Retirement Focus - What Now???
Forecasts & Trends

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by Mike Posey


  1. Avoiding Costly Bear Market Mistakes
  2. Active Management Revisited
  3. Other Post-Retirement Investment Alternatives
  4. Combining Strategies


To say that the world has changed since I last wrote to you on August 26th would be a vast understatement. Long-time cornerstones of the financial services industry have either been forced into mergers or have ceased to exist. The credit markets have seized up, choking off vital sources of borrowing for corporations and consumers alike. And the US government has embarked upon what might best be called a domestic "sovereign wealth fund."

Trillions of dollars of investor assets (including retirement funds) have literally vaporized in front of our eyes. For those accumulating assets prior to retirement, the recent market activity could mean working longer and/or saving more of each paycheck. For those already in retirement, however, the situation could be much worse. It could mean going back to work, learning to live on a lot less money, or a combination of the two.

This week, I'm going to follow my original plan to complete the series of E-Letters dedicated to investing after retirement. My next category to discuss was that of actively managed investments. Since Gary did such a good job of discussing those investment strategies last week, I'll only add a few observations to what he already wrote. Then, I'll move on to a discussion of investment alternatives that don't neatly fit in other categories.

Before that, however, I'm going to address some very timely issues in relation to post-retirement investing during the market turmoil we are now experiencing. All investors are nervous about the market, but those in retirement are understandably more fearful of how the stock market meltdown has affected their retirement assets. Since we know that fear is a major emotional trigger for investment decisions, I want to inject some calm reason to help you avoid making costly investment mistakes in this market environment.

As always, I need to point out that any investment information provided in this E-Letter is general in nature, and should not be construed as specific investment or insurance advice. You should always evaluate insurance and investment options in light of your personal financial situation, retirement goals and any special circumstances you may have.

Avoiding Costly Bear Market Mistakes

As I noted above, many retirees now fear that their nest eggs may not carry them through retirement after having been devastated by the recent stock market decline. For those who had not saved all that much to begin with, this fear is now close to panic as the prospects of a longer life span are now on a collision course with a smaller (much smaller in some cases) retirement fund.

Fear and panic often blind investors as to the best actions to take in regard to their retirement assets. Combine that with the constantly changing advice from the financial media and the empty promises of scam artists and it becomes hard to know exactly what to do. To help any readers who may be in that situation, I offer the following advice on ways to avoid making costly investment mistakes in retirement:

  1. Keep retirement distributions realistic. Actually, long before the recent market decline, I had read of studies documenting how recent retirees were withdrawing far too much from their retirement assets to be sustainable. One article I saw was entitled "Delusional Distribution Strategies," alluding to the idea that many Baby Boomers assume they could take annual distributions of 10% and still have sufficient income throughout retirement.

    As I have mentioned in my Retirement Focus E-Letters, many experts suggest a more reasonable withdrawal rate of 4% to 6% per year is most appropriate. If that was true before the recent market meltdown, it may be necessary to withdraw even less that 4-6%, especially for retirement portfolios that may have suffered significant losses. Increasing the withdrawal rate on a portfolio of assets that has declined in value only makes the problem worse, and hastens the day when the portfolio can no longer provide a sufficient income stream.

    Thus, if you are retired and the value of your investments has been hit hard by the market's bailout blues, seek out other ways to supplement income rather than by increasing your withdrawal rate to a level that may be unsustainable. For details about these other options, see my February 19, 2008 Retirement Focus issue.

  2. Be careful when liquidating assets. It's been said that cash is king when markets take a dive, and who wouldn't want to have been in cash or fixed-rate investments over the past year or so? However, if you have an equity portfolio that has suffered major losses, you may want to resist the temptation to cash out now.

    The reason? While no one knows how much further this bear market has to run, it's certain that if you cash out now, you realize all of the losses that are now just on paper. Remembering back to the 1987 market dive, we saw that those who held onto their investments were eventually rewarded by having their value restored. Those who sold out at the bottom and stayed in cash over the next couple of years didn't get this rebound.

    While it may sound strange coming from a firm that promotes actively managed accounts and moving to cash in bad markets, there are some times when holding onto losing investments may be the best alternative. This is especially true when the markets are hit with selling pressures that are not based on fundamentals, but rather on news reports, selling by hedge funds, mutual funds and other panicked investors, and a generous helping of global uncertainty.

    As these selling pressures diminish over time, it's possible that equity prices will eventually rebound. And while they may not get back to their original October 2007 values, they may pare losses enough to make it worthwhile to have waited to liquidate. Of course, there's no guarantee that market prices will rebound within any given time period, and losses could get a lot worse before the market gets better.

