Retirement Income Blog

 
Thanks to the FDIC, millions of Americans are able to sleep peacefully at night, knowing that their savings are protected by government-backed insurance. Since the thirties, certificates of deposit have become synonymous with safety of principal. Bank customers who shop for CDs concern themselves only with the rates and terms that are available as CD investing is riskless within the insured amounts.  When financial planning for retirement, CD investing can be a cornerstone of those plans.

Unfortunately, the safety that comes with FDIC insurance comes with a price. Will Rogers once said, “It’s not the return on my money that concerns me, it’s the return of my money.” This famous saying exemplifies the attitude of many bank customers. While CD investments are among the safest types of investments available, their rate of return is correspondingly low. If interest rates are around 4%, then that is about what you can expect a short term CD to pay. While longer term and jumbo CDs can pay slightly more, it is very difficult to see much real growth (i.e. after inflation and taxes) from them over time. CD investing is easy and safe, but doesn’t often pay very well.

However, there is another option available for those seeking higher rates on their guaranteed CD investments. Unbeknownst to many CD buyers, many brokerage and investment firms offer CDs. While these brokered CDs do differ from their cousins in the banking system in some respects, they are still FDIC insured up to $250,000 per owner or beneficiary (through 12/31/2009). CD investing is easy through a brokerage because you can choose from among many banks or diversity amongst banks all on one statement. Furthermore, brokered CDs generally pay a higher rate than bank CDs, and they often contain other features, such as put or call options that allow either the buyer or the issuer to redeem the certificate prematurely without penalty. (Use the retirement calculator to see the impact of an additional 1% interest over time). For example, a brokered CD with a 20-year maturity could be “puttable”, after five years, if the buyer so desires. That means that five years from now, if rates have gone up and the buyer wishes to move the money in this CD to another one, then he or she can put the CD back to the issuing bank for return of their original principal.  But read the fine print.  The put feature is often subject to available of funds and is not a guaranteed feature.

Call features give the issuing bank a similar privilege as prior to maturity, the issuing bank can return the investors principal. CD investing can also get more complex and profitable if you want to take advantage of another’s misfortune as you can buy brokered CDs on the secondary market from a person who needs the money early (and will likely need to sell to you at a discount). Note that the FDIC guarantee will only apply for investors that either hold their certificates to maturity or redeem them in a put or call transaction so if you buy a CD on the secondary market, check the quality of the issuing bank. If the certificate is sold prematurely in the secondary market, then the owner may receive more or less than his original investment, depending on market conditions. But those who hold their CDs to maturity can enjoy higher rates of income.  These long term CDs should be considered illiquid investments even though there may be liquidity possibilities.

Note that brokered CDs usually are of a longer term or have features not typical of the CD from your neighborhood bank.  Brokered CD investing may not be right for you.  Just understand all of the features to decide.

Post provided by Javelin Marketing

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Who can you trust? That’s a major concern for retired investors.

You don’t want someone who simply “has a job” in the financial services industry who sells products and services. You want a professional retirement advisor who has made the commitment to competency and high standards to serve their clients at the highest levels. Certified Retirement Financial Advisor graduates have made that commitment to stay educated and knowledgeable about the solutions to the financial challenges of retirement. And if the Certified Retirement Financial Advisor graduate does not have the expertise in an area important to your circumstance, he can access his network of other professionals in the community to assist him in specialty areas, including:
. CPAs for tax consultations
. Attorneys for legal issues or document drafting
. Property and Casualty Insurance agents to insure you have adequately covered your risks
. Life, health, disability and long-term care specialists
Why choose a financial advisor who is NOT a Certified retirement Financial Advisor graduate? 
 
What is a Certified Retirement Financial Advisor?
A Certified Retirement Financial Advisor is a financial professional who has completed a program of study on the financial challenges faced by retirees. The program is designed for experienced financial professionals who learn solutions to those challenges. Before enrolling in the Certified retirement Financial Advisor program, many graduates already hold credentials such as Certified Public Accountant (CPA), Certified Financial Planner (CFP®), and Chartered Financial Consultant (ChFC). Upon course completion, graduates pass a closed book exam, agree and sign the Society of Certified Retirement Financial Advisors Code of Ethics, and are then permitted to use the Certified Retirement Financial Advisor designation. In addition to any other continuing education credits that graduates must obtain for any other licenses or certifications they hold, to retain their Certified Retirement Financial Advisor credential, they must annually complete 15 hours of study specific to retiree financial issues. 

Different graduates may have different focus of expertise,.  While one may be a specialist in health insurance coverage for retirees, another may be a specialist in retirement financial asset management.

