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Warren Buffet Retirement Planning Rules: What Would Warren Buffet Do?

Warren Buffet Retirement Planning Rules: What Would Warren Buffet Do?

Jan 2021

Everyone can learn some valuable lessons from Warren Buffet, arguably the most successful investor of all time. Buffet has two strict rules about investing that anyone would find, well, frustratingly simplistic. The first – “don’t lose money,” and the second – “don’t forget rule number one.” But for Buffet, winning can only happen in the stock market. Obviously, when your money sits in low yielding savings accounts it is impossible to win. In fact, if your money is earning below two percent interest, you lose each day to inflation. Over a twenty-year period, your dollars are worth just a fraction of what they were.

What Does Buffet Know that We Don’t?

Over time, Warren Buffet has graciously imparted bits and pieces of his knowledge with us average investors, and for those who really paid attention, they have managed to gain many of the advantages of his practices. See, Buffet adheres to history and he doesn’t fight the facts, while average investors tend to let their emotions guide their decisions. Buffet will be the first to tell you that emotions and investing don’t mix.

  • Fact #1: Bear markets do happen – but then, so do bull markets
  • Fact #2: The average duration of a bear market is 11 months as compared to 32 months for a bull market
  • Fact #3: The average bear market decline is 27 percent; the average bull market gain is 119 percent
  • Fact #4: Since WWII there has been as many bear markets as there have been bull markets, yet the stock market has still managed to advance more than 100-fold.

The takeaway for investors is that the losses of the bear markets have only been temporary while the gains of the bull markets are permanent. With each bull market, the losses of the preceding bear market decline were made up and the gains of the prior bull market were extended. In that perspective, bear markets are nothing more than a temporary interruption of a longer term uptrend. So, the real risk is not in the next market decline of 27 percent; the real risk is not being in the next 100 percent market increase.

How to Invest Like Buffet

The most notable successful investors, such as Buffet, are long term strategists with almost super-human patience. They believe in diversification, buy-and-hold, investing in value with a focus on wealth preservation, not wealth building – apparently a lot easier said than done for most people.

But, there are enough successful high net worth investors around from which we can glean the best practices that, when applied by any investor, can provide the edge that everyone seeks.

  • First: Develop clear and meaningful investment objectives. Many investors focus on investment performance, and, consequently, they often find themselves chasing it by trying to time the markets and making risky buy and sell decisions. Successful investors focus only on their specific objectives and use them as their sole benchmarks as opposed to some irrelevant stock market benchmark.
  • Second: Building and preserving wealth is as much about managing risk as it is managing investment performance. The key is to diversify your asset classes in a way that they act as counter weights to the various forms of risk, such as market risk, inflation, risk and interest rate risk. Periodically your portfolio should be rebalanced to ensure that the exposure to any one risk as not increased due to changes in your portfolio values.
  • Third: Buy stock insurance. Buffet and other successful investor hedge their portfolios with financial instruments called put options that limit their losses when stocks decline. The average investor, especially those closer to or in retirement might be better off by hedging their portfolio and their retirement income with annuities. With fixed indexed annuities a portion of your portfolio can still have access to stock market gains without having to endure the losses.
  • Fourth: Surround yourself with qualified and trusted advisors who have your sole interests in mind when providing you with guidance. The most successful investors rely on a team of advisors that provide unbiased advice in formulating the most appropriate investment strategy to meet their needs.

Not everyone has the courage or the patience (or the billions) that Buffet has to stay fully invested in the stock market, yet constant exposure to equities is vital if you are to have any chance of a secure retirement. And no one can pick individual stocks like Buffet either, nor should they try. Buffet has a fully diversified portfolio of hundreds of stocks invested across many industries, global regions and asset classes. You can achieve the same diversification with index funds or exchange-traded funds with the ability to allocate your assets broadly to reduce risk and volatility. Then, if you can exercise the same level of discipline and patience as Buffet, and hedge your portfolio and retirement income with annuities, you too can win by not losing.

Tags: retirement income, retirement planning, retirement

Securities are offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services are offered through NFP Retirement, Inc., a subsidiary of NFP Corp. (NFP). Kestra IS is not affiliated with NFP Retirement Inc. or NFP.

