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Retirement

Risks to Your Retirement Future

As Americans live longer, the task of managing money after retirement gets more complex. A retiree in his or her mid-60s typically has a different risk profile than an individual approaching 90. It may be helpful to look at various types of risk from the vantage point of how they affect retirees at different life stages. Here are four key risks to consider.

Risk 1: Investment Risk

Balancing risk and return takes on a different meaning for individuals as they age. A negative rate of return during the early years of retirement could leave an individual with a significantly smaller nest egg when compared with negative returns later in the retirement life cycle. Your financial advisor can help you craft an investment mix with the goal of smoothing out returns over the long term and increasing the chances that your assets will last throughout your lifetime.

Risk 2: Longevity Risk

Withdrawing too much from a portfolio during the early years of retirement may heighten the chance of depleting your assets during your later years. For this reason, many financial advisors recommend limiting annual withdrawals to 5% or less of a portfolio’s value, adjusted for inflation, to make assets last as long as possible.

Risk 3: Inflation Risk

Because younger retirees typically are planning for a time horizon of 20 years or more, it is important that their portfolios include a source of growth that is likely to exceed inflation over the long term. To complement this potential growth, many retirees rely on more conservative investments that may generate income and help to balance risk and potential return.

Risk 4: Health Care Risk

It is not unusual for medical costs to increase as retirees age, and it may be prudent to plan for these costs before the need is immediate. Preretirees and younger retirees may want to explore options for medical insurance that supplements Medicare, as well as long-term care insurance, to reduce the possibility of dipping into personal assets to finance illness- or accident-related expenses. Also, remember that those who retire before age 65 need to find an alternate source of medical insurance prior to becoming eligible for Medicare.
Reviewing these and other challenges associated with retirement planning with your financial advisor may increase your confidence that you have considered all scenarios. While it may not be possible to prepare for every situation, planning ahead may help you cope with financial issues that come your way.

© 2012 S&P Capital IQ Financial Communications. All rights reserved.

Retiree Challenge: Making Your Money Last

The ultimate goal for most retirees is making sure their assets last as long as they live. And because of increased longevity, managing cash flow is more critical than ever. While many variables come into play, there are a number of planning moves that can help retirees live within their means and make appropriate adjustments in response to changes in income and expenses.

Tools for the Task
If you are retired or about to retire, you will need to clarify your current financial situation, as well as any significant changes you expect. Two sources will provide this information:

  • A net-worth statement, which provides a snapshot of your assets, debt, and cash reserves.
  • Your monthly or annual budget, with itemized breakdowns of your income and expenses. If you haven’t retired yet, it’s a good idea to prepare a projected budget of your retirement income and expenses.

Even with reasonable assumptions about investment returns, inflation, and retirement living costs, it is likely you will encounter numerous changes to your cash flow over time. Experts often recommend a monthly review of your budget, as well as a comprehensive annual review of your financial situation and goals.

What to Look For
What should you look for as you monitor your finances? Following are potential developments that could affect your cash flow and require adjustments to your plan.

  • Interest rate trends and market moves may result in an increase or decrease in income from your savings and investments.
  • You may also encounter changes in federal, state, and local tax rates and regulations. Watch for changes in Social Security or Medicare benefits or eligibility, as well as new rules affecting employer-sponsored retirement benefits and private insurance coverage.
  • Inflation and health care costs are two other variables that can have an impact on living costs and, hence, your retirement planning assumptions.
  • Life events such as marriage, the death of a spouse, and the addition or loss of a dependent may also affect your cash flow. In addition, cash flow is impacted by both small and significant choices you make over the course of your retirement, such as how much you spend on travel and entertainment and whether you live in a lower-cost or a higher-cost locale.

It is worth paying close attention to cash flow, making sure you budget carefully, monitor income and expenses frequently, and take action whenever you believe that significant changes may be necessary.
© 2011 McGraw-Hill Financial Communications. All rights reserved.

Phases of Retirement

Although many Americans now plan for a retirement up to 20 years, your retirement may last much longer.

Believe it or not, living nearly a century may someday soon be almost commonplace. As a result, rather than thinking of retirement as the final stage of life, a more realistic approach may be to view it as a progression of phases, such as early, middle, and late. This involves taking a fresh look at retiree expenses and income, as well as withdrawal and estate planning strategies.

The Need for Flexible Planning
Traditionally, retirees were advised to project income needs over the length of time of retirement, add on an annual adjustment for inflation, and then identify any potential income shortfall. But the planning required may not be that linear. For example, research suggests that some retirees’ expenses — other than health care — may slowly decrease over time.

That means many retirees — depending on personal expenses — may need more income early in their retirement than later. That’s why it’s critical not just to determine a sustainable withdrawal rate at the outset of retirement but also to periodically evaluate that withdrawal rate.

Or consider another trend: The desire to remain active means many people are continuing to work part time or starting new businesses in retirement. In fact, some psychologists and gerontologists believe that many people don’t really want to retire, but instead want to reinvent themselves through a mixture of work and leisure. As a result, more older men and women may be inclined to jump back into the workforce – and possibly enjoy the most productive years of their lives.

