Retirement Income Blog

The “baby boomer” generation are those people 45 and 62 years of age (as of 2008). This generation has saved on the average retirement savings of $38,000, excluding pensions, homes, and social security. However, “baby boomers” with qualified retirement plans has an average retirement savings of $88,000. The $88,000 of average retirement savings will generate an annual retirement income of about $5,000 yearly. Not many people would be satisfied with this level of retirement income. To get an exact amount, based on your age and retirement savings, you can use the retirement income calculator. But there is ample evidence that these retirement plan accounts are mismanaged with approximately half invested in under-earning money market funds rather than long term growth investments.  Its clear not many baby boomers will retire rich.
Source: http://chaz11.blogspot.com/2008/05/baby-boomer-retirement-dilemma-how-much.html

Here is additional data on average retirement savings and attitudes. Allstate has conducted a Retirement Reality Check annually. The survey measures Americans’ attitudes toward, and savings for, retirement. In the 2006 version, respondents were asked, “If saving for retirement were like driving on the highway, where would you be?”

By far, the majority of respondents– 48% — said they are “in the middle lane, keeping up.” More confidence was shown by 20%, who said they are “in the fast lane, passing others.” And everyone else was rather timid. “On the on ramp, still getting started” came in at 14%; “in the slow lane, watching others go by,” notched 13%; and “lost and looking for a map” held strong at 5%. Obviously, retirement is one area where many of us are perfectly content thinking of ourselves as average and the average retirement savings sounds to be pretty dismal. The dismal facts mean that most babay boomers will need to annuitize their nest egg and will have nothing to leave to their children (use the fixed annuity calculator for estimates).

It’s estimated that the average projected postretirement income replacement needed among employees of large U.S. employers is 126 percent of final pay, a level only about 19 percent of employees are expected to satisfy, according to a Hewitt Associates report released July 1. If we assume that the average person earns $40,000 annually, they would need about $50,000 in retirement income, requiring an average retirement savings of $833,000 (not taking into account any social security income).

In fact, according to the report, Total Retirement Income at Large Companies: the Real Deal 2008, about 67 percent of the more than 1.8 million employees of 72 large U.S. employers tracked in the study are expected to have accumulated less than 80 percent of their projected needs at age 65. Despite the gloomy projections, the report’s authors concluded that employees can make a big difference in their retirement readiness by making small changes in their savings rates, investing smarter, paying lower fees, and delaying their retirement – all great actions to increase the average retirement savings in America.
I think in particular the last point is what we are going to see more and more of: individuals working well into their 70’s just to pay their bills and survive. Unless savings rates make a big change, average retirement savings by retirement date will be too low.
Source: http://www.typepad.com/t/trackback/89778/31259398

Economist and humorist Ben Stein set out to answer the question, “Why won’t the baby boomers save?” According to Stein, the average baby boomer needs to save about $400,000 to have sufficient interest income to make up the difference between Social Security and what he or she needs for retirement.
Yet the average retirement savings of baby boomers has saved only $50,000—or $110,000 if you
include equity in their homes. He called this a crisis in the making.

Humorously exploring the question of how we got to this point, Stein suggested a number of possible causes for a low average retirement savings. First, he suggested, baby boomers have “always had it too good.”

Never having lived through economic hard times, they lack the discipline to save. He also proposed
a Freudian explanation: the false sense that mommy and daddy—or the government—will always
bail them out if they get in trouble. A third possibility drew on the theories of behavioral psychologist
B.F. Skinner: saving offers no immediate gratification, while spending provides immediate positive reinforcement such as a flat-panel plasma TV set or a new car. The final theory suggested that baby boomers felt compelled “to obey the media consumer spending machine.”

Whatever the cause, Stein concluded, many baby boomers in retirement will have to cut their
standard of living drastically, while others will simply run out of money. The baby boomers may
actually have saved more than the previous generation of Americans, but because fewer of them have DB pension plans, they are worse off.  In other words, because baby boomers must save on their own whereas their parents largely had company retirement plans, this generation’s average retirement savings rate is lower.

