A Retirement Fact Sheet

Some specifics about the “second act.”

Does your vision of retirement align with the facts? Here are some noteworthy financial and lifestyle facts about life after 50 that might surprise you.

Up to 85% of a retiree’s Social Security income can be taxed. Some retirees are taken aback when they discover this. In addition to the Internal Revenue Service, 13 states levy taxes on some or all Social Security retirement benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. (It is worth mentioning that the I.R.S. offers free tax advice to people 60 and older through its Tax Counseling for the Elderly program.)

Retirees get a slightly larger standard deduction on their federal taxes. Actually, this is true for all taxpayers aged 65 and older, whether they are retired or not. Right now, the standard deduction for an individual taxpayer in this age bracket is $13,500, compared to $12,200 for those 64 or younger.

Retirees can still use IRAs to save for retirement. There is no age limit for contributing to a Roth IRA, just an inflation-adjusted income limit. So, a retiree can keep directing money into a Roth IRA for life, provided they are not earning too much. In fact, a senior can potentially contribute to a traditional IRA until the year they turn 70½.

A significant percentage of retirees are carrying education and mortgage debt. The Consumer Finance Protection Bureau says that throughout the U.S., the population of borrowers aged 60 and older who have outstanding student loans grew by at least 20% in every state between 2012 and 2017. In more than half of the 50 states, the increase was 45% or greater. Generations ago, seniors who lived in a home often owned it, free and clear; in this decade, that has not always been so. The Federal Reserve’s recent Survey of Consumer Finance found that more than a third of those aged 65-74 have outstanding home loans; nearly a quarter of Americans who are 75 and older are in the same situation.

As retirement continues, seniors become less credit dependent. GoBankingRates says that only slightly more than a quarter of Americans over age 75 have any credit card debt, compared to 42% of those aged 65-74.  

About one in three seniors who live independently also live alone. In fact, the Institute on Aging notes that nearly half of women older than age 75 are on their own. Compared to male seniors, female seniors are nearly twice as likely to live without a spouse, partner, family member, or roommate. 

Around 64% of women say that they have no “Plan B” if forced to retire early. That is, they would have to completely readjust and reassess their vision of retirement and also redetermine their sources of retirement income. The Transamerica Center for Retirement Studies learned this from its latest survey of more than 6,300 U.S. workers.    

Few older Americans budget for travel expenses. While retirees certainly love to travel, Merrill Lynch found that roughly two-thirds of people aged 50 and older admitted that they had never earmarked funds for their trips, and only 10% said that they had planned their vacations extensively.

What financial facts should you consider as you retire? What monetary realities might you need to acknowledge as your retirement progresses from one phase to the next? The reality of retirement may surprise you. If you have not met with a financial professional about your retirement savings and income needs, you may wish to do so. When it comes to retirement, the more information you have, the better. 

 

Citations.
1 – gobankingrates.com/retirement/planning/weird-things-about-retiring/ [8/6/18]
2 – forbes.com/sites/kellyphillipserb/2018/11/15/irs-announces-2019-tax-rates-standard-deduction-amounts-and-more [11/15/18]
3 – thestreet.com/retirement/18-facts-about-womens-retirement-14558073 [4/17/18]

A Bucket Plan to Go with Your Bucket List

A way to help you prepare.

The baby boomers redefined everything they touched, from music to marriage to parenting and even what “old” means – 60 is the new 50! Longer, healthier living, however, can put greater stress on the sustainability of retirement assets.

There is no easy answer to this challenge, but let’s begin by discussing one idea – a bucket approach to building your retirement income plan.

The Bucket Strategy can take two forms.

The Expenses Bucket Strategy: With this approach, you segment your retirement expenses into three buckets:

* Basic Living Expenses – food, rent, utilities, etc.

* Discretionary Expenses – vacations, dining out, etc.

* Legacy Expenses – assets for heirs and charities

This strategy pairs appropriate investments to each bucket. For instance, Social Security might be assigned to the Basic Living Expenses bucket. If this source of income falls short, you might consider whether a fixed annuity can help fill the gap. With this approach, you are attempting to match income sources to essential expenses.

