Will you outlive your money?

Will you outlive your money?

Before you retire, take the time to figure out just how much money you'll need for retirement. One of the biggest concerns for retirees is whether their retirement savings will last the rest of their lives-- will they run out of money? Social Security is not the guaranteed source of retirement income it once was, and people generally don't want to depend on public assistance or their children during their retirement years. Whether you might run out of money hinges upon several factors; how much money you've saved, how long you need your savings to last, and how quickly you spend your money, to name a few. You'll be better off if you can tackle these issues before retirement by maximizing your retirement nest egg. But, if you are entering retirement and you still have concerns about making your savings last, there are several steps you can take even at this late date. The following are tips and ideas to help make sure you don't outlive your money.

Tips to help make your savings last longer

You may be able to stretch your retirement savings by adjusting your spending habits. You might be able to get by with only minor changes to your spending habits, but if your retirement savings are far below your projected needs, drastic changes may be necessary. Saving even a little money can really add up if you do it consistently and earn a reasonable rate of return.

Make major changes to your spending patterns

If you have major concerns about running out of money, you may need to change your spending patterns drastically in order to make your savings last. The following are some suggested changes you may choose to implement:

•      Consolidate any outstanding loans to reduce your interest rate or monthly payment. Consider using home equity financing for this purpose.
•          If your home mortgage is paid in full, weigh the pros and cons of a reverse mortgage to increase your cash flow.
•           Reduce your housing expenses by moving to a less expensive home or apartment. • If you are still paying off your home mortgage, consider refinancing your mortgage if interest rates have dropped since you took the loan.
•           Sell your second car, especially if it is only used occasionally.
•           Shop around for less expensive insurance. You'd be amazed how much you can save in a year (and even more over a period of years) by switching to insurance policies that have lower premiums, but that still provide the coverage you need. Life and health insurance are the two areas where you probably stand to save the most, since premiums can go up dramatically with age and declining health. Consult your insurance professional.
•          Have your child enroll in or transfer to a less expensive college (a state university as opposed to a private one, for example). This can be a particularly good idea if the cheaper college has a strong reputation and can provide a quality education. You could save significantly over the course of just two or three years.

Make minor changes to your spending patterns

Minor changes can also make a difference. You'd be surprised how quickly your savings add up when you implement a written budget and make several small changes to your spending patterns. If you have only minor concerns about making your retirement savings last, small changes to your spending habits may be enough to correct this problem. The following are several ideas you might consider when adjusting your spending patterns:

• Buy only the auto and homeowners insurance you really need. For example, consider canceling collision insurance on an older vehicle and self-insure instead. This may not save you a bundle, but every little bit helps. Of course, if you do have an accident, the amount you saved on your premium could be wiped out very quickly.         
• Shop for the best interest rate whenever you need a loan.
• Switch to a lower interest credit card. Transfer your balances from higher interest cards and then cancel the old accounts.
• Eat dinner at home, and carry "brown-bag" lunches instead of eating out.
• Consider buying a well-maintained used car instead of a new car.
• Subscribe to the magazines and newspapers you read instead of paying full price at the newsstand.
• Where possible, cut down on utility costs and other household expenses.
• Get books and movies from your local library instead of buying or renting them.
• Plan your expenditures and avoid impulse buying.

Manage IRA distributions carefully

If you're trying to stretch your savings, you'll want to withdraw money from your IRA as slowly as possible. Not only will this conserve the principal balance, but it will also give your IRA funds the opportunity to continue growing tax deferred during your retirement years. However, bear in mind that you must start taking required minimum distributions (RMDs) from traditional IRAs (but not Roth IRAs) after age 70½.

Use caution when spending down your investment principal

Don't assume you'll be able to live on the earnings from your investment portfolio and your retirement account for the rest of your life. At some point, you will probably have to start drawing on the principal. You'll want to be careful not to spend too much too soon. This can be a great temptation particularly early in your retirement, because the tendency is to travel extensively and buy the things you couldn't afford during your working years. A good guideline is to make sure you don't spend more than 5 percent of your principal during the first five years of retirement. If you whittle away your principal too quickly, you won't be able to earn enough on the remaining principal to carry you through the later years.

Portfolio review

Your investment portfolio will likely be one of your major sources of retirement income. As such, it is important to make sure that your level of risk, your choice of investment vehicles, and your asset allocation are appropriate considering your long-term objectives. While you don't want to lose your investment principal, you also don't want to lose out to inflation. A review of your investment portfolio is essential in determining whether your money will last.

