Tag Archives: retirement planning

Getting a written retirement plan makes you twice as likely to succeed.

A study by the Charles Schwab brokerage firm found that people with a written retirement plan are 60 percent more likely to increase their 401(k) contributions and twice as likely than others to stick to a monthly savings goal. But only 24 percent of Americans have a financial plan in writing, according to the study. Those with a plan are also more likely to have a budget and an emergency fund.

Call us for a customized written retirement plan just for you.

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Saving and Retirement

The Center for Retirement Research (CRR) at Boston College, found that 52 percent of working-age U.S. households are at risk of being unable to maintain their standard of living in retirement. Many recognize the possibility of a shortfall but 19 percent do not. Contributing factors include increased life expectancy, declining Social Security income replacement, and the shift from pensions to defined contribution savings plans. Older Americans are entering retirement carrying more debt. According to a paper by the Retirement Research Center at the University of Michigan, more Americans between ages 56 to 61 are carrying more debt than any time in recent history. Another retirement problem receiving increasing attention is the social isolation of retirees, which has been deemed a risk equal to or greater than major health problems such as obesity.

Studies about retirement savings plan contributions indicate a lack of participation by many American workers. A study by the PEW Charitable Trusts found that 25 percent of millennial adults participate in employer-sponsored defined contribution retirement plans versus 40 percent of Generation X and 43 percent of baby boomers. Stated another way, a large majority of millennials have no retirement savings plan.

If you are concerned about having the money to retire, call us.

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How to Avoid Fumbling Your Retirement Money

NFL football player Marion Henry retired from football at age 28.  Professional athletes usually begin a second career after they give up the game, most because they have to.  Here’s his admission:

Eighty percent of retired NFL players go broke in their first three years out of the league, according to Sports Illustrated.

I was one of them.

Out of football and money at age 28, I saw the financial woes of big-money ballplayers as symptomatic of a larger problem plaguing average Americans – a retirement problem. Experts say many people are inadequately prepared or poorly advised when it comes to retirement planning. As a result, they outlive their funds.

 

He goes on to make the point that:

When I played football, we practiced against the worst-case scenario that we could face on game day. Many Americans are not planning for those worst-case scenarios in the fourth quarter of their lives, and some who believe they are prepared may have a false sense of security.

 

People often have a false sense of security because they have not really priced out all the expenses that they will incur during retirement, or considered the effects of inflation on the cost of living as they get older.  They also assume that their investments will continue to grow at the same rate as they have in the past.  And few retirees really plan for how they will pay for long-term care if they should develop serious long-term illnesses not covered by Medicare.

A good retirement planning program will take these issues into consideration.   Visit an dependent RIA who will prepare a retirement plan for you and take the guesswork out of retirement.

 

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Questions and answers about retirement

A couple facing retirement asks:

I will retire in the Spring of 2018 (by then I will have turned 65). My wife is a teacher and will retire in June of 2018. When we chose 2018 as our retirement date, we paid off our house. At the same time we replaced one of our older cars with a new one and paid cash. We have no debt. We will begin drawing down on our investments shortly after my wife retires. Also we both plan to wait until we are 66 to draw on Social Security. Our current nest egg is divided 50/50 in retirement accounts and regular brokerage accounts. About 60% are in equities and mutual funds. The rest is in bonds and cash. I’ve read about the 4% rule, adjusting annually up depending on inflation, expenses and market performance. As of today, based on our retirement budget, we can generate enough cash only using our dividends to live on. In our case this approach would have us taking interest and dividends from all accounts, including IRA, 457 B and 403 B before we are 70 years old. Seems that this approach would make it easier to deal with market volatility, yet it does not seem to be favored by the experts.

My answer:

There are a number of different strategies for generating retirement income. The 4% rule is based on a study by Bill Bengen in 1994. He was a young financial planner who wanted to determine – using historical data – the rate at which a retiree could withdraw money in retirement and have it last for 30 years. The rule has been widely adopted and also widely criticized. It’s a rule of thumb, not a law of nature and there are concerns that times have changed.

