Wealth Distribution


 Powered by Max Banner Ads 

Retirement Adventure and Discovery


 Powered by Max Banner Ads 

Retirement is a great time for adventure and discovery, but you need to make sure you’re prepared for the challenges you will face over those 20 to 40 years.  Some people feel like the Great Recession ended years ago, while others feel it’s still in process. Retirees are determined not to be financially strapped when the time comes to retire.

Now that retirement is here (or near), how do you create an income plan from your savings?  Put money into your 401(k), contribute to your individual retirement accounts, and one day, when you are ready to retire, that savings become income for you. How does that actually happen?

The go-to method of retirement saving for most white collar American workers these days is the company-sponsored 401(k) plan. Workers benefit from an easy, tax-favored way to sock away money. But the plans are not fool-proof, and they’re full of pitfalls that could trip up the novice investor.

The basic concept of retirement accounts such as IRAs and 401(k)s are an “on-your-own adventure”.  While you work, you put money in; when you retire, you take money out. For maximum benefit from your retirement income, though, you need a withdrawal strategy.

Figure out how much income you need your savings to generate every year. The amount is your total estimated expenses minus your Social Security, pensions or real estate income. Once you know how much you need each year, you can then begin to formulate a distribution strategy.

An ideal system would create a reasonable amount of retirement income that a person could actually count on, without becoming an expert on the financial markets. It would require the money to be set aside and invested in assets managed by the best in the business, and all of it at low cost.

However, a crippling combination of stagnant wages, stock market crashes, and poor savings habits have tarnished Boomers’ so-called golden years.  Pensions and similar defined benefit plans are becoming extinct.  Baby Boomers, those born between 1946 and 1964, were already well into their working careers when retirement planning started to focus on 401(k) plans instead of defined benefit plans.

The fundamental concept behind fixed income investing, especially for retirement investors, is that you are trying to preserve capital while generating enough interest and dividends to enhance your income.   The strategy is also designed to allow you to at least keep pace with inflation.

There is a growing mistrust of the financial system.  A perception that the last recession was to some extent caused by financial services industry missteps underlies the suspicion of financial advisors.  You will need to be able to cope with financial shocks.

The stock market crash in 2008 and ensuing deep recession left many Baby Boomers who were close to retirement shaken.  While 2008 did not end up taking (the Great Depression’s) path, it could have. You’d think the Great Recession would still be fresh enough in everybody’s minds that we’d be going out of our way to avoid putting ourselves through the financial wringer once again.

Having the wrong asset allocation can limit your ability to grow or protect your nest egg.  Providing a retirement plan is a generous perk for employees — not only because of the time and expense required to run the plan. Retirement plans can also be a huge liability for employers because they come with a tremendous amount of responsibility for at least some of the people acting on behalf of the plan.

Last year was a struggle for most stock pickers looking to beat the S&P 500, even more than the year before.  With so many funds struggling to beat their benchmark index, dollars have increasingly gone to those that simply try to mimic stock indexes. Index funds also have lower costs.

For the person with a day job outside of finance, trying to divine truth from the daily machinations of the stock market is at best a waste of time. At worst, it increases the odds you will be trapped by all the behavioral biases that cause people to make the wrong investing decisions – and become the dumb money of Wall Street.

If people are going to be successful in retirement, not only do they need to put away sufficient funds, they need to grow sufficiently. The key factor is what you are paying in terms of investment or management expense.

Each year, funds tally the gains and losses they made from selling stocks. They then pass on those gains to shareholders, usually in December. Investors who own funds in a taxable retirement account must pay taxes on these distributions, even if they don’t sell any shares of the mutual fund.

Fund managers struggled to keep up with their respective index. The majority of small-cap U.S. stock managers failed to keep up with the benchmark both last year and over the last decade. Same with managers who focus on mid-cap stocks. And emerging-market stocks. And real-estate investment trusts. Most large-cap fund managers fell short of the index.  The last time the majority of them beat the index was in 2007.

