Five Tips For an Easier Retirement

Generally, retirement planning isn’t considered a relaxing leisure activity, but it’s a necessary step to enjoy your later years. We’ve warned you before about four risks that could ruin your retirement. In a more positive context, we want to help your retirement be secure to reduce stress and have a tidy nest egg waiting for you when your working days are over. Here are five tips to help accomplish that objective.

1) Never stop growing.

Inflation isn’t a four-letter word. But when it comes to the impact on your retirement, inflation is one of the nastiest words in the dictionary. Rising costs coupled with taxes can ravage your portfolio without proper planning. Remember that health care costs are rising faster than general inflation, and health care will be one of your biggest costs in retirement.

2) Hedge your bets.

One of the best ways to protect your portfolio against risk is to allocate your resources amongst different asset classes and to diversify your holdings inside those asset classes. Unfortunately, “Asset Allocation” is too narrowly defined at times, and diversification is often not enough to protect common day investors. Real Estate, commodities, and even currency hedges can be a valuable part of an overall investment plan. Also, ensure that you have a strategy for your portfolio. Invest-and-forget can lead to untimely volatility with often severe impacts on your retirement plans.

3) We’re here to pump you up: Always Max Out.

You’d be surprised how many investors don’t contribute all they can to their IRA accounts and 401(k) plans. If you’re under 50, you can contribute up to $5,000 a year to a Roth IRA or to a traditional IRA. Contributions to the latter may be tax deductible. If you’re under 50, you can contribute up to $16,500 a year to a 401(k) plan as well.

If you’re over 50 and need to bolster your nest egg, don’t worry. Take advantage of the “catch up” provisions allowable by the IRS; $6,000 a year to each IRA and up to $22,000 to your 401(k) if you’re over 50. If you have the investable cash available, contribute as much as you can.

4) Hold on loosely.

It always surprises me how many folks confuse loyalty to their companies with holding too much of its stock. Does anyone remember Enron? AOL? Adelphia? Many loyal employees, who decided not to sell their stock or stock options and then diversify, when they had the chance, ended up with next to nothing. This happens all too often, yet many are still compelled to keep a big part of their portfolio in their employer’s company stock. This is too much stress to put on a portfolio. Ten percent or less is a good rule of thumb for one security in a portfolio. Sometimes these holdings can be intricate to unwind, so consult an investment professional if you need help to diversify.

5) Don’t let the tax tail wag the dog.

Few people enjoy paying taxes. Taking advantage of available tax-advantaged accounts is important in retirement planning. Equally important is minimizing tax liability. However, tax avoidance shouldn’t preclude you from mitigating risk. I’d much rather folks pay a little more in taxes and keep more of their portfolio than risk their retirement by refusing to diversify. Yes, you might have to pay some taxes, but that might be better than waiting around only to see the bottom fall out. Remember, capital gains means you made money on an investment. Don’t cut off your nose to spite your face. If your portfolio requires you realize a little taxable gain in order to reduce risk, then you should do it or else risk that gain melting away for good.

The thought of retirement can be captivating, but the road to a successful retirement takes a well thought-out plan and the discipline to follow that plan. Keep your eye on the prize and your feet on the ground. If you don’t know where to begin, consult a professional. Retirement dreams can become reality with hard work and wise preparation.

Deflation v Inflation

The most frequent question we receive regards inflation.  We think that massive government stimulus packages, bank bailouts, ramped-up fed lending facilities, and other similar plans from governments and central banks in Europe and the U.S. will ultimately cause hyperinflation.  The derivative question is how should one invest with inflation on the horizon.  We should not be overconfident, however, in a world that can change in a moment.  What happens if we have continued deflation in the meantime?  Knowing whether deflation will continue, or when inflation will kick in, is really a question of timing when trying to pick your next winner. 

Clearly we are in a deflationary spiral right now.  Trillions of dollars of net worth have been vaporized across the planet.  Main asset classes like real estate and equities have taken huge losses.  Far from reaching a bottom, the downturn seems to be accelerating.  Japan just roiled global markets with a significant GDP decline.  China has lost 20mm jobs almost overnight.  The U.S. unemployment rate is climbing toward 8% in the short-term, with some predicting double digits soon.  Higher unemployment, lower consumer spending, and falling economic activity are not a recipe for inflation.   The money wiped out in the financial collapse is presently offsetting the various stimulus and money-creating schemes.  At some point, though, all the new liquidity will likely cause major inflationary pressure.  The question is when, not if.

Other than gold bullion, other traditionally inflation-beating sub-sectors have not appreciated so far.  That could be a tell.  It is possible gold is catching a flight to safety bid from those who think we’re close to the end of the world, or more likely, as a safe haven from a global depression and “everything else isn’t working other than cash and if I’m going to be long anything, gold seems as good as it gets right now” type attitude.

Either way, for those wanting to know if we foresee the collapse of the U.S. dollar, or if one should hold more than a small to moderate position in gold, our answer would be NO.  The time may come when one should be prepared and invested for the hyperinflation scenario.  But is that time now?  Probably not.  That is why we favor hoarding cash, small positions in gold, silver, and mining companies, (although it certainly feels like a crowded trade) and waiting and watching for opportunities.  Deflationary forces have the upper hand right now.  Why try to push the stack one way or the other in this environment?  Better safe than sorry.  Holding cash while waiting for new trends to emerge is an excellent strategy in this economy.

Good Luck.