Based on your question you have determined that the dividends from your investments have generated the kind of income you need to live on in retirement. Like the 4% rule, there is no guarantee that the dividends your portfolio produces in the future will be the same as they have in the past. Dividends change. Prior to the market melt-down in 2008 some of the highest dividend paying stocks were banks. During the crash, the banks that survived slashed their dividends. Those that depended on this income had to put off retirement because their retirement income disappeared.

I would suggest that this is an ideal time to consult a certified financial planner who will prepare a retirement plan for you. A comprehensive plan should include your income sources, such as pensions and social security. The expense side should include your basic living expenses in addition to things you would like to do. This includes the cost of new cars, travel and entertainment, home repair and improvement, provisions for medical expenses, and all the other things you want to do in retirement. It will also show you the effects of inflation on your expenses, something that shocks many people who are not aware of the effects of inflation over a 30-year retirement span.

Most sophisticated financial planning programs forecast the chances of meeting your goals based on a “total return” assumption for your investments. Of course, the assumptions of total return are not guaranteed. Many plans include a “Monte Carlo” analysis which takes sequence of returns into consideration.

That’s why the advice of a financial advisor who specializes in retirement may be the most important decision you will make. An advisor who is a fiduciary (like an RIA) will monitor your income, expenses and your investments on a regular basis and recommend changes that give you the best chance of living well in retirement.

Finally, tax considerations enter into your decision. Most retirees prefer to leave their tax sheltered accounts alone until they are required to begin taking distributions at age 70 ½. Doing this reduces their taxable income and their tax bill.

I hope this helps.

If you have questions about retirement, give us a call.

 

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What is the right amount to save when aiming for a certain retirement goal?

Question from middle-aged worker to Investopedia:

I am 58 years old earning $100,000 per year and have investments in multiple retirement accounts totaling $686,250. I’m retiring at the age of 65. I am currently investing $16,000 per year in my accounts. I project to have $848,819 in my retirement accounts at the age of 65. I will be collecting $2,200 in Social Security when I retire. I also do not own my home due to my divorce. How much money will I need to hit my projection? Should I be saving more?

My answer:

I believe that you may be asking the wrong question. For most people, a retirement goal is the ability to live in a certain lifestyle. To afford a nice place to live, travel; buy a new car from time to time, etc. By viewing retirement goals from that perspective you can “back into” the amount of money you need to have at retirement.

To do that correctly you need a retirement plan that takes all those factors into consideration. At age 65 you probably have 20 to 30 years of retirement ahead of you. During that time inflation will affect the amount of income it takes to maintain your lifestyle. You will also have to estimate the return on your investment assets. As you can see, there are lots of moving parts in your decision making process. You need the guidance of an experienced financial planner who has access to a sophisticated financial planning program. Check out his or her credentials and ask if, at the end of the process, you will get just a written plan or have access to the program so that you can play “what if” and see if there are any hidden surprises in your future.

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Retirement Planning 101

An Investopedia reader from Indiana asks this question:

 I have $1,000,000 in my 401(k) and am 48 years old. My wife and I have a $550,000 house paid off with no debt. We have $200,000 in CD’s and cash. I have a pension that assures I will receive $1,200 per month for life. Currently, I maxed out on my 401(k). We save $35,000 per year on top of both of our 401(k)’s. My wife is 50 and she also maxed out her 401(k), but plans to retire at 52. My question is when can I or should I retire? 

Here’s my answer:

That is a great question.  Congratulations on having accumulated much more savings than most people your age.  To answer your question I would have to know a great deal more about you.   For example:

  • How much does it take you to live the lifestyle you would like in retirement?
  • How long will you and your wife live?
  • How do you plan to pay for medical expenses?
  • When will you and your wife apply for Social Security benefits and how much will those be?
  • What is your estimate for inflation as it affects the cost of living?
  • Is your pension fixed or indexed for inflation?
  • How will you invest your savings?
  • Can you live in your pension and savings until you are 59 ½ and begin drawing on your 401(k) without a penalty?

These are just a few of the questions that need answering.