Continue to invest for growth

Traditional wisdom holds that retirees should value the safety of their principal above all else. For this reason, some people totally shift their investment portfolio to fixed-income investments, such as bonds and money market accounts, as they approach retirement. The problem with this approach is that it completely ignores the effects of inflation. You will actually lose money if the return on your investments does not keep up with inflation. The allocation of your portfolio should generally become progressively more conservative as you grow older, but it is wise to consider maintaining at least a portion of your portfolio in growth investments. Many financial professionals recommend that you follow this simple rule of thumb: The percentage of stocks or stock mutual funds in your portfolio should equal approximately 100 percent minus your age. So, for example, at age 60 your portfolio should contain 40 percent stocks and stock funds (100% - 60% = 40%). Obviously, you should adjust this rule according to your risk tolerance and other personal factors.

Basic rules of investment still apply during retirement

Although you will undoubtedly make changes to your investment portfolio as you reach retirement age, you should still bear in mind the basic rules of investing. Diversification and asset allocation remain important as you make the transition from accumulation to utilization.

Laddering investments

Laddering investments is a method of controlling your investments to avoid having them all mature at the same time. The principle of laddering is simple: Stagger the maturity dates of the associated deposits or investments so that they mature in different time periods. You can apply laddering to any type of deposit, loan, or security having a specified maturity date, such as bonds.

Laddering can reduce interest rate risk

Interest rates rise and fall in response to many factors. Consequently, they are largely unpredictable. Whether you apply laddering to a cash reserve or use it in portfolio investing, minimizing interest rate risk is one of its most important benefits. Laddering investments minimizes interest rate risk because you will be investing at various times and under various interest rates. Thus, you are unlikely to be consistently locked into lower-than-market interest rates.

A single large deposit or investment that matures during an interest rate slump will leave you with two undesirable choices regarding reinvestment. You can hold the money in a low-interest savings account until rates improve or roll it over at the now low rate. However, a later rebound of interest rates can catch you locked into the prior low rate for an extended period. Breaking your investment into smaller pieces and laddering maturity dates allows you to avoid this situation.

How do you do it?

When you first begin your laddering strategy, you will need to acquire several term deposits (e.g., certificates of deposit) or securities with specified maturity dates. Initially, your individual investments should have terms of varying lengths, and you should intend to hold them until maturity. This will set up your staggered maturity dates. For example, you might purchase three separate certificates of deposit--one with a three-month term, one with a six-month term, and one with a nine-month term. When you reinvest as your CDs mature, your new investments should each be of the same length to perpetuate the staggering, or laddering, of maturity dates. Keep your laddering strategy intact by promptly re-depositing each maturing investment for a new term.

Long-term care insurance

A catastrophic injury or debilitating disease that requires you to enter a nursing home can destroy your best-laid financial plans. You will need to decide whether to take out a long-term care insurance policy that may cover nursing home care, home health care, adult day care, respite care, and residential care. If you decide to purchase such a policy, you'll need to choose the best time to do so. Typically, unless you have a chronic condition that makes you more likely to require long-term care, there is generally no reason to begin thinking about this issue before age 50. Usually, there is no reason to purchase such a policy before age 60.

Won't Medicare pay for any long-term care expenses you might incur?

Contrary to popular belief, Medicare will not pay for most long-term care expenses, and neither will any health insurance you may have through your employer. Medicare benefits are only available if you enter a nursing home within 30 days after a hospital stay of three days or more. Even then, Medicare typically will only provide full coverage for 20 days of skilled nursing home care in Medicare-approved facilities. After 20 days, Medicare will cover part of the cost of care. You will pay $148 per day in 2013, and Medicare will cover the rest through day 100. No further coverage is available after 100 days.

What about Medicaid?

Medicaid is sponsored jointly by federal and state governments. Each state's Medicaid program is required to provide certain minimum medical benefits to qualified persons, including inpatient hospital services, nursing home care, and physicians' services. States also have the option of providing additional services. All states require proof of financial need. However, each state has different rules regarding benefits and eligibility, so it is essential that you understand your state's Medicaid program before you decide that Medicaid will provide adequate long-term care coverage.

How much does long-term care insurance cost?

Unfortunately, long-term care insurance can be quite expensive. If you begin coverage when you are younger, premiums will be more reasonable, but you will likely be paying for the insurance for a much longer period of time. The cost of LTCI will vary depending on your age, the benefits, and the insurer you choose.

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.