Do rules for saving change in retirement?

Posted by on Aug 28, 2014 in Uncategorized | 0 comments

During working years while accumulating assets, there are many different rules of thumb about what percentage of income should be saved and invested. When retirement arrives, the same rules of thumb are of no value when it becomes necessary to prepare for a variety of possibilities — the most important of which center around longevity. No one knows how long they will live. When people spend their working life accumulating assets, they are uncomfortable transitioning into retirement and then making the decisions needed to take income in retirement. For some people, these decisions are very difficult, and they complicate and struggle with important choices. Many retirement plans permit a lump sum asset distribution rather than remaining within the plan. This option helps the employer, which no longer needs to track former employees for decades. It is an even better choice for participants because they can make monthly withdrawals from the plan or purchase an annuity to provide essential income. Most employees consolidate their retirement assets into a personal individual retirement account (IRA). Vanguard Funds finds that more than 80 percent of retirees withdraw their funds within five years of retirement and roll these into an IRA. There is no single agreed method of determining how much income is needed in retirement. Most theories center around replacement percentages. My personal preference follows the methodoly of Professor Moshe Milevsky of York University, Toronto, Canada. Milevsky teaches the need to replace and recreate in retirement the paycheck received during one’s working years. What changes are the income sources, which are usually a pension, IRA, Social Security, and fixed income vehicles, including annuities. The key here is the income must be guaranteed and adjusted for inflation to prevent gaps opening between income and expenses. All assets used for income must be guaranteed against loss of principal. For example, dividend paying stock would be excluded. The remainder of assets is in an investment account and these can be drawn down to meet ones wants, while the rate of withdrawal is lifestyle influenced. The extent to which portfolio assets can be converted to income depends on how much investment risk a retiree is willing to assume. If the market is running against successful accumulation, the potential loss of principal is present, and the number of years of income available may be reduced or a desired level of income expected during working years cannot be sustained in retirement. One retirement income strategy advanced by James Mahaney of Prudential involves drawing down qualified plan assets, such as an IRA or 401(K), more rapidly during the early years of retirement, while deferring receipt of Social Security to age 70. This strategy allows retirees a way to maximize income...

Read More

Adjusting to Retirement

Posted by on Aug 15, 2014 in Uncategorized | 0 comments

Adjusting to Retirement What people don’t always realize about life after work.   Provided by Frederick (Fred) Saide, Ph.D.    If you have saved and invested consistently for retirement, you may find yourself ready to leave work on your terms – with abundant free time, new opportunities, and wonderful adventures ahead of you. The thing to keep in mind is that the reality of your retirement may not always correspond to your conception of retirement. There will inevitably be a degree of difference.      Some new retirees are better prepared for that difference than others. They learn things after leaving work that they wished they could have learned about years earlier. So with that in mind, here are a few of the little things people tend to realize after settling into retirement.   Your kids may see your retirement differently than you do. Some couples retire and figure on spending more time with kids and grandkids – they hang onto that five-bedroom home even though two people are living in it because they figure on regular family gatherings, or they move to another state to be closer to their kids. Then they find out that their children didn’t really count on being such frequent company.   Financial considerations come into play here as well. Keeping up a big home in retirement can cost big dollars, and if you move to another area, there is always the chance that a promotion or the right job offer could make your son or daughter relocate just a few years later. The average American worker spends 4.6 years at a given job, and less than 10% of U.S. workers in their twenties and thirties stay at the same job for a decade.1      Medicare falls short when it comes to dental, vision & hearing care. Original Medicare (Parts A & B) will pay for some things – cataract surgery and yearly glaucoma tests for people at risk for that disease, for example, as well as dental procedures that are deemed necessary prior to another medical procedure covered under Medicare. These are exceptions to the norm, however, and as people’s sight, teeth and hearing become more problematic as they age, it can be frustrating to realize what Medicare won’t cover.2   You may lose the impulse to work a little. These days, most retirees at least think about working part-time. Actually doing that may not be as easy as it first seems. It is a lot harder to get hired at age 65 than it is at age 45 – no one is denying that – and part-time work tends toward the mundane and unfulfilling. If you are able to earn income as...

Read More

What you can do about retirement mistakes

Posted by on Aug 14, 2014 in Uncategorized | 0 comments

How much income will your portfolio produce, for how long, and is it guaranteed to last as long as you do? Our expert helps navigate these difficult questions. (Photo: FILE PHOTO )  1CONNECTTWEET 1LINKEDINCOMMENTEMAILMORE If you have a pain in your side would you give yourself an appendectomy? That is the financial nightmare that retirement becomes when there is a failure to plan beforehand. Often, failure to plan is really an unwillingness to transition to an age appropriate plan. What I have learned from both my clients and my students is they enter retirement with lots of financial tools they have managed to acquire or purchase over the course of their working lifetime. They have portfolios with products from some of the best know names on Wall Street. Their portfolios mirror the stock and bond markets and rise and fall, crash and recover, and then repeat the entire cycle over and over again. When you enter retirement or are in retirement, especially the early years of retirement, you are especially vulnerable to sequence of risk. Sequence of risk or sequence of returns risk, has to do with the order in which your investment returns occur. It is something you experience when you transition into needing to draw income from your investments. When you are in the accumulation or savings stage, sequence risk does not affect you. One of the ways to avoid sequence risk is to be aware of the key retirement killers. These are: • Running out of income • Incurring market losses • Catastrophic illness • Loss of a spouse • Taxes • Inflation • Violating withdrawal rate “rules.” If you are using a status quo strategy, the volatility of the market drives your investment performance. Can you be confident about your portfolio? Ask yourself or your advisor how much money will I have the day I retire? How much income will my portfolio produce, for how long, and is it guaranteed to last as long as I do? If you advisor cannot answer these fundamental questions, and you agree that these questions must be answered to provide you with solid security, then these are five things your retirement portfolio must do for you: • Provide income for both spouses during both lifetimes • Capture the upside of the market without exposing the entire portfolio and your life to disaster • Provide sufficient liquidity reserves to meet emergencies and opportunities • Protect assets from long term care and Medicaid spend down • Distribute your assets according to your wishes after both you and your spouse are gone. Rebalancing and reallocation are maintenance strategies and will not defeat the key retirement killers. If you squeeze a balloon the air...