A million dollars is quite a bit of money.  At your age your life expectancy is 36 years.  Using the inflation rate (2.9%) for the past 36 years, something that costs $1.00 today will take $2.80 by the end of you actuarial life.

There are a lot of factors that need to be considered before you can get a good answer to your question.  I would strongly recommend that you sit down with a financial planner who will provide you with a realistic retirement projection.  The last thing you want to do once you retire is to find out that you have to go back to work to make ends meet.

If you are thinking about retiring, doing some serious planning is an absolute must, especially if you plan to retire early.  Call us for an appointment.

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Answering the important retirement questions.

With over 100 million people in America closing in on retirement, big questions arise.  Most investment advisors are oriented toward providing advice on how to build assets, but lack the tools and experience to advise their clients about how to live well during decades of retirement.

The most common advice that retirees get involves invoking the “4% Rule.”  That number is based on a 60-year-old-study that may well be out of date.  Individuals and families should be getting better guidance because now retirement often spans decades.  Many people are retiring earlier and living longer.

There are many critical decisions that must be made before people leave their jobs and live on their savings and a fixed income.

  • When should I claim Social Security benefits?
  • What happens if I live too long? Will I run out of money?
  • What would happen to my income if my spouse died early?
  • Will I need life insurance once I retire? If so, how much?
  • What are the effects of Long-Term-Care on my retirement plans?
  • Can I afford the items on my “wish list?”
  • Will I leave some money to my heirs?

Some Registered Investment Firms (RIAs) have the sophisticated financial planning tools to answer these questions.  They are often CFPs® and focus on retirement planning.  Once a plan is prepared, these same RIAs, acting as fiduciaries, are often asked to help their clients manage their assets to meet their retirement income goals.

If you are approaching retirement and have questions or concerns, contact us.  We’ll be glad to provide you with the answers.

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Beware the Quirks of the TSP in retirement

The TSP (Thrift Savings Plan) is a retirement savings and investment plan for Federal employees. It offers the kind of retirement plan that private corporations offer with 401(k) plans.

Here is a little information about he investment options in the TSP.

The TSP funds are not the typical mutual fund even though the C, F, I, and S index funds are similar to mutual fund offerings.

The C Fund is designed to match the performance of the S&P 500

The F Fund’s investment objective is to match the performance of the Barclays Capital U.S. Aggregate Bond Index, a broad index representing the U.S. bond market.

The I Fund’s investment objective is to match the performance of the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index.

The Small Cap S Fund’s objective is to match the performance of the Dow Jones U.S. Completion Total Stock Market Index, a broad market index made up of stocks of U.S. companies not included in the S&P 500 Index.

The G Fund is invested in nonmarketable U.S. Treasury securities that are guaranteed by the U.S. Government and the G Fund will not lose money.

One advantage of the TSP is that the expenses of the funds are very low.  However, if you plan to keep your money in the TSP after you retire you need to understand your options because there are traps for the unwary.

The irrevocable annuity option.  

This option provides you with a monthly income.  You can choose an income for yourself or a beneficiary – such as your spouse – that lasts your lifetime or the lifetime of the beneficiary.  The payments stop at death.  Once your annuity starts, you cannot change your mind.

Limited withdrawal options. 

You can’t take money out of your TSP whenever you want.  When it comes to taking money out you have two options.

  1. One time only partial withdrawal. You have a one-time chance to take a specific dollar amount from your account before taking a full withdrawal.
  2. Full withdrawal.   You can choose between a combination of lump-sum, monthly payments or a Met-Life annuity.

Limited Monthly Payment Changes

If you take monthly payments from your TSP as part of your full withdrawal option you can change the amount you receive once a year, during the “annual change period” but it takes effect the next calendar year.  If you choose this option, make sure that you know how much you will need for the coming year.

Proportionate distribution of funds

When you take money out of your TSP you have no choice over which fund is liquidated to meet your income needs.  It comes out in proportion to which your money is invested.  This means you can’t manage your TSP and decide which of the funds you will access to get your distribution.

If you want to give yourself greater flexibility once you retire you have the option of rolling the TSP assets into a rollover IRA without incurring any income tax.

 

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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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