401(k) Plans Estate Planning IRA Life Insurance Retirement Asset Planning

Avoid Unintended Consequences for You and Your Family

As defined by Wikipedia, “in the social sciences, unintended consequences (sometimes unanticipated consequences or unforeseen consequences) are outcomes that are not the ones foreseen and intended by a purposeful action.” I don’t know if Robert Merton, founder of the sociology of science, had it in mind when he developed and popularized the term in the twentieth century, however, it’s clearly applicable to estate planning.

A monumental moment in many individuals’ lives occurs when they finally meet with, and engage the services of, an estate planning attorney. This isn’t an easy thing to do as evidenced by the fact that more than half of U.S. adults don’t have a will.

For those who take the plunge, it’s important that this is followed up with periodic reviews with an estate planning attorney and financial professionals to discuss potential changes to an estate plan whenever there are any major life-changing events. These include birth, death, marriage, divorce, career changes, and major health events.

Wills and Living Trusts are Part of an Estate Plan

Without discussing the purpose of wills, living trusts, and other estate planning documents, suffice it to say that while the beneficiaries named in these documents generally control the disposition of assets at the time of death, there are several situations where they don’t apply. These include participants in retirement plans and owners of life insurance and annuities.

Whether you’re a participant in a retirement plan or own a life insurance policy or annuity contract, a beneficiary form is used to name primary and contingent beneficiaries. While they may be identical, the beneficiaries and percentages specified on beneficiary forms supersede those in wills, living trusts, and other estate planning documents. Copies of current beneficiary forms should be retained in an estate planning file that includes your other estate planning documents.

Trust and other non-standard beneficiary designations are often appropriate for estate planning documents and beneficiary forms where there are children who are young, have special needs, struggle with substance abuse problems, or are otherwise not good candidates for inheriting assets outright. Coordination of designations between wills, living trusts, and retirement plan, life insurance, and annuity beneficiary forms in light of the various assets and values to which they apply is essential.

Enter Unintended Consequences

As you can imagine, a fair amount of time and expense is devoted to litigating beneficiary issues in probate court. This is often associated with unintended consequences related to erroneous or outdated beneficiary designations that surface after death.

Unintended consequences are possible when contingent beneficiaries aren’t named, are improperly named, or when a primary or contingent beneficiary has passed and a beneficiary form hasn’t been updated with a replacement beneficiary. Sometimes the mistakes can be corrected after death; however, this generally isn’t the case. This post discusses two types of situations that present opportunities for unintended consequences related to beneficiary form designations.

Former Spouse Beneficiary of 401(k) Plan and Life Insurance Policy

One type of unintended consequences scenario can occur when a divorcee dies and never changed the beneficiary designation of a retirement plan, life insurance policy, or annuity contract from his/her former spouse to another beneficiary. There have been two Supreme Court cases in the last eleven years that have addressed this situation.

The first case, Kennedy vs. DuPont, which was decided in January, 2009, ruled that the beneficiary, who was a former spouse, was entitled to the 401(k) plan since it is an ERISA-covered plan that’s governed by federal law. Under ERISA, a spouse always receives half the assets of a qualified retirement plan unless he/she has completed a spousal waiver and another person or entity is listed as a beneficiary.

The second case, Sveen v. Melin, which was decided in June, 2018, upheld Minnesota’s revocation upon divorce law which has been adopted in twenty-six states. Under this law, there’s an assumption that a decedent intends to terminate all connections with his/her ex-spouse. In this case, it was decided that the former spouse, who was the primary beneficiary of a life insurance policy, wasn’t entitled to the proceeds and they were instead payable to the contingent beneficiaries.

Although Case #2 didn’t result in unintended consequences since it was determined that the former spouse wasn’t entitled to the life insurance proceeds, expensive and prolonged litigation was required in order to obtain this result. Furthermore, litigation was necessary despite the fact that Minnesota has a revocation upon divorce statute.

Estate as Beneficiary of a Retirement Plan

A second type of event related to beneficiary form unintended consequences can arise when it’s determined that an estate is the beneficiary of a retirement plan. This can occur when (a) there’s no beneficiary designation and no surviving spouse or (b) the individual who is named as the primary beneficiary is deceased and there are no named contingent beneficiaries.

Whenever a retirement plan participant dies without an effective beneficiary designation, the terms of the retirement plan or IRA agreement need to be reviewed. Qualified retirement plans such as 401(k) plans are subject to ERISA. The default beneficiary for these types of plans is generally the employee’s surviving spouse if applicable or the employee’s estate. Most IRA’s also provide that benefits are payable to one’s estate whenever there’s no surviving spouse and no effective beneficiary designation.

If an individual is the beneficiary of a retirement plan, he/she is considered to be a “designated beneficiary.” A designated beneficiary is entitled to defer distribution of inherited retirement benefits by withdrawing them gradually over his/her life expectancy under IRS’ minimum distribution rules.

An estate cannot be a designated beneficiary since it isn’t an individual. As such, it cannot take advantage of the life expectancy minimum distribution rules. Instead, there are two rules that apply in this situation, both of which are less favorable. This often results in unintended consequences when there are non-spouse beneficiaries and sizable retirement plan assets. The two rules are as follows:

  • If the decedent died before his/her required minimum distribution date, all benefits must be distributed by the end of the year that contains the fifth anniversary of the date of death (the five-year rule), or
  • If the decedent died on or after his required minimum distribution date, all benefits must be distributed in annual installments over his/her life expectancy had he/she not died.

The five-year rule is typically reduced to an immediate lump-sum payment in the case of 401(k) plans since installment payouts generally aren’t offered by these types of plans. As such, 100% of the value of the plan is subject to taxation in the year that it’s distributed.

In addition to being able to take advantage of the five-year rule, an executor of an estate can potentially set up inherited IRAs in the names of children as successor beneficiaries of a decedent if the IRA provider permits this type of transfer. Each child can then take distributions from the beneficiary IRA over his/her expected life expectancy.

Periodically Review Beneficiary Forms

An estate plan needs to be reviewed periodically during an individual’s lifetime to ensure that distributions will be made to intended beneficiaries upon death. A crucial part of the review is current retirement plan, life insurance, and annuity beneficiary forms since distribution of these types of assets isn’t controlled by the terms of wills, living trusts, and other estate planning documents.

As discussed, erroneous, incomplete, or outdated beneficiary designations can result in distribution of retirement plan assets, life insurance policies, and annuity contracts to unintended beneficiaries, unfavorable income tax consequences, and expensive and protracted litigation in some cases.

