Retirement and Social Security

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Jim Lorenzen, CFP®, AIF®

It’s one thing to simply ‘maximize’ your Social Security, it’s another to know just how taxation and the future health care costs will impact your plans.

Your planning solution should be able to:

  • Quickly provide estimated health care costs in retirement for individuals or couples.
  • Incorporate Medicare Parts B and D, Medigap and out-of-pocket care expenses.
  • Calculate the total lifetime cost of health care in current dollars.
  • Provide a side-by-side comparison of your lifetime health care costs with projected Social Security benefits
  • Create a full financial picture to address your best interests.

And, remember, Social Security is taxable income.  You may be interested in this report, “Retirement and Social Security“.

Jim

See “The IFG Difference

 

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Will My Annuity Income Really Increase?

6a017c332c5ecb970b017c37fc6922970b-320wiJim Lorenzen, CFP®, AIF®

Annuities can play a valuable role in a retirement portfolio; but, often they’re somewhat oversold.

Should equity-indexed annuities serve as a substitute for stocks?

Short answer: No.  And, when making historical performance comparisons, you’d be better off comparing them to CDs and traditional fixed annuities.  An equity-indexed annuity is nothing more than an interest-bearing IOU from an insurance company paying an unpredictable interest rate each year… anywhere from 0% up to the “cap”, which these days can be around 4-5%.   So, do the math:  if you get the maximum cap in two out of three years – let’s assume 5% – and zero in every third year, you’re averaging 3.33%.  It’s up to you to decide whether that’s a good return.  It is tax-deferred until withdrawn, but you also have a liquidity issue.

As I said, in some cases, they can make sense for a portion of a bond portfolio because of downside guarantees from the insurance company; but, you should also see if another alternative might make more sense.

 “My annuity Living Benefit is guaranteed to return 5-10% each year!”

Not likely (translation: No).  Too often, people look at the ‘income benefit base’ in the paperwork and assume (because they see a dollar sign in front of the number) they’re looking at real money.  Not so.

Think of the income benefit base as “sky miles” – it’s a number that’s used to calculate the amount of income that will be generated and has nothing – zero – to do with the return on the policy itself.

Technically, many, if not most, annuity offerings state that if the account value ever exceeds the income benefit base, the purchaser will receive a ‘step-up’ in income.  Realistically, however, it’s not likely (translate: won’t happen) these days, considering the spreads and cap rates the insurance companies are using.  As long as living benefit income is calculated on the income base vs. the account value, you shouldn’t expect anything beyond what’s guaranteed on the first day of the policy.

If you’re considering purchasing an annuity, there are seven things you should consider ahead of time.  You might find this short report worthwhile.

By the way, although annuities won’t be the topic (or even discussed), I will be hosting a webinar about planning for retirement income on Saturday, June 4th at 9 a.m. Pacific.  If you’re interested, you can learn more and register here.

Enjoy!

Jim

Webinar Announcement: NEW DATE FOR WEBINAR – Planning Retirement in an Unpredictable World

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DATE CHANGE:  The webinar will be held on June 4th!

Uncle Sam (translation: elected politicians) will likely need more money in coming years.   

They’ll need it to fund all their promises – and it wouldn’t be surprising to see their demand for your money rise over the coming 2-3 decades just as aging ‘baby-boomers’ – the largest of the demographic bubbles – will be retiring while others in that group are trying to survive their second and third decade in retirement.

Rising taxes and prices, coupled with a potential health-care crisis – that problem still isn’t solved – all spell possible problems.

Easy answers are easy to find.   Too bad those often fall short of matching real life needs.

Too often, we focus on trying to find those easy answers instead of focusing on the right questions.

IFGi_LifeGuide_Thinking_About_Retirement_vsa_001I’ll be conducting a webinar on Saturday, June 4th, at 9 a.m. Pacific (noon Eastern) discussing these issues.  You can register for it here and also receive our free LifeGuide, So You’re Thinking About Retirement.

This LifeGuide contains tips, checklists, tools, and other helpful ideas to get you started on your journey.   And, of course, both the LifeGuide and webinar are free.

Register for the webinar and get your LifeGuide – and I’ll see you on the 4th!

