Tag Archives: retirement income

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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Exploding health care costs

Here are some scary projections about the cost of health care for retirees:

 The average lifetime retirement health care premium costs for a 65-year-old healthy couple retiring this year and covered by Medicare Parts B, D, and a supplemental insurance policy will be $266,589. (It is assumed in this report that Medicare subscribers paid Medicare taxes while employed, and therefore will not be responsible for Medicare Part A premiums.)

If we were to include the couple’s total health care (dental, vision, co-pays, and all out-of-pockets), their costs would rise to $394,954. For a 55-year-old couple retiring in 10 years, total lifetime health care costs would be $463,849.

These projections come from Health View Services.

“Obamacare” enrollment has just begun for the coming year and premiums are increasing an average of 22% even as deductibles have increased to $6,000 for the “Bronze” plan before insurance actually pays anything.   The number of companies offering health insurance to individuals is shrinking and some of the larger companies have stopped offering individual policies altogether.

Many people tell us that health care is one of their top concerns in retirement, right up there with running out of money.  Unfortunately the majority has not even begun to put money aside for retirement and those who have underestimate the cost of doctors, hospitals and drugs during their retirement years.

No matter where you are in your life cycle, you should take action now to get to know a knowledgeable financial advisor, preferable a fee-only Registered Investment Advisor (RIA) who specializes in retirement and who can provide guidance on these issues.

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The Public Pension Crisis

Government workers at all levels are likely to have pension plans but there is a big question about the plans’ ability to pay.

According to the Bureau of Labor Statistics (BLS), 92% percent of full-time government employees like teachers and police officers are eligible for pensions, known as “defined benefit plans.”

According to the BLS about 22% of workers in the private sector have pensions, down from 42% in 1990.  In the private sector, retirement plans are much more likely to be 401(k) plans, known as “defined contribution plans.”  Part of the reason for this is that some large companies, like General Motors, accrued huge pension liabilities over the years that they were unable to pay.

Since the Federal Government can print money, federal employees are not worried.  However, states and municipalities depend on their tax base and can’t print money.  That’s where the problem comes in.  Some estimates claim the unfunded liability of public pension plans exceeded $3 trillion dollars.

According to Governing, the city of Chicago’s has an unfunded pension liability of almost $20,000 per capita.  Other cities are somewhat better off, but no big city has a fully funded pension account.  Dallas and Denver, for example are on the hook for between $8,000 and $9,000 per resident.  It’s difficult to even measure the amount of indebtedness because political leaders really don’t want to discuss it.

The problem has been exacerbated by rate-of-return assumptions that are unrealistic.  Most pension funds assume that their assets will grow at rates of seven to eight percent per year indefinitely, a virtual impossibility in this age of low interest rates and sluggish growth.

What does that mean for public employees?   They may want to cast a wary eye on Puerto Rico and some cities in California who have gone into default.  As a wise man once said, “something that can’t go on forever, won’t.”  A little planning ahead won’t hurt.

Whether you are a public employee or work in the private sector we welcome your inquiries.

 

 

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Retirement statistics

  • 65 – The age at which the average American expects to retire, up from 63 in 2002.
  • 26 – Percentage of baby boomers who expect to retire at age 70 or later.
  • $265,000 – the estimated amount a couple, both age 65, should expect to spend on health care.
  • 22 – Percentage of couples who factor health care costs into retirement.
  • 30 – Percentage of adults born in the 1940s and 1950s who have traditional pension plans.
  • 11 – Percentage of adults born in the 1980s who are expected to have a traditional pension plan.
  • 60 – Percentage of medical expenses that Medicare by itself covers.

If some of these statistics don’t scare you read them again.

For others, we may be able to help.

And read the first three chapters of Before I Go.

 

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You Could be Making the Biggest Mistake of Your Life

There are a few things in life you can do that you can’t undo.  You can’t turn back the clock.  Once you jump out of a plane at 15,000 feet, you’re committed to your parachute.  Retirement is another one of those things that is almost impossible to undo.  It’s literally a life-changing event.  So why do so many retire without a plan?

People retiring in their mid-60s will likely spend 20, 30, or more years as a retiree.  Before they make the plunge – “jump out of the plane” – they had better know that they have a parachute that works.

The Baby Boom generation is retiring at the rate of thousands a day and most haven’t planned adequately.  Over the coming decades there will be a lot of changes in their lives.  They will have to spend their time differently.  The cost of living will go up and they may face medical expenses as they grow older.  Their income may not match their expenses and they will need to figure out how to bridge the gap or where to cut back.

A good plan, prepared before you hand in your retirement notice, can take most of these issues into consideration.  If you don’t plan, you could be making the biggest mistake of your life.

Contact us.

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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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Baby Boomers are Getting Richer

According to Bloomberg writer Ben Steverman, Baby Boomers – “part of the wealthiest generation in U.S. history” – just keep getting richer.   The Boomers started turning 65 in 2011 and since then the S&P 500 Index is up 91 percent.

That’s fortunate because the worst thing that can happen to a retiree is for his retirement investment portfolio to decline just as he retires and begins dipping into his savings.  If  the market declines as he retires, with no income to replenish his losses, the retiree find himself in a financial hole he may not be able to climb out of.

Older boomers have experienced what is arguably the best-case scenario: The S&P 500 has returned 269 percent since its March 2009 low. As a recent study in the Journal of Financial Planning shows, wealthy retirees can be very cautious about spending down their savings. This instinct, along with the stock market’s new record, suggests that many boomers are likely to end up with far more money than they know what to do with.

Researchers followed the spending and investing behavior of 65- to 70-year-olds from 2000 to 2008. The poorest 40 percent of the survey respondents generally spent more than they earned, according to the study, which was funded by Texas Tech University. Those in the middle were able to keep their spending at about 8 percent below what they could have safely spent from pensions, investments, and Social Security.

The wealthiest fifth, meanwhile, had a gap of as much as 53 percent between their spending and what they could have spent.

For individuals, broad statistical averages like these are not very useful.  As retirement looms, everyone should have a plan that will help them determine what happens if they get lucky and the market goes up, and what they can safely plan to spend if the market goes down.

Contact us for more information.

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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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Social Security Benefit Changes

Changes in the Social Security law was signed into law November 2, 2015.  These changes affect certain strategies that were used to increase basic Social Security income for many people.

There are two major changes to Social Security benefits under the new law. The first is your ability to file a “restricted application,” which is now limited to filers who were at least age 62 at the end of 2015 (born in 1953 or earlier). A restricted application allows you to first claim benefits from a spouse for a time (typically between full retirement age and age 70) and delay your own retirement benefit until age 70 to earn delayed retirement credits of 8% per year. But for folks born after 1953, this option no longer exists.

If you were born in 1953 or before, to submit a restricted application you must be at least full retirement age. That would be age 66 for anyone born between 1943 and 1954.

The second major change affects those who planned to use a “file and suspend” strategy. This tactic has allowed workers, once they have attained full retirement age, to file for benefits but not actually receive anything. The result before now has been this: 1) The worker’s own benefits have continued to earn delayed retirement credits of 8% per year until the worker was age 70, and 2) Because the worker’s benefit record had been activated, any beneficiaries eligible to claim benefits (i.e., spousal) could have begun collecting those dollars.

The new law changes all that. Family members (other than divorced spouses) are no longer able to receive benefits based on the earnings of workers with a suspended benefit. This part of the law takes effect April 30, 2016. The good news is that anyone who was already taking advantage of this strategy before the deadline will not be affected. 

Who is affected?

For questions, contact us.

 

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