrash.htm
http://finance.yahoo.com/expert/article/richricher/26878

Also check out my blog: http://www.theretirementpros.com/blog

Article Source: http://EzineArticles.com/?expert=Shelby_Smith

Saving for Retirement – Are You Choosing Not to Save?

By Harold L Lowe

Losing half of my income by going into retirement was a really shocking eye-opener for me. I had obviously not done enough saving. How could that be? I felt terribly. I felt that I was a failure in some way. It only dawned on me later that I could only have saved more by earning more or by reducing expenditures in other areas; in other words, by adopting a lower standard of living while working. I also realized that millions of other people were facing those same kinds of choices all of their lives; eat healthy or eat poorly; raise the children in poorer, rougher neighborhoods or in nicer, safer neighborhoods; send the children to inferior schools or send them to better schools; take vacations to new, culturally stimulating places or go to see the same relatives every year.

I want to be very clear. If you or other people eat poorly, rear your children in rougher neighborhoods, send your children to inferior schools etc., by choice, that is perfectly all right.
One of the wonderful things about this great country of ours is it does provide us, all of us, the freedom to choose. Does that mean that we prudently exercise our right to choose? The answer to that question is a resounding NO! Do I believe that most people choose not to save? My position, and you will see it again and again throughout these articles, is that paycheck-to-paycheck employees do not earn enough money, so I certainly do not blame them for the situation in which most people find themselves come retirement time. Remember, I was in the same situation.

In the United States today, inequality in wealth, wages, and income are historically high. About 95% of the population retires to levels 20 to 50 % lower than their pre-employment income.
That new, reduced income level generally becomes fixed, with the exception of occasional “cost of living” increases from Social Security. Only about 5% of people in the United States retire financially independent. I define financial independence as having income from assets that provides levels of income sufficient to support your living standards whether you work or not.

Expanding global competition, changes in the nature of work, the out-sourcing of work, out-of-control un-documented immigration, and rapid technological advances are altering economic reality. Yet many of our policies, attitudes, and institutions are based on assumptions that no longer reflect real world conditions. One constant, however, is the fact that most people who work for a paycheck do not become financially independent, even with the aid of the best financial planning. Another major question for you to answer for yourself is: Can you even survive mergers, down-sizing, lay-offs and other adverse factors and maintain your present or a comparable job until retirement?

Remember, you do not have to live on less in retirement. No matter where you are right now financially, you can build and enjoy a retirement lifestyle you desire. Peace.

Harold L Lowe retired at age 62 when his six-figure income position eliminated. He shockingly found a 50% reduction in his (combined pension and Social Security) income. He’s since learned that income reduction is faced by most paycheck-to-paycheck employees. You can get a copy of his Free, eye-opening Report “Financial Planning for Retirement is not Enough!” at http://www.haroldllowe.com