Bass Financial Solutions, Inc.

It has been almost five years since the stock market’s last low point. You’ll recall that the period from 2000-2002 contained the burst of the dot.com bubble, an outbreak of accounting scandals that exposed Enron, WorldCom and others, and the 9/11 attacks that demoralized investors. In March 2000, the total value of the NYSE-listed companies plus NASDAQ-listed companies stood at $18.3 trillion. At the bottom in 2002, the values had collapsed to only $9 trillion - a $9.3 trillion loss. The S&P 500 companies lost 50% of their market value, and the NASDAQ companies lost 80%. The bottom was finally reached in October 2002, and the previous peak of early 2000 was not seen again until 2007. Of course, if adjusted for inflation, the current levels are still below the previous high.

During the summer of 2007, you began to see how Wall Street spun this bad news into good news: brace for an onslaught of mutual fund advertisements touting double digit gains over the past five years. Keep in mind that a 50% loss requires a 100% gain to get back to where you started! A long climb out of the Grand Canyon only means you’re back to where you started. Over the “long-term” you’ve got a good chance of doing well in the “market”, but shorter term there is much risk. If your money is needed near-term, or if you’ve barely enough to pay for a long retirement, be cautious because there are both bear and bull markets. How can the “market” have a bearing on your retirement?

If the money you’ve saved, including your 401(k) or comparable employer-sponsored pension plan, will be your sole source of support for retirement, you can’t afford to gamble. Your investments will be your income from now on through “old age”. By the way, “old age” is not what it used to be because medical advances have increased expected life spans substantially. In fact, if you and your spouse are both age 65, there is about a 50% probability that one of you will live to age 90 and a 25% chance at least one of you will reach age 95. This means the cost of your retirement will be greater - not only because you live longer, but with advancing age comes the likelihood you’ll need additional money for medical care. What happens when you no longer have an income from working and the market crashes? What happens if you live to age 95 rather than 83, and you need to pay someone to help you?

In some corner of your mind, no matter how much money you’ve got, you probably imagined something going very wrong financially. It could be an expensive emergency like a major health problem, an uninsured loss or a market crash that makes 2000-2002 look like a minor blip. You’ve realized your greatest fear: running short of money before the end of your retirement! While you may never experience a major financial interruption, understand that the market gains are presumed, not guaranteed. History tells us that gains don’t always arrive on schedule, and there can be long periods of declining prices. During the withdrawal years, there is less room for error than in the accumulation years when you can scrimp to save more, postpone retirement a few more years or wait for the market to recover. If you retired in 1968, you would have unknowingly entered a 14-year period when the market did not gain the presumed 10% yearly but, point to point, gained nothing. This stagnant 14-year period represents about 50% of your retirement.

If your retirement plan uses the customary assumption of a 10% annual investment gain over the long-term, make sure you have enough time for the long-term. Don’t forget you’ll also need the discipline to hang on when values are going south and not to sell if they go the other way. You’ll need to gulp hard when the market is down and you are drawing down (selling) your investments to support retirement. Constant withdrawals mean that if the returns you’ve assumed do not arrive on schedule, your greatest fear could become a reality.

So what’s the answer? Your intuition tells you to “go it alone”, but logic points in another direction: getting professional help. Help to space your investment maturities so your money is working hard but available when needed for retirement - including sufficient liquidity for emergencies. Help to avoid investment risk that can lead to devastating results. Help to advise you about the pros and cons of the numerous new options that have become available in response to a growing retirement population: lifecycle mutual funds, fixed annuities with guaranteed lifetime income benefits, when to start Social Security and how to integrate the benefits with your retirement money to save taxes, using the Roth or stretch IRA, and how to insulate your earnings from income taxes until the money is withdrawn for use. You can’t start planning too early, and it’s never too late to reassess your retirement investments.

Send your questions and comments to tony@tonybass.net, or call me direct to discuss your retirement options at 888-962-7768.