Financial planning for seniors – There is a plethora of financial planning for seniors’ advice available and an equally voluminous amount of investment options as well. Your own tolerance for risk and level of affluence to a large extent will determine what type of asset mix you are comfortable with. The evolution of our global markets has enlarged your investment choices whether retirement is looming soon or years from now. Here are some ideas and alternatives.
Stock Market Portion
There a number of ways to participate in the stock market depending on how much risk you are willing to assume under financial planning for seniors strategy. One question you are going to ask is how much in domestic equities? Given that, are you going to buy large-capitalization companies, mid-cap or small-cap stocks? What industries? The odds are fairly good that people retiring are going to opt for more conservative companies that pay a dividend.
Another option one could consider is international/foreign markets. There are some additional risks one should be aware of in this category. First is currency or foreign exchange risk. This is typically a longer-term risk but can have short term consequences as well. In addition to that, there is a marked difference between developed countries and markets and emerging markets. Liquidity is also an issue in this case.
A third category to consider is investing in exchange-traded funds (ETFs) or index funds that are pegged to a highly recognized index such as the S&P 500 in the United States, the FTSE 100 in the United Kingdom or the Nikkie 225 in Japan. There other equally important indexes around the globe. Additionally, you should consider whether either of these types of funds is passive or actively managed.
Bond Market Portion in Financial Planning for Seniors
Fixed income investments share some of the same risks and rewards that equities do. Your first choice is domestic or international markets. In this case, currency risk is a consideration even if one buys sovereign debt.
The second risk is volatility vs. reinvestment risk. Volatility is measured by a concept known as “duration” which is a combination of maturity and cash flow from interest payments. Longer maturity issues have a larger duration than short ones. Cash flow from interest payments affects the duration. Bonds at a premium have a shorter duration than at par and both have a shorter duration than a zero-coupon bond.
The third major risk is credit risk. Sovereign debt has the least amount of credit risk. Next government agencies, then investment-grade corporate debt and last are less than investment-grade debt, commonly known as “junk” bonds. The less creditworthy an issuer is the greater the income but the greater the credit risk. There are also a number of choices in funds, be they passive or actively managed.
For the more affluent investor that is not risk-averse, there are “alternative” investments. Within this broad category are choices such as hedge funds, equity real estate and private equity. There are also different strategies within each group. The whole idea behind alternative investments is a “non-correlated” return. In other words, the return is not dependent on broad market performance.
One usually has to be an “accredited investor” to participate in alternative investments as they are quite risky and often illiquid in nature.
Asset – Liability Management
The concept of matching assets to liabilities is used by banks and pension funds and can be used by you as well. Depending on when that retirement date is, you should make some strategic decisions now. The bottom line is, once you do call it a day match the income from your investments to the bills you have to pay.
Defined contribution plans have turned into defined consternation plans. There are many retirees and even more Baby Boomers getting ready to retire. The global market meltdown during the past eighteen months has caused very real worries as many people are wondering how their retirement is going to be affected. Plan sponsors are taking action to see that retirement plans are as well-funded as they can be.
Research by the consulting firm Greenwich Associates has shown some startling recent trends because of the performance of the equity markets over the past year and a half. The percentage of assets allocated to stable value funds dropped from 35% to 19% from 2007 to 2008 while at the same time assets allocated to target-date funds rose from 35% to 53%.
Plan participants are understandably concerned, as for many these retirement funds comprise the bulk if not the entirety of their retirement assets. Plan sponsors are doing what they can to help their employees cope with the failure of the equity markets and to learn to act rationally and not panic by abandoning the equity markets at the worst possible time.
Many plan sponsors are doing what they can to help their employees understand that the current economic and market conditions are severe in a historical context. They are doing their best to help people understand that by continuing to invest as they have will help them buy assets that are under valued by almost any measure.
Plan participants should understand some basics: In many cases, such as in the United States, contributions are made pre-tax and that over time, assets do grow on a tax-deferred basis. Payroll deductions help the employee reap the benefits of dollar-cost averaging and that their monies are watched over by investment professionals and that fees are more cost-effective than if they did it by themselves.
Although there are some subtle differences between defined contribution plans and defined benefit plans, by far the most popular asset class in active managers of domestic equities followed by the company’s own shares and them passive managers of domestic equities. International equities come next followed by stable value investments. This last class sees a large disparity between DC and DB plans.
Smaller asset classes seen are guaranteed investment contracts, balanced funds, target retirement date, target-risk funds, real estate investment trusts (REITs) and money market funds.
For those that wish professionally managed retirement accounts, many plan sponsors offer some choices: The vast majority offer target retirement date funds while about a quarter, offer managed accounts. Approximately half have target-risk funds while a fifth have real estate investment trusts and a small percentage have commodity funds and hedge funds.
Institutional investors are committed to long-term diversification with increasing allocations to not only international markets but alternative asset classes as well. The choice is yours.