Retirement Income Blog

Financial planning prior to retirement is focused on asset accumulation, tax minimization and maintaining a budget that allows for maximum savings.   Retirement financial planning however is focused on these different objectives:  maintain an adequate income without salary or wages, maximizing pension and social security, having adequate health and long term care protection and minimizing financial risk.

You can’t know for sure if you have adequate resources until you do some number work.  If you find this nitty gritty of retirement financial planning to stretch your patience, than hire a retirement planner or CPA. 

Here are the steps:

1. Estimate your retirement spending needs: housing (including new furniture and updating), food (including dining out), insurance (including long term care), personal expenses, vacations, entertainment, utilities, transportation, taxes (income and property), etc.  Add to this list anything that applies to your desired lifestyle.  Add up the total and now you know how much you need, which is step one of your retirement financial planning.  Let’s say this figure is $50,000.

2. Next, you want to see how much you have and create a retirement income plan.  Add your sources of retirement income including social security, pensions and annuities.  From any savings such as IRAs and 401k and other investment accounts, assume a withdrawal rate of 5%.  So if you have a nest egg of $500,000, assume that you can take 5% annually and the nest egg should be fairly safe at least for  30 years (see results of the Trinity Study ).  Note that just to maintain your standard of living, you need to always leave some earnings behind in your nest egg to account for inflation.  An item that costs you $10,000 this year will cost you $10,300 next year.  Even if you don’t care about having anything left and want to spend more, you don’t have much wiggle room.  For example, if your nest egg were to earn a constant 6% annually and you withdraw 8% annually of your beginning balance, you exhaust the fund in 23 years.  You could easily outlive your money and that’s why it’s important to stick to the retirement financial planning 5% rule.

3. Compare your total sources of income from step 2 and your expenses from step 1.  If you have excess income, congratulations–you’re a retirement financial planning master!  If you have a deficiency, you have a few options:

• adjust your lifestyle and spend less
• maintain your lifestyle, but move to a less expensive area of the country or out of the country
• work part time in retirement
• retire later — by working a couple more years, a $500,000 nest egg growing at 6% accumulates an additional $61,000.  That additional principal provides an additional $3050 of spending money annually. 

Note that later in life, say at age 75, you may switch your strategy and decide to “annuitize” some of your assets–i.e. spend them down to zero and give yourself more income today.  The safest way to do that is with a life annuity as payments will last as long as you do.  Consult the immediate annuity calculators for annuity payments.

Although this is a stripped down version of comprehensive retirement financial planning, it’s more than 95% of retirees ever plan.

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You may be able to achieve more of what you want for retirement than you think. The right retirement advisor, often can help you see implications of your actions, decisions, and wishes and how they impact your retirement and estate planning. But your advisor cannot help you unless he knows what wishes are ultimately on your mind.

Retirement planning–in the most general sense–seeks to optimize a retirement income consistent with what makes you happy and financially comfortable. You can start with a simple tool like the retirement income calculator but you need to explain to your retirement advisor in detail, what you desire for your retirement lifestyle–how many trips you want to take, do you need to stay at the Ritz or will a tent be okay, how often you need to done out, go to theatre, etc. And the choices you make impact both your retirement and estate planning because the more you spend in your retirement years, the smaller estate you leave.

Your required retirement income depends on the amount of assets you have, how you intend to use and draw upon them, where you will live, and if you intend to work during some of your retirement years.  How these questions are answered can have significant impact on optimizing what you have. What’s left will dictate a lot about your estate planning since as mentioned, retirement and estate planning are two sides of the same issue.  Of course, how you protect your estate are matters of specific trust and estate planning.

Your legacy may include a donation to charity and bequests to your children and others. How you make charitable donations and bequeath to others can be achieved in a variety of ways through various financial planning approaches. And how much can be devoted to these desires will depend on the amount in your estate.

There’s a general rule offered by most retirement advisors that you can spend 4% to 5% of your nest egg annually and it will remain intact.  Remember that if you spend 5%, your nest egg needs to earn a lot more to compensate for cost of living adjustments and also taxes.  To have $10,000 to spend, your nest egg needs to generate $12,875 if we assume $2,500 goes to taxes and another $375 needs to get reinvested into the nest egg to compensate for the following year when costs will be 3% higher.

