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Retirement Investment Strategies

Chicken yet? Choosing a retirement strategy that won’t scare you

Some corners of the investment world are putting out downright frightening predictions:

“We’ve just witnessed four of the worst economic bubbles in history burst in catastrophic succession, crippling our nation and robbing you of tens of thousands of dollars. The only two economists who predicted this mess now foresee two more bubbles directly ahead.” – Newsmax

“For many Americans, the years ahead will be nothing short of a modern Dark Ages, where each day brings forth fresh anxieties, unfamiliar risks, and a deep sense of foreboding.” – When Giants Fall, Michael Panzer

“The only reason oil prices aren’t higher is economic weakness around the world. But countries including India and China are adding to their fuel demand at a rip-roaring pace. … How will it end?: Potentially in an oil crisis that sends the U.S. deeper into an economic tailspin while dramatically changing the way you live. In more extreme cases, an oil crisis can lead to a food crisis. Food travels between 1,500 and 2,500 miles to get to your dinner table, and supermarkets are going to run out of food fast if the delivery trucks run out of gas.” – Sean Brodrick, Weiss Research

After several email boxes full of these messages, it’s understandable when small business owners feel paralyzed. But don’t count Retirement Financial Adviser Greg Phelps, CFP®, CLU, AAMS, owner of Red Rock Wealth Management in Las Vegas, Nev., among the frozen. “I’ve heard it for 15 years, usually from the talking heads in the media who are out to sell something: a magazine subscription, a newsletter, a book. Even CNBC is selling advertising,” he notes. “If they don’t sensationalize things – on both sides of the fence – then they will not get readers, followers, viewers.”


Reasons to Fear


Human beings are wired to accept both good and bad predictions as gospel truth, thanks to a psychological phenomenon known as anchoring. Basically, we think whatever happened for the last few months will go on indefinitely. “It’s a short-term perspective extrapolated out into a long-term plan – and it’s a big mistake,” Phelps says. The results are often retirement investment strategies that are either too fearful or recklessly greedy.

Retirement Investment Strategies Fear

When considering retirement investments, be certain to keep higher taxes, rising interest rates, and persistent high unemployment numbers in mind.

Business owners, however, have a unique “truth meter” at their fingertips, points out Robert Brokamp, the lead adviser for “The Motley Fool’s Rule Your Retirement” newsletter service. “Anyone at the franchise-ownership level would see corroborating evidence,” he explains. “If you own a Subway®, for instance, you would probably start to see things slow down or pick up.” He, too, subscribes to the theory that a high percentage of those offering financial advice face a conflict of interest – including the Federal Reserve, which would like to keep confidence in the economy high.

That’s not to say the United States’ current financial picture is sunshine and roses. There are enough nuggets of truth in the doom-and-gloom naysayers’ messages to convince Brokamp the world isn’t perfect. “If pressed, I would say I am not overly optimistic about the future,” he says. His list of concerns is ready: Higher taxes have to come, if not for the deficit, for all the entitlements promised to the baby boomers that we have not yet found a way to pay. Interest rates are more likely to go up than down, which means it will cost more for businesses to borrow, which will also be a drag on the economy. Persistent high unemployment looks like it’s here to stay for a while. Those who find jobs won’t see raises.

Still, Brokamp sleeps at night because of Japan. Japan’s stock market is still down 70 percent from where it was in 1990 after its disastrous crash. “Yet Japan is a functioning economy with wonderful restaurants and stores, and a great place to visit,” he says. “The takeaway is that there will be bad news, but it doesn’t have to take you off track. We’ve had wars, high inflation, high interest rates, high taxes in this country and still we’ve done very well. It’s not the end of the world.”

Robert Wickenkamp, AIF®, owner of RJW Investment Consultants in the Greater Chicago area, offers a similar calming overview toward black swan events – a term investors have coined for those large impact, hard-to-predict, rare events like 9/11 or Hurricane Katrina. They’re different from “the sky is falling” messages because they hit without warning. But that doesn’t automatically leave retirement funds defenseless and vulnerable, either. For starters, the old “diversify” advice still holds true when it comes to spreading the risk. And these days, Wickenkamp recommends checking out collars – a system of calls and puts insurance that was previously available only for the very rich. In 2010, the average investor also has access to this strategy within mutual funds.

In a nutshell, it boils down to Brokamp’s personal philosophy: “Everyone should be a short-term pessimist and a long-term optimist.”

