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Cornerstone of Retirement Plans

It’s understandable why some chose to get overweight in stocks. But while a balanced portfolio with some rather meager annuity investments didn’t make you the No. 1 investor on the block in 2013, such a strategy will most likely protect your capital if and when this “risk-on” market changes gears.  And for many Americans more concerned with retirement security than retirement luxury, that’s an important distinction.

If the stock market had continued to rise, the recent retirees who “socked” enough money away would have been just fine. However, taking a loss at the beginning of your retirement years can have a devastating effect on the longevity of your retirement income no matter how much you saved, especially when you are relying on a finite amount of savings.

Everyone’s heard of the stock market — but few know why it works. Were you aware that each stock has two prices? That you can’t buy and sell for the same amount?  The market has built-in shock absorbers: as you sell more, the price you get is smaller and smaller, so you sell less. As you buy more, the price you pay gets higher and higher, so you buy less. So it makes sense to take things slow. Nifty.

Right now is the perfect time for many marketers to get their hooks in unwitting investors. We just closed the books on a fantastic 2013 — a year that bulls can use to fuel promises of a repeat performance, or that bears can use to warn we are poised for a crash.

We’ve seen what can happen when life savings are wiped out by forces outside of our control. What are we to do? Do we trust the stock market to provide us with the growth needed to build a significant nest egg? If not, where do we put our money so that it keeps up with inflation and will be there when we need it most?

Retirement income planning requires a different mind-set. But let’s not be naïve about how difficult is to outsmart the market. If Wall Street sharks with Ivy League diplomas and expensive investment tools can’t beat the indexes, you had better be extremely lucky or amazingly gifted to do differently. The past is past and can’t be changed; and the future doesn’t lend itself to accurate predictions.

One key lesson should stand out: Market predictions and expectations are often very far off the mark. In other words: Wrong. But here’s the thing: Wall Street analysts are often wrong, and even more frequently err on the side of optimism. And in the cold light of day, they end up eating crow.  Want a stock tip? Don’t listen to stock tips.

The primary issue with using the traditional asset accumulation approach for retirement planning is we don’t know how long we’re going to live. One thing for sure is hope is not a strategy. If you have this as your plan and realize when you get to retirement age that the plan hasn’t worked, it’s then too late to do anything about it. The most sensible option is to take responsibility yourself and take whatever action is necessary to save sufficient funds.

Recently, especially post 2008, we have seen the impact of a perfect storm. The earliest baby boomers are starting to retire, most likely without a pension, which means they must rely on their personal savings in vehicles such as 401(k)s, IRAs , brokerage accounts, CD’s, etc.

What is the amount of sustainable income that you will need during different phases of your retirement years? Whereas asset accumulation is the name of the game for most other financial planning goals, sustainable lifetime income is the cornerstone of retirement income planning.

We all have non-discretionary expenses that must be paid which, by definition, aren’t optional. These include rent or mortgage payments, real estate taxes, homeowners’ dues, utilities, food, and income taxes. The primary purpose of sustainable income is to create a known floor of income to cover non-discretionary expenses throughout retirement. Sustainable income can also be used to cover quasi non- discretionary expenses, including auto, clothing, insurance, and repairs.

Sustainable lifetime income sources aren’t as readily available in the private sector with the widespread elimination of traditional defined benefit pension plans. The good news is that there’s a long-established reliable source of sustainable lifetime income that’s competitively priced and offers creative solutions in the retirement. It’s known as a fixed income annuity and is offered by life insurance companies.

When analyzing fixed-income annuities, the goal is to use the least amount of assets to purchase the amount and timing of income to match your projected financial need in each phase of retirement, taking into consideration existing sources of sustainable income such as Social Security. The income is consistent, no matter how the stock market or economy is performing.

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Thursday, January 23rd, 2014 Wealth Distribution, Wealth Management, Wealth Preservation Comments Off on Cornerstone of Retirement Plans

Realty in Big Money World

When a person reaches the age of retirement, their priorities need to start shifting from asset accumulation, which involves building their nest egg, to retirement income, which includes determining how they will access their savings once retirement starts. Unfortunately, the income part of retirement is not as simple as turning on a switch.

