“Over the past 40 years, the responsibility for making retirement spending and investment decisions has shifted away from governments and corporations and toward individuals.” According to The Floor-Leverage Rule for Retirement paper By Jason S. Scott and John G. Watson, managing the investment risk of retirement savings can be leveraged using this rule, and rule of thumb.
Meet Mary and Martin Shirman. They are your typical couple one year away from retirement. Both have worked their entire adult lives and have managed to retain the bulk of their retirement savings even during the recent economic downturn that saw many like the Shirmans go bankrupt. Martin has been careful about watching over their portfolio and was proactive in keeping up with the latest news about smart investing. He even clued Mary in on things as time went on.
Now, it seems to be crunch time and this couple is asking if they will be secure to live on their retirement savings for the rest of their lives, with the possibility of leaving some for their family. Having an adequate amount of insurance to cover burial and essentials at the needed time is not so much the question because Mary and Martin plan to live another 30 – 40 years. That is more of a possibility now than it was a generation ago and this couple have taken healthy living to a level where they want to plan their retirement lifestyle.
Here are 5 tips that you and the Shirman’s might consider as they are moving towards retirement day:
- The Shirmans have lived in their present home for the last 20 years and while it was a perfect size for them and the 3 kids they raised and who are doing well on their own, it is on the large size for them. They no longer need 6 bedrooms and the ¾ acre lot they’ve been maintaining. While having the space is and has been great, they may consider downsizing to a home that provides them with little to no expense for home and yard maintenance, and provides the other benefits they seek.Leveraging home ownership, even though the mortgage payments are manageable in their retirement budget, the income from a sale could put them in a debt free home, large enough to meet their special needs, reducing their maintenance costs and their tax obligations. It gives them the freedom of time and finances to travel the way they would like.
- Revise your budget and revise your list of possible daily activities and responsibilities. Things will change at retirement, not just your money. When we speak about leveraged retirement, all systems point to what you’ve saved and how to manage or spend it, however, I’d like to draw your attention for a moment to what you are spending and how to spend less.You will only see this saving when you revise your budget. For example, you will not be driving 2 cars to work every day, what will that save you in gas, oil, and maintenance. You will be spending more time at home, so your utilities expense may go up. Because you are not eating out for lunch as often, there could be savings, yet, you may enjoy going out to lunch together more, so the expense may stay the same. Take the time to review what you could potentially save here.
- Depending on your age, gender, and health, there are specialized forms of life insurance that may actually be a great leverage vehicle for you. Meet with your insurance advisor to determine the current status of what you have, whether you need more, need to shift, or need to change some of your coverage. Your individual situation will determine what you need and can afford.The Agency of America says “If it turns out that life insurance is best [or one of the best strategies] for you, the power of leverage can explode the beneficial impact for your retirement years.”
- A recent article in Forbes.com called “Leverage Your Way to a Richer Retirement” discusses two key points that I believe must be considered when the leveraged retirement conversation begins: (1) Will you outlive your nest egg? and (2) Can you play the stock market with a piece of your egg?My best answer to almost any question is ‘It depends!’ Whether Mary and Martin will outlive their nest egg depends on how much their nest egg is, what they are already invested in, and how savvy they are to continue the investment growth instead of just spending. Playing the stock market with a piece of the egg is an again, ‘It depends!’ answer. If your involvement with investing in the stock market or any high risk investment area is based on #5 here, you may have just hit the nail on the head.
- Of the many approaches to building a retirement portfolio, maintaining its integrity and growth potential, yet having a little freedom with which to splurge, this strategy, referred to as floor-leverage, calls for investing your nest egg in two accounts: one filled with safe investments and the other with walk-on-the-wild-side risky investments.
According to “The Floor-Leverage Rule for Retirement,” a paper published in the Financial Analysts Journal, this approach to retirement is the answer. With it, you would invest the bulk of your money earmarked for retirement, say 85%, in low-risk-income-generating instruments (i.e., ladders of zero-coupon bonds or annuities) and the balance, the 15%, in high octane investments (ETFs or mutual funds that maintain a daily 3× leveraged exposure to equities.) Having this investment flexibility allows the freedom that all retirees are looking for with the portfolios they have built up.
So, what’s an ETF? Investopedia.com defines an ETF, or exchange traded fund, as a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.
Leveraged retirement management can happen more easily with an ETF because ETF shares are traded on public stock exchanges. The supply of ETF shares are regulated through a mechanism known as creation and redemption and involves a few large specialized investors, known as authorized participants (APs).
Only APs can create or redeem units of an ETF, therefore finding a reputable firm that not only helps you with the process, they teach you what you want and need to know about moving in this space.
In addition, to give you a taste of one of the most widely known and traded ETFs that tracks the S&P 500 Index, check out the Spider (SPDR). It trades under the ticker SPY. You will get a great view of the landscape from this vantage point so you will know whether this is the space that you want to play.
While Mary and Martin have each other to take the journey with, if you are single and are not as financially savvy as you think you have to be, this is a quick learn. Be open to understanding this leveraged retirement opportunity. It may buy you your next vacation to visit another country.
Article Author Bio:
Lynn Hawkins is “The Money Girl”, a small business strategist, co-author of Woman Entrepreneur Extraordinaire, founder of the P3 Academy of Social Entrepreneurship, and host of the weekly BIZ Info Zone WebTV Show in Google Hangouts on Air. She helps women (and a few good men) entrepreneurs plan and implement the strategies that build business and bring in more revenue, so they can do more for their family and do more good in the world.