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If you are a full-time employee in the private sector, you probably belong to a 401(k)-defined-contribution fund. In this case, all you can be certain of is how much your employer will contribute and how much you may contribute. A traditional 401k or pension may seem like the way to go because it appears to give security to those who have one. Given that there are variations in the investment strategies for these types of retirement plans, one thing remains fairly constant, your money is subject to changes in the market.

As more and more people retire without defined benefit plans, their own savings, often in 401(k) accounts, will be increasingly important — and investors’ choices about how to use them will be more complex.  While pensions still exist for some retirees, subsequent generations have seen them massively scaled back.

Almost all companies have replaced the “defined benefit” plan, i.e., the company handling all investment and administrative aspects of your retirement, with 401(k)-type retirement plans in which, you, the employee, bear the consequences for investment selection and market volatility.

There is no guarantee of how much money you will accumulate by the time you retire, and there is no guarantee of how much you will receive as a pension.  For instance, the stock market has been dropping and you’re looking at your 401K and investments drop in value.  The amount you receive, even if you belong to the fund for 40 or 45 years, will depend mainly on the investment returns earned by your retirement portfolio in the build-up to retirement.

For one thing, people are living longer, and their money has to last all that time. One in four people who are 65 years old today will live to age 90, and one in 10 will live to 95. You could be looking at 30 years of retirement.  You need to have the safety in terms of predictable income, yet at the same time you may need to have part of your portfolio in risk assets.

Retirees in the past often relied on a simple rule for retirement income: Most people near retirement may have heard of the 4% rule.  Draw down 4 percent of your savings every year and you will be all set. It’s a guideline for turning savings from 401(k) plans, IRAs and other types of accounts into retirement income. It quantifies the amount of money that can be sustainably harvested from savings each year.

But, like many rules of thumb, it doesn’t always work. The retirement landscape has changed. Low interest rates have complicated the picture for savers.  Safe withdrawal rates in retirement are down from 4% to around 2% in the first year of retirement.  The returns of the stock market during fragile periods just before and after retiring can be make-it-or-break-it factors for this type of retirement income strategy.

Another approach is to consider annuitizing some retirement savings. As Americans live longer, more experts are pointing to them as tools to help your money last.  An annuity is really like an additional pension for some people, it adds some stability to where you are getting your income. Putting your money into some type of fixed indexed annuity may be more appropriate. This will allow your money to grow with the market because it is usually directly tied to the Stock Market or the S&P 500 even though there is a limit to the growth.  However, remember that when you invest in the stock market your average brokerage will take a larger percentage off the top before you earn anything.

The real upside of a fixed indexed annuity is that you earn money whenever the market is on the rise, and the market never stays down for very long. With the reset feature of fixed indexed annuities, not only do you retain any money in your annuity when the market goes down but you earn money from the market being low because it has to rise again. You will not waste the time you would have just returning to your original account balance, in fact you will be gaining funds the whole time that the market is on the rise.

In addition to providing more stable income, annuities help offset the risk that investors will outlive their assets. And having an annuity that throws off income reduces the chance that retirees will have to draw on invested savings at a time when the market is weak. Most people don’t want to be paying for basic, necessary expenses out of something that gyrates up and down

People may use the annuity as a method of giving them some confidence in knowing that they are assured of part of their income.  One can consider the purchase of the annuity to be a type of insurance policy that will provide a sense of security. It can help prevent one from outliving one’s savings.

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Wednesday, October 14th, 2015 Wealth Management Comments Off on Reset Your Retirement

Retirement Income Management

To enjoy a comfortable retirement lifestyle, you’ll need to have adequate financial resources in place. And that means you must plan for the expected — but prepare for the unexpected.  You also need to know that your money will be there for you as you need it during retirement.

Knowing that, you’ll then have to figure out how much you can withdraw each year. This is a complex decision that must take into account a number of factors including your life expectancy, risk tolerance and asset allocation. Of course, your choice of withdrawal sum will have a significant impact on how long your money will last.

If your investments are going to provide a significant part of your retirement income, you need to carefully manage annual withdrawals from your portfolio. Your withdrawal rate plays the biggest role in determining the sustainability of your spending strategy. In other words, it is key in helping to ensure your portfolio provides for your needs as long as you need it.

You can avoid or minimize your danger of overspending in retirement by doing some thorough thinking and planning well before you retire. Perhaps start with the widely promoted 4% withdrawal rule, which suggests that you withdraw 4% of your nest egg in your first year of retirement, and then another 4% each year thereafter, adjusting the 4% for inflation.

That withdrawal rate is designed to make your money last. You can use the rate to estimate the nest egg you’ll need in retirement by multiplying your desired annual income stream by 25. So, for example, if you’re looking for $15,000 annually to supplement your Social Security income, you’d multiply that by 25 and would get $375,000. (Four percent of $375,000 is $15,000.)

It is critical to prepare for unexpected market declines, as this can affect the health of your portfolio and can also affect your ongoing withdrawal rate. It is important to either budget for this by being more flexible with spending (and possibly withdrawing less) or consider insuring against this risk by using an immediate life annuity to provide you with a guaranteed income stream.