Early Years: Income and Tax Decisions
Keep in mind that adding employment earnings to your retirement “paycheck” requires careful planning because it may impact other sources of retirement income or bump you into a higher tax bracket. For example, in 2012 retirees who collect Social Security before the year of their full retirement age will see their benefits cut $1 for every $2 earned above $14,640. Also, depending on adjusted gross income, you might have to pay taxes on up to 85% of benefits, according to the Social Security Administration.

The need to potentially stretch out income over a longer period than previous generations also means that some people may not want to tap Social Security when they’re first eligible. Consider that for each year you delay taking Social Security beyond your full retirement age until age 70, you’ll receive a benefit increase of 6% to 8%, depending on your age. One caveat: If you do decide to delay collecting Social Security, you may want to sign up for Medicare at age 65 to avoid possibly paying more for medical insurance later.

Also plan ahead as to how you’ll pay for health care costs not covered by Medicare as you age. Remember that Medicare does not pay for ongoing long-term care or assisted living and that qualifying for Medicaid requires spending down your assets.

If you have accumulated assets in qualified employer-sponsored retirement plans, now may be the time to decide whether to roll that money into a tax-deferred IRA, which could make managing your investments easier. A tax and financial pro can also help you decide which accounts to tap first at this point in your post-retirement planning — a situation that could significantly affect your financial situation.

Finally, don’t overlook any pension assets in which you may be vested, especially if you changed employers over the course of your career. Pensions can supply you with regular income for life. Annuities may also play a role in helping you generate steady income.1

Middle Years: Distributions and Lifestyle Realities
By April 1 of the year after you reach age 70½, you’ll generally be required to begin making annual withdrawals from traditional IRAs and employer-sponsored retirement plans (except for assets in a current employer’s retirement plan if you’re still working and do not own more than 5% of the business you work for). The penalty for not taking your required minimum distribution (RMD) can be steep: fifty percent of what you should have withdrawn. Withdrawals from Roth IRAs, however, are not required during the owner’s lifetime. If money is not needed for income and efficient wealth transfer is a goal, a Roth IRA may be an attractive option.

Also, consider reviewing the asset allocation of your investment portfolio. Does it have enough growth potential to keep up with inflation? Is it adequately diversified among different types of stocks and income-generating securities?

Later Years: Your Legacy
Review your financial documents to make sure they are true to your wishes and that beneficiaries are consistent. Usually, these documents include a will and paperwork governing brokerage accounts, IRAs, annuities, pensions, and in some cases, trusts. Many people also draft a durable power of attorney (someone who will manage your finances if you’re not able) and a living will (which names a person to make medical decisions on your behalf if you’re incapacitated).

You’ll still need to stay on top of your investments. For example, an annual portfolio and asset allocation review are important. Keep in mind that a financial advisor may be able to set up an automatic rebalancing program for you. And finally, be aware that some financial companies require that you begin taking distributions from annuities once you reach age 85.

Preparing for a retirement that could encompass a third of your life span can be challenging. Regularly review your situation with financial and tax professionals and be prepared to make adjustments.

Points to Remember
1. By April 1 of the year after you reach age 70½, you’ll generally be required to begin making annual withdrawals from any tax-deferred accounts.
2. Match living arrangements to changing lifestyle needs and plan ahead for how you’ll pay escalating health care expenses.
3. Make sure that financial documents are true to your wishes and beneficiaries are consistent.
4. Regularly consult with financial and tax professionals and be prepared to make adjustments, depending on how your life and needs change.

1Withdrawals from annuities before age 59½ are taxed as ordinary income and may be subject to a 10% federal penalty tax. In addition, the issuing insurance company may also have its own set of surrender charges for withdrawals taken during the initial years of the contract.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

© 2012 S&P Capital IQ Financial Communications. All rights reserved.

Can You Afford Early Retirement?

Early retirement is a phrase many Americans wish they could turn into a reality. While retiring in your 50s or early 60s sounds enticing, it typically requires years of planning to make sure you’ve accumulated enough retirement assets to last for 20 or 30 years or more. It’s important to factor in how an early retirement could affect your Social Security benefits, options for health insurance, and the nest egg you plan to rely on for ongoing living expenses.

Social Security and Medicare
Those who collect Social Security at age 62, the earliest age when most retirees are eligible, face a permanent reduction in benefits. For example, if your full retirement age is 66, collecting benefits at age 62 will result in a 25% reduction in the monthly benefit you would have received by retiring at 66.1

Those born in 1960 or later will experience a permanent 30% benefit cut if they choose to begin collecting benefits at age 62 instead of their full retirement age of 67. In contrast, delaying benefits past full retirement age results in a higher benefit, with a maximum delayed retirement credit of 8% annually for those who were born in 1943 or later and wait until age 70 to retire.

Regardless of your age when you retire, Social Security is not likely to pay all of your living expenses. Social Security currently comprises 36% of the income of Americans aged 65 and older, with remaining income coming from employer-sponsored retirement plans, wages, and other sources.2

Finding health insurance is equally important if you plan to retire early. Eligibility for Medicare begins at age 65, and those who retire earlier typically must obtain health insurance on their own or through a former employer, which can cost thousands of dollars annually in premiums.

