A question on the mind of many aging baby boomers is how much money must be saved to afford a comfortable retirement. Conventional wisdom dictates building at least a $1.0 million nest egg, or alternatively, saving an amount equal to 10 to 12 times your current income. However, a more accurate response for most retirees is “it depends”. Everyone’s retirement needs are different, based upon current health, planned retirement age, where they live and what activities are planned during the retirement years. While there is no single answer that covers every baby boomer, there are a few questions boomers can ask that will help them estimate their retirement needs.
The first question refers to current spending levels. An old rule of thumb was that retirees should be able to live comfortably on 70-80 percent of their pre-retirement income, but many financial experts are now questioning the wisdom of that assumption. This is because spending doesn’t always slow in retirement. In fact, many people increase spending right after they retire to pursue travel or other hobbies.
A second question concerns longevity, which has increased significantly for Americans in recent years. According to CDC research, a man 65 years of age may currently expect to live another 18 years, and a 65-year old woman is likely to live for at least another 20 years. Morningstar research found that a middle-aged adult hoping to generate $40,000 of annual income during retirement would need to have saved nearly $1.2 million to fund 30 years of retirement. Morningstar’s model assumed a portfolio returning 6% a year and a 2.5% annual inflation rate. .
A third big question for retirees is healthcare costs. According to a study by Fidelity, a 65-year old couple should anticipate spending on average $260,000 in out-of-pocket medical expenses during retirement. If long-term care becomes necessary, spending on medical costs is likely to increase to nearly $400,000.
While everyone’s retirement needs are different, the investment risks that must be managed to build a retirement nest egg are common to all. One major investment risk is volatility. Any investor who watched stocks melt down during the 2008 market crash understands the dangers of volatility. Although volatility cannot be eliminated entirely, there are ways to minimize its’ impact. A key strategy for managing risk is to invest for the long-term. Another essential strategy is portfolio diversification, which reduces the impact of volatility by spreading risk across many assets. Diversified portfolios should have allocations among all the major asset categories (stocks, bonds and alternative assets), as well as diversification within each category. For example, rather than owning one stock, investors should hold multiple stocks and a variety of companies from different industries. The easiest way to achieve this level of diversification is to invest in a broad-based mutual fund.
Mortgage Pool Funds Offer Diversification Benefits and a Hedge Against Inflation
Because of low correlations with stocks and bonds, mortgage pool funds can be invaluable tools for diversifying a portfolio. This characteristic of mortgage pool funds was evidenced during the 2008 crash when stocks lost nearly 40% of their value, bond returns dropped to 5%, but many mortgage pool funds continued to deliver 8-10% returns to investors.
A second major investment risk and one that may increase exponentially over time is inflation, or the loss in purchasing power that occurs as consumer prices inflate. Mortgage pool funds are real estate-backed fixed income instruments and may help reduce an investor’s exposure to inflation risk. Real estate has been proven to be an effective hedge against inflation; According to Investopedia, real estate has beaten inflation 71% of the time. Mortgage pool funds offer a convenient way to leverage the inflation hedging benefits of real estate without assuming the risks that are associated with direct property ownership such as poor liquidity. Other benefits of owning real estate-backed investments include the asset’s stable intrinsic value, its’ major role in the US economy and its’ numerous investment opportunities.
To feel secure in retirement, most investors want to hold assets that generate steady income. With the exception of dividend stocks, which are trading at a premium right now, the stock market cannot be relied upon to deliver consistent income. Over the longer-term, stocks have generally been solid performers, but there have also been extended periods when stocks lost value. An example is the period between 1998 and 2008, when US stocks actually declined by 0.6%. Bonds generate predictable income, but the Fed’s low interest rate policies of recent years have reduced bond yields to miniscule levels. At present, ten-year Treasuries are yielding just 2.3%.
Mortgage pool funds can help investors feel secure in retirement by delivering dependable monthly income at yields superior to most bonds and with minimal downside risk. Annualized returns vary by mortgage pool fund depending on the markets served, the fund’s investment timeframe and risk profile and other fund-specific factors. Mortgage pool fund investors have the option of accepting monthly payouts or expanding their stake in the fund by reinvesting distributions in more shares, which fuels exponential growth through compounding.
One of the principal ways that mortgage pool funds can help investors achieve their retirement goals is by providing high risk-adjusted returns. Well-managed mortgage pool funds typically generate yields that handily beat most stocks and bonds. At present, the average mortgage pool fund investor can expect to be earning high single-digit/low double-digit yields from their investment. Risk of losses is minimal as a result of the pool’s diversified loan portfolio and the safety margin provided by the fund’s conservative loan-to-value ratio. Most mortgage pool funds limit loan amounts to less than 70% of a property’s collateral value.
Investors can defer taxes on their investment in a mortgage pool fund by holding the asset in a Self-Directed IRA account. To learn more about mortgage pool funds, including how these assets can help investors reach their retirement goals, visit our website at Socotra Capital.