This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. NFP Retirement Kestra IS and Kestra AS do not provide tax or legal advice. For informational purposes only. Please consult with your tax or legal advisor regarding your personal situation

Trading option security contracts involves risk and may result in potentially unlimited losses that are greater than the amount you deposited with your broker. Because of the leverage involved and the nature of option contract transactions, you may feel the effects of your losses immediately. Under certain market conditions, it may be difficult or impossible to liquidate a position. Under certain market conditions, it may also be difficult or impossible to manage your risk from open options positions by entering into an equivalent but opposite position in another contract month, strike price, through another market, or in the underlying security. You may be required to settle certain option contracts with physical delivery of the underlying security. All option contracts involve risk, and there is no trading strategy that can eliminate it. You should thoroughly read and understand the customer account agreement with your brokerage firm before entering into any transactions in trading security option contracts.

1. http://www.stowefinancialplanning.com/blog/planning-new-normal-retirement

NFPR-2019-86 ACR#324841 09/19

Planning for the New Normal Retirement

Planning for the New Normal Retirement

Jan 2021

The need for retirement planning didn’t really exist until well into the 1970s. Up to that point, people worked until age 65, spent a few years in leisure through their life expectancy which was about 69. Many retirees of that era were able to coast into retirement with a cushy pension plan. Over the next few decades, as life expectancy continued to expand, as did the number of years in retirement, financial planners came up with simple rules of thumb for determining how much a person would need at retirement in order to maintain his or her lifestyle.

That’s where the 70 percent rule came from. People were told that they would only need 70 to 80 percent of their pre-retirement income to preserve their lifestyle throughout their golden years. While that may have worked for retirees back in the 1970s and 80s, it could spell disaster for today’s retirees.

It’s not your Grandfather’s Retirement Anymore -Today’s retirees face a whole new set of financial challenges. Many are carrying mortgages and other debt into retirement. Health costs have increased nearly ten-fold. And, because we are living longer these days, health care costs will consume an increasing piece of the retirement budget. About 50 percent of today’s retirees find themselves sandwiched between their own kids, who may still be in college, or struggling to break free of the nest – and their aging parents who may require assistance in their daily living. Some retirees are actually finding that their retirement income needs may be as much as 110 percent of their pre-retirement needs. So much for the rules-of-thumb.

Better to Manage your Risks than your Investments -Today’s retirement savers are finding that there are no certainties in the markets, or in the economy. The only certainties that do exist are the risks they face leading up to and all the way through retirement. The two biggest risks all retirees must confront are longevity risk and inflation risk. Unlike market risk, which can be avoided by simply taking your money out of the market, these two risks are inescapable. And, most people are either unaware of these risks, or have not fully grasped their significance in planning. It seems like decades ago that we experienced any real inflation. And, it has only been in the last couple of decades that the life expectancy rates have been accelerating.

For today’s retirees, longevity risk is a new phenomenon. While people may understand that they can expect to live longer, few realize that age longevity is constantly expanding, meaning that the higher your attainted age, the greater your life expectancy. The risk of longevity is further compounded by the risk of inflation. Even at an average inflation rate of 3 percent, the cost of living will double in 20 years which could put many retirees’ life style in jeopardy.

Retirement as a New Life Cycle -For this reason, most retirees are viewing their golden years not as retirement, but as a new life phase in which earnings from some form of employment or a business may be a necessity. But who says that is a bad thing? Many people can’t imagine themselves coasting through 30 years of life without being able to apply their skills or knowledge in a meaningful way. For many, it is an opportunity to regenerate themselves through new opportunities and new knowledge. Instead of an ending phase of life, retirement will be looked upon as a new life cycle in and of itself.

The prevailing attitude among a growing number of pre-retirees is that they aren’t going to limit themselves by trading a life of work for a life of leisure; rather they are going to take control and trade in work that they no longer want to do, for work they will really like to do.

Today’s retirees are finding that retirement requires at least as much psychological and emotional preparation as it does financial preparation. So, retirement planning needs to include a thorough assessment of human assets and liabilities along with an assessment of financial assets and liabilities. It is no longer enough for retirees to know how much money they will need to live; they need to know how they will be able to make the most of this new life stage.

