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Life Cycle Retirement Success

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The main goal of life cycle finance is to effectively distribute a person’s income from the working and earning years over their entire life. Saving becomes important in order to fund the later years, when one leaves the workforce and rely on those assets to supplement Social Security, employer pensions and other income.

In life many of the important financial choices we face are shrouded in uncertainty and fraught with risk. For instance, we can’t predict with accuracy the financial needs of our families, the returns we will earn on our investments or how long we will live in retirement.

Retirement is a fairly recent phenomenon. In the past, life expectancy was much shorter, and those lucky enough to live a relatively long life worked until they were no longer capable, and they didn’t live long after they stopped working.  One note of caution as you’re thinking about retirement strategies: nothing will make up for the fact that you haven’t saved enough.  Savvy retirees know that successful portfolio oversight is just one part of financial success in retirement.

Managing expenses is also essential. Anticipating near- and longer-term expenses is an important part of the process so it is important to model out how big-ticket items and unplanned expenses will affect the portfolio’s cash flow.

Investors face a difficult investing environment, with low yields on fixed-income investments and an economy on the mend. Some investors may opt to “chase return,” meaning they put their assets into riskier and sometimes complicated products that promise higher yields than they can get in more traditional investments. Investors should realize that they could be taking on more risk if they invest in products with higher returns.

Thankfully, experts say there are a number of strategies to avoid or at least mitigate the risk of outliving your assets or what some describe as longevity risk. If you knew your date of death, retirement planning would be a breeze. Unfortunately, you likely don’t know when you’ll die. That means you have to plan for an unknown — how many years you and, for some, your spouse might live.

The first reality is that most people live longer than they expect.A 65-year-old couple has an 88 percent chance that one of them will live to age 80; a 73 percent chance one will live to age 85; and a 49 percent chance one will live to age 90. So they will be collecting benefits for a long time.

Think strategy rather than plan. Start by turning off the stock market report. Nothing is more useless than knowing whether the Dow is up or down 100 points today.  A strategy allows for contingencies. It specifies types of actions to take, depending on what scenario unfolds. In other words, you have to plan to make sure you don’t run out of money before you run out of life. And that’s no easy task.

The immediate annuity: a retirement paycheck to yourself is a better strategy: Not only does it provide more financial security to retirees, there are positive psychological benefits. Some of them are simply different numbers, such as the idea of a “retirement paycheck”.  Here’s how they work: you turn over a lump sum of money to the insurance company in exchange for a stream of income that will last as long as you do, with that monthly check reflecting how much you can put down, your age today and how long the insurance company figures you’ll live.

If you’re a 65-year-old woman, you can turn $200,000 into a lifetime (inflation-adjusted) income of between $1,000 and $1,100 a month; if you’re 70, the same sum will bring you as much as $1,230 a month. Those dollar figures may not sound immense. But especially for those in their late 40s to mid-60s who are starting to realize that they may not have saved enough for retirement, they could be a big help when combined with social security payments.

While many Americans are not prepared for retirement, and only 54% of non-retired respondents have some kind of retirement account, we feel that workers should continue to use tax-advantaged savings accounts like 401(k)s to boost their retirement security, however, there are some problems with  401(k)s that should be addressed.

The advent of 401(k) retirement savings since the late 1970s was supposed to help secure and boost the retirement savings of baby boomers. The plans, originally conceived as a supplement to pensions, have since mostly replaced them.

The investment industry has said for the past 30 years that 401(k)s are a big improvement over pensions, giving employees more investment choice, more control over retirement planning and more portability amid the frequent job changes of the modern workforce. That, at least, was the promise held out by the industry that now holds $4 trillion in retirement assets.

It hasn’t worked out that way. The median balance in 401(k) and individual retirement accounts for households headed by people ages 55 to 64 who had accounts at work was just $120,000 in 2010, according to the Center for Retirement Research at Boston College.

More troubling companies that adopted 401(k) plans have realized they can adjust them, tinkering with the plumbing and, in the process, costing workers millions in retirement savings.  The corporate cutbacks are adding to employees’ financial anxieties at a time when incomes are stagnant and even those earning low-six-figure incomes aren’t accumulating enough retirement savings.

Companies also save costs through lengthy vesting requirements, forcing employees who leave to forfeit unvested contributions. Another form of skimping occurs when companies delay 401(k) matches until the end of the year or early the following year.

Contributions to a traditional 401(k) are not subject to income tax withholding and are not included in your taxable wages, and earnings on Roth 401(k) contributions are tax-free. In 2014, you can contribute up to $17,500 to your 401(k). And if you’re age 50 or over, you can contribute an additional $5,500 for a total of $23,000.

A good portfolio is well-balanced and when we’re putting together portfolios and balancing portfolios, an annuity becomes more of the foundational portion along with Social Security. It’s looking at things that are market related and things that are not market related. If you cannot stomach the ups and downs, find your investments elsewhere; that’s the secret. An annuity is slanted towards providing income, whether for the future or an immediate need, this is where an annuity is well-suited.

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Sunday, February 16th, 2014 Wealth Accumulation, Wealth Preservation

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