Retirement Webinar Announcement: This Saturday, October 1st

iStock Images

iStock Images

I’ll be conducting a retirement webinar this coming Saturday, October 1st.

Who would benefit:  “Baby Boomers” planning for or nearing retirement and desiring to put a plan in place.

You can learn more about the webinar and register here.

When you register, you’ll automatically be signed-up to receive our weekly ezine and, as a bonus, you’ll also receive a retirement income planning tool you can use to help get your own ‘ducks lined up’.  I think you’ll find it quite useful.

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients providing retirement planning and wealth management services 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.

What if Retirement Plan Statements Stated the Facts?

iStock_UncleSamLiftingWallet_MediumThe next time you open your 401(k) or IRA statement and see your current balance, it might be worth remembering it isn’t true.  The balance, you see, isn’t all yours!

Remember how many times you’ve heard the phrase tax deferred?     You’ll avoid taxes only as long as you leave the money untouched; of course, by age 70-1/2 or thereabouts you’re going to have to take some money out, whether you like it or not, because Uncle Sam wants his cut.

Then, the truth hits:  You’ve been growing money for Uncle Sam, too!

If you’re in a combined state and federal income tax bracket of 33%, it means only 66% of the balance you see on your statement is really yours – or ever will be.

For example, if your tax-deferred retirement plan statement indicates you have $500,000, remember it’s illusory.  Your tax bracket will 6a017c332c5ecb970b01a73dd6e411970d-320widetermine how much Uncle Sam will get – and Uncle Sam is not only the one who ‘writes the rules’, he also determines when he wants to do it.

If your combined state and federal tax bracket is 30%, for example, Uncle Sam’s balance in your account is $150,000.  Your balance is $350,000 – unless Uncle Sam changes his mind about your bracket.

So, the next time you look at your tax-deferred balance, you might want to whack-off Uncle Sam’s cut and enter the remaining balance on your own balance sheet – it will probably be a closer representation of what you really own when all the dust settles.

There are some steps you can take to reduce or potentially eliminate income tax in retirement, if you’re prepared to do what it takes today.

You have to ask yourself:

  • With an aging population demanding services, do I feel confident Uncle Sam won’t raise taxes in the future on those who’ve worked and saved?
  • With the “official” national debt over $19 trillion – and the real debt more like $89 trillion – do I feel confident Uncle Sam will simply manage better and keep taxes where they are on those who’ve worked and saved?

If you feel good about trusting their management of your money over the next thirty years, you may even be content with your tax status moving forward.  If not, you may want to begin exploring your options.

IFGi_4 Steps to a Tax Free Retirement_001Here’s a short report you might find interesting as a first step in your process.

You can access it here.  I hope you find it helpful.

 

Jim

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RESOURCES:

 

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

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.

IS IT TIME TO RETHINK (Dump) THE 401(K)?

6a017c332c5ecb970b01a5116fb332970c-320wiMany Believe It Is…. including some well-known experts
Jim Lorenzen, CFP®, AIF®

In his book, The Retirement Miracle, Patrick Kelly writes about a man who had built-up a 401(k) balance of over $2 million over his career.  Then, on the brink of retirement, his world was shattered.  It was a September day in 2008.  He’d lost about 10% of his nest-egg in a single trading day.   By October 7th, he found his balance was down to $1.5 million!  By the time he reached his last day of work, his account was down to $1.2 million – actually about $1 million less than what it had been before all this happened.

And, just as an aside,  if that wasn’t bad enough, that $1.2 million had an embedded tax liability.  If this man was in the 30% combined federal and state tax brackets, $360,000 of that belonged to the state and federal government, leaving him with only $840,000 to retire on – and THAT’s only if taxes don’t go up while he’s in retirement.

Is the 401(k) really an answer to America’s growing retirement crisis?  After all, 401(k)-type plans are a little less than 40 years old in this country, created when most people were accumulating assets.  They haven’t been around long enough to see what happens when the ‘baby-boom bubble’ begins to drain them.

