Baby Boomers Not Prepared for Retirement

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
April 12, 2011

IN THIS ISSUE:

1.  AP Survey Says Boomers are Busted!

2.  Taking Control of Your 401(k)

3.  Individually Directed Accounts  

4.  The New “HCM 401(k) Optimizer®“ Program

Introduction

The so-called Baby Boomer generation reflects those Americans born after World War II from 1946 to 1964.  We are the largest generation ever born in America.  This year, the first of the Baby Boomers are on schedule to hit the traditional retirement age of 65.  Next year, they will reach the Social Security retirement age of 66, and the number of Boomer retirees will grow rapidly each year after that. 

Observers of the Baby Boomers have long predicted that their retirement would put unprecedented strains on our entitlement systems – Social Security, Medicare and Medicaid – and that is undoubtedly correct.  And with the government on track to run trillion-dollar deficits as far as the eye can see, it looks like we are on a collision course in the years just ahead.

Most Boomers never saved enough to begin with.  And the two stock bear markets since 2000 have devastated much of what little they have saved, including their 401(k)s, IRAs, pension plans, etc.  That’s why many Boomers are in real retirement trouble!  There is no way many Boomers can retire into the lifestyle they thought they would.  Some even feel they’ll never be able to retire at all.

A new study released last week from the Associated Press highlights just how bad the problem is for retiring Boomers.  In the pages that follow, I will highlight the findings of this study – with the hope that I don’t depress you too much.  Then I will follow-up with two alternatives for your 401(k) plan investments that may make sense for many of you who want some fresh investment options for your retirement nest egg.

Associated Press Survey of Baby Boomers

My generation, the so-called Baby Boomers, largely bought into Wall Street’s age-old mantra that buy-and-hold is the only long-term strategy for success in the stock and bond markets.  I’ll admit that the historical data behind this theory is correct IF you go back a hundred years.

But going back 100 years is hardly a blueprint for what we have seen since 2000.  We have experienced two devastating bear markets in stocks, including the triple-whammy of a credit crisis and the Great Recession. 

An Associated Press survey of Baby Boomers released last week had some somber findings, not that they will surprise my readers.  The bottom line: Baby Boomers facing retirement are worried about their finances, and many believe they'll need to work longer than planned or will never be able to retire, the latest survey finds.  What else is new?  Here are a few quotes from the latest AP Boomer survey:

The 77 million-strong generation born between 1946 and 1964 has clung tenaciously to its youth.  Now, boomers are getting nervous about retirement. Only 11 percent say they are strongly convinced they will be able to live in comfort…  Another 44 percent express little or no faith they'll have enough money when their careers end.

Further underscoring the financial squeeze, 1 in 4 boomers still working say they'll never retire. That's about the same number as those who say they have no retirement savings.

The Associated Press-LifeGoesStrong.com poll comes as politicians face growing pressure to curb record federal deficits, and budget hawks of both parties have expressed a willingness to scale back Social Security, the government's biggest program. 

The survey suggests how politically risky that would be: 64 percent of boomers see Social Security as the keystone of their retirement earnings, far outpacing pensions, investments and other income.

The survey also highlights the particular retirement challenge facing boomers, who are contemplating exiting the work force just as the worst economy in seven decades left them coping with high jobless rates, tattered home values and painfully low interest rates that stunt the growth of savings.

Here are a few more quotes from the AP survey that probably won’t surprise many of my readers:

Two-thirds of those still on the job say they will keep working after they retire, a plan shared about evenly across sex, marital status and education lines, the survey finds. That contrasts with the latest Social Security Administration data on what older people are actually doing: Among those age 65-74, less than half earned income from a job in 2008.

Excluding their homes, 24 percent of boomers say they have no retirement savings. Those with nothing include about 4 in 10 who are non-white, are unmarried or didn't finish college.

At the other end, about 1 in 10 say they have banked at least $500,000. Those who have saved at least something typically have squirreled away $100,000, with about half putting away more than that and half less.