In all fairness, it’s been pretty easy to overlook the prime rate of late, because nothing’s happening. It’s been sitting at a rock-bottom, near-zero level for years now, with any increase contingent on the Federal Reserve raising its benchmark rate, a move they’ve been reluctant to make — until recently.

An important deadline is fast approaching for people required to tap their retirement savings for the first time.  If you turned age 70½ at any point in 2014, you must take — by April 1 of this year – your first “required minimum distribution” from your retirement accounts – generally those with tax-deferred contributions. These include, among others, IRAs, 401(k)s, 403(b)s and 457(b)s.

(There are two exceptions. The rules don’t apply to the original owners of Roth IRAs. And if you continue to work beyond age 70½, you can generally delay withdrawals from your employer’s retirement plan until after you retire.)

If you need to top up your secure income, you could use some of this pot to buy a lifetime annuity. This is an insurance policy that in return for a lump sum guarantees to pay you a regular income for life regardless of how long you live. You can arrange for this income to rise over time so that its value is not eroded by inflation. This income is secure so there is no danger of it drying up.

If you have contributed to an employer 401(k) pension where you built up your own pension pot, for those that are retiring with a defined contribution (DC) pension plan (a plan that has a fixed dollar amount and not a defined monthly payment amount), rolling your plan proceeds into an annuity is a great option.

Tags: , , , ,

Sunday, March 22nd, 2015 Wealth Distribution Comments Off on Retirement Adventure and Discovery

Safe Withdrawal of Retirement Nest Egg

Building up a solid nest egg is only half the battle. Equally important, and perhaps even more complicated, is figuring out how to safely withdraw money from those savings. You may also be confronting a savings gap as your retirement draws near, making your drawdown strategy that much more important.

The secret to successful planning is to create a model with multiple strategies that can be activated over time in order to maximize income, reduce risk, minimize taxes, offset the savings of inflation and create a “shock absorber” for unforeseen events like negative markets, loss of principal, medical expenses and long-term illnesses.

While uncertainties are logically unplanned, one thing they always are is inevitable.  When you retire, you don’t have to worry about a job loss anymore but cars and roofs can still need repair in retirement. Be aware that accidents, major home or car repairs and other uncertainties will still loom on the horizon once you retire.  Things will crop up. When they do, it’s best to be prepared.  Remember that emergency funds aren’t just for the young.

When you are retired, you don’t want to have to sell investments at a loss or have to go into debt to pay for them.  The stock and bond market go through cycles of times when prices rise and periods where prices decline. Knowing this, one might assume the average investor is taking steps to become safer with their investments now that the equity market is at or close to an all time high.

Sadly, it is a world where the two primary asset classes stateside — U.S. stocks and U.S. bonds — are extremely overvalued. And yet, the choices of how to manage the overvaluation in one’s portfolio are not particularly attractive either. Since there are no meaningful risk-free rates of return in a zero percent interest rate environment, investors have been choosing between risky and riskier alternatives.

Yet, in our experience lately, some investors are instead falling into the same pattern of the past, and instead increasing their risk to try and earn more returns like the markets.  An investor who wants “market” returns must also be willing to accept “market” losses.

When it comes to paying your bills in retirement, it doesn’t really matter if you use an “income” dollar paid via dividends or interest or whether you use a “capital gains” dollar from the sale of stock. At the end of the day, a dollar is a dollar.

Planning your retirement is no walk in the park. One of the most common questions from people about to retire is how to turn their retirement savings into retirement income. After all, for most of our life, retirement planning is about accumulating a nest egg. What to do with that nest egg when we actually retire is a whole different ball game.

Make sure your income lasts as long as you do.  Take your expenses per year and then subtract that from your projected annual Social Security income and any pension income you expect to receive, and then divide the result by your remaining retirement savings.

