Threats to Retiree Investors

The sluggish economic recovery is a threat to everyone’s financial security. But for retirees, that threat is multiplied.

Retirees don't have the luxury of the long time horizon that younger counterparts have, and because retirees are making account withdrawals, they're more susceptible to market volatility.

And going back to work to replenish lost savings becomes less and less viable the older you get.

Here are the six threats to retiree investors — and tips for how to beat them.

1. Time

A lack of time prohibits the usual means of ringing out risk — from holding an investment over a long time to dollar-cost averaging. It also means you won’t have as much time to recover from a catastrophic market event like the recent financial crisis.

So retirees need to, plain and simple, take less risk.

Some people tend to think that a person has risk tolerance based on the amount of money they have, but it should be based on the person’s ability to make up a loss.

Aside from choosing less-risky investment options, retirees can also be smart about locking in profits.

Individuals nearing retirement and those with the need to depend on investment income to cover daily expenses may wish to select investments that lock in gains and provide a guaranteed income stream.

2. Trust

The older you get, the more you have to rely on others. And especially if you don’t really understand the financial stuff — you have to be very careful who you place your trust in.

Retirees should ask the hard questions and do their homework before turning over their money to a financial-services firm — even if you get a referral from a friend. (Remember: Bernie Madoff relied on friends telling friends about his great returns!)

But don’t let your guard down after you hire a financial adviser: be cautious that if anything seems out of the statistical norm — super high returns or super low prices, it could be scam, so do a little extra research of your own.

And if anyone rushes you to invest in something — raise an eyebrow. Your financial adviser should always be willing to answer as many questions as you need — and always make sure you’re comfortable before investing your money.

Remember: They work for you — not the other way around.

3. Technology

When you hear about the “next big thing,” a hot sector like technology that’s going to bring investors mega returns, it’s easy to get sucked in.

But when you’re a retiree, you have to act your age! Not every new company in that sector is a sure thing and if you pick the NOT sure thing — you don’t have time to make up that money.

As a rule, be wary of anything priced below $5 a share.

And, if you absolutely, positively insist that you MUST invest in a hot, young company — make sure it’s no more than 1 percent of your total portfolio, he adds.

That way, you’ll never wonder “what if” — and if it doesn’t work out, you won’t lose the whole farm!

4. Taxation

Pay attention to the taxes your retirement account is subject to — and find ways to keep them from putting a hole in the bottom of the boat and sucking out your life savings.

Estate taxes will be on the rise again next year and capital-gains taxes are always lurking when you have stocks that do well. So, consider gifting those stocks that have done well to your kids and grandkids — you can give up to $13,000 per person.

Also consider converting some of your retirement account to a Roth IRA, which is tax free, but beware of tax traps you could be subjected to during the transfer. Check out a site like RothIRA.com for the latest laws, information — and potential tax traps.

Another line of defense is to get more life insurance. Life insurance is tax free, and your kids and grandkids will get the check without with being held up in probate, the legal process of divvying up an estate.

5. Television

We tend to trust the people we see.

But you have to be very careful when you’re watching a program where someone on TV is advising you to buy or sell a stock or other investment. Take it as a tip but then do your homework on the soundness of your investment and whatever motive the person telling you to buy or sell may have. Is he a short-seller? Do you even know what a short-seller is?

This is why you need to do your own homework.

(FYI — a short seller is a person who’s betting against the stock, so they have every interest in the stock falling because they’ll profit when the stock goes down.)

6. Terrorism

Unfortunately, we’ve seen it too many times in the past few years — from fake anthrax scares to terror attacks — one-time events like this can send a ripple of fear through the market.

Younger investors can afford the time to watch their investments dip, for however long, and they have time to recover. Retirees — who are drawing an income from their account — don’t have that luxury.

Here are a few simple formulas:

First, subtract your age from 90. The resulting number is the percent of your retirement account you should have in riskier investments, like equities.

So, if you’re 50, that’s 40 percent you can have in equities. If you’re 75, that number drops to 15 percent.

If there’s a sudden drop in the market — you’re shielded.

When it comes to individual stocks, if it goes down more than 5 percent — get out. A younger investor has more time to make up the difference — retirees don’t. Better to lose 5 percent — than your shirt.

And finally, if something in the market has you rattled, don’t be afraid to take some money out and sit on the sidelines.

Don’t try to be a hero and stick it out. When it comes to your life savings, the most heroic thing you can do is hold on to it, and pass some of it on to your kids and grandkids.

URL: http://www.cnbc.com/id/39504953/