In regard to these last numbers, a few years back Mike Posey, my Senior VP, wrote a Retirement Focus article entitled  How Much is Enough? When I showed Mike the article about the AP Survey, he wasn’t surprised, but he did note that there is a new phenomenon going on among Boomers at or near retirement.

It seems that many investors who previously thought they had saved enough money for a comfortable retirement are now becoming concerned that they might outlive their money.  We’re not talking about those who have put away a couple of hundred thousand or so, but those with a million dollars or more who are now uncertain about their retirement future.

Mike believes and I tend to agree that much of this fear comes from Boomers having lived through two major bear markets when their retirement nest eggs were subjected to huge losses.  What if another bear market comes along right when they need their money for retirement?

Plus, rising fear of future inflation spawned by runaway deficit spending and printing money is having an impact on Boomers.  Add to that the possibility of spending cuts in Social Security and Medicare and longer life expectancies, and you can see why even those with millions squirreled away are becoming concerned about the sufficiency of their nest eggs.  Even much more so for those who have not put away anywhere near this amount, or nothing at all.

Taking Control of Your Retirement Destiny

One factor contributing to the uncertainty surrounding Baby Boomer retirement is that the traditional pension plan has largely been discarded by corporate employers.  Under a pension plan, a set level of monthly income was guaranteed by the company for life.  Employees didn’t have to worry too much about investment performance since, if returns were insufficient, the employer just had to kick in more money. 

About the only people who can still count on a traditional pension plans are public employees, but some recent reports indicate that even these plans are on shaky ground.  A recent study of 126 state government retirement plans by the Center for Retirement Research indicated that these plans will run out of money by 2023 or 2025, depending upon the benefit structure and assuming investment returns of 6%. 

401(k) and other “defined contribution” plans have now replaced many of the more secure pension plans.  These arrangements differ from traditional pensions in that they do not guarantee any certain level of monthly benefit.  You get whatever income your accumulated account balance will buy.  Thus, if a bear market comes along just as you retire, a pension plan would still pay you the same benefit but require greater contributions from the employer.  A 401(k) plan would most likely lose alongside the markets, since most such plans are highly correlated with major stock indexes.

After two bear markets in less than a decade, we have had many investors contact us about the investment programs we offer that can move to cash in down markets, only to find that most (or all) of their investable assets are in their 401(k) plans.  While 401(k) plans allow participants to select their own investments, they usually don’t include alternatives that offer participants the ability to produce real growth and manage risks.

Seeing the state of Baby Boomer preparation for retirement (or lack thereof), I had Mike Posey research ways that individuals whose primary assets are in 401(k) plans could participate in programs that go beyond the typical asset allocation strategies dominating most 401(k) plans and have the potential to manage risks in down markets.  I’m happy to report that there are valid alternatives to the buy-and-hold approach of most plans, which I will discuss in more detail below.

The most obvious choice is to have the employer include actively managed alternatives as investment options in the plan.  However, this requires action by the employer that might result in additional liability for the employer.  Plus, many 401(k) plans are sold by brokerage firms and mutual fund companies who prefer to limit options to buying and holding an allocation of mutual funds.  Many of these plans also offer turn-key administrative services to the employer to handle the necessary recordkeeping, administrative and filing duties.  For these reasons, many employers are reluctant to look outside of their preferred provider for investment options.

However, we found two additional ways that individual participants can take advantage of actively managed strategies.  The first is an “Individually Directed Account” that would allow a participant to invest in virtually any kind of managed investment account, including those offered through our AdvisorLink® Program

The other is an innovative new program from Howard Capital Management, one of our newest recommended Advisors.  This option actually helps you invest your retirement money based on the specific investment options in your plan.  Plus, it can instruct you to go to cash in down markets. 