No matter who you listen to and what statistics are used, the average retirement savings of baby boomers is inadequate.

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At a time when nearly 8,000 Baby Boomers are turning retirement age each day, it does not appear that most Baby Boomers (Born between 1946-1964) are ready to retire. Fidelity’s research reports the following retirement savings statistics:

• Boomers have $35,000 in median total household personal retirement savings.
• Boomers typically save $2,750 annually for retirement.
• Boomers are on track to replace 59% of their pre-retirement income.
  Boomers who save in a 401(k) have an average 401(k) account balance of $80,000.
• 57% of Boomers expect to receive a pension (either own or spouse).
• 22% of Boomers will rely on the sale of their primary home for income in retirement (that was in 2006—these plans are no longer realistic in 2008).
• 69% of Boomers will rely on working at least part-time for income in retirement
• Of the 69% of Boomers expecting to work in retirement:

            –  68% will do so to cover basic expenses.

            –  52% will do so to receive employer health benefits.

            –  23% will do so because they want to stay busy

Based on these retirement savings statistics, the bottom line is this: boomers financial planning for retirement has been inadequate.  It’s clear that most will need to work during their “retirement years”, will need to annuitize their assets (consume their nest egg for income—see the annuity calculator) and live more conservatively (perhaps in lower costs areas or with more stringent lifestyles) than desired.

Why has this happened and is there a way out?  Boomers simply like to spend on goods that make them happy today rather thn for their edler years as this retirement savings statistic indicates:

Retirement Savings vs Purchases of New BMWs

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The attraction of a certificate of deposit (CD) is its higher interest rate over your bank’s regular savings account rate. Also, federal deposit insurance secures it up to $100,000 per institution ($250,000 if an IRA). CD returns today offer new options that seniors who seek short term secure investments should be aware of.  CDs can play an important part of the conservative porion of your retirement investing portfolio.

Traditionally when you purchase a CD, you invest a fixed sum of money for a fixed term – six months, one year, five years, or more for a fixed CD return. The bank pays you a fixed interest rate and you receive your investment back when the CD matures. If you redeem it earlier, you pay an “early withdrawal” penalty or forfeit a portion of the interest. So you need to plan your cash needs accordingly to not be penalized.

Today, CDs offer more options perfect for retirement investing . You can choose among variable rate CDs and long-term and callable CDs. You can even buy them through your broker. But not understanding each type’s exact features can leave you with an investment you didn’t mean to buy.
 
Some long-term, high-yield CDs have “call” features. The issuing bank may call (i.e. terminate) a CD after only one year or some other fixed period of time, perhaps because interest rates are falling. You’ll receive your full investment back plus accrued interest, but you lose out on your high interest payments in the future.

On the other hand, if you’ve invested in a long-term CD and interest rates subsequently rise, you’ll be locked in at the lower rate unless of course you pay the early withdrawal penalty.

Before you consider purchasing a CD, make sure you fully understand its terms. Know its maturity date and don’t confuse it with the call date.

As an example, don’t assume that a “federally insured one-year non-callable” CD matures in one year. It doesn’t! These words mean the bank cannot redeem the CD during the first year, but have nothing to do with the CD’s maturity date. A “one-year non-callable” CD may still have a maturity date 15 or 20 years in the future! In other words, when you see a high CD return make sure you understand why the return is so high.

Investors have accidentally bought 10 year CDs when they only wanted to tie up their money for 1 year. If you have any doubt about your CD’s maturity date, ASK. Fully understand the CD’s call features confirm when it matures.

Always remember that you’re insured only up to $100,000 per institution under federal deposit insurance rules ($250,000 throuigh 12/31/09). So, if you buy CDs through a broker, make sure that your CDs are held among institutions so that you don’t exceed $100,000 at any one or use different titling to increase your FDIC coverage.