What is the Society of Certified Retirement Financial Advisors?
The Society was formed to set standards, maintain the educational curriculum, provide opportunities and programs for continuing education and monitor the quality of the Certified retirement Financial Advisor program. The Board of Standards comprises individuals from the financial services industry with 10 or more years serving retirees.

Certified Retirement Financial Advisor study includes the following topics. The list of topics is continually expanding as additional issues become important to retirees, tax laws change, or the economic environment changes, requiring a need for additional education.
 
Topics
. Asset Harvesting to Last a Lifetime
. Asset Allocation Appropriate for Retirees
. Taxation of Social Security
. Deductibility of Medical and LTC Premiums
. Tax Deferred vs. Tax Free
. Protection of Principal and Guarantees
. Advanced Directives and Trusts
. IRA and Retirement Plan Distribution Planning
. Health and Finances—Long-Term Care
. Estate Planning and Asset Preservation
. How to Construct Fixed Income Ladders for Consistent Income
. How to Construct and Protect Retiree Investment Portfolios

The Society of Certified Retirement Financial Advisors has established a Code of Ethics for graduates. The Code embodies five fundamental principles of ethical conduct. Graduates promise:
1. To conduct their business according to high standards of honesty and fairness and to render that service to their clients so that any “prudent man” would agree that their conduct and business practices are beyond reproach.
2. To provide competent and “client centric” service. If products or services do not fit the prospect or client, they will identify that fact as soon as possible and withdraw.
3. Seek to make a comprehensive review of your financial circumstances and make appropriate referrals to other professionals for services beyond their expertise. In other words, seek to protect your financial well-being, whether or not it is within their specific area of expertise.
4. To provide prompt handling of your financial affairs and immediately address client concerns, dissatisfaction, or complaints.
5. To advertise honestly, to use appropriate sales materials and presentations

The typical graduate will use a variety of tools to provide solutions including retirement planning software, a deferred or immediate annuity calculator, monte carlo simulations and retirement income estimation projections.

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Allocate Your Investments to Achieve Your Retirement Goals

Your retirement concerns may include income to live on, travel, gifting, and making bequests to heirs and charity. Which of these goals will you achieve and how? The value of your investments and their allocation among various investment categories suggest statistically what is realistic for you to achieve–but not what you will achieve.   The following retirement investment advice will bring your actual results closest to your potential.

Entering retirement is a good time to strategize on how to best allocate your resources to achieve what you can. Maintaining your strategy will keep you on track. Let’s review the basics of retirement investment advice.

Entering retirement at 55 to 65 years old gives statistically 20 or 30 years to live, based on current mortality rates. The best retirement investment advice we can provide is that you don’t plan for an early death.  Odds are, scientific advances may have you living 40 years in retirement. That is a long time period for a nest egg to last. But if you will need to live on part or all of your investments, then you better maintain them so they can provide you with income for the duration. If you have plenty of income from pensions and investments to live on, then any excess investments can be invested for long-term performance (e,g, higher risk). Deciding your situation on income and excess investment determines your allocation strategy.  To determine your personal spending needs, use the retirement planning calculator.

The fourfundamental investment categories are stocks, bonds, commodities and cash. They have their many renditions as mutual funds, ETFs, money markets, unit trusts, certificates of deposits, etc. that produce stock-like, bond-like, or cash-like performance. These four investment classes historically suggest fundamentally different statistical return and risk categories to choose from. Their historical performances determine what is realistic to expect for investment growth and at what risk.

The best retirement investment advice is to combine a mix of these four categories because they are inversely correlated.  When one is up, the other is down.  Currently, stocks are down, gold (a commodity) is up, bonds are even or rising and cash is great to own as you get ready to buy stocks cheap.

Stocks have historically had the highest returns over time, but the greatest risk. To gain these higher returns, investors need both the time and a willingness to ride out market downturns. This requires a long-term strategy (at minimum ten years and higher).  Since you have 20-30 years for your nest egg to last, you have plenty of time to make stocks work. Critical retirement investment advice:  if you’re investing in stocks for ten years, then stop looking at them everyday and watching CNBC!

Bonds are generally less volatile than stocks but offer more modest returns. Investors approaching a near term (six months to five years) need for income might increase their bond-type holding because of their reduced risk of loss. Do not include high-yield or junk bonds here and out retirement investment advice is to avoid high yield bods and choose stocks instead.

Cash and cash equivalents–such as savings deposits, certificates of deposit, treasure bills, money market deposit accounts, and money market funds–have almost no risk. But they are most vulnerable to inflation. Store only assets in this category for immediate (within six months) use.  Although retirees may have a preference for these “safe” low risk assets, their low return will increase the likelihood of depleting your assets early.  Sound retirement investment advice means that you MUST take some risks in order to have a sufficiently high portfolio return.