By focusing primarily on financial issues, traditional planning reduces retirement to an economic event with its financial objectives marked by a finish line. The dangerous misconception it perpetuates is that, if you hit the finish line, on time and on goal, your planning is done and you’ll have a successful retirement. While it may address the financial goal of creating a sufficient standard of living, it doesn’t address the larger, more important issue of the quality of life.

Tags: education, retirement planning, tax planning

Tags: investments, managing investments, retirement

How to Make Your Retirement Savings Last

How to Make Your Retirement Savings Last

Jan 2021

At one time, employees worked until they reached their 60s and passed away not long after retirement. However, as life expectancies have reached the late 70s and early 80s, planning for a long retirement is an integral part of managing financial risk. Consumers must plan for longer golden years.

Set a Budget

When your income is reduced, the best way to combat the difference is to pull back on your spending. You already won’t have the expense of a daily work commute, so look for other ways to cut back as well. Set a monthly budget and stick to it, tracking expenses as you go and asking someone to hold you accountable. Over time, you’ll observe spending trends that will help you make reductions and save even more.

Continue Earning Income

One of the best ways to safeguard your retirement savings is to ease into retirement rather than quitting work cold turkey. This could mean going part time at your current workplace or retiring and starting a small job. Retirement is the perfect time to do what you’ve always wanted to do; if you love books, work in a bookstore; if you’ve always wanted to run your own business, consider becoming part of the sharing economy, driving for a ride-sharing service, or shopping for grocery delivery services.

Move

Retirement is a great time to change your location. Since you no longer need to live within a reasonable commute to a business, the world is wide open. Consider moving to a more remote area or another state where the cost of living is much more affordable, and you’ll be surprised by how far your dollar stretches.

Managing your financial risk means making sure you have enough money in the bank to keep you comfortable during retirement. With a little planning and some cutbacks, you can confidently enjoy your senior years.

Tags: help with budget, retirement planning, retirement

Smart Things to do BEFORE You Retire

Smart Things to do BEFORE You Retire

Jan 2021

A lot of people focus on things to do after they retire, but there are a number of things you should take care of before you hit that milestone. Retirement planning specialists can explain the steps that will help you better prepare for retirement and help make this transition successful.

Establish a Plan:

You need to know how much money you’ll have coming in during your retirement, and then balance that against your expenses. Start by creating a budget, listing all your sources of income, and all your likely expenses. You’ll need to make sure your income covers or exceeds your essential expenses. As part of your plan, create a schedule. You need to know when you’ll apply for Social Security and Medicare and when you’ll receive any pension benefits or distributions from your retirement plans. These rules are complex, so you may want to consult with a retirement planning expert at least a year before you retire.

Consider Your Health:

As part of your plan, you need to factor in any health considerations. A medical emergency or major illness can completely disrupt your retirement. People often assume Medicare covers “everything,” but that’s not true. In addition to Medicare, you will probably want to obtain supplemental medical insurance to protect your family and future from unforeseen medical expenses or accidents. You should also review any wills, powers of attorney, medical powers of attorney, and other estate documents to make sure they still represent your wishes. Finally, start focusing on your personal health NOW. Exercise, eat right, and start doing the things that will support your health in retirement.

Set Goals for Your Future:

What do you want your life to be in retirement? Often, people focus on financial planning but don’t actually think about what they will do after they retire. Strong social networks, family and personal relationships, and new opportunities to learn and grow are important components of a happy and successful retirement. The things you want to do will influence many of your financial decisions, so it’s a good idea to figure out what those goals are before you retire.

Tags: help with budget, retirement, retirement planning

Insurance Basics

Insurance Basics

Jan 2021

Insurance may be less about if you’ll need it than when you’ll need it. Anyone who started driving at 16 is likely to have had a claim by the time they’re 34. More than 1 in 20 insured properties reported a claim in 2016, according to Insurance Services Office (ISO). And according to the U.S. government, someone who turns 65 this year has an almost 70% chance of needing long-term care services, which are generally not covered by Medicare.

