Resolving Projected Income Shortfalls: Bridging the Gap

What is a projected income shortfall?

When you determine your retirement income needs, you make your projections based on the type of lifestyle you plan to have and the desired timing of your retirement. However, you may find that reality is not in sync with your projections and it looks like your retirement income will be insufficient for the rate you plan to spend it. This is called a projected income shortfall. If you find yourself in such a situation, finding the best solution will depend on several factors, including the following:

• The severity of your projected shortfall
• The length of time remaining before retirement
• How long you need your retirement income to last

Several methods of coping with projected income shortfalls are described in the following sections.

Delay retirement

One way of dealing with a projected income shortfall is to stay in the workforce longer than you had planned. This will allow you to continue supporting yourself with a salary rather than dipping into your retirement savings.

What it means

Delaying your retirement could mean that you continue to work longer than you had originally planned. Or it might mean finding a new full- or part-time job and living off the income from this job. By doing so, you can delay taking Social Security benefits or distributions from retirement accounts. The longer you delay tapping into these sources, the longer the money will last when you do begin taking it.

While you might hesitate to start on a new career path late in life, there may actually be certain unique opportunities that would not have been available earlier in life. For example, you might consider entering the consulting field, based on the expertise you have gained through a lifetime of employment. This decision may involve tax issues, so it may be beneficial to review its tax impact with a tax professional.

Effect on Social Security benefits

The Social Security Administration has set a "normal retirement age" which varies between 65 and 67, depending on your date of birth. You can elect to receive Social Security retirement benefits as early as age 62, but if you begin receiving benefits before your normal retirement age, your benefits will be decreased. Conversely, if you elect to delay retirement, you can increase your annual Social Security benefits. There are two reasons for this. First, each additional year that you work adds an additional year of earnings to your Social Security record, resulting in potentially higher retirement benefits. Second, the Social Security Administration gives you a credit for each month you delay retirement, up to age 70.

Effect on IRA and employer-sponsored retirement plan distributions

The longer you delay retirement, the longer you can contribute to your IRA or employer-sponsored retirement plan. However, if you have a traditional IRA, you must start taking required minimum distributions (and stop contributing) when you reach age 70½. If you fail to take the minimum distribution, you will be subject to a 50 percent penalty on the amount that should have been distributed. If you have a Roth IRA, you are not required to take any distributions while you are alive, and you can continue to make contributions after age 70½ if you are still working. Minimum distribution rules do not apply to money in qualified retirement plans until you reach age 70½ or retire (whichever occurs later), unless you own 5 percent or more of your employer.

Social Security, Taxes, Medicare...

The decision you make regarding how and when to claim your Social Security benefits will be among the most complex and largest financial decisions you will make in your lifetime; and now being informed has become more important than ever! Most individuals are completely unaware of a few little-known strategies capable of greatly increasing your lifetime benefits and your quality of life in retirement. We have found that many people do not consider their Marital Status, Taxes, Medicare, Required Minimum Distributions (RMD), and their Income Gap among others, when planning for their Social Security and retirement income. This is your opportunity to learn some crucial factors you should consider PRIOR TO APPLYING FOR SOCIAL SECURITY.

Get these questions answered:

• How to decide the best time to apply?
• How much income you can expect to receive?
• How to minimize taxes?
• How to coordinate benefits with your spouse?
• How working can effect your benefits?

Please join your hosts, Bret Elam and David Bezar of Thrive Financial Services, for this very informative, educational event. We welcome those who are at or nearing retirement to join us for an enlightening discussion on how to avoid some very common mistakes people make in signing up for Social Security benefits and get the most from your Social Security benefits. Learn how making one uninformed decision could potentially impact your retirement income by tens of thousands of dollars! Timing could be everything!

Americans Are Living Longer, But What Does That Mean?