Jim

 

Your webinar host:  

6a017c332c5ecb970b01a5116fb332970c-320wiJames Lorenzen, CFP®, AIF®

Background:

Retirement Planning & Wealth Management (1991-present) serving selected private clients.  Founding Principal of The Independent Financial Group, a Registered Investment Advisor.  Jim is a CERTIFIED FINANCIAL 6a017c332c5ecb970b01a51174caed970c-120wiPLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® , earned through the Center for Fiduciary Studies in conjunction with the Joseph M. Katz Graduate School of Business, University of Pittsburgh.

Interviewed for American Airlines Sky Radio, heard on more than 19,000 flights, and by The Wall Street Journal for Smart Money.  Articles published in Insights by the Profit Sharing Council of America and the Journal of Compensation and Benefits, as well as in numerous newspapers locally and nationally.

International speaking and management consulting (1984-1996). Headline speaker at more than 500 conventions throughout the U.S., Canada, and the U.K. Clients included Foster Grant, Hobie Cat, CapCities/ABC, Hearst Corp., Independence Bank, Val-Pak, Dial-One, Inc., and scores of others.  Contributing author to more than 25 national and international publications.

Business owner – Founded, built, and sold five businesses in the publishing industry (1978-86) in Simi Valley, California.  Prior experience includes senior executive positions in consumer and commercial finance overseeing 65 offices throughout the United States and Canada.

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

PLANNING RETIREMENT IN AN UNPREDICTABLE WORLD

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Planning to Retire?

Here are a few things worth thinking about now!

Jim Lorenzen, CFP®, AIF®

 

  • Record numbers of ‘baby boomers’ are headed for retirement.
  • People are living longer than ever before.
  • Rising health care costs are not an unsolved risk.
  • The federal government’s debt is at record highs.
  • The last thing boomers need is to retire into a period of rising taxes and inflation.
  • Easy answers – planning ‘in a box’ – often fall short in real life.

I’ll be hosting a webinar on this topic Saturday, May 28th, at 9 a.m. Pacific (noon Eastern).

IFGi_LifeGuide_Thinking_About_Retirement_vsa_001You can sign-up to attend here and also receive a free copy of our LifeGuide, So You’re Thinking About Retirement.  It contains checklists, tips, and tools I think you’ll find helpful.

So, sign-up today, get your free LifeGuide and, we’ll see you on the 28th!

Jim

 

Your webinar host:  

6a017c332c5ecb970b01a5116fb332970c-320wiJames Lorenzen, CFP®, AIF®

Background:

Retirement Planning & Wealth Management (1991-present) serving selected private clients.  Founding Principal of The Independent Financial Group, a Registered Investment Advisor.  Jim is a CERTIFIED FINANCIAL 6a017c332c5ecb970b01a51174caed970c-120wiPLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® , earned through the Center for Fiduciary Studies in conjunction with the Joseph M. Katz Graduate School of Business, University of Pittsburgh.

Interviewed for American Airlines Sky Radio, heard on more than 19,000 flights, and by The Wall Street Journal for Smart Money.  Articles published in Insights by the Profit Sharing Council of America and the Journal of Compensation and Benefits, as well as in numerous newspapers locally and nationally.

International speaking and management consulting (1984-1996). Headline speaker at more than 500 conventions throughout the U.S., Canada, and the U.K. Clients included Foster Grant, Hobie Cat, CapCities/ABC, Hearst Corp., Independence Bank, Val-Pak, Dial-One, Inc., and scores of others.  Contributing author to more than 25 national and international publications.

Business owner – Founded, built, and sold five businesses in the publishing industry (1978-86) in Simi Valley, California.  Prior experience includes senior executive positions in consumer and commercial finance overseeing 65 offices throughout the United States and Canada.

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

RMDs – A Quick 4-Tip Checklist for Baby Boomers

6a017c332c5ecb970b01910219a734970c-320wiJim Lorenzen, CFP®, AIF®

Remember the 1990s?  That was when every business channel had multiple programs with business gurus picking and ranking mutual funds.  It was a time when many mutual fund managers were becoming the ‘rock stars’ of financial meda.  Everyone wanted to know what Peter Lynch, Bill Gross, and others were buying, selling, and saying.

