It's not easy being a retiree in an unsettled market

Photo Source: Citizen Tom

For retirees, the current market events present an unfortunate circumstance, where many retirement portfolios are stuck between a rock and a hard place, whether in fixed income, equity or the trusted stock market. With a huge rally in commodities, combined with the dropping stock market and money market accounts that pay half the rate of inflation, it’s hard to find a good place to invest for your retirement.

The investing scenario is as follows: money markets aren’t investments, but rather safe places to store your money at night, commodities are screaming to be the next “bubble,” and the stock market has significantly more to fall if it will catch up all the news we’re seeing.

FED interest rate policy and your retirement planning

The Federal Reserve interest rate policy has ruined the possibility for your retirement portfolio to earn any money in money markets. However, what the Fed did do was prop up the stock markets and certainly the real estate market at the cost of higher inflation and eventually higher prices. Its also safe to say that FED policy affected the red hot commodity prices, both for oil and gold. When inflation runs high in the United States, other countries can purpose oil at even cheaper rates, as the price of oil is set in dollars and in no other currency.

Retirees investing in real estate

Real estate as a speculative investment is always a poor decision, especially for retirees. For example, condominiums on the coast will never represent a casual investment due to the ups and downs in the coastal property market. As an added disadvantage, the fastest accelerating real estate markets are usually in the danger zone for natural disasters.

Your best bet in real estate is still in single family homes that produce tenant income rather than vacation income. In an economic downturn, the vacationer may not take another trip, but it’s certain that everyone will want a roof over their heads. Throw in the decreased cost of insurance, easier lending standards, and the potential to have a constant stream of income locked in two years at a time, and single family homes look great as a long term investment in this market – making it ideal for your retirement income.  

The best bet for landlords are a rent to own or lease to own programs. In this kind of agreement, the tenant has a chance to buy the home at the end of their lease for a set price, usually much higher than current market price. People generally take better care of homes when they assume they might purchase them; whether they do or do not is usually up for probability, but those that buy the home after the lease is up generate huge profits for the landlord – giving you both retirement income and a great investment.  

Consider a $150,000 home in the breadbasket of the United States. The typical monthly payment would run about $900-1000 per month, but the true profit comes when the tenant decides to exercise the lease to own and buys the house at the contract price of $190,000. The landlord has since taken in $16,200 in monthly payments plus a net capital gain of $40,000. The total profit is more than 35% with zero leverage.

Photo Source: Randy Glasbergen

TIPS as a money market substitute for retirement

Though money markets are performing poorly, the Treasury Inflation Protected Securities are doing quite well, especially in times of high inflation. As a fixed income investment, they’re about as good as it gets in times like this. Rather than invest in a money market that pays 2% per year, TIPS currently return 1% per year, but the kicker is that the rate of inflation is added to the principal each year.

For instance, an investment of $100,000 would yield $101,000 after the first year…but you enjoy the addition of the inflation rate of 3%, which would add up to a total of $104,000 in principle. Though the actual yield of TIPS bonds is very low, it is due only to the fact that so many people have found them to be a great investment. If inflation were to top 20% this year, you would enjoy get a payout of 21%. In this way, you’re always beating inflation while producing a decent return on fixed income.

In the days when the stock market was doing better and inflation wasn’t out of control, you could get a return of 2.2% per year plus the inflation difference. This fits very well into the 4% plan, especially considering that your returns are adjusted for the CPI increase every year. If the cost of living goes up 15%, so do your earnings. This is a great way to hedge yourself against inflation while beating the returns of money market and fixed income retirement investments.

Beating the stock market with your retirement

In a bear market, beating the stock market should be relatively easy; however, rather than just beat the market, you should want to produce a reasonable return as well. The simple answer?  Take your money overseas. The Latin American and Chinese markets are doing very well. Latin America has boomed with the growth in the sugar trade and ethanol production, while China remains the manufacturing center of the world.

Foreign stock markets generally perform pretty well when the US market slows down. While the consumer in the United States is not spending nor importing the amount of goods they were previously, the amount of money that flows out of the US and into other markets generally boosts returns around the world, especially in developing countries. India is set to do well during US market slowdowns, especially in outsourcing, which is a big part of their GDP. Countries with high natural resource reserves will also do very well, as prices tend to skyrocket with high inflation. Imagine how easy it is to run a trade surplus when you can pump millions of barrels of oil each and every day.

Beating the market takes new focus in your retirement

The possibilities for beating the market are available, but the methodology is completely different than even just a few years ago. Think outside the box; rather than invest in money markets, go with TIPS and be inflation protected, or instead of investing in the overall US stock market, pick a country that is set to prosper. Adjusting your retirement investment strategies in face of shifting domestic economic situations is what will continue to help you generate retirement income.