Plan to Ensure You Don’t Outlive Your Nest Egg

At age 65, the average life expectancy is 81.8 years for a man and 84.8 years for a woman.

Those were the figures as of March 2006 from the National Center for Health Statistics.

But with advances in medical science, it’s no longer a stretch to think that you could live to be 100. That’s great news – unless you run out of money.

Consider the following hypothetical example, which assumes:
•    You’re 64 years old and earn $60,000 per year.
•    You plan to retire at age 65.
•    You’ve accumulated $1,000,000, which you think will return 6% per year.
•    You’ll need $60,000 a year in retirement, excluding Social Security.

The good news is that if you have a 15-year retirement, from age 65 to 80, you’ll end up with almost $696,000 to pass on to your heirs.
The bad news is that if you have a 30-year retirement, from age 65 to 95, you’ll run out of money at age 88. (See footnote.)

But don’t worry.

With careful planning, you can recover, even after a downturn such as that of the past year.

You can save more, invest more aggressively or work longer. In fact, working longer might be the best option. According to Financial Engines, 50-to-60-year-olds can get their retirement savings on track after recent stock market losses without any additional savings if they work just two or three more years.

(Footnote) Assumes $1,000,000 in retirement savings has already been accumulated; another $60,000 is added. The money grows at a hypothetical 6% per year; $60,000 (in today’s dollars) is withdrawn each year. The example cited is hypothetical and for illustrative purposes only. It is not meant to represent performance of any particular product.

The Pros and Cons of Lifecycle Mutual Funds

Lifecycle mutual funds are designed to be easy, but if you don’t use them correctly they can throw your portfolio off balance.

Lifecycle funds offer a mix of assets designed to fit a particular investor’s time horizon. The asset allocation is changed over time as a certain goal, or “target date,” gets closer.

As a result, lifecycle funds can be good options for investors who want to take a hands-off approach to investing. But there are two potential pitfalls.

First, a one-size-fits-all approach seldom works in investing.

You may have the same expected retirement or withdrawal date as your neighbor, but you probably have different financial goals and different tolerances for risk.

The same fund, then, is probably not right for both of you.

Second, many investors don’t use lifecycle funds in the hands-off manner for which they were intended. Instead, they also own other mutual funds, stocks and bonds. This can open investors up to more risk. For example, if your desired asset allocation is 50% stocks and 50% cash, and your lifecycle fund achieves that, buying more bonds in addition to the fund will throw your portfolio off balance.

If you like the idea of a lifecycle fund’s simplicity but also want to invest elsewhere, you may want to put the bulk of your assets in a lifecycle fund and then allocate a smaller amount to other investments that aren’t likely to be represented in the lifecycle fund – such as sector-specific stocks.

One Way to Rebuild Your Battered 401(k)

A year ago, at about the time many investors would normally have done a regular reassessment of their 401(k) plans’ asset allocations, the markets were in too much chaos to make the exercise practical. But now it’s time to face reality. How can you rebuild your 401(k)?

The good news is that you can recover from sizable losses, even if you’re approaching retirement.

The bad news is that you only have a few options for recovering. You can save more, invest more aggressively or work longer. The easiest option is to work longer.

Savings certainly matter – but for many of us, saving more isn’t a viable option because we’re strapped as it is.

If you plug figures into the Fidelity Financial Engines model, you’ll find that working longer is the best way for a 50-year-old Average Joe to get a 401(k) back on track.

If Average Joe had a $500,000 portfolio, was contributing $1,000 a month to his 401(k), and was planning to retire at age 65, the model determined that increasing his savings by $100 a month or changing his investment mix from 70% stocks and 30% bonds to 60% stocks and 40% bonds helped only a little.

But if Average Joe worked until age 67 instead of 65, it would have a dramatic effect.

According to the analysis, 50-to 60-year-olds can get their 401(k) plans back on track after recent stock market losses without any additional savings if they work just two or three more years.

The Pros and Cons of Investing in an Index Fund

Popular investing wisdom holds that index funds generally perform as well as the market and have lower expenses than traditional mutual funds – but is that true?

An index fund seeks to match the returns of a specific index by holding all – or in the case of very large indices, a representative sample – of its securities.

Since the stocks in an index change infrequently, the stocks in the index fund also change infrequently.

Why do people use index funds?

For the past 50 years ending on December 31, 2008, the U.S. stock market, as represented by the S&P 500 Index, provided investors with an average return of 9.19% per year.

