The number of senior citizens is on the rise at the same time investment yields are on the decline.
Americans 65 years of age or older now total 31 million, or one in every eight citizens. They're understandably concerned about their finances. A typical American retiree has to live on barely one-third of pre-retirement income, while those in other industrialized countries can expect as much as 90 percent, the Citizens' Commission on Pension Policy told the Senate labor committee recently. That calculation includes Social Security.
Such harsh reality has been made tougher by the investment climate. In the past decade, these senior citizens who typically emphasize fixed-rate bank investments have watched interest rates tumble. In 1981, they'd have earned $3,154 annually from a $20,000 certificate of deposit with a 15.77 percent annual rate. Last year, that had fallen to $1,182 from that same $20,000 at a 5.91 percent rate. Now rates are at their lowest in recent memory.
Targeting seniors for diversification out of strictly bank vehicles has become big business, with some firms more adept at it than others. New York-based Scudder, Stevens & Clark offers a family of funds designed for the over-50 membership of the American Association of Retired Persons (AARP). More than 600,000 members of AARP have responded by investing in one or more of the funds since their inception seven years ago.
"The philosophy leans toward safety of income and high investment quality, which our surveys have shown to be the major desires of retired investors," said Cuyler Findlay, chairman of Scudder, Stevens & Clark's AARP program.
Scudder's choices point out the fact that seniors should have investment diversity. Included are taxable and tax-free money-market funds, a Ginnie Mae fund, taxable and tax-free bond funds, an equity growth and income fund, and a capital growth fund.
"A mistake made by so many retirees is making a decision about an investment, then sighing with relief because they don't have to think about it anymore," said Richard Grabish, a vice president with A. G. Edwards & Sons Inc. "Even the best investment vehicles must be monitored, in terms of current economic and lifestyle conditions."
Another error is not analyzing and maximizing their options for retirement plan distributions, he added. Many pension plans offer a number of ways to take their money and, by making a snap decision, the retiree may not be making the proper choice in terms of taxes and inheritance planning.
"Because people are living longer due to medical advances, they're concerned they'll outlive their financial resources," said Don Underwood, vice president of Merrill Lynch & Co. retirement plans and services, who likes the strong yields of utility stocks. "My advice is to split investments first into cash or money-market equivalents, secondly into income-producing choices such as bonds, and thirdly into stocks."
Though both retention of capital and income are important, Underwood maintains that overlooking opportunities in stocks will make it difficult to keep pace with inflation.
"A retired person doesn't have the time to recover from a down market, so I'd recommend that they not put more than 20 percent of their portfolio into stocks," added Peter Rogers, a financial planner with CIGNA Individual Financial Services in Minneapolis.
Peters likes mutual funds, his favorite fund families being Colonial, Oppenheimer, American, Fidelity and AIM. Meanwhile, Grabish of A. G. Edwards would put 10 percent in CDs, money-market funds or other liquid investments; 60 percent in fixed-income investments with staggered maturities; and 30 percent in stocks to keep up with inflation.
Though a lot of retirees favor individual stocks or bonds, there's been a rush to mutual funds.
"I receive the money from my retirement package a year from now and it will be going into mutual funds with good track records," said Ray Diehr, a 58-year-old advertising creative director in Commerce Township, Mich., who recently took early retirement. "I like funds because they offer me broad diversity and I don't have to pick winners myself."