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Investment Portfolio

Retirement Risks

By | Investing, Investment Portfolio, SH&J Blog | No Comments

Retirement, or Financial Independence, is a relatively new concept here in the U.S. Retirement used to be pretty simple: you step away from the company where you spent your entire career and they rewarded you with a pension check in the mail every month. That was really all there was to it from a financial standpoint. With people now living longer and a shift from employer sponsored pension plans to defined contribution plans (401(k)s, 403(b)s, etc.), people are now responsible for the success of their own retirement more than ever before. Listed below are risks that are unique to retirees, with explanations on ways that these risks can be mitigated.

Longevity Risk

Put simply, longevity risk is the risk of outliving your assets. According to the Social Security Administration, life expectancy for someone born in 1930 was only 58 for men and 62 for women. Now 1 in 4 people who reach age 65 will live past age 90, and 1 in 10 will live past age 95. One of the primary ways to combat this risk is to plan for longevity. When we create financial plans for clients, it is our standard to run the plan until the youngest client reaches age 95 at the minimum. Planning for a longer time horizon forces a retiree to be more conservative when pulling from their investment portfolio throughout retirement.

Inflation Risk

Inflation reduces the purchasing power of a dollar as goods and services increase in price over time. In your working years, inflation may not be as critical of an issue as many workers see cost of living adjustments to their salary. When you’re retired and not earning a salary anymore, it’s important that whatever sources of income you have, keep up with inflation. Social Security has a built-in cost of living adjustment that has historically been around 2% per year. Some government or employer-sponsored pension plans have living adjustments associated with them as well, but they are fairly uncommon and the adjustments are usually less than inflation. One way to help your investment portfolio keep up with inflation is by having a portion of your portfolio invested in stocks. Stocks have historically helped hedge inflation risk.

Long-Term Care Risk

Long-term care risk goes hand-in-hand with longevity risk. As our society continually makes medical advancements, we are able to live longer, but for some this may come at a cost. Many elderly people no longer have the ability to care for themselves, and they have to rely on either family members or professional caretakers to watch over them. According to a study by AARP, 66% of people aged 65 in 2005 will need some type of long-term care during their lifetime. Long-term care insurance policies are the primary way to mitigate this risk, but they are expensive and many people don’t like the “use it or lose it” terms of these policies. Therefore, life and long-term care insurance hybrid policies have recently become more popular. These policies allow you to access the death benefit for long-term care needs while you are still living, yet still provide a death benefit to your beneficiary after you pass away if you do not end up requiring long-term care.

Financial Elder Abuse Risk

A growing risk that retirees face is financial elder abuse. Financial elder abuse occurs when someone tries to take advantage of an elderly person for their own financial gain. What many people don’t know is that elder abuse most often comes from family members! One way to help prevent elder abuse is to simplify your finances as you get older. The less accounts a retiree has, the less accounts they have to monitor. Another way is to work with a trusted financial advisor, who can act as a safeguard if bad actors are trying to swindle money away from those who are no longer able to track their finances as easily as they have in the past.

Sequence of Returns Risk

As we all know, investment returns are unpredictable. We often have very little warning when an event like the 2008 Financial Crisis will occur and send global stock markets tumbling. Negative returns in the first few years of retirement can be detrimental to the success of a retirement plan. It is important to make sure you have a well-diversified portfolio heading into retirement with a mixture of stocks, bonds, and cash. If the stock market were to decline while you’re pulling money from the portfolio, you need conservative investments to draw from so you can allow the stocks to recover.

Loss of Spouse Risk

Losing a spouse can be a turbulent point in anyone’s life. It can be very hard to make sure you have your financial house in order after enduring such a tragic event, especially if the recently deceased spouse handled all of the finances. One of the best ways to ensure the surviving spouse maintains their level of lifestyle is to have a comprehensive financial and estate plan. Hiring a financial advisor in retirement gives the surviving spouse an advocate in such a trying time. The advisor should help create a plan to ensure the surviving spouse has enough assets and income streams to not alter their lifestyle.

If you or anyone you know is nearing retirement, contact Sharkey, Howes & Javer to meet with a CERTIFIED FINANCIAL PLANNER™ and develop a financial plan that helps mitigate these and other retirement risks.

What Data is Telling Us About Investors and Investing

By | Investment Portfolio, Investors, SH&J Blog, Tips | No Comments

We all make assumptions about investors, but what does the data actually say? Today we take a look at recent studies and publications to get more insight into the mind of investors.