Some investors earned more than 9.19%, while others didn’t fare as well.

So some investors figure that it’s better to imitate the index – and hopefully obtain similar returns – than it is to try to beat the index.

The downside to index funds, however, is that they perform similarly to the market not just when the market is up but also when the market is on a downswing.

They can also underperform the market due to expenses and the percentage of their portfolios held in cash.

For some investors, index funds may be a good choice.

They often have lower expense ratios and less portfolio turnover – and thus fewer capital gains taxes – than do traditional actively managed funds.

And because they imitate the market, they usually perform similarly to it.

One thing to keep in mind, though, is that past performance is no guarantee of future results.

Index returns assume reinvestment of all distributions and do not reflect any fees or expenses.

What type of fund is best for you?

The best course of action is to consult a financial advisor who is familiar with your circumstances and goals and who can give you more personal guidance.

Bereavement and Social Security: The Facts

Thinking about a spouse’s death is not something anyone likes to do, but it’s an important part of financial planning. If your spouse dies, will you receive any or all of his or her Social Security benefit?

You could – but it depends on your age when your spouse passes away.

Let’s say you and your spouse both are eligible for or receive separate Social Security benefits, and your spouse dies. You can either collect your own benefit or your survivor benefit – but not both at the same time.

You’ll want to choose the greater benefit – and which one that is depends on whether you have reached your full retirement age, as defined by the Social Security Administration, when your spouse died.

If you’ve already reached full retirement age: You’ll be eligible to receive your deceased spouse’s full benefit, assuming your spouse’s benefit is larger than yours.

As an example, let’s say you’re 68 and collect $1,000 a month, and your husband is 70 and collects $2,000 a month. If he dies, you’ll be able to collect his $2,000 a month instead of your $1,000, since you are past your full retirement age.

If you haven’t reached full retirement age: You’ll be eligible to receive a fraction of your deceased spouse’s full benefit, just as you would if you took your own benefit early.

As an example, let’s say you’re at least 60 but have not reached your full retirement age when your spouse dies at age 70.

You could collect between 71% and 99% of your deceased spouse’s benefit, depending on your age.

Try these resources for more information:

•    SSA Publication 05-1007, What You Need to Know When You Get Retirement or Survivors’ Benefits

•    SSA Publication 05-10084, Survivors’ Benefits

•    SSA retirement age calculator. All at

•    Your financial advisor

Managed Futures: Are They Right for You?

Returns on managed futures are appealing, but investors may want to look before they leap.

A managed future is like a mutual fund, except instead of stocks or bonds, it holds futures contracts and similar securities. Managed futures are overseen by commodity trading advisors (CTAs).

Managed futures may seem to offer solid returns in any economic environment. The Barclay CTA Index of managed futures rose 14% in 2008, beating the S&P 500 index by leaps and bounds. It has gained an annual average of 12.2% since 1980, losing money in only three of those calendar years.1

But are managed futures right for you? Probably not. Here’s why:

•    Performance may not be as good as it seems: The historical performance of managed futures is based only on the results of those managers who choose to report their returns to industry databases, meaning the worst funds may not get into indices.

•    Fees are high: You may have to pay an introducing broker to get into a managed future. Once in, managed futures charge a management fee, plus a percentage of any “new new profits.” All told, the fees can reach 6% to 8% annually.

If you’re looking for an alternative investment strategy, we recommend you contact your financial advisor, who can point you in a suitable direction.

1Index returns assume reinvestment of all distributions and do not reflect fees or expenses. It is not possible to invest directly in an index.

Why Municipal Bonds Offer Opportunities Today

The turmoil in the credit markets has made many investors nervous – but it has also created opportunities for those who are willing to consider municipal bond funds.

Municipal bonds are issued by state and local governments and agencies, such as counties, cities, schools and water districts. They’re used to finance public projects such as roads, schools and airports and certain private projects, including nursing homes and assisted living centers.

Traditionally, investors have purchased municipal bonds primarily because they offer tax-free income: The interest on municipal bonds is exempt from federal taxes, and because most states don’t require their residents to pay state and local taxes on interest received from bonds issued by political entities within those states, it may also be exempt from state and local taxes.

The Pre-Refunded Bond

Today, many investors are interested in a specific type of municipal bond called a pre-refunded bond, because these bonds offer additional benefits.

