Baby Boomers Protect Your Nest Egg in Retirement Now!

Baby Boomers, unless you live under a rock you will be well aware there is stock market turmoil and the possibility of your Nest Egg being a lot smaller for your retirement. You need to Protect Your Nest Egg Now.

This article is not intended to alarm you but to arm you. You see most Baby Boomers don’t understand how their Nest Egg is managed. In fact most find the whole subject totally boring.

It’s a fact people spend more time planning which restaurant to go to rather than planning their retirement. But what’s worse is they spend no time planning how to protect their Nest Egg against a major loss.

Over time Stock markets have always recovered. More recently it seems these recoveries have been quicker, giving us a false sense of security. If you were in the work force and accumulating your Nest Egg it was easy to sit tight and let the market take care of itself. But if you are in Retirement the whole situation changes dramatically.

For a start you might no longer be earning any income and so will not be contributing to your Nest Egg. Plus if you have no other source of income you will be drawing your income from your Nest Egg. If you take just 4%, which is suggested by many experts, this is equivalent to the stock market dropping by 4% on top of any real stock market drop.

So you have the worst of situations. Your Nest Egg is reducing in value and you are taking money out. Talk about punching a guy when he is down!

Fund Managers will tell you to hold for the long term. This is true – if you live forever! But you won’t and what makes it even more dangerous is you only have a tiny “window of opportunity” in time open to you in the share market to set up your Nest Egg for the long-term in retirement. It might seem that 30 years is long term to you but to the stock market it is just the blink of an eye. What if in that fraction of time or even in a fraction of that fraction, say only 5 years the market went down 30%-40% as it did on 2000-2003. And what if you were just about to retire? Think about that.

You could have been in the market for 30 years with the market going up and up and up but now just as you retire it plunges 30%-40% in a few months. How will you feel?

You may not believe it could happen, but it can and will. In 2000-2003 many people lost 30%-40% of their Nest Egg’s value. If you were young enough then you could stay in for the long term. Many of the funds took until 2007 to recover your Nest Egg losses, and have just lost much of it again in 2008.

It is a known fact that if you suffer significant losses to your Nest Egg in the first few years of retirement it will seriously affect how long your Nest Egg will last.

In any other business if it suffered 30%-40% losses heads would roll, and systems put in place to protect against it or minimise it. We are told a well diversified portfolio should protect us against large losses. I’m sure those people who lost that much in 2000-2003 thought their fund managers had given them a balanced and diversified portfolio. I’m also sure the Fund Manager would agree they had indeed done a good job.

They will tell you you should not complain because you have made significant gains over the 30 years. That is true but isn’t that why you invested with them to build your retirement Nest Egg? It is a finite resource you have built up in order to use in your retirement for the next 30 years hopefully. Rationalizing your sudden loss does not help you in retirement. You need the money to live – period.

Remember this, if you build your Nest Egg over 30 years to $1M, and the market drops 50%, you lose $500K of your Nest Egg. They will tell you not to complain because you still have $500K and to hold for the long term. It has been an “easy out” for the last 30 years for the Financial Planning industry to tell you to Buy and Hold for the long term. And since 1980’s that has worked for the most part, even through the 1987 crash. Us Baby Boomers have been in the work force and for the most part just ignored what was happening to our Nest Egg. Now we are asking questions because we need the money – simple as that.

I may be criticized for only talking about the stock market dropping and conveniently forgetting that the portfolio’s are diversified. Well let me say from my own experience in my conservative diversified portfolio Property was down, Fixed Interest was down, International and Local shares were down. So I think I can stick to the stock market example here.

Fund managers rely on asset allocation and diversification to minimise the down-side. This has worked well over the last 30 years whilst us Baby Boomers have not been overly concerned with our Nest Egg and just kept sending them more of our money to invest. When the market was down, this money was used to buy depressed price stocks at bargain prices and over time this worked in our favour. I also believe the shear weight of money being invested helped put a bottom under the market.

The question is what will Fund Managers do and where will they get the money when 77 million of us stop accumulating and start drawing from our Nest Egg?

The title of this article is a call to Baby Boomers to Protect Their Nest Egg in Retirement. The emphasis here is on that words “in Retirement”.

Okay so how do you protect your Nest Egg in Retirement? Well the short answer is you need to take control yourself. The Fund Managers really can’t do it partly because most Funds have to be in the Market and also if they did it would causing massive market turmoil.

This is because the best way to protect your Nest Egg in retirement in these volatile markets to be in Cash, because you must avoid the risk of large losses in retirement in markets like these. If you are a sophisticated investor then you can do other things to protect your Nest Egg.

As Al Thomas from mutualfundmagic.com says in his weekly emails “CASH is a POSITION”. He goes on to say something to the effect that 2% return I Cash is better that 35% loss in stocks. He calls this “Reverse Profit”.

