| Taking too much risk with your investment: We all | | | | either for-the-first-half-of-your-retirement money, |
| want the highest interest rate possible and the | | | | you can continue to keep your money at risk and |
| lowest risk possible - unfortunately these are | | | | hope for the best. |
| competing objectives. High rates always spell high | | | | Putting your money only in short-term bank CDs: |
| risk BUT high risk does not always spell high rates. | | | | Many of you have all your retirement money in |
| You should know that risk and reward are | | | | 6-months CDs because you want safety and are |
| traveling companions: if you want low risk you've | | | | afraid you'll need it all very soon. The good news |
| got to settle for low rates and if you want the | | | | is that you've got safety and ready access...the |
| chance of making high rates you've got to accept | | | | bad news is that this is costing you a king's |
| high risk. | | | | ransom. |
| Most people work a lifetime to save enough so | | | | Generally, the longer you commit you money the |
| they can have a comfortable retirement - the last | | | | higher the rate of interest you'll earn - that's why |
| thing in the world they want is to lose their | | | | 5-year CDs pay more than 3-months CDs. You |
| retirement nest egg in bad investments. So why | | | | should space, or ladder, your money so that it |
| is it that most retirees have all their money in | | | | comes due at about the same time you think |
| mutual funds, stock, bonds, a diversified portfolio | | | | you'll need it. Yes, you may guess wrong |
| of securities, variable annuities, etc.? All these | | | | sometime but the penalty will be a lot less than if |
| things carry the risk of loss - yeah I know that "in | | | | you always keep your money short and liquid. |
| the long run" you'll do a lot better than with a | | | | Let's say you now have $150,000 in short-term |
| safe money alternative. BUT, in retirement you | | | | bank CDs that you've earmarked for retirement. |
| don't have a long run. A great economist once | | | | You think you'll need about $15,000 a year of this |
| said, "in the long run we're all dead". | | | | money to cover expenses above your Social |
| In the closing years of the 1900's and up until | | | | Security, pension (if you have one) and other |
| 2002 the stock market was roaring upward - | | | | income. Here how a CD ladder could work. Put |
| would-be-retirees were making loads of paper | | | | $15,000 in a money market account (can get |
| profits and looking forward to retirement next | | | | anytime you want without penalty), $15,000 in a |
| year. Out of the blue came the bust and a | | | | one, two, three and four year bank CD. You now |
| market meltdown - over the next two years the | | | | set so that every year for the next five you'll |
| S&P lost half its value, the DJIA sank like a | | | | have access to $15,000 (plus interest which will |
| rock and the poor NASDAQ stocks lost 80% of | | | | keep you up with inflation) to cover your needs. |
| their value (that's where most of the dot.coms | | | | What do you do with the other $75,000? Why |
| were traded). Instead of retiring, or continuing to | | | | not look into a five year tax-deferred fixed |
| be retired, many "risk taker" had to change plans | | | | annuity? You'll pay no taxes on the interest you |
| or go back to work as Walmart greeters, taxi | | | | earn in the annuity until you withdraw it (that |
| drivers or whatever they could get in the | | | | means triple compounding: interest on principal, |
| depressed employment environment. Can this | | | | interest on interest and interest on money you |
| ever happen again? | | | | would have paid in taxes) and you'll have rock |
| Look around you: sub-prime problems, | | | | solid safety because your principal and interest is |
| foreclosures shore to shore, the dollar losing | | | | guaranteed by a major insurance company. The |
| ground at an alarming rate, inflation picking up, real | | | | same insurance company that insures you home, |
| estate activity grinding to a halt, economic | | | | life, health, business, car and everything else of |
| recession being mentioned often, bank stocks | | | | value. Oh yes, you'll probably get a much better |
| losing half their value, major corporation turning to | | | | earnings rate than if you put the money in a bank |
| China and the UAE for capital infusion to stay | | | | CD. |
| solvent, record federal deficits, commodity prices | | | | Yes, you will lose the opportunity to hit it out of |
| shooting upward and lots more of gloom and | | | | the park with a high flying stock your |
| doom. I don't want to be negative...but there are | | | | brother-in-law told you about but you'll also avoid |
| storm clouds gathering and you don't have an risk | | | | the risk that goes with that high flying stock. |
| umbrella if you've put your retirement money in | | | | When you annuity matures in five years you an |
| the market. | | | | annuitize (take an income) over the next five |
| The first big mistake retirees (or | | | | years or do another 5-year bank CD ladder. |
| would-be-retirees in the red zone before | | | | Retirement is a time to keep what you've got |
| retirement) make is they have taken too much | | | | rather than trying to double or triple your money |
| risk with them retirement money. | | | | in a short period of time. But, you can err by |
| What can you do? Find a financial adviser quick if | | | | being too safe and too liquid with everything in |
| you don't know how to lower your risk without | | | | short-term bank CDs. Retirement is also a time to |
| one. Examine every retirement investment you | | | | reassess your risk and make sure you can afford |
| have and make sure the money you'll be using in | | | | the worse case outcome. That's why money in |
| the next 10-15 years is in rock solid saving places | | | | the market don't make sense unless you've got a |
| like bank CDs (for use in years 1 - 5) or fixed | | | | lot more money than you'll need for retirement. |
| annuities (for use in years 6 - 15). If you don't like | | | | |