Saving and Budgeting
Early retirement typically requires a larger nest egg to finance living expenses over a longer period of time. Contributing as much as you can afford to qualified retirement accounts, such as an IRA or an employer-sponsored retirement plan, can help you build this nest egg.

Retiring early requires advance planning to make the situation work to your advantage. If you have the financial resources to do it, you may want to start the process at your earliest opportunity.
1Source: Social Security Administration.

2Source: Social Security Adminstration, Fast Facts & Figures About Social Security, August 2010.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

Are You Prepared to Retire?

Retirement used to conjure up images of lazy days spent in a rocking chair. Today’s retirement is very different. You might plan to open a business of your own. Or perhaps you’ll return to school for that degree you never had the chance to complete. So what does this redefined retirement mean to you? There is no one answer. In the coming decades, “retirement” will mean something different to each of us. Regardless of your decision, you’ll need to design a financial plan suited to your specific vision of the future.

Income Is Key
A good starting point might be to examine your sources of retirement income. If you pay attention to the financial press, you’ve probably come across at least a few commentators who speak in gloom-and-doom terms about the future for American retirees, decrying a lack of savings and warning of the imminent growth of the elderly population.
True, there is widespread concern about at least one traditional source of income for retirees — Social Security. Under current conditions, Social Security funds could fall short of needs by 2033.1
This shift makes it even more important for individuals to understand their goals and have a well-thought-out financial plan that focuses on the key source of retirement income: personal savings and investments. Given the potential duration and changing nature of retirement, you may want to seek the assistance of a professional financial planner who can help you assess your needs and develop appropriate investment strategies.

As you move through the various stages of the new retirement, perhaps working at times and resting at others, your plan may require adjustments along the way. A professional advisor can help you monitor your plan and make changes when necessary. Among the factors you’ll need to consider:

  • Time: You can project periods of retirement, reeducation, and full employment. Then concentrate on a plan to fund each of the separate periods. The number of years until you retire will influence the types of investments you include in your portfolio. If retirement is a short-term goal, investments that provide liquidity and help preserve your principal may be most suitable. On the other hand, if retirement is many years away, you may be able to include more aggressive investments in your portfolio.
  • Inflation: While lower-risk fixed-income and money market investments may play an important role in your investment portfolio, if used alone they may leave you susceptible to the erosive effects of inflation. To help your portfolio keep pace with inflation, you may need to maintain some growth-oriented investments. Over the long-term, stocks have provided returns superior to other asset classes.2 But also keep in mind that stocks generally involve greater short-term volatility.
  • Taxes: Even after you retire, taxes will remain an important factor in your overall financial plan. If you return to work or open a business, for example, your tax bracket could change. In addition, should you move from one state to another, state or local taxes could affect your bottom line. Tax-advantaged investments, such as annuities and tax-free mutual funds, may be effective tools for meeting your retirement goals. Tax deferral offered by workplace plans — such as 401(k) and 403(b) plans — and IRAs may also help your retirement savings grow.

Prepare Today for the Retirement of Tomorrow
To ensure that retirement lives up to your expectations, begin establishing your plan as early as possible and consider consulting with a professional. With proper planning, you may be able to make your retirement whatever you want it to be.

Source/Disclaimer:

1Source: Social Security Administration, Facts & Figures About Social Security, 2012.
2Past performance is no guarantee of future results.

© 2012 S&P Capital IQ Financial Communications. All rights reserved.

Is a Million Dollars Enough?

If your clients left $1 million to their family in the form of a life insurance policy’s death benefit, would it be enough? You may be surprised at the answer.

A Quick Case Study

Tom and Susan are a married couple with:

  • A $200,000 mortgage
  • Annual incomes of $60,000 each
  • Two children, ages 2 and 4

In the event Tom or Susan should pass away, they want:

  • To provide for their children’s education
  • Their family to be able to pay off all expenses and debt
  • Their family’s standard of living to remain the same
  • The surviving spouse to retire comfortably

Upon the passing of one spouse, the other spouse receives the $1 million benefit. Subtract from that the mortgage, college costs of $95,0001 and funeral and other final expenses of $5,000, leaving a lump sum of $700,000. A hypothetical return rate of 6% would create an annual income stream of $42,000. That amount replaces only 70% of the spouse’s missing income ($60,000) with no adjustment for inflation.

If Tom and Susan would like to maintain the annual pre-tax income of $60,000 (and assuming a 3% inflation rate and an annual pre-tax investment rate of 6%), the lump sum will last only 14 years.

1 Based upon both children attending school with current tuition of $20,000 a year, taking into account 4% inflation and 8% return on a lump sum of money for 16 and 14 years, respectively.

In the case of Tom and Susan, a surviving spouse would only be able to maintain the family’s current standard of living for 14 years. What are your clients’ needs, and do they have the appropriate coverage in place?

This case study can serve as a valuable illustration and encourage a dialogue between you and your clients regarding the importance of proper life insurance coverage.

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