For many baby boomers looking to retire in the next few years, the biggest worry is not whether or not they can retire, but if they’ll outlive their savings. It’s not enough to have a certain amount of money in your portfolio, you want to have a guaranteed check coming in in addition to your investments.”

It’s a valid concern: One of every four people turning 65 today can expect to live past their 90th birthday, and one in 10 will live past 95, according to the Social Security Administration.  For a married couple, there’s a 58 percent chance that one of them will live to 90.

When corporate America dumped the defined benefit pensions and put your retirement responsibility squarely on your back with defined contribution plans, aka: 401k plans. With a 401k plan you were given the power over your own retirement destiny.

You were free to contribute — or not. Free to plan — or not. Free to gamble on the highest growth investment choices. You were afforded the wonderful opportunity to create your own retirement paycheck!  You can be very certain, your retirement income will be uncertain.

Many investors have used IRAs and 401(k)s successfully as a primary vehicle for retirement planning. However, if the retiree has built fairly significant wealth prior to age 701/2, the required minimum withdrawals may seem like a penalty for years of saving instead of a reward. No one expects taxes will go down – they’ll be going up.

Uncle Sam already has a lien on your IRA or 401(k).  Many future retirees and present retirees have not taken in consideration the impact that “Uncle Sam” will have on the income from your 401(k), 403(b) or IRA accounts.  Uncle Sam owns up to 30-, 40-, or even nearly 50-percent of your account value.

If you have not started taking distributions yet you probably don’t realize the impact this will have on your actual retirement income.  Uncle Sam doesn’t start taking his “cut” until you start withdrawing money from your account.  Then it’s time for you to pay up.  To pay up all those taxes you were previously told had been “saved,” as well as all the tax now due on the accumulation.

The reality for the affluent is that IRAs are inefficient vehicles for tax purposes. For some, the withdrawals bump the client into a higher tax bracket and may result in an undesirable taxation of Social Security income.

Most retirees will pay back every dollar to the IRS that was saved in taxes during the first 18-24 months of their retirement.  In fact, the average retired couple will pay eight to twelve times the taxes during their retirement years than the taxes they saved during their contribution/accumulation years.

We hear “Wall Street’s best year since 1997!  Yet, tell us that “2014 will be better” and give us predictions of more big returns, yet stocks have started the new year in lackluster fashion especially compared with how they closed out 2013 at record highs.  On an inflation-adjusted basis, today is a bizarrely zero-sum economy,

The stock market seems to be the only game in town, but how can we tell what’s fiction and fact?How equity investors managed to scamper through 2013 with the friskiness of puppies when all about them lay doubt and potential disaster.  Investors need to be open to trying new retirement platforms in 2014, but a lack of understanding on these offerings may be a strong obstacle to overcome.

What is reality in this Big Money world?  The world not long ago was so mesmerized by the emerging markets now investment bankers are recommending investors cut allocations in developing nations by a third, forecasting “significant underperformance” for stocks, bonds and currencies over the next 10 years. Not everything you throw against the “wall” sticks. 

What we have seen so far this year is most likely a case of profit taking.  Wall Street and big Money are winning again. And you, Main Street investor, are the loser. The stock-market benchmark’s all-time highs are a fantasy.  Yet, the majority, the “collective unconscious” actually believes that what it’s hearing in the media is factual.

Many retirees fixate on investment return, when they should instead look to turning their assets into predictable income.  Those looking for more security will want to buy an annuity while those wanting to keep as much of their assets invested could follow some kind of withdrawal rule, such as 4% of assets a year.  You may need to cut back on your spending, if the market dips and that 4% is too small to cover your expenses.

So, how do you signup for a secure, stable, and certain retirement?  Some of the benefits of annuitization are no market risk, no interest rate risk, and no worries about who will get the balance of the funds or the income stream in the event of death. Better still, the annuity bypasses probate. With the reliable guarantees of income payments that an annuity provides, tax planning and cash flow projections can be done with confidence.

Looking for certainty – Annuities to fund retirement packages make tremendous common sense. First, payment to the retiree is guaranteed when the risk is transferred to an insurance company. Second, the payment is not dependent upon how well the company performs in the stock market years after the retiree retires. Third, annuity payments are a valuable asset protection strategy for the retired in the event of bankruptcy, lawsuits, and so on.

