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Predictible Stream of Retirement Income


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The market has been volatile and there is talk of another drastic drop in the stock market. Many on Wall Street had expected an easy ride for stocks into the end of the year, with a Santa rally capping a year of gains. But the mood has soured this week.  Just several days ago, the market was buzzing with talk about Dow 18,000. The Dow lost 1.5 percent to 17,533 Thursday.

You may be labeled as “pre-retirees,” which means we can see the sun beginning to set on our working years.  Retirement planning has a lot of moving parts, factor in things like taxes, inflation, distribution strategy and uncertain investment returns.  In order to retire financially secure, you need to have a plan.

Although boomers are optimistic about retirement, many are concerned about meeting their financial needs in retirement. Are you nearing retirement and fretting about what income you can pull out of your 401(k) or IRA? We have a recipe for you. It’s a way of converting a lump sum into a very predictable stream of cash payouts. It won’t give you a huge return, but it may succeed in taking some of the financial worry out of old age.

You may be looking for a sustainable investment and making a sustainable distribution strategy requires a long-haul approach.  Once you reach retirement, you must rely on the wealth you accumulated to pay the bills as you probably do not work. In this state, you use money generated from your portfolio or you make withdrawals.

There can always be the question of whether or not you and/or your spouse will outlive the money.  Life expectancy of a 65-year-old has grown by 37 percent since 1950. The amount of money needed to fund a secure retirement has grown as well. A 2013 Government Accountability Office report stating “middle-class retirees should convert at least half of their retirement savings into a lifetime income annuity”.

It is difficult for the average person contemplating retirement to determine how to drawdown his/her wealth.  Choosing a wealth decumulation and consumption strategy that maximizes lifetime income is a source of uncertainty.

  • Number one you need to answer the question, what are your expenses?  You need to include your mortgage payment, your annual insurance payments, your property taxes, income taxes, vacations, entertainment, tithing, charitable giving, even the money you spend on your children.
  • Number two, find the difference between your expenses and your income. Multiply that number by 25, and then multiply that sum times 12. Why?  25 is 4%, which is the suggested withdrawal amount. 12 is the number of months in a year. By doing this calculation you have just learned how much money you will probably need to live on. You will also know if you have work to do or if you are there already.
  • You’ve probably heard people say you can’t take out 4% any more. With so much volatility in the market, you can only withdraw 2%. If you don’t have a sell strategy that helps to protect you from bear markets, that could be true. You’ll need to go back to Step No. 2 and recalculate, multiplying the difference between your expenses and your income by 50 and then again by 12. And when you look at your new total, you may decide you can’t retire.
  • Number Three, Dedicate an emergency account that would cover several months’ worth of expenses.
  • Number four, Asset allocation — or how assets are divided among different classes, such as cash, stocks, bonds, real estate and so on — plays an important role in both the risk and return of your portfolio. The longer you have until retirement, the more aggressive you can afford to be. The closer you get, the more important it becomes to have a balanced portfolio with both stocks and bonds.
  • Number five, Seriously consider getting long-term care coverage. It will help cover costs like home health services, assisted living, skilled nursing care and specialized memory care. Those types of care can be expensive — the median cost of one year in a nursing home is about $77,000 — and can quickly deplete your nest egg.

Having more than 80 percent of your portfolio allocated toward stocks could open you up to significant losses that might force you to delay retirement if we have another major downturn like we experienced in 2002 or 2008.  A common rule of thumb is to take 100 minus your age and put that percentage in equities, but that guideline looks dated for a few important reasons.

First, people are living longer now, which means their assets need to last longer too. Being too conservative can mean not keeping pace with inflation and running out of money too soon. Second, interest rates are at historic lows, which will affect the risk and return of bond portfolios. So for those looking for a simple guide, it’s probably better to take 110 or 120 minus your age and put that in equities.

People often misunderstand the rules about drawing down their assets in retirement. People forget that they need to start taking required minimum distributions from their individual retirement accounts and 401(k)s after age 70 ½. For those nearing age 70, an important milestone that affects all of their tax-deferred retirement funds is approaching. By April 1 of the calendar year after reaching 70, minimum withdrawals based on age must begin if the annuity option has not been chosen.

Prior to the issuance of regulations announced by the U.S. Department of Treasury (Treasury) and the Internal Revenue Service (IRS) in July 2014, longevity annuities were, as a practical matter, not accessible to DC and IRA investors due to Internal Revenue Code rules that require distributions from a DC or IRA account to begin by age 70 ½, which is prior to the age longevity annuities are designed to begin income payments. With these new regulations, qualifying longevity annuity contracts (QLACs) are exempt from required minimum distribution (RMD) rules within prescribed parameters.

