In this month’s MaxOut Savings Report we will look at the retirement home stretch between ages 50 and 65, the period before retirement, and what you should be doing to prepare for retirement. We will also review some of the trends acting as a drag on the economy and the investment markets as well as our outlook going forward.

Retirement Home Stretch
We call the savings period between 50 and 65 the retirement home stretch for two reasons.  This is the time when most people hit their maximum earnings potential and, thereby, savings potential.  At the same time this is the when your previous savings begin to compound in larger amounts, boosting your retirement plan.  If you are over 50 years old and behind on your savings plan, now is the time to increase your retirement savings program during the retirement home stretch.  We have found that once people reach age 50 they tend to increase their savings rate well above the average savings rate of the previous ten years as they begin to prepare for retirement.  If you are in the Retirement Home Stretch, there are four simple rules to follow.

1.  Increase Your Savings Rate
If you are behind on your savings, and many people are, now is the time to ramp up your savings rate. Let’s take a look at a savings scenario: if you are 50 years old, earn $80,000, and have your savings rate set at 10% plus a 3% company match, in fifteen years at age 65 how much money will you have?  Over $282,000, if we assume a 7.0% growth rate and a 3.0% increase in salary.  Now if we assume a 15% savings rate the numbers will be closer to $400,000!  Recent research has found that over 40% of people in the workforce are not saving enough for retirement.  If you are behind on your retirement savings now is the time to make a change and boost your savings rate in the home stretch before retirement.

2. Payoff your Home Mortgage
By eliminating your home mortgage payment, you reduce the amount of income needed at retirement.  As an example, let’s say your mortgage is $1500 per month for interest and principal (excluding taxes and insurance).  That works out to $18,000 per year.  We recommend that you withdraw no more than 5% per year from your retirement savings for living expenses.   To get $18,000 in retirement income at the max withdrawal rate of 5%, we need another $360,000 in savings.  So by eliminating the house payment, it is the same as having an extra $360,000 in savings.  Start working on paying off your mortgage.  If your mortgage maturity is well past your targeted retirement age you can make extra payments or refinance to a ten or fifteen year loan to reduce the interest rate and have your home paid off at retirement.

3. Begin to Pay Off Debts
This one is very simple.  You should have a plan to payoff of your credit card and other debt by retirement date.  This way you are not making payments after retirement requiring more income.

4. Reduce the Risk Level of Your Retirement Funds
We find many investors take on more risk than is necessary as they are in the home stretch for retirement.  Now is the time to review your risk levels for retirement.  Are you over-weighted in stocks or another asset class that could hurt your plan if something goes wrong?  We would stick with a 60% stock and 40% bond weighting and adjust cash levels from there.  Care should also be taken to ensure you do not have too much exposure to long term bonds that could be hurt by inflation.

Global Slowdown
For the first time since 2008 we are seeing an economic slowdown in the three major trading blocks of the world: United States, Europe and China.  This is what is causing concern about the increasing possibility of a “double dip” in the worlds economies.  With all three trading blocks slowing simultaneously there’s little room to avoid an economic slowdown and possibly a double dip in the United States.

Europe
Europe has seen its economies slow with the Greek lending crisis.  Europe is slowing for two main reasons.  The problems in Greece have spread, to an extent, to Spain and Portugal as the real estate problems in these two countries have worsened, putting pressure on banks with bad real estate loans and worsening unemployment rates.  Spain now has a 17.9% unemployment rate.  The good news is that its borrowing and deficits are in much better shape than Greece.

The second factor slowing European economic growth is austerity programs that Spain, Italy, Portugal, France, England and Germany have put in place to prevent a reoccurrence of Greece’s problems and to control spending.  All of these countries are working to cut spending. Many European Central Bankers and government officials are terrified of inflation.  They remember what happened in Germany with the hyperinflation that led to World War II and will take whatever steps are necessary to prevent hyperinflation from ever happening again.  The Germans in particular, representing the biggest part of the European spending bloc, are very cautious about runaway spending.  As a result of the Greek crisis and European austerity programs, we now expect zero to negative growth in Europe in the second half of the year.

