Social Security

3 Pitfalls of Social Security Optimizers

Social Security is an important source, and in many households, the largest source, of income for retirees. You can start collecting benefits at any time between age 62 and 70. Since Social Security is an income annuity, the longer you wait, the greater your monthly income will be for the rest of your life.

The Social Security start date decision is complicated by the fact that there are different types of retirement benefits for which you may be eligible. These include spousal, divorcee, and survivor options in addition to benefits based on your earnings. Furthermore, you may qualify for more than one type of benefit at a given time.

How do you learn about all the available strategies and choose the one that will provide you, and your spouse, if married, with the greatest amount of income during your lifetime? Recognizing the opportunity, a Social Security optimizer software industry has evolved with programs targeted for consumers and financial advisers.

Before using any Social Security optimizer, you need to be aware of three pitfalls.

1. Longevity

The results of all Social Security optimizers are dependent upon assumed longevity, i.e., how long you’re going to live. This is the most important assumption that will affect your results. Since it’s also the most difficult to forecast, multiple scenarios should be run with different assumed ages of death.

2. Inconsistent Results

Social Security optimizers vary as to the type and detail of requested data, including, but not limited to, summarized vs. detailed historical earnings, projected earnings, government pensions, and economic assumptions. Consequently, results and recommendations can vary from program to program.

3. Optimized Result May Not Optimize Retirement Cash Flow

Let’s assume that you or your financial adviser use a high-quality Social Security optimizer that captures all of the data points and assumptions needed to recommend the best strategy for your situation. Should you implement the recommended solution? Not necessarily.

It’s important to keep in mind that the overriding goal of retirement income planning is to optimize lifetime cash flow. You want to make sure that you have the right types of assets and income when needed to provide you with sufficient after-tax income to cover your projected inflation-adjusted expenses for the duration of your retirement. The key is timing.

None of the standalone Social Security optimizer programs consider the myriad of financial information and assumptions that are required to determine how the recommended results will impact your projected retirement cash flow. For this reason, an optimized Social Security strategy may not be the best plan of action for ensuring that sufficient cash is available when needed.

I’ve had situations where the recommendation from one of the leading Social Security optimizers was projected to result in earlier depletion of my clients’ retirement assets than would have been the case using another strategy. As an example, deferring the Social Security start date to age 70 to maximize monthly income may not be the best recommendation for a single individual who retires at age 65 with limited investments or other sources of sustainable income.


The Social Security start date determination is one of the most, if not the most, important retirement income planning decisions most people will make. You shouldn’t rely solely on the recommendation of a Social Security optimizer when choosing your start date given the fact that the decision is generally irrevocable and will have long-term consequences for you and your family. Multiple strategies, not simply the “optimal” one, need to be analyzed using comprehensive retirement income planning software to determine the one that’s projected to optimize your retirement cash flow.

Retirement Income Planning

Can We Still Plan to Retire at a Specific Age?

Not too long ago it was common for pre-retirees to depend on two sources of retirement income: Social Security and a private or public pension. Both began at age 65, were expected to last for life, and typically met 50% or more of retirees’ financial needs.

With two secure sources of lifetime income, age 65 was the standard retirement age for many years. Retirement income planning focused on closing or narrowing the gap between one’s projected retirement income needs and what would be provided by Social Security and pension income.

Retirement Planning Milestone

The decline of defined benefit pension plans over the past 30 years eliminated one source of dependable lifetime income for most retirees. The replacement of these plans with 401(k) defined contribution plans was a milestone in the retirement planning world since it transferred the responsibility for funding retirement from employers to employees.

Retirement income planning has dramatically increased in importance in recent years as employees have realized that it isn’t easy to (a) accumulate sufficient assets in 401(k) plans to generate adequate retirement income and (b) convert 401(k) plan assets into sustainable lifetime income streams beginning at a specified age.