The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).

For the Discretionary Expenses bucket, you might consider investing in top-rated bonds and large-cap stocks that offer the potential for growth and have a long-term history of paying a steady dividend. The market value of a bond will fluctuate with changes in interest rates. As rates fall, the value of existing bonds typically drop. If an investor sells a bond before maturity, it may be worth more or less than the initial purchase price. By holding a bond to maturity an investor will receive the interest payments due, plus their original principal, barring default by the issuer. Investments seeking to achieve higher yields also involve a higher degree of risk. Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. Dividends on common stock are not fixed and can be decreased or eliminated on short notice.

Finally, if you have assets you expect to pass on, you might position some of them in more aggressive investments, such as small-cap stocks and international equity. Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss.

International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risk unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility.

The Timeframe Bucket Strategy: This approach creates buckets based on different timeframes and assigns investments to each. For example:

* 1 to 5 Years: This bucket funds your near-term expenses. It may be filled with cash and cash alternatives, such as money market accounts. Money market funds are considered low-risk securities but they are not backed by any government institution, so it’s possible to lose money. Money held in money market funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Money market funds seek to preserve the value of your investment at $1.00 a share. However, it is possible to lose money by investing in a money market fund. Money market mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

* 6 to 10 Years: This bucket is designed to help replenish the funds in the 1-to-5-Years bucket. Investments might include a diversified, intermediate, top-rated bond portfolio. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline.

* 11 to 20 Years: This bucket may be filled with investments such as large-cap stocks, which offer the potential for growth.

* 21 or More Years: This bucket might include longer-term investments, such as small-cap and international stocks.

Each bucket is set up to be replenished by the next longer-term bucket. This approach can offer flexibility to provide replenishment at more opportune times. For example, if stock prices move higher, you might consider replenishing the 6-to-10-Years bucket, even though it’s not quite time.

 

A bucket approach to pursue your income needs is not the only way to build an income strategy, but it’s one strategy to consider as you prepare for retirement.

Citations.
1 – kiplinger.com/article/retirement/T037-C000-S002-how-to-implement-the-bucket-system-in-retirement.html [8/30/18]

401(k) Loan Repayment

A longer repayment time can be an advantage.

The conventional wisdom about taking a loan from your 401(k) plan is often boiled down to: not unless absolutely necessary. That said, it isn’t always avoidable for everyone or in every situation. In a true emergency, if you had no alternative, the rules do allow for a loan, but they also require a fast repayment if your employment were to end. Recent changes have changed that deadline, offering some flexibility to those taking the loan. (Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.

The new rules. Time was, the requirement for repaying a loan taken from your 401(k)-retirement account after leaving a job was 60 days or else pay the piper when you file your income taxes. The 2017 Tax Cuts and Jobs Act changed that rule – now, the penalty only applies when you file taxes in the year that you leave your job. This also factors in extensions.

So, as an example: if you were to end your employment today, the due date to repay the loan would be the tax filing deadline, which is April 15 most years or October 15 if you file an extension.

What hasn’t changed? Most of what transpires after a 401(k) loan still applies. Your repayment plan involves a deduction from your paycheck over a period of five years. The exception would be if you are using the loan to make a down payment on your primary residence, in which case you may have much longer to repay, provided that you are still with the same employer.

You aren’t just repaying the amount you borrow, but also the interest on the loan. Depending on the plan, you’re likely to see a prime interest rate, plus 1%.

If you do take the loan, a good practice may be to continue making contributions to your 401(k) account, even as you repay the loan. Why? First, to continue building your savings. Second, to continue to take advantage of any employer matching that your workplace might offer. While taking the loan may hamper your ability to build potential gains toward your retirement, you can still take advantage of the account, and that employee match is a great opportunity.