A “refunding” occurs when a municipality issues a bond at a lower rate to retire a bond that was issued earlier at a higher rate. In most cases, municipalities will spend the money raised by the new issue on government debt such as Treasuries and then, at a later date, use these securities to retire the older bond.

Why Consider these Bonds

Why consider municipal bonds that are candidates for refundings? First, these pre-refunded bonds are essentially backed by the federal government, but they generally offer a higher yield than do Treasuries. Second, if the municipality does cash the bond, the bondholder has received a yield that one might expect to receive from a longer-term bond for a short amount of time. As a result, prices for pre-refunded bonds usually rise.

Buying interest for these bonds is higher now than at any time since the early 1990s, and as a result, they may be hard to find. Your financial advisor can help you locate them.

Investing in Your Values with Socially Responsible Funds

Many investors turned off by the questionable business practices that made headlines during the financial crisis are seeking to align their personal values and their retirement savings by making “socially responsible” investments.

So-called socially responsible mutual funds have been around for a while. Typically, they don’t invest in companies that create products or have practices deemed undesirable. In some cases, that may mean avoiding companies that manufacture alcohol or tobacco or are involved in gambling; in other cases, it may mean avoiding companies with poor pollution records or those involved in nuclear energy.

After those criteria are met, these funds typically screen for companies in the same way other funds do – by looking for strong balance sheets and good growth prospects. They may also consider factors such as workplace diversity and environmental impact.

In the past, socially responsible funds were primarily available to individual retail investors. But today, more investors are demanding – and getting – these funds as options in their retirement plans. The question is, will socially responsible funds outperform the market any better than traditional funds? That remains to be seen.

If you think the governance offered by socially responsible funds is good for your portfolio, you may want to speak to your financial advisor. He or she can help direct you to a fund that meets your values as well as your investment goals and risk tolerance.

Why It’s Important to Understand the Wash Sale Rule

Most investors are familiar with the “wash sale” rule – but that doesn’t stop them from trying to find ways around it, especially in today’s market environment.

A wash sale occurs when you sell a security at a loss, then buy back the same security (or what the Internal Revenue Service calls something “substantially identical”) within 30 days. The idea is to take a capital loss and keep the security – in essence, to have your cake and eat it too. Clearly, the IRS frowns upon this.

Some people trying to find a way around the wash sale rule mistakenly assume it refers only to buying back a security 30 days after the sale – but it applies before a sale as well.

What does that mean? To illustrate, let’s say you buy a stock and hold it for several years. You then purchase additional shares and sell the initial shares at a loss a few days later. You then deduct the loss.

That seems like it would work – but it doesn’t, because the wash sale rule still applies. You can’t sell a security then buy the same security 30 days before or after the sale.

Some areas of the law are fuzzy, as is the case with many IRS regulations. For example, the definition of “substantially identical” is unclear. And the wash sale rule can get confusing when used with derivatives, which are sophisticated securities that derive their value from the value of underlying securities.
As a result, you may want to consult your financial advisor before buying and selling any security

Ways to Find Companies That Won’t Cut Dividends

For many investors, one of the most challenging aspects of a recession is the decline in dividends that often accompanies it.

First, let’s review dividends. When a company earns profits, it often pays a share of those profits to its shareholders (directly or through mutual funds). These profits are called dividends. Typically, dividends are paid by well-established companies that generate regular profits but are too mature to grow significantly.

In a recession, many companies cut or suspend their dividends, and we see that happening now. According to Standard & Poor’s, a record number of companies cut their dividends in the first quarter of 2009. As a result, dividend decreases outpaced increases for the first time since S&P started tracking dividends in 1955 – resulting in a net dividend decrease of $77 billion.

How can you predict whether a company will cut dividends?

The size of the company. Many of the earliest dividend cuts were made by large companies. Although smaller companies could be next, the unfavorable investor sentiment resulting from cuts by larger companies could inspire smaller ones to prevent cuts.

The type of stock. Dividend cuts on preferred shares, which are hybrid securities that resemble both stocks and bonds, are rarer than dividend cuts on common shares.

A history of raising dividends. By regularly committing to distributing more of its earnings to shareholders, a company may be signaling that its prospects are good.

Where companies get the money to pay their dividends.
Many financial advisors like to see dividends supported by current earnings rather than a company’s nest egg of cash and marketable securities.

Of course, you may not be comfortable poring over a company’s books and researching its history. In this case, you can always help protect yourself from a dividend cut via two standbys: consult your financial advisor, and maintain a diversified portfolio.