The 1990s: a decade of financial responsibility.
In 1985, Paul and Marian, a St. Louis couple in their early 50s, were on a roll. As a senior executive, Paul made an excellent salary and had invested successfully in small company stocks and several limited partnerships. The couple spent their investment profits of nearly $50,000 on a $26,000 power boat, vacations to the Caribbean and Colorado, and several home-remodeling projects. They enjoyed life thoroughly, but like the hedonistic grasshopper in Aesop's fable, they played the summer of their lives away with little thought to leaner times ahead.
Fast forward to 1994. Bob and Lois, both 60, of suburban Detroit, bear a much closer resemblance to the same fable's industrious ant, who stored food and built a sturdy home in the warm months to see him through the long, cold winter ahead. Like Paul and Marian, they are doing well in the stock market. Bob makes as much money as Paul, but instead of spending it all, he invests in an IRA and puts the maximum allowable into his 401(k) retirement plan. He also spreads his investment risk among stocks, bonds and cash. Unlike Paul and Marian, Bob and Lois make saving for the future a priority, typifying what experts predicted as being the more conservative, responsible 1990s.
Experts agree that as the decade turned, a shift occurred in Americans' perception of their own financial security. The rampant consumerism that characterized the '80s has been replaced by a far more cautious approach to financial matters. Factors like the October 1987 stock market crash, the collapse of the savings-and-loan industry, falling interest rates, skyrocketing health-care costs and, most recently, fears of recession brought on by the Persian-Gulf crisis paved the way.
"I think two things led to this change in attitude," says Kimberly D. Overman, CFP, a financial planner with INVEST Financial Corporation in Tampa, Fla. "In the '80s, high interest rates and economic growth encouraged an attitude of prosperity and risk-taking. When interest rates fell, so did income-producing opportunities, and people started looking for other conservative investments. Also, factors like soaring college education and health-care costs, longer life expectancies and responsibility for aging parents have alarmed people and convinced them they need to save to meet these needs."
Ross Levin, CFP, of Accredited Investors Inc. in Minneapolis, agrees. "In the '90s, we'll see less debt, more savings and a general return to basics. The people we held up as heroes in the '80s, like Donald Trump and Michael Milken, have fallen off their pedestals. I think the '90s heroes, instead, will talk about responsibility, not excesses. They'll be practical, not promotional."
According to a survey released last summer by the International Association of Financial Planners, Americans overwhelmingly view the 1990s as a decade of increasing financial responsibilities. Some 61 percent of those polled say they are less inclined to take financial risks, and 62 percent plan to save over the next decade.
A majority (86 percent) think severe inflation is likely to be a problem in the '90s, and 69 percent fear a deep or prolonged recession is likely. Nearly 66 percent say there will be less opportunity for retirees to be self-sufficient in the coming decade.
Saving enough money for a comfortable retirement is of special concern to an increasingly large group of Americans. The 65-plus age group is already 12 percent of the population and is projected to reach 25 percent by 2030, according to the U.S. Census Bureau. In spite of longer life expectancies, a myth persists, according to Money magazine, that most people need to save for no more than five or 10 years of retirement. Recent studies show that people consistently under-estimate how long they'll live. In one study, men guessed they would reach age 78, but most lived to 84. Women thought they'd live to be 80, but 88 was more accurate.
In years past, employees spent many years with the same company, building a sizable pension fund, accumulating Social Security benefits and looking forward to a comfortable retirement. Health-care costs were manageable, and Medicare could be counted on to pick up any slack after retirement.
It's a different and far less certain world today. Workers change jobs more often. Employers have cut back benefits considerably, necessitating pension plan supplements from other retirement funds. Medical costs have soared out of sight. (Even now Medicare pays only half the bills of the average person over 65). Those retiring fairly soon will probably be able to count on Social Security, but many fear the system will be eliminated entirely in years to come. "I don't even include Social Security in financial planning unless someone is retiring within the next five years," notes Overman.