A network of prudent insurance coverage is the foundation of any solid financial plan. A single healthcare crisis, incident of property loss, or other liability can quickly wipe out a lifetime of savings. The types of circumstances that may require the use of insurance may not be a subject we like to think about, but it’s one of the most important issues to address when planning for the financial security of you and your family.

Here are some common types of insurance available and the associated risks they can help address.

Health Insurance:

Many people receive health insurance through their employer, while others purchase it independently. Health insurance can cover everything from preventive care, treatment for injuries and disease and mental health treatment, as well as products and equipment necessary to address various medical needs. Your insurance may dictate from whom and in what types of facilities you are eligible to receive treatment. It will also indicat what your responsibilities are for payment in terms of deductibles and any limits to your coverage. It is critically important that you review your health insurance on an annual basis and fully understand your policy.

Auto Insurance:

Your automobile insurance is designed to cover property damage and personal injury in the event of an accident. The amount of coverage for these occurrences can range dramatically from policy to policy. With car insurance, you not only have to be concerned about covering your own liability if you’re at fault — but damage that may be caused by uninsured drivers as well. One in eight drivers are uninsured according to The Insurance Information Institute. Luckily uninsured motorists coverage for both property damage and bodily injury is available, although not all states require it.

Disability Insurance:

This covers loss of income resulting from injury or illness. Many people receive disability insurance from their employer, but not everyone does — so it’s important to understand whether or not you have this benefit. If you do not have disability insurance through your employer, you may wish to buy a private policy. You may elect to purchase short-term disability insurance, long-term disability insurance or both. Many people think they’re automatically covered for disability losses through Social Security disability, otherwise known as SSD. However, SSD which is administered through the Social Security Administration, has stringent requirements:

  • You are unable to perform the work you did before.
  • The SSA determines you are unable to do other work due to your condition(s).
  • The disability is expected to last at least a year or lead to death.

Private disability insurance eligibility requirements are often less strict and no not require a complete inability to work in order to receive benefits. And it is possible to receive SSD and benefits from private disability insurance simultaneously.

Long-term Care Insurance:

This can cover medically necessary assisted living or nursing home care —or if you require help at home to carry out daily activities. Many people mistakenly assume that Medicare pays for such services, but this would be a faulty assumption. With Medicare, coverage is generally limited to rehabilitation from an acute injury or illness where a full recovery is anticipated as opposed to long-term care needed in old age as a result of gradually declining function. This type of care is extremely costly. Here are some averages according to government statistics:

  • $6,844/month for a semi-private room in a nursing home
  • $7,698/month for a private room in a nursing home
  • $3,628/month for care provided in an assisted living facility

Life Insurance:

This coverage pays a death benefit when the insured passes away. It’s particularly important for breadwinners with family members who depend on their income. Life insurance needs often change over time as children grow up and move out of the house. Here’s an article that explains some common types of life insurance (link to previous life insurance blog here). This may be the type of insurance people don’t like to think about the most — but in the event of the unthinkable, it may matter the most.

Property and Casualty Insurance:

P&C can cover your home and possessions as well as provide personal liability protection should you injure someone or damage their property. It’s a broad category of insurance. Here are some common types:

  • Homeowners Insurance:insures your home and possessions in the event of theft or damage. It’s important to know your deductible for different types of losses, and any limitation for certain types of events, such as floods and hurricanes.
  • Renters Insurance:this insurance is specifically designed for renters, who do not own their dwelling. It is substantially less expensive than homeowners insurance, and can cover property and liability as a renter.
  • Condo Insurance: These policies can mitigate risks specific to condominium owners,including portions of the structure they’re responsible for, as well as assessments levied against owners to pay for repairs or improvements to commonly owned elements.
  • Umbrella PolicyAn umbrella can extend the coverage of your auto and homeowners insurance policies. Carriers will generally require insured individuals to have a minimum amount of coverage already in place before they will write an umbrella policy.

Risk is a part of life — there’s no getting around that. But with solid insurance coverage, you just might be able to sleep a little better at night no matter what the future may hold.

Reference:

https://www.iii.org/fact-statistic/facts-statistics-homeowners-and-renters-insurance

https://longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html

Tags: Baby Boomer, behavioral finance, education, finance, insurance, millennials, retirement planning, risk management


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