Category Archives: Social Security

What Makes Women’s Planning Needs Different?

While both men and women face challenges when it comes to planning for retirement, women often face greater obstacles.

Women, on average, live longer than men.  However, women’s average earnings are lower than men, according to a recent article in “Investment News,”  in part because of time taken off to raise children.  What this means is that on average, women tend to receive 42% less retirement income from Social Security and savings than men.

The combination of longer lives and lower expected retirement income means that women have a greater need for creative financial advice and planning.  The problem is finding the right advisor, one who understands the special needs and challenges women face.

A majority of women who participated in a recent study said they prefer a financial advisor who coordinates services with their other service professionals, such as accountants and attorneys.  They want explanations and guidance on employee benefits and social security claiming strategies.  They want advisors who take time to educate them on their options and why certain ones make more sense.  Yet many advisors do not offer these services.

Men tend to focus on investment returns and talk about beating an index.  Women tend to focus more on quality of life issues and experiences, on children and grandchildren, on meeting their goals without taking undue risk.

If your financial advisor doesn’t understand you and what’s important to you, it’s time you look for someone who does.

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The Fate of Social Security for Younger Workers – And Three Things You Should Do Right Now

We constantly hear people wonder whether Social Security will still be there when they retire.  The question comes not just from people in their 20’s, but also from people in their 40’s and 50’s as they begin to think more about retirement.  It’s a fair question.

Some estimates show that the Social Security Trust Fund will run out of money by 2034.  Medicare is in even worse shape, projected to run out of money by 2029.  That’s not all that far down the road.

So how do we plan for this?

The reality is that Social Security and Medicare benefits have been paid out of the U.S. Treasury’s “general fund” for decades.  The taxes collected for Social Security and Medicare all go into the general fund.  The idea that there is a special, separate fund for those programs is accounting fiction.  What is true is that the taxes collected for Social Security and Medicare are less than the amount being paid out.

What this inevitably means is that at some point the government may be forced to choose between increasing taxes for Social Security and Medicaid, reducing or altering benefits payments, or going broke.

Another question is whether the benefits provided to retirees under these programs will cover the cost living.  Older people spend much more on medical expenses than the young, and medical costs are increasing much faster than the cost of living adjustments in Social Security payments.  If a larger percentage of a retiree’s income from Social Security is spent on medical expenses, they will obviously have to make cuts in other expenses – be they food, clothing, or shelter – negatively impacting the lifestyle they envisioned for retirement.

The wise response to these issues is to save as much of your own money for retirement as possible while you are working.  There is little you can do about Social Security or Medicare benefits – outside of voting or running for public office – but you are in control over the amount you save and how you invest those savings.

As we face an uncertain future, we advocate that you take these three steps:

  1. Increase your savings rate.
  2. Prepare a retirement plan.
  3. Invest your retirement assets wisely.

If you need help with these steps, give us a call.  It’s what we do.

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What does planning mean for you?

Financial planning is about more than assets, investments and net worth.  It’s about what you want to do with your money and why.  It’s about identifying your concerns, expectations and goals.  It’s about how you feel and what you want.

Financial planning helps address common fears and concerns such as health care costs, outliving your money and the best time to file for Social Security benefits.

The “Confidence Meter” helps you gauge how likely you are to reach your goals and whether you are on track instead of focusing on headlines.

Financial planning takes your risk tolerance into account.  You will get a “Risk Number” that guides you to the kind of investment you should have.

Learn more about how financial planning can help you by contacting us at Korving & Company today.

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Even the “rich” can’t afford retirement.

Investment Approach

Registered Investment Advisors (RIAs) deal with people at all wealth levels but most are upper income even if they are not billionaires.  There is a retirement crisis and it’s not just hitting the working class.

The typical median wage earner making $50,000 a year and retiring at 67 can expect Social Security to pay him and his wife about $2400 per month.  To maintain their previous spending levels this leaves a gap of about $1000 a month that has to be made up from savings. But many of these middle income people have not saved for their retirement.  Which means working longer or reducing their lifestyle.

This problem is also hitting the higher income people.  How well is the person earning over $200,000 a year going to do in retirement?  The issues that even these so-called “rich” face are the same:  increased longevity, medical care, debts and an expensive lifestyle are all issues that have to be considered.