The Changing Realities of Retirement

Retirement is a relatively young financial concept. The idea that people would work for 30-40 years, then retire and live on their savings for another 15-20 years was impossible to comprehend before the 20th century. Even in the industrially developed countries of the late 19th century, most of the population didn’t live long enough or accumulate enough assets to make this possible. The first generation to experience modern retirement was born around 1900. In the U.S., this generation saw Social Security implemented during their early working years, rode the prosperity of the Baby Boom after World War II to steady employment and generous pensions – and then benefited from medical advances that allowed them to enjoy their good fortune for a longer time. It was a pretty attractive model, but in retrospect, the sample size was relatively small. As more Americans from successive generations approach retirement age, updated data suggests they are more likely to encounter new and daunting challenges to their financial well-being. Among the findings:

Americans are living longer, but not necessarily healthier, lives. Life expectancy has improved steadily, even in the past 20 years. According to a 2013 OECD (Organization for Economic Co-Operation and Development) report, U.S. life expectancy rose three years to 78.2 years in 2010 from 75.2 in 1990. However, the report also found the number of years of  living with chronic disability, an indicator of quality of life, increased as well. On average, Americans lived in good health (i.e., without short- or long-term disabilities), for just 68.1 of those 78.2 years. This gap of 10.1 years between total life span and a healthy life span rose from 9.4 years in 1990. An in-depth explanation of these statistics comes from a March 2014 study published by the Journal of the American Medical Association (JAMA). While medical advances have improved the outcomes for many life-threatening conditions like heart attacks, strokes and certain cancers, Americans have been slow to adopt better health habits that tend to ensure a longer quality of life. The prescriptions of “better diet, smaller food portions, increased physical activity, quitting smoking and better management of stress” are lifestyle issues that generally cannot be filled by medical procedures.

If you live to 70, there is a high probability you will experience a retirement "shock" on the next nine years.

In a November 2012 report from the Society of Actuaries and the Urban Institute titled “The Impact of Running Out of Money in Retirement,” the authors identified four “shocks” likely to disrupt retirees’ financial stability: severe disability, cognitive impairment, death of a spouse, or entering a nursing home. For 70- year-old men, the likelihood of one of these shocks was 67 percent. For women, it was even higher, at 76 percent. Any one of these events could cause significant disruption in retirement - physically, emotionally, and financially. So it is sobering to project that 2 of 3 men and 3 of 4 women will encounter these shocks in the decade after their 70th birthday.

As we get older, retirement increasingly becomes a women's issue.

Longevity and the demographic bump of the Baby Boomer will dramatically increase the percentage of Americans over 85 in the next four decades (see chart). Right now, women over age 85 in the U.S. outnumber men 2-1. Although demographic trends project the percentages will narrow a bit over the next three decades, the vast majority of older Americans are, and will be, women. If you combine this demographic imbalance with the findings about the gap between life span and healthy lifespan, as well as the likelihood of a retirement “shock event,” it results in a troubling conclusion: The realistic probability of elderly women having to manage their retirement finances by themselves – after experiencing a financial shock.

Shock Absorbers

Given the possibilities/probabilities of longer lives that include retirement shocks, it should prompt both retirees and those on the cusp of retirement (and their children) to consider protective financial measures.

Develop a team of assistants.

You may have done a great job managing your money and building your wealth over the past 50 years, but what happens if your “shock” is a cognitive decline? The probabilities of aging may require financial management to eventually become a group effort. And “group” probably doesn’t mean just one other person. A better way to protect your interests is by giving several parties responsibilities, in a checks-and balances format. This team may consist of family members, financial professionals, and trusted friends. The designations should be in writing – as part of power-of-attorney documents, or similar authorizations used by financial institutions.

As you get older, make it simpler.

Scientists who study cognitive decline identify two different types of intelligence – fluid intelligence (the ability to learn and process information quickly) and crystallized intelligence (your at-the-ready knowledge of your world). Some studies indicate fluid intelligence declines as early as middle age (45-49), but crystallized intelligence increases until around 65. To a great degree, crystallized intelligence compensates for losses in mental fluidity.

The same researchers determined that “financial literacy declines in later life and investment skills deteriorate sharply around age 70.” We can expect to retain comprehension of financial basics, because they have “crystallized” in our perceptions, but complexity and change may be problematic. A simpler approach promises less confusion and anxiety, and not just for you. Delegating complex financial decisions to someone else puts pressure on them to perform in your stead, a responsibility they may not be qualified for, or want to take on.

Make guarantees part of your program.

