Published: Tuesday, 5 Oct 2010 | 1:32 PM ET Text Size By: Cindy Perman
CNBC.com Staff Writer
The sluggish economic recovery is a threat to everyoneâ€™s financial security. But for retirees, that threat is multiplied.
â€œRetirees don’t have the luxury of the long time horizon that younger counterparts have, and because retirees are making account withdrawals, they’re more susceptible to market volatility,â€ says Greg McBride, a senior financial analyst at Bankrate.com.
Plus, McBride says, going back to work to replenish lost savings becomes less and less viable the older you get.
To help retirees navigate their unique course, Kelly Financial Services, a financial-services firm in Braintree, Mass., has come up with the Six Tâ€™s â€” threats to retiree investors â€” and tips for how to beat them.
A lack of time prohibits the usual means of ringing out risk â€” from holding an investment over a long time to dollar-cost averaging. It also means you wonâ€™t have as much time to recover from a catastrophic market event like the recent financial crisis.
So retirees need to, plain and simple, take less risk, says Bill Kelly, founder and president of Kelly Financial Services.
Some people â€œtend to think that a person has risk tolerance based on the amount of money they have, but it should be based on the personâ€™s ability to make up a loss,â€ Kelly says.
Aside from choosing less-risky investment options, retirees can also be smart about locking in profits, says Stacy Francis, a personal financial adviser and founder of Savvy Ladies, a group aimed at educating women about money.
â€œIndividuals nearing retirement and those with the need to depend on investment income to cover daily expenses may wish to select investments that lock in gains and provide a guaranteed income stream,â€ she says.
â€œUnderstanding the value of time will help you develop an appropriate strategy to achieve financial wealth,â€ Francis says.
The older you get, the more you have to rely on others. And especially if you donâ€™t really understand the financial stuff â€” you have to be very careful who you place your trust in.
Kelly suggests that retirees ask the hard questions and do their homework before turning over their money to a financial-services firm â€” even if you get a referral from a friend. (Remember: Bernie Madoff relied on friends telling friends about his great returns!)
â€œThere are designations I can get behind my name in a few hours or days â€” which means little or no real education is required,â€ cautions Jerry Lynch, who IS a certified financial planner.
To find certified financial planners and registered investment advisers, Kelly suggests checking with state agencies as well as the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission, both of which have easy-to-use Web sites.
Lynch adds that you should also do a criminal background check on anyone youâ€™re turning over all your life savings to.
â€œWhatâ€™s unfortunate is that you can be a convicted felon and still be a â€˜trustedâ€™ financial adviser â€” as long as the adviser hasnâ€™t been convicted of securities fraud, â€œ he says.
But donâ€™t let your guard down after you hire a financial adviser: Lynch cautions that if anything seems out of the statistical norm â€” super high returns or super low prices, it could be scam, so do a little extra research of your own.
And if anyone rushes you to invest in something â€” raise an eyebrow. Your financial adviser should always be willing to answer as many questions as you need â€” and always make sure youâ€™re comfortable before investing your money.
Remember: They work for you â€” not the other way around.
When you hear about the â€œnext big thing,â€ a hot sector like technology thatâ€™s going to bring investors mega returns, itâ€™s easy to get sucked in.
But when youâ€™re a retiree, you have to act your age! Not every new company in that sector is a sure thing and if you pick the NOT sure thing â€” you donâ€™t have time to make up that money.
â€œFor every Facebook, there are probably 20 or 30 companies that donâ€™t make it,â€ Kelly says.
â€œTechnology is really great to get an email from your grandson in Guatemala or your daughter in London,â€ Kelly says. â€œBut be very careful about investing there because it can vaporize,â€ he cautions.
As a rule, be wary of anything priced below $5 a share, Kelly advises.
And, if you absolutely, positively insist that you MUST invest in a hot, young company â€” make sure itâ€™s no more than 1 percent of your total portfolio, he adds.
That way, youâ€™ll never wonder â€œwhat ifâ€ â€” and if it doesnâ€™t work out, you wonâ€™t lose the whole farm!
Pay attention to the taxes your retirement account is subject to â€” and find ways to keep them from putting a hole in the bottom of the boat and sucking out your life savings.
Estate taxes will be on the rise again next year, Kelly cautions, and capital-gains taxes are always lurking when you have stocks that do well. So, consider gifting those stocks that have done well to your kids and grandkids â€” you can give up to $13,000 per person.
Also consider converting some of your retirement account to a Roth IRA, which is tax free, but beware of tax traps you could be subjected to during the transfer. Check out a site like RothIRA.com for the latest laws, information â€” and potential tax traps.
Another line of defense, Kelly suggests, is to get more life insurance. Life insurance is tax free, and your kids and grandkids will get the check without with being held up in probate, the legal process of divvying up an estate.
â€œWe tend to trust the people we see,â€ Kelly says. â€œWe used to love Walter Cronkite and David Brinkley.â€
But you have to be very careful when youâ€™re watching a program where someone on TV is advising you to buy or sell a stock or other investment. Take it as a tip but then do your homework on the soundness of your investment and whatever motive the person telling you to buy or sell may have. Is he a short-seller? Do you even know what a short-seller is?
This is why you need to do your own homework.
(FYI â€” a short seller is a person whoâ€™s betting against the stock, so they have every interest in the stock falling because theyâ€™ll profit when the stock goes down.)
Unfortunately, weâ€™ve seen it too many times in the past few years â€” from fake anthrax scares to terror attacks â€” one-time events like this can send a ripple of fear through the market.
Younger investors can afford the time to watch their investments dip, for however long, and they have time to recover. Retirees â€” who are drawing an income from their account â€” donâ€™t have that luxury.
Kelly suggests a few simple formulas:
First, subtract your age from 90. The resulting number is the percent of your retirement account you should have in riskier investments, like equities.
So, if youâ€™re 50, thatâ€™s 40 percent you can have in equities. If youâ€™re 75, that number drops to 15 percent.
â€œIf thereâ€™s a sudden drop in the market â€” youâ€™re shielded,â€ Kelly says.
When it comes to individual stocks, if it goes down more than 5 percent â€” get out, Kelly advises. A younger investor has more time to make up the difference â€” retirees donâ€™t. Better to lose 5 percent â€” than your shirt.
And finally, if something in the market has you rattled, donâ€™t be afraid to take some money out and sit on the sidelines, Kelly says.
Donâ€™t try to be a hero and stick it out. When it comes to your life savings, the most heroic thing you can do is hold on to it, and pass some of it on to your kids and grandkids.