The shift from employer defined benefit to employee defined contribution retirement plans, combined with longer life expectancies, has made it much more challenging to plan for retirement at a specific age. While it’s definitely possible, it requires a different mindset and the assistance of an experienced retirement income planning professional to increase one’s opportunity for success.

Retirement Income Plan is Essential

As part of the change in mindset, it’s important to understand and recognize that a retirement income plan is an essential tool for helping individuals close or reduce the gap between projected retirement income needs and what will be provided by one source of sustainable lifetime income in many cases, i.e., Social Security. Unlike other types of financial plans, a retirement income plan typically isn’t a “one-and-done” exercise.

A successful retirement income plan generally requires an ongoing disciplined, systematic, approach beginning at least 20 years prior to retirement and continuing for the duration of retirement. The purpose of such a plan should be to make sure that sufficient assets will be saved at specified times using tax-advantaged investment and protection strategies that will increase the likelihood of providing adequate and reliable after-tax income to cover one’s planned and unplanned expenses beginning at a specified age for the duration of retirement.

With the shift from employer to employee retirement funding, can we still plan to retire at a specific age? I believe that it’s possible provided that we understand (a) the burden for making this a reality has shifted from employers to employees, (b) a retirement income plan beginning at least 20 years prior to retirement in most situations is essential, and (c) a lifetime commitment is required to monitor and update the plan in order to reduce the risk of outliving one’s assets.


Retirement Income Visions Celebrates 5-Year Anniversary!

It’s hard to believe that it’s been five years since Retirement Income Visions™ made its debut.

As stated in the August 16, 2009 post, the importance of retirement income planning as a separate and distinct discipline was magnified during the October, 2007 to March, 2009 stock market decline. This was true for both my clients and for me. This is what motivated me to expand my expertise and develop proven conservative retirement income planning solutions for my clients that would stand the test of time in any type of market.

My goal in writing this blog remains the same as it was five years ago: to bring to your attention innovative planning strategies that you can use to create and optimize your retirement income, and in many cases, reduce your exposure to adverse financial market conditions. Per my August 16, 2009 post, the customization and implementation of these strategies for your needs by an experienced retirement income planning professional should enable you to visualize and live a more fulfilling and less stressful life.

Living a more fulfilling and less stressful life doesn’t happen by accident. It’s a goal. Like all goals, you need to create and systematically follow a plan in order to achieve it. Achieving this particular goal during one’s retirement years is especially challenging. As evidence of this challenge, simply take a look at the list of categories in the right-hand column of this blog for some of the issues that need to be analyzed and addressed in a retirement income plan.

While the basic goal of retirement income planning has always been, and will continue to be, not to outlive our assets and income, none of us knows how long we’re going to live. Unlike other financial planning goals which have definitive start and end dates, this isn’t the case when it comes to retirement income planning. Increased longevity compared to our ancestors adds more potential years of planning on the back end.

Included in the category of financial challenges, although not always considered in many plans, is health care. This expense, if not properly planned for, can single-handedly reverse one’s planning efforts and ultimately lead to financial devastation. Proper planning for routine health and unpredictable extended care needs is critical to the success of any retirement income plan.

As I always tell my clients, there’s much more to retirement income planning than the financial aspects. Assuming that your goal is living a more fulfilling and less stressful life, you need to plan for how you will spend your time each day. This can be especially difficult for someone who has worked outside of the home most of his/her adult life and hasn’t cultivated any meaningful hobbies or non-work related activities.

As I’ve done in all of my annual celebration posts, I want to thank all of my subscribers and other readers, clients and non-clients alike, for taking the time to read Retirement Income Visions™. If you also read my MarketWatch RetireMentor articles, a double thank you to you. Here’s to a more fulfilling, joyful, and less stressful life!

Annuities Deferred Income Annuities

You Don’t Have to Wait Until 85 to Receive Your Annuity Payments

Longevity insurance was recently blessed again by the IRS with its finalization of a regulation allowing the inclusion of an advanced-age lifetime-income option in retirement plans such as 401(k) plans and IRAs.