If the number is above 4%, you face a considerable risk of outliving your money so you may want to consider purchasing an income annuity. With an income annuity, you pay a lump sum to an insurance company in exchange for a payment that lasts as long as you live.

It’s like buying a traditional, old-fashioned pension plan. However, you generally give up the ability to access your lump sum (that’s why you need emergency savings) or pass it on to heirs (although you can get one that pays for a minimum number of years or add a survivor who will get all or a portion of your payments until they pass away).

As a general rule, use income dollars for personal expenses to avoid selling shares. In a prolonged bear market, selling your shares can be akin to a farmer eating his seed capital. Shares sold at depressed prices are shares that won’t grow in value when the market turns around.

I want you to imagine the PERFECT place to put your Retirement Funds.  First, you would want something that offered you a good rate of return.  Second, you would want something that would never lose money. Third, you would want something that could provide you with income for your retirement.

An annuity in its most simple form is a contract between you and an insurance company.  The contract is the yen, to Life Insurance’s Yang.  Where Life Insurance was designed to protect you from living to little, the annuity was designed to protect you from living too long.

No two annuities are the same. They come with different features and benefits, which only YOU can decide are either right for you or not. A partial listing would include: individual annuities, immediate annuities, deferred annuities, single premium or installment premiums, fixed annuities and variable annuities.   (We do not recommend Variable Annuities as the fees are way too high.)

The list goes on. In this case, variety is a good thing for you as the consumer because you can fine-tune your annuity to get it just the way you want.

Tags: , , ,

Saturday, February 21st, 2015 Wealth Distribution, Wealth Management Comments Off on Safe Withdrawal of Retirement Nest Egg

Safety First Crystal Ball Annuities

Millions of Baby Boomers are in search of the same thing—a monthly income. If you’re fortunate enough to be ready for retirement, you should plan your income needs very carefully.  Some rely on government pensions alone. Others have private pensions. But when your primary source of retirement income is your investments, you’re tasked with creating your own pension.

Retirees do not have a crystal ball. They don’t know what the return on their assets might be. They don’t know how the value of those assets will fluctuate. And most importantly, they don’t know how long they are going to live.

Managing your finances and planning for your future do not end when you retire. If anything, you need to be more active in managing your money, because mistakes made in retirement can be far more damaging than pre-retirement slip-ups.

Baby boomers now in or approaching retirement, investing is just one part of a more complex challenge: getting to the point of being financially ready to retire and then managing several facets of your financial life—including spending, tax planning and Social Security strategy, as well as investing—to minimize the risk of running short and to get the most benefit for you and your family

The single most important factor that determines when one can retire comfortably, is the size of the investment corpus. You can estimate the corpus you may need. But this estimation is not just some math, but also a set of assumptions. You have to make assumptions about the rate of inflation and the rate of return on investments.  Even after retirement, income needs will increase with inflation.

The safety-first school relies more on matching assets to liabilities. Spending needs are differentiated between essential and discretionary, with the idea that essential needs should be covered by assets that are safe and secure. A proper strategy will most likely involve laddering purchases of bonds or annuities over time. This will help reduce any exposure to interest rates at one particular date. This means holding individual bonds to maturity or using income annuities.

Only after covering essential needs with dedicated assets should a retiree think about investing in the stock market. Stocks should be targeted to discretionary expenses.  The reality for today’s retirees is that interest rates are very low and stock market valuations are high.

It is very important you consider your stomach for risk and that your goals—in terms of when you plan to retire or need the money—align with the target date. Then you can determine whether you should invest in the market with more aggressive characteristics, or if you’re better off in annuity that, while it may lag in up markets, will better protect capital in down markets.

Sustainable withdrawal rates are intricately related to the returns provided by the underlying investment portfolio. The returns experienced in early retirement will weigh disproportionately on the final outcome.  The essence of insurance is to protect individuals by pooling resources. An individual does not know how long he or she might live, but the law of large numbers means we can be more confident estimating the life expectancy of a group.

