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The Retirement Income Crisis (and how you can avoid it) - Part I


Why is there a Retirement Income Crisis?

Retirees and pre-retirees today have a serious problem. With life spans increasing and interest rates near historic lows, conventional bond income strategies are not providing enough income and appreciation to meet the cash-flow needs of retired individuals and sustain them throughout 20 to 30 years in retirement.  Consequently, today's retirees and pre-retirees are at risk of: 

  • Not having enough income to meet their daily cash-flow needs
  • Outliving their retirement savings
  • Depleting the nest egg they had hoped would sustain them in retirement and then pass in-tact to loved ones and favorite charities
  • Becoming a financial and emotional burden on their children or grandchildren
  • Inhibiting their children's ability to retire comfortably and remain financially secure
  • Living out their retirement in fear 
  • Never fulfilling their retirement goals and dreams

In today's low interest rate environment, CDs, municipal bonds, Treasuries and most other fixed income securities are paying out only a fraction of interest they paid out five and ten years ago.  So, unless you are exceptionally wealthy, if you invest only in safe fixed income investments like CDs, floating rate mutual funds and short-term bonds, the income you receive may not be enough to meet your cash-flow needs. Additionally, the rate of return on your investments will never keep pace with the annual increases in the rate of inflation.  To outpace inflation and meet your retirement income needs, you have no choice but to take on more risk and invest in longer-term and higher-yielding (higher-risk) bonds.  Even then, with average life expectancies in retirement now 20 to 30 years, employing a riskier fixed income strategy may not be enough to guarantee that you won't outlive your retirement nest egg.  To ensure that doesn't happen, you are going to have to include stocks and stock mutual funds in your retirement portfolio. 

When you combine increased longevity with historically low interest rates, and other factors we'll discuss in this article, it adds up to what we refer to as The Retirement Income Crisis

Get rid of outdated beliefs and fears.

Traditionally, retirees have had three primary objectives:  

  1. Generate enough income from their investments to live comfortably and meet their lifetime cash-flow needs
  2. Avoid any loss of principal 
  3. Pay as little as possible in taxes (which explains why so many wealthy retirees invest almost exclusivly in municipal bonds)

As long as their principal is never at risk and they pay as little as possible in taxes, most retirees are satisfied with low returns that barely keep pace with the rate of inflation. That's why advisors at the major banks and brokerage firms are encouraged to recommend municipal bonds to their affluent senior clients. It's a lot easier to sell people what they want and will readilly buy (regardless of whether doing so might jeopardize their financial security) than to properly educate them and only recommend investments and strategies that will help them avoid the Retirement Income Crisis. As long as they can continue to make money, the big banks and brokerage firms will perpetuate their retired clients' "old school" beliefs and fears and continue to recommend municipal bonds and "old school" fixed income strategies. 

Unfortunately, those “old school” beliefs and investment strategies are putting people's retirements in jeopardy and putting them on the fast track to outliving their retirement savings. To ensure that you don't meet the same fate, you're going to have to throw out your insideous “old school” beliefs and fears and accept the reality that the biggest risk you will face in retirement is the risk of outliving your money, NOT the risk of losing money in the stock market. Even the wealthy are at risk. 

If it sounds like I'm being overly dramatic, read Part II of this three-part article series.  You'll soon understand why I'm so concerned about these risks and why I've drawn up a battle plan in Part III to help you face them head on to ensure your long-term financial security and independence. 

Click on the following link to read The Retirement Income Crisis (and how you can avoid it) - Part II: http://www.brightscope.com/financial-planning/advice/guide/6688/The-Retirement-Income-Crisis-And-How-You-Can-Avoid-It-Part-Ii/

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Rich Winer is the president of Winer Wealth Management in Woodland Hills, CA. Winer Wealth Management is a fee-based Registered Investment Advisor offering comprehensive financial planning services including asset management, insurance, retirement and estate planning. Additional services include investment management, insurance, employee benefit and retirement plan services for businesses.   

Rich works with clients throughout the country, especially in California including Woodland Hills, Los Angeles, Calabasas, Tarzana, Encino, Sherman Oaks, Burbank, Northridge, North Hollywood, Agoura Hills, Westlake, Thousand Oaks, West Hills, Beverly Hills and Santa Monica.

For more information, please visit http://www.winerwealth.com or call (818) 673-1695. 

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