Retirement Income Blog

Want to play the stock market without risk?  FDIC insurance will help you do that.

The FDIC insures the “index-linked” CDs offered by some banks. These CDs pay interest based upon the overall performance of a stock market index, and your principal deposit is FDIC insured up to current limits (generally $100,000 and $250,000 for retirement accounts). Here’s an example of how one of these CDs works. Please note, however, that the various features of these CDs vary from bank to bank (e.g., maturity, interest rate determination, withdrawal penalties).

Here’s a hypothetical example. You make a deposit, say $10,000. The FDIC insured CD has a 3.75 year maturity, non-callable. At the end of 3.75 years, you would receive your deposit back plus interest based upon the movement of a pre-selected stock market index, such as the S&P 500.(1) Let’s assume that the S&P 500 index increases 3% per calendar quarter over the next 3.75 years. In this hypothetical example, you would receive $12,271.  That’s equal to a 5.6% annual return.  Had you invested in the S&P 500 index, you would have received 12% annually, plus dividends. But with the CD, even if the market drops, you still have your original $10,000 FDIC insured.

The attractive feature of such CDs is that you could earn a higher amount of interest than the fixed rates offered by most banks. However, you could earn zero if the stock market falls during the term of the CD. Your full deposit is always returned to you at maturity no matter what occurs in the stock market due to the FDIC insurance. Index-linked CDs are subject to early withdrawal penalties, and an investor is not guaranteed to receive 100% of his or her principal investment if funds are withdrawn prior to maturity. Also, an investor’s right of early withdrawal can be limited to certain dates.

Note that some varieties have a “cap” limiting the gain. For example, a 100% cap would mean that a $10,000 CD would not provide more than $20,000 no matter how large the gain in the stock market index. Others may have a call feature allowing the issuing bank to redeem the CD before maturity at pre-stated prices.
Yet others may have a “participation rate” where you partially participate in the index gain. For example, if the stock index rises by 100% and your participation rate is 50%, you enjoy only half of the market gain. All of these features are included in the descriptive materials. So read and understand them carefully before you invest.  If consfused, take the description ot an accountant or financial planner for interpretation.

If you think that the stock market performs well over the long term, index-linked CDs could interest you. It’s an opportunity to participate in potential market gains and to protect your principal from market losses. But some people may still opt for the traditional CD with its fixed payment of 3 to 5 % (Bankrate.com’s national average rate for five year CD was 3.39% as of 2/04/08).

If today’s CD rates leave you yearning for a higher return with safety, FDIC insured index-linked CDs could be for you.

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Callable CDs

“Callable CDs” are a variety of CDs that often pay more than regular (non-callable) CDs. These CDs come with Federal Deposit Insurance Corporation insurance (FDIC), full principal repayment at maturity and above-average yields.  These insured CDs appeal to safety-conscious retirees looking for income.

Although FDIC insured, that does not mean they are not without risk. These FDIC insured CDs have features you must understand. Before you jump at the rate offered by some ad in the Sunday newspaper, here’s what you need to know about the features offered:

High Rate
The higher rate could be temporary. Some callable CDs are callable after a year or two, which means you can get paid off and your high rate stops. Although your principal may still be insured by the FDIC, you may be required to find another place to invest your money which could subject your investment to interest rate risk (i.e having to accept a lower rate than you were earning). Although the bank could have the option to pay you back after one or two years, you do not have the same flexibility.  If you want to terminate your deposit, it could cost you as described below.

Banks offer FDIC insured callable CDs to shift interest rate risk to the depositor. Because the depositor is taking on this interest rate risk, a callable CD will have a higher yield than the same maturity CD without a call provision. The additional yield is partial compensation for the depositor accepting the interest rate risk. Callable CDs typically have terms of 10 or 20 years. Therefore, these CDs are typically suitable for someone who does not need liquidity and wants higher returns than a non-callable CD and the safety afforded by the FDIC protection. Consider that earning more on your money could reduce the need for you to tap into your principal investments. If you buy such higher-paying CDs, it might be wise to keep other money for liquidity available in a money market account or bank account.