As discussed in my July 25 MarketWatch article, 6 Ways a New Tax Law Benefits a Sustainable Retirement, “longevity insurance” isn’t an actual product that you can purchase from a life insurance carrier. It’s instead a term that refers to a deferred lifetime fixed income annuity with an advanced age start date, typically 80 to 85.

In a nutshell, IRS’ final regulation allows you to invest up to the lesser of $125,000 or 25% of your retirement plan balance in “qualifying longevity annuity contracts” (QLACs) provided that lifetime distributions begin at a specified date no later than age 85. Although the regulation leaves the door open for other types of fixed-income annuities in the future, QLAC investment vehicles are currently limited to lifetime deferred income annuities, or DIAs.

Suppose you’re concerned about the possibility of outliving your assets and you’re considering investing a portion of your retirement plan in a QLAC. Do you have to wait until age 85 to begin receiving your lifetime annuity payments? Absolutely not. So long as distributions begin no later than the first day of the month following the attainment of age 85, you will be in compliance with the regulation.

Although the regulation doesn’t define the earliest starting date of QLAC payments, based on previous legislation, it would seem to be April 2 of the year following the year that you turn 70-1/2. Why April 2? Per my MarketWatch article, regulations in effect before the new rule allow for inclusion of fixed income annuities without limit provided that the periodic annuity payments (a) begin by April 1 of the year following the year that the owner turns 70-1/2 and (b) are structured so that they will be completely distributed over the life expectancies of the owner and the owner’s beneficiary in compliance with IRS’ required minimum distribution, or RMD, rules.

Let’s suppose that you’re doing retirement income planning when you’re 60 and you’re planning on retiring at 67. In addition to your IRA which has a value of $600,000, you have a sizeable nonretirement portfolio that will not only enable you to defer your Social Security start date to age 70, there’s a high likelihood that you won’t need to withdraw from your IRA until 75.

Despite the fact that you don’t foresee needing income from your IRA until 75, IRS requires you to begin taking minimum annual distributions from your IRA beginning by April 1 of the year following the year that you turn 70-1/2. This is true, however, IRS now also allows you to circumvent the RMD rules by investing a portion of your retirement plan assets in a QLAC. Relying on these rules, you decide to invest $125,000 of your IRA in a QLAC with an income start date of 75. This enables you to longevitize, or extend the financial life of, your retirement using the six ways described in my MarketWatch article.

As you can see, there’s a lot of flexibility when it comes to selecting the start date of your lifetime income distributions from a QLAC. There’s approximately a 13- to 14-year window depending upon your birth date which falls between April 2 of the year following the year that you turn 70-1/2 and age 85. The key is that you must define your income start date at the time of applying for your QLAC. This is a requirement of all deferred income annuities, not just QLAC’s.

Finally, a QLAC may, but is not required to, offer an option to begin payments before the contract’s annuity starting date. While the amount of your periodic distributions will be greater the longer you defer your start date, you don’t have to wait until age 85 to begin receiving lifetime income.

Retirement Income Planning

What is Your Planned Retirement Trigger?

The introduction to one of my recent MarketWatch RetireMentors columns, You Need a Plan to Retire Before You Plan to Retire, stated the following fact of which most people aren’t aware:

“You’re not going to retire when you plan on retiring. You’re probably going to retire earlier.”

The article cited results of two recent well-known and respected annual studies that demonstrated that there’s a good chance that you will retire before you expect to do so.

The Employee Benefit Research Institute (EBRI) Retirement Confidence Survey has consistently shown an increasing trend in the percentage of people retiring earlier than planned since 2007. Per the 2014 survey, 49% of people retired earlier than planned, 38% retired about when planned, and only 7% retired later than planned.