What protection can the Fund Managers really offer? Can you imagine what would happen if the Fund Managers had a Stop Loss in place that exited any stock or fund when it had dropped by 10%? All the computers would be programmed to “pull the trigger” within milli-seconds of each other. The stock or Fund would go into free fall and it is likely many sell orders would not get filled or they would be filled at the bottom.

So we Baby Boomers actually want the Fund Managers to continue doing what they are doing. Why? because this gives astute Baby Boomers a market to sell into when their stocks or funds drop by 10%. Of the 77 million baby Boomers only a small fraction of us will actually take charge of our Nest Egg. So you should be able to sell your stocks or funds easily when they drop 10% or more.

As a Baby Boomer your main concern should be to protect your Nest Egg from the down-side. Any upside should be part of a planned strategy with your financial advisors after you have in place plans to protect you from the down-side. Fund Managers cannot protect you from the down-side in the short-term, which is where you are when you are in retirement. Every day in retirement is short-term, because of the combined effect of short term stock market losses and you paying yourself a 4% pension compounds the difficulty of your Nest Egg recovery when the market recovers.

Jim Otar from Otar Retirement Solutions has a great article called the “Time Value of Fluctuations” which you should read. He considers market losses with Pension withdrawal rates. For instance if your Nest Egg drops by just 20% and you draw a 4% pension then the returns in the next three years will have to be 42% just to get back your losses. (inflation, dividends and management costs not included)

This must be understood. By all means use a Financial Planner because a good one can make the whole process so much easier. But give them clear instruction on what to do to protect your Nest Egg from large losses in retirement. Protect yourself from the down-side even if you have be be in Cash for some time. Then when the market turns up you can plan to put some of your protected Nest Egg back in the market to grab some better returns. Cash will be king!

You need to be aware I am not a financial advisor, just a concerned Baby Boomer who is doing something to try and protect his Nest Egg both short-term and long-term. Any ideas I provide here should be thoroughly discussed with your trusted financial advisors before you act on them.

4 Responses to “Baby Boomers Protect Your Nest Egg in Retirement Now!”

  1. Chris says:

    Agreed, as a GenX’er I have liquidated everything to avoid the worst run coming in the next ten years. But not necessarily for all the reasons explained in your article.

    Mostly it has to do with the coming lack liquidity and volume. The fact is boomers will at some point need to draw from those funds wrapped up in stocks, bonds and funds to pay for “crazy” things like food, clothing, gas, transportation, taxes, medicine and the new hip pads (single level bungalows that have no stairs). With 80 million boomers sucking the money out of the markets it will give the appearance of a shrinking economy. While true in some form, it’s really just the market adjusting to the size of the labor market.

    So regardless of diversification, because all boomers are diversified as commanded by their investment managers/friends/neighbours/talking heads on TV, it doesn’t matter where anybody to tries to hide. If there are less people working in the labor market, less money will be made. Other than advanced mathmatics in infinty notions, the market is finite and expands and contracts with labor rather than capital. The market will deflate because the funds will have to be spent on life somehow and since there is a certain amount of loss in each transaction, the economy will shrink. I’m not for or against it either way, it is just a reality and we’ll have to make due.

    Look at it this way. Roughly all of the gain the markets have met in the last 8 years are the boomers pushing their investment capital into the markets as an echo of the housing market. Really, it isn’t a mystery to figure out that the market peak was roughly the same time as the first boomer to cash their social security and the slow loping down hill is the rest of the demographic following suit.

    In effect the sheer volume of people in the boomer demographic is also their own weakness. It took 80 million boomers to create a massive market and investment system, it is also the same volume of people that will collapse it.

    Unfortunately someone in my position ends up taking a loss if I stay, because if I invest in anything other than sometype of service industry not connected with old age, I’ll get screwed. On the flip side if I stay I get screwed because even though death is a bull market, unless I’m selling caskets it’s not worth much to me. So better to sell everything and watch the wreck happen.

    So as one of the economists mentions in your article, CASH is the position. I am safer as a guy in my thirties earning 4.5% a year in a savings lock up for ten years (GIC/CD take your pick) than I am playing with a short market that is leaking resources like a Kmart canoe.

  2. David says:

    Hi Chris,

    Thank you for taking the time to provide a thoughtful and detailed response. Your points are most valid even though the jury is still out on what will happen. As I’m sure you know the Markets are perverse and will do the opposite of what we expect. So it may be there will be opportunity in the markets after the “down-sizing”.
    Selling caskets sounds like a growth business to me ;0) If you can make it a “Green Business” you might have a winner there. Put me down for one please!
    Once thing you might take a look at is the Teeter Totter Principle. Greg Heiple developed this model as a good way to invest and always be on the right side of the market. I am implementing it myself in my retirement because even though I have most of my Nest Egg in the Banks (we get >7% down under in Oz) I still need some exposure to the Stock market to off-set inflation once this turmoil has settled down. The Teeter Totter Principle will help me control the exposure and risk to where I can sleep at night. Anyway take a look if you are interested. He has a video demo too.
    http://www.teetertotterprinciple.net/

    Thank you again.

