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Retirement Income Certainty


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One-fifth of the U.S. workforce has passed or is nearing retirement age, according to the Bureau of Labor Statistics. The biggest question they have is, ‘Will I run out of money?’ and ‘What can I do so I don’t run out of money?’ It’s not only getting to retirement, it’s living through retirement. Retirement income management is all about making sure your retirement savings provide enough income for your needs, and that you don’t outlive your assets.

Retirees need a snapshot, usually for a specific need or purpose.  At its core, the components needed to plan for retirement are fairly clear: what are your guaranteed income sources during retirement and what are your variable sources? Similarly, what will your fixed expenses be and what will vary?

Longevity is a big factor, indeed, health care advancements have increased life expectancy dramatically over the years. The longer you live in retirement, the greater the likelihood that you will need to use health insurance or arrange for long-term care. With increased life expectancy, there comes more time spent in retirement. You have to be calculating the numbers with an expectancy that men will live until they’re 90 and women until they’re 95.

People want to feel less intimidated about planning for retirement. However, according to a recent TIAA-CREF survey, more Americans spend less time planning for an IRA or 401(k) investment than choosing a restaurant, flat-screen TV or tablet computer.  Investment returns also have a big impact on retirement capital needs. The higher your expected or potential rate of return, the less you need to retire. Likewise, a conservative investor needs a much bigger retirement nest-egg than a balanced or aggressive investor.

Many people who are approaching retirement or have recently retired turn to a professional to seek help planning for that event and managing their income. If you’re looking for that kind of help, you need to shop around to find someone you like and trust. Be aware that each advisor and firm has a different approach when it comes to how they plan for retirement and how they help clients in retirement ensure that they have adequate income to last the rest of their lives.

Advisors can be a problem in that retirees or the near-retiree usually presumes this person is honest and competent and has integrity and character. However, mis-representation can occur when a broker purposefully makes untrue representations of material facts or omits material information. This can happen in any security in any account, but this problem is commonly found with low-priced, speculative securities because of their increased risk.

In theory, everybody’s supposed to read everything right to the bottom line and you take all the risks associated with it if you don’t.  We also have our jobs to perform. We can’t sit there and read prospectuses all day. Ambiguous wording means some fail to adequately explain that banks can bet against the very notes they’re selling or suspend new offerings or take other actions that can affect their value.

If you rely on your broker, make sure the investment meets your objectives; and make sure you understand and are comfortable with the risk, costs and liquidity of the investment. Never invest in a product you don’t understand.  Discuss fees with your investment professional. These may include sales commissions, mark ups or mark downs, administrative and management charges, and costs associated with the sale or redemption of an investment.

All mutual funds charge fees. The higher the fees you pay while owning a mutual fund, the lower the return generated by your fund shares. Even a small percentage difference in the fees among funds can add up to a big difference in the dollars you can make. It’s important to be aware of all the fees associated with a mutual fund investment. A 1% difference in investment returns doesn’t seem like much, but it could mean a retirement fund that is almost one-quarter larger over the course of a typical retirement.

Tax-deferred retirement plans—including employer-sponsored retirement plans such as 401(k)s, 403(b)s, individual retirement accounts (IRAs) and annuities—provide income based on the amounts you put in them, the investment choices you made and the way those investments performed.

We don’t think the markets are necessarily going to crash, but the current high valuation makes it more likely that normal returns over the coming years may be lower than what they have been in the past.  While taking on that additional equity risk may cause your portfolio some added volatility, many believe that step is necessary for those unwilling or unable to save dramatically more just before retirement.

Our view is to encourage people to pool their longevity risk, which is sensible given that it is cheaper to hedge risk collectively.  Essentially, many advisors seem to have forgotten that annuities are pensions. They are the principal source of the retirement income certainty that most retirees crave.  Fortunately, with ordinary fixed annuities, you can provide level income for your maximum lifespan for about 40% less than it would take to provide the same level of lifetime income security using noninsurance vehicles.

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Thursday, April 24th, 2014 Wealth Management

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