Retirement Asset Planning Retirement Income Planning

Why Aren’t You Retired?

Why aren’t you retired? This is the question that one of my client’s long-time friends posed to him recently.

This is a reasonable query given my client’s financial situation and age, i.e., mid-60s. Though not his true name, I will refer to him as “Lou.”

I have had the pleasure of working with Lou as his financial advisor for many years. In addition to preparing Lou’s income tax returns, I have created, implemented, and manage a comprehensive retirement income plan for him.

Delayed Retirement Becoming More Common

Although many people still retire at the traditional age of 65, more are choosing to delay retirement. Average retirement ages have risen among women and men since the early 1990s according to the Brookings Institution Later Retirement, Inequality in Old Age, and the Growing Gap in Longevity Between Rich and Poor research.

Older males’ participation in the work force has increased by nearly one-third, going from a low of 26 percent in 1995 to 35 percent in 2014. Older women have experienced a similar increase, from 15 percent in 1995 to 25 percent in 2014. In addition, many older workers have moved from part-time to full-time status according to the study.

Financial Incentives for Working Longer

There are various financial incentives for working longer. In addition to continuing to receive a paycheck, ongoing employment enables further 401(k) and other savings, continuation of employee benefits, and an opportunity to increase monthly Social Security and income annuity benefits by delaying one’s start date.

Retirement and nonretirement distributions can also be delayed, resulting in additional portfolio growth opportunities. This can be important in the event that you retire during a prolonged stock market downturn.

Whether your financial resources are inadequate for meeting your retirement needs or you’re in Lou’s situation, working longer can provide you with a greater financial buffer in the event that you live a long life.

Nonfinancial Factors at Play

Given the fact that inadequate financial resources aren’t an issue, what’s holding Lou back from pulling the retirement trigger? I believe that there are three important interrelated nonfinancial factors at play for Lou and many individuals that haven’t received a lot of attention as they pertain to retirement planning:  routine, camaraderie, and discipline.


Employment provides us with a daily routine. The importance of having structure in our life cannot be underestimated. In the working world, it gives us a set of tasks that we must perform each and every day of the working week.

Routine instills good habits in our life and helps us break bad ones. It enables us to prioritize our day, get the most important tasks done, and procrastinate less. Following a routine builds self confidence and helps reduce stress.


If you were ever in the military or on a professional sports team, you understand how difficult it is to duplicate the strong bonds, sense of purpose, and teamwork you experienced. Whether you work in a large organization or you’re working by yourself serving clients, camaraderie provides you with a sense of well being.

In a Gallup poll cited in Christine Riordan’s Harvard Business Review article, We All Need Friends at Work, it was found that close work friendships boost employee satisfaction by 50% and people with a best friend at work are seven times more likely to engage fully in their work. Per Ms. Riordan, friends at work form a strong social support network for each other, both personally and professionally.


While routine and camaraderie are natural benefits of interacting with others at work, this isn’t the case when it comes to discipline. Discipline is a self-imposed state of mind that’s a way of life. It applies to one’s personal and work life. Discipline is responsible for many people’s success. It’s difficult to achieve success without it.

Jocko Willink wrote about this subject in his highly-regarded book, Discipline Equals Freedom. He describes the mental and physical disciplines that he imposed upon himself to become commander of the most highly decorated special operations SEAL team unit in Iraq which he continues to practice every day.

Is Routine, Camaraderie, and Discipline Part of Your Retirement Plan?

Making a successful transition from the workplace to retirement requires a heavy dose of nonfinancial planning. You can have the best financial plan; however, if you haven’t prepared for how you will replace your daily routine and camaraderie at work, it will be difficult for you to make the adjustment. Discipline will make the process easier and will increase your chances for success.

It’s natural to fall into the trap of linking your inherent value as a person, or self-worth, to your work identity. When planning your retirement, you need to do a lot of soul searching to figure out who you really are, what you want to accomplish in your remaining days, and what you want your legacy to be.

Once you do this, it will be easier to build a daily routine, camaraderie, and discipline tied to your newly or rediscovered identity. This will enable you to retire with confidence, excitement, a sense of purpose, and a new lease on life.

Retirement Asset Planning Retirement Income Planning

Do You Have Enough After-Tax Income to Retire?

I recently did a Google search, “How much do I need to retire?” This is obviously a popular query since it returned 19,600,000 results.

After scrolling past the ads, I began clicking on the responses. Excluding retirement calculators, here’s a summary of the top five answers:

  • Yahoo Answers – Best Answer: $750,000
  • Fidelity: Save at least 1x your income at 30, 3x at 40, 7x at 55, 10x at 67.
  • Forbes: Use the 4 percent rule of thumb.
  • The Motley Fool: Use either 80% of income at the time of retirement or the 4 percent rule of thumb.
  • U.S. News: Multiple the difference between your projected annual retirement expenses and income by 25.

While all of the articles presented simplistic rules of thumb, U.S. News’ approach of calculating a projected annual income gap came closest to the starting point for determining how much you need to retire.

There’s No Magic Number

“How much do I need to retire?” is really asking “What is the total amount of investment assets that I need to retire?” This, in turn, implies that there’s a magic number, and once you achieve it, your retirement is set.

In addition to eliciting a simplistic rule of thumb response, this question ignores a number of factors that are crucial for planning a financially successful retirement. Ten of the more important ones are as follows:

  • Projected income sources, amounts, and taxation of different types of income
  • Types of investment assets and taxation of same
  • Timing of retirement relative to sequence of returns
  • Potential sales of real estate that can be used for retirement
  • Potential use of reverse mortgages to generate tax-free retirement income
  • Absence or presence of long-term care insurance
  • Life insurance for surviving spouses
  • Longevity
  • Inflation
  • Large one-time expenses that occur throughout retirement

Start With the Right Question

When planning for retirement, you need to start with the right question. The key question that everyone who is planning for retirement should be asking is, “How much annual after-tax income do I need to retire?”

This question shifts the focus of retirement planning from asset accumulation to paying for expenses. It recognizes that there are three key elements that need to be addressed:

  1. Income is the starting point for planning.
  2. After-tax income pays for expenses.
  3. Annual after-tax income must be calculated to match changing expense needs.

Expense needs generally vary in different stages of retirement in response to physical and mental changes associated with the aging process. Travel is typically a high priority in the first several years of retirement. Uninsured extended care expenses are often a concern of individuals in the latter stage. One-time expenses for things like new cars or home improvements will also result in spikes in expenses from time to time.