Although money market accounts are typically considered to be safer than many equity investments, money-market shares are redeemable at net asset value, which may be more or less than original cost. An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in such a fund.

These callable CDs are suitable for:
• People who want to protect their “core” principal that they never want to spend
• People who want to leave money for heirs
• People who need to safely maximize income
• People who have adequate liquid resources

Take these precautions:
Some retirement planner may tell you that you can sell these CDs at any time. It is true that most banks will buy back the CD from you but it could be at a steep discount. The ONLY way to be sure to get all of our pricnciapl back is to hold the CD to maturity (could be 10+ years) or until called by the bank. With respect to principal repayment, the bank’s obligation is to pay you back at maturity.

You may be told that if you pass away before the CD matures, your heirs can “put” the CD back to the bank and get the principal. This offer however is dependent upon the bank having enough funds in the “put” pool. Your heirs will have priority but could wait to see cash, months if not years.

To find callabale CDs at 6%, just do a Google search on “callable CDs” and you will encounter many offerings.  This site does not require any login http://www.bergencapital.com/clientservices/inventory/cd_inventory_new_issue.htm

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If you’re 5 years from retirement you may be offered an early retirement plan – i.e. an offer of money in return for retiring at an earlier time than you had planned. What should you consider before choosing to accept any particular early retirement plan?  First, you want to make create a retirement plan–start with the retirement planning calculator.

You must look at your financial situation, your family’s needs, and whether or not you have enough money to finance your lifestyle for the next several years (or are readily employable).

The issues of concern are:
• Evaluating your early retirement plan and stock option issues
• Maintaining insurance for health, life and disability (including long term care)
• Generating income for the duration of your retirement years

Let’s look at each issue.

The early retirement plan and stock options
Your company’s plan administrator must provide a written explanation of your options 30 to 90 days before the final date on which you must take action. Make it clear when you can start receiving plan benefits, what form they take, and what are the consequences of beginning early retirement benefits early.  The tax impact of your alternatives must also be disclosed.  With your early retirement plan in hand, head to your accountant or retirement financial planner.  

Health insurance
Find out if your employer, as part of your early retirement plan, offers any permanent health insurance for your retirement years. If so, how much does it cost? Employer-provided coverage may end on the day you’re laid off or soon after. But, by U.S. law, the Consolidated Omnibus Budget Reconciliation Act (COBRA) allows you to continue your current coverage, including qualified physician, hospital, dental, vision and other medical expenses, at group rates plus a small administration fee. You have a limited time to elect COBRA coverage before it lapses.  Note that Cobra is not a permanent option as it could be much more expensive than what you had been paying as your ex-employer will not subsidize any part of the premium.

Life/disability/long term care insurance
Is it part of your early retirement plan? Other than health insurance, no other types of insurance are provided for under COBRA. But your ex-employer may pay it for a month or more as part of your severance pay and benefits, and then offer a continuance option. It usually isn’t cheap either; and you may be able to find a better deal. Alternative, you may be able to negotiate for longer coverage as part of the total early retirement plan. But as with health insurance, new private plans may not cover you for previous or existing conditions. Investigate them thoroughly, before you decline your ex-employer’s plan.  Consulting an insurance specialist is a good idea.

Income
How much income do you need?  (Use the retirement income calculator). How will you generate income?  Will you qualify for unemployment benefits – and if so, how long will you need to wait before qualifying? Determine other options to work for the duration of the time you expected to work.  In fact, because you are usually given some time to elect or negotiate an early retirement plan, you should be able to take interviews and possibly secure other employment before you job ends.  or, this may be ther opportunity to start your own business.  Your early retirement plan may have some silver linings.

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Perhaps you have made your will and now you think you know where your money will go. Think again! Is there a new child, a new spouse, or was there a death in your family? If so, then take these changes into account in your will. Or what if after you pass, things as they are now change–will those heirs you selected get what you want them to have?  Will preparation requires thinking about not only today’s relationships but also potential future relationships.