Results of the Gallup 2014 Average Actual vs. Expected Retirement Age Survey for the last 13 years have found that the average expected retirement age among non-retirees has consistently exceeded the average actual retirement age among retirees by four to seven years. 2014 was no exception when the average expected retirement age among non-retirees was 66 vs. average actual retirement age among retirees of 62.

Why did 49% of people surveyed by EBRI leave the workforce earlier than planned? While some retirees gave positive reasons for retiring early, many cited negative reasons for doing so. The top three were as follows:

  • Health problems or disabilities (61%)
  • Changes at companies, such as downsizing or closure (18%)
  • Having to care for spouses or other family members (18%)

Why Plan for a Specific Retirement Age?

As emphasized in several of my posts, including the last one, Do You Want to RAP or Do You Prefer to RIP?, retirement planning is unquestionably the most difficult type of goal-oriented financial planning. Knowing that there’s a 50% chance that you will retire earlier than expected, often for reasons beyond your control, and that the average actual retirement age among retirees is 62, why bother planning to retire at a specific age?

While you may retire earlier or later than planned, that’s no different than other types of financial planning where actual results are generally different from those that were planned. Furthermore, this knowledge doesn’t negate the need for planning, especially when it comes to retirement income planning where the fear of running out of money can cause many sleepless nights without proper planning. If anything, it emphasizes the importance of having a retirement income trigger, or age at which you would like to retire, and reinforcing your plan by including a premature retirement strategy.

Increase Your Odds for Success

You don’t have to be average. If you want to improve the likelihood of retiring at your planned retirement age, consider working with a financial adviser if you aren’t doing so already. As pointed out in my July 11, 2013 MarketWatch RetireMentors article, Retire Confidently With a Written Plan, the value of working with a financial adviser and having a written retirement income plan is reinforced by the numbers of individuals who retire voluntarily versus involuntarily.

Citing the results of the 2013 Franklin Templeton Retirement Income Strategies and Expectations (RISE) Survey, the article stated that 74% of those currently working with an adviser retired by choice. In addition, per the survey, only 18% of those working with an adviser expected running out of money to be their top concern during retirement.

Three Questions to Ask Yourself

If you’re planning for retirement, here are three questions you should ask yourself:

  • What is your planned retirement trigger?
  • Do you have a written retirement income plan for your trigger?
  • Are you working with a financial advisor who specializes in retirement income planning?
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 Income Planning

The Retirement Income Planning Disconnect

When I began writing and publishing Retirement Income Visions™ almost five years ago, retirement income planning was a relatively new concept. What people thought was retirement income planning turned out to be traditional retirement asset planning in most cases.

While the distinction between retirement income and retirement asset planning has gotten more attention in the media over the last five years and has come to the forefront for financial advisors with The American College’s establishment of the Retirement Income Certified Professional® (RICP®) designation two years ago, the importance of implementing a retirement income plan hasn’t caught on yet with most pre-retirees.

According to a TIAA-CREF survey, 72 percent of retirement plan participants said that either their plan didn’t have a lifetime income option or they weren’t sure if their plan offered one. While 28 percent said that their plan offered a lifetime income option, only 18 percent of plan participants actually allocated funds to this choice.

This is despite the fact that 34 percent of retirement plan participants surveyed said that the primary goal for their plan is to have guaranteed money every month to cover living costs and another 40 percent wanted to make sure that their savings are safe no matter what happens in the market. Furthermore, while 74% are concerned about security of their investments, only 21 percent expect to receive income from annuities.

Given the fact that fixed income annuities are the only investment that’s designed to provide guaranteed lifetime income, there’s an obvious disconnect and associated lack of understanding between what pre-retirees want and what they’re implementing when it comes to retirement planning. A large part of the problem is attributable to the fact that employees are relying too much on their employer’s retirement plan to meet their retirement needs. See Don’t Depend on Your Employer for Retirement.

