The Biggest Wealth Transfer
From: Joeseph Clark, CFEd®, RFC®
It has arrived, the money’s in motion. The money tsunami of over 20 trillion dollars. The age of the Baby Boomers, of 10,000 people turning age 65 years old for the next 19 years in the U.S. since January, 2011.
As Boomers pull the plug with employment and head into retirement, there is an extremely important need for new ways to preserve retirement savings and obtain income with guarantees that last a lifetime, for themselves and for future generations.
The key element of understanding the macro picture for planning is that there comes a time in our working years where we have fulfilled our personal objective within what we call the accumulation of our working years. Now it’s time to plan for wealth decumulation years, such as we know retirement income for years to come. In the era that we’re living in, we have to plan out our retirement for 25 to 30 years. More and more people these days are living to age 90 and beyond. In order to properly guide our clients, there must be awareness of the retirement game — the full retirement game; both the first and second halves; the first half representing the accumulation phase and the second half representing wealth decumulation. We must help our clients be winners at both halves of the game during the first half, the accumulation phase of their working years.
Unfortunately, most people don’t plan correctly for retirement. They should be creating a foundation known as a retirement income benchmark. If we were to take a time machine back to the 2008 meltdown and see what the average losses were, most 401(k)s lost an average of 24% during that time span. In today’s uncertain market, retirees and investors are still recovering from the financial and emotional trauma.
The most current economist’s view of decumulation is in full agreement and endorsed by the most prominent economists in the world, including Nobel prize winners. The Wharton Business School report that reviles the significance of annuitization of a substantial portion of retirement wealth is the best way to go.
Additional studies within the report showed the aspects of annuitization in retirement wealth. They compared mutual funds, stocks, money market or a combination that are subject to greater risk and possible higher expenses. They are unlikely to keep pace with annuity returns, when risk is taken into account.
The Rule of 100 is an effective way to measure the risk assessment for appropriate allocation of the retirement and investment assets. The Rule of 100 uses age as a baseline in the calculation and exposes risk. This calculation takes the number 100 and subtracts the average age of a husband and wife from 100. This produces the appropriate ratio of risk to safe assets. The impact to market risk can dramatically impact the longevity of retirement savings due to how long it takes to make back the losses. The aftermath of the 2008 meltdown, as stated earlier where accounts lost anywhere from 24 to 70%, is still being felt today.
Here’s an example. If you were to lose 30%, what kind of return would you have to get to recover? A 42% return. Wall Street doesn’t want you to know this. So, if you lost 30% and if you had 3% net return, it would take 12 years to fully recover.
The dreaded Triple Top Chart is alarming to investors and traders due to the current stock market patterns and clearly shows that the S&P 500 is in a third major peak right now. The Triple Top chart has proven that market patterns go through three common tops. The first peak was in 1999, followed by a 60% market loss. The second peak was in 2007 and followed by another 60% market loss. Now the third peak has formed. Could another stock market plunge be on its way? Could it hit retirees at any time?
Does history repeat itself? Most boomers are still operating on the investment and accumulation mind-set of the 1982—2000 stock market rallies, which have grown their six and seven figure portfolios. We are currently on a 5 year Bull market run that was manufactured by government quantitative easing. This feeds into the Bull run frenzy, which puts the markets on life support, waiting to pull the plug at anytime. Most folks are navigating forward with the rear view mirror!