    A final caution is in regard to income producing property. If you have bonds, dividend-paying stocks or other income-producing assets, it is often best to concentrate on the sufficiency and stability of ongoing income payments rather than the market price of the underlying asset. If the ongoing income stream appears to be stable and is sufficient for your needs, then selling out may be a big mistake.

  3. Don't try to "make it all back" in risky investments. Retirees need to resist the temptation to seek out investments that will let them "make it all back." I recall after the end of the 2000 – 2002 bear market, we had several investors in or near retirement contact us wanting to find an investment that would quickly restore all of the money they had lost during the bear market.

    While investments do exist that have the potential for oversized gains, it's important to remember that they generally have oversized risks that goes along with them. The bottom line is that retirees who push the risk envelope to make up lost ground could end up losing even more of their nest eggs.

    Thus, when investing during retirement it's usually best to seek out investments that are suitable to your goals and risk tolerance and not buy the latest hot performance. It's also preferable to invest in programs with actual track records that span different market cycles rather than putting money with short-term performers who may only be a "flash in the pan."

  4. Be aware of scam artists. Both Gary and I have previously written about investment scams, and especially those aimed at retirees. Be aware that the huge losses in the stock market are going to be fertile ground for scam artists who will promise the world, but deliver only misery. Just remember, if it sounds too good to be true, it probably is.

Active Management Strategies Revisited

As I mentioned in the introduction, Gary has already written extensively about actively managed investment strategies in last week's E-Letter. That being the case, I'll only add a few comments of my own to highlight how these strategies can be effective during retirement. First, however, let me summarize the other post-retirement investment options that I have already discussed.

In my initial discussion of post-retirement investing alternatives in the May 27 Retirement Focus, I mentioned the following ways to invest during retirement, each with its own set of advantages and disadvantages:

  1. Immediate Annuities;
  2. Fixed Income Alternatives;
  3. Variable Annuities;
  4. Asset Allocation Alternatives;
  5. Actively Managed Strategies; and
  6. Other Alternatives.

I covered the first two of these alternatives in the May 27 E-Letter, and discussed variable annuities in the July 15 issue. Asset allocation strategies were covered in my August 26 E-Letter, and as noted above, Gary discussed actively managed investment strategies in the October 21 Forecasts & Trends E-Letter.

As Gary discussed last week, active management strategies are those that involve actively moving from one investment to another in an effort to provide superior risk-managed returns. While the active management category encompasses a number of different money management strategies, Gary spent most of last week's E-Letter talking about a specific active strategy known as "market timing." This strategy seeks to move out of the market or into hedged positions during bear markets and major corrections, and then back into the market as conditions improve.

Through the years, the idea of market timing has not always been easy to sell. During the late 1990s, the tech bubble was buoying the entire stock market, with 20%-plus annual returns commonplace in the major market indexes. Needless to say, investors didn't think they needed a strategy that would take them out of the market.

Savvy investors, however, knew that the market couldn't continue to provide double-digit returns forever. Sure enough, the bear market of 2000 – 2002 once again underscored the need for an investment strategy that has the ability to go to cash or hedge long positions during extended declining markets.

Beginning in 2003, the stock market experienced a new bull market phase that continued through the third quarter of 2007. Guess what! Investors again forgot the lesson learned about having a money management strategy that would move out of the market. "Index investing" once again became the fad, with an emphasis on low fees rather than risk management. Account balances once again soared, with both the Dow and S&P 500 Indexes entering new record territory.

As is often the case, those who do not learn from history are destined to repeat it, and repeat it they did. Beginning in November of 2007, the market started digesting the steady stream of bad news about the subprime mortgage crisis and resulting credit crunch. I probably don't need to tell you what has happened since then, but suffice it to say that, as this is written, the S&P 500 Index stands not too far from its 2002 low. The subprime debacle has served as a big eraser of sorts, obliterating most of the equity gains experienced since the last bear market.

Will the lesson be learned this time around? I suspect that it will, especially by those who are seeking to nurse a wounded nest egg during retirement. A second major bear market within the first decade of the 21st Century should be reason enough for all investors to look more toward risk management, and not just focus on short-term performance or the lowest fees.

While Gary covered the topic of actively managed investment strategies very well, I do want to point out the following issues that are particular to someone who is investing for post-retirement income rather than pre-retirement accumulation:

  1. Be prepared for more frequent trading activity. Most experienced investors are wary of frequent trading in their accounts. Fear of having their accounts "churned" to generate new commissions is a real threat in many brokerage accounts. Thus, when active management strategies generate numerous trades over the course of a year, some investors become concerned about the level of activity.

