Oxstones Investment Club™Emily Lambert, Forbes,
The number of retirees trading actively online is growing.
Maureen Christensen had put in 32 years as an information technology specialist when in June 2007 she retired with the intention of kicking back and letting her newly hired adviser worry about her finances. That plan came to a crashing halt a few months later when a full-blown financial crisis struck. The Portland, Ore. resident felt helpless watching her savings evaporate. It was scant comfort that her adviser assured her a “normal” correction was under way and the wise thing to do was to ride it out.
Unconvinced, Christensen started reading investing books, sitting in on investing webinars and buying and selling options in a dummy trading account. Now, at age 64, she climbs out of bed at 6 a.m. weekdays, careful not to wake her husband, and heads to a home office outfitted with several computers, a high-speed Internet connection and a backup power supply. She uses a portion of her retirement savings to manage a portfolio of high-dividend stocks. With the rest she actively trades stock options, keeping her busy until New York’s markets close. Then she devotes another two hours to paperwork and research.
“If I’d known I was going to do this when I retired, I’d have started learning about economics and world markets long ago,” Christensen says. “It’s absolutely fascinating.”
Nobody can say with certainty how many retirees are swapping golf clubs and bingo boards for a computer mouse and online trading account, but the anecdotal evidence is that their ranks are growing fast. In a business that’s long been dominated by the young, an invasion by the silver-haired set makes sense. Retirees have both the savings and the time to devote to active trading. Add in the fact that the financial crisis left many–rightly or wrongly–with the sense active investing is smarter than the buy-and-hold approach touted by many experts.
“You’d be amazed at the number of older people taking up trading,” says Kevin Cook, an options strategist atTheStreet.com ( TSCM – news – people ) in Chicago. “I think it’s a combination of demographics and technology.”
For many retired traders the intellectual challenge and camaraderie that often surround trading communities are definite attractions. The prospects of beating the market, much less trading themselves to riches, are sketchier.
Take Trading Seriously
Trading is a tough business with high burnout rates. Adam Packard of Zaner Group, a futures and currency brokerage, sees lots of people try it for a few months and give up. “They realize it’s much harder [to make money] than they thought” and move on, he says.
If it’s a casual hobby you’re looking for, consider chess or knitting. To make a serious go at trading, approach it more like a job. That means educating yourself about how markets work, setting limits on the risks you’re going to take, settling on a strategy and pursuing it in a disciplined way.
For retirees in particular, the most important bit of discipline involves how much to put at risk. The soundest policy: Limit yourself to a slice of savings that, in the worst case, you can lose without ruining your lifestyle. Tuck the rest of your savings into a mix of stocks, bonds and cash.
Gerald Buddenbaum, 69, has done just that. After retiring from the electronics distribution business in 2000, he moved from Chicago to Bend, Ore. and then to Portland. He soon found himself bored and looking to earn more from his investments than his bond funds were paying. These days Buddenbaum has most of his savings in cash and blue-chip stocks like IBM (IBM – news – people ) and McDonald‘s ( MCD – news – people
With the remaining 10%, each morning at 6:30 a.m. West Coast time he buys and sells securities based on short-term momentum. When violence broke out in Egypt recently, Buddenbaum bought call options on energy stocks, likeConocoPhillips ( COP – news –people ), and says he quickly doubled his money. He logs off daily by 1 p.m. local time.
Educate Yourself
As with any discipline, an education in trading doesn’t come cheap. Danny C. O’Neal, 65, began trading after seeing former Dallas Cowboys coach Jimmy Johnson pitch a stock-trading course on TV. O’Neal attended a free seminar at an airport Marriott, signed up for an online chat room and made a few hundred dollars a day mimicking experienced peers. Then came an $8,000 loss within a few weeks. Convinced the only way to make money was with his own ideas, O’Neal spent $5,500 on classes from a trading outfit called Value Zone and believes he’s on the right track.
It hasn’t been easy. Each morning at 5 a.m. he mans an office in his Knoxville, Tenn. home and studies market charts. He trades stocks and futures until breaking at 11:30 a.m. and then trades for another hour near the day’s close. O’Neal says two or three screens would normally be enough to monitor markets, but he has eight because his eyesight is failing. He’s still $7,000 in the hole but has no regrets.
“This is really like a college education,” he says. “It’s something for me to do that I actually enjoy.”