An annual national poll of 400 adults ages 45 to 64 conducted by the Wirthlin Group for Money magazine revealed a paradoxical mix of optimism and scanty financial preparation for retirement. Eight out of 10 questioned said they're looking forward to retirement, yet just 24 percent claimed to be confident about maintaining a comfortable standard of living. Twenty-three percent admit they're saving nothing at all, 45 percent fear they'll outlive their money, and 69 percent are concerned about being overwhelmed by health-care costs.
How do you go about ensuring that your money will see you through a long, financially secure retirement? The rule of thumb is that you'll need about 70 percent of your current income to maintain your standard of living. Planners agree the first step should be to think carefully about what kind of retirement life you want. "Ask yourself these questions," says Jerry Burg, CFP, CLU, ChFC, of Acacia Financial Center in Phoenix: "What are you saving for? What do you want and need? And what are your resources, both current and future?"
Talk to your spouse, if you're married, and agree on goals. Review your estate plan, pension benefits and healthcare coverage. If you're still employed, find out if your medical policy will cover you to any extent after retirement. In addition, Levin advises establishing appropriate lines of credit now. You may also want to consolidate loans with non-deductible interest and pay them off with a deductible home mortgage.
"I think the issue of the '90s could be the aging population," says Wil Heupel, CFP, of Accredited Investors in Minneapolis. "More and more older adults will have to care for their parents. When we do a retirement plan, we ask about parents as dependents, not just people's kids, and we look at the parents' assets as well."
Do you need a financial planner or other specialist to help you devise a savings plan? Unless you're very knowledgeable about money and investments, you could well benefit from the advice of an expert. Find someone you trust and with whom you feel comfortable, ask a lot of questions, ask for references, and call other clients.
The Risk Factor
Experts agree, in general, that the closer you get to retirement, the less financial risk you should take. "As people get older, they can't re-create money like they used to, nor do they have as much time to recover from financial mistakes," observes Burg. "We promote 'effective saving.' That's not keeping money under a mattress or in a bank savings account, where it's actually losing money because of inflation, but finding safe investments with appropriate growth."
"I urge people over 50 to continue investing," adds Michael Carey, CFP, vice president of Alexandra Armstrong Advisors Inc. in Washington, D.C. "One problem I run across frequently in that age group is that people figure they'll convert everything to bonds and live off the income. That's a big mistake, because it doesn't give any opportunity for growth."
"I find that most older people are more conservative than they should be," agrees Frank Sinclair, first vice president-investments of Advest Inc. in Clearwater, Fla. "Many people nearing retirement put their money in 'safe' investments like CDs, Money Markets, GNMAs (Ginnie-Maes) and short-term government securities, assuming they won't live much longer, but they nearly always do. Those very conservative assets don't grow enough to help them. I advise clients close to retirement to keep between 20 percent and 30 percent of their portfolios in growth investments."
Planners and investment counselors like Sinclair mention deferred annuities, mutual funds, bonds with staggered maturities, and stocks as popular retirement planning vehicles with good growth potential in the '90s.
"My advice is to diversify," Overman stresses. "Don't put all your eggs in one basket. As the stock market crash of '87 showed, that's just too risky. You need a balance between cash, stocks and bonds, and that balance should depend on how close you are to retirement. If you retire at 65 and live to 95, you're going to need a percentage of your investments geared to growth to keep up with inflation."
A common mistake, financial planners agree, is to become discouraged when retirement funding isn't begun until late in the game and, as a result, do nothing about it. "Put even a small amount of money away consistently," advises Sinclair. "Even with just a few years to retirement, every little bit helps, and you'll be surprised how much you can accumulate. It's never too late to start saving."
Do financial experts see any good news amid the caution and concern about the coming decade? There are some very heartening signs, particularly for those nearing retirement. "What I'm finding is that people over the age of 60 weren't as caught up in the '80s materialism as the Baby Boomers," notes Carey. "A lot of them grew up in the Depression and still have that feeling that they can never have enough. They just don't have as many bad habits to undo, and many of them have been saving all along."
Nancy N. Bell is a freelance writer in Tampa, Fla.
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|Title Annotation:||investing for financial security|
|Author:||Bell, Nancy N.|
|Date:||Jan 1, 1991|
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