Managing Retirement Income Decisions During Retirement

Jim Lorenzen, CFP®, AIF®

Managing retirement income has never been easy.  Those who retired in the early 1970s saw interest rates rise dramatically, then fall the same way – all within about a 15-year period.   When interest rates were going up, it made them feel good; but, few paid attention to inflation or tax implications.   During one period, interest rates were in the double-digits, but so was inflation, which meant their “increased” income wasn’t really increasing at all.    Money is worth only what it buys at the checkout counter.

So, the retiree who felt great about a 15% interest rate during 15% inflation (yes, it really happened and could happen again, blindsiding people who didn’t live through it before), weren’t really getting a raise at all – and that was before taxes!

The real problem, of course, came when interest rates began to fall.  During the period that interest rates (and inflation) dropped to 12% from 15%, retirees were seeing their incomes drop by 20% (a 3% drop in rates from 15%) while still seeing prices rise by 12%.

How do you manage income in retirement?  It ain’t easy.

Naturally, you could consider a basic withdrawal sequence using a straightforward strategy to take money in the following order:

  1. Required minimum distributions (RMDs) from IRAs, 401(k), or other qualified retirement accounts.
  2. Taxable accounts, such as brokerage and bank accounts.
  3. Tax-deferred traditional IRAs, 401(k), and other similar accounts
  4. Tax-free money – from Roth IRAs for example

This sequence can provide an order of withdrawals; but, other than the RMDs, it doesn’t tell you how much!

But wait! (as they say on tv).

How much?  And, how can you be sure you won’t run out of money?

RMD can provide a clue!

The RMD calculations can provide sound guidance for your entire portfolio!  Using the IRS formulas, Craig Iraelson, executive-in-residence in the financial planning program at Utah Valley University, did some back-testing with hypothetical portfolios invested in different investment allocations with RMD withdrawals starting in 1970 (the beginning of a relatively flat ten-year stock market).   Using beginning values, and even with a portfolio invested in 100% cash, there was still $850,000 left after 25 years!   And, a portfolio that was 25% stocks had $2 million left.

RMDs appear to address longevity risk pretty well; but, there’s another question.   Is the income level provided by the RMDs enough to preserve the pre-retirement lifestyle – or anything close?

There’s the rub.  In the back-tested portfolios, the initial RMD was 3.65% of assets… and that falls within the widely-accepted 4% rule…  but, that’s only $36,500 of pre-tax income.  Even if the retiree family has an additional $30,000 from Social Security, that’s still just $66,500 before taxes; and, for many successful individuals, that isn’t enough.

So, there’s the trade-off:  Sacrifice income for longevity, or accept longevity risk in order to take increased income.

Fotilla Images

Maybe there’s another way.    How can a couple have more freedom to take greater income early while still addressing the risk of running out of “late-life income”?

My “Late Life Income” report shows how many couples have addressed this issue.   You can access it here!

By the way, when you get my report, you’ll also receive a subscription to my ezine.    If you decide you don’t want the ezine when you receive it, you’ll be able to unsubscribe immediately with a single click and, of course, your email is never shared with anyone.

Enjoy the report!  Hope you find it helpful.

 

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.

Will Your Retirement Money last? Maybe – with the right ‘Late Life Income’ strategy.

iStock Images

iStock Images

Jim Lorenzen, CFP®, AIF®

This past Monday, I retweeted a Fox Business post, Why Your Retirement Savings May Be a Pipedream.

A number of my clients, deciding to help ensure their late-life income needs will be met, have  in the past elected to execute a “late life income” strategy – however, they wanted one that would not lock them in to the low rates and liquidity issues that come with annuities.

I created a hypothetical – translate fictitiousLate Life Income “case study” of what such a strategy might look like for the right candidate couple (this may not be right for everyone).  You can learn more by getting it here.

Enjoy,

Jim

————

Resized CFP_Logo_GoldJim 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 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.6a017c332c5ecb970b01a51174cbb0970c-120wi

TO ROLL? OR, NOT TO ROLL….

iStock Images

iStock Images

Jim Lorenzen, CFP®, AIF®

Getting ready to pull the retirement cord?  In a previous post, I had talked about pension options – worth reviewing if that’s an issue for you.  I also recently provided an IRA rollover checklist  for those evaluating the pros and cons of such a decision.

Whether or not to to do a rollover is not a simple ‘yes’ or ‘no’ question.  It depends on your particular situation.  There are good reasons both for and against rolling over your retirement plan to an IRA – the checklist can help sort those out.

Believe it or not, there may be a reason to take some of your retirement out in cash and pay taxes right now!  How can that be?

If you’re on of those now doing your homework – good for you – you may enjoy reading this report, Six Best and Worst IRA Rollover Decisions.  This report not only discusses those decisions, it will also provide some insight on additional issues worth considering.

I hope you find it worthwhile.  You can download it here>  Click here for your report!

Before you get to the report, however, here’s a bit of news I came across from Mark Dreschler, the president and founder of Premier Trust.  His words:

The US Supreme court ruled this past June, in Clark v. Rameker, that inherited IRAs are NOT protected from a beneficiaries’ bankruptcy. Previously, this was an open issue. Now, the only way to protect an inherited IRA from inclusion in the beneficiaries’  bankruptcy, is to have a correctly worded IRA Inheritance Trust named as the beneficiary. This will also protect the IRA principal from other creditors, or divorce proceedings.

However, if the distributions are paid directly to the beneficiary, they are NOT protected from bankruptcy or even attack in the event of a divorce. An IRA Inheritance Trust which also protects distributions from attack is called an “accumulation trust.”  The trustee cannot be the child. The trustee has full discretion to hold distributions from the IRA in trust to protect the child or pass them out, depending on the circumstances. The child beneficiary may benefit from the distributed assets that the trust holds, but does not own them individually. Obviously, if the child-beneficiary has no title or control of the IRA distributions, they cannot be taken by a charging order or other legal means of attack.

Hope you find that helpful.  And, don’t forget to download your report.

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.

 

 

17 Unexpected Retirement Expenses

checkbook-penJim Lorenzen, CFP®, AIF®

The Society of Actuaries outlined 17 unexpected or shocking expenses during retirement in its 2015 Risks and Process of Retirement Survey.  I’ve put those into a small report that explains why two in particular happen to too many retirees.

I hope you enjoy it.  You can get yours by simply clicking on the button below.
Click Here for your report

 

—————–

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® providing private client wealth management services since 1991.

The Independent Financial Group is 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. 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.

 

How Middle-Income Boomers Are Planning For Retirement

Conceptual one way signs on Life

Conceptual one way signs on Life

Jim Lorenzen, CFP®, AIF®

According to a survey conducted by Bankers Life Center for a Secure Retirement, middle income boomers aren’t paying much attention to planning for their old age.

Here are some of the results:

While 61% have taken at least one step in retirement planning, about only 1% have taken all the steps.

Only 25% have calculated a monthly retirement goal – no information on what method they used – but only 12% have translated that into an account balance goal.

Only 9% have developed a formal, written plan (how this happened with only 1% having completed all the steps, noted above) is a little interesting.

Nevertheless, they still have some work to do, it appears.   Maybe a good first step might be attending our retirement planning webinar this coming Saturday.  They can learn more and register here.


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.

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.

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

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

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®

—————————————-

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

The 401K Failure

Fotilla Images

Fotilla Images

Are we in the midst of a 401(k) failure?  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