Actually, an annuity, as the vehicle for guaranteed lifetime income, should not come as a surprise. Only life insurance companies can offer the consumer an income stream, which is guaranteed for life.  The right annuity used properly can fill gaps in your retirement income plan that no other financial product can.

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Tuesday, January 7th, 2014 Wealth Distribution, Wealth Management Comments Off on Realty in Big Money World

Plug and Play Retirement Income

Retirees typically want a ‘plug and play’ retirement. The Baby Boomer retirees have carefully, diligently saved all their lives, and now they’re ready to put their money to work for them. This year’s big bull market may have pushed stock allocations beyond many retirees risk tolerance.

Although the market is flourishing, a real concern of many is that the economic growth record has been so poor, and poverty has soared, middle class incomes have plummeted, and inequality has accelerated. Yet, our government is strongly incentivizing people to buy stocks by keeping interest rates low.

The biggest risk facing those retiring now and in the future is longevity risk, which also represents the largest disparity in expectations versus reality as people plan for a short retirement but must make income last “25 to 35 years”.  However a bigger risk may be that we are running the economy on an untested set of academic theories.

Maybe they are right, although I do not think so. I am wary of actions that grossly distort market behavior, because a small group of people (central bankers) want millions of people to change their self-interested actions, and offer us incentives to do so.

Today’s retirees are not as concerned about where the overall economy will be in 20 years; their concern is with ensuring a stable retirement income with no fear of running out of money too soon. They don’t want to see those investments, waste away under the influence of artificially suppressed interest rates.

Because of the miserable conditions with interest rates being kept so low, the effect of such low rates is disastrous for the millions of retirees and near-retirees who rely on interest earnings from bonds and bank CD’s to support their retirement income needs.

Higher interest rates are rotten for stocks. They slow economic growth and tempt investors to dump stocks and buy bonds. The last two bear markets have made us (appropriately) concerned about the safety of our money and left us keenly aware that we need to be able to run for the hills when the time comes to do so.

As recently as 1970, about 80 percent of all workers were covered by a pension plan. It was the Golden Age for American workers. They owned their homes. They had Social Security. And they had a shot at getting a monthly pension check from their former employer — for life.

Today, only about 30 percent of all workers are still covered by a pension plan.  Instead, workers have another imperfect plan: a 401(k). Today, workers are expected to save part of their income and make investment choices that will grow their savings enough that they can create a healthy income when they retire.

And defined-contribution plans only accumulate assets. What they don’t do is create reliable retirement income. That leaves an army of retirees needing to find a way to squeeze spending cash out of whatever they have for savings. It’s not a pretty picture.

The move into retirement is perilous as we give up employment income and begin to tap investments. The goal: To have sufficient income from pensions and investments plus what the Social Security support for the years when income is relatively fixed. Fixed and immediate income annuities can provide the ideal hedge against these stagnant interest rates and the continual uncertainties of the market.

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Friday, December 27th, 2013 Wealth Distribution, Wealth Management Comments Off on Plug and Play Retirement Income

Risk Elimination Product

Guaranteed Income is the holy grail of retirement. There are several factors to be considered in retirement planning. Longevity risk is a concern as people who stop their careers when they’re 65 now could have 15 to 20 years or more in retirement. Now, a reasonable life expectancy is closer to 80, and some people live into their 90s.  The most daunting risk facing retirees is the uncertainty regarding the length of life they will need to fund. 

We all know that “unplanned” decumulation happens when markets turn against you, like what happened in 2008. Planned decumulation normally happens when you start transitioning your investments from growth to income. 

Old assumptions about retirement finance held that you’d have three financial sources for retirement: Social Security, personal savings, and your pension.  The pension generally was a monthly check you’d get for the rest of your life after working 20 or 30 years for one company. That type of plan is rare today, and has been replaced by plans where the employee contributes to it and directs how it is invested and takes on all risks.

It is important to consider medical costs while you are planning your retirement income. If you do not take this into consideration, you may not have enough funds to fulfill all of your retirement dreams.

The need for money for a longer period of time makes it very important to consider the risk of inflation and/or purchasing power risk. Purchasing power risk is the likelihood that a certain amount of money will not purchase the same amount of goods in the future as it does today. This is the result of inflation. The cost of goods has gone up and the value of the dollar has gone down.