If you were one of those following all those shows back then, you were no doubt thinking about your financial future.  And, if you were born in the years following 1946, chances are you’re a ‘baby boomer’ – a term we’re all familiar with by now.

I read somewhere that there are 65,000 boomers turning age 65 every year!  And, those turning 70-1/2 have hit a big landmark:  It’s the year – actually it’s up until April 1st of the following year – Uncle Sam begins sticking his hand into your retirement account – after all, he is your partner; and, depending on your combined state and federal tax-bracket, his ownership share can be pretty significant, depending on the state you live in.  Yes, that’s when you must begin taking required minimum distributions (RMDs).

By the way, if you do wait until April 1st of the following year, you’ll have to take TWO distributions in that year – one for the year you turned 70-1/2 and one for the current year.  Naturally, taking two distributions could put you in a higher tax bracket; but, Uncle Sam won’t complain about that.

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So, now that you’ve been advised of one trap that’s easy to fall into, what are some of the others?  You might want to give these concerns some thought – worth discussing with your tax advisor, as well as your financial advisor.

Here are four tips to think about:

Not all retirement accounts are alike.

IRA withdrawals, other than Roth IRAs, must be taken by December 31st of each year – and it doesn’t matter if you’re working or not (don’t forget, there is a first year exemption as noted earlier).

401(k) and 403(b) withdrawals can be deferred past age 70-1/2 provided you’re still working, you don’t own more than 5% of the company, and your employer’s plan allows this.

As noted, Roth IRAs have no RMD requirements.  However, if you’re in a Roth 401(k), those accounts are treated the same as other non-Roth accounts.  The key here is to roll that balance into a Roth IRA where there will be no RMDs or taxation on withdrawals.

The amount of your total RMD is based on the total value of all of your IRA balances requiring an RMD as of December 31st of the prior year. 

You can take your RMD from one account or split it any or all of the others.  By the way, this doesn’t apply to 401(k)s or other defined contribution (DC) plans… they have to be calculated separately and the appropriate withdrawals taken separately.

Uncle Sam owns part of your withdrawal.

How much depends on the year and he can change the rules without your consent.  Chances are you will face either a full or partial tax, depending on how your IRA was funded – deductible or non-deductible contributions.  And, the onus is on you, not the IRS or your IRA custodian, to keep track of those numbers.  Chances are your DC plan at work was funded with pretax money, making the entire RMD taxable at whatever your current rate is; and, as mentioned earlier, it’s possible your RMDs could put you in a higher tax bracket.

It’s all about provisional income and what sources of income are counted.  The amount that’s above the threshold for your standard deduction and personal exemptions are counted.By the way – here’s something few people think about:  While municipal bond interest may be tax-free, it IS counted as provisional income, which could raise your overall taxes.  Talk to your tax advisor.

Don’t miss taking your RMD.

If you fail to take it by December 31st of each year – even if you make a miscalculation on the amount and withdraw too little – the IRS may hit you with an excise tax of up to 50% of the amount you should have withdrawn!  Oh, yes, you still have to take the distribution and pay tax on it, too!   There have been occasions when the IRS has waived this penalty – floods, pestilence, bad advice, etc.

Remember to talk with your tax advisor. I am not a CPA or an attorney; but, of course, these are issues that come up in retirement planning and wealth management quite often.

I’ll be doing a webinar on retirement planning for income on May 28th.  We’ll have more information on that soon.  I’ve also created a report entitled, The Five Biggest Risks to Your Retirement. You can get it here.

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. Images contained herein are public domain images and do not depict IFG clients or anyone affiliated with IFG unless otherwise noted. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Can You REDUCE Risk by ADDING Risk?

6a017c332c5ecb970b0192aa32ebb9970d-500wiJim Lorenzen, CFP®, AIF®

Does ‘adding’ a riskier position to a portfolio actually REDUCE the total portfolio risk?

The fact is many investors are often their own worst enemy.  The media gurus – usually selling their own DVD sets – have succeeded in focusing on fees and expenses (something they’re correct in doing) to the exclusion of any possible value (something they’ve been successful in doing to the point of dereliction).   The unfortunate result has been many portfolios that are scattered vs. diversified (as this Morningstar chart depicts) and too conservative to the point of being risky.