    Generally speaking, the trading in an active management strategy is done to manage risk, and not to generate additional commission income. In fact, most actively managed portfolios that I'm familiar with do not generate commissions. Instead, they usually involve the trading of mutual funds on a no-load basis, or individual stocks and bonds within a "wrap" account that charges a flat asset-based fee.

    In some cases, frequent trading activity can result in added costs to the investor over and above the management fee paid. Therefore, it's important to determine whether an active money manager has the potential to provide a level of return that justifies any additional fees from active trading. This determination is one of the many "due diligence" services we perform for our clients in the AdvisorLink® Program that Gary discussed last week.

  2. Consider the tax aspects of active management. Due to the potential for frequent trading as noted above, many actively managed investment programs are not "tax efficient." Essentially, this means that most, if not all, gains will be treated as short-term capital gains and taxed as ordinary income rather than under the more favorable long-term capital gains rates for assets held for a year or more.

    As a result, many investors place actively managed strategies in their IRA, annuity or other tax-qualified plan, and use taxable accounts for other types of investments that have the potential for gains that would qualify for special long-term capital gain tax treatment. That's why it's always a good idea to consult a tax professional or qualified Investment Advisor to determine which assets may be best inside or outside of an IRA or annuity.

  3. Consider total returns when taking income. Within an actively managed portfolio, the goal is primarily risk management and producing "total returns," which include interest, dividends and capital gains. Thus, few of the actively managed programs we run across specifically try to manage solely for income. While some income is usually produced from interest-bearing accounts and dividends from mutual funds, most of any increase in value generally comes from gains from trading activity.

    That being the case, it is usually best to withdraw income by taking whatever interest and dividend income the investments have produced, and then liquidating assets in order to get to the appropriate withdrawal percentage you seek. Most mutual fund and brokerage companies have a way to automatically withdraw a certain percentage of assets on a periodic basis, which makes it easy.

    However, don't let an automatic withdrawal election lull you into complacency. It's sometimes easy to get used to regular withdrawals and forget about the underlying performance of your portfolio. Thus, it's important to continue to closely monitor the performance of your account and adjust the withdrawal percentage over time as may be appropriate.

The current stock market environment underscores the need for active management strategies that seek to manage portfolio risk. In fact, as Gary pointed out last week, these strategies can be a valuable addition to virtually any suitable investment portfolio. For retirees, it's imperative to seek out the counsel of an Investment Advisor or other qualified professional in order to help insure that active management strategies are properly integrated into an overall portfolio.

Other Post-Retirement Investment Alternatives

As I have written this series of E-Letters about various post-retirement investment strategies, there have been some alternatives that do not fit neatly into any of the other categories that I outlined above. That being the case, the following discussion will cover other investment alternatives that you may want to consider after you retire.

Please note that this list is in no way exhaustive, and I will only provide a very minimum of information on each alternative since all of these options could be the subject of an entire E-Letter by themselves. As always, you should fully check out all of the advantages and disadvantages of any post-retirement investment before making a purchase. That being said, other post-retirement investment alternatives include the following:

  1. Real estate / rental property – We often talk to investors who have substantial holdings of rental property and intend to keep it as a source of income during retirement. For anyone who is already familiar with the ownership and management of rental property prior to retirement, continuing to maintain this source of income is usually not a problem in retirement. Even if travel and leisure plans take you away, management companies exist that can take on the day-to-day administration of properties for a fee.

    My only caveat would be to someone who has never managed rental property deciding to do so after retirement. While you would certainly have more time to deal with renters, repairs and leasing activities, some people find these duties to be an unending source of headaches. Plus, it may not be wise to acquire rental properties with debt, as mortgage payments are due whether or not properties are rented.

  2. Master Limited Partnerships – Master Limited Partnerships (MLPs) are somewhat unique investments in that they combine the tax benefits of a limited partnership with the liquidity of a stock. MLPs are usually established based on payments from natural resource, commodity or real estate assets and are traded on major stock exchanges.

    MLPs are generally held to be better alternatives than dividend-paying common stocks because there is no "double taxation" as there is on corporate dividends. Instead, income is passed through to the MLP's unit-holders. Because there is no tax at the company level, cash distributions tend to be higher than corporate dividends and carry certain tax benefits to investors.

    The primary things to remember about MLPs are: 1) income reporting is on a Form K-1 rather than a 1099, which can complicate income tax preparation and estimated tax calculations; 2) MLPs are generally not recommended for IRAs and other qualified retirement plans because the income is considered to be "unrelated business taxable income" (UBTI), which could actually create a tax liability for the retirement fund.

  3. Royalty Income Trusts – This type of investment is similar to the MLP discussed above, but can be owned by an IRA or qualified retirement plan without UBTI consequences. Otherwise, the royalty income trust is an investment in which unit-holders participate in royalties on the production and sales of a natural resource company. Like MLPs, they can generally produce higher yields than stocks and bonds and are traded like stocks on major stock exchanges.