Part of this trend toward fixed annuity products may be explained by shifting demographics—baby boomer clients are aging, and the oldest members of this group are now entering (or just a few years away from) retirement. Logically, a client who is just a few years from retirement begins to look for products that will guarantee a certain fixed level of retirement income, thus explaining the shift toward fixed annuity products.

The bottom line is that the 401(k) pension saver only really knows how much wage replacement the 401(k) pension fund can generate until the last minute, the point of switching on the income.  Until then, they are vulnerable to shocks from volatile financial markets that can knock the best-laid plans off course, as many experienced in the aftermath of the last market downturn.

This uncertainty is compounded by the fact that unless they buy a guaranteed income solution, perhaps up to the level of their personal ‘minimum income requirement’ – the income they really can’t afford to lose – then they are likely to carry this vulnerability into retirement.

As people are saving for the future through automatic enrollment into workplace pension savings, such as 401(k)s (403(b)s and IRAs, they can look into a crystal ball and guarantee their income, along with Social Security checks to help protect against longevity and market risks.  When it comes to choosing how to spend their pension pot, annuities are one of the best income-generating solutions.

Tags: , , , ,

Wednesday, September 3rd, 2014 Wealth Distribution, Wealth Management Comments Off on Safety First Crystal Ball Annuities

Retirement Risk Management

The main thing to understand with retirement planning is that there are many risks that present problems for retirees,  Risk management is the buzz word for today’s retirees and near retirees including;  Stock Market Risk, Inflation Risk, and Longevity Risk.

No one will be able to tell you precisely how much you can safely withdraw from your nest egg. There are just too many things that can happen over the course of a long retirement—markets can crash, inflation can spike, your spending could rise or fall dramatically in some years.

Stock Market Risk – Retirement is nice in many ways, especially when the stock market has been strong. When we’re making money with little effort, financial success can seem simple.  Our emotions (and Wall Street’s marketing machine) may tell us that recent performance is a good guide to what’s ahead.

The Standard and Poor’s 500 stock index has surged more than 170 percent since bottoming in March 2009. The Standard & Poor’s 500 Index reached the 2,000 mark this week for the first time.  It brings back memories that for a whole decade, the S&P 500 compounded at 18.2% a year, about twice its long-term average. Many people decided that investing was easy — just buy big, popular stocks.

The S&P 500 actually lost about 1% a year from 2000 through 2009, including the reinvestment of dividends.

The real path to stock market success is buying assets and corporations when they are on sale and holding them until they come back into favor and selling them for many times what you originally paid. However, by attempting to time the market, investors often increase their losses rather than avoid them.  Market timing is more speculative in nature and brings on additional risks that may be greater than those it is attempting to avoid. The financial tide can turn swiftly and unexpectedly; momentum can vanish in a heartbeat.

If you panic in a downturn and sell, you will lose. And if you’re retired, it’s harder to recover from that. The value of a stock or bond may rise or fall depending on a myriad of factors.The stock market is a bit like riding a rollercoaster in the amusement park; you may know that the coaster is the biggest, best ride, but plenty of people simply can’t buckle themselves in and take the ups and downs.

Even though Americans feel like they are wealthier today because of the rise in the stock market, please bear in mind that the top 20 percent of American income earners own 90 percent of the market.  The objective is to create a “wealth effect” that will make those who invest in stocks feel wealthier and then decide to spend money and invest in new projects.

However, almost everything seen on TV or read in the financial media is focused on short-term success in trading stocks.  Much of today’s action comes from large institutions and individuals without substantial retirement funds may have not benefited from the recent market rally.

Inflation Risk – Inflation hurts retirees.  You need to realize that inflation will erode the purchasing power of the funds you put aside toward retirement. Inflation averages 3.5% every year which means prices double about every 20 years. The real-world value of $100 has receded over the years, thanks to the steady drip of inflation eating away at the value of a dollar, and that costs consumers at the checkout line, when paying bills.

