What would I do? Buy investment property or invest in the stock and bond market?

80% of the time I would invest in the stock and bond markets.

Why?

• From time to time you'll hear people say that "owning real estate takes deep pockets". It does. Numerous things can go wrong with a property, and each time it will cost you money. Until you have a significant amount of liquid assets, I would choose to continue to invest in the stock and bond markets over buying investment property.
• From a diversity standpoint, you take on a large degree of risk when you purchase a single piece of investment property.
• It takes time to find renters and maintain a property. I'd rather use my time doing other things.

What About The Other 20%

• If I were in the real estate or property management industry I would consider buying investment property because I would have a greater degree of knowledge about how to do it.
• If I had sufficient liquid savings that I could make a down payment, have cash reserves just for that property, and maintain my normal emergency fund, then I would consider buying investment property.
• If I were in one of the highest tax brackets, I would consider buying investment property sooner than if I were in a lower tax bracket, as most investment properties generate a tax loss (due to depreciation) that can be used to offset other forms of income.

The nice thing about owning a rental property: essentially you are purchasing an asset with someone else's money. If you are in a high tax bracket, have sufficient liquid assets, and the time and energy to find the right property, than I think rental real estate can be a great addition to an investment portfolio. I just don't think those three criteria apply to most people.

It seems many upcoming retirees come in to our office and tell us, "Well, I've only got five years."

"Really?" I ask, "Are you terminally ill?"

They look at me funny and say, "No, no, that's when I want to retire."

It always puzzles me that people confuse their investment time-horizon with the amount of time they have until they retire. After all, I hope they plan on living for quite some time after retirement, which means their investment time-horizon could easily be thirty plus years... not five.

They way you invest for a thirty year time-horizon is substantially different than the way you invest for a five year time-horizon. If you need to use all your money in the next five years, put it all in safe investments.

If you need your assets and your income to keep pace with inflation over a potentially long time-horizon, you'll need to look beyond safe investments; instead thinking about placing your funds in short, medium and long term buckets, each designed to provide you with income for a certain decade of your upcoming life. I describe such a philosophy in Strategies For Creating Retirement Income From A Portfolio. You could also layer a small allocation (less than 15% of your total portfolio) to high yield investments as part of a long-term strategy.

Remember, one of the simplest ways to pick the right investments is to match your investments with your true investment time-horizon. Short term investments for short term needs; long-term investments for long-term needs.

Every Friday (last week a day late... this week... a day early) I post a "What Would I Do" topic. Keep in mind, it is not necessarily what you should do. Instead, it is written to give you insight into how to think about various financial decisions, understand the variables involved, and then, from an educated perspective, you can make the right decision for you.

So, what would I do, buy individual stocks, or stock index funds?

95% of the time I would buy stock index funds.

Why?

• Very simply put, with an individual stock, you can lose all of your money. With a stock index fund, for you to lose all of your money, the hundreds of companies listed in the index would all have to go out of business at once. If that happens, we've all got bigger problems on our hands than how much we've saved for retirement.
• To effectively manage a portfolio of individual stocks it takes a significant amount of time and research, and the odds are you will still end up with the same or lower return than if you had just bought an index fund.
• I prefer the simplest way to accomplish an end result and index funds provide a simple, low cost way to build a diversified portfolio.

What about the 5%?

• If I enjoyed stock trading, I would set up a play account in which I could buy and trade stocks. I would fund it with a dollar amount that was small in relation to my overall investment portfolio.
• If I worked in the investment industry, had earned my Certified Financial Analyst certification, and felt very confident in my ability to research and make unemotional investing decisions, than I might use individual stocks for a larger portion of my portfolio.

Learn More:

• Risk In A Stock Verses Risk In An Index Fund
• What Is An Index Fund And Why Would I Use One?
• Best Index Fund Families

We have a client who comes in each year and tells us they want to retire in five years. Each year we tell them what they would need to save on a monthly basis to make that happen. They tell us that's what they are going to do. A year later, they come back, and they have hardly saved at all.

After several years of this we are not sure what to think. What is it that they really want? A better lifestyle now... or early retirement? There's nothing wrong with either choice. But there is something delusional about saying you want something, and on an ongoing basis taking no significant steps to achieve it. So, if you think you don't have enough to retire when you want to you've got four choices:

• Work Longer
• Save More Now
• Earn A Higher Rate of Return (which means taking on more risk)
• Reduce Expenses So You Can Retire On Less

There it is. If you don't want to take any of those steps, then plan on a later retirement date. It's that simple.

You buy it.

Last week I went to Chicago to attend a one day retirement income symposium hosted by Morningstar. It was an academic approach to evaluating annuities, and it was an eye-opener for me. A room full of PhDs and CFAs all there to discuss the dilemma of how to create sustainable retirement income for generations of long-lived baby boomers.

In the upcoming weeks I'll be adding content based on these discussions. I cannot refute the fact that the academics support layering in guaranteed income products into a traditional retirement allocation.

My new perspective would suggest that for many people the proper retirement allocation would involve replacing a portion of their fixed income (bond) allocation with some type of investment product that produces guaranteed, life-long income.  For many people, social security and a pension plan provide this secure base, or floor, of retirement income. For others, they will want to consider buying guaranteed income through some form of an annuity product. More and more annuity companies are coming out with no-load annuity products that provide the security a retiree would need at a cost that is fair. More to come on that topic.

