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Asset Allocation

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The Nervous Retiree

Robert J. Phillips
Chief Retirement Consultant

Like most of you during my working years I planned and saved for a comfortable retirement. There is no shortage of resources available to help with retirement planning. Numerous books, financial institutions and consultants are available and calculators can be used to determine how much you have to save to have a comfortable retirement.

I have found that most retirees who took an interest in retirement planning did a good job in implementing their retirement savings plan. They take great pride in their accomplishment.

The problem comes after you have retired. Something happens psychologically to retirees. They have a difficult time transitioning from an aggressive saver to an active spender. In other words it's hard to change that savings account into a spending account. They see the savings as a trophy, the culmination of a life long goal. Their entire working life has been a savings culture now they must change their thinking to using their investments as a resource for retirement income.

Even more important, a major market downturn like the one we just recently experienced makes them extremely nervous. Many have seen their entire savings drop by 40 percent. They worry that if they start to spend their money during a major market downturn the money will not last. Just at the time they should be enjoying the fruit of their long years of saving they abandon the plan.

I have talked to many retirees. Most are afraid to tap their savings. Some even plan to go back to work in order to survive. Many will restrict their withdrawals and shift their assets to more secure fixed income investments including the money market.

Others will turn their money over to a financial manager or put the money in an annuity for safety. The cost for such services are typically 2 percent of the money invested. If you are trying to achieve an 8 percent return on your investments this cost can represent 25 percent of the income you can produce from these investments. All of these actions by retirees reduce their available income at a time they should be fully enjoying the income that their savings can produce.

This is increasingly important for future retirees. Baby Boomers will likely have most of their retirement income coming from self-managed accounts. Companies are eliminating funded pension plans in favor of self managed accounts. In addition, these companies are reducing or eliminating health care coverage for retirees, which will further strain a retirees income needs. Also, the future of social security is in doubt. The bottom line is that future retirees will need to actively manage their accounts while maximizing their returns in order to enjoy a comfortable lifestyle.

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