Most employers today offer a 401(k), or defined contribution plan, to their employees vs. the traditional defined benefit plan that was prevalent several years ago. The latter plan is designed to provide lifetime income beginning at a defined age whereas a 401(k) plan is designed to accumulate assets, the value of which fluctuates over time depending upon market performance.

Since an income tax deduction is available for contributing to a non-Roth 401(k) plan and the maximum allowable contribution level is fairly generous for most employees, the incentive to seek out lifetime income options in the marketplace is limited for most retirement plan participants. This is the case even though people like the idea of lifetime income and their employer’s retirement plan doesn’t usually offer this option.

As the marketplace becomes better educated about the importance of having a retirement income plan, this is reinforced by the next stock market downturn, and employers increase the availability of lifetime income options, the disconnect between the desire for, and inclusion of, sustainable lifetime income in one’s plan will lessen over time.

Retirement Income Planning

Accumulate Income, Not Assets, for Retirement

The personal savings rate in the United States has never been exemplary, averaging 6.83 percent from 1959 through 2013 as reported by the U.S. Bureau of Economic Analysis. Although we’re encouraged to save from an early age, it’s difficult for people to accumulate funds in a financial institution account without taking withdrawals from the account unless the reason for savings is to purchase a tangible product.

As an example, unless we receive a sizeable gift or inheritance, the down payment on our first house doesn’t fall from the sky. Most people in this situation need to diligently save a portion of each paycheck in savings and/or investment accounts to accumulate the necessary funds for this goal.

A tangible product such as a house is much easier to plan and save for than a more nebulous, loftier goal such as retirement. With the down payment on a house, the target is a fixed dollar lump sum in a defined number of years that’s typically within ten years at the most of the savings starting date. Once you accumulate the desired lump sum, it’s just a matter of time until you sign the reams of paperwork to purchase, and move into, your first house.

Saving for retirement is a totally different, and for most people, daunting challenge. For starters, unlike saving for the down payment on a first house, retirement isn’t a tangible goal. Contrary to the message in the popular 2010 ING commercial, “What’s Your Number?,” accumulation of a fixed dollar amount at an unspecified date isn’t the way that successful retirement planning is practiced today.

Although it’s easier for people to relate to, and plan for, saving a fixed dollar amount at a specified date, this way of thinking cannot, and shouldn’t be, applied to retirement planning. Without listing them all which is beyond the scope of this post, there are simply too many variables, many of which are beyond our control, when it comes to retirement planning to apply this type of approach. Suffice it to say that the potential for spending two to three dozen or more years in retirement without any predictable end date doesn’t lend itself to a traditional asset planning methodology.

Recognizing this fact and acknowledging that the financial side of retirement is expense-driven, retirement income planning was born. Rather than trying to accumulate a single lump sum that we don’t have a clue whether it will meet our financial needs for the duration of retirement, we need to accumulate streams of income that will match our projected expenses during various stages of retirement.

Since retirement isn’t a single event and is instead open-ended when it comes to duration, the income streams need to last for our lifetime. Like it or not, assuming that you don’t want to risk running out of money, lifetime needs to include the possibility that we may live to age 90 or longer.

Although it’s not simple due to the numerous interactive assumptions that must be made, it’s easier and more appealing to calculate individual years of projected expenses and match them up with projected income streams vs. simply saving a percentage of one’s income each year and not knowing if the resulting savings will meet our retirement needs.

Recognizing the foregoing facts, it should be easy to understand that saving 6.83% of your income in the absence of a sizeable inheritance isn’t going to be sufficient in most cases for funding all of our various financial goals, including retirement, especially if the start date for funding the latter goal is deferred to age 50 or later.

Knowing that when it comes to retirement planning you need to replace your employment income with other income that will pay for your future inflation-adjusted expenses for an indeterminable period of time may just motivate you to save a little more and start saving a little sooner than you would otherwise do.

Retirement Income Planning

When It Comes to Retirement Planning, It’s All About You

People are always comparing themselves to other people. It’s human nature. Retirement planning is no exception.

