Monthly Archives: June 2014

The Unexpected Question

In the three decades I have been a financial advisor, there is one question that will remain in my memory forever. It was early in my career. I was meeting with a young couple who were making long term plans. Near the end of our discussion the wife asked me “What will happen to us when you die?” I was momentarily stunned. I mumbled something about not being that old.

Actually, while the question is unusual, it’s actually a good one. Advisors and clients beginning a relationship should expect it to last a long time. It’s often like a marriage: “till death do you part.” But what does a client do when someone who has been providing financial advice retires or dies?

When looking for advice, most people look for someone with experience. When I look for a doctor, I prefer someone who has been practicing for a while. I like my surgeons to practice and make their mistakes on someone else. A good financial advisor doesn’t have to be old, but it helps to know that he has been through several market cycles. Experience is mostly gained with time and that can be a problem. According to a recent study, 43% of advisors are nearing retirement. That means that if you are middle-aged, there’s a good chance you will lose your financial advisor at the very worst time: as you and your spouse enter retirement.   That’s not the time to have to find someone new.

There is an answer. If another couple were to ask me the same question I was asked nearly 30 years ago, I’d have a great answer. It just happened that my interest in investing carried over to my son, Stephen. He attended Virginia Tech, majoring in Finance with an emphasis on risk management. Upon graduation he became an analyst for one of the top investment management consulting firms in the world: Cambridge Associates. They provide advice and portfolio guidance to some of the country’s largest institutions and ultra-wealthy families.

I was able to persuade him to join me 10 years ago and put his expertise to work for my clients. We have been a great team ever since.   As a team, we manage money the way institutions do, with individual goals and emphasis on controlling risk. At Korving & Company we offer our clients a rare combination of age and experience that won’t be found at other investment firms.

Call us for our White Paper: “Eight Steps for a Better Retirement.”

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Some Social Security Statistics From “Wealth Management”

  • Percent of couples nearing the end of their careers who disagree on their anticipated retirement ages: 62
  • Average retirement age today, up from 57 in 1991: 61
  • Maximum annual Social Security benefits for those retiring at age 66: $30,396
  • Average annual Social Security payment received by retired individuals and married couples, respectively: $14,748; $23,928
  • Amount (matched by employer) the average earner will pay into Social Security this year: $2,522
  • The taxable maximum the Social Security Act of 1935 set as the income subject to Social Security taxes: $3,000
  • The taxable maximum for 2013 earnings: $113,700 
  • Average period life expectancy (the number of post-retirement years collecting benefits) for a 65-year-old male in 1940: 11.9
  • Ratio of workers to retirees in 1935: 40 to 1
  • The ratio today: 2.9 to 1 
  • Increase in the number of people receiving Social Security disability benefits [from 1965 to 2011] : 510 percent

If those last three statistics don’t scare you, they should.

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Delaying Social Security can outperform investment returns

The May 2014 edition of Investment News has an article by Mary Beth Franklin discussing the benefits of delaying social security benefits.

We have discussed the advantages and disadvantages of taking social security early, on time, and late. It’s obvious that you can’t collect social security from the grave. As Franklin says “you must be present to win.”

The person who begins before full retirement age gets full use of his money to spend or invest. Waiting to collect means that while you get a much larger check, you have to make up for the money you failed to collect earlier.

But if you don’t need the money at age 62 or 66, delaying social security can be thought of as investing in an annuity to be used later in life. Based on one analyst’s calculations

“those who reach age 90 (which would be the 28th year after delaying) have generated the equivalent of a 5% real rate of return in what is essentially a government-backed bond.”

Social security payments are indexed for inflation.

“The assumptions that are embedded in the social security formulas and benefits … were built when longevity was shorter and interest rates were higher.”

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When to start collecting Social Security benefits. Chapter 7.

Consider the Spousal and Widow Benefit!

Calculating the spousal benefit can get very complicated. We will not get into all of the benefit combinations here, but there are a few rules to mention.

If you are married you are eligible for your own benefit based on

  • Your earnings or
  • A spousal benefit which is up to 50% of your spouse’s benefit.

There is one other issue to consider and that’s the “Widow Benefits.”

We have a couple, Paul and Linda.

Here is what Linda’s “Widow Benefit” would look like under various scenarios.

 

Filed at 62 Filed at age 70 Died prior to FRA Died at age 70
Widow Benefit = Paul’s reduced benefit $1,500/month Widow Benefit = Deceased Benefit (plus COLAs) Widow Benefit = PIA* of Deceased Widow Benefit = Deceased benefit as if deceased elected on date of death
Linda Claims Widow(er) Benefits at age 60
Receives 71.5% of the deceased PIA* $1,430 Receives 71.5% of the deceased benefit $1,887/month Receives 71.5% of deceased PIA* $1,430/month Receives 71.5% of the deceased benefit as if he had just elected $1,887/month
Linda Claims Widow(er) Benefits at age 66
Receives $1,650 Due to Widow Limit benefit is capped at the greater of the deceased spouse’s benefit or 82.5% of the deceased PIA* Receives full survivor benefit $2,640/month Receives Deceased PIA* $2,000 Receives full survivor benefit $2,640/month

 

Note that if Paul delays filing until age 70, Linda is eligible for Paul’s full delayed retirement benefit. This is something to consider if you are concerned about your spouse’s income after death.

*PIA = Primary Insurance Amount.

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When to start collecting Social Security benefits. Chapter 6.

You have three main options:

  • Start collecting early
  • Start collecting at full retirement age
  • Start collecting after full retirement age

One of the key trade-offs is longevity. If you die while delaying your benefit, you have made a bad choice. Since we don’t know what our individual life expectancy is, it’s useful to determine what the break-even point are.

As in the previous hypothetical example, let’s assume that your full retirement age is 66 and you are eligible for a benefit of $1000 per month at full retirement age.

  •  If you begin taking benefits at age 62 your total benefits will equal those who wait until full retirement age at age 78.
  • If you begin taking benefits at full retirement age your total benefit payments will equal those waiting until age 70 at age 82.

At age 85 the total benefit payments:

o   For those who began at 62 will equal $216,000

o   For those who began at 66 will equal $240,000

o   For those who began at 70 will equal $253,000

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