One of the attractive features of the “first-generation” retirement model was the (almost) certainty of a lifetime pension and Social Security payments. Although hindsight might argue the returns could have been greater if allocated elsewhere, those monthly checks provided a secure financial foundation for retirement. Regardless of the “shock” one might encounter, and the subsequent costs, these baseline financial items were not affected. Retirees can achieve similar baseline guarantees with insurance vehicles. Annuities can provide a lifetime stream of payments. And life insurance designed to remain in force can minimize or eliminate many of the financial and estate challenges encountered at death. 

Take the Right Steps to Protect Your Retirement Income

Saving for retirement:

It used to be something you could count on your employer to do for you. But not anymore. Thanks to the increasing use of 401(k) and other types of contributory retirement plans over the past 30 years, the percentage of private-sector workers who qualify for the guaranteed retirement income provided by an employer-sponsored pension plan has dropped dramatically.

According to the Bureau of Labor Statistics, in 2011, only 20 percent of private-sector workers were offered a traditional pension plan by their employer. 1 Rather, a far greater percentage of workers (58%) had access to a 401(k) or other similar type of retirement plan.1 Unfortunately, 401(k) plans shift the burden of saving for retirement from the employer to the employee. Furthermore, the money invested in a 401(k) is not ordinarily guaranteed – meaning that the investment risk also falls on the employee’s shoulders. 

Taking “Stock” of Your Retirement Investments 

One of the most popular types of investment choices for those saving for retirement is a stock fund. During the 1980s and 1990s, selecting this type of investment option did not pose major problems for most retirement investors. That’s because the stock market was generally increasing in value, meaning most workers were accustomed to seeing their retirement account balances increase – due to both their ongoing contributions, and their account’s investment earnings. 

But things started to change in the early 2000’s, when the stock market started to experience a great deal of volatility. Most recently, during the Great Recession (2007-2009), many retirement investors – including those who were approaching retirement – experienced dramatic drops in the value of their 401(k) plan accounts, due to major losses in the stock market. 

Keep in mind… 

Most financial professionals believe that investors planning for retirement typically need the growth potential of stocks (often referred to as “equities”) to help them accumulate assets potentially at a greater rate – but of course, there’s a greater risk with stocks than with many other types of investments. 

Why Stock Market Volatility Can Cause Problems for Retirees 

Even if you have accumulated substantial assets in your retirement account, when you begin withdrawing money during retirement, you may encounter problems if your withdrawals are occurring during a time when the stock market is generally losing value. This is because the combination of your withdrawals and investment volatility – which both cause your account value to drop – along with inflation, which requires you to spend more on goods and services, can put you at risk that your account could run out of money during your retirement lifetime. 

Annuities: One Approach That May Help 

If you are striving for a financially secure retirement, an annuity can play an important role in your retirement planning strategy. An annuity is a long-term financial product for retirement purposes. Some annuities allow you to accumulate tax-deferred savings (during the accumulation period) or period a fixed rate of return and then during the annuity payout period, provides you with the option to start receiving guaranteed regular payments year after year for the rest of your life or for a specific period of time. Other annuities can provide immediate annuity payments to you either for a set period of time or for the rest of your life. 

Having a guaranteed source of lifetime income may give you the confidence and ability to enjoy retirement the way that it should be enjoyed — doing the things you love without the worry of outliving your money. So, be sure to speak with your financial professional about the role an annuity can play in giving you greater financial security in retirement. 

1 Brandon, Emily. “The Growing Challenge of Funding Retirement,” U.S. News & World Report, February 1, 2012. Web. February 10, 2012. http://money.usnews.com/money/retirement/articles/2012/02/01/the-growing-challenge-of-funding-retirement 

Prepared by ACTA Financial, LLC (ACTA). The information contained in this article is for general, informational purposes only. ACTA, its subsidiaries, agents or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.

Are You Ready For Your Review?

Over the last few years, life insurance is one thing that has actually gotten CHEAPER and BETTER. Changes in interest rates, mortality rates and the regulatory environment make today’s products much different than they were even a few years ago. However, many people haven’t taken the time to review what they own.

Ask yourself. Do you...