But, risk is a concern!  However, it is often possible to reduce risk by actually adding a riskier position.  The key lies in understanding investment correlation.

You might find this short report helpful;  just click on the button below.
Adding Risk Report
Enjoy,

Jim

Danger in Future Inflation, Interest Rate, and Tax-Law Changes.

6a017c332c5ecb970b01a5116fb332970c-320wiJim Lorenzen, CFP®, AIF®

Back during the 1990s, many Americans, particularly baby-boomers, were focusing on accumulation.  Many of us can remember the focus on mutual funds and a rising stock market.  Today, these same boomers are thinking more about protecting what they’ve saved.

The problem, as is often the case, is Uncle Sam.

For years I’ve believed that our 401(k) and other tax-deferred account statements are misleading.   Someone who’s successful and in his/her 50’s might open their retirement account statement and see a balance of $600,000, for example, and believe they actually have $600,000!

Not likely.  For someone in a 28% federal bracket, for example (we’ll ignore state taxes for  now, but you shouldn’t), the statement should read:

Your money:  $432,000
iStock_UncleSamLiftingWallet_MediumThe Federal Government’s money:  $168,000, unless your tax bracket changes and unless the federal government decides to change how much will be required to fund government operations.  If more is required, the government can increase it’s share of your retirement account without your consent.

And, there lies the problem.

According to this chart, federal finances may experience a bleak future.

201603i_Federal Finances

I aplogize for the poor image quality, but the upper-left depicts the annual deficits both past and projected, while the lower left chart shows the effect of these accumulated deficits

There’s more you should know about this and how this issue, combined with a few others, has important implications for baby boomers who need to navigate the retirement maze in the face of potential rising interest rates, inflation, and tax-increases – all during the years when they’ll be tapping into their nest-eggs.  I’ve included this and a few other charts – all much more legible – and additional information you might find interesting, as well.

Click Here!

Retirement in the New World

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Last week PBS aired an excellent program on retirement and how the various generation, including baby boomers, are being affected by their planning – or failure to plan.

It’s an hour-long program entitled, When I’m 65.  The program addresses savings rates, withdrawal rates, investment pitfalls, issues to address, pitfalls to avoid, and even the difference between advisors, including the fiduciary standard – what it means and why it’s different from the ‘suitability’ standard adopted by product sellers.  It also discusses the recent legislation affecting the advisory industry and consumers and even addresses annuities –  insurance-based products widely misunderstood by much of the general public who tend to see things through an ‘either-or’ lens (for additional information on income annuities, you can access a ‘primer’ here).

This PBS program is well worth watching. You may even want to forward it to someone who you think can benefit. You can see it here – scroll down to the video.

There have been questions about the failure of the 401(k) system that have been discussed in the media from time to time since the 2008-9 market meltdown.   This topic was addressed in a Frontline program some time ago and also well worth watching:

I addressed this issue myself in a webinar I recorded last year.  It’s also about an hour long; so, for those of you who aren’t faint of heart, you can access it here.  I think you might find it interesting, as well.

Hope you find all of this worthwhile and helpful.

Jim

 

Optimizing Retirement Income: Combine Actuarial Science with Investments.

6a017c332c5ecb970b017c384ba1fa970b-320wiYou’ve probably heard about “The 4% Rule” – it’s been an ‘accepted’ rule-of-thumb for years that a retiree could withdraw 4% of his or her initial retirement portfolio value each year (increasing for inflation only, not market returns) and could reasonably expect his or her retirement nest-egg to last.

Of course, that’s when the markets seemed to be going up all the time.  In recent years, due to low interest rates and increased market volatility introducing everyone to sequence-of-returns risk, many advisors have dialed back the 4% withdrawal rate to 3.5%

It’s also lead to some back-testing within the industry to determine just what retirees can expect.

