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Women’s “All Weather” Retirement

Retirement for women is different than for men, and unless this fact is recognized and acknowledged, a woman’s retirement may become something less than golden.  A question for the women out there: how well do you know your finances? Whether you’re single, married, widowed, or divorced, planning for retirement can be tough.  Women live about five years longer than men on average, which means planning is key.

Retirement should allow you to spend the rest of your life in peace, provided that you have saved a considerable amount of money for your post retirement expenses.  The big disadvantage for women is a financial one, they’re more likely to be poorer than men. Although they’re more likely than their mother’s generation to have had jobs, they’re still more likely than men to spend their retirement in poverty.

There are a couple of other things that contribute to women’s potential for poverty in retirement. In addition to women generally earning less than men over the course of their lifetimes, they live longer, retirement, for some, can last 30+ years.  So any money they’ve managed to accumulate has to last them longer.

The risk of outliving assets is greater for women than men.  But that’s just the tip of the iceberg when it comes to women, where the problem is especially acute.  As a result, women typically have about 1/3 less money set aside for retirement than men.

Women are more likely to be well-educated, less likely to lose their jobs in the recession, and more likely to look after their health by eating their five daily fruit and veggies and by visiting their doctor when they first start noticing symptoms. In contrast, men don’t live as long as women, they’re more likely to be overweight and they’re three times more likely to take their own lives – presumably because they don’t have those supportive networks to turn to.

There are several reasons for this poverty and they’re all to do with being female:  Women STILL make less money than men over the course of their working lifetimes, and they don’t get as many promotions as men do. Women are more likely to have worked in low-paid jobs or to have worked part-time.  Less than half of wage-earning women in the US participate in retirement plans. To review –

  1. Women live longer than men.
  2. Women, on average, work in jobs that earn less than men – causing an earnings gender gap.
  3. Women (more often than men) interrupt their careers to care for children, aging parents and grandchildren.

In addition to all that, women are more likely to have had time out of the workplace due to raising children or looking after elderly parents, so they have fewer years to build up their retirement savings. At the same time, during that time that they are out of the workplace, they’re also losing out on years of paying into a pension plan – and if that comes with an employer contribution, they’re missing out on the employer’s contribution too.

There are various tools in our kits to help create “water-tight” financial plans to address the retirement funding gap.   Based on the longevity of women, it is certainly in everyone’s best interests to provide sufficient sources of income to carry us comfortably through our seventies, eighties, nineties, and even beyond. The question is, how?

To answer that challenge we suggest placing a portion of the nest egg into an investment portfolio composed of what we call a “All Weather” account that will provide a monthly income designed to pay the income amount required for her lifetime.  Why an income annuity? Because it is the only investment I am aware of that will pay a lifetime income, no matter how long the recipient may live.

Annuities are “the only way to generate retirement income that cannot be outlived.   Women will feel more confident in their retirement plans if they know that their basic expenses will be covered by guaranteed income. Therefore, any retirement-planning conversation should include a discussion of strategies for generating lifetime income, and how annuities can help create financial security no matter what the weather is.

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Thursday, February 26th, 2015 Wealth Management Comments Off on Women’s “All Weather” Retirement

Retirement Spending Plan

When you retire, you’ve lost your biggest source of regular income, so you’ll need your investments to replace a large part of it. For retirees, it’s generally a good idea to take fewer risks with your money, focusing more on income-producing assets such as bonds instead of riskier assets such as stocks.  A spending plan helps determine what you expect to receive in retirement income vs. your anticipated living expenses.

Retirement is more than getting a good return on your financial investments — it’s about getting a good return on life. Financial independence refers to a situation where an individual can generate enough income to pay all expenses for the rest of his or her life.  Building income streams allows individuals to achieve financial independence, if those income streams are sound and stable.

Over the last two decades, the provision of a pension in retirement has undergone dramatic changes. Not only did the introduction of defined contribution funds (401k) shift the responsibility from the employer to the employee, but more importantly, the investment management industry shifted the emphasis away from a focus on securing an inflation-hedged income through retirement to maximizing your capital on the day your retire.

