In the late 1990’s, just as the stock market boom was peaking, I left the relative security of a government job to become a financial adviser for a leading brokerage firm. The pay was decent, and with commissions I could probably double what I was earning at my previous job, but I was not much of a salesman, and the idea of cold-calling people I had never met to sell them the firm’s “stock of the week” wasn’t very appealing. I ended up leaving the job and returning to government service shortly thereafter.
It was while working as a financial adviser that I developed a soft spot for retirees. The reason is because I saw so many of them make mistakes which jeopardized their nest eggs and their retirements. Some couldn’t afford to retire because they had never contributed to their 401k fund while others had diversified too much and left their retirement earnings exposed to the market meltdown that followed the dot.com bust of the early 2000’s. Many didn’t understand that money earmarked for retirement should be placed in rock solid investments in the years immediately preceding retirement age, and some had to go back to work because they realized that Social Security and private pensions would not be enough to supplement their retirement.
For those approaching or contemplating retirement, there are important lessons to be learned here, namely that taking risks is not advisable for retirees. Some level of modest risk is advisable in the years leading up to retirement, but retirees should be putting the money they will be using in the 10 to 15 years after retirement into rock solid investments like CD’s or fixed annuities.
The first step is to figure out how much of your nest egg you will need to withdraw annually to supplement expenses above what Social Security and any pension will cover. For those who need additional help in this area, the services of a good financial adviser are recommended.
As an example, if you have $150,000 earmarked for retirement, putting your money in short-term CD’s might appear safe, but you would be better off dividing that money into longer term CD’s (3 to 5 years) which pay a higher rate of interest.
Let’s say you and your financial adviser determine that you will need about $15,000 a year from that $150,000 nest egg in the first five years of retirement. One way to structure your retirement income is by using a CD ladder. Putting $15,000 in a money market account will assure you of ready access to the first year’s supplement. Additional increments of $15,000 can then be invested in one, two, three, and four year CD’s respectively. That way, you will have access to $15,000 every year for the next five years plus accumulated interest to help you keep up with the rate of inflation.
The remaining $75,000 can be put into a five year tax-deferred annuity. You pay no taxes on the interest you earn until you withdraw it, and you get the rock solid safety of having your principal and interest guaranteed by a major insurance company.
This may not be a sexy way to invest, and you probably won’t have the opportunity to double or triple your money with that high flying stock your brother-in-law recommended, but as the recent sub-prime crisis and collapse of the financial and housing markets has demonstrated, elusive and risky investments are not the place for your hard-earned retirement savings to be.