Testing with annuities

An FPA Journal paper back in December 2001 by Mark Warshawsky and co-authors John Ameriks and Bob Veres introduced the use of immediate annuities into the retirement discussion.  In his current contribution, Warschawsky  examines  the use of immediate annuities combined with a fixed withdrawal percentage from a total-return portfolio.  The conclusions [1] were:

  • The 4% rule tends to fail when utilized for extended periods, i.e., 30 years, whereas immediate annuities provide continual cash flow, regardless of market or economic
  • A 3.5% or less is often more appropriate than 4% (for obvious reasons).
  • When incorporating an immediate annuity at age 70, the annual payout almost always exceeds the 4% rule and does not risk full income or running out of money – in essence it’s purchasing an unending cash flow that, testing shows, exceeds the 4% rate.

Immediate annuities offer many advantages, but they likely not suitable for those with impaired longevity, liquidity needs, and adequate pension income.  For those who face longevity risk with no pension income, creating a “floor” may make some sense, after all.

Testing with insurance

Industry thought-leader Wade Pfau, in a paper commissioned by OneAmerica, addresses this issue in three scenarios:

  1. Investments combined with term life insurance
  2. Investments, joint and 100% survivor annuity, and term insurance
  3. Investments, single life annuity, and whole life insurance[2]

He compared these three approaches for 35 year-old and 50 year-old couples.  Without getting into the weeds, I just say his study found a “substantive evidence that an integrated approach with investments, whole life insurance, and income annuities provide more efficient retirement outcomes than relying on investments alone.”  It’s not an either/or decision.

Withdrawal strategies vary  beyond what’s  been discussed here, of course, which is why professional help can be very important and the difference of even hundreds of thousands of dollars.

There are some things you should consider before purchasing an annuity.  You can access my report here.    Also, inflation is also an issue worth considering.

It pays to do your homework and have a good guide.  If I can be of help, feel fee to get in touch!

Jim Lorenzen, CFP®, AIF®

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.  Opinions expressed are those of the author and do not represent the opinions of IFG any IFG affiliate or associated entity.The Independent Financial Group is a fee-only registered investment advisor with clients located across the U.S.  He is also licensed for insurance as an independent agent under California license 0C00742. Jim can be reached at 805.265.5416 or (from outside California) at 800.257.6659. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  

Interested in becoming an IFG client?  Why play phone-tag?  You can easily schedule your 15-minute introductory phone call!

[1] Journal of Financial Planning, January 2016

2 ibid

Taxes in Retirement: A Potential Time-Bomb for Many!

Jim Lorenzen, CFP®, AIF®

No one knows what taxes will be like in the coming years; but, with a debt that’s rising dramatically and an ageing baby-boomer population moving ever-increasing numbers into retirement, this is a collision that isn’t hard to predict.

For retirees, it’s like being in business with a partner who has the ONLY vote on howiStock_UncleSamLiftingWallet_Mediummuch of the company gross s/he gets to take.  And your partner gets it BEFORE you get to pay the overhead with whatever s/he decides should be left.

Not good.

Is it possible to completely eliminate Uncle Sam as a partner?  I think so.  So do many others, including retirement guru, Ed Slott, who many of you may have seen on PBS and who is also a practicing CPA.

But, is it possible for everyone?  Maybe not; but, almost everyone can mitigate taxes dramatically and many can likely eliminate them completely.

Think about THAT!  Wouldn’t it be nice if you lived through retirement without paying income taxes, regardless of what tax law changes Congress made?  Do the math:  That could really add up!

First, a dose of reality:

  • If you’re retiring now, a tax-free retirement isn’t going to happen.  There are no ‘quick-fixes’, but you can take steps to reduce future taxes, and keep more of your own money.  Everyone’s situation is different, but it’s worth pursuing.
  • If you’re more than ten years away from taking retirement income from your retirement plans (you must begin taking required minimum distributions around the time you turn age 70-1/2), then a tax-free retirement may be very realistic!

How do you begin your journey to a possible tax-free retirement?  You might want to begin by reviewing this 12-page outline, 4 Steps to a Tax-Free Retirement.

IFGi_4 Steps to a Tax Free Retirement_001

This will help you understand your situation, provide a framework for your decision-making, and hopefully get you started on your journey.

You can get your copy by clicking here.

Enjoy!

Jim

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.