Retirement Income Blog

Many retirees lack control over 50% or more of their retirement income.  For example, if a retiree has income of $50,000 annually, and $30,000 comes from social security and employer pension, the retiree controls less than half of his retirement income making those sources somewhat useless to discuss.  So let’s focus on the sources of retirement income you can control and how to boost them.

Interest Income
An important source of retirement income is Interest income.  Interest income comes from money you loan.  You may loan it to a bank (in the form of savings accounts or term deposits), you can loan it to a company in the form of owning a bond, you can loan it to a local government in the form of owning a municipal bond and you can loan it to a national government, US or otherwise.  In all cases, these sources of retirement income you control because you select the instruments to own.  Generally, the longer term instruments will pay you higher interest income.  For example, if you want to loan your money to the bank for 12 months, don’t be upset to earn only 4%.  If however you loan you money to IBM for ten years, you may earn 6%–a whopping 50% more in your retirement income.

Of course you may come up with all types of reasons  not to lend to IBM–its not as safe as the bank, ten years is too long, etc. but all of these excuses add up to a much smaller paycheck for you.

Dividend Income
Dividend income from stocks and mutual funds can be an important and significant source of retirement income. If you own mutual funds, there are funds oriented toward paying a consistent dividend income and those that do not.  Are you in the right funds?  Similarly, there are value stocks that pay dividends in the 5% neighborhood while many growth stocks pay no dividends at all.  By your selection of stocks and funds, you control this important source of retirement income.

Annuitization
Although many retirees don’t often think of their retirement income in the following way, they should.  Your assets are always a source of retirement income and how much of your assets you “annuitize,” i.e. convert to an income stream, is a personal decision that can be the difference between eating filet mignon or dog food.  The simplest way to create this source of retirement income is to buy a life annuity from an insurance company.  For example, a 70 year old male purchasing a life annuity for $10,000 can expect payments of $8,500 annually for life.  Of course, when he dies, the $100,000 is gone.  BY purchasing the life annuity, he has converted capital to a source of lifetime income. The immediate annuity calculators will give you an idea of how much retirement income you can obtain in this manner.

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McKinsey in their recent report on The Coming Shakeout in the Defined Benefit Market estimates that 50-75% of all private Defined Benefit assets will be in a frozen or terminated status by 2012.  In plain English this means that retirement plans offered by companies will cease or terminate in the next few years.  If you are working, the pension plan is likely to cease and your balance will be rolled over into a 401k  — meaning that any future contributions to your retirement plan will come from you, not the company.   If you are already retired, it’s likely you will get a lump sum payout as the employer will terminate the plan. In other words—you’re on your own. Start with the retirement income calculator to determine your needs.

The trend in retirement solutions is that you must fend for yourself.  Companies, being for-profit entities are facing the music and closing down their plans because they simply cannot afford them.  The US Government can delay facing the music and keep people in denial that the Social Security system will never sustain itself.   While people currently age 65 or older will likely not see any changes to their Social Security benefits, they will likely see a dilution in their employer retirement benefits, possibly with a reduction in monthly pension payments or the reduction or elimination of heath care benefits.  Those under age 65 should not rely on anyone but themselves for retirement solutions.

Fortunately, there is a lot you can control that determines your comfort in retirement.  These retirement solutions include:

Where you live—if you live in a high costs area (e.g. Ney York, California), move to a lower cost area.  You may not like this option, but it could be the keystone to your retirement solution program. Lower housing costs mean more that you add to your retirement nest egg.

Lifestyle choices–opt for savings and not luxuries—vacations, luxury cars, dining out, even driving 75 on the freeway instead of 55 all take money out of your pocket today that could go to retirement savings. 
Keep working—you may still retire from your current job at retirement age but consider doing what you enjoy and also making money.  You can get a HUGE impact on your retirement solutions by working more years (you get the double benefit of not consuming any of your retirement nest egg and having it continue to grow for each year you continue to work).

Investing better – it’s easy to let money sit rather than be properly invested.  As you see from the table below, investors expose half of their 401k assets to equities and this should be higher, particularly for those more than 10 years form retirement.

Allocation of 401k Assets -- More Equities Needed for Sound Retirement Solution

Also, determine how much of your assets you are willing to “annutize.”  Some retirees are fixated on leaving and inheritance or a house to their heirs.  If they annuitize that asset into an income stream, they can live more comfortably.  Annuitization can be accomplished with or without commercial annuities.

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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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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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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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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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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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