An annuity is the flip side of life insurance. Life insurance protects your loved ones if you die too soon. Annuities protect you if you live too long. With a classic annuity, you are essentially buying a pension for yourself. That design is very much in line with what people had in their traditional pensions. The value of their benefits grows over the years, and the only thing they have to do, at some point in the future, is turn on the income stream.

Don’t think of annuities as a type of investment. They are a way to convert savings to guaranteed income. Investments involve calculated risk. Annuities involve minimal risk. The whole point is that you know how much monthly income you can count on. Do consider buying an inflation-protected annuity, which increases the payments each year to keep up with the cost of living.

Whatever is going to happen with your annuity can be found in the policy that is issued by the carrier. There are no surprises, secrets, or hidden gotchas in the contract. Nothing is over hyped or bullet pointed in the policy. There are no hypothetical, theoretical, projected, back-tested, or hopeful return scenarios in the annuity contract. It is what it is.

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Thursday, December 11th, 2014 Wealth Management, Wealth Preservation Comments Off on Predictible Stream of Retirement Income

Retirement Crisis Looming

Inability to plan, save and invest incomes has been identified as the major reason why working class people end up broke and financially down during and after their working life.  The future is unpredictable, so there’s no way to account for every possible scenario.  The country is facing a retirement crisis as its citizens live longer, which will result in greater demands on their assets. Yet many workers are failing to save enough — or anything at all — for their golden years.

However, Americans are living longer and we all want to age with dignity, independence and choice but that requires planning that few undertake.  Personal income management as one of the fundamental elements for a secure future.  The message is that when you fail to plan, you are planning to fail.

In 1950 the life expectancy was 68 and now it’s closer to 80, so that means that this whole generation of Baby Boomers is going to live in retirement 20 to 25 years, [compared with] the previous generation of 14 years.

With the shift to investment plans such as 401(k)s, that puts the onus on workers themselves to contribute money to their retirements.  Even when Americans do put away funds for retirement, they’re often making an investment misstep that could lower their long-term financial prospects.

The gap between the reality of Americans’ low participation in saving for retirement and their very real concerns about running out of money may reside in the economic realities facing many workers.

If you’re nearing retirement, make sure one of the most important and expensive aspects of your golden years—your future health-care needs—is not overlooked   Blowing through hundreds of thousands of dollars for medical expenses in retirement is a reality for many people.  People spend the most on health care during the last 10 years of their life.

Few boomers recognize that most who reach age 65 will need some form of long-term care. Government has no plan in place to deal with the needs of millions of aging boomers and few have set aside money to cover costs. In retirement, you may encounter expanding healthcare needs or even experience a life-changing disability. When trying to cover these health costs, you may realize that health insurance and Medicare fall short when it comes to providing ongoing, long-term care.

For instance, if you don’t need the care of a doctor, but need custodial care for daily living activities, such as bathing, dressing or eating, those costs are never reimbursed by traditional health insurance or government programs. People mistakenly associate long-term care with nursing home care, but most care actually takes place at home or in the community.  Either way, the costs are significant as is the toll on loved ones who typically are called on to provide care. Long-term care insurance can be an affordable option but many wait too long so it’s not available because they’re either too ill or it’s too expensive.

The biggest costs come from co-payments, deductibles and excluded benefits, along with out-of-pocket costs for prescription drugs and the cost of premiums for Medicare Part B (basic coverage) and Part D (prescription drug benefits).  Premiums for Medicare are based on income; the higher your income, the more you’ll pay. Beyond basic coverage, there also are other options that come with additional costs.

On top of all that are long-term care needs that arise from chronic illness, disabilities or other conditions that require daily assistance. Medicare doesn’t pay for continuing care in nursing homes, assisted living or home-based aides.  Medicare doesn’t pay for long-term care in a nursing home. The most it will pay for is 120 days. And that’s if you are improving the entire time you’re there. Improvement doesn’t always occur, so the period Medicare would pay for could be even shorter than that.

There is another program that will pay for a nursing home “Medicaid” and how do we qualify for that?  You have to have a medical condition that requires the medical attention provided in a long-term care facility. The income and resource amounts change from year to year. This year your monthly gross income can’t exceed $2,161, if you are the only one applying for Medicaid. If you and your spouse both apply, the income can be as much as $4,326.