Citations.
1 – kiplinger.com/article/taxes/T001-C001-S003-ex-workers-get-more-time-to-repay-401-k-loans.html [2/13/19]

What the SECURE Act Could Mean for Retirement Plans

If passed, it would change some long-established retirement account rules.

If you follow national news, you may have heard of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Although the SECURE Act has yet to clear the Senate, it saw broad, bipartisan support in the House of Representatives

This legislation could make Individual Retirement Accounts (IRAs) a more attractive component of retirement strategies and create a path for more annuities to be offered in retirement plans – which could mean a lifetime income stream for retirees. However, it would also change the withdrawal rules on inherited “stretch IRAs,” which may impact retirement and estate strategies, nationwide.

Let’s dive in and take a closer look at the SECURE Act.

The SECURE Act’s potential consequences. Currently, traditional IRA owners must take annual withdrawals from their IRAs after age 70½. Once reaching that age, they can no longer contribute to these accounts. These mandatory age-linked withdrawals can make saving especially difficult for an older worker. However, if the SECURE Act passes the Senate and is signed into law, that cutoff will vanish, allowing people of any age to keep making contributions to traditional IRAs, provided they continue to earn income.

(A traditional IRA differs from a Roth IRA, which allows contributions at any age as long as your income is below a certain level: at present, less than $122,000 for single-filer households and less than $193,000 for married joint filers.)

If the SECURE Act becomes law, you won’t have to take Required Minimum Distributions (RMDs) from a traditional IRA until age 72. You could actually take an RMD from your traditional IRA and contribute to it in the same year after reaching age 70½.

The SECURE Act would also effectively close the door on “stretch” IRAs. Currently, non-spouse beneficiaries of IRAs and retirement plans may elect to “stretch” the required withdrawals from an inherited IRA or retirement plan – that is, instead of withdrawing the whole account balance at once, they can take gradual withdrawals over a period of time or even their entire lifetime. This strategy may help them manage the taxes linked to the inherited assets. If the SECURE Act becomes law, it would set a 10-year deadline for such asset distributions.

What’s next? The SECURE Act has now reached the Senate. This means it could move into committee for debate or it could end up attached to the next budget bill, as a way to circumvent further delays. Regardless, if the SECURE Act becomes law, it could change retirement goals for many, making this a great time to talk to a financial professional.

Citations.
1 – financial-planning.com/articles/house-votes-to-ease-rules-for-rias-correct-trump-tax-law [5/23/19]
2 – irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2019 [6/18/19]
3 – congress.gov/bill/116th-congress/house-bill/1994 [6/17/19]
4 – shrm.org/resourcesandtools/hr-topics/benefits/pages/house-passes-secure-act-to-ease-401k-compliance-and-promote-savings.aspx [5/23/19]

Should you… take your money and run?  

bear

Based on Federal Reserve Policy and geopolitical risks a stock market crash may be virtually unavoidable. The recent 10 percent declines are a sign that the party is likely over. I think the February correction was a foreshock — and stocks could lose more than 20 to 25 percent of their value by year’s end or sooner.

All this volatility with the VIX [Cboe volatility index] having doubled is very, very disturbing. I am more than concerned with the trade wars and Syria and Trump’s rhetoric toward Russia is an additional source of anxiety.

In a tweet Wednesday, Trump wrote “Russia vows to shoot down any and all missiles fired at Syria. Get ready Russia, because they will be coming, nice and new and ‘smart!'” But on Thursday, he tweeted that a U.S. missile strike on Syria in response to its alleged use of chemical weapons may not be imminent.

Rising interest rates will inevitably put the economy under pressure. Fed rate hike cycles historically lead to recessions and deep market declines. This time is no different because the market is very overvalued.

John Hussman, president of Hussman Investment Trust, who describes himself as an economist and a philanthropist is concerned the stock market shows signs of unraveling on the back of the tech sector’s stumble. Hussman’s claim to fame includes forecasting the market collapses of 2000 and 2007-2008. In his most recent call, he argued that measured “from their highs of early-2018, we presently estimate that the completion of the current cycle will result in market losses on the order of -64% for the S&P 500 index, -57% for the Nasdaq-100 Index, -68% for the Russell 2000 index, and nearly -69% for the Dow Jones Industrial Average.”

