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Retirees need to earn more on investments

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Fixed income
I teach a retirement planning class and one data point I use is the average six-month CD rate over 25 years. At the beginning of the 25-year period the average rate was about 15 percent. If that was someone's starting point they were sure they could get by on 15 percent interest on their money. But seeing that rate go down to 1.2 percent 25 years later is pretty brutal.

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Wealth transfer
Leading-edge baby boomers seem to be doing OK with the investments they put away for themselves, but there's this huge intergenerational transfer of wealth that they don't know what to do with and they're pretty much leaving it in cash. I wouldn't say that it's on purpose that they're being too conservative, but in practice that's how it ends up because these inheritances are fairly large and make up a decent portion of their portfolio. If it's entirely in cash, it skews the overall asset allocation.

Their parents' generation wasn't exactly well-versed in investing so a lot of their parents' money was in CDs and bank accounts. There's so much misinformation about being conservative with your investments when you approach retirement that, I think, people who are in this circumstance don't feel an overwhelming desire to fix it. They're approaching retirement so they think having hundreds of thousands of dollars in cash is OK.

Easing into the stock market
For people who are very conservative I recommend dollar cost averaging their money into the market. If someone is 100 percent in cash but needs to have 75 percent in equities, I would probably move their cash into the market over the next 24 months. That way they could get used to it -- small exposure at first but, eventually, two years down the road they'll be in the correct balance.

I would recommend mutual funds for these people. I think it's irrational for someone to be mostly in cash and suddenly think they're going to start investing in individual securities. It makes it that much more likely that they'll get badly burned and then retreat from stocks altogether, which isn't in their best interest. Funds will be smoother, less volatile than individual stocks in most cases.

If people are going to do this themselves, then index funds are a fantastic way to go. If they're feeling even more sophisticated I would have them look at exchange traded funds.

Long-term care insurance
I don't think there's much of an unmet health expense issue, but I think there is a disability issue. People who are conscientious about planning are the ones buying long-term care insurance. The people who are not planning are not buying this insurance. They're going to get creamed -- twice. They don't have the appropriate insurance coverage in place, and they probably didn't have many assets to begin with, so they're stuck. Fifty-five is a good age to begin long-term care insurance.

Next: Advice from Eric Soiland
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