Investment risk is the probability or chance that an investment’s actual return will be different than expected. A fundamental idea in finance is the relationship between risk and return. The greater the amount of risk that an investor is willing to take on, the greater the potential return.  All investments have some level of risk associated it due to the unpredictability of the market’s direction.

Another main concern is with the risk known as sequence of returns. This risk involves the actual order in which a retirement portfolio’s investment returns occur. Generally, negative portfolio returns early in retirement have a more destructive impact on the retiree’s income portfolio than negative returns in the later part of retirement.

In both fact and fiction, fascinating stories of winning and losing vast fortunes in the stock market abound.  When I look at this market and how it has performed to date this year, I’m somewhat encouraged and surprised at the same time. While the advance has been decent, I continue to wonder why traders appear to be underestimating the overall stock market risk, which could lead to investor mistakes. 

The earnings season will likely be weak on both revenues and earnings. We are seeing more major companies slash jobs to compensate for the lower business volume.  Signs indicate that stocks are overvalued, earnings are abnormally high, and risks and low returns are ahead for investors.

You can draw parallels with the market environment seen in the late 1990s, when huge appetite for internet-based stocks led to massive gains for U.S. indices and their eventual crash in 2000, broadly known as the dot.com bubble. Legions of investors plunged into to the tech-stock craze of the late 1990s in search of easy riches and ended up falling victim to the worse crash since the great depression when the Nazdaq fell 78% in 2 ½ years.

The Nasdaq has returned to 4000, last seen in September 2000, is a symbolic end to more than a decade of pain.  While 4000 is cause for celebration for battle scarred investors, the watershed doesn’t erase the a major risk. A similar trend is emerging in U.S. stock markets today, due to the Fed’s huge monetary stimulus program, which has pumped $2.8 trillion into the U.S. economy since late 2008. But rather than stimulate the economy, the flow of easy money has instead stimulated the stock market.

For example, The S&P 500 climbed to 1804.76 this past week. The index is up 27% this year, on pace for its biggest annual gain since 1998, when it climbed 31%. Individual investors appear to be regaining comfort with stocks, and are putting their money in the market at a time where the market is at the highest cost level ever.  This means the stock market’s rally has been based solely on people paying more money for the same amount of earnings.

In the wacky world of Wall Street, when investors get too optimistic, it’s usually a sign that stocks are setting up for a fall.  One would need to go back to the Bubble of 2000 to find lower liquidity than the situation today.  This is one definition of an overbought market. We are also seeing signs of “excessive optimism” on the part of investors.

The stock market is not a reflection of the economy. It’s a reflection of demand for returns. Skeptics argue stocks have become overvalued and are due for a pause. Some point to sluggish revenue growth in the corporate sector and argue the Fed’s low-rate policy and bond-buying program, meant to stimulate the economy, has distorted the market in favor of equities, setting the asset class up for a pain in the future.

This may be the time to look at other alternatives to investment risk. You might find a solution that can provide the returns you are looking for with protection against declines in the market and reduce your inflation risk in the process.

Where the goal is to provide yourself with an income, an income annuity may be the ideal mechanism, especially if the income is to continue for the recipient’s lifetime. The certainty afforded by such a contract is sometimes more important than the amount of each income payment or the fact that the annuity income does not preserve principal.

If you buy a lifetime income annuity and you live to age 125, the insurance company is on the hook to pay you.  The true value of an annuity happens when your annuity account is at zero. Yes, the real value proposition of an annuity is when there is no money left in the account and the insurance company has to contractually pay you regardless of how long you live.

In other words, it happens when you are on the annuity carrier’s dime.  Up until you get to zero, you are really just getting your money back with some interest when receiving a lifetime annuity income stream.

Every retirement vehicle (to be fair to annuities) has become less certain due to the less predictable, lower-returning mutual funds underpinning most of them.  Why Are Annuities Attractive? For people absolutely disinterested in managing their own finances, annuities offered a simple menu. The participant must decide on only three things: lump or periodic inputs (contributions), deferred or immediate income, and fixed or variable returns.

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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Tuesday, November 26th, 2013 Wealth Distribution, Wealth Management Comments Off on Risk Elimination Product

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