Beyond the Pessimism


That’s why retirement counselors recommend franchise owners cultivate three basic mindsets before making any investments:

  • Know your goals. Not what your neighbor plans to do, not what the market dictates today, but what type of retirement lifestyle you’d like to establish and when, says Wickenkamp. He compares it to nothing more mysterious than putting together a business plan, and then following it. “Does everything in your business plan have to come true for you to be successful? No. Not everything you put in your financial plan will come true, either, but you end up focusing on the important things and you’re driving toward the end result,” he says.
  • You can’t predict tomorrow. “Being an American makes us innately think we can outsmart the market,” Phelps says. And yet most Morningstar Five-Star rating funds don’t repeat their performance. Instead, they sink to the bottom for the next three or four years. In 2009, the mighty Berkshire Hathaway lagged the Standard & Poor’s index by nearly 21 percent. “Markets are efficient, meaning that by the time the news hits, whether it is 9/11 or the real estate bubble, and everything is in a tailspin, by the time most people can react to it, it’s gone,” he says. “The problem with trying to use a crystal ball methodology is that it will never be accurate consistently.” Phelps provides his clients with a formal document outlining the investment parameters they’ve agreed on that will reach the franchisee’s goal – a balanced portfolio of 50 percent stocks and 50 percent bonds diversified across several asset classes, for example – and unless the factors that went into the plan change, it remains their map.
  • Only attitude counts. Harriet Veenker, CFP® and Grangaard Strategy Adviser with North Woods Retirement Services in Aitkin, Minn., learned in a former career that if you have a choice between wringing your hands over possibilities that may or may not happen versus appreciating the moment, the latter choice gives you the life you’re looking for. That’s why she tells clients to keep their perspective local, focus on making a difference in the community, and you’ll see the results of the accomplishments. That alone is enough to stay optimistic.


Pulling Retirement Investment Strategies Together


The first decision is whether you will take a do-it-yourself route or outsource the job to an investment adviser. Certainly many individuals have the skills, background materials, and research smarts to efficiently manage their own IRAs, Phelps assures. Nor does it take a crippling chunk of time to educate yourself on these issues. “The media [have] blown this whole thing about investing out of proportion. They’ve made such a big spectacle that they’ve confused the public into thinking they need to go to a Merrill Lynch or a Morgan Stanley and pay their high commissions. That is highly counterproductive to a small business owner’s end results,” he says.

Outsourcing, however, isn’t without its hurdles. The Motley Fool crew recommends fee-only financial planners, who are experts you pay by the hour or project, eliminating the commission incentive to give you conflicted advice. Just make sure the adviser is a fee-only, not fee-based, which is a Wall Street term to camouflage the fact that the adviser can still take commissions and double-dip on the recommendation. The National Association of Personal Financial Advisors does some of this legwork for you via its certification process; the Garrett Planning Network is a similar organization endorsed by The Motley Fool.

Retirement Investment Strategies

Advisers should offer more than one investment plan, helping to put the pieces together for a perfect fit.

Every adviser that you see should offer more than one investment plan, says Veenker, because the goal is to find the right fit. “It’s like buying clothes. Sometimes the first pants you try on is the right pair and sometimes it isn’t, but you usually bring more than one item into the dressing room,” she says. In your shoes, Veenker would expect no less than three options.

Second, be wary of advisers who immediately suggest life insurance so that you can get tax-free income or annuities. According to Veenker, the industry is paying particular attention to these products and how they are being sold. “Your adviser should be talking broader terms. He should be talking about how much you have saved in cash in case of an emergency. They should be looking at the broader person rather than just the investment portfolio,” she advises. After all, having a back-up plan wards off the heebie-jeebies when doomsayers begin their spiel.

Any plan should address the fact that, as a business owner, you need options you could tap into on a moment’s notice – funds you invest safely. This is on top of an emergency fund for your business and personal life; Veenker takes the conservative route and assumes a year’s worth of income for her clients. Only long-term needs should hold riskier assets. As a rule of thumb, if you put half your wealth into things that are not in the market and the other half in well-diversified stocks, you just increased your chances of success nicely, planners say.

Veenker calls it the farmer theory: Farmers throw their seed (retirement monies) out in the field (investment) in the spring. For franchise owners, every year of work is considered spring. The seed grows into a crop over a period of time and begins to amass a nice value. That’s when the owner, in a farmer’s role, harvests a nice percentage of the yield and stores it in the silo. This cycle continues throughout retirement, with the farmer/owner taking money out of the silo when he needs cash.

“A bull market could be when you harvest two-thirds for the silo; a bear market is nothing more than a drought this season,” Veenker continues the analogy. (Just make sure you live out of the silo and not the field – those reserves no longer have the potential to grow.)

“I know there’s always something to be worried about out there, whether it’s the health care bill, or commercial real estate is the next shoe to drop. Last year it was the value of the dollar and it was oil six months before that. A lot of what I do is being a psychologist to my clients and keeping them focused,” says Phelps.

“In the end, the American economy is resilient because of franchise owners: The people [who] are entrepreneurial minded, and all small businesses, because they find a way to make it through [a recession] and the economy will do the same,” he assures.