More than a few experts believe it’s time to shake things up, as you’ll see in this video (there’s a very brief ad in front – it’s quick).  There’s also another video (scroll down below this one) I think you’ll find very interesting.

A recent article by Wealth Management Systems, writing for the FPA noted the following:

“Recent research indicated that a third of retirement plan participants were “not at all familiar” or “not that familiar” with the investment options offered by their employer’s plan. The study went on to reveal that individuals who were familiar with their retirement plan investments were nearly twice as likely to save 10% or more of their annual income, compared with those who report having little-to-no knowledge about such investments. Understanding your investment options is essential when building a portfolio that matches your risk tolerance and time horizon. Generally speaking, the shorter your time horizon, the more conservative you may want your investments to be, while a longer time horizon may enable you to take on slightly more risk.”

Here’s another one I think you’ll find very interesting.

The 401k Failure

How familiar with their options are 401(k) investors? Not very, apparently. Many now believe it’s time to move from a stock market-based system to something that’s insurance-based. While this may not be the right path for everyone, it certainly appears it is for most, as the following clips from FrontLine, 60-Minutes, and others.

According to The Power of Zero, by David McKnight (with a forward by Ed Slott, a CPA and well-known retirement expert, and a back cover endorsement by David Walker, former Comptroller General of the United States), an insurance-based approach makes far more sense, particularly if properly designed. And, there are a number of advantages.

The  insurance-based approach to funding retirement you saw in the video clips, does seem to have it’s benefits.

Indexed Universal Life:  A Life Insurance Retirement Plan is one 401k Alternative.
• No contribution limits
• No Pre-59-1/2 withdrawal penalties AND no mandatory distributions
• Tax Free Income at retirement
• Zero Loss From Market Crashes – with annual reset locking-in gains!
• Tax Free to heirs
• Self-funding option in case of disability
• Protection from market loss – You never lose money

It also doesn’t create taxation of Social Security benefits, provides protection from lawsuits in many states,  has no minimum age or income requirement, avoids probate, and – this is a big one – provides accurate return figures, an issue I’ve discussed in other writings.

There’s a lot more to this,of course.  If you’d like to visit with me about this, you can schedule your introductory phone call with me so I can gather some preliminary information.  Just let me know you’re interested in discussing an alternative to your 401(k).

Jim

Tips for Managing an Inheritance

6a017c332c5ecb970b01a73de5d743970d-320wi

Receiving an inheritance? 

Not sure how to manage it?

Before you make decision, it’s good to do your homework.  You might find our report on managing inheritance money helpful.  You can access it below.

Get Your Inheritance LifeGuide here!

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Visit the IFG Website!

Arrange a brief 15-minute introductory phone call with Jim Lorenzen, CFP®, AIF® here.

 

Follow Jim on Twitter: @jimlorenzen

and also Jim’s MoneyBlog

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Become an IFG client!  Schedule your 15-minute introductory phone call here!

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice.

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.

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

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.

Guarantees Against Loss Not A Panacea… but maybe still valuable.

6a017c332c5ecb970b01901dd12617970b-320wiJim Lorenzen, CFP®, AIF®

Active managers can’t beat their indexes consistently.   

Who cares?

During my 25+ years of helping people navigate financial waters, I can honestly say I have never had a single client who cared about beating an index – any index – except inflation.

Pretty amazing since most media tend to focus on only two things:  Active managers vs. a passive index and cost of ownership.   Little, if anything, is ever said about the value provided.  To them, apparently, value is ‘nil’.

Actually, our industry is at fault, as well.  Look at our quarterly or annual reports.  Performance is always measured against an index or some blend of indexes.  Industry custodians don’t get it, either.

 

The ONLY index that REALLY counts is long-term performance measured as progress toward your personal goals, measured in probabilities.  Probabilities, after all, are all we really have to work with since there are no guarantees in life.  Even our money isn’t guaranteed; it’s “backed by the full faith and credit of….”  

 

So, what approach offers the best chance of meeting your goals?  As you might guess, there is no one right answer.  The answer will depend on which approach is most appropriate for you.