How much should you invest in CDs for sensible retirement investing?  That depends on the results from your retirement planning calculators and you asset allocation among insured investments and those with greater risk yet higher return.

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Will planning, trust planning and estate planning is not just for older people.  It’s for anyone that wants to avoid heartache for those they love. It’s simply a asset of instructions to distribute property to those who you want to have your property. 

If you have a will your property will go to those you want to have it and there is no other way for you to have this assurance because the State will determine who gets your assets if you don’t have a will.  Additionally, by planning your will, friction and arguments will be lessened among beneficiaries.  Without your instructions, how will they know who gets what?  Moreover, the potential for large legal fees and court costs can be minimized because you avoid litigation among family members.  And of course, with proper will planning, The estate will be settled more promptly.  A good retirement planning calculator will help you estimate the size of your estate to be planned.

The major aspects of the planning are
1. To decide who you want to name as beneficiaries (both primary and contingent)
2. What you want each beneficiary to receive
3. You can name an executor/executrix to manage the distribution of your assets
4. If you have children, can name a guardian to care
5. Make an charitable bequests

Some people avoid will estate planning because of superstition—that if they plan the distribution of their assets they will die.  You will be comforted to know that there is no research or statistics to support this.  In fact, there’s a statistics floating around that 75% of attorneys die without a will.  That would support the case that people without a will are more likely to die!  So plan and prepare your will now!

Don’t delay estate planning because there are things you cannot decide.  For example, if you are torn about which beneficiaries to indicate or what to leave them, just have a will made anyway with your “best guess.”  You can always change it later.  And since you can use will planning and preparation software, you can change your mind as often as you desire without cost.  Or you may be undecided about charitable beneficiaries.  Again, you can change, add or delete charities at any time to your will.

Below find the information you need.  If you don’t want to prepare your own will, it’s a relatively inexpensive attorney’s fee to have it done. 

• Names and address of each beneficiary.  If a relative, state relationship.
• If any of your beneficiaries were to predecease you, name the contingent beneficiary (next in line)
• List specific bequests to be made to each of those persons listed above. Describe the gift, the amount of money or percentage of the estate to each recipient.  It’s best to use percentages.
• Names and addresses of charities for charitable requests and amount (again, best if a percent of your estate)
• If minor children are living at the time of making a will, you should name a guardian for their care. 
• Appoint your executrix/executor. Husband and wife often name each other. Specify if they will serve without being bonded in administering your estate. Again an alternate should be named.

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One of the topics we cover on this blog is estate planning as its unlikely you will spend every last dime before you die.  So let’s consider trust planning and how to leave assets to your heirs, just in case there’s some money left over.

I am a big fan of leaving money in trust to provide trust income to your heirs and not leaving assets outright.  Leaving assets outright has several problems:

• Your heirs may blow the money, intentionally or not
• The creditors of your heirs can get at it
• An alienated spouse can get at it (if they are clever)

If you leave money in trust, you can set it to give your heirs a trust income and not expose the principal to any of the above problems.  Of course, you can provide additional flexibility through the trustee.  You can empower the trustee (the person who is responsible for the trust on behalf of your heirs), to make discretionary distributions of trust income.  For example, if you your heirs get $20,000 annually from the trust, you can empower the trustee to make additional distributions of trust income or trust principal for certain purposes such as education or starting a business or buying real estate.

It’s important that the trust distribute its income each year because trust income left in the trust is taxed at very high rates:

By distributing the trust income to the beneficiary, the trust will not pay any tax and the income will be taxed to the beneficiary at much lower rates.

How important is trust planning?  You can consult retirement income calculators to see how much income you need, how much of your assets are likely to not be exhausted and to what extent to carry out estate planning.

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You may hear a lot about retirement planning. Estate planning is an essential part of retirement planning although many people aren’t aware of all that it encompasses. So they put it off until it’s often too late. Many assume that trust and estate planning is for the wealthy.  But that’s not so.

Let’s take a look at what estate planning addresses and why it’s important to begin it ASAP.