No Rule-of-Thumb Answers to the Key Retirement Planning Question

Unlike “How much do I need to retire?,” “How much annual after-tax income do I need to retire?” cannot be answered with a simple rule of thumb. It challenges you instead to do three things:

  • Envision your retired self and the various expenses you’re likely to incur throughout different stages of retirement.
  • Design a plan for producing the required after-tax income to pay for your projected expenses.
  • Monitor and make changes to your plan as you approach retirement and throughout retirement in response to changes in your financial situation.

This approach, unlike traditional rules of thumb such as the 4% rule, requires the preparation and ongoing modification of a retirement income plan. Furthermore, its success is dependent upon consideration of the ten factors cited earlier that are crucial for planning a financially successful retirement.

Ignore Rules of Thumb and Start Planning

Retirement planning is by far the most complex type of financial planning. This begins with designing a plan that answers the question, “How much annual after-tax income do I need to retire?”

Rules of thumb are too simplistic since they fail to address individual planning needs. You only get one shot at retirement. You need to be committed to planning for your retirement if you want it to be successful.

Investment Planning Retirement Asset Planning Retirement Income Planning

Volatility ETFs are Too Volatile

Looking for an investment to protect you against sharp market downturns? How about these seven securities that have been around for the last five years?:

Symbol                      Name        YTD      5 Years
   VXX iPath S&P 500 VIX Short-   -53.27%   -98.36%
Term Futures ETN
   VIXY ProShares VIX Short-Term   -53.40%   -98.36%
Futures ETF
   VIXM ProShares VIX Mid-Term   -37.46%   -86.96%
Futures ETF
   VXZ iPath S&P 500 VIX Mid-   -37.27%   -86.80%
Term Futures ETN
   VIIX Velocity Shares Daily Long   -53.34%   -98.36%
VIX Short-Term ETN
   XVZ iPath S&P 500 Dynamic   -18.02%   -59.95%
   VIIZ VelocityShares Daily Long   -37.24%   -86.86%
VIX Medium-Term ETN

The year-to-date (YTD) and 5-year returns are as of August 25th for the seven exchange traded funds (ETFs) with a five-year track record that are included in the 12 ETFS that comprise the Volatility ETF database category on  The first, VXX, is by far the most popular, with total assets of $1.4 billion and average volume of 20 million shares. VIXY, the second most traded, has total assets of $197 million and average volume of 1.2 million shares. Both funds are two of the three worst performers in the Volatility ETF database year-to-date and for the last five years.

What is a Volatility ETF?

A volatility ETF is an alternative, or niche, exchange traded fund, or ETF. An ETF, according to Investopedia, is a “marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange.” Per Investopedia, “ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.”

As stated in, “Volatility ETFs offer exposure to volatility in one form or another. Often referred to as ‘fear’ indicators, these funds tend to move in the opposite direction of the broad market. Thus, these funds are used primarily by traders looking to capitalize on sharp market downturns.”

There are currently 22 U.S. volatility ETFs. The first two, Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX) and iPath S&P 500 VIX Mid-Term Futures ETN (VXZ), debuted on January 29, 2009, shortly before the March 6, 2009 bottom of the 18-month bear market that began in October, 2007. It’s ironic that there has been only one loss year, 2008, since volatility ETFs were introduced.

Seemingly Appealing Strategy

Investing a portion of one’s portfolio in a volatility ETF would seem to be an appealing strategy given the historical performance of the stock market over the last eight years. Beginning in 2009 when the S&P 500 Index increased 26.5%, there have been eight consecutive years of positive returns, with six of them double-digit between 11.9% and 32.4%. 2017 continues to fare well with the index up 10.6% year-to-date. It has increased 266% since March 6, 2009 as of August 25th.

Barring a significant correction over the next four months, why wouldn’t you purchase a volatility ETF knowing that we’re knocking on the door of nine consecutive years of positive returns? This would seem to be a no-brainer given the fact that negative stock market returns occur once every four years on average and we’ve seen only one loss (2008) in the last 14 years.

Market Timing

Volatility ETFs lose their appeal for most investors when you realize that they’re a market timing play that attempts to predict future market price movements. An investment in one of these ETFs is based on a prediction of a sharp market downturn. Like all market timing strategies, however, achieving a long-term return that exceeds the return you would have realized if you simply did nothing is atypical. The reason for this is that you need to be right on two bets, often in a relatively short period of time.

In order to be successful, volatility ETFs must be purchased before a sudden market downturn and sold before a significant market rebound. Even if the timing of your purchase is correct, which often isn’t the case, you need to ride out the bear market for its duration and sell your volatility ETF before the market begins its recovery.

You can see how easy it is to err on the purchase side by looking at the annual and cumulative returns of the individual ETFs in the Volatility category over the last five years. Beginning in 2013, after the S&P 500 Index experienced returns of 26.5%, 15.1%, 2.1%, and 16.0% for the previous four years, investors naturally questioned short-term sustainability of positive stock market returns.

Despite the fact that volatility ETFs fared poorly during this period, they were being touted as protection against a likely downturn. Not only didn’t this occur, the S&P 500 Index continued to experience positive returns for the next four years:  32.4%, 13.7%, 1.4%, and 11.9%.

A Risky Retirement Planning Strategy

The excessive downside risk associated with volatility ETFs renders them unsuitable as a prudent investment strategy for most investors. While seemingly appealing when evaluated against the backdrop of the bull market that has raged since 2009, their market timing identity makes them a poor choice for anyone who is planning for retirement or who is already retired. Volatility ETFs are simply too volatile.

401(k) Plans Retirement Asset Planning Retirement Income Planning

6 Deficiencies of 401(k) Plans

If you work for a company that has 25 or more employees, chances are that you have a comprehensive employee benefits package. This typically includes health, term life, and disability insurance, with 50% or more of the cost paid for by your employer. Once you enroll in these benefits, unless there are personal or family changes, there’s generally no ongoing work required on your part to maintain them.

There’s one benefit that’s included in most private company benefit packages today for which this isn’t the case. 401(k) plans, which were introduced in the Revenue Act of 1978, dramatically changed the retirement planning landscape. Employer-provided lifetime monthly pension payments that were previously provided by defined benefit pension plans have virtually been replaced by these employee savings plans.

When compared to a defined benefit pension plan, a 401(k) plan is a much less desirable employee benefit. There are six deficiencies every plan participant needs to address in order to use them successfully as a retirement planning tool.