    As with any investment, the security of the cash distributions from a MLP or royalty income trust depend upon the real value of the underlying natural resources. Accordingly, offerings carry various levels of risk that must be investigated before investing – especially for investors who are already retired. It's also a good idea to discuss an investment in either of these offerings with a tax professional prior to investing.

  4. Private Secured Loans – This type of investment is usually based on a short-term loan secured by a lien on commercial real estate. It differs from an investment in a Real Estate Investment Trust (REIT) in that it is not traded on a stock exchange and is sometimes based on a single, specific property rather than a collection of holdings. Secured loans also tend to be shorter in duration since many are used as interim funding pending more permanent financing arrangements.

    Obviously, the ability to produce a high rate of return during retirement is attractive, but it is only as good as the property underlying the loan. There are companies that exist to put together packages of private secured loans, and can help evaluate the property securing the loan. However, I would still suggest a high level of personal investigation on any such transaction.

    Considering the current "credit crunch," private secured loans are likely to become even more popular as sources of funding for commercial property transactions. As banks find it harder to lend money, private investors will likely step into the gap, drawn by the potential for attractive returns on these investments.

    Still, these notes are generally secured by real estate, and we all know what can happen to property values, especially as we enter into a potentially prolonged recession. As always, enter into this type of transaction only after careful scrutiny and preferably with a company that has a long track record of satisfactory transactions.

  5. Managed-Payout Mutual Funds – A final type of non-standard post-retirement investment is known as a "managed-payout" mutual fund. Never one to miss a marketing opportunity, the mutual fund industry knows that 78 million Baby Boomers are heading for retirement, and will need retirement income options. Think of these funds as the eventual evolution of "target" retirement funds, where the money is now going out rather than coming in.

    Various mutual fund companies have already launched similar funds, including Vanguard, DWS, Fidelity, Charles Schwab and others. Each fund offering is a little bit different in the investment portfolio and income options available, but all have the goal of providing a retirement income for the life of the retiree.

    However, it is important to note that these funds are not annuity contracts, so the payouts are not guaranteed. While the payout levels and portfolio mixes of these funds are based on mountains of historical data, there is generally no insurance guarantee to continue payments if poor investment results and withdrawals empty the account. Bottom line – it is possible to run out of money during retirement using these funds.

Conclusion – Consider A Combination Of Strategies

This marks the end of my series of E-Letters on investing after retirement. While the stock market meltdown has placed an exclamation mark behind the need to manage risk during your retirement years, it may have also underlined the need to have at least part of your nest egg in guaranteed retirement assets such as an immediate annuity that pays a constant amount of monthly income.

Thus, many Advisors recommend a mixture of the various investment and payout techniques I have mentioned in this series. Some recommend anywhere from 50% to 80% of the portfolio should go to a guaranteed immediate annuity payout. This will provide a stable level of income that can then be supplemented with the remainder of assets invested using other techniques I have discussed. However, other Advisors shun immediate annuities as they do not provide for increased income over a potentially long retirement.

While I tend to agree with the combination approach, the best solution should be one based on a retiree's individual wants, needs and financial situation. Someone with a predictable monthly income from a defined benefit pension plan will have a different planning need than someone whose only retirement assets are in the form of personal savings. Between these two extremes lie a myriad of combinations of asset types and tax consequences that must be evaluated for the best fit during retirement.

As the Baby Boom generation continues to enter into retirement, we're sure to see even more innovative solutions from the financial services industry over time. Hopefully, this series of E-Letters has provided you with a road map to follow and armed you with the kind of questions you need to ask about any financial instrument designed to produce income. After all, scam artists will be after your money as well.

As always, I welcome your questions and comments regarding this article as well as any other retirement topic. Just send an e-mail with your input or questions to [email protected]. Also feel free to forward this article to anyone you feel may benefit from the information.

Best regards,

Mike Posey

P.S. from Gary:

I would strongly urge all of you to read the following article from Accuracy In Media. While it starts out being critical of President Bush, it goes on to point how a President Obama would be in a unique position to advance a socialist-leaning agenda. With the government now owning equity stakes in major banks and insurance companies, the US is ripe for a move toward socialism. This is an article I wish all voters had the chance to see.


"Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend any product or service advertised herein, unless otherwise specifically noted."

Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.

Posted 10-28-2008 7:16 PM by Gary D. Halbert


stanley shapiro wrote re: Retirement Focus - What Now???
on 10-29-2008 8:21 PM

on average , what percent decline have your retirees experienced since june 2008.