Consider Costs And Taxes
In addition to the $12,000 O’Neal spent on seminars and home study courses, he invested $4,000 in computer hardware. His ongoing trading expenses set him back another $500 a month. They include high-speed Internet access ($45), an online trading account with charts and live data feeds ($130), access to a chat room ($250) and an alert system that suggests entry and exit points ($79)
Taxes also take a bite. For retirees, or anyone else trading actively in a taxable account, all gains from stock and stock options positions held less than a year are subject to short-term capital gains rates of up to 35%. Even if you can verify trading losses, you can use no more than $3,000 worth annually to offset ordinary income (in contrast, you can use the losses to offset an unlimited amount of capital gains). Suppose one year you have $60,000 in ordinary income from a pension and $60,000 in trading losses. You’ll still be on the hook for $57,000 in taxable income.
Another option is to qualify as a professional trader and then elect a special method of accounting called mark-to-market. You won’t be subject to the $3,000 limit on deducting losses against other income, but any profits you make will be taxed as ordinary income. As a trader you can deduct various expenses (a home office, seminars) a normal investor can’t. Unfortunately, the IRS recognizes such status only for people who trade heavily and show they’re trying to making a living at it; few fledgling active traders come close to qualifying. Claiming to be a pro may also invite an audit, warns tax lawyer Kaye A. Thomas, who offers tax advice for investors at www.fairmark.com. “Because of the expenses involved and the cutthroat nature of the business, most people who trade heavily enough to qualify for this tax status go broke before they get around to filing a tax return,” he says.
If you join the futures trading boom, you’ll have to mark your positions to market at year’s end. Then 40% of your realized and paper gains will be taxed at short-term rates; the remaining 60% will be taxed at the 15% long-term rate.
The good news for some retirees: Trading income will not reduce the Social Security income you draw before reaching full retirement age, which for early baby boomers is 66
One way around such complexities is to trade inside a tax-deferred 401(k) or IRA (from which you must start taking taxable withdrawals at age 701/2). You can also avoid taxes trading inside a Roth IRA or 401(k). However, you’ll be wagering savings on which you’ve already paid taxes, and if you lose money you won’t be eligible for any tax refund and can’t claim a loss against other income.
O’Neal, the Knoxville trader, is a good example of the effect of costs and taxes on actively trading retirees. Beyond the money he’s still out for seminars and trading gear, on an ongoing basis he says he’s grossing about $500 a week. After expenses and taxes it’s more like $225. Assuming he’s putting in 25 hours, O’Neal’s earnings come to about $9 an hour; that’s $1.75 an hour more than the minimum wage.
Control Risk
In addition to betting only money that, if lost, won’t wreck your life, set other risk parameters and stick to them. O’Neal, whose wife is jittery about his trading, limits himself to holding only one or two open futures contracts at a time (“for now,” he says). If two of his trades go sour, he calls it quits for the day
“I can’t see gambling money I worked so hard to get,” he says.
John Smithman is a former pilot and a part-time management coach. At 69 the Vancouver resident limits his stock and options positions to $1,000 each, which is only a sliver of his $150,000 trading fund.
Many traders who are active, but not rabid, limit buying and selling to the morning and near the close. When you step away from the computer, much less go on vacation, at a minimum have a stop-loss order in place to cap potential losses. As the Flash Crash showed, however, stop losses are not fail-safe. A better idea: Make sure you’re “flat,” with no open positions, during prolonged absences. Another option is to bring a computer with you, as Buddenbaum did on an Alaskan cruise last September
“I did a couple of trades, not much,” he says.
Be Honest With Yourself
If you lose money trading, try changing strategies. If you lose more, perhaps you’re not cut out for trading. It might also be time to consider a change if you make money but not nearly enough to justify the time and stress involved.
Bottom line, the retirees we spoke with traded for the intellectual challenge as well as the profit potential.
“I don’t see retirement in my future,” says Smithman. “There’s so much to learn. It’s a whole new career.”
Christensen, the retired techie, says she’s made back almost all the money her retirement fund lost during the market crash. She’s also made friends and found an endlessly engaging pursuit: “Had I not gotten into trading,” she says, “I’m not sure what I would have done with myself.”
Tags: active traders, investment, Investment Trends, retirees, trading, trading volume