Investment Forms the Backbone of Retirement Funding
In the years since bank deregulation in the late 1980s, we have witnessed the bursting of the dot-com bubble, the Great Recession, and huge bank bailouts. All these combined factors have contributed to the fact that banks no longer pay enough interest on savings deposits to result in meaningful gains. That means Americans can’t count upon savings accounts to fund their retirement years. And given the tenuous condition of Social Security, neither is that system a reliable solution. Anyone who wants to enjoy his or her desired lifestyle post-retirement is going to have to understand how to invest. Here two financial professionals offer their advice regarding key financial literacy lessons to learn.
James A. Winkelmann, a Registered Fiduciary and SEC-registered Investment Advisor in Chesterfield, MO, begins by describing the importance that everyone recognize the dynamics of cash flow – money coming in versus money going out. “Just like business expenses are a lot easier to predict than income,” Winkelmann explains, “If you do not need income from your portfolio you should have very little allocated to the bond or fixed income investments.” Next he recommends developing an awareness of the difference between risk and market volatility. “Deep risk is a lot more troublesome than the shallow risk of a dip in the stock market,” he states. “Since 1913 we have only seen the purchasing power of drop against goods and services while every time the stock market dipped it has come right back.”
Winkelmann further illuminates that Social Security and pension benefits should be viewed as implicit bond positions. That is, “The net present value of those future payments represents a fixed income holding. A big mistake in this low interest rate environment is that retired investors have too much allocation in the bond market.” That’s a problem for retirees, according to Winkelmann, because buying bonds is like lending money. “Inflation greatly benefits the borrower, not the lender. The impact of inflation is dialed up when someone holds bonds.”
Neither should investors look at past performance to judge investment value. “The outcome of any investment has always been and will always be random and unpredictable,” Winkelmann avers. “The only thing predictable are the fees that will be incurred.” Winkelmann’s final piece of advice? “Wealth management is not about chasing returns. It is about managing risk.”
The second industry leader consulted for this article is Molly Stanifer, CFP, of Old Peak Finance in Chapel Hill, NC. Her expert opinion is that, since the interest rate environment, the stock market, and the bond market are all dynamic, education around these topics should be ongoing.
“In the accumulation stage,” recommends Stanifer, “one should understand how to invest, what to invest, and where to invest. A person should be able to clearly define his or her goals and be able to take advantage of all that is available to accomplish his or her goals most efficiently.” What does that mean for the average middle-class investor? “This could include employer sponsored retirement plans, individual retirement plans, and college savings plans which all have their own tax benefits,” Stanifer says. “A good understanding of what to expect in terms of volatility in the stock and bond markets will provide folks a much higher chance of successfully accomplishing their goals because they are more likely not to react to something at the wrong time.”
Winkelmann and Stanifer, like their colleagues and peers, agree that financial education is important for Americans at any life stage. In order to become financially independent, it is essential to understand the basics of saving, lending, and investing. And those nearing retirement must gain a firm understanding of investment risk – and how to manage it – in order to realize their lifestyle goals.
The NFEC encourages people to take an active role in their investment education. In today’s age, there are a variety of educational resources available that meet your time and investment needs. Many financial professionals offer complimentary retirement presentations in communities across the country. Colleges and other education centers also provide a workshops and classes – be sure to chose the course whose financial literacy lesson plans match your learning objectives. There are also a variety of resources available online, at your local library or book store that can help you learn the lessons needed to help you reach your retirement goals.