Individually Directed Accounts

There is a hidden gem tucked inside many 401(k) plans known as the Individually Directed Account (IDA).  IDAs allow 401(k) participants to direct the investment of their accounts outside of the list of options chosen by the employer.  Best of all, accounts can be established at a variety of brokerage firms, custodians and mutual fund companies, thus allowing participants to access actively managed strategies such as those in our AdvisorLink® Program.

Because each employer’s 401(k) plan can be different, IDAs are not available in all plans, so ask your Human Resources Department if IDAs are available in your plan.  It is probably a good idea to contact your plan’s administrative service provider as well, since it is not uncommon for HR managers to be unaware that IDAs are available within their 401(k) plans. 

Even when IDAs are available, the procedures to establish one are usually different for each employer, but here’s how it generally works.  Employees obtain the necessary applications for the custodian to receive the funds.  Accounts are set up with the registration in the name of the plan for the benefit of the participating employee, since the IDA is still an asset of the plan.  Letters of instruction must be executed by the plan’s trustee(s) each time a participant wants to move any money to or from the IDA.

IDAs are generally restricted to brokerage and other custodial accounts, and you cannot set up an IDA for purposes that might be deemed a “prohibited transaction,” as defined by law.  In other words, you can’t use your 401(k) account as a personal piggy bank to finance your own home or business or that of a close relative.

Once the money is moved to an outside custodian, that portion of the participant’s account no longer appears on the plan’s website (if available).  However, most custodians offer online access so participants can still obtain timely information on their IDA accounts.

You can usually have multiple IDA accounts so you can spread your 401(k) assets among a variety of investments and strategies for maximum diversification.  Also note that some administrative service providers charge a fee for IDAs, and some employers require this fee to be paid by the participant.  However, it’s usually a small price to pay for the added diversification and risk management.

A final note on IDAs is that we have this option in my firm’s 401(k) plan, and my employees love it!  Our 401(k) plan provider allows only 20 mutual fund options, so the availability of the IDA allows my employees to participate in the same AdvisorLink® programs that I recommend to you, while also enhancing the diversification of their nest eggs.  To see why my employees are so eager to access the actively managed investments we offer to our clients, check out the following analysis of our AdvisorLink® programs versus the S&P 500 Index:

CLICK HERE to view the AdvisorLink® Performance Analysis.

As you can see, the AdvisorLink® Program offers professional money managers that seek to maximize returns as well as those with the goal of minimizing losses.  It’s not often that you find a group of recommended money managers, almost all of which beat the S&P 500 Index in total returns AND annualized returns since their inceptions, AND have lower drawdowns (losing streaks) to boot.  Of course, past performance is no guarantee of future results. 

If you have money in a 401(k) plan that offers an IDA, I’d suggest that you consider one or more of these actively managed strategies before the next bear market comes around.

Howard Capital Management’s “HCM 401(k) Optimizer®”

As I noted above, not every 401(k) plan allows participants to have individually directed accounts.  However, we found another option that is available to virtually anyone participating in a 401(k), 403(b), 457 or similar defined contribution plan.  The name of the program is called the HCM 401(k) Optimizer® and it is offered through Howard Capital Management (HCM), one of the newest recommended money managers in our AdvisorLink® Program.

The HCM 401(k) Optimizer® is a subscription service in which HCM offers personalized investment recommendations that you then, in turn, execute in your 401(k) account.  The investment recommendations made by HCM are based on its extensive research and more than 10 years of experience in active money management. 

One valuable feature of the HCM 401(k) Optimizer® is access to the HCM-BuyLine®, a proprietary indicator that tells HCM when to be in the market and when to move to a defensive position.  This offers you the potential to go to cash during bear markets and corrections, something buy-and-hold strategies simply can’t (or won’t) do.  Here’s how it works:

  • You sign up for the HCM 401(k) Optimizer® using HCM’s Online Sign Up Form.  One of our Investment Consultants will give you the website address along with a coupon code that lets you save 10% off of the cost of the service.  Note that, since this is a subscription service, you can participate in the HCM 401(k) Optimizer® without having to receive approval from your employer.
     