For many people, retirement and estate planning are competing goals because what you spend, you cannot bequeath.  In fact, many advisors will show you that you can  “annuitize” your next egg–i.e. spend not only the income but also some of the principal each year so that you have more spendable income.  Of course. if you erode the principal, the heirs get nothing.

A good retirement advisor can help you minimize the tradeoffs of retirement and estate planning. For example, maybe you want to leave your home to charity but want to reside in it for life now. (You get a tax deduction if you make the arrangement now that you otherwise miss if you leave the home at death.) You can in fact have both of these–live in your home for life, leave it to your favorite charity and even get a tax break today. Experienced retirement advisors are aware of how factors supporting your goals are interrelated, often through complicated tax, social security rules, and financial strategies.

To see what you can actually achieve, you need to talk openly to your retirement advisor about your ideas and wishes.

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One aspect of retirement planning is protecting the assets you have accumulated.  Estate planningis also about protecting the assets you have accumulated but comes at the issue of asset protection from a different aspect. For example, in retirement planning, one is concerned with asset allocation–the idea of spreading your money among different asset classes so that a decline in one class is offset by an increase in another class.  In estate planning, you protect your assets by forming trusts which can protect assets from estate taxes and claims of creditors.  When retirement & estate planning are coordinated, they become a powerful combination of tools to create and preserve wealth.

However, sometimes, the goals of retirement planning and estate planning compete. When its time to retire, one often has the choice to leave their funds in their employer’s 401k (some companies allow retirees to leave their account with the company) or rollover their funds to an IRA.  Is this an issue of retirement or estate planning?  From a retirement planning perspective, one may have more investment choices in the IRA and thus do the rollover.  From an asset protection standpoint, one’s funds are protected from creditors by ERISA.  Such protection is not automatic once the funds are rolled over into an IRA as creditor protection of IRAs is a state law (note that we are addressing non bankruptcy creditor protection here).  In this case, retirement & estate planning objectives may be in competition–we want the rollover for investment flexibility and we want to keep funds in the 401k for ERISA protection.

Another example where retirement & estate planning compete impacts the trade-off of capital gains and estate taxes.  If, for example, you own real estate that you don’t want to see because of high capital gains tax, you are making a retirement or financial planning decision that saves tax on the gain (currently 15% federal).  However, if the asset remains in your estate when you pass, depending on the estate tax laws in effect currently for estates in excess of $2 million, your heirs will pay 45% tax on the entire asset value.  So do you sell the asset now, pay the capital gains tax, gain liquidity which can be distributed from your estate before you pass or do you leave the real estate in your estate, avoid the capital gains tax yet expose the property to estate tax?

Another example of interdependence of retirement & estate planning the naming of beneficiaries on your IRA.  One may consider this a retirement planning issue involving the proper management of your IRA.  However, it is also an estate planning issue as it involves the distribution of your estate, potentially how much estate tax is paid on your estate (e.g. IRA funds left to charitable beneficiaries are exempt from estate taxes) and also estate liquidity.  Whether one spends more of their IRA funds and less of their non-IRA funds impacts how much of each type of asset remains in ther estate and thus we see that retirement & estate planning are again intertwined.

Last, consider the issue that faces most baby boomers coming up on retirement.  Most will learn a word which is unfamiliar to them–annuitization.  This is the process of converting an asset into an income stream.  While baby boomers parents have left many of them substantial assets, many baby boomers will not be able to leave an estate to their heirs as the boomers will need to annuitize their assets in order to produce a sufficient retirement income.  This is the ultimate competition of retirement and estate planning goals.  Time to get out the retirement planning calculator and consult you estate planner.