He admits the numbers seem extreme but says they are backed up by what he refers to as the “Iron Law of Valuation.” “The higher the price investors pay for a given set of expected future cash flows, the lower the long-term investment returns they should expect. As a result, it’s precisely when past investment returns look most glorious that future investment returns are likely to be most dismal, and vice versa,” he writes. Check out Prepare for the biggest stock-market selloff in months. According to Hussman’s math, from 2009 to 2018, the S&P 500’s price sales ratio jumped from less than 0.7 to a multiple of 2.4 this year, the highest on record. And it’s not just that particular valuation metric that bothers Hussman. He also detects other signs of weakness.

“At present, our measures of market internals remain unfavorable, partly because of deterioration in interest/credit sensitive sectors, as well as tepid participation (the number of individual stocks participating in various market advances), divergent leadership (for example, a large number of stocks simultaneously hitting 52-week highs and lows), and the divergences we observe in an array of other sectors,” he said.

These trends suggest that investors are becoming less willing to take on risk, a bad sign for equities as stocks generally flourish when market participants are willing to make risky bets.

And he warns that the stock market won’t be able to escape this “danger zone” until it shifts to a less dangerous combination of valuations, internals and overextended conditions.

He provides numerous charts on valuations to back up his theory which can be found on his blog.

“The best time to protect money is while you have it.”  

                                                   ~Tom Penland

PAYING WITH OUR HEALTH

vbnThe survey, Paying with Our Health finds, money continues to be the leading cause of stress for Americans. When we think of health, we think about diet and exercise. Both very important, but stress can undo a lot of the good you accomplish from diet and exercise.

Financial worries served as a significant source of stress for 64 percent of adults, ranking higher than three other major sources of stress: work (60 percent), family responsibilities (47 percent), and health concerns (46 percent).

Money is a very important component of establishing a healthy, secure life. When we are financially challenged, it makes sense that our stress level would go up. This is true at any age. Financial stress affects everyone, and to an increasing degree, retirees. You must be prepared for retirement with sufficient income. Yes, I said… income. Income to pay bills and live the life you want to live. Rolling the dice in the stock market, for income you will 100% need, is the wrong way to go about it too! Wall Street does not want you to know this! Risk only adds more stress.

Stress will shorten your life and make it less worth living. Be prepared for the ‘income’ you will need when your paycheck stops. Women are more likely than men to report money as a significant source of stress too. Women need to find out what their guaranteed income options are as early as possible, to avoid stress in retirement. Inflation for retirees can be a silent killer and exacerbate their money worries. We don’t want to feel squeezed, in terms of taking care of our daily needs.

Talk about money stress and health, 20 percent of adults said they have skipped or considered skipping going to the doctor for treatment because of money concerns. Almost one-third of adults with partners report that money is a major source of conflict resulting in intimacy distance.

Some things to think about; live below your means, realize the payments from unnecessary purchases far outlast the pleasure, establish a saving habit, and do not spend money you do not have. Be prepared and if necessary, do not be afraid to seek emotional support from family, friends and even health and wealth coaches. People without any support tend to suffer worse.

To combat money stress, the best thing… is to be prepared; manage your money to reduce stress. Decrease risk, it does not pay like ‘they’ say it does. Realize most of what you think you know about money, investing, and retiring is taught by people selling something. The money world, the financial world is somewhat of a matrix that you need to break out of, to wake up from. Wake up!

Don’t Worry, You Are Going to Get Happier. Ha!

downloadAs we age, things start to go downhill: bad knees, high blood pressure, not being as needed by the world we more recently inhabited, and slowly tallying the friends and acquaintances who have passed from our lives. From that you would assume as we age our happiness decreases. But for most of us that is not true!