And you must have a limited number of assets. What’s the limit on that? That depends on whether a person is singe or has a spouse who is not going into the nursing home and upon whether the assets are ‘countable resources.’ Some things, like your home, a car, a life insurance policy less than $1,500 cash value, a pre-paid burial policy and burial plots, aren’t ‘countable resources.’ If you were single, you would have to spend down any countable resources to $2,000.”

If married the difference is if one of you has to go into the nursing home, the other is considered the ‘community spouse.’ Congress decided some years ago the spouse who stays at home shouldn’t be impoverished just because a partner is in the nursing home.  So they put all yours and spouse’s countable resources in a pile, then they divided them in half. If Mom is the one staying at home, she gets to keep half of those assets up to $117,240. Also, since Mom’s income, even after allocating your income to her is still less than $2,931, some of your half of the assets can be invested to produce an income stream for Mom up to that amount.

It is recommended that you closely examining your options—especially because chances are that medical expenses will increase as you age. It’s [typically] the end of life when you have the really bad stuff that costs a lot of money.  This is where long-term-care insurance comes in. The cost is based on many factors, including your age when you purchase the policy and particular choices in coverage. Long-term care (LTC) insurance policies were created to pay for daily care expenses. They reimburse you for a pre-selected daily amount of care either in your home or in a nursing facility.

The cost of a LTC policy depends on several factors such as your age when you purchase the policy, the daily coverage amount, the number of years of coverage and any optional benefits you choose.  While having LTC insurance sounds like the perfect solution for getting the care you need, the reality is, there are challenges with these policies. One problem is getting the coverage to begin with. If you’re in poor health or are already receiving long-term care services, you can be turned down. Unlike regular health insurance, which can’t be denied to those with pre-existing health conditions, most LTC policies require medical underwriting.

Another problem is the availability of long-term care insurance. Due to an environment of rising health care costs, increased longevity and low interest rates, in the past five years, 10 of the top 20 providers (such as MetLife and Prudential) have gotten out of the LTC insurance business.  For providers offering LTC insurance, it’s possible they’ll be forced to raise premiums to remain profitable.  If LTC premiums go up, one way to manage the cost is to reduce your coverage. For instance, you could shorten the benefit period from five to three years or reduce the daily benefit amount from $100 to $75.

In the worst case, if LTC premiums become unaffordable, you might have to abandon the policy altogether without getting any benefit from it. Unfortunately, no other type of insurance can completely replace it; however, there are other options. To protect yourself or a loved-one from the rising costs of long-term care, consider these alternatives to regular LTC insurance:

Fixed Indexed Annuity (FIA) – is a financial product sold by an insurance company. The insurer guarantees to protect your principal and give you the potential for growth linked to an index, such as the S&P 500.

An FIA offers the opportunity for growth through a steady, guaranteed lifetime income stream, all while protecting your principal from the uncertainty of market volatility. You don’t actually invest your money in the stock market, but you can receive some of the upside potential of growth without putting your money at risk.

In addition to receiving guaranteed income for retirement, many FIAs offer annuity riders that provide additional financial security to pay for unexpected health care expenses, such as long-term care.

For instance, a nursing home rider may allow you to increase the monthly income on an annuity or to withdraw from your account to pay for care in your home or at a nursing facility. Another option is a terminal illness rider, which allows you to access a portion of your account value if you’re diagnosed with a terminal illness.

Having coverage through LTC insurance or a fixed annuity with optional riders gives you peace of mind for future health costs. If you carefully consider all your options and plan now for future long-term care expenses, you’ll be prepared to cover the care you need when you need it.

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Friday, October 31st, 2014 Wealth Management Comments Off on Retirement Crisis Looming

Long Term Care Awareness Month

November is Long Term Care Awareness Month… a continuing effort to raise public awareness regarding the importance of long term care planning. Consider this: 3 out of every 4 people who live past age 65 will need some sort of long-term care support, according to the US Department of Health and Human Services.  A stroke, a broken hip, Parkinson’s, simple frailty from aging – these are just a few examples.

The single biggest health issue requiring long-term care is that of Alzheimer’s and/or dementia. More than 50% of all long-term care insurance claims are related to a cognitive issue such as these. The Alzheimer’s Association 2014 Facts and Figures reports:

  • Alzheimer’s disease is the 6th leading cause of death in the United States
  • The disease kills more people than breast and prostate cancer combined
  • More than 5 million Americans are currently living with Alzheimer’s
  • 1 in 3 seniors dies with Alzheimer’s or another dementia
  • Almost 2/3 of Americans with Alzheimer’s disease are women
  • Women age 60 and older have a 1 in 6 chance of getting Alzheimer’s, men: 1 in 11
  • Women in their 60s are about 2 times more likely to develop Alzheimer’s than breast cancer at some point in their remaining years
  • More than 60% of Alzheimer’s and dementia caregivers are women
  • The average Alzheimer’s patient requires 24-hour care for an average of 4-7 years

Long term care includes a range of services to assist you when you suffer from a chronic or prolonged illness or disability (Alzheimer’s, Parkinson’s, stroke, cancer, accidents and much more) that leaves you unable to care for yourself for an extended period of time.