Read More

An alternate approach to retirement planning

Posted by on Aug 14, 2014 in Uncategorized | 0 comments

Our investment expert examines the value of mutual funds recently criticized in a white paper. (Photo: FILE PHOTO )  2CONNECTTWEETLINKEDIN 1COMMENTEMAILMORE Sometimes reviewing what we already know can be illuminating. In a “white paper” entitled “Stop Wasting Your Money on Mutual Funds,” David Berkowitz, principal of ValueAligned®Partners, argues that investments into mutual funds need to be reexamined. Instead of mutual funds, Mr. Berkowitz advocates to the exclusion of other pooled alternatives separately managed accounts (SMAs). SMAs compete with mutual funds, Exchange Traded Funds (ETFs), and Unified Managed Accounts (UMAs). At this point, don’t worry about the alphabet soup of product alternatives. In the investment management world, there are products designed for middle-income investors, which usually are mutual funds that have investment requirements when the account is opened. There are also separately managed accounts for those who are a bit wealthier (but not ultra-wealthy). To be fair to Mr. Berkowitz, I will summarize his argument against mutual funds. He notes they have fees and expenses, most of which are due at inception. Not all funds have all the expenses all of the time, as he indicates. He is on firmer ground comparing mutual funds to SMAs. Mutual funds have a manager who makes decisions for the entire fund, including share purchases, sale of shares, dividend reinvestments and distributions, and these will affect all fund investors the same way. For SMAs, decisions are at the account level and will vary by investor. This high level of customization is one of the selling points of SMAs, especially if the account is an individual taxable one. All portfolio transactions have expense and tax consequences. With managed accounts, investors can feel they have more control over these decisions, and they can hold the account manager more closely to the investment management statement. One of the challenges presented by Mr. Berkowitz is the actual difficulty in making apples-to-apples comparison among investment alternatives is that fee structures do vary. Mutual funds fees are fairly easy to focus on the net expense ratio. Funds are required to disclose expense information in their prospectuses and show how the fund expenses and sales charges would affect hypothetical returns over different holding periods of time. In a separate account, the fees are disclosed in a filing called a Form ADV Part 2. The fees may be subject to negotiation between the individual investor, investor’s advisor, and the money manager. Often the fees are on a scale expressed as a percentage of assets under management and decreases as the amount invested increases. To get the most from a separate account, most investors work with a professional investment advisor. One of the key functions of the advisor is to assist with the money...

Read More

Less Protectioin for Inherited IRA’s

Posted by on Aug 1, 2014 in Uncategorized | 0 comments

They are no longer exempt from creditors & bankruptcy proceedings.   Provided by Frederick Saide, Ph.D.      A SCOTUS ruling raises eyebrows. On June 12, 2014, the Supreme Court ruled 9-0 that assets held within inherited IRAs by non-spousal beneficiaries do not legally constitute “retirement funds.” Therefore, those assets are not protected from creditors under federal bankruptcy statutes.1,2   This opinion may have you scratching your head. “IRA” stands for Individual Retirement Arrangement, right? So how could IRA assets fail to qualify as retirement assets?     Here is the background behind the decision. In 2010, a Wisconsin resident named Heidi Heffron-Clark filed for Chapter 7 bankruptcy. In doing so, she listed an inherited IRA with a balance of around $300,000 as an exempt asset. No doubt this seemed reasonable: the Bankruptcy Abuse Prevention and Consumer Protection Act provided a cumulative $1 million inflation-adjusted bankruptcy exemption for both traditional IRAs and Roth IRAs in 2005.3    So under BAPCPA, wasn’t that $300K in inherited IRA funds held by Ms. Heffron-Clark creditor-protected? Her creditors, the bankruptcy trustee and the Wisconsin bankruptcy court all thought not. That wasn’t surprising, as bankruptcy trustees have issued numerous challenges to the exemption status of inherited IRAs since BAPCPA’s passing.3     Clark v. Rameker made it all the way to the country’s highest court, and boiled down to one question: is an inherited IRA a retirement account, or not?   The Supreme Court rejected the idea that a retirement account for one individual automatically becomes a retirement account for the individual who inherits it. It made that stand based on three features of inherited IRAs:   ** The beneficiary of an inherited IRA can draw down all of the IRA balance at any time and use the money for anything without any penalty. Compare that to the original IRA owner, who will face penalties for (most) IRA distributions taken before age 59½. ** Typically, beneficiaries of inherited IRAs must start to take required minimum distributions (RMDs) in the year after they inherit the IRA; it doesn’t matter how old they are when that happens. They could be 68 years old, they could be 8 years old – age doesn’t factor into the RMD rules. ** Unlike the original IRA owner, the beneficiary of an inherited IRA can’t contribute to that account – another strike against the contextualization of an inherited IRA as a retirement fund.3   All this gave the high court a basis for its decision.     Do IRA funds that pass to surviving spouses remain creditor-protected? It would seem so. Frustratingly, the Supreme Court didn’t tackle that question in its ruling. IRAs inherited from spouses are still presumably exempt from federal bankruptcy laws, and if a surviving...

Read More