Increase in Social Responsibility

Big investment firms and banks are embracing corporate social responsibility, both in their own organization and in their investing. Since the United Nations supported the Principles for Responsible Investment Initiative, there has been a growing network of international investors fighting to practice responsible investing. This new network represents $59 trillion in assets. (source)

Sharkey, Howes & Javer Blog | Financial Planners in Denver, CO | What Data is Telling Us

Ready for Retirement

Baby Boomers, who make up the largest population group in the United States, are transitioning into retirement. Experts anticipate that 20% of the population will be over age 65 by 2030, up from 12.4% in 2003. With high numbers moving into retirement, we are likely to see Boomers begin the process of turning their investments into income streams. (source)

Sharkey, Howes & Javer Blog | Financial Planners in Denver, CO | What Data is Telling Us

Increase in Female Investors

75% of women report not working with a financial advisor, although women control over $11.2 trillion of the United States’ wealth. As millennials begin investing, we are likely to see an increase in female investors. More women are starting their own businesses and becoming financially savvy, making them more likely to start investing earlier than previous generations. (source)

Low Financial Literacy

29% of United States households own only retirement accounts and 38% of households have no investment accounts. In a survey to understand the financial literacy of investors, it was found that households with only retirement accounts or with no accounts are significantly less knowledgeable than households with taxable accounts. Even among households with taxable accounts, only 60% are considered to have high financial literacy. (source)

Data about investing and investors is fascinating to us. What is equally fascinating is deciding how the data should or should not influence investment strategies. If you are struggling to develop an investment strategy, reach out today for a complimentary consultation. We would love to talk data and investments with you!

The Pros and Cons of Owning Stock Where You Work

By | Investment Portfolio, SH&J Blog, Stock Market, Tips | No Comments

Many companies offer stock options and stock bonuses to their employees, but is owning stock where you work a good idea? The short answer: it depends. Below are our thoughts on the pros and cons of owning stock where you work.

PROS

One ‘pro’ to owning stock in the company where you work is the added motivation you have for the company to succeed. As an ‘owner’ in the company, your success is tied to their success. This holds true for the employees you manage as well.

More than the incentive to work hard, owning stock in the company you work for can pay off quickly. Often companies offer their stock at discounted prices to employees. Buying stock at a discount can pay off if the company does well. In general, you may want to limit your company stock exposure to 10% of your net worth (or less) to maintain diversification.

Sharkey, Howes & Javer Blog | Financial Planners in Denver, CO | The Pros and Cons of Owning Stock Where You Work
Sharkey, Howes & Javer Blog | Financial Planners in Denver, CO | The Pros and Cons of Owning Stock Where You Work

CONS

Your paycheck is already tied to your employer and tying more of your investment portfolio to the company where you work could significantly increase your risk. While being motivated to help the company grow can positively benefit your investment, it doesn’t mean the company is destined to be successful. Their downfall can mean a big financial loss for you. Remember General Motors, Enron and Lehman Brothers?

THE BOTTOM LINE

Owning stock in the company you work for can be a beneficial part of your financial plan. Talking to your financial advisor before making a decision to invest where you work is a good idea. Call 303-639-5100 for a complimentary consultation.

Will Millennials Ever Retire?

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“60% of Millennials think it is harder to plan for retirement than to stick with a diet and exercise plan.”

Millennials and Retirement

One word sums up how Millennials tend to view planning for retirement:overwhelming. This is a very clear conclusion from this 2015 survey, which reveals attitudes about retirement in the U.S. You can easily guess why Millennials feel this way: soaring student debt, increased cost of living, stagnant wages for college graduates, and a lack of confidence in Social Security and the stock markets.

Diving into the data, it is not surprising that the millennial generation views traditional retirement as a mythical creature, out of reach and unattainable. “The majority of Millennials believe they will not be able to retire when they want to…with 28% believing they will never be able to fully retire.” So why bother planning for something that may not even be a possibility?

Here’s the reality: the concept of a “traditional retirement” is evolving and will continue to evolve. The advent of technology is increasing the amount of work completed remotely, while the drain of commuting to an office Monday-Friday 8am-5pm continues to decrease as technology advances. By the time Millennials begin turning age 65 in the year 2045, the logistics of working will likely have evolved into more flexible hours, a more flexible location, and “commuting” may be a word of the past. Therefore, the desire to fully retire may not be as strong of a pull as it was for their parents and grandparents.

Sharkey, Howes & Javer Blog | Financial Planners in Denver, CO | Will Millennials Ever Retire?
Sharkey, Howes & Javer Blog | Financial Planners in Denver, CO | Will Millennials Ever Retire?

Planning Steps

With this said, however, there will likely come a time where one no longer has earned income and must rely on an investment portfolio, along with other supplemental income sources. Therefore, making sacrifices to save for retirement will always be a key element, no matter which generation your birth year indicates. To create the opportunity to pull back from full or part time work someday in the future requires accumulating retirement savings over working years.

Meeting with a fee-only financial planner could be the first step in tackling an overwhelming goal, such as planning for retirement. For a complimentary consultation, call Sharkey, Howes & Javer today.


Source: “Will Millennials Ever Be Able to Retire?” research presented by the Insured Retirement Institute and The Center for Generational Kinetics