No Employer-Provided Pension for Employee and Spouse

From an employee perspective, a defined benefit pension plan is straight forward. Depending on years of service and final salary, a plan participant receives a monthly lifetime pension at no cost to the employee. 50% to 100% of the monthly income continues to be paid to a surviving spouse depending upon the income payout option selected.

A 401(k) plan, on the other hand, is an employee savings plan with no employer-provided pension. Traditional 401(k) plans provide for pre-tax employee contributions and tax-deferred savings. Contributions to Roth 401(k) plans, when offered, are made after-tax, however, they accumulate tax-free.

Retirement Savings Responsibility Transferred From Employer to Employee

100% of the cost of funding a defined benefit pension plan, including administration and benefits themselves, is borne by the employer. Other than administration costs and potential matching employer contributions, employees assume the responsibility of making contributions to 401(k) plans. Employer matching contributions, when offered, are typically limited to a percentage of an employee’s contributions with a cap on qualifying employee contribution percentages.

Limited Opportunities for Converting Plan Savings to Lifetime Income

A 401(k) plan offers diversified savings vehicles to accumulate funds for retirement. This typically includes a choice of mutual funds from the cash, fixed income, and equity investment asset classes. Given the fact that the focus is on accumulation, there are generally limited options, if any, for converting savings into predictable lifetime income streams.

Often Falls Short in Providing Adequate Retirement Income

Employees can count on receiving a predictable monthly lifetime income based on years of service and final salary with a defined benefit plan. Given the fact that this can be as much as 60% of one’s final salary, the combination of a defined benefit pension and Social Security often satisfies the majority of a retiree’s financial needs.

401(k) plans, on the other hand, are notorious for not meeting lifetime retirement income planning needs. Beginning with the fact that they’re simply a savings plan, they aren’t designed to provide sustainable lifetime retirement income. In addition, the ability to accumulate sufficient savings to generate a meaningful income stream is limited by contribution limits, employee and employer contribution amounts, and investment performance.

Requires Ongoing Employee Involvement

Unlike a defined benefit pension plan which requires virtually no employee involvement until it’s time to choose a monthly payout option, a 401(k) plan is a different story. Plan participants are faced with two, and sometimes three, decisions when they enroll in a 401(k) plan:

  • Percentage of salary or fixed dollar amount they will contribute to the plan
  • Allocation of contributions among available investment choices
  • Allocation of contributions between traditional vs. Roth option assuming the latter is offered

The foregoing decisions need to be revisited whenever there are changes in salary, personal tax situation, and investment choices. In addition, participants need to decide if they will leave their 401(k) plan intact, transfer it to a new employer’s 401(k) plan, or roll it over into a traditional IRA if employment is terminated.

Needs to be Coordinated with a Retirement Income Plan

A defined benefit plan is designed to provide a known sustainable lifetime income stream. As previously mentioned, when supplemented by Social Security, the majority of one’s retirement needs can be met with this type of plan.

A 401(k) plan needs to be coordinated with other nonretirement and retirement savings plans to determine the amount of projected after-tax income that will be available to cover projected retirement expenses. Projected annual required minimum distributions from 401(k) plans as well as from all qualified retirement plans must also be considered.


A 401(k) plan can be a great vehicle for accumulating retirement savings. It’s important, however, to be aware that there are six deficiencies compared to traditional defined benefit pension plans that need to be addressed by plan participants when planning for retirement.

The six deficiencies of 401(k) plans transfer the retirement accumulation and retirement income planning responsibilities provided by defined benefit pension plans from employers to employees. 401(k) plans may need to be converted into, and/or supplemented by, sustainable income-producing investments to provide comparable lifetime income streams and reduce investment risk.

Retirement Asset Planning Retirement Income Planning

Read Between the Retirement Survey Headlines

I was recently looking at the results of one of the key word searches that I routinely perform, “retirement survey.” The first two, both of which are headlines of articles in widely-read publications, are as follows:

This was refreshing to see since survey results regarding confidence in one’s ability to comfortably retire tend to be negative for all age groups. The two headlines that I came across claim that both younger and older individuals are optimistic about retirement.

New York Life Survey

According to a recently-released New York Life survey cited in the “Younger Americans” article, 66% of Americans aged 30 to 35 think they will be in better shape for retirement than in previous years. Despite the fact that Millenials have the least amount saved for retirement, the article attributed their optimism to having time on their side.

Per the survey, 46% of Gen Xers are optimistic about retirement, with only 33% of boomers feeling the same way.

Ipsos/USA TODAY Survey

The finding that only 33% of boomers are optimistic about retirement contradicts an Ipsos/USA TODAY survey of 1,250 adults ages 45 – 65 conducted in mid-January that’s cited in the “Older Workers” article. According to the survey, 65%, or double the percentage of boomers in the New York Life survey, are “very or somewhat confident they’ll have enough money to hold them through their golden years.”

The boomers’ optimism prevails despite the fact that, according to the USA Today article, (a) 27% surveyed have no retirement savings or investments and 22% have less than $100,000 and (b) nearly 50% believe they will need at least $500,000 to be comfortable and approximately 25% say they will need at least $1 million.

Misplaced Optimism?

Millenials’ and boomer’s optimism about retirement is fueled by the stock market’s meteoric ascent since March, 2009. The Dow Jones Industrial Average (DJIA) has increased by over 14,000 points, or 220%, in the eight ensuing years. Both groups have been mesmerized by, and have taken for granted, the DJIA’s recent track record. Seven out of the last eight years have seen positive performances of between 5.5% and 26.5%, with the losing year (2015) experiencing a decline of just 2.2%.

While Millenials’ optimism is understandable due to the fact that they have time on their side, I would have hoped that boomers’ retirement outlook would be more cautious. The overheated and overinflated stock market is a potential perfect storm for a repeat of the 2007 – 2009 stock market decline of 52%.

Have boomers forgotten about all of the individuals who were getting ready to retire in 2008 and 2009 who were instead forced to postpone their plans? The scenarios that will eventually play out could be very ugly for many given the group’s widespread lack of adequate savings relative to their expected needs.

I know for a fact that a lot of pre-retiree and retired boomers were spooked by the downturn eight years ago. Many have reallocated a portion of their savings into fixed income annuities. Survey after survey shows that those who have implemented this strategy are more relaxed, knowing that they will receive sustainable lifetime income beginning at a specified age – no matter how the stock market performs.  Perhaps these are the same people who responded to the Ipsos/USA TODAY survey.

Retirement Asset Planning Retirement Income Planning

Sometimes You Don’t Know What You Don’t Know Until It’s Too Late

I recently came across the following comment by a reader of an article in an online publication discussing planning strategies that you can use to help you determine if you’re ready to retire:

These points are fine.