“The $200,000+ executive expects a fine house, two cars, two holidays a year, private schools, to pay for his kid’s university tuition, and so it goes on. And this is not to mention the tax bill he’s paying on his earned income. A bunch of all this was really debt-funded, so effectively the executive spent chunks of his retirement money during his working days.”

When high income people are working, they usually don’t watch their pennies or budget.  But once retired, that salary stops.  That’s when savings are required to bridge the gap between their lifestyle and income from Social Security and (if they’re lucky) pension payments.  At that point the need for advance planning becomes important.

Before the retirement date is set, the affluent need to create a retirement plan.  He or she needs to know what their basic income needs are; the cost of utilities, food, clothing, insurance, transportation and other basic needs.  Once the basics are determined, they can plan for their “wants.”  This includes things such as replacing cars, the cost of vacation travel, charitable gifts, club dues, and all the other expenses that are lifestyle issues.  Finally, there are “wishes” which may include a vacation home, a boat, a wedding, a legacy.  The list can be a long one but it should be part of a financial plan.

If the plan tells us that the chances of success are low, we can move out our retirement date, increase our savings rate or reduce our retirement spending plans.

This kind of planning will reduce the anxiety that is typically associated with the retirement decision making.

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The Retirement Dilemma Facing American Workers

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The way Americans fund their retirement has undergone a fundamental transformation in the last 30 years. According to the Bureau of Labor Statistics, the percentage of private-sector employees with a traditional defined benefit pension plan has dropped from about 45% in 1980 to a little over 20% in 2011. A defined benefit pension plan is one that provides the retiree with a guaranteed income for the rest of his or her life.

The guaranteed pension has been replaced by a defined contribution plan. Today, about 50% of the private workforce participates in one of these plans, which include 401(k) plans and 403(b) plans and allow the worker to set money from their paycheck aside to grow tax-deferred until they retire, at which point they can start pulling from it to fund their retirement. However, there is no guarantee that the amount saved will be adequate to meet their income needs once they retire.

Most government workers still have access to traditional defined benefit pension plans. However, most of these plans are severely underfunded and questions are being raised about cities and states being able to pay the benefits that were promised. A recent poll of people 25 years and older concluded that “Americans are united in their anxiety about their economic security in retirement.” Over 75% of those surveyed worry that economic conditions might hurt their chances for a secure retirement. (For related reading from this author, see: How Retirees Should Think About Retirement Income.)

Social Security and Medicare Concerns

The federal government provides a basic level of retirement income via Social Security, and provides a basic level of health insurance via Medicare and Medicaid. However, these programs are on shaky ground according to most actuaries. The Social Security Trust Fund will run out of money around 2034 unless it is reformed. That does not mean that checks will not go out to retirees, but it does mean that the amount going out will decrease.

Medicare is in even worse shape and, with the continued rapid rise in medical costs, may face a crisis even sooner. The costs of health care and increasing life spans are major issues for retirees, which explains the reason that so many Americans think they are facing a retirement crisis in the first place. Given the level of debt at the federal level and the rhetoric of the current administration, we do not see the government jumping in to fund the American worker’s retirement at levels above what it does now.

Even Denmark, an icon of the Welfare State, is proposing tax cuts, reducing welfare benefits and raising the retirement age.

“We want to promote a society in which it is easier to support yourself and your family before you hand over a large share of your income to fund the costs of society.”

Funding Your Own Retirement

If the government is not going to come to the rescue, and if corporations are going to continue to unload the financial risks and burdens associated with pension plans, what is the answer? Look to the old saying, “If you want something done, do it yourself.” Going forward, it’s increasingly going to be up to the individual American worker to fund his or her own retirement.

If people begin saving early, a large part of the retirement problem will be solved. The most valuable asset that people have when they are young is time. If workers begin putting money aside at an early age, it will grow and compound for 40 to 50 years until retirement, solving a large part of the problem. The compounding of returns is what makes so much of the difference.