Post provided by Javelin Marketing

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Know what you need when you seek a retirement planning consultant.  Make a list of questions you want answered.  Some retirement planning consultants have a psychology and therapy background and deal with the issues of transition of working to not working.  They address such retirement planning issues as:

Leaving the friendships and social interaction of work
How to use your time so that you feel productive
How to adjust other elements of your lifestyle—exercise, eating, when you wake

If you are concerned about these types of issues than the retirement planning consultant you seek will typically have a PhD in psychology or counseling.  On the other hand, many people seek help with financial planning for retirement.  Such people would seek a retirement planning consultant  with a financial background.  They need answers to questions such as:

Do I have enough money to retire
How do I handle my 401k rollover
How do i set up my portfolio for a consistent monthly income to cover my needs
What do I need to do estate planning?
Where should I live?

If your questions and concern are in the financial arena, you want a retirement planning consultant that has  a financial background and may have the CFP(r) or ChFC credential.  You may find that you need both types of retirement plan consultant—one that has a background in the psychological aspects of retirement and one with the financial background.  There are more and more professionals that have both. 

Some psychologists have supplemented their knowledge by gaining a CFP(r) credential and gaining the experience to assist you in both realms.  Additionally, some professionals from the financial arena have focused on life coaching, an emerging field for financial advisors.  They have obtained training through The Financial Life Planning Institute or the Kinder Institute of Life Planning.  Here is a synopsis of what a retirement planning consultant learns:

“Within the profession of Financial Planning and advising, a new approach has emerged from a core group founded in the USA by George Kinder and Richard Wagner.  Shifting the emphasis of the planning relationship to assisting clients in formulating their “life of choice” first, advisers then establish the financial decisions that will support the unfolding life plan and its financial requirements.”

Start your search with appropriate keywords and it won’t take very long to find the right retirement planning consultant in your area.

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If you don’t plan where you’re going, you’ll probably get there.  To have the comfortable retirement you desire, you need to plan ahead.  In 60 minutes using this retirement planning checklist, you can lay the groundwork for the retirement you desire.

How do you want your retirement to look?

What is your average day?  Where do you live? Do you work and if so, at what? Do you volunteer? Where? Do you see family members, friends, how often.   Do you take vacations?  How often and to which places.  Develop a clear picture of what you want your retired life to be.  This retirement planning checklist will be of greatest value if you take the most time on this step—actually defining what you want and putting it on paper.

Calculate expenses

This is most easily done with an Excel spreadsheet

Given the picture you created above of your retirement, list all of your expenses—everything from food to rent to vacations to health care , long term care insurance (use the long term care calculators to get cost) and total for the year.  Now you know how much you need.  On to the next step of our retirement planning checklist.
Take stock of retirement income sources

Of the expenses you calculated above, what income will you have in retirement?  Go to the social security web site ssa.gov to get the estimate of your social security benefits.  Will you have pension or other income or income from work?  Also, from your investment assets, be conservative and assume you will withdraw 4% annually.  For example, if you have a retirement nest egg—retirement accounts such as IRA, 401k and other investments of $500,000, assume you will withdraw $20,000 annually.  This seemingly conservative assumption will insure that the pot lasts through your lifetime.  Now you have the total income you have in place to offset the expenses above.  Subtract the two.  If you have a deficiency in income, that’s okay for now.  We address that in the next section of our retirement planning checklist.

Fix the Gap between income and expenses

If you have time until retirement, you can fix the gap by saving more and reducing your current expenses.  If you’re close to retirement, then you can save more by working longer or you can close the gap by reducing retirement expenses (e.g. living in a less costly area, reducing annual vacations from three to one.  Or you can work part time in retirement.  You do have choices.

Make a time line

Put it on paper.  By when will you have saved your targeted amount, what is your retirement date.  When will you starting your search for part time work.  If moving, when do you put your house up for sale?  All of the items listed in your retirement picture in step 1of the retirement planning checklist list by date to start and complete.

At this point, don’t obsess about smaller issues that you can address once retired like tax and estate planning, selecting specific vacation destinations (unless you know them now), the investment choices for your portfolio.  These can follow in the first few weeks after retirement.

 Learn more, have a more comfortable retirement.
Get your Retirement Financial Guide.