But I’m retired, and I know plenty (of) other retirees. Retirement planning is not all that difficult. Control your spending, and have a plan and budget. Some common sense.

Retirement will work for the majority of us. Don’t over think it.

Jerry’s (not his real name) comment immediately brought to mind the following saying:  “You don’t know what you don’t know.” The next day when I began writing this post, I modified this to read, “Sometimes you don’t know what you don’t know until it’s too late.”

Retirement Planning Is Complex

While I appreciate Jerry’s attempt to simplify retirement planning, the reality is that it’s anything but. Anyone who has planned for retirement or has been retired for ten or more years understands and appreciates this.

Although I could be wrong, it appears that Jerry probably wasn’t retired when the Dow Industrials dropped 7,324 points, or 52%, between October 1, 2007 and March 2, 2009. Many people who thought they could retire didn’t consider the possibility of an extended stock market decline. At a minimum, they were forced to make unanticipated lifestyle changes and, in many cases, seek reentry into a difficult job market.

Controlling spending, budgeting, and having a plan are not simply about common sense. They are lifelong habits that require a lot of discipline. While controlling spending and budgeting are important, they are just part of the recipe for a successful retirement. Planning for the right types and amounts of after-tax, inflation-adjusted income that matches your projected needs is equally important.

Uncertainties Abound

Retirement planning is challenging (which is why I love it!) for professional advisers who specialize in the field. Retirement is a long and winding road with different stages, usually lasting at least 15, and up to 30, or more, years in some cases.

You need to plan for a plethora of uncertainties, most of which are uncontrollable. These include, but aren’t limited to, the following:

  • Potential forced retirement
  • Premature death
  • Long life
  • Extended care
  • Escalating health care costs
  • Income tax erosion
  • Inflation
  • Unknown investment returns
  • Sizable and/or extended stock market declines
  • Unexpected expenses

Planning for these and other uncertainties requires the preparation, implementation, and ongoing maintenance of a comprehensive retirement plan. Multiple what-if scenarios need to be included and analyzed in order to reduce the possibility that you will outlive your assets. The ability to increase cash flow and extend the life of portfolio assets by employing appropriate income tax saving and other financial strategies requires specialized knowledge.

You Cannot Over Think Retirement Planning

Given all of the various uncertainties and complexities, the ability to enjoy a successful retirement hinges on designing, implementing, monitoring, and making ongoing changes to a customized comprehensive plan. What works for one person won’t necessarily work for you.

Experience in and understanding of the interplay of risk management, income tax laws, investment management, cash flow planning, and retirement income planning strategies is essential to the success of most retirement plans. An experienced professional financial adviser who understands your needs and specializes in retirement income planning is invaluable for guiding you through the pre- and post-retirement maze.

There are no Do Overs in Retirement

As a CPA, PFS, CFP®, RICP®, CLTC with 30+ years of income tax and financial planning experience working with clients and who has been specializing in, and writing about, retirement income planning for the last eight years, I know that retirement doesn’t simply “work.” Unless you’re Phil Collins and have the wherewithal to unretire, you have one shot at getting it right.

Not a week goes by when I don’t come across several articles discussing the inability of individuals to retire in the lifestyle to which they were accustomed as a result of the lack of proper and timely financial preparation. Sometimes you don’t know what you don’t know until it’s too late.

Retirement Asset Planning Retirement Income Planning

Get It Right the First Time – You Probably Won’t Be Able to Unretire Like Phil Collins

Phil Collins, best known as the drummer and lead singer of Genesis after Peter Gabriel left the band in 1975, recently announced that his comeback tour, Not Dead Yet, will take place next summer. This follows the pop icon’s announcement a year ago in a Rolling Stone article that he was no longer retired after officially retiring in 2011.

Phil Collins’ two young sons were his primary motivation for retreating from life on the road, moving to Switzerland full-time about ten years ago, and eventually retiring when they were 10 and 6. Phil’s retirement vision was derailed, however, and he was devastated, when his wife left him in 2008 and took the boys to Miami.

Plan Early and Keep on Planning

Despite the fact that Phil Collins’ most recent marital split was his third and occurred when he was retired, he continues to thrive financially. This is evidenced by Phil’s June, 2015 purchase of Jennifer Lopez’s former Miami home for $33 million and his estimated net worth of $250 million.

Most of us will never accumulate 1% of Phil Collins’ net worth, let alone enjoy his financial freedom.  Unlike Phil, the ability to retire comfortably generally requires the creation, implementation, and maintenance of an ongoing retirement income plan. This takes a lot of discipline which many of us don’t have.

To increase the likelihood of success, an initial comprehensive plan should be committed to writing at least 20 years before your targeted retirement date. The plan needs to be constantly tweaked to accommodate personal, financial, and other changes. The changes include, but aren’t limited to, job and career, marriage, children, and health.

Planning doesn’t stop when you reach the finish line, i.e., you retire. Life’s changes don’t pause and neither should your strategizing. Health issues, the timing, scope, and expense of which are difficult to anticipate, become more likely as you progress further into retirement. The possibility of living a long life is a reminder of the importance of the need for ongoing planning.

Plan for Various Possibilities

Although he had two failed marriages in the rear view mirror, Phil Collins experienced a third divorce after he retired. Divorce can be financially challenging when employed, let alone if it occurs in retirement. Unfortunately, with the recent uptick in divorces in later life, it needs to be considered when doing retirement planning.

The older you get, the more you understand the importance of planning for various possibilities, and not just things that you think are likely to happen. If the likely things do occur, they probably won’t do so when you think they will.

A good example is a bear market. Most people don’t plan on a stock market crash coinciding with the beginning of retirement. If this phenomenon, otherwise known as the “sequence of returns,” occurs, it can wreak havoc on your portfolio and your retirement if not properly addressed in your retirement income plan.

You Probably Won’t be Able to Unretire

Phil Collins retired at age 60 with a sizable net worth and royalty income stream before he unretired at 64. After undergoing major back surgery in 2015 to repair dislocated vertebra in his neck that caused nerve damage in his hands, leaving him unable to play the drums, Phil’s popularity hasn’t declined. His performance singing “In the Air Tonight” at the US Open tennis tournament in August was warmly and enthusiastically received.

Whether we retire at age 60, like Phil Collins, or at 70, most of us probably won’t be able to unretire.  The further away we get from a daily work routine, the less employable we become. The opportunity for reentry into the workforce is even less likely for individuals who experience health issues that force them into premature retirement.