Here is a little math exercise: assume you begin by saving $25 per month—much less than the cost of having one decent dinner at a restaurant—and invest it conservatively so that it grows at 5% per year. At the end of 45 years you will have $50,000. Now assume that you increase your savings by 10% each year—so that in year two you save $27.50 per month (still far less than the cost of just one dinner out)—at the end of 45 years you have $400,000 to use in retirement. These examples go to show that saving a modest sum for retirement does not require much cost or effort, just discipline, time and patience.

Financial Education is Key

The greatest asset that young workers have is time. Unfortunately, people rarely enter the workforce knowing much about saving or investing. That is one reason so many people live paycheck to paycheck. The solution to the retirement crisis is achievable by educating young people and raising awareness. Until schools and colleges begin having mandatory courses for our young people about managing money, parents should be doing this. If they are unsure, they can put their children in touch with a financial planner who will spend time to provide the education. Many financial planners are beginning to offer hourly rates to help people learn to plan and budget.

For most people, the retirement problem is the result of a lack of information. The solution is right in front of us, if we realize that times have changed and people must change with it.

(For more from this author, see: Are You Ready for the Retirement Challenge?)

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How much annual retirement income will you have?

Most people believe that their home is their most expensive thing they’ll ever pay for.  They’re wrong.  The most expensive thing people ever pay for is retirement. And they’ll pay for it after they quit working.

That’s why it’s important to have a clear idea of what you’re getting into before you decide to tell your employer that you’re leaving.

The typical retiree’s sources of income include Social Security.  They may have a pension, although fewer companies are offering them.  If there is a gap between those sources of income and their spending plans, the difference is made up by using their retirement savings.

Running out of money is the single biggest concern of retirees.  The big question is how long we will live and the amount we can draw from our savings before they are depleted.

For simplicity, let’s assume: You’re ready to retire today and plan to have your retirement savings last 25 years. You’ve moved your savings into investments that you believe are appropriate for your retirement portfolio. The investments will provide a constant 6% annual return. You’ll withdraw the same amount at the end of each year.

If you saved this amount Here’s how much you could withdraw annually for 25 years
$100,000  $7,823
$200,000 $14,645
$300,000 $23,468
$400,000 $31,291
$500,000 $39,113
$600,000 $46,936
$700,000 $54,759
$800,000 $62,581
$900,000 $70,404
$1,000,000 $78,227

Keep in mind that these examples don’t include factors such as inflation and volatility that can have a big impact on your purchasing power and account value.

For example, if inflation were 4% a year, a withdrawal of $31,291 25 years from now would only be worth $11,738 in today’s dollars.

Investment losses would decrease your account’s growth potential in subsequent years. To account for these factors, you might need to save even more.

Many experts estimate that you’ll need 80% or more of your final annual salary each year in retirement. Social Security may only provide around 40% of what you need. And don’t forget that retirees typically have different types of expenses compared to people still in the workforce, such as increased health care and travel costs.

This is why planning is so important.  A financial plan will provide you with answers to many of these questions.  Retirees also need to reduce the chances that their portfolio will experience major losses due to market volatility or taking too much risk.  This is where a Registered Investment Advisor who is also a Certified Financial Planner (CFP®) can help.  At Korving & Company we prepare retirement plans and, once you approve of your plan, we will manage your retirement assets to give you peace of mind.

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Getting Financial Help

When people have financial questions, what do they look for?  According to a recent survey most people are looking for someone with experience.  We want to take advice from people who are familiar with the issues we face and know what to do about them.  We all know people with experience, but financial problems, like medical problems, are personal.  Most people we know would rather not go into detail about their personal finances with family or friends.  They are more comfortable sitting down with a financial professional to discuss their finances, their debts, their financial concerns, and their financial goals in both the short and long term. Professionals will provide advice without being judgmental and are required by their code of ethics to keep your information confidential.

Once people find someone who has a track record of giving good, professional advice, they want personalized advice and “holistic” planning.

No two people have exactly the same problems.  A good financial advisor listens attentively to learn the goals, the concerns and personal history of the people who come to him for advice.

People have specific issues and questions.  For example: a couple, aged 39, is seeking advice about their path to retirement.  They give their financial advisor a laundry list of their assets, their investments, their savings rate, their debts, and the ages of their children and ask if they should be doing something different or are they on the right path.  That’s a very specific question and the advisor’s response is going to be personalized for them.

