Financial Planners Worried About Retiree Finances, Reports

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Worrisome economy, rising inflation concerns, and higher healthcare costs may cause more retirees to go broke during retirement.

There is an American retirement crisis on the horizon, and over 50 million retirees should be concerned. Over 39% of investors in or nearing retirement have saved less than $25,000 for their golden years, reports This is the lowest American savings rate since the Great Depression.

"We may already be in a recession, and retirees are behind the eight-ball for saving enough for retirement," says Jon Hicks, Chief Investment Officer for Louisville based J. Hagan/Warren Wealth Advisors. "We expect interest rates to remain low and the stock market to be very volatile for 2008. This is a very bad combination for retirees to earn a reasonable rate of return in traditional investments."

While Hicks maintains that younger investors may have enough time to weather the storm in the equity markets, he is worried about retirees. "We are seeing a lot of retirees that lost principal during the last recession and have most of their savings in low-yielding accounts. If food, energy and healthcare costs keep increasing at their recent rates, many retiree portfolios may expire before they do," he explains.

It is hard enough to make money in the stock market without expert guidance. A recent study conducted by Dalbar found that between 1983 and 2003, the S&P 500 index returned 12.98%; but the average equity mutual fund investor returned only 3.51% during the same time period. It also found that investors who actively traded to capitalize on short-term fluctuations actually lost 3.29% annually during the same period. Why do investors perform so poorly? "Volatility," points out Hicks immediately.

"Those retirees that got out of the market after the last recession in 2000 never got back into the market to experience the bull market from 2003 through 2007. The market volatility made them buy high and sell low, which is exactly the wrong thing to do," adds Hicks.

When asked what retirees should do to overcome the possible retirement crisis, Hicks said that they should seek out expert advice to avoid as much volatility as possible in their portfolios while seeking a healthy income stream. "If the markets are in a recession, the lower volatility will help investors sleep at night, and the income stream can offset the higher energy and healthcare costs that our headed our way."

The biggest problem he sees is that many retirees are trying to manage their finances on their own without expert help. "Nine out of ten investors do not have a financial plan. It's bad enough that most people have not saved enough for retirement, but they also have no roadmap to see where they are going," Hicks points out. "This will ultimately lead to being financially lost, which is emotionally far scarier than knowing where you are headed."

When asked about specific investments, Hicks indicated that every individual investor has different objectives and needs and no specific product is right for everyone. He disclosed, however, that there are an increasing number of alternatives to the traditional fixed income vehicles of CDs and bonds that could play an important role in a less volatile portfolio.

One specific warning he made was against long term bonds that last longer than 10 years. "Even though we expect interest rates to stay low for the near term, we are steering our clients away from long term bonds because of inflation concerns.

Interest rates and bond values work like a teeter-totter," he adds. "If long term interest rates increase over the next five years, you could lose principal if you needed to access your money before the bond comes due at maturity. And if you have not saved enough for retirement, there is a higher chance that you may need access to principal sooner than you hoped for."

Hicks relays that there are a few steps retirees can take to put themselves in a better position. First, they should consider seeking out the help of a financial professional to establish a financial plan that includes assumed rates of inflation and realistic rates of return. Many investors overestimate their expected returns from investing. Secondly, retirees should seek investments that have low volatility to curb their fears during turbulent times. Last, retirees should review their plan annually to ensure they are still on the path to achieve their goals.

So what about the unfortunate masses that have saved less than $25,000 for retirement? "Other than going back to work, there may be no other options," he says somberly. That is what has him worried.


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Jon Hicks
J. Hagan, Warren Wealth Advisors
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