Running on empty

The biggest financial mistake you can make in your baby boomer years isn’t lending your Uncle Joe money for his latest scheme or filing bankruptcy. While those decisions can cause you to kick yourself into tomorrow, arguably the biggest financial mistake you can make is running out of money during retirement. Financial consultant Bob Farmer cautions boomers that time is short

By Bob Farmer

Imagine a couple of years into your retirement. You’re lingering over breakfast, the only urgent thing on your calendar being a round of golf that afternoon. Pity the younger set that whizzes past your patio view of the Rocky Mountains in their SUVs full of youngsters. They’re headed into work, putting in another 12-hour day. Your wife leans in to pour another glass of fresh-squeezed orange juice and tells you, “Honey I just paid the bills and our bank account is empty.” Being the good husband you are, you get online and check your account balances. They’re empty, the savings account too. You log in to your investment portfolio. That’s showing a zero balance. What about all the plans, all the trips to places you hadn’t seen yet, the things you wanted to do? If this happens and you are in your 70’s you are in deep trouble.

Ever see the old lady working as a greeter at Wal-Mart with the oxygen tube stuck in her nose? Do you think she is there because she became disillusioned with airport security setting her aside for special screening because she was taking a flammable substance on her annual trips to Europe? She works there because she simply cannot live on her meager social security payments.

So here you are, sitting at your kitchen table wondering, what do we do now? The answer is almost too painful; there is almost nothing you can do in the fourth quarter of any game to turn it around to a victorious win.

For baby boomers in the third quarter of their lives, the game strategy is suddenly defining:

Just how much do you need to save? Do you want to live like a pauper? Do you want your children to inherent anything? Imagine the look on your children’s faces when you tell them you’re heading out to discover the wide, wide world on the back of your Harley, just you and the ole’ lady, not a care in the world.

Start by figuring out what it is you want to do when you retire and how you would like to live as a retiree. Then make a plan.

About that trip on the Harley…you wouldn’t just jump on that bike and go where the road took you. Of course not, you might end up on a dead-end road 100 miles from water and two feet from hell. You need a map that shows where you are going, the shortest route, the straightest road with the fewest detours, the best places to stop to rest, and the places to avoid at all costs. If a map is this important enough for a road trip, why then would you spend your entire working life headed toward retirement without a similar plan?

The old lady at Wal-Mart may well have retired with what she thought was enough money. Maybe she wasn’t careful with her savings, but more than likely, she didn’t have enough to retire in the first place. Over her lifetime, she may have taken some ill-advised detours, made some investments she shouldn’t have, paid some taxes she didn’t need to—all expensive mistakes. Possibly, if she had that money back, things would be different.

In April of 2008, a study was released by the Employee Benefit Research Institute in Washington that stated: Only 23% of workers age 55 and older have savings and investments totaling $250,000 or more, while about 60% have less than $100,000. Most financial advisors would agree that 4-6% is the maximum that you should consider taking out of your investments annually during your retirement years. Five percent of $250,000 = $12,500 per year, or a little more than $1,000 a month.

Unless they change something soon, most baby boomers will find themselves in dire straits down the road. Betcha you’re asking yourself: how can I put more money away and make it grow better? The answer is in understanding the odds you’re up against.

The problem with your 401(k) is that you have too little control over it. Most 401(k) plans do not allow you to take your money out during periods of high volatility and invest in more stable opportunities. If you are 30 years old, you might want to ride out that volatility. But what if you plan on retiring in two or three years? The last thing you need is to lose 40% in a market downturn. Moreover, how do you know that your contributions are being properly allocated and the fees charged are reasonable?

The defined benefit plan or pension plan is quickly becoming a thing of the past. The Pension Benefit Guaranty Corporation in May of 2009 told a Senate panel that their current deficit of $33.5 billion is on the rise. In its 2008 annual report, the State of Colorado Public Employees Retirement Association showed unfunded liabilities of $27.5 billion. Pensions are increasingly unreliable for baby boomers, unlike the pensions that funded the golden years of the Greatest Generation.

If you are distressed and overwhelmed, you are not alone. In a recent study by Bankrate.com, 70% of Americans are unsure if they’ll be able to save enough for retirement.

What if saving more isn’t the only answer? “Don’t work hard; work smart” can be applied to the boomer’s financial situation. You need a financial plan that outlines exactly how much money you’ll need when you retire, how much you need to save to get there, the impact of social security on your ultimate plan and tax implications. From that, you can calculate just how much you will have available on a monthly basis.

Some do’s and don’ts:

  1.  Don’t make it worse. If you’ve lost a lot of money already from your retirement accounts, increasing the risk factor with the hope you’ll realize a gain may just make matters worse.
  2.  Avoid schemes and learn to recognize red flags. If it seems too good to be true, it almost always is. How many people involved with Bernie Madoff Investments ignored this basic axiom?
  3.  Avoid being overly conservative. Too many people exit the market after realizing huge losses only to invest in CD’s. They think they’ve stopping the bleeding. But they haven’t calculated the long-term net. If you are making 2.5% on your CD and your effective tax rate is 25% and inflation is 3.5%, do you think you are making money?
  4.  Don’t get too hung up on fees. Many investment houses tout low fees as their advantage. Yet cost is only a concern in the absence of value. Consider: what is an investment advisor’s contribution to your gains?
  5.  Get a second opinion. It’s okay. You’d do the same for a medical diagnosis; why not your financial plan?
  6.  Avoid stepping into an area where you’re not an expert. Warren Buffet is quoted as saying, “Risk is not knowing what you are doing.” Many people achieve temporary success at day trading, market timing, currency trading, and options trading, but very few neophyte investors succeed over the long term.
  7.  Make decisions with your head, not heart. Fear, greed, panic and irrational exuberance are your biggest enemies.
  8.  Seek professional advice. Beware of online trading firms who encourage investors to get online and make your own trades. If you don’t understand a principle as basic as evaluating the leverage ratios of competing real estate investment trusts, you need help. Seek advice from a pro, one who understands the difference between allocation and diversification.
  9.  Don’t give up. The volatility of the market is what provides opportunity and resulting gain. Stick to the plan.

Bob Farmer is a licensed financial consultant with AXA Advisors. He holds an MBA from Regis University and is currently pursuing his Ph.D in finance.