In addition to a change in the relationships amongst heirs that impact your will preparation, there is also State law. Your will is not the law. The probate court may override your will for various reasons –one of which is non-conformance with state law. State laws often require that a surviving spouse be entitled to a third to a half of the estate. If you have taken her or him into account, then at her or his death, a substantial amount of your estate will shift to other beneficiaries. You may wish to re-evaluate who could get your assets and be more definitive in your will preparation.

Suppose your spouse has died and you prepare a will. You leave your entire estate equally to your two children, each of whom has two children. Your beneficiaries are therefore your children and grandchildren, which the law regards as your “issue” (direct descendants). If you live long enough, there is a chance that you may outlive one of your children.

If one of your two children died, your estate distribution would depend on how you referenced their inheritance–as “per stirpes” or “per capita.”  Huh?  This is where state law can determine who gets what without you even realizing the following could happen.  The following is what make specificity in will preparation so important.

 If you leave an inheritance to your surviving issue per stirpes, then your children’s children will divide the share their parent would have received had he or she lived. On the other hand, if you leave the inheritance per capita, then each surviving issue gets an equal share.  If you don’t  specify this in your will preparation, your State law decides.

To illustrate the above example, we assume that both children were due equal shares of your estate. That would send half of your estate to the remaining child, while the other half would be equally divided by the children of the other child. That’s the case for per stirpes. See figure below.

Under a distribution per capita, when one child dies, all the remaining issue equally divides the estate. The remaining issue is your surviving child and his two children, along with the two surviving children of your deceased child. That is five people and each of them receives one-fifth of the estate. That is quite a significant reduction for your sole surviving child.   Now the preparation of a simple will does not seem so simple, does it?

Lastly, if you willed an inheritance to a friend, but he predeceased you, then his wife will likely receive your bequest (again, this depends on State law which operates when your will preparation and instructions are inadequate). If your intention was that the bequest was only for the friend, then you must state in your will that he must survive you to receive it.

If there is a major change in your family structure–or in your financial circumstances too–you should revise your will immediately.

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According to the Bureau of Labor Statistics, these are the sources of retirement income and proportions thereof.

Bureau of Labor Statistics

Note that 60% of your retirement income sources are not within your control so it does not need to be addressed.  Let’s address the sources of retirement income you can control.  Let’s also note that the portion of retirement income you can control may be increasing as employer provided benefits have been on the decline (and thus the rise of self funded 401k plans).  Additionally, this more recent data shows that pre-retirees expect to have more of their retirement assets coming form sources they can control:

EXPECTED RETIREMENT INCOME SOURCES

Source: Gallup Poll 2003

As you see form above, there are many sources of retirement income. In fact, within a 401k there are choices such as equity mutual funds, bond mutual funds and real estate investment trusts. Then we could further divide mutual funds into open end funds, closed end funds and exchange traded funds (ETFs).  Within bonds, we have treasury securities, federally backed mortgage notes, corporate bonds and tax free bonds.  Additional retirement income sources would include retirement annuities: traditional fixed annuities, variable annuities and equity indexed annuities. To supply any detail in one article would be overwhelming so in this blog, we have devoted at least one post to each of these retirement income sources and you can locate these posts using the category listing at http://www.retirement-income.net/blog.

The overall approach in designing your retirement income sources is to start with a retirement income calculator to determine your total retirement income needs.  Step 2 is to subtract those sources of income you cannot control (social security, employer benefits, deferred compensation, etc) and this will leave us with the amount of income that needs to be provided by retirement income sources that you can control.

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if you’ve investigated the cost of long term care insurance, you know its expensive.  So what ate your long term care options?

There are a number of ways to potentially reduce the cost of long-term care insurance. One method for couples is to add a “shared-care” rider. For example, instead of a lifetime benefit period for each of you, consider a five-year benefit pool that each of you can share. The savings from this long term care option could be significant.