Interestingly, at the recent G20 meeting the Obama Administration was lobbying the Europeans to continue large deficit spending programs and the Europeans rebuffed the Administration.  The battle lines have now been drawn with the Europeans coming down on the side of fiscal conservatism and the Untied States backing a continued ramp up of deficit spending.  All around the world countries are scrambling to get their government deficit spending under control and their financial house in order, the exception being the United States, which is pushing for higher deficit spending.  The historic record is pretty clear regarding the ability of countries to spend their way to prosperity. Over time, this will cause the dollar to continue to decline.

China
The Shanghai Composite Index in China has recently hit one year lows, a further indication that the Chinese economy is slowing down.  We believe that we are seeing the start of the bursting of the Chinese real estate bubble.  As we have pointed out in recent MaxOut Savings Reports, China is in the midst of a massive bubble in real estate construction and speculation.  We expect this to end badly, leading to an economic slowdown in China.  If construction slows dramatically in China, we expect to see commodity prices fall worldwide.  We have already been seeing commodities fall over the last couple of months.  This is likely the result of a slowdown in China as the Chinese stock market has been selling off as well.

United States
In the United States we are seeing a slowdown in hiring and economic activity.  For May and June, almost all of the hiring and economic numbers have pointed to a slowdown in the economy.  In addition, the offshore drilling ban is causing an economic slowdown throughout the Gulf Coast region, further adding to the malaise.  The Obama Administration’s policies are now being viewed as anti-business by many business leaders in the United States.  What is only now being understood is that this is leading to a slowdown in hiring as executives become more concerned where government policies are headed.  The anti-business policies of the Administration have now reached the point of exacerbating the economic slowdown and increasing job losses.

Shipping Costs Falling
In past MaxOut Savings Reports, we have written about the importance of the Baltic Dry Shipping Index as foreshadowing the direction of growth, much as railroad shipping rates did fifty years ago before the boom in global trade.  As can be seen below, the shipping index has now broken through October 2009 lows.  In a recent example in the Financial Times, the average rate of a Capesize dry bulk ship fell from $60,000 per day in mid-May to $23,000 recently. This is telling us that global trade is slowing worldwide as countries are importing fewer commodities.  Now that we have broken the October lows, which could be signaling a further slowdown in China as the real estate boom turns into a bust and worldwide import/export demand declines.

Outlook
With an outlook where the US, Chinese and European economies are slowing down simultaneously, caution would be warranted.  Couple that with a negative year over year SGS estimated M3 money supply growth rate that is worse than the 1970s and an Administration that has become progressively anti-business, we would be very defensive in our investment posture.  At MaxOut Savings Advisors we continue to maintain a higher than normal cash position.   In this type of environment, it does not pay off to be making an investment unless you are getting a very good deal in one form or another.  There are simply too many ways to lose money.  In economic hard times you should be getting paid a very good rate to take a risk.  Nobody pays retail in a crisis!  The good thing about times like these is they will inevitably present great opportunities that will allow for outstanding investment returns over a number of years in the future.  Therefore, we want to hold our cash until high reward opportunities present themselves.

We continue to believe that a combination of high quality dividend paying stocks, short term bonds and foreign investments with a higher than normal level of cash are the best strategy in these turbulent investment markets.  Risk management should be a very high priority in this market.  When it comes to risk management we would rather forego lost opportunity to lost capital.

As a member of Ed Slott’s Elite Advisors Group we have had extensive training on the ins and outs of IRA rollovers.  Ed Slott is one of the foremost IRA experts in the country.  If you are retiring and need some help or a second opinion before you retire, let me know and I will be happy to meet with you and see if we can help you out.

Retiring soon?
Now is the time to set up an appointment with MaxOut Savings Advisors, LLC.  At MaxOut Savings Advisors, LLC, we work every day managing investors’ 401(k), IRA Rollover and Trust accounts.  If you need help or would like MaxOut Savings Advisors, LLC to manage your accounts, I would be happy to meet with you.  Email us at ted@maxoutsavings.com or call us at 713-627-0400.


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