You need this money to last at least 20 to 30 years, so the focus should be on preserving as much capital as possible while generating a regular income.  Having a plan and systematic process in place to handle the withdrawals over time is critical.  After the paychecks stop, there are fewer options to correct mistakes.  Underestimating life expectancy, is very dangerous if you’re planning your retirement finances.

Uncertainty around how long you’ll live is one of the biggest retirement planning challenges.  People need to plan for this uncertainty.  There’s a big difference between living to age 79 or living to age 92, and planning for one or the other extreme (or anywhere in between for that matter) could make a big difference in how much you save and spend before and during retirement, how you invest before and during retirement, how long you work, and how much or how little you leave to loved ones.

First, nothing is guaranteed. Investing in the markets is inherently volatile in the short run, no matter how inherently profitable they are in the long run. When the markets bounce around you may want to adjust your withdrawal rate in response to market movements. Even $100 a month makes a large difference in long-term financial projections. And re-computing your safe spending rate each year is an important discipline.

When the markets bounce around we are all wired to do the wrong thing: sell what has gone down and buy what has gone up. Investing in stocks is appropriate only when your time horizon is at least five years or longer. Recent history has proven that safe investments generally don’t produce decent returns, however.

Do annuities still have anything to offer in this brave new world? In a lot of the coverage of their downsides, we often ignore their biggest selling point: the security and peace of mind they offer.

An annuity is really the only way you can guarantee a retirement income that will never dry up. If you keep your 401(k) pension invested, or use the cash to buy property as many people are planning to do, you may well benefit from higher rates of growth.

But there will always remain the risk that your investments will go bad and that at some point down the line you will run out of cash. Government pensions could fail. The markets could drop precipitously. The Treasury could default. Tax rates could double. We could experience hyperinflation. These unexpected occurrences, often called “black swan” events, mean it is nearly impossible to achieve a 100% success rate in retirement.  This could equally be the case if you take too much income in the early years and live for longer than you expect.

What annuities do is allow people to mix and match when it comes to providing a retirement income. It will be possible to use some of a pension money to buy an annuity which, when combined with Social Security, will provide a minimum income. The rest of the pension can be left invested in shares and other assets in the hope that it will continue to grow, or cashed in and used for other spending or investment.

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Tuesday, February 10th, 2015 Wealth Management Comments Off on Retirement Spending Plan

Financial Security in Retirement

Retirement planning can be extremely difficult as individuals are tasked with planning for an uncertain time period. In many ways, retirement planning is like trying to shoot a moving target in the wind.

  • Many people are afraid of “not being able to accumulate enough assets to retire with a life of dignity.
  • Many people wonder whether their money will outlive them or they will outlive their money.
  • Many retirees have a strong financial plan, but debt and unexpected circumstances can take away that plan’s wiggle room.
  • Many retirees will still crave and need the security of an annuity, which guarantees a regular income throughout retirement.

Not having enough money can cause financial stress throughout life.  Not having enough money in retirement is a big problem, especially since a 65-year-old is likely to live another 21 years and will need a pretty big nest egg to meet their retirement needs.  The longer the retirement period, the smaller the sustainable withdrawal rate.  This means that as one lives longer they need more resources at retirement.

Once retirement begins, the consequences of overspending become more dire. It can translate into less cash flow for retirees later on, or worse, they might even outlive their money. Will they have enough money when they retire, or worse, will they live out their golden years in poverty?

While people may still want to use the new flexibility offered in 401)k) plans, many will also want a level of certainty and security provided by an annuity to cover at least their basic income needs

When you are considering when to collect retirement benefits, one important factor to take into account is how long you might live.  About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.  Life, it turns out for many of us, is going to be very long. And long lives are expensive.

Since defined contribution plans have largely replaced traditional defined benefit pension plans, meaning that employees are now responsible for making contributions to their retirement plans. Beyond the fact that many people aren’t saving enough, a big part of the problem is that people don’t know how to figure out how much money they’ll need in retirement. If they can’t figure out how much they’ll need, then it’s hard to put aside enough money to meet those needs.

The 4% rule is a rule of thumb about how much can be safely withdrawn from a portfolio in retirement without prematurely depleting the portfolio.  The 4% rule really can help calculate a ballpark estimate of how much needs to be saved for retirement.