The plan that the advisor comes up with is going to involve much more than money.  It’s going to take their personal characteristics into account.  This includes personal experience with investing, their risk tolerance, and their closely held beliefs and ethical values.  This is what is referred to as “holistic” planning; taking personal characteristics into consideration.

There is a fairly big difference in the advice sought by

  • “Millennials” (those born after 1980 and the first generation to come of age in the current century),
  • “Generation X” (the children of the Baby Boomers) and the
  • “Baby Boomers” (children of the soldiers returning from World War 2)

“Millenials” say that among their top three concerns are saving for a large expense such as a car or a wedding.  Too many are saddled by debt acquired to pay for higher education and are finding that their degrees are not necessarily an entry into high paying professional jobs.  Their next largest concerns are saving for their kids’ education and putting money aside for retirement.

“Generation X” is primarily focused on saving for retirement.  They are married, own their own home and may have children in college.  Concerns two and three are tax reduction and paying for their children’s education.

“Baby Boomers” have finally reached retirement age.  More than a quarter million turn 65 each month.  As a group they are a large and wealthy generation, but a vast number have not saved enough for a comfortable retirement.  Many are forced to continue to work to supplement Social Security income.  Their number one concern is the cost of health care.  Concerns two and three are protecting their assets and having enough income for retirement.  The three concerns for Baby Boomers are inter-connected.  For many Boomers, Medicare helps them with the costs associated with most medical issues.  However, as people live longer, there comes a time when they are unable to care for themselves and live independently.  Long-term-care insurance was once believed to be the answer but insurance companies found that costs were much greater than anticipated.  The result is that many insurers have stopped offering the policies and those remaining have hiked premiums beyond the ability of many to pay.  The cost of long term care is so high that many Boomers are afraid that their savings will soon be exhausted if they are forced into assisted living facilities or nursing homes.

Each generation has its own problems and at a time when the world has gotten much more complicated.  Getting experienced, personalized and holistic financial advice is more important than ever.

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The Retirement Challenge

For most people, retiring means the end of a paycheck, but not the end of an active life.  The typical retiree spends 20 to 30 years in retirement and running out of money is their biggest fear.  When you retire, how will your lifestyle be affected?  Here are some of the things to take into consideration.

Retirement age – Modern retirees face lots of choices that their parents did not have.  There is no longer a mandatory retirement age, so the question “when should I retire” gets more complicated.

Social Security – The age at which you apply for Social Security benefits has a big effect on your retirement income.  Apply early and you reduce your monthly benefits by 25% – 30%, depending on your age.  Wait until you’re 70 and you increase your monthly benefit by up to 32% (8% per year), depending on your age.  If you are married, the decisions get even more complicated.

Pension – If you are entitled to a pension, the amounts you receive usually depend on your length of service.  The formula used to calculate the pension benefit can get quite complicated.  Those who work for employers whose finances are questionable may want to consider whether they will get the benefits they are promised.  If you are married, you will need to decide how much of your pension will go to your spouse if you die first.

Second career – More and more people go back to work after retirement.  Many don’t want to stop working, but do something different.  Others use their skills to become consultants, or turn a hobby into a business.  A second career makes a big difference in your retirement lifestyle and how much income you will have in retirement.

Investment accounts – These are the funds you have saved for retirement: in IRAs, 401(k)s, 403(b)s, 457s, and individual accounts.  These funds are under your control.  Most retirees use them to supplement Social Security and pension income.  They are the key to determining how well people live in retirement.

Combine these issue with the effects of inflation, market volatility, investment returns and health care costs and it becomes apparent that retirees need to plan.  If your retirement is years away, a plan allows you to make mid-course corrections.  If you’re already retired a plan will allow you to sleep soundly, knowing that a lot of the uncertainty has been removed.

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Making Smart Decisions About Social Security

Social Security CardDeciding when to start collecting your Social Security retirement benefits is an important choice that will impact the income you receive for the rest of your life.  The decision can also affect the income and lifestyle of a surviving spouse.