Although there are no guarantees that a well thought-out and executed retirement income plan will result in a financially successful retirement, studies show that retirement confidence is increased compared to those who don’t follow a disciplined approach. Per the title of a popular Billy Joel song, “Get it right the first time.” You probably won’t be able to unretire like Phil Collins.

Retirement Asset Planning Retirement Income Planning

Do You Want to RAP or Do You Prefer to RIP?

Retirement planning is unquestionably the most difficult type of goal-oriented financial planning. Most goal-based planning is straight-forward, solving for the amount, and frequency, of payments that need to be made to accumulate a sum of money at a future date using two assumptions: rate of return and inflation rate.

College education planning is a good example of the use of this methodology with a twist. Unlike other planning where the future value will be withdrawn in one lump sum, college costs are generally paid for over a series of four or five years. This complicates the planning since it requires the calculation of the present value of the future annual costs of college at the beginning of college, which in turn becomes the future value that must be accumulated.

Retirement Asset vs. Retirement Income Planning

Retirement planning is a whole other world. For starters, there are two stages of retirement planning, i.e., retirement asset planning (RAP) and retirement income planning (RIP). Until recent years, RAP was the only type of retirement planning and, as such, is what’s considered to be traditional retirement planning. RAP’s focus is the accumulation and “spending down” of assets. Although it’s more complicated, much of the methodology used is similar to other types of goal-oriented financial planning.

While RAP works well in the accumulation stage, it isn’t designed for calculating, and planning for, projected retirement income amounts that need to be available to pay for projected retirement expenses during various stages of retirement with unknown durations. As a result of the uncertainty of traditional RAP as a solution for providing a predictable income stream to match one’s financial needs in retirement, RIP was born.

Retirement Income Planning Issues

In addition to possessing the knowledge and experience of financial planners who specialize in RAP (RAPers?), retirement income planners (RIPers?) require an expanded skill set and associated knowledge to assist their clients with issues that are unique to RIP before and throughout a client’s retirement years. Planning issues extend well beyond asset accumulation and include, but aren’t limited to, the following:

  • Medicare
  • Long-term care
  • Social Security claiming strategies
  • Conversion of assets into sustainable income
  • Income tax minimization
  • Choosing strategies to address gaps in income
  • Retirement plan distribution options
  • Retirement housing decisions
  • Philanthropic
  • Estate transfer

Recommended Timeframe

Retirement planning is a time-sensitive and arduous task that requires a high level of discipline and commitment over the duration of one’s adult years, not to mention specialized expertise. Given the relatively short accumulation period compared to the potential duration of retirement complicated by an unknown escalating cost of living, the RAP phase should begin as soon as possible.

There are always competing goals, including saving for one’s first house and education planning, to mention a couple. All financial goals must be balanced against one another, keeping in mind that the ability to provide for your support – before and throughout retirement – supersedes all other goals.

RIP works best when it’s initiated long before you plan to retire. In addition to the nature and complexity of the various planning issues, this is very important given the fact that historically approximately 50% of all retirees retire before they plan on doing so. Given this reality, a 20-year pre-retirement RIP timeframe is recommended.

Finally, it’s important to keep in mind that RIP doesn’t end the day you retire. The success of your retirement years is dependent upon your ability to employ and adjust RIP strategies for the duration of your, and your spouse’s, if applicable, retirement years.

Do you want to RAP or do you prefer to RIP? As I hope you can appreciate, you need to do both at the appropriate time in your life in order to enjoy your retirement years on your terms.

See Planning to retire? Start with the right question

Financial Planning Retirement Asset Planning Retirement Income Planning

I Paid for My Dad’s Funeral

When we make financial decisions, we often don’t think about the long-term effects – good and bad – they will have on other people. Their impact can shape the lives of immediate family members as well as generations to come long after we’re gone.

You may be wondering, what does this have to do with retirement income planning? In my case, everything. When clients ask what motivated me to become a financial planner, I tell them that observing, and paying for, the consequences of my parents’ (may they rest in peace) lack of planning was the driving factor.

My dad, who served in World War II and had a college degree, initially struggled to support our family, which included two sisters and me in addition to my mom. Despite this rough start, we enjoyed a fairly comfortable middle class life. After moving from a small house when I was ten, we lived in a nice house in a typical middle class town. My sisters and I graduated from college, with one of my sisters completing her last two years at a private out-of-state university.

While my parents generally lived within their means, they didn’t do any retirement planning to speak of, formal or otherwise. A couple of years after my dad retired from his auto insurance and income tax preparation business in the Bronx, New York, my parents sold the family house they owned for 26 years in New Jersey and moved to Las Vegas in 1991.

My parents used the proceeds from the sale of their house to make a sizeable down payment on a condo, buy some new furniture, and deposit the balance, which wasn’t a huge sum, in a savings account. Although Las Vegas was a relatively inexpensive place for them to retire, my parents’ Social Security benefits and the earnings from their savings account only went so far.

When my dad died in early 2000 without any life insurance, my parents’ savings account had dwindled to several thousand dollars. To provide comfort and security for my mom, I paid for my dad’s funeral, and shortly thereafter sat down with my mom to put together a budget.

Not only was my dad’s monthly Social Security benefit which my mom inherited insufficient for supporting my parents, it fell short of enabling my mom to make mortgage payments and pay for basic living expenses, let alone those of a discretionary nature.

Knowing that my mom’s wishes were to remain in her condo, I put together a plan, in consultation with my sisters, for me to purchase my mom’s condo from her. Using a purchase price that was greater than the value of her condo at the time, I paid off her mortgage using proceeds from refinancing my wife and my house, and structured a ten-year note with my mom for the equity in her condo.

To make a long story short, my monthly mortgage payments to my mom enabled her to meet all of her financial obligations, including for an additional two years after the term of our mortgage ended. When she died in 2012, there were not only sufficient funds to pay for her funeral, my sisters split a small inheritance.

Although my parents never did any retirement planning together and unfortunately experienced the consequences of their lack of planning first-hand, I’m proud of the fact that I was able to assist my mom with her planning so that she could enjoy the final 12 years of her life without worrying about where, or how, she was going to live. Needless to say, my wife and my son will benefit from my experience, including my decision to specialize in retirement income planning.

Retirement Asset Planning Retirement Income Planning

Don’t Plan to Squeak By Into Retirement

Let’s face it. We’re a “just in time” society. With our busy lives, we do a lot of things at the last minute. Many people thrive on the adrenaline rush that often accompanies completion of a project right before its deadline.