If you know how much income you need to generate from your assets, you can see that with 20,000 a year in income, you need in the ballpark of $500,000 at retirement.  Because of the ups and downs of the market, the sustainable withdrawal amount is much less than the average return on the portfolio. However, anytime you want an income stream that will continue for the rest of your life, an insurance annuity is the answer.

People don’t necessarily say that they worry about ending up living in the back of their car, but they want to maintain a similar quality of life during retirement as they had during their working years.  There are myriad of financial instruments to help accomplish our goals, we have to have some portion of investments in the stock market, because they are the only financial instrument that has consistently outperformed inflation but the vehicles that make us feel the calmest – CDs, money markets, bonds – typically will not accomplish our future goals.

However, when you move a big chunk of money from a mutual fund or exchange-traded fund into an annuity, that’s less for your fee-based financial planner to manage. It trims the fees he or she earns, and that’s why your financial advisor may steer you away from a financial tool that guarantees you a lifelong income.

In another effort to give qualified defined contribution plan participants additional access to a guaranteed income source, the Treasury Department and the IRS issued guidance, IRS Notice 2014-66, allowing expanded access to annuities inside of 401(k) plans.

The new rules allow 401(k)s to offer target date funds that include deferred income annuities as the default investment option. The target date fund can include annuities that begin payments as early as retirement or at a much later age. This gives individuals another way to generate some guaranteed retirement income and protect themselves from running out of money later in retirement.

Target-date funds are widely considered one of the most innovative investment products of the past 20 years. They automatically shift to a more conservative asset allocation as you age, starting with around 90% stocks when you are young and moving to around 50% stocks at age 65. By simplifying diversification and asset allocation, target-date funds have become 401(k) stalwarts.

The annuity feature stands to make them even more popular by closing an important loop in the retirement equation. Now, at age 65 or so, a worker may retire with a portion of their 401(k) automatically positioned to kick off monthly income with no threat of running out of money.

In simple terms, a target-date fund that has moved from stocks to bonds as you near retirement may now move from bonds to fixed annuities at retirement, easing concerns about outliving your money and being able to meet fixed expenses.

Annuities have always been an important part of ERISA qualified retirement plans, as the primary form of payment offered to married participants in a defined benefit plan is a qualified and joint survivor annuity. However, longevity annuities, which can be used to help pay for long-term care expenses and protect against outliving your assets, have not had a role inside of qualified plans despite their natural fit with retirement planning.

New rules from the Treasury Department changed all of this in 2014, allowing the use of longevity annuities in 401(k)s and IRA markets. Individuals can now hold a qualified longevity annuity contract (“QLAC”) inside of an IRA or 401(k) worth up to the lesser of 25 percent of their account balance or $125,000.

The previous concern with a QLAC was that the annuity would not begin payments until long after the individual was subject to the required minimum distribution rules, which kick in once someone reaches 70 ½ years old. Under the new rules, the QLACs are excluded from the retirement account balance when calculating required minimum distributions. This rule change gives people planning for retirement another tool to create a well-developed retirement income plan.

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Tuesday, December 9th, 2014 Wealth Management Comments Off on Financial Security in Retirement

Women’s Gold Plated Retirement System

Some people, including women, continue to believe that only men retire. This misconception ignores the career women who have the same retirement adjustment problems that men have.   While working it was all about building a large pile of money. Now when retired they’re worried about the check in the mailbox.  Pensions paid by defined benefit programs pay an income for as long as one lives however, on death no money is passed to dependents (the program may offer a spouse’s pension).

Final salary schemes have been phased out by many employers because they became so expensive. In the old days, before the growth of 401(k) plans, many employers paid you a pension that lasted a lifetime. The employer paid you your benefit no matter what happened to the stock market.

Today, while some people are fortunate to still have those types of pensions, many people must make their own key decisions, decide how to manage their own funds and how to cope with the three big what ifs of retirement. What if I live too long, what if my investments lose money and what if inflation hurts my investments?