Retirees generally lean toward a lesser risk portfolio of investments because of their nearer term need for income. Typical percent allocation of a portfolio among stocks–bonds–cash category types is 40 – 40 - 20 or 20 – 60 - 20.   We urge you to read the Grangaard Strategy, a book that explains how to get higher returns without ever sacrificing your retirement income to stock market risk while having a significant portion of your income working in stocks.   To get retirement helpemploying this strategy, the author’s web site has a listing of trained advisors.

Lastly, you do not want to depend on one stock or one bond in each category. Companies can default or go under. Be sure to diversify your investments within each category (e.g. mutual funds, ETFs, etc). That is where all the various diversified funds and managed accounts come into play.  If it all makes you crazy, you may choose to annuitize your assets and get a safe lifetime income.  Consult the annuity calculators.

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Is there a better way to manage your mutual fund portfolio through the ups & downs of the market?
 
If you have been a “buy-and-hold” investor through the most recent bull and bear markets, you might be aware of the shortcomings of this strategy. A buy-and-hold strategy seems to work out well in a bull market when the stock market, as a whole, is rising. But in a bear market, the buy-and-hold mutual fund portfolio strategy could require you to sit, wait and hope that the bull market returns soon so you can try to recover your losses. NOW THAT YOU’VE LOST MONEY in your mutual fund portfolio, there is no magic way to get it back in a hurry.

Although no strategy is guaranteed to have you retire rich, there is another alternative. A number of professional investment managers take a different approach to building a mutual fund portfolio. Instead of sitting and waiting, they seek out investment gains whenever and wherever they may appear in the market, and attempt to avoid investments that could spell trouble down the road. These managers practice an investment strategy known as “tactical asset allocation.”  Warning–most people don’t have the stomach to manage their mutual fund portfolio in this way but for those who are bold, here are the guidelines.

1. You buy what other people don’t want.  If your Russian mutual fund fell more than any other type of fund, that’s what you buy
2. You sell what everyone else wants.  If your gold fund doubled, sell it (or at least trim back).
3. Select the same time annually (or quarterly) to rebalance your portfolio and don’t touch it in between

Morningstar did a study which showed that buying the mutual funds which had performed the worst in any year subsequently outperformed in the following three years.  The implication is clear–if you want a winning mutual fund portfolio, you have got to be a contrarian and buy what looks bad today.

Instead of implementing these rules to manage your mutual fund portfolio on your own, you may want a professional to do it.

Tactical asset allocation, when applied by professionals,  will manage your mutual fund portfolio moving from stocks to bonds to cash depending on where the investment manager believes the best opportunities for returns will be found. Other strategies may rotate your holdings among different sectors of the market (e.g.: energy, technology, health care, etc.) or different types of stocks (e.g.: growth or value, large-cap or small-cap.) It depends on what areas the manager believes will do well given the current market and economic conditions. Notice that the three guidelines to manage your mutual fund portfolio in the previous paragraph for do-it-yourselfers are much more structured than what professionals my employ.

One possible advantage of using a tactical asset allocation manager is that your portfolio is under constant supervision during all phases of the market cycles. A tactical asset allocation manager evaluates conditions in the financial markets on a regular basis to determine where the best opportunities (buy) and the highest risks (sell) could potentially be found. Then, the manager invests your mutual fund portfolio in different investments based on this evaluation. The manager also monitors performance to help your portfolio remain on track to meet its objectives.

Tactical asset allocation strategies do not come without risks. There is always the risk that the manager could be wrong about the market and may miss out on gains or suffer losses. Plus, a tactical strategy may trigger more capital gains and result in higher income taxes. For some investors these mutual fund portfolio management strategies work better in a tax-deferred account.

A tactical asset allocation strategy can be used by itself or may complement the “buy-and hold” portion of your portfolio. Either way, tactical asset allocation can provide a disciplined strategy for managing risks and seeking out returns in an ever-changing market environment to improve returns of your mutual fund portfolio.

If it’s all too complex, check the fixed annuity calculatorto see what you’ll have by just throwing your funds into a safe fixed annuity.

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While many Americans have spent years planning for their retirements, a great many of them have made a basic discovery once they reach that plateau. Namely, that there are some issues that simple math and time will not necessarily resolve. If you are near retirement or have retired, here are several common mistakes that occur in the arena of financial planning for seniors that you can plan now to avoid.

• Underestimating your life expectancy – a generation ago, it was probably safe to assume that men would live to approximately age 70, and women to perhaps 75. But advances in medical science have pushed those ages up at least fifteen to twenty years. Realistic financial planning for seniors should probably assume that at least one spouse will live to age 90 or beyond.  To make sure your money lasts, you may need to annuitize your assets to create a sufficient income.  Consult the annuity calculator for estimates.