 

Managing the downside

 

When active managers are chosen for a portion of a client’s portfolio, in most cases what the investor is really seeking are returns that outpace inflation while limiting downside risk.

Take a look at this purely hypothetical 10-year market environment.  You’ll see our hypothetical market begins and ends with 20-point gains.  There are six years of +20% and four years of -20%.

Image_Managing for Downside

Portfolio A begins with $500,000 and invests in that market.  To keep things simple for illustrating this concept, we’ll ignore expenses and taxes.  Those aside, you’ll note the average annual compound return and the ending value.  The numbers aren’t important except for comparison with the next chart.

 

IHere’s a hypothetical portfolio that’s been managed for downside risk.  Here our fictitious manager is very conservative, capturing only 80% of the upside of each up-market, and also very effective, capturing only 70% of the downside moves.  Despite the fact this manager never beat the market on up years, outperforming by limiting losses in down years lead to an overall outperformance.

 

It’s a made-up scenario, I know, but it does illustrate a concept:  Limiting the downside can be quite effective – maybe even more than trying to beat the market indexes and accepting big downside losses.

 

What if we eliminate the downside altogether? 

 

Insurance companies market their equity-indexed annuities and equity-indexed universal life products with this guarantee.  What if you could capture 100% of the upside up to a ‘cap’ of 12%, for example, and be guaranteed that you never lose money?  You’ve seen the commercials.

 

Here’s the same hypothetical market return, this time compared to the strategy that eliminates downside risk!  Wow!  Looks good!  Compare the ending values with our manager limiting losses in the prior example.  Now, even if you factor in expenses and inflation, it would still look pretty good.

Image_Eliminiating the Downside

But, does this method outperform in all markets?

 

In this third chart, I’ve created another hypothetical series of market returns starting at -10% and moving all the way up to +35% over ten years.  There are only two down years, yet despite that, this market return series outperformed the guaranteed return.  In fact, our downside guaranteed portfolio came in $477,000 BELOW the ‘market’ portfolio.

 

You could create a million market return sequences and come up with a million different variations.  The point is while these downside guarantees don’t necessarily mean you will make more money, they can provide a valuable ‘protected’ return.

Image_Protected Return

Again, who cares?  If the portfolio is advancing you to your goals, that should be all that counts.

 

But, how do you position these guaranteed products in your portfolio?   

 

What asset-class should they be assigned to?  Just because you may have participation with a stock index, do those assets get assigned to the stock portion of your allocation?   If not, why not?  And, how would you position them?

 

The answer might surprise you.  Many retirement plans may fail.  Some time ago I created a report on this subject – you might find it helpful.  You can access it here.

Enjoy!

 

Jim

Annuity Income May Contain a Hidden Surprise

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Annuity income may feel secure; but, is it really?   Once you realize that money is worth only what it can purchase, the effects of inflation become woefully clear.

Suppose your annuity will provide you with $50,000 in annual income through retirement.  It sounds good, but does it provide for cost-of-living increases?  If not, those payments will likely be worth less each year.  Assuming a 3% inflation rate, your $50,000 will represent only about $48,500 of purchasing power in today’s dollars in the second year.  In the tenth year, your purchasing power would be around $37,200 in today’s dollars; and, in the 20th year, it would be around $27,700!

The pattern is clear:  Your purchasing power would be declining each year.  If you purchased the annuity in order to preserve lifestyle security, you may be very disappointed.

Remember, there are different kinds of annuities:

  • Immediate
  • Deferred
  • Indexed
  • Variable

All have their own bells & whistles and all have their own set of characteristics and costs, sometimes not so obvious.   And, the chances are excellent you’re paying extra for any add-on benefits that may appear free.  Often, you may be able to replicate those same benefits with less cost through some basic and prudent financial planning.    Just remember NOTHING is ever the answer for ALL your money.  Diversification isn’t about money; it’s about risk.  And, there are more risks than one you should be considering.   Also remember….