Longevity Risk – the many medical advances being made every day, we are living longer, and no one wants to run out of money late in retirement.  If you’re a retiree or near-retiree, how can you draw enough savings from your nest egg to live on, yet not so much you run out of money too soon?  The need for lifetime income is huge and growing as life expectancies continue to increase and traditional sources of guaranteed income disappear.

The 4-per-cent rule is as close to a universal law as there is in financial planning for taking income from your investment portfolio. However, it now says that retirees who don’t want to run out of money and are planning for 30 years of life after work should restrict themselves to withdrawing no more than an inflation-adjusted 3 per cent a year of their original portfolio.

If you’re like most people, an initial withdrawal rate of 3% won’t come close to giving you the income you’ll need.  It also falls far short of the aspirations of many avid investors who figure their portfolios can be counted on to produce returns that will be much higher than the measly withdrawals.

Keep in mind that achieving a given rate of return may be tougher than you think.   your chance of running out of money rises.  The question is how much you want to bet on that “probably.

If you’d like to have more income that you can count on no matter how long you live and regardless of how the markets fare, then you may want to at least think about an annuity that guarantees you (and your spouse, if you wish) a payment for life. Because they don’t have to worry about losing principal, little panic-selling is expected.

Overall, Fixed Indexed Annuities are not designed to beat the stock market even though many have from 1999 through 2010. They are basically designed to outperform the fixed markets such as CDs, money markets and bonds.  Investors in Fixed Indexed Annuities face little volatility, even in the bear market for stocks, because of guaranteed minimum return.

All fixed index annuities are tax-deferred with no income tax requirement until withdrawal. This is a definite advantage over many investments like CDs, mutual funds, stocks and bonds when considering a long term retirement investment. A long term fixed index annuity acquisition may consistently outperform CDs, bonds and treasuries.

Reinvesting money that would otherwise be paid out in tax over an extended period of years is always an advantage. In addition, fixed index annuities have several benefits that can be important for retirement planning.

The nice thing is that percentage gains are based on the anniversary reset. So if the market was down 25%, your crediting would start at the new market low. Any percentage gains from that low point would be credited to your account up to a specified amount, usually half or more of the market gains for the new year with no risk of loss to accumulation or principal. This works especially well with flat or declining markets over long periods of time.

When the distribution phase of your annuity starts, you can receive periodic (usually monthly) income payments.  Annuities allow you to hedge the risk that you might inadvertently live too long. An annuity guarantees you a set amount of income for life — or for your and your spouse’s life. It is similar to a pension-type income stream.  By adding a lifetime withdrawal benefit to an annuity, you’ll get income for life—with the potential to benefit from market gains—without giving up control of your assets.

 

Tags: , , , , ,

Thursday, August 28th, 2014 Wealth Distribution, Wealth Management Comments Off on Retirement Risk Management

 Powered by Max Banner Ads 

Receive "Five Wishes"

Fill out the form below to receive your free subscription to Annuity News and our gift to you "Five Wishes"

Five Wishes is a legally-valid tool you can use to ensure your wishes and those of your loved ones will be respected even if you can't speak for yourself. Five Wishes helps you express how you want to be treated if you are seriously ill and unable to speak for yourself. It deals with all of a person's needs: medical, personal, emotional and spiritual. Let your family and doctors know your Five Wishes!

Our strict privacy policy keeps your email address 100% safe & secure.

Five Wishes is changing the way America talks about and plans for care at the end of life. More than 12 million copies of Five Wishes are in circulation across the nation, distributed by more than 15,000 organizations. Five Wishes meets the legal requirements in 40 states and is useful in all 50. Five Wishes has become America’s most popular living will because it is written in everyday language and helps start and structure important conversations about care in times of serious illness.