My wife and I just returned from a vacation on the Outer Banks. We celebrated my 60th birthday a few days early by rocking and rolling with Hurricane Arthur into the pre-dawn hours of July 4th. Despite virtual white caps in our toilet bowls during the peak of this Category 2 hurricane, there was no property damage to our stilt-supported condominium in Kill Devil Hills, nearby the epicenter of the Weather Channel’s overly dramatic live coverage.
We have been distantly anxious oceanfront property owners during hurricanes for over twenty years. Several times we have been on-site to experience 60 mile per hour winds of a nor’easter storm. But as we anticipated riding out our first hurricane, trusted local advisors reassured us that we had no reason to fear for our personal safety if we followed basic instructions.
As the media suggested the need to prepare for Arthur with a supply of ice and batteries in case of a power outage, my 60th birthday loomed as a formidable reminder of the need to solidify pre-retirement planning. Although I have been rounding-up my age for a while, as in “not bad for a 60-year-old,” the arrival of the actual birthday seemed to invite the anxiety triggered by Hurricane Arthur to linger longer than the storm itself. I became preoccupied with deciding whether the time has arrived to cash in some earnings, as my 60th birthday coincided with a record high stock market.
The financial advising community offers this general advice for those of us who will retire without a pension: 1) Baby boomers should work until age 66 to become fully vested in Social Security; 2) A nest-egg of eight times one’s final salary is enough; and 3) A reasonable plan is to withdraw four percent per year from the nest egg to supplement Social Security.
Considerable expertise in law, investment real estate and insurance does not make me feel qualified to offer financial or tax advice. I failed to predict the financial crisis of 2007-2008, or that the annualized S&P 500 return over the past two years would exceed 22%. So I am not presuming to issue a warning about the collapse of the stock market or the rise of interest rates.
However, if you are like me, nearing your retirement with some debt that is either aggressively leveraged or with a floating interest rate, it is a good time to consider the opportunity to cash in on the record-high stock market to pay down the debt. This is counter to the conventional wisdom that the leverage of borrowing other people’s money “(OPM) is the dope that makes real estate work.” However, it recognizes not only that the potential damage from market volatility increases near retirement, but also that some experts warn that the present market is over-valued.
In retirement planning, emotional factors may be worthy of considering along with the financial advisors’ generally accepted rules of thumb. However illusionary, I feel safer in real estate ownership than stocks, investment funds, and other securities. I believe that my actions and decisions personally affect my real estate property values, and I don’t feel that sense of control with stocks and other investments. If I were not an expert in investment real estate, perhaps I would feel differently.
The desire to own something tangible has caused some people to invest in commodities such as gold and silver. I have no special insight about the probable future value of those investments. But I do understand that an ounce of a precious metal can be measured and touched in way that could seem more real or secure than a fractional interest in a publicly traded company.
Collectable art and antiques are tangible and offer the benefit of enjoyment as well as some probable investment value. But I can easily imagine events that could make it difficult suddenly to convert the present value of art and antiques into cash when needed in the future to buy groceries and pay medical expenses. Owning a small business offers similar intangible rewards and liquidity risks.
I wish I had invested more in Google and Amazon, especially since both companies’ websites are bookmarked among my favorites! But I have always respected that experts understand the underlying value of the less glamorous companies which serve our essential daily needs. That is why I have deferred to their strategy to invest my savings in funds which do not consider my personal interests or spending habits.
I understand annuities and am licensed to earn commissions by selling them to consumers. However, I generally advise that it is unwise for those who are 65 years and older to purchase an annuity. Even though annuities can provide a guaranteed income stream, most annuities have significant surrender penalty charges. Government programs, which otherwise can help to pay for long-term care when Medicare stops after 100 days or less, often penalize annuity ownership. Extensive experience with the financially devastating consequences of sudden long-term care expenses causes me to advise that retirees with investment assets of less than $1 million would do better to have their nest egg managed by a fee-based financial advisor than to be locked up in one or more annuities.
If you are planning to retire in the next several years, you should develop a financial strategy that considers your expected retirement pension and Social Security income, as well as your current net worth and tolerance for continued investment risk to reach your targeted nest egg at retirement. You also need a legal strategy that considers how to mitigate the risk of your probable need for long-term care. Especially if you have a net worth of more than $500,000 and/or an expectation of investment income of at least $1,500 per month to supplement your pension and Social Security, you should discuss your strategy with a lawyer who understands the risks of long-term care expenses, your tax advisor, and a fee-based financial advisor. We offer a detailed written analysis to facilitate such a discussion.
By Dave Nesbit, Attorney