• Have what you need?
• Have what you think you have?
• Have the lowest cost, or highest performing product available to you?

Consider an analysis of your current coverage:

• Do you currently have the appropriate amount and type?
• Whether you need more or less, is there anything better available?

There are many options in the market today that feature longer guarantees^*, more flexible premiums, and additional features and benefits that were unheard of until recently.

Please call me to schedule a time to review your coverage and make sure it’s a custom fit, just for you!


*Guarantees are based on the claims paying ability of the issuing insurance carrier.

Mapping Out Your Retirement Plan

All Americans look forward to a comfortable and healthy retirement. Lately, the unpredictability of the stock market and recent vacillating economy may have impacted our time frame for retirement or possibly even stopped it all together. Kiplinger published an article titled “5 Steps to a Secure Retirement.” In this article they highlight 5 key steps to focus on as you enter retirement. Step 1: DO A REALITY CHECK Step 2: PLAY CATCH-UP Step 3: WORK LONGER Step 4: CREATE RETIREMENT INCOME Step 5: DELAY SOCIAL SECURITY Depending on your situation, not all of these steps may apply to you, however, almost everyone can benefit from learning more about one of these steps. Call me today to set up a time where we can sit down and help map out the successful retirement you have been dreaming of.

Are your investments safe?

Many retirees have turned to bonds to create an income stream during retirement. Bonds have historically been considered a safe asset; however, over the last several years, we have seen many large companies file for bankruptcy, potentially leaving their bond-holders floating in the wind. While the default risk is what most investors are concerned with, interest rate risk can be just as big of an issue, especially in this low interest rate environment. Inflation is one of the primary factors causing interest rate risk. For example, if you buy a bond in today’s marketplace, with a low interest rate environment, you can only receive a low interest rate on the bond you purchase. If interest rates rise and companies start offering bonds at higher rates, you have two choices: You either hold onto your existing bond and continue to earn a low interest rate or you sell it. Or, If you sell it, the next buyer will give you less value for your bond because they could buy a new bond today at a higher interest rate. U.S. News posted an article on this topic titled “How to Lose Money Investing in Bonds.” Read this article and give me a call. There may be a better option to give you more retirement income with less risk.

Social Security has changed!

As you may have heard, the Bipartisan Budget Act of 2015 made dramatic changes to several well-known Social Security claiming strategies. The two main changes were to the"restricted application" for spousal benefits and the “file and suspend” strategy. These strategies were used to maximize the monthly income that Social Security provides, helping many retirees to retire comfortably and avoid a drop in quality of life in retirement. With these solutions now being removed, Americans will have to find other means of income to supplement a full retirement. This is why Thrive Financial Services went into business years ago, To educate and guide people through the twists and turns on the road to their retirement.

How Does This Affect You?

What Can You Do? Hundreds of thousands of people will be affected by these changes brought on by The Bipartisan Budget Act of 2015 . Thrive Financial has been helping families by providing solutions to life's toughest financial obstacles. If you have questions about the many changes being made to Social Security and other areas of your retirement, Please call us for a complimentary consultation and a free educational conversation. To schedule a consultation with Thrive, Please call our Client Relationship Manager, Matt Olecki  (800) 516-5861 (ext. 104), Matt can help you find a time that works best. The Bipartisan Budget Act of 2015 has reduced options for many Americans, along with many other changes. Please, if this affects you, give us a call today. If this does NOT affect you, please forward this to someone who could benefit from the knowing about these recent changes.

The Hidden Costs of Social Security

Due to recent budget legislation that removed two advanced filing strategies used by retirees, Social Security has, once again, been in the headlines.

A natural reaction to this news would be to feel as if something has been taken away from you. But, the truth is, you have actually been given a reminder of just how important it is for you to review your Social Security benefits to ensure two things:

• Are you getting the maximum benefit amount that is available to you?
• Are you keeping as much of your benefit as possible?

Taxation of benefits, or reductions due to pension benefits or earned income, could have a huge impact on your retirement lifestyle.

Call me at 484-206-4200 to request your personalized Social Security Report that will tell you exactly what you need to know about your options. Even if I have provided you with your report previously, the legislation changes may impact the outcome of that report!