Retirement income planning lesson #1: Don’t plan to squeak by into retirement. We simply cannot apply our “just in time” thinking to retirement. Retirement income planning is complicated, with too many things that can go wrong, many of them beyond our control. It requires a totally different mindset that runs contrary to the way most of us are use to thinking.

While there are no guarantees, a retirement income plan that’s begun and frequently revisited well before and throughout retirement provides the best opportunity for success. The basic goal of any retirement income plan is for your money to outlive you. When you see headlines like “Boomers’ Retirement Confidence Sinks,” you know this isn’t an easy goal to achieve.

Retirement income planning is especially tricky. It is quite different from retirement planning where the primary objective is accumulation of assets to obtain financial security throughout one’s retirement years. Traditional retirement planning isn’t enough to get you to the finish line in most cases today.

It’s too easy to have a false sense of comfort that one’s accumulated assets are sufficient to last for the duration of retirement only to be unpleasantly blindsided by the “sequence of returns” in the first several years of retirement. For those of you who aren’t familiar with this term, it is a series of investment portfolio returns, usually expressed annually, that has a direct impact on the longevity of an investment portfolio during the withdrawal stage. See The Sequence of Returns – The Roulette Wheel of Retirement that includes a comparison of three scenarios to help you better understand the importance of this risk to a retirement asset plan.

Retirement income planning takes retirement planning a step further. It requires planning for a predictable income stream from one’s assets, that when combined with other sources of income, is designed to meet an individual’s or family’s financial needs for the duration of retirement. This is a very important distinction. Locking in a predictable income stream in advance of one’s retirement reduces the impact of a down market in the early years of retirement.

A retirement income plan needs to have a secure floor of retirement income that will last for your, and, if applicable, your spouse’s lifetime. The timing and after-tax amount of the floor needs to correspond to ongoing and one-time predictable and unpredictable expenses that will fluctuate during different periods of retirement adjusted for inflation. To the extent that known income streams, e.g., Social Security, aren’t projected to be sufficient to cover expense needs, other sources of sustainable income need to be developed well in advance of retirement.

Don’t plan to squeak by into retirement. Trust me – there won’t be any adrenaline rush.

Financial Planning Retirement Asset Planning Retirement Income Planning

Budget Now or Budget Later – It’s Your Choice

No one likes the word, “budget,” let alone doing it. While it should be basic to personal financial planning, budgeting is often a reluctant response to a negative financial experience. A common example of this situation is after an inordinate amount of credit card debt has been accumulated.

Setting up, modifying, and sticking to a budget requires discipline. Planning, organizing, and monitoring personal finances needs to be done on an ongoing basis. It may mean sacrificing things you would otherwise do and buy without this essential financial tool.

The ostensible, traditional purpose of budgeting is defensive in nature — making sure that you live within your means. To many people, this implies spending all of the income you receive without going in the hole. Never mind setting aside funds for an extraordinary unexpected expense, let alone saving for a future life-changing financial event like retirement.

For those of us who want to control our financial destiny, budgeting is instead a proactive financial strategy that’s used to achieve various financial goals. The overriding theme of this strategy is “Pay yourself first.” Before you allocate income toward paying for nondiscretionary expenses like your mortgage, utilities, food, etc., set aside a defined amount of income in an account that’s earmarked for a specific financial goal.

A common way this is often done is with employee 401(k) plan contributions. Before a participant’s paycheck hits his/her checking account, a specified percentage of each paycheck is automatically withdrawn and deposited into a retirement savings account. As an added bonus, the participant receives a tax deduction for the contributions and the funds grow tax-deferred until they’re withdrawn.

Does making a 401(k) plan contribution seem like budgeting? It should if you’re doing it with the goal of paying yourself first to save for retirement. It’s more difficult to adopt this mindset, however, if you don’t have a mechanism in place to automatically transfer funds from your paycheck to an investment that’s earmarked for a particular financial goal. This is a major reason why people aren’t successful in achieving financial goals, especially saving sufficient funds for retirement.

Once realistic goals are established, the core of any type of financial planning approach is a proactive budgeting “pay-yourself-first” strategy. To the extent that you don’t adopt this mindset during your working years and earmark funds for retirement, you will be forced into traditional defensive budgeting when you retire, i.e., making sure that you live within your means. Your means will be much less than what they would otherwise be had you chosen to employ a disciplined approach with your finances during your working years. Budget now or budget later – it’s your choice.

Fixed Index Annuities Retirement Asset Planning Retirement Income Planning

What is a Retirement Income Planner?

Choosing the right fixed index annuity (“FIA”) with the right income rider for your situation requires that you first choose the right individual who specializes in this unique retirement income planning strategy. The conclusion of the post, Retirement Income Planner Key to Success When Investing in Fixed Index Annuities, was that the person you choose should be a professional retirement income planner.

What is a retirement income planner? Before answering this question, let’s start by stating what a retirement income planner isn’t. Although it’s possible that the same individual may perform both services, a retirement income planner isn’t the same thing as a retirement planner.

Simply stated, a retirement planner develops and manages strategies for building assets that are intended to be used for retirement. Retirement planners practice retirement asset planning, As defined in Retirement Income Visions™ Glossary, Retirement Asset Planning is:

The process of planning for the accumulation of sufficient assets to be used for retirement and “spending down” of those assets during one’s retirement years.

Retirement asset planning is all about accumulating assets. It begins when assets are earmarked for retirement, either by (a) the nature of the assets, e.g., qualified plans including 401(k) plans, or (b) dedicating nonqualified assets for retirement. By definition, retirement asset planning ends at retirement whether or not there are sufficient assets that will last for the duration of retirement.

Retirement income planning, on the other hand, begins during the asset accumulation process and ends at death. As defined in Retirement Income Visions™ Glossary, Retirement Income Planning is:

The process of planning for a predictable income stream from one’s assets, that when combined with other sources of income, is designed to meet an individual’s or family’s financial needs for the duration of retirement.

Retirement income planning is practiced by retirement income planners. Per Retirement Income Visions™ Glossary, a Retirement Income Planner is:

An individual who is professionally trained, licensed, and experienced in developing and managing strategies for creating and optimizing retirement income to meet one’s financial needs for the duration of retirement.

“Income” and “duration of retirement” are the key words and phrases, respectively, in this definition. In today’s low-interest rate environment, it’s difficult to find investments that will generate decent income streams that will meet one’s short-term financial needs, let alone for the duration of retirement.