Protection against the rising cost of long-term care expenses is certainly important, especially when you consider that for over 40 years, health costs have been going up faster than inflation. But this inflation rider can be expensive. So instead of a compound inflation rider, which increases your daily benefit more rapidly, look into raising the initial benefit slightly and buying the simple inflation rider.   Again, another long term care option to reduce your premium costs. 

And what about Medicaid? True, it is meant for people who have gone through most of their money. But do you really want to spend all funds that you had planned to leave to your family? There could be a way to structure a long-term care insurance plan so that you can eventually qualify for government assistance without having to transfer assets out of your family circle.  One long term care option is to purchase a long-term care policy with a benefit period that covers the Medicaid look-back period for asset transfers (60 months). Or you could also consider using the cash payments from an immediate annuity to make the premium payments.

At the end of the look-back period, your long-term care policy’s benefits will stop. And in the month after that, you would apply for Medicaid. Assuming the look-back period has expired, you could be eligible for government benefits without depleting the money you gave to your loved ones.  Medicaid is a tricky and controversial long term care option and you must include a specialist–an elder care attorney in this planning.

To know what you can afford, consult our retirement calculator.

Do not rely on prices that others pay for their long-term care insurance plans to make a decision. For example, your friends may be older, have health problems, or be in a totally different financial situation than you.  To find out what long term care insurance will cost, check the long-term care calculator.  With cost estimates in hand and to uncover all of your long term care options, talk with an experienced retirement advisor.

Note:  Long-term care insurance is subject to medical underwriting, and benefits will vary based among other things upon your age, health, and premiums. Fees and other expenses apply with the purchase of long-term care insurance, and surrender charges may be applicable on money withdrawn after the policy purchase. Insurance benefits and premiums do vary from company to company. Insurance guarantees are subject to the claims-paying ability of the issuing long term care company.

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Do you have funds in a 401k and have you often had questions about managing those funds?  Its quite possible that the plan administrator or your employer offers Morningstar Retirement Manager as a tool to make 401k management easier.  While software is never as good as sitting with retirement advisors to get in-person individualized advice, this software is a good second choice.

The Retirement Manager will help you decide how to invest in your retirement plan and how to allocate your funds among the various 401k selections. You can receive an individualized portfolio proposal that you implement yourself, or let Morningstar professionally manage your plan through the managed account service if you’re the type of person who would rather not be bothered.

Whichever Morningstar Retirement Manager service you choose, you’ll make progress toward an improved, financially sound retirement strategy. The Retirement Manager divides your retirement strategy into the components of goals, risk level, investment diversification, and savings rate. You then get recommendations to improve your strategy in each area, using an intuitive rating system.  Not just a 401k management system, Retirement Manager calculates how much money you’ll need each year of retirement, and shows how close you are to reaching that goal.

You can easily make adjustments to the key inputs (e.g. your savings rate) affecting your goal, and the Retirement Manager shows whether you are close to your target.

Determining your proper risk level is a key to generating a successful retirement strategy. Retirement Manager will select an asset mix for you based on your individual risk profile. You can complete a quick risk questionnaire to fine-tune your risk profile.

Using Morningstar’s extensive database, the Retirement Manager will analyze the available investments and select the ones that are most appropriate for you. Morningstar will take into account any investment preferences, restrictions, and current holdings in company stock and/or brokerage accounts when creating your individualized portfolio. So the software takes into account your investments beyond just your 401k plan. A powerful tool to help increase your wealth is Morningstar’s managed savings program. This program will automatically increase your savings every year by a pre-set amount up to allowable limits. Retirement Manager uses advanced modeling techniques to estimate the growth of your investments over time. See how much wealth you may accumulate, depending on the performance of the financial markets. Once you enroll, Morningstar provides an overall analysis of your portfolio. You can access your profile at any time to view your portfolio or make updates to your personal information. The Retirement Manager will incorporate any new information and generate an updated portfolio, if necessary.

