The economic storm clouds are gathering and it's looking like the U.S. is in for some tough financial weather.
If the U.S. catches an economic flu will the rest of the world get pneumonia? The warning signs include a credit crunch, a real estate depression, rising inflation (including gas prices), higher unemployment, a weak dollar with rising deficits, widening trade balance, lower interest rates engineered by the Fed, a highly volatile stock market and widespread forecast of economic recession.
The Bush administration and Congress, with the endorsement of the Fed, are crafting a stimulus package to bail out the economy. Consumer confidence is low and sinking with investors rushing toward safety with their retirement dollars.
In the first few trading days of 2008, investors have moved billions from the stock market into safer options. If you're leaving
your money in the market, make sure your retirement plans won't be derailed by the worst case outcome. If so, you need to head to higher investment ground. If you're taking your dollars out of the market to safer places, what are your options?
First there's bank CDs, Treasury bills and money market accounts. The good news is that these are super safe, ready available and easy to cash in when the time comes. The bad news is the interest rates they pay don't even keep up with inflation. These options are super safe if your only concern is "safety of principal" but they are extremely unsafe if you're afraid of "outliving your retirement money". Since these options have historically not kept up with inflation, they may be a good short term parking place for your retirement money but are not a long term solution. Plus, income taxes take a big bite out of your paltry earnings.
Corporate or government bonds can provide you good safety but not during times of low interest rates. As rates rise - and you may be assured that the interest rate cycle has not been cured - the market value of fixed rate bonds will decline. Yes, you'll get your principal back at maturity but in the meantime you'll have a hard time keeping up with inflation. Plus, if you have to sell before maturity the loss could be a shocking surprise. Not a good long-term solution and much too risky for the short term.
What about real estate? Since most retirees are not real estate gurus, the safest route is to put your money in real estate investment trusts where it is professionally managed. Given the recent track record of "professional real estate investors who fueled the sub-price meltdown" are you sure you want to entrust your money to them? Maybe a good long term solution but why buy when prices are dropping like a rock? International investments available in mutual funds and stocks are getting strong endorsements at this time... so maybe this is the ideal place! The last time I looked mutual funds (which are nothing more than a collection of stocks and bonds inside a single investment) and corporate stocks waxed and waned with economic gyrations. If the U.S. sneezes and the rest of the world catches a cold, you'll be caught outside without a coat. Generally way too much risk for retirees and that why your exposure to international markets, even in the best of times, is a small fraction of your total portfolio.
How about annuities? These are savings options guaranteed by insurance companies that offer more than safety if you stick to the fixed variety. Variable annuities are nothing more than mutual funds wrapped in a tax deferred package by an insurance company - they still have risk plus the ownership costs are much higher than just plain mutual funds. Stay away from variable annuities. Fixed annuities on the other hand come in several varieties: traditional fixed that mirror a bank CD and offer a set interest rate plus no current income taxes on earnings; index-linked which offers the opportunity for a higher rate because the interest rate they pay depends on the movement or growth of a stock/bond market index like the S&P 500 ... but if the market nosedives you don't because the worse you can do is the minimum return guaranteed by the insurance company; lastly there is the income annuity which guarantees you a period certain or lifetime income in exchange for depositing with the insurance company all or some of your retirement money. The income annuity can give you what employers once guaranteed their retiring employees: a lifetime income you can't outlive - even if you live to be 125. If you haven 't yet discovered the fixed annuity option, get in touch with your financial advisor and demand to know more about them - just steer clear of the variable annuity because they pose market risk just like a stock, bond or mutual fund. Oh yes, don't be leery of fixed annuities because they are guaranteed by insurance companies because you'll be dealing with some of the world's oldest, largest and financially strongest businesses that have weathered wars, economic depressions and failure of governments. These are the same companies that insure your home, car, life, health, business and virtually every valuable you own or risk you face.
When the economy goes into a tailspin and investments sink like a rock thrown into a lake, wall street and its army of brokers go into battle mode because their commissions hang in the balance. Their war cries include "now is the time to buy at bargain prices", "don't sell just buy more to average down" and "over the long run you'll do just fine by leaving your money in the market". Remember: no sale - no commission and that is bad for Wall Street and it brokers. Granted, longer-term the stock market has outperformed the safer alternatives but the ten years you need to ride out the market cycles is a substantial portion of your retirement years. Years when you'll be worried about your financial well-being, whether your money will run out before you do and whether an emergency will force you to sell at a loss before the long term has run it course. Retirement is a time to keep what you've got rather than speculate in hopes of making more. If you lose your retirement money, there will be no second chance. Consult with your financial advisor and check out all the safe options - it could be the most important retirement decision you'll make.
If you'd like to hear and see what others are forecasting for 2008, click this link: http://www.youtube.com/watch?v=op4BNyU6QQ4
For more information on Retirement Planning and safe investing topics - tools, Calculators, Videos and updated articles, go to the Retirement Pros at http://www.theretirementpros.com/
Article Source: https://EzineArticles.com/expert/Dr._Shelby_Smith/155473
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