It is not just medical care, but is considered custodial care – care that is generally needed when you are unable to perform certain ‘Activities of Daily Living’ – bathing, eating, walking, getting dressed, etc. Services may be provided in nursing homes, assisted living facilities or a patient’s own home.

Long-term care is poised to become an important issue in the U.S. as the nation’s population grows older.  Each and every day, over the next two decades, 10,000 Americans will celebrate their 65th birthdays and as many as 70 percent of them, at one point as they grow older, will need some level of assistance with every day necessary chores.

When you stop and think about it, the decision not to buy long term care insurance is a decision to self insure. This can be costly and possibly devastating.  The average cost of a nursing home today is $80,000 per year and rising. At that rate, it doesn’t take but a few years to grind through a modest estate.

Until recently, consumers had few choices when it came to long term care insurance. Traditional policies, which provided a certain amount of selected coverage, were the norm.  If the policy was never used, the owner would lose the investment of his or her premium payments.

The Solution: The Long Term Care Insurance That is Not a Policy!  These new products, long term care annuities, provide the option to receive long term care benefits only if they are needed. There is no separate long term care insurance policy, no premiums and generally little or no underwriting.

In response to customer and agent demand, insurance companies have designed what can be best described as hybrid or linked policies. These policies combine the benefits of an annuity or life insurance agreement with a traditional long term care contract.

With hybrid policies, the consumer has the guarantee of long term care benefits or, if no care is needed, the promise of insurance benefits to themselves and their beneficiaries.

The newest addition to the hybrid marketplace is the long term care annuity. This product also functions exactly like a fixed annuity, but has a long term care multiplier built into the policy. There is no premium rider attached to this medically underwritten annuity policy. Instead, a portion of the internal return in the contract is used to pay for the long term care benefit.

A Long-Term Care rider provides long term care insurance in addiction to a steady stream of income. The 2006 Pension Protection act now allows for withdrawals from an annuity or life insurance policy with a long term care rider to be tax free to the individual for qualified long term care expenses.

  • Please Note – Applies to non-qualified money – Your money is used first.

Long term care coverage is calculated based on the amount of coverage selected when the policy is purchased. The insurance company offers a payout of 200% or 300% of the aggregate policy value over two or three years after the annuity account value is depleted.

For example, a policyholder with a $100,000 annuity who had selected and aggregate benefit limit of 300% and a two year benefit factor would have an additional $200,000 available for long term care expenses after the initial $100,000 policy value was depleted.

The policy owner would spend down the $100,000 annuity value over a two year period and then receive the additional $200,000 over a four year period or longer. In this example the contract pays $50,000 a year for a minimum of six years, but care will last longer if less benefit is needed.

Again, if long term care is never needed the annuity value would be paid out lump sum to any named beneficiary.

Long term care planning for you and your family is an important strategy for protecting your financial future. Regardless of whether or not insurance is utilized, the out-of-pocket costs for care can be a heavy financial burden.

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Tuesday, October 28th, 2014 Wealth Management Comments Off on Long Term Care Awareness Month

Retirement Risks Threaten Financial Success

As retirement approaches, the investor contemplates how to eventually convert savings into an income stream without the benefit of continuous earnings from a full time job. There is a good chance that interest and dividend income will not be sufficient to support cash flow needs in retirement and that a withdrawal strategy that includes a reduction in principal will be required.

To that end, an additional set of risks such as inflation risk, longevity risk and sequence-of-returns risk appear on the horizon for the investor and threaten the chances of financial success in retirement. 

Overall, consumers ages 55 to 75 see great value in having guaranteed lifetime income in addition to Social Security.  Most retirees say they receive far more income from guaranteed income sources than from non-guaranteed sources.  According to consumers, the two leading benefits that guaranteed lifetime income products provide are peace of mind and making it easier to know how much to spend. 

Building up enough retirement income to live comfortably until the end of your days isn’t as difficult as it might seem, so long as you start saving and investing early and understand that the process evolves throughout your lifetime. Continuing to throw your hat in the ring over the long term will give your portfolio a chance to outperform and last throughout your lifetime.