How long you can expect to live is somewhat of a mystery. If you were to live longer than you anticipated, would you be financially prepared? To help make sure your money lasts throughout your lifetime, you may need to consider investments that can provide you with a lifetime income stream. And your longevity will obviously also affect your annual portfolio withdrawal rate.

Even the U.S. Treasury encourages annuities, which allow for retirees to receive a steady stream of income for the duration of their lifetimes.

Here are a few benefits of annuities not offered by other investments:

• Guaranteed Income for Life – even if annuity value falls to zero,
• Creditor Protection – if you get sued you can’t lose your annuity
• Guaranteed Increases in your future income,
• Tax-Deferral – can help reduce income-tax on social security and Medicare Part B premiums,
• Control of when, and how much income you want,
• Tax-free fund exchanges,
• Free from Probate – pass directly to beneficiaries at death without the cost, delays and publicity of Probate,
• Safety – Backed 100% by issuing companies,
• Liquidity – offer 10-12% annual free withdrawals offering immediate liquidity,
• Annuitization can eliminate need for RMDs,
• Long-Term Care riders
• Backed by state insurance departments

With a fixed annuity, you pay a sum up front and, in return, receive a fixed monthly payment for life, providing you with a reliable stream of income you can’t outlive. This may make sense if you’re seeking income now or if you want a known income stream that won’t be affected by market fluctuations

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Wednesday, August 26th, 2015 Wealth Management Comments Off on Retirement Income Management

Retirement Adventure and Discovery

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.

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

Golden Years Financial Security

People want three things from retirement; income that grows with inflation, security of income till death and protection from stockmarket fluctuations.  To plan your retirement, the retiree needs to know three main things when allocating their money. How long will they live? What will be the impact of inflation? What will be the returns from “risky” assets such as equities or property?

The financial realities of our world are changing. More and more people need to rely on their own investments for income during retirement. The assets from which you expect to create a vital stream of income during your retirement face risk from economic turmoil, interest rate uncertainty and market volatility.

Americans are anxious about their ability to live out their Golden Years with a measure of financial security. Those fears, unfortunately, are more than justified.  In years past, middle class Americans maintained their standard of living in retirement through three major sources of income: Social Security, defined benefit pension plans and defined contribution individual savings accounts such 401(k) plans.

These days, however, a large portion of the workforce lacks access to, or is not participating in, retirement plans, making future retirement security prospects “challenging at best.  And as time goes on, people will become more dependent on their Defined Contribution (401) pots and thus the impact of making the wrong decision will be all the greater.

Total portfolio value does not pay one bill nor can it be eaten. A monthly statement with nice total portfolio gains does not and never will pay the bills without selling the very assets that are continuing to pay you on a regular basis like clockwork, period.

With about 10,000 Americans retiring each day, a growing number are leaving the workforce without pensions, with modest Social Security benefits or inadequate individual account balances. Factor in skyrocketing health care costs and the picture becomes even more alarming.

If you’re wondering whether you’ll have the money you need when you’re ready to retire consider this.  For an upper-middle-class couple age 65 today, there’s a 43% chance that one or both will reach at least age 95.  Living longer is a good thing, of course. But there’s a downside—increasing longevity may mean the end of retirement as we know it.

Problem is, a long lifetime in retirement is a huge financial challenge. Most people can’t save enough in 40 years of working to support themselves for 30 or more years of not working.  To afford a longer life, Americans will have to rethink their savings and withdrawal methods.

Even if people understand the rules of the system, they may still be misled into thinking they can beat the risk-free rate (what the annuity represents) without risk. Many income seekers were failing to diversify away from equities, which would create problems if the stock market should suffer a correction.

Doubtless, there will be retirees who end up investing in worthless Canadian silver mines or Bolivian condominiums that offer 20% a year. But many more may end up paying annual expenses of 2% of more on funds that may not even beat annuity rates.  They may also fail to understand the impact of those charges.

While annuities remain the only investment product to guarantee a fixed income for the life of the investor.  We suggest using only a portion of your portfolio to buy an annuity—you might aim to cover your essential expenses with a guaranteed income stream, which would include Social Security.

Match your essential retirement expenses with your guaranteed income sources, and you’ve gone a long way toward building a more secure draw-down strategy—without relying on any rules of thumb. A secure financial future is about more than just reaching a destination.  Longevity investing raises the appeal of guaranteed streams of income, and annuity payouts will become more attractive as boomers retire and face a 30 plus retirement.

Often, people may be thinking about annuities framed in terms as a gamble on the possibility of a long life, rather than as a risk reduction measure aimed at improving that possible long life.  With your income guaranteed forever you can rest assured that your retirement will be safe and secure. If you invest in a way that, no matter what, your basic income needs are covered you never have to worry about the markets ups and downs ever again

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Wednesday, March 4th, 2015 Wealth Management Comments Off on Golden Years Financial Security

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