    David

  3. Chris says:

    Hi David,

    It’s a type of contrarian investing, although if it works I wonder what it’s contrary too? I started like this ten years ago with the understanding that I could afford to lose 5k, after ten years its turned into about 375k Canadian. It could have been more but I would get to a certain point, say 30k, then get nervous about having that much capital in the market and pull 25k out of the investment account and stash it in the tax hiding device (RRSP) with a fixed interest rate.

    It’s odd, but my initial “loan” to myself of 5k is all I really invest with and it’s the only thing I mentally committed myself to losing. lol I could start with 10k in there, but honestly I’m a bit fixated on 5k almost like form of financial autism. In some cases it’s saved me some grief by only committing a small nest egg and hustling the trades a bit and learning about shorts, stops, etc.

    Rinse repeat and recycle.

    Mind you I only invest into things I deal with directly on a day to day. Mainly IT because my job requires I have a detailed knowledge of IT being a super geek (Senior Systems Architect). People pay me to know how to make things run, cover industry risks and understand/implement upgrade paths that make sense for the businesses that I contract to. The last big two trades that I was in the right place/time was Nintendo and VMWare. Nintendo was easy to figure out with the Wii, by all the announcements the media ignored, it was going to be a huge hit. VMWare I literally had a buddy working as a third party vendor phone me about the release. Nintendo I got at 6 and sold at 30, VMware I got at 27 and flipped two days later at 70.

    That isn’t the case right now though. In Canada at least. While the country is huge, the population is relatively small at 30 million people, roughly about 10 million are between the ages of 55-75. It’s a huge demographic. Canada’s population by median age looks like a turnip. Heavy on top and tiny on the bottom. Plus the Canuck economy is extremely married to the US market system, if it booms there, it echos very loudly here.

    I’m waiting for the skeletons to pop out of the closet soon. We’ll probably see capital invested by corporations like Microsoft or Novell or GlaxoKline into the sub-prime foolishness. I would not be surprised if it hits all sectors because brokers by the nature of their work can be dirt bags (not all though) and the incentive is to push stuff that looks great on paper otherwise they don’t get paid. Since it’s corporate responsibility to maximize profits for shareholders, the subprime mess looked pretty sweet at one time to investors. Now, not so much.

    Going back to demographic investing.

    In Canada we try to compensate for population loss through immigration, although the that isn’t exactly working as planned. Most of the folks Canada ends up absorbing through immigration either don’t have the skills because they were goat herders or they are professionals that Canadian agencies will not allow to practice (doctors, engineers, techies, mechanics). So mostly immigration and welfare are tied like Siamese twins at the head 70% of the time. The intent was to have a productive base that contributed to the economy, instead Canada created a hungry tax vacuum. A shame really, it could have been something more but reality versus the the dream are sometimes diametrically opposed to one another.

    So pretty much it leaves X and Y, to repopulate and provide a productive economy. While most of the lads (and ladies) I know in the Boomer set are going to continue working. There are a hundreds of differing reasons for it, most I’ve noted are second marriages and second families. These folks have teenagers in their 50’s. (shutter…I have two kids at 35 and it’s staying that way, lol)

    I love the boomer work ethic, show up on time, they walk to a problem (rather than run/panic) and the solution rate is about 85% (very high). The experience brought is phenomenal. Personally I wouldn’t be where I am today if it wasn’t for the guidance of a lot of folks in the boomer demographic in learning how business works in IT or understand the importance of team building with beer on a sunny friday “lunch meeting” that ends at supper.

    Sad thing is I’ve put at least ten friends in the ground in the last year that never quite made it to retirement or just retired. This is where is gets really, really stupid. The aforementioned two families for some of these guys literally tear to shreds what these lads had built for all their lives. By the time the families are through with the estate, savings have turned into consumer goods like tv’s and cars. The investment properties are mismanaged and typically are sued into oblivion. This is what I’m talking about when capital disappears. It becomes ether and is removed from the market cycle. Kind of the financial equivalent of the second law of thermo-dynamics: Entropy

    Without the boomers the economy will become smaller even with retirement and senior consulting gigs. Most of the economy relies on the movement of large capital. If most of that capital is turned into consumer goods, we can go look in the landfills in five years and see how well the economy was doing rather than is doing.

    I realize it’s a bit pessimistic of me, but at 35 I have go with Cash is the option verdict for a little while until the market stops reacting the way it has been. So mostly I’ll stick to shoveling money into paying off the mortgage in the next five years and keeping the money I’ve made on the market in an tax-shelter RRSP interest account (the fed here keeps reflecting the US changes so interest is low at 4.5%). I figure by the time I’ve paid off the mortgage, the $3600 (1600 mortgage and $2000 extra per biweekly accelerated), it will feel like taking off a backpack on a long hike. lol 🙂

    Yeah, I’ve been trying to find that market opportunity for casket futures myself…nothing yet.

  4. […] That they will go into Cash if need be to protect my nest egg. […]

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