Families will have a greater degree of financial security by making retirement decisions earlier rather than later.  But it’s never too late to plan for the future even for those retirees with a solid nest egg and keen planning.  The increasing lifespan and the likelihood of needing significant physical assistance and even long-term-care placement for many years prior to death may significantly undermine financial projections.

The key is to start saving/investing early in life and be consistent (save with every paycheck). The power of compounding is lost on many people. Also maxing out contributions when possible, eliminating debt, avoiding risks with your nest egg, planning for multiple streams of income once retired (pensions, dividends, part time work, etc.) should all be part of everyone’s plan.

Financial experts’ rule of thumb is that retirees need 70 percent of the income that they earned during their working years. If there’s a gap between your savings and the amount you think you’ll need in retirement, you can either work longer, scale back on your retirement plans, consider a part-time job to help cover the shortfall, or buying an annuity can help create the steady and guaranteed income that can give retirees peace of mind.

By purchasing an annuity that, combined with Social Security and possibly a pension, will cover just the fixed costs they’ll face in retirement. That way, they have the confidence of knowing that we don’t have to draw from investments to cover those costs, and regardless of what happens, those costs are covered

Retirement planners have touted the “4 percent rule” for years. Under it, they say retirees can safely withdraw 4 percent of their total assets in their first year of retirement, and withdraw that amount, adjusted for inflation, thereafter. The problem with that, as many new retirees learned in 2008, is that if the market crashes early on in your retirement, your assets could suffer irreparable damage.

The fix, is having a cash cushion to see you through the next market crunch. It is recommended that retirees keep at least two to three years’ worth of expenses in an emergency account, so they can avoid pulling money out of the market when it’s falling. Or have a guaranteed income account.

What happens when one spouse unexpectedly predeceases the other?  Planning for such a contingency need not be overwhelming, but it is vital to fold this concept into your retirement planning as early as possible. The choices you and your spouse make before retiring can make the difference between a surviving spouse living comfortably or one being left with little financial support.

It’s important to think about this issue early on, because once you make a decision regarding the administration of your pension, it’s permanent. If your spouse will need your pension in the event that you die first, then crunch some numbers to decide which option will work best for you.

Guaranteed lifetime income products make it easier to manage a budget and provide more long-term security than other financial product.  A deferred income annuity is similar to an immediate income annuity, however guaranteed income payments typically start anywhere between 5 to 20 years after purchase.

The longer the time between purchase and the start of income, the higher the amount of guaranteed lifetime payment. Many deferred income annuities guarantee payments for 10 years even if you do not live that long. Like any insurance, the benefits received from an annuity contract can be tied to either the lifetime of one person (a Single Life contract) or two people (a Joint Life contract).

An annuity is an insurance contract that provides protection in the event of someone living too long (in the form of a sustainable income stream), whereas a life insurance policy provides protection in the event of someone dying too soon (in the form of a lump sum payment to the estate). Both forms of insurance are based on a mortality table (i.e., a “probability of death” table) managed by actuaries at the insurance carrier.

Deferred income annuities typically make the highest monthly income payments among sources of retirement income and there are no additional costs or fees associated, but you cannot withdraw the cash value of the account beyond these monthly payments. For example, if you deposited $100,000 into a contract at age 55 and waited until age 65 to receive payments, you can expect to receive approximately $9,300 per year for the rest of your life.

Income Annuities are used in situations where the investor needs to create – and specifically define – a source of guaranteed and predictable income.  There are no explicit fees associated with an Income Annuity. Like a Bank CD, these expenses are embedded in the rate you are given.

When withdrawals are made from a retirement savings account, the investment performance or return of the account can be negatively impacted in a significant way, especially during a down market. On the other hand, if withdrawals take place during an up market, the account is not as severely impacted.

The timing of market returns is important and is an additional risk that needs to be addressed. As an individual, one does not get to choose retirement based on what market sequence will materialize. Sequence-of-Returns risk may force the individual to adjust his/her standard of living in retirement and, in extreme cases, can cause a dependency on social programs, friends, and family.

By allocating retirement savings across investment and insurance-based products in proper proportions, one can effectively combat the additional risks found in retirement (inflation risk, longevity risk, and sequence of returns risk).

The impact of longevity and the risk of outliving one’s investments are real. Rather than trying to predict the future for inflation, longevity, and sequence-of-returns in the market, an investor should consider insuring against potentially adverse outcomes by adopting a product allocation strategy that aligns different types of annuities combined with investment accounts that can balance and fine-tune the sustainability and legacy trade-off throughout retirement.

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Monday, October 20th, 2014 Wealth Management Comments Off on Retirement Risks Threaten Financial Success

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