Most of us wonder about how to be happy, and also what life will look like as we age? Our cycle of life is such that, for most people, are pretty happy when we are young, for lots of reasons. But then we slog and grind our way through our 30s to our 50s, dealing with unrealized goals and avoiding uncomfortable truths about ourselves. But as we approach 60 all indications are that we get happier, become more satisfied. I am 63, and have dealt with life’s realities, like everyone. Oh, and I accept them. Ha! Maybe that is what they mean when they say “we get wiser as we age”. Giving up control over things we cannot control, came to me late in life. But, I now find that comforting and have more peace.

imagesIt turns out that at that time in our lives, we start to shed a lot of our illusions and disappointments and start appreciating what we have and where we want to make a difference — literally forgetting about the Joneses or the regrets of a musical, or artistic career never pursued. Instead we turn our eyes to those most important to us, like family, friends, and others in our circle of loved ones.

It’s really easy to get caught up in our here and now, and divert our eyes from the distant horizon. Let’s face it, we’re all pretty busy doing what we are doing. It’s also easy to wonder what life is all about, and maybe feel like we kinda missed out on what we thought, at the time, would make us happy. What I think we really have done is not see what is most important, and not focused on those things. And that just takes time. But the nice part? As you age, you will probably be happier and more content.

That crossover in life expectations reminds me of what we experience in the financial markets all the time. The former high-flying stock markets bottoms out as earnings expectations eventually catch up with reality… or some off the ‘thing’ like Hawaii is notified of an incoming ballistic missile (on a day the market is open).  Many of the disappointed retirees sell out, and those remaining are satisfied just keeping up with inflation, many without even realizing it.

Our lives are not investments. But expectations matter. The evidence on the midlife valley in life satisfaction is overwhelming. If it doesn’t hit you smack-dab between the eyes, consider yourself lucky. We spend so much time planning our financial lives: saving, working, spending. We do little to plan for life’s inevitable shocks, whether they be in middle age or in retirement. Just knowing about this little talked about reality of life will remind you that you are not unique, and there is a reason for optimism as you emerge from the valley of disappointments of the 40’s and 50’s into the sunshine of the 60’s.

So what all this means it that you can literally plan on being happier as you age, with the understanding that your 30s to your mid-50s may be disappointing in many ways. But you probably won’t care about that once you are through it. You’ve got good things ahead. As I always say, “bolder not older”.

You can HOPE you do not run out of money or…

images (1)… you can KNOW that you will not. Most workers today are retiring without a pension. If you are one of them then you might be worried out running out of money. Turing an investment portfolio into a steady stream of income has gotten harder over the years because of low bond yields, high market volatility, and increased longevity. But it can be done. As a Retirement Income Certified Professional, RICP®- this is the process I use to help people that want more certainty, want to know they will never run out of money.

STEP #1: WE LOOK AT HOW MUCH THEY HAVE SAVED. One source of guaranteed income most of us have is Social Security. If you are married, then you might be able to count on two checks. What other sources of guaranteed income will you have, rental, inheritance, reverse mortgage, etc? Will you be working part-time?

download (1)STEP #2: I CALCULATE WHAT THEY WILL NEED. We do not low ball either. We don’t use general rules of thumb, like you will only need 80% of your working years income. I have not found this to be true, in reality. Not in Southern, CA. We want to detailed, realistic and specific to one’s situation. That is real life.

STEP #3: ARE WE COMING UP SHORT of what is required, whether now or later?

downloadThe difference between the income you need and the income you have is the income that’s missing. In an article titled Psychology of Retirement Satisfaction, it is evidenced that retirees with more certainty about what they have and will have to live on for the rest of their lives are MORE SATISFIED. NOTE: contentment increases with lifelong guarantees but… does not increase based on how much one has at risk in their portfolio. It is less stressful to spend the money earmarked as retirement income than it is to spend down money directly from your portfolio. The only way to use part of your portfolio to replace the secure, lifetime pension you’re missing is by investing in a product designed to give you a steady income. This is where an annuity can be part of a successful income strategy.