This post provided by Javelin Marketing

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We’ve all heard the saying, “there’s no such thing as a free lunch,” but in fact, there is.  Many financial planners will invite you to a free lunch to hear their presentation in hopes that you want to meet with them individually.  They will in fact offer a free retirement planning session.  How can they make money doing this?  In hope that you become a client from which they will earn commission from product sales or fees for additional financial planning or money management.  So one strategy for free retirement planning is to attend as many lunch seminars as possible and then accept the financial planner’s invitation for a free retirement planning hour.  If you do this enough, you may actually get some worthwhile advice and you will also have many view points to compare!

While the above is recommended tongue in cheek, there are some legitimate and structured sources of free retirement planning. 

1. More and more web sites are interactive and if your financial situation is simple, may provide sufficient free retirement planning direction.  Do a Google search on “interactive financial planning.”
2. The Financial Planning Association often sponsors free retirement planning sessions at their various meetings across the country.  Contact the association through their web site www.fpanet.org
3. Check with your employer–more and more companies provide a free retirement planning benefit to their employees.  Of course, the employer pays the financial planning firm a retainer and then offers the benefit to employees at no cost
4. Check with associations you belong to.  For example, AARP runs a free tax return preparation service during tax season.  Other organizations may offer a similar free retirement planning service.
5. The National Association of Financial Planners, similar to the FPA, offers free retirement planning sessions through the year.  Check the website at http://www.napfa.org/.
6. The National Endowment for Financial Education has many resources on their web site.  Additionally, you can email them and ask if they fund any free retirement planning resources in your area.  http://www.nefe.org/
7. The CFP(r) Board also provides free retirement planning clinics at different times. Here’s an example http://www.cfp.net/clinic/overview.asp

You may find many more resources.  Do we web search  on “free retirement planning” and “free financial planning” and you may want to add to the search phrase the name of your town or state to locate an event near you.

The website which accompanies this blog offers retirement income plan advice and a suite of tools for retirement income planning like the immediate annuity calculators.

This post provided by Javelin Marketing

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You’ve decided to retire now. You know how much you’re due from social security and any pension too. Then there’s the lump sum from your defined contribution plan at work. What retirement planning tips can help you make the most of your lump sum?

In most cases, you want to do a direct rollover of the lump sum into a new IRA.  This’ll prevent paying any tax, keeps your earnings growing tax-deferred, and preserves protection of the funds from creditor claims (rollover funds kept segregated get better creditor protection than your contributory IRA–this is a little known retirement planning tip).

Another retirement planning tip on investing your rollover–don’t commit these rolled over funds to any particular investment until you determent how much of it you’ll need each year. Put it in a money market account until you decide. When considering specific investment options look closely at the fund fees; they can eat away at your compound return benefits.  You won’t get the straight story from anyone on mutual fund fees so please read John Bogle’s book–Bogle on Mutual Funds.

Here’s a retirement planning tip if you know you want top spend some of the money right away–you may be able to get at it tax free.  Before you roll over your lum sum to an IRA, ask your comopany plan administrator is any of the funds were contributed post-tax.  If so, this means you have already paid tax on some money which can be removed–BEFORE–you do a rollover. 

Here’s another retirement planning tip–if any of our plan is invested in shares of your company, you may be able to save income tax by using the special Net Unrealized Appreciation Rules.  Ask your retirement advisor or tax counsel.  This special rule allows you to convert ordinary income (taxed at up to 35%) to capital gains income (currently 15%).

Another retirement planning tip about your investment allocation–at age 65, your life expectancy is 18 years so 40% of your lump sum needs to go into growth-type investments to beat out inflation. You’ll diversify your holding to include growth as well as income-producing investments. And be sure you maintain some of it in the money market account for emergencies.

Retirement planning tip about withdrawals form your lump sum–if you want its income but don’t want to deplete your money, you should consider annual withdrawals of just 3% to 4% per year. Of course, you must make the IRS’s minimum required distributions after turning 70½. If you do have funds outside a tax-deferred plan, it’s more tax beneficial to use those up first so that your tax-deferred funds can keep growing at the higher compound rate that tax-deferring allows.