  • As part of the information gathering process, you answer risk tolerance questions and provide information about the investment options available in your employer’s plan.  This information helps HCM tailor a portfolio recommendation just for you.
     
  • HCM analyzes your risk tolerance and the choices available in your employer’s plan and sends you an e-mail to let you know that your recommendations have been posted on your personal, password-protected web page.  You simply log in to the HCM 401(k) Optimizer® and follow the instructions.
     
  • Instead of offering general recommendations based on wide asset classes, HCM’s advice is based on your 401(k) plan’s actual set of investment options.  In other words, you will get an investment recommendation telling you which particular funds to buy or sell based on your plan’s list of available investments. 
     
  • Reports typically come on a quarterly basis which is consistent with how often many 401(k) participants rebalance their portfolios.  However, you will receive immediate e-mail notification if the HCM-BuyLine® indicates a defensive position is called for based on adverse market action. 
     
  • Since you are responsible for implementing HCM’s investment recommendations, you always maintain complete control of the assets in your 401(k) account.  However, you will need to maintain the discipline to restructure your portfolio on a periodic basis as HCM can only provide the guidance; they cannot actually trade your account.
     
  • Finally, when you sign up for the HCM 401(k) Optimizer®, you will be automatically assigned to one of Halbert Wealth Management’s experienced Investment Consultants who will be available to help you with questions about this program.

While no active management strategy is perfect, Howard Capital Management offers you the ability to know when to move to the sidelines based on how its strategy interprets the current market environment.  Just think what this would have been worth back in 2008 when the stock market took a dive while HCM’s clients rode out the worst of the storm in cash.

During our research, we found 401(k) account management services with costs in the $1,000 to $1,500 range per year.  However, the HCM 401(k) Optimizer® is a bargain at only $348 per year ($313.20 with your 10% Halbert Wealth Management discount).  That works out to less than a dollar per day to access the experience and strategy of a professional Advisor managing over $210 million of client assets in all of its various programs.

By the way, Howard Capital Management also offers a very good managed account program for other non-401(k) assets that we have recently begun to recommend to our clients.  It’s a long-or-cash program that uses the HCM-BuyLine® to know when to enter and exit the stock market.  Then, HCM’s Proactive Sector Rotation (PSR) methodology seeks to identify those market sectors with the greatest potential for gain.  I plan to write more about it soon, but you can find more information about this strategy now on our website at the following link:

CLICK HERE to view the HCM RYX-PSR Strategy.

Conclusions

Unfortunately, the availability of the two programs discussed this week may be too little, too late for many of the Baby Boomers nearing retirement.  For those who have saved little or nothing, Social Security may be their only hope for retirement income unless they receive a big inheritance or happen to win the lottery.  There is no doubt that many will have to continue working far beyond their normal retirement ages just to meet expenses.

However, if you have saved diligently and have money in your 401(k) and you’d like to have all or part of it actively managed, you do have options.  The ability to have professionally managed investments that can move to cash or hedge its positions during severe market downturns might mean the difference between retiring in comfort or perhaps never retiring as many Baby Boomers are now contemplating.

If you would like to learn more about the benefits of Individually Directed Accounts, receive a HCM 401(k) Optimizer® kit, or get more information about any of our other risk-managed AdvisorLink® investment programs, please feel free to contact us in one of the following ways: 

As always, past performance is not necessarily indicative of future results.  Be sure to read all offering materials and Important Disclosures, including those about comparisons to stock indexes, before making a decision to use either of the 401(k) options discussed above.

Wishing you a secure retirement,

Gary D. Halbert

Important Information:  Before making a decision to set up an Individually Directed Account (IDA) you should consult with the Plan Administrator for your retirement plan account, and make sure you understand all the rules and restrictions for this type of account.  You should also understand that all investments have risks, and there is the potential for loss of principal.  You should not invest in any program unless you understand and are comfortable with the risks, and you have read all of the applicable disclosures.


Read Gary’s blog and join the conversation at garydhalbert.com.


Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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