STEP #4: WHAT? WHEN? HOW? WHY? WHERE? Once our clients come to understand what having income certainty means, we then set about figuring out what is the best way, best annuity, best company, best time to start income and why. It must be designed specifically for that individual or couple. This involves, INCOME PLANNING which is something different than financial planning. Very few professionals are trained to do this. This looks at year by year, where the income will come from for you to live on for as long as we anticipate you will live. Our clients have found this unbelievably valuable, a retirement game changer and life saver.

STEP #5: THEN WE REVIEW AND ADJUST EACH YEAR. This is as important as putting the right plan in place. Maybe even more so. Life changes, therefore we want and need flexibility. That provides additional peace of mind. In reality, it is peace of mind that most every retiree wants. They want to mentally be able to relax. KNOWING they will have enough money to live on for the rest of their lives provides that in a way that an at risk portfolio subject to marker risk cannot.

If you have questions about the best way to secure your retirement income, we encourage you to give us a call. We will help to educate you, help you to understand the retirement realities in one of our upcoming courses or workshops.

 

“I Would Never Put My Money in an Annuity”

“The last thing I want to do is lose some of my hard-earned money to the stock market”. And so it goes. People have strong opinions about both. When I do ‘Income Planning’ I make it very clear that the most important requirement for a good retirement plan is that the clients have peace of mind. They should do what they want with their money. After all, they worked for it. Risk it, protect it, a combination of both… Whatever you decide is right for ‘you’.

160202155232-annuity-780x439I have been a financial professional for 35 years and seen it all, what works and what doesn’t. There are many different types of annuities and a lot of unnecessary confusion. But, since their inception in 1995, I have thought that Fixed Index Annuities can play a critical role in many retirement plans. My conviction gets stronger all the time.  I’d like to share some different perspectives that may help you decide.

A Fixed Index Annuity is a contract typically provided by an insurance company to an “annuitant” (often a retiree).  It can be used to mitigate longevity risk, outliving our retirement savings as well as a potentially great growth opportunity that also protects your principal against loss. The public has been deceived about the returns too. I have clients doing better over time by risking less.

The insurance company invests your investment in the annuity in bonds. It also uses premiums paid by annuitants who don’t live a long time to help pay annuitants who do live a long time using what are referred to as “mortality credits.” The payouts you receive come from bond interest, from increases in an underlying market index as well as from a partial return of your own capital, the money you worked for.

One the greatest objection to annuities is the you must give up your principal to get income. This is NOT TRUE for a Fixed Index Annuity. You do not give up any principal to get income, as it is provided via a ‘rider’. You principal will continue to be added to, even after you turn on lifetime income, in any year there are gains in the underlying index. They can earn money when the market goes up and NEVER LOSE when the market goes down. The remaining value of your account is available to you, subject to a predesignated free withdrawal schedule, known in advance.

imagesHERE ARE SOME OF THE REASONS I LIKE FIAS FOR SOME OF MY ASSETS:

  • It is a ‘protected’ asset outside of the Wall St (Red Money) bucket
  • I can make money when the market index increases but I never lose if it goes down
  • They don’t lose principal providing a source of money that has not (will not) go down in value because of market loss
  • They provide longevity insurance by GT’ing income for one or both lives
  • Remaining principal, interest, & bonus paid to heirs
  • Liquidity ranges from 7% to 100%
  • Account value credits gains even after income is started
  • Guaranteed income cost is fixed, typically 1%
  • Income continues even if account value goes down to zero

Risk selling advisors sometimes try to make you feel stupid if you consider an annuity. But here are just a few prominent, figures who have owned annuities: Benjamin Franklin(no dummy) assisting the cities of Boston and Philadelphia; Babe Ruth avoiding losses during the great depression, and O. J. Simpson (Hey, I did not say you had to be a good person to own an annuity) protecting his income from lawsuits and creditors. Ben Bernanke (the previous Fed Chairman who knows as much as anyone or more about money, insurance companies and protection as well as Wall St and their risk strategies… in 2006 disclosed that his major financial assets were annuities. —THINK FOR YOURSELF!