• Thinking that you’ll be able to retire when you want.  In financial planning for retirement, manyworkers plan on working into their 70s-until illness, disability or mere fatigue forces them to reconsider. If you plan on working past the normal retirement age, do not count on the extra money earned to pay for essential expenses. Sound financial planning for senior years would have you save a sufficient nest egg by age 65 in case health reasons prohibit you from working longer.

• Neglecting to adequately factor in health care costs – failure to do this can be disastrous, especially if long-term care treatment is needed. And don’t count on the government to pick up the bill for you, either. Make certain that your health coverage is adequate and that you have a plan to cover other elder care needs.  This is the #1 error in financial planning for seniors as its estimated that half of the bankruptcy in the US is caused by health failures and the accompanying costs.

• Settling for low returns- don’t let your fear of risking principal leave you with a guarantee of running out of money prematurely. Sensible asset allocation will substantially lower the risks of investing-including the chance that your money will not grow enough to meet your needs.  But if you insist on keeping money in threemonth CDs and T-bills as many seniors do, your earnings will be so low that you increase the likelihood of running out of money.  Sound financial planning for seniors means that your investment horizon should match your actuarial life expectancy.

• Not taking retirement distributions within the allowable time frame – avoiding costly withdrawal penalties whenever possible is just common sense. Do everything you can to avoid paying both the 10% early withdrawal penalty before age 59 ½ and the 50% excise tax for failure to begin taking mandatory minimum distributions by April 1 after attaining 70 ½.

• Failure to monitor or control your distribution rate – your financial advisor should be able to run some basic calculations based on the size and allocation of your portfolio that show a safe rate of withdrawal. A general rule of thumb is somewhere between 3 and 5 percent per year, depending on your portfolio’s allocation between equity and fixed income investments.  We have seen some financial planning disasters when people spend beyond this level

• Refusing to get a fresh perspective – no matter how effective your advisor or plan is, getting a second opinion on it will never hurt. Different advisors have different areas of expertise, such as taxes or mutual funds. Therefore, having a different set of eyes review your situation may provide insights that you would otherwise miss.
 
Sound financial planning for seniors results form avoiding major mistakes and sticking to the big picture guidelines as explained above.

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Your local bank likely offers among the lowest CD savings rate–not a good thing for your retirement investing.  The local bank has the expense of rent, the tellers’ salaries and highly unproductive service representatives that will waste an hour opening a checking account.  The expense of running a bank branch is enormous and therefore, the CD savings rate offered by the local bank won’t be your best bet.  What if they could avoid all of these expenses and pay you a better rate?

That’s exactly what Internet banks do.  They have no buildings in high rent retail centers (they can have their offices in the warehouse district because they don’t have customers visit) and they don’t waste time opening checking accounts.  The customers serve themselves online.  An Internet bank can offer a higher CD savings rate because their expenses are lower and that means more for you, the investor.

But it can even get better than that if you share some risk with the bank.  The rate offered by the bank is limited by the potential risk they have.  If they give you 5% locked in for 5 years, they have the risk of not being able to earn 5% each year when then lend their money out for mortgages, etc.  But, if you allow them to cancel your CD in case they cannot earn the promised rate, then you can get a higher CD savings rate.  These CDs where you share the risk are called “callable CDs.”  The bank is permitted to call your CD (pay you off) before the end of the term.  These callable CDs are usually offered in terms of 5 years and up so they are appropriate for long term investors who desire a higher CD savings rate.

Another way to get a higher CD savings rate is with an indexed CD.  Such a CD has interested tied to the stock market.  Don’t worry, the FDIC insures your investment so you can’t lose money.  But if the stock market does not rise, you wont make money either.  With such a CD, the rate is typically measured at the end of the term, e.g. 5 years.  A typical CD may pay you 50% of the increase in the stock market.  So if the market rises 80% over the 5 years term, you get 40%–equivalent to 8% simple interest on your invested principal.  Not bad.  But if the stock market stays the same or declines, you get your money back with no interest.  Like the callable CD, if you are willing to share some of the bank’s risk, you can get a higher CD savings rate.  So check your retirement planning calculators and start figuring!

If you’ve ever had the thought that it’s good to own a bank, you can participate in the two CDs just described and share the banks risk, earn a higher CD savings rate and see how you like being the banker as well as the investor.

Last, let’s not forget that the rich get richer.  Jumbo CDs ($100,000+) typically pay higher CD savings rates and for larger amounts, say $250,000 and above, the CD rate is negotiable. You simply show the best rate you find and ask your local banker to beat it.  You may be surprised that the rates are not fixed and your banker has some room to negotiate.

Post provided by Javelin Marketing

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