Estate planning services address these key questions:
• Do you want input into how you’d like to be taken care of when you become incapacitated?
• Do you want to be sure that your assets go to the people you choose when you die?
• Would you like to eliminate or minimize needless loss of some or all of your assets when you need long term care?
• Would you like to minimize excessive taxes on what you want to give your beneficiaries?
• Do you want to prevent public exposure, costs and delays of probate?

These are important questions and virtually everyone will answer ‘yes’ to all of them. Making arrangements to satisfy each question is what estate planning services are all about.

But what’s especially important is making arrangements to address these questions ASAP because of these 4 circumstances:
1. You never know when you’ll die
2. You never know when you’ll become mentally incapacitated
3. You never know when you may need long term care
4. Arranging satisfactory solutions to some of these questions requires 3 to 5 years lead time - at least - before these circumstances occur!

Consequences of not addressing these questions are:

Incapacitation:

• You’re treated in a manner you would never wish to be.
• Someone other than your choice determines how your money is used and distributed.
• Your assets go to someone not of your choice:
• With no will, your assets will be distributed according to state rules – not your wishes.
• Without a trust, you must trust your current spouse to give assets to your previous children

Long term care:
Without long term care insurance or a lot of wealth, paying direct long term care costs can wipe out a small estate easily.  Can you afford to do so?  Check the retirement income calculator.
Gift and estate taxes:
If you’re estate is worth some millions of dollars, estate and gift taxes above an uncertain exclusion level in years beyond 2010, can rob up to 45% of it.
Probate:
Public exposure on who’s getting what can trigger legal claims and hard feelings between potential beneficiaries and other relatives.

The table shows you estate planning services to address each estate planning question.

Estate Planning Questions and Tools
Estate planning questions Tools to address it
How should you be taken care of? • Living will or
• health care power of attorney
• Springing power of attorney
Assure your assets go to beneficiary of your choice? • Will
• Trusts
• Joint ownership
• Appropriate designation for beneficiary on account type (insurance, IRAs, bank accounts)
Lose your assets to long term care costs? • Medicaid planning (early transfers and gifting)
• Long term care insurance
Lose your assets to excessive estate and gift taxes? • Annual gift exclusion
• By-pass Trust
• Irrevocable trusts
Avoid probate? • Avoid sole ownership of any assets
• Revocable living trusts

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Whether you do it yourself or hire an asset manager, your choices of financial asset management are several.

Mutual Funds
The favorite choice of American investors for their financial asset management, mutual funds delegate the day to day decisions to a professional management team.  But the average fund charges about 2% annually (management fees, plus 12b-1 fees plus slippage costs) not including any front or back end loads.  Because the day to day portfolio management decisions are delegated, you only need to select and monitor the fund categories you select.  In recent years, asset allocation has been the buzzword to even make the selection of mutual funds easier with an allocation that looks like this (perhaps 1/6 invested into each category):

• Large US company stocks
• Small us company stocks
• Large foreign company stocks
• Small foreign company stocks
• Bond fund—domestic and International
• REIT (real estate) fund

Complexity (and potentially better performance) can be added by shifting money between the above categories annually by taking money for the categories that have appreciated and adding to the categories that have declined.

Individual Stocks and Bonds
The smaller investor has shunned the purchase and management of individual securities as a financial asset management choice because of lack of knowledge and ability to do the necessary research or lack of time or interest.  Larger investors tend more toward individual securities because on larger portfolios, the 2% fee inherent in many mutual funds gets to be expensive.  The costs to buy or sell stocks at a discount brokerage is insignificant at less than $10 per trade and there is no annual or management fee.  The burden is on the investor or his financial advisor to know what to buy and sell and when to buy and sell.

Managed Accounts
Wall Street created the managed account as a way to offer the best of both worlds (supposedly) as a financial asset management choice.  In this type of financial management account,  you have your own individual account.  Your funds are not commingled with other investors as with a mutual fund.  You appear to have personalization and an individual strategy.  In fact, you have the same portfolio as thousands of other investors (it is really not personalized unless your account is $1 million+) and depending on which type of firm you select, your fees will range from 1% to 20% annually.