Retirement Asset Planning Retirement Income Planning Social Security

Your Social Security Retirement Asset – Part 2 of 3

Part 1 of this post last week made the point that Social Security, which has historically been taken for granted as a retirement income source, is also a retirement asset, specifically, an annuity. The post explained how Social Security, while not in strict compliance, comes pretty close to fulfilling most of the various attributes of an annuity.

If Social Security is, in fact, an annuity, then why isn’t it included as such on personal financial statements? If you own a variable or fixed annuity that hasn’t been annuitized, the life insurance company from whom you purchased your annuity periodically makes available to you a statement that includes the current value of your investment as of a specific date. The annuity and its value is routinely included as an asset in the nonretirement or retirement section of your personal financial statement, depending upon whether it’s nonqualified or qualified. Nonqualified annuities are generally owned by individuals whereas qualified annuities are owned by retirement plans, including 401(k) plans, traditional IRA’s, SEP-IRA’s, Roth IRA’s, etc.

What happens to your asset when you complete a form instructing your life insurance company to exchange the value of your investment for an ongoing irrevocable structured payout, generally monthly, with a specified number of payments or for the duration of your lifetime and potentially your spouse’s lifetime in the event that you predecease your spouse, i.e., you annuitize your annuity? Similar to your experience when you purchase a new car and it immediately loses an ascertainable amount of its value the moment you leave the car dealer, your $100,000 annuity is diminished in value the moment you receive your first annuity payment.

Just like your new car, while its value is reduced, your annuitized annuity nonetheless has a definable residual value. Unlike your car which may only be worth 85% of what you paid for it the moment after you drive it off the lot, depending on a multitude of factors, the value of your annuity could retain 99% of its previous value after receiving your first annuity payment. The diminished value of your car can be readily determined through an online service such as Kelley Blue Book and included on one’s personal financial statement. The calculation of the value of an annuitized annuity is more difficult, however, and, as a result, while it should be, it isn’t always included on personal financial statements.

Furthermore, once you annuitize an annuity, most life insurance companies cease to provide you with a statement showing you the remaining value of your investment. Why is this? Three reasons: (1) The life insurance company, while it is contractually obligated to make periodic payments to you and potentially to your survivor in the event of your premature death for a specified period of time, unless you elect some type of refund option, it generally is no longer required to return the value of your investment to you in the form of a lump sum payment, (2) The calculation of the remaining value of your annuity is complicated, requiring development and ongoing refinement of assumptions about interest rates and number of potential payments in the case of a lifetime payout, and (3) Aside from highly-skilled, technical, and experienced financial professionals who are always looking out for their clients’ best interests and who, like myself, understand and appreciate the importance and value of this information, there is currently little demand for it.

You’re probably wondering how this relates to Social Security. Unlike a traditional annuity, even though you’re investing in a future annuitized stream of payments via Social Security withholding in the case of an employee and self-employment tax in the case of a self-employed individual, while you receive an annual statement with the amount of your projected monthly benefit, Social Security Administration doesn’t provide you with a statement showing the current value of your investment. Nonetheless, similar to a commercial annuity contract that has been annuitized, although it isn’t straightforward, the value of the future payment stream can be calculated.

Even though the calculation of the current value of one’s Social Security benefits is further complicated by the uncertainty of the remaining duration of Social Security Trust Fund assets, in my opinion, it should be done routinely and the resulting value included as an asset on every qualified Social Security recipient’s personal financial statements. Who is a qualified Social Security recipient? Read Part 3 next week to find out.

Retirement Asset Planning Retirement Income Planning Social Security

Your Social Security Retirement Asset – Part 1 of 3

This is Part 1 of 3 of the final post in Retirement Income Visions™ series about Social Security. Since its inception on September 27, 2010, the series has focused on Social Security retirement income planning strategies. What most people don’t realize is that Social Security is more than an income stream. It’s an asset – perhaps your most important retirement asset.

Specifically, Social Security is an annuity. Per Retirement Income Visions™ Glossary of Terms, an annuity is:

A contract between an insurance company and an individual, or insured, whereby the insurance company, in exchange for a receipt of a lump sum payment, or premium, or series of payments, or premiums, that is invested by the insurance company in one or more tax-deferred investment vehicles, agrees to pay the insured a lump sum, distributions of the contract balance, or the option to elect an irrevocable structured payout with a specified payment beginning at a specified date, paid at specified intervals over a stated period of months or years or for the duration of the insured’s and potentially his/her spouse’s and/or other individuals’ lifetime(s) depending upon the payout option selected.

While it isn’t in strict compliance with the definition, Social Security comes pretty close. Let’s dissect the definition of an annuity as it pertains to Social Security retirement benefits. Social Security:

  • Is a contract between an insurance company, i.e., the United States government and an individual, or insured, i.e., the Social Security benefit recipient.
  • In exchange for a receipt of a series of payments, or premiums, i.e., Social Security withholding in the case of an employee and the Social Security portion of self-employment tax in the case of a self-employed individual.
  • That is invested by the insurance company in one or more tax-deferred investment vehicles. Although it isn’t fully funded like an insurance company is required to do and although it’s currently projected to be depleted in about 2037, there’s a Social Security Trust Fund that provides a means by which the federal government accounts for excess paid-in contributions from workers and employers in the Social Security system that aren’t required to fund current benefit payments to retirees.
  • Agrees to provide the insured with the option to elect an irrevocable structured payout. Although it’s ostensibly an irrevocable structured payout, there currently exists the ability to repay cumulative benefits received in exchange for a higher payout using a “do-over” strategy (See the November 22, November 29, and December 6, 2010 three-part Pay-to-Play Social Security series).
  • With a specified payment beginning at a specified date. While it isn’t an option since it’s the only payout mode available, Social Security payments begin at a specified date chosen by the recipient, whether it be at Full Retirement Age (“FRA”), beginning from age 62 until FRA, or beginning after FRA until age 70.
  • Paid at specified intervals over a stated period of months or years or for the duration of the insured’s lifetime. Social Security is paid monthly for the duration of the recipient’s lifetime.
  • And potentially his/her spouse’s lifetime. If an individual is married, Social Security retirement benefits don’t cease upon the individual’s death. Instead, the identical benefit continues to be paid to the surviving spouse unless the survivor’s benefit is greater than the deceased spouse’s benefit, in which case the surviving spouse will continue to receive his/her benefit based on his/her employment record.

So, besides the fact that Social Security is an annuity, what else is important about the fact that Social Security is an asset? This will be addressed in Part 2 next week.