For now, here's a brief intro into the topic of guaranteed income: Finding Guaranteed Retirement Income

Every Friday (ok, I'm a day late this week, it's Saturday) I post a "What Would I Do" topic. Keep in mind, it is not necessarily what you should do. Instead, it is written to give you insight into how to think about various financial decisions, understand the variables involved, and then, from an educated perspective, you can make the right decision for you.

What Would I Do? Hire A Financial Advisor Or Do It Myself

Wow, this is a difficult question for me to answer objectively, because I am a financial advisor, so I have to think about what I do in other areas of my life. I have a CPA, an attorney and an insurance agent. When it comes to my home, there are plenty of things I try to fix myself, if it's simple, but once it's outside my area of expertise I hire someone to do it. When it comes to financial decisions, my business partner and I often act as each other's advisor, using one another as a sounding board in making personal financial decisions. So, all that being said, I'll say...

80% of the time I would hire a financial advisor.

Why?

• I value professional advice.
• If I wasn't a financial advisor, I would rather spend my time furthering my education in my own field of work, rather than spend it studying taxes, investments, insurance and estate planning.
• If I didn't need a full-service advisor, it is likely I would hire someone on an hourly basis for as-needed advice.

What about the 20%

• If I was the do-it-yourself type, I would read every book on investing and financial planning that I could get my hands on, watch financial shows, and subscribe to a few respected finance publications until I felt my knowledge level was sufficient to make sound decisions without a professional sounding board.

I think most people are better off seeking professional advice, but at the same time, there is a difference between a quality financial advisor and someone whose primary motivation is to sell investments and insurance products, so before hiring anyone, I would learn about the credentials, experience level, and types of compensation that I would encounter when searching for an advisor.

I came across a great article that explains the current rise in the stock market, which many people find odd considering unemployment is so high. You can find the article in Voices of Reason, Why Are Stocks Surging While Jobs Disappear.

The author does a fabulous job of explaining how Corporate America can report an increase in earnings, and yet their revenue is down.  The increased earnings come from serious reductions in costs; much of which comes from a reduction in labor costs. But cutting costs will only go so far. How much longer can a company continue to increase their earnings without an increase in sales? And increases in sales typically come from consumer spending; something expected to stay at a lower level for quite some time.

I'm often asked how to estimate the amount of taxes someone might pay in retirement. It's not always an easy calculation. Each type of income you receive in retirement has a different tax rule that applies to it; for example social security will be taxed differently than investment income which will be taxed differently than withdrawals from retirement accounts.

To provide a quick and easy overview, I just posted  What Kind Of Retirement Taxes Will You Pay?.

Of course, once you've calculated how your retirement income will be taxed then you must factor in your itemized deductions, which will depend on whether you have a mortgage, how much you gift to charity, how much you spend out-of-pocket on medical care... and that is why I have an accountant.

It's also why, when you shift from working to retirement, I recommend you have a tax projection done so you're not caught off guard with an unexpected tax bill at the end of your first year of retirement.

You can find online calculators to do your own tax projection, ask your accountant to run one for you, or find a qualified financial advisor to run one.

Every Friday I post a "What Would I Do" topic. Keep in mind, it is not necessarily what you should do. Instead, it is written to give you insight into how to think about various financial decisions, understand the numerous variables involved, and then, from an educated perspective, you can make the right decision for you.

What Would I Do - Take Social Security Early Or Late?

• 90% of the time I would wait and take social security at late as possible, which would be age 70.

Why?

• I am healthy, love life, and plan on living a long time. I think the odds are high that I will live past the breakeven point and I will receive more total dollars by taking a higher amount later.
• I enjoy working in some capacity and see myself continuing to work on income generating projects as long as I am able.
• By waiting, I will accumulate delayed retirement credits, and will then get annual inflation adjustments which will be calculated based on my higher benefit amount.
• I have a high degree of confidence that social security benefits will not go by the wayside.

What About the 10%

• If I had chronic health issues, a shorter than average life expectancy, did not enjoy working in any capacity, or had sufficient resources that the extra benefit from waiting longer did not matter to me, then I would take social security earlier rather than waiting as long as possible.

Additional resources on this issue:

• Should I Take Social Security At Age 62?
• Strategies To Maximize Your Social Security Benefits

Here's what I know about gold. In the last two years it has gone from $750 an ounce, up to $1,000, back down below $750, and is currently back up over $1,000. So, depending on when in the last few years you may have bought it, you either made 33%, lost 25% or ended up somewhere in the middle. (Don't just take my word for it - check out historical gold prices for yourself.)

Gold doesn't produce a good or service. It has no way of making a profit. You either time it right, or you don't. Corporate America, on the other hand, has a history of producing goods and services at a profit. I'm not saying to run out and buy stocks either, but at least if I do, I can see where their future value will come from.

If you want to hedge, I personally think cash is better than gold. Cash is not going to drop from $1,000 to $750 in a matter of months.

What about gold as an inflation hedge? InflationData.com has a detailed historical analysis discussing gold as an inflation hedge; the conclusion is "As a crisis hedge Gold is excellent.
But as an inflation hedge it has a very spotty record although it has had its moments."