There is no “right” answer to the above financial asset management choice that you make.  In all three situations, commodities are being added to the asset mix as investors realize that rising demand for commodities from China and India presents an attractive appreciation opportunity.

Note that your choice of a solution is secondary to larger strategies issues like your tax planning and retirement income needs which can be ascertained by using a retirement calculator.

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Help your spouse (or relative) settle your estate now - while you can!  Use this estate planning checklist for your loved ones so that they don’t need to organize a mess of information.  Don’t hesitate to ask your retirement advisor for assistance.
 
We collect and lose a lot of information about what we have. Do you know where your insurance policy, deeds, will, and all your bank accounts – just to name a few – are?  If you die, all these documents and more must be found and acted upon – or else your spouse and beneficiaries lose their benefit!  Ask your retirement advisor to maimtain a complete file for you.

Part of estate planning is getting your documents in order - the sooner the better and this estate planning checklist will help. It’ll help you recognize what titling needs to be changed. Also, settling estates can be time consuming and costly. Knowing where documents are shortens the time and helps reduce costs. Start collecting them into one place or at least constructing a list of where they are and what should be done about them. It’s also a great idea that your retirement advisors have a copy also.  Have your documents scanned and get a copy to your financial advisors.

Here’s an estate planning checklist of things to find and record their location and what to do about them:

Wills and trusts
List your executor and trustees and update where needed.  Make sure that these people have a copy of your important documents and that your beneficiaries know the identity of your executors and beneficiaries to contact.

Property deeds 
Review the titles to real property and cars and update if necessary.

Financial accounts
Identify all checking, savings, brokerage accounts, and their titling. Make sure you’ve registered “transfer on death” statements for easy transfer to your beneficiaries too.

Pension and retirement programs (pension, IRAs, 401(k), ESOP, etc)
Record all employer-sponsored programs you’re participating in. List who to contact and phone numbers. Estimate present value and the benefits each holds.

Benefits due you or your spouse
Find and list if your spouse will be due any social security, medical or other benefits as your survivor.

Tax and legal advice
Your estate tax planning should map out what passes to your spouse, and what goes to a trust with all tax consequences. You should identify who will be a suitable estate attorney for your affairs and suggestions on estate tax-related decisions.

Insurance policies
Find and review all your policies – life, home, automobile – and give their contact information. Some of these may carry additional benefits in the event of your death.

Credit cards and other liabilities
List all your credit cards and debt obligations (mortgage, bank loans, etc.) with their outstanding balances. Give contacts and telephones. Some credit cards carry death benefits too. All credit cards will need to be cancelled so they don’t continue to accumulate fees and interest charges.

Funeral arrangments
Don’t leave this grief-enhancing duty to your family.  Take care of them now so that your family memebers will be spared these details and decisions.

Your first reaction will be to procratinate feeling that this is too much to do.  But just take each bolded item above on the estate planning checklist to tackle each week.  Get assistance for your retirement advisor if needed. You’ll find that in a few weeks, you have everything organized and it won’t be so bad afterall.

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The typical sources considered for retirement funding are

• 401k and retirement plans (IRAs)
• Pensions
• Other savings
• Social security

But you have huge opportunities to gain retirement funding from other sources under your own steam, during retirement.  These other sources are not often mentioned by retirement advisors unless you pay a fee for their advice as there is no commission to be made for the following recommendations.

Part time work—what are you going to do if you don’t work—watch Oprah reruns?  Although the unemployment rate is up slightly because of a weak economy, we are heading into a labor shortage with more jobs than workers.  There will be demand for your paid time.  And don’t fret about your page—any employer would rather have a worker from the baby boomer generation than a Gen X or Gen Y employee as their work habits are not what they truly desire.