If you’re worried about assuring yourself –and your spouse – a lifetime income beyond what social security (and any pension) is giving you, you might consider using all or a portion of your IRA to purchase an immediate annuity. This can ensure a lifetime income that- is either fixed or variable according to your choice–a good retirement planning tip for those who need more cash flow. Check monthly payments with the immediate annuity calculator.

Our final retirement planning tip–since there’s a good chance that you may need long term care in the future, you may want to purchase a long term care insurance policy now. It can be expensive – so purchase it as early as possible. Direct costs of long term care can devastate your savings.

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Selecting the right retirement financial planner is important to you.
Here are questions to ask a retirement financial planner candidate that will help distinguish one from the other.

1. What experience do you have with retirement financial planning?
Find out the percentage of his clients by age category.  You want to make sure that the bulk of his clients are similar to you so that he has experience in actual planning for people like you.

2. What are your credentials and what do they mean?

There are retirement financial planners with great credentials that are not that competent and vice versa.  But credentials do illustrate an individual’s willingness to engage in further learning and take on additional work.  Find out what work was required to earn each credential as there are some credentials in the financial services industry that have little value.

3. What services do you offer?
Likely, you need assistance with retirement income planning, tax reduction, budgeting, possibly estate planning and portfolio management.  If his list of services does not match your needs, then move on to another retirement financial planner candidate.

4. What is your approach to retirement financial planning?
When you ask this question, you look for a thoughtful systematic approach.  It might sound like this:

1. First, we estimate the income you will need in retirement based on your desires.
2. Next, we calculate the sufficiency of your current financial resources to achieve that income.
3. If the resources are insufficient, then I present you with alternatives to fix the deficiency as best we can.
4. Next, we document a spending plan, a retirement planthat takes into account which pots of money get used first, tax minimization and a portfolio design.
5. Then we implement what you agree on.
6. Last, we meet every 6 months to review progress and account for any changes in your desires or circumstances.

If the retirement financial planner cannot easily state their approach in a concise and chronological manner, find a professional that will.

5. How can I tell that you’re competent?
Don’t be afraid to ask this challenging and direct question to a prospective retirement financial planner.  If he cannot give you an answer that inspires confidence, then why trust him with your financial future?

6. How will I pay for your retirement financial planning services?
As part of your financial planning agreement, the financial planner should clearly tell you in writing how she will be paid for the services to be provided.

Retirement Financial Planners can be paid as follows:

• Fees based on an hourly rate, a flat rate, or on a percentage of your assets
• Commissions paid by a third party from the products sold to you to carry out the financial planning recommendations.
• Commissions are usually a percentage of the amount you invest in a product.
• A combination of fees and commissions whereby fees are charged for the amount of work done to develop financial planning recommendations and commissions are received from any products sold.

In addition, some planners may offset some portion of the fees you pay if they receive commissions for carrying out their recommendations. You would prefer to deal with a professional that works on a fee basis rather than commissions that may be “buried” or hidden in products.

7. I have assets of  $xxxxxx.  How much do you typically charge someone like myself and what are the components of those charges?
This question gives clarity to the answer from question 6.

8. Will my retirement financial plan look like those for your other clients?
If the planner tells you everything is totally customized, be ready to pay a fortune or the planner is not being honest.  If most of the retirement financial planner’s clients are between age 55 and 65, then the plans SHOULD look similar from one another as people in the same circumstances have similar retirement planning issues.  It’s the similarity among the retirement financial planner’s clients that gives him the experience you desire.
9. Have you ever been publicly disciplined for any unlawful or unethical actions in your professional career?
While you may think this is an important question, there is no reason to ask it as you can get this information on the Internet.  The planner is either responsible to the SEC, FINRA and/or the State Department of Insurance.  All 3 list disciplinary records and in 15 minutes, you can check the background of any potential retirement financial planner.

10. What do I get in writing?
If the retirement financial planner offers little in witing, walk.  At minimim, you should get a list oif fees and services, disclosure of any conflicts of interest, a written plan and an investmemnt policy statement.  While these dont need to be lengthy, a reputable retirement financial planner will provide documents that serve these purposes.

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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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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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