Investing and insurance for growth as well as Income

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MANAGING YOUR INVESTMENTS

It’s tough enough to manage your invest ments effectively at any age, but it’s particularly tough during your retirement years. When you were younger, you could make some investment mistakes because you had many years to make up for them. Most retirees can’t afford to make serious investment mistakes. Investing in the current environment is downright scary for retirees and everyone else, for that matter.

My feel ing is that if you take a sensible, long-term approach to investing, you won’t be affected too adversely dur ing bad investment markets, and you will flourish dur ing good investment markets, which will certainly return. Some general suggestions are given here.

Take heed of the following recommendations whether you invest on your own or use an investment advisor. If you use an investment advisor, remember that it is your money and that you need to pay attention to how it is being managed.

Unfortunately, many investment advisors, even those who work in big, well-respected institutions, have had a great deal of difficulty navigating the recent stock market implosion.

Invest for Growth as Well as Income

If you, like most retirees, rely on income from your personal investments to help pay your living expenses, some of these investments must also provide growth so that you can keep up with rising living costs. Stocks and real estate are the two investment cat egories that provide the most consistent, though erratic, inflation-beating returns. Many retirees feel that they should avoid these investments because they are risky.

Certainly the performance of real estate and stocks during the recent world economic contraction amply illustrates the risk. On the other hand, over the long run, stocks and real estate have provided a much higher return than the third major category of invest - ment, interest-earning securities like bonds and certificates of deposit (CDs).

This is not to suggest that you should go out and sell your CDs and buy a lot of stocks next week. On the other hand, although it is difficult to generalize, if a retiree’s investment portfolio does not include any stock, it is likely to suffer from the erosive effects of inflation not this year and not the next, but 10 and 20 years hence, when inflation will seriously diminish the purchasing power of investments that provide only income, like bonds and temporary investments like CDs. The fact is that retirees are living long and active lives today.

Life expec tancy tables indicate that a couple, both age 65, have a “last to die” life expectancy of 27 years. In other words, on average, one of them will live to age 92, and that is just the average. I hope that you will beat the average, but whatever happens, you will need to keep your eye on how inflation is going to affect you.

You can’t rely on your income to increase to keep up with inflation through annual raises as you did during your working years. Instead, you have to rely on your investments to grow with inflation, in addition to pro viding you with adequate interest and dividend in come.

Maintain a Diversified Portfolio That Is Appropriate to Your Needs

As I discussed earlier, it’s important that you have at least some inflation-beating investments in your portfolio, namely stocks. Real estate also provides that opportunity, but most retirees do not want to get involved in the hassle of owning individual properties, although you could and should invest in a real estate mutual fund. Excluding real estate, a balanced portfolio should consist of both interest-earning investments and stock investments.

Generally, retirees should have a higher proportion of their savings invested in interest-earning investments than younger people would. But stocks still belong in most retirees’ investment portfo -

lios. Typically, retired investors should emphasize high-quality stocks with good dividend-paying records or mutual funds or exchange-traded funds that hold such stocks. High-quality stocks make particularly good sense in the current frightening stock market environment be cause well-established companies with the capacity to pay generous, regular dividends will not be as ad versely affected by a declining market as other stocks.

As far as interest-earning investments are con cerned, retirees who pay attention to the inter est rates paid on various securities can be well rewarded, particularly when interest rates are quite

low, as they are now. For example, a little comparison shopping among local banks or on the Internet is likely to uncover very attractive rates paid on FDIC-insured CDs. Finally, as in all areas of investing, spreading your money around among various types of interest-earning securities is the best solution.

Don’t Do Anything Precipitous in Response to Market Uncertainty

Sometimes, retirees get themselves into financial trouble because they react too hastily to unfavorable investment market conditions. In other words, they may make a major change in their invest ments, often at the suggestion of some selfanointed expert.

Certainly you need to be concerned about keeping your money safe amidst economic uncertainty and volatile investment markets. If you’re so frightened that you want to concentrate more of your invest ments in safer securities, that’s fine, but do so gradually.

On the other hand, you may feel that you have invested too conservatively, or perhaps that stocks have been beaten down so badly that they are attractive. That’s okay, too, but change your investments gradually over a period of months or even a year or two. That way, you won’t suffer unduly if you guess wrong. And since most experts guess wrong most of the time, it is always possible that you may do so as well.

Don’t Make Inappropriate Investments

Just as you have to maintain a balanced portfolio that consists of a variety of carefully selected investments made and monitored by you and/or your investment advisor, you also need to avoid making risky investments. Unfortu nately, retired people are favorite targets for opportun istic or unethical salespeople who recom mend overly risky or otherwise inappropriate investments. The best way to avoid making them is to stick with old-fashioned, plain-vanilla investments that you understand. If someone who is trying to sell you an investment can’t describe it to your satisfaction in one sentence, don’t buy it.

Be particularly careful of high-yield (high-interest) investments. Far too many seniors are burned in times of weak stock markets and low interest rates by being lured into investments that pay an unusually high rate of interest.

Don’t be a yield chaser. Opt instead for high-quality interest-earning investments. The current eco nomic situation is hardly the time to invest your money in securities that pay unusually high returns. There is a reason why companies pay those returns, and it isn’t because they like you a lot; it’s because they are riskier. What good is earning high interest if you’re going to lose your principal?

Keep Short-Term Money Safe

Retirees are understandably unhappy if they have to sell investments that have recently taken a drubbing to pay bills. It’s better to give that money a chance to recover its losses. To avoid that unsavory situation, keep the equivalent of two years’ worth of expenses invested in no-risk securities, like CDs and money market funds. This will provide at least some solace during a declining stock market, as you won’t be compelled to “sell low” to pay your bills.

REVERSE MORTGAGES

If you are well into your retirement years and you own your home free and clear or almost free and clear, a reverse mortgage may help you offset lost income from the stock market decline. But you need to examine the ramifications of a reverse mortgage carefully.

A reverse mortgage is a loan based on the value of your home that you needn’t repay until you move, sell your home, or die

At your demise or when you move, the loan is repaid. In short, reverse mortgages can be an added source of income if you need cash and you have no heirs, or if your heirs are unconcerned about inheriting your home. (Even if they are concerned, it’s your money and your life, so do what’s best for you.) Unlike traditional loans, a reverse mortgage requires no income to qualify. But it generally comes with a host of fees, making it more expensive than a traditional mortgage. The longer you wait before doing a reverse mortgage, the more money you’ll be able to get out of your home.

Matters to Consider

Reverse mortgages come in several flavors, including programs that pay you a lump sum rather than a lifetime monthly emolument, give you a credit line, or a combination of those. Be especially wary of any program that allows you to get all or most of the money up front. Receiving a large sum of money or a credit line may tempt you to use the money imprudently. It’s far safer to opt for the monthly payment program. Carefully evaluate whether other options such as selling your home might prove more attractive. While you are probably attached to your home, comparing a reverse mortgage with selling your home and using the proceeds to buy or rent new quarters is the best way to evaluate whether a reverse mortgage makes sound financial sense.

While the thought of moving from the family home may be anathema, you might welcome the possibility of moving into more manageable and less costly housing. If you have children, ask for their opinions as well. Finally, the permanence of a reverse mortgage should not be taken lightly. Too many things can happen during a long retirement, and the equity in

home is like an insurance policy. Tapping into it through a reverse mortgage is like cashing in a life insurance policy.