When it comes to Social Security, you may be wondering whether you should: 

  • Start collecting early but receive a reduced benefit?
  • Wait until Full Retirement Age to start collecting your full benefit?
  • Delay past Full Retirement Age to maximize your benefit?

To help make an informed decision, you’ll want to consider a number of key factors, including your marital status, your health, your plans for retirement and your retirement income sources…just to name few.

Your Full Retirement Age (FRA) is the age at which you qualify for 100% of your Social Security benefits (known as your Primary Insurance Amount).  Your FRA is based on your year of birth.

When you’re ready to start collecting benefits, you should apply for Social Security no more than four months before the date you want your benefits to start.

If you start collecting Social Security benefits and then change your mind about your choice of start date, you may be able to withdraw your claim and re-apply at a future date, provided you do so within 12 months of your original application for benefits.  All benefits (including spousal and dependent benefits) must be repaid and you may only withdraw your application for benefits once in your lifetime.

You generally have three main options when it comes to choosing when to start collecting your benefits—often referred to as your Social Security “filing strategy.”

  • Start collecting early
  • Start collecting at Full Retirement Age
  • Start collecting after Full Retirement Age

Each filing strategy has advantages and disadvantages.

Order our white paper on Social Security claiming strategies by calling our office or going to our website.

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Planning to Retire Someday? Start Planning Today!

Americans want help with financial planning.

A recent survey showed that most Americans don’t want to do their own financial planning but they don’t know where to go for help.  60% of adults say that managing their finances is a chore and many of them lack the skills or time to do a proper job.

The need for financial planning has never been greater.  For most of history, retirement was a dream that few lived long enough to achieve.  In a society where most people lived on farms, people relied on family for support.  Financial planning meant having enough children so that when you could no longer work, if you were fortunate enough to reach old age,  you could live with them.

The industrial revolution took people away from the farm and into cities.  Life expectancy increased.  In the beginning of the 20th century life expectancy at birth was about 48 years.  Government and industry began offering pensions to their employees.  Social Security, which was signed into law in 1935, was not designed to provide a full post-retirement income but to increase income for those over 65.

For decades afterward, retirement planning for many Americans meant getting a lifetime job with a company so that you could retire with a pension.  The responsibility to adequately fund the pension fell on the employer.  Over time, as more benefits were added, many companies incurred pension and retirement benefit obligations that became unsustainable.  General Motors went bankrupt partially because of the amount of money it owed to retired workers via pension and health obligations.

As a result, companies are abandoning traditional pension plans (known as “defined benefit plans”) in favor of 401(k) plans (known as “defined contribution plans.”) This shifts the burden of post-retirement income from the employer to the worker.   Instead of knowing what your pension income will be, employees are responsible for investing their money wisely so that they will have enough saved to allow them to retire.

In years past, people who invested some of their money in stocks, bonds and mutual funds viewed this as extra savings for their retirement years.  With the end of defined benefit pension plans, investing for retirement has become much more serious.  The kind of lifestyle people will have in retirement depends entirely on how well they manage their 401(k) plans, their IRAs and other investments.

Fortunately, the people who are beginning their careers are recognizing that there will probably not be pensions for them when they retire.  Even public employees like teachers, municipal and state employees are going to get squeezed.  Stockton, California declared bankruptcy over it’s pension obligations.  The State of Illinois’ pension obligations are only 24% funded.  Other states are facing a similar problem.

In fact, many Millennials we talk to question whether Social Security will even be there for them.  They also realize that they need help planning.  Traditional brokerage firms provide some guidance, but the average stock broker may not have the training, skills or tools to create a financial plan.  Mutual fund organizations can offer some guidance but getting personal financial guidance via a 800 number is not the kind of inpersonal relationship that most people want.

But there is an answer.  The rapidly growing independent RIA (Registered Investment Advisor) industry offers the kind of personal guidance that people want to help them create and execute a successful financial plan that will take them from work through retirement.  Many RIAs are also Certified Financial Planners (CFP™).  Many are fiduciaries who put their clients’ interests ahead of their own.  Dealing with a local RIA is like dealing with a family friend who’s can act as your personal financial guide.

For more information, and a copy of our book Before I Go, contact us.

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