When something sounds too good to be true… well, you know the rest.  If you’d like to learn more about income annuities, I’ve prepared an Income Annuity Primer for you.  It’s free when you subscribe to IFG Insights.  If you’re not happy with Insights you can always cancel; but, I think you’ll like both the primer and the ezine.  You can get the primer here.

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Enjoy!

Jim

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RESOURCES:

IFG Report:  The Hidden Risk No One Talks About (registration required)

A Financial Conversation Checklist (does not require registration)

Subscribe to IFG’s Ezine:  IFG Insights   http://tinyurl.com/IFGInsights

The IFG Website

Follow Jim on Twitter: http://twitter.com/JimLorenzen
Jim on LinkedIn   http://www.linkedin.com/in/jimlorenzencfp
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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

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.

Buying An Annuity? Keep it Simple!

Jim Lorenzen, CFP®, AIF®

6a017c332c5ecb970b0192ac05f306970d-320wiIt isn’t uncommon for people to buy things they don’t need; and when it comes to annuities, it’s often no different, and it doesn’t help when (sometimes) an agent adds bells and whistles, in the form of elaborate policy riders, that the client will never use!

Today, because many baby-boomers are concerned about a lifetime income they can’t outlive, annuity recommendations often include a guaranteed minimum withdrawal benefit (GMWB) rider.  The problem is that often it isn’t needed.  Worse, the cost of the rider reduces the earnings potential for wealth accumulation by eating away at the interest clients would otherwise earn.

Rich Lane and Jeff Affronti, in the October 2015 issue of National Underwriter, cited an example of a buyer who purchased an annuity with $1 million in premium who paid more than $160,000 for this type of rider – and it ended-up being a benefit the client wasn’t even going to use!   They pointed out that the example may be extreme; but, the point is no less valid:  It’s a waste of money if it isn’t used.

In today’s low interest rates, it may not be the best choice to add an income rider over selecting the appropriate rate of return.  The GMWB rider may sound great, but during the accumulation stage the focus should be on accumulation.

If income is needed down the road, a deferred annuity will allow the client to turn-on (annuitize) the income stream.  If they need income now, simply purchase a single premium immediate annuity (SPIA) that allows instant access to funds that can be used to supplement Social Security.  For a guaranteed income, it’s probably the highest payout for the money available today.

Deferred annuities have an income stream ‘built-in’ to the product – they all have a basic fundamental feature that allows the owner to elect an income stream on or before the maturity date – and it doesn’t cost a thing.

Something to bear in mind.   You might find our Income Annuity Primer 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

Retirement in the New World

Fotilla Images

Fotilla Images

Some time ago, 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

 

HEALTH CARE COSTS MAY EAT HALF OF YOUR SOCIAL SECURITY INCOME

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

The 2016 Retirement Health Care Costs Data Report recently released by Healthview Services found that health care costs are continuing to rise, as if any of us are surprised, of course.

According to Marlene Y. Satter, writing for BenefitsPro.com in the July 2016 issue of Retirement Advisor, a healthy person retiring in 2016 can expect to spend $288,400 in today’s dollars on lifetime Medicare Parts B, D, and supplemental insurance premiums.

There’s more.  Ms. Satter indicates that Social Security isn’t going to be of much help, either:

  • A 66-year-old retiring this year will need 57% of the Social Security to cover health care costs.
  • A 44-year-old retiring in 10 years will need 88%.
  • A 45-year-old couple will require 116%!

And, she says, it’s going to get worse!  A 30-year-old female retiring at 65 can expect to pay $548,098… $118,632 more than a male the same age.

Wow.

What to do?

The simple truth for long-term investors is that nothing beats growth; but older investors may be tempted to grab any “sure thing” that comes down the path – thus the popularity of annuities, even at current low interest rates.

Fotilla Images

Fotilla Images

But, before you leap, it’s worth doing some homework.  You can begin with the Income Annuity Primer.  It won’t tell you everything you need to know; but, it’s a start.

Naturally, the Social Security claiming decision can be a costly mistake if not made properly.  We have a LifeGuide on retirement and Social Security you might like, as well. You can get it here.

Enjoy!

 

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  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.