The Retirement Manager can help craft a retirement strategy that is right for you. Ask your employer or plan administrator to make this available to you.  Combined with other tools at your disposal like retirement income calculators, immediate annuity calculators, long term care calculators, the Retirement Manager will round out the contents of your financial arsenal.

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Suprisingly, there is no such thing as a “certified retirement advisor” in the US.  Because there are several designations, it may be hard to keep them straight so let’s do a little sorting out to help you find a retirement advisor.  Most all of these individuals do some sort of financial planning and work with retirees (some may only deal with business owners so ask). Typically, they may offer a financial plan and have financial planning tools as retirement income calculators, immediate annuity caculators and other forecasting software.

Registered Investment Advisors
Licensed either by their State or Securities and Exchange Commission. Rather than charging commissions, these advisors charge fees for their time or for money management services. In most cases, they are required to pass the series 7 exam and file detailed information about their background (form ADV).  These people do not have any particular expertise and are simply licensed to give advice for a fee.

ChFC®—Chartered Financial Consultant
Insurance professionals that have completed an eight-course program of study and passed an exam. The ChFC program focuses on the comprehensive financial planning process as an organized way to collect and analyze information on a client’s total financial situation, to identify and establish specific financial goals, and to formulate, implement, and monitor a comprehensive plan to achieve those goals. The ChFC program provides financial planners and others in the financial services industry with in-depth knowledge of the skills needed to perform comprehensive financial planning for their clients. Students also must meet specified experience requirements, maintain ethical standards, and agree to comply with both The American College’s Code of Ethics and Procedures and applicable continuing education requirements. Those graduates who also complete the College’s Chartered Advisor for Senior Living are also trained in retiree matters

CFP®—Certified Financial Planner ™
Have completed 5 courses and passed a comprehensive exam. These individuals have met CFP Board’s education, examination and experience requirements, have agreed to adhere to high standards of ethical conduct and who complete CFP Board’s biennial certification requirements, including continuing education, to use the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and . The CFP® board is not a governmental organization. These certificants have completed coursework and exam designed to test their practical application, not just theoretical knowledge, of personal financial issues. The training is rigorous but these individuals have no particuar expertise in financial issues of retirees.

CRFA™—Certified Retirement Financial Advisor ™
Graduates are generally experienced financial planners who desired to get a focused education in financial issues of special concern to retirees. This is the only designation focused on financial issues facing retirees. CRFA™ graduates complete a four-day program, pass a closed-book final exam and must obtain 15 hours of continuing education annually. Topics studied: 1) how to structure retiree portfolios for increased income, less risk and reduced taxes 2) how retirees make financial decisions and skills for presenting to retirees 3) estate and long term health planning 4) tax issues specifically affecting retirees 5) asset protection.

CSA—Certified Senior Advisor
This is not a credential focused on financial issues but a much broader array of senior issues. Attendees may be financial professionals as well as nurses, caregivers, gerontologists, elder law attorneys, etc and others serving seniors. Topics studied include: TRENDS IN AGING, PRINCIPLES OF AGING, SOCIAL ASPECTS OF AGING, ALZHEIMER’S AND DEMENTIA, CHRONIC ILLNESS IN SENIORS, FINANCIAL PLANNING, ESTATE PLANNING, SOCIAL SECURITY, END-OF-LIFE PLANNING, SENIOR SPIRITUALITY, MEDICAID PLANNING, TAX PLANNING, SENIOR HOUSING, LONG-TERM CARE, RESOURCES FOR SENIORS, MARKETING TO SENIORS. CSA holders attend a 3-day class and pass an exam and complete annual continuing education.

Sorry we could not help you locate a “certifed retirement advisor” but hopefully, the explanations above help.

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If you’ve ever been involved in a qualified retirement plan (401k, profit sharing, pension, defined benefit, etc) there has been a retirement plan administrator working behind the scenes.  This firm has insured that the plan was in compliance with all federal rules (e.g. ERISA) and maintained all pertient filings with the government and disclosures to you, the plan participant.