Because the stock market has become a part of our daily conversation – the deal is everyone is supposed to be building retirement assets. Okay, so you build your assets, but how do you make sure that you don’t outlive them?  With traditional pensions disappearing, many boomers especially women boomers will be relying on not-fully funded 401(k) plans that could take a massive hit in a recent volatile stock market.

Retirees and near-retirees are increasingly aware of the need for lifetime income sources; people are living longer than ever before, and the threat of running out of money is not one to take lightly.  How long your savings will last will depend on how well you planned. In addition what you use during retirement should depend both on savings and continued income.

The goal for retirement is to start saving/investing early in life, be consistent, take advantage of any employer matching plan, max out contributions when possible, eliminate debt, avoid risks with your nest egg and plan for multiple streams of income once retired (social security, pensions, dividends, part time work, etc.).  Today’s near retirees have been smart with their money and are now looking for equally smart ways to turn their accumulated funds into lifetime income security and a worry-free retirement.

Men and women approach retirement differently: from how they save, to spending plans and what they expect out of their golden years, there are major difference between the genders.  It’s been well reported that more women than men encounter financial hardship during retirement.

What’s more frightening to me is the retirement income gap that women retirees face. Many women still earn lower wages than men in many occupations. Women across all occupations earned 81% of what men earned, according to the U.S. Bureau of Labor Statistics. In retirement, lower income translates to smaller Social Security benefits or defined benefit pension payments, along with smaller balances in 401(k) accounts, IRAs, and other retirement-savings vehicles.

Women face some challenges that are purely logistical, like the simple fact that they live longer than men.  Women face greater longevity risk in retirement, which means they need to stretch their resources across more years.  Women outlive men usually by six years and the combination of longer lives and limited finances can put older women at risk.

Women are more likely than men to move in and out of the labor force to raise children and care for older relatives, which typically reduces any pensions they may qualify for and makes it harder to build up a nest egg.  Caregiving, whether for aging parents or children, often cuts into earnings and destabilizes retirement plans.

Women need to plan for more years in retirement and they need to be saving more for their retirement. A comfortable retirement should be their number one goal and they should have on blinders when it comes to reaching that goal.

Few of us realize that we have to make that money last for perhaps 20 or 30 years after we stop working. There are two ways to make your fund last for the rest of your life:

  • Make withdrawals that you estimate will last for the rest of your life – and keep whatever money you haven’t spent in an investment.
    Or
  • Take some of your money and buy an income annuity – which will provide you with guaranteed income payments for the rest of your life.

Women want the certainty of knowing they won’t outlive their means. An annuity is the best way to be certain you will get payments for the rest of your life, no matter how long you live. Some people worry they will die early. An alternative is to get an annuity that is guaranteed to pay benefits for at least 10 years, even if you die before then. You may be able to make more money in the stock market, but you may not. If you can live with the uncertainty, you can just time the withdrawals from your investments.

If you have retirement expenses not covered by monthly pension and Social Security benefits. An annuity can guarantee a regular monthly payment for the rest of your life. If you have a large income to pay all your expenses, you may not need an annuity.

How Much Annuity do I Need?
1. Estimate your annual expenses in retirement. Remember that some of your expenses will go down. You won’t have to pay Social Security taxes, you won’t need to pay work-related expenses and you probably won’t need to save. However, be prepared for some expenses to go up – especially your health care expenses.

2. Subtract your annual Social Security benefit from your estimated annual expenses.

3. Subtract your pension benefits.

4. If you decide to buy an annuity, it should cover your expenses NOT covered by Social Security and pension benefits.

Many retirees would rather use drawdown instead of using the money to buy an annuity that provides an income for life.  It is swapping a capital sum for a guarantee of income.  Many retirees do not see that they are buying an income stream.  If you buy a car, you don’t get to keep the money you use to buy the car.

Annuities carry two important advantages: they provide a guarantee of income for the rest of an retiree’s life, however long that may be; they also allow investors to benefit from the “mortality cross-subsidy”, by sharing out some of the value of the pensions of those who die young, they increase the payments to those who live longer. This is an extremely efficient “Gold Plated” retirement system for all retirees but especially for women.

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Saturday, October 4th, 2014 Wealth Management Comments Off on Women’s Gold Plated Retirement System

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