Self Employment—there are gobs of opportunities for retirement funding if you are willing to learn something new.  For example, if you want to invest in real estate but don’t have any money, there are plenty of companies that will provide money for you to find underpriced real estate and split the profits with you.  You must think like an entrepreneur to profit from the myriad of such opportunities If you are not willing to learn, forget it.  Spend a day searching the web and you will quickly be overwhelmed by work-at-home entrepreneurial opportunities–super sources for funding retirement.

Multi-level Marketing—a type of self employment not to be shunned and quite suitable for funding retirement.  There are millions of people involved in this very social way of making money.  If you are rooted in your existing opinions and not open-minded to such opportunities, don’t expect to generate more retirementnd.

Phone Sales—Hundreds of companies need people who can conduct successful sales conversations and close business. Work from home.  Don’t know how to sell?  Take a class.  Most people in sales have never taken a sales training class so you’ll be ahead of the crowd if you do.  And you can wow your peers with this very lucrative method of retirement funding.

While visits to a retirement advisor can help with tax planning, passive investments in stocks, bonds and funds, when it comes to generating your own income, the Internet will be your best source of information.  Also attend “work-at-home” expos which come to most large cities.

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Are you disturbed by the rates on CD savings at your bank? Not enough to satisfy your retirement income plan goals?

Many banks are FDIC insured, just like your local bank. Shop around for the best Certificates of Deposit. Check out other banks and saving institutions in your neighborhood, and in other states. Their rates could be higher than what you can get locally. In fact, the highest rates offered by some banks could be 40% higher than national averages… sometimes more.

How do you shop for a competitive rate? You could spend hours searching the Internet and maybe find a few. Alternatively, many financial planners and retirement consultants can do the shopping for you.  You don’t actually pay a fee for this service.  The CD you purchase for $100,000 will be sold to your retirement consultant for $99,000 so he earns 1% for shopping and assisting you.

Here are various types of CD savings accounts available, beyond what your local bank offers:

Callable CDs

“Callable CDs” are a variety of CD savings accounts that often pay more than regular (non-callable) CDs. The Federal Deposit Insurance Corporation insurance, full principal repayment at maturity and above-average yields appeal to safety-conscious retirees looking for income.  Although FDIC insured, they have features you must understand so read the brochure completely.  If you don’t, you could be stuck in a CD for 15 years.

Banks offer callable CDs to shift interest-rate risk to the depositor. Because the depositor is taking on this interest-rate risk, a callable CD savings account 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. They may have terms of 10 or 20 years. Therefore, these CDs are typically suitable for a retirement income plam that does not require liquidity and requires higher returns than a non-callable CD and the safety afforded by the FDIC protection.

Index-Linked CDs

These CD savings pay interest based upon the overall performance of a stock market index, and your principal deposit is FDIC insured up to current limits. Here’s an example of how one of these CD savings accounts work. Please note, however, that the various features of these CDs vary from company to company (e.g., maturity, interest rate determination, withdrawal penalties).

Here’s a hypothetical example. You make a deposit, say $10,000. The 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 500.² Let’s assume that the index increased 3% per calendar quarter over the next 3.75 years. In this hypothetical example, you would receive $12,271 (interest rates are subject to change and your actual results will vary). Please note that this example is used for illustration purposes and is not a prediction of future market performance.  Few retirement consultants will recommend these index linked CDs as they prefer to recommend equity indexed annuities which pay them more commission.

FDIC Insurance - Do You Really Understand It?

Most people realize that their CD savings are insured up to $100,000 per person, per institution. To ensure that all your accounts are fully insured, you could just spread your money among different banks. However, you can also keep accounts at the same banks and get several hundred thousands of dollars of insurance if your accounts are organized correctly.

One strategy is to use trusts or “pay-on-death” designations. Accounts that have named beneficiaries are insured $100,000 per named beneficiary. Here’s an example of how two parents and one child can insure $1.2 million of deposits using the correct designations on accounts:

How a husband, wife and one child
may have insured amounts totaling $1,200,000

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