Retirement plan administration is not necesssary with an individual acount such as an IRA, Roth IRA, SEP or individual 401k.  Typicaly, you as the participant have no direct interaction with the retirement plan administration process other than when you join the plan or when you retire and leave the plan.  The type of retirement help you typicallly need (e.g. selecting investments) is not what the retirement plan administrator will do.  Most however do maintainin retirement income calaculators, annuity calculators and other tools on their web sites to help retirement plan participants.

The types of plans that require professional retirement plan administration are:

Profit Sharing Plans - formulas may be integrated, non-integrated, age weighted or cross-tested

Money Purchase Pension Plans (Integrated and Non-integrated)

401(k) Profit Sharing Plans - Profit Sharing formulas may be integrated, non-integrated, age weighted or cross-tested

Safe Harbor 401(k) Plans

Super Comp and 401(k) Plans

One-Person (Solo) 401(k) Plans

Defined Benefit Plans

Cafeteria Plans

Employee Stock Ownership Plans (ESOP)

Typical Services Provided by a Retirement Plan Administrator

Employee Communications
Announcement Information
Participant Election Forms
Investment Direction Forms
Beneficiary Forms
Administration Services Included in Base Fee
Daily, Monthly, Quarterly and Annual Record-keeping
Individually Directed Accounts (single brokerage account offering participants multiple mutual fund choices)
Pooled Accounts (single portfolio)
Separate Accounts (each participant maintains a separate brokerage account)
Financial Statements
Earnings Allocation
Contribution Allocation
Forfeiture Allocation
Summary Annual Reports
Participant Statements
ADP/ACP Testing Quarterly (if applicable)
401(a)(4) and 410(b) Testing Annually (if applicable)
5500 Series Form Filings and Related Attachments

Retirement Plan Administration Administrative Services

Daily internet access to participant accounts and/or Voice Response Unit (VRU) daily access
New Participant Enrollment
Participant Termination (includes all forms prescribed by Department of Labor and/or IRS)
Hardship or Other Withdrawals
Participant Loans (includes loan documents and amortization schedules)
Additional Participant Accounts (such as rollover funds maintained separately)
Refund Calculations
Manual Data Entry (for employee census information)
Trust Accounting (in excess of 8 hours)
1096, 1099-R and 945 Governmental Filings
Plan Documents and Related Forms

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Typically, a professional that calls themselves a retirement financial advisor helps you prepare for retirement and may not be much value to you if you are already retired (yes, there are big difference in managing assets and providing advice for someone still working as opposed to an investor now living off their assets).  Their clientele will typically be age 45 to 65 and their focus will be on growth of assets and portfolio management.  The services and advice provided by retirement investment advisors comprise:
*Investment design and management using stocks, bonds, mutual funds, exchange-traded funds, real estate investment trusts, certificates of deposits and many other possible choices. Most retirement  advisors make money by managing your investments.  Typically, they are fee-based advisors and charge 1% of the portfolio value annually for making specific investment choices, monitoring the portfolio and making changes when needed.

*Insurance planning using annuities, disability insurance, life insurance, long term care insurance and health insurance. The other side of financial security is making sure that your risks don;t destrpoy your assets o having the right insurance and protreciton is cricial.  Most retirement  advisors have training and experience in risk management tools or will refer you to a colleague who is a specialist.

*Tax planning is the focus on minimizing taxes and advice will usually focus on maximizing the use of 401ks or other tax sheltered ways to grow you assets. 

*Financial planning is the activity that encompasses all of the above and it typically an analysis of your current a and provides a road map, a financial plan, or activities that will help you get to your financial destination. In preparing your plan, a fair amount of analysis is done and retirement financial advisors will typically make use of various software such as fixed annuity calculators, retirement income calculators, IRA distribution projections and portfolio allocation software.

In other sections of the site, we cover how to select a retirement consultants for those who are already retired.

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