One of the value-added services that I provide to my investment management and retirement income planning clients is the ability to view an up-to-date net worth statement 24/7 from anywhere in the world at a moment’s notice. This is possible because of account aggregation technology that automatically updates values of clients’ financial institution accounts daily. These include, but aren’t limited to, bank, investment, annuity, life insurance, mortgage, auto loan, and credit card accounts.

From time to time when I’m reviewing a net worth statement with a client, he/she will ask me how his/her net worth stacks up against other people who are about the same age. My reply is always the same. I start out by telling my client that everyone’s situation is different. Each of us has a unique personality, with different values, needs, family history, health situation, comfort zones, etc. This in turn directly influences how we approach our finances, including retirement planning.

Even if I have two clients whose net worth happens to be identical at a particular moment in time, the planning that I do for them will never be the same due to the differences mentioned above as well as other reasons. For one thing, two people with a net worth of $3 million are likely to have totally different financial situations.

Keeping in mind that net worth equals total assets minus total liabilities, it’s possible that one person may have assets of $3 million and no liabilities while another individual has assets totaling $5 million and liabilities totaling $2 million. In addition, the types of assets and liabilities may be quite different. The first person may own a residence that’s valued at $1.5 million; have $500,000 of annuities, and $1 million in a 401(k) plan. The second individual may own a home and rental properties worth $4 million with mortgages totaling $2 million, a business worth $750,000, and life insurance with cash value of $250,000.

Due to the fact that the components of net worth can be quite different from one person to another, it doesn’t matter how your net worth compares to someone else. When it comes to retirement planning, what’s most important is how you plan on converting components of your net worth to provide you with sufficient sustainable after-tax, inflation-adjusted lifetime income, when combined with other sources of income, to meet your projected planned and unplanned expenses for the duration of your retirement years without depleting your net worth.

In summary, it’s not important how your net worth compares to someone else. What’s significant is how you will use your net worth to furnish you with the income that’s not provided from other sources to enable you to support your desired lifestyle and pay for unplanned expenses throughout your retirement. You see, it’s not about other people. It’s all about you.

Annuities Fixed Index Annuities

Fixed Index Annuity Income Rider Charge – Is It Worth It? – Part 1 of 2

Although fixed index annuities (“FIA’s”) offer a number of attractive features, not the least of which is protection from stock market downturns, I recommend them as a sustainable lifetime income strategy for a portion of my retirement income planning clients’ investment portfolios when appropriate. In order to obtain this popular benefit, it’s generally, although not always, necessary to apply for an optional income rider when you apply for a FIA.

When you add an income rider, you turbocharge your FIA. A FIA income rider offers the following five benefits that, when taken as a whole, cannot be duplicated by any other investment:

  1. Guaranteed, subject to individual life insurance company claims-paying abilities, lifetime income or lifetime retirement paycheck (“LRP”)
  2. Flexible LRP start date
  3. Potential for increased LRP amount
  4. Ability to calculate an LRP amount that you will receive beginning on a specified future date on the date of purchase
  5. Ability to adjust initial and ongoing investment amount to match one’s income needs

A charge is deducted from the accumulation value of a FIA on a monthly, quarterly, or annual basis in exchange for the foregoing five features when they are provided by an optional income rider. It’s generally calculated as a percentage of the income account value, however, the charge is sometimes calculated as a percentage of the accumulation value. A typical charge ranges between 0.75% and 0.95% of the income account value.

The income account value is used to calculate the amount of your LRP and is separate and apart from the accumulation value of your annuity contract. The starting point for the calculation is your initial and ongoing investments plus any premium bonuses offered by the life insurance company. A simple or compound growth factor is applied to the income account value for a specified number of contract years or until income withdrawals begin, whichever occurs first.

As an example, let’s say that you invest $100,000 in a FIA with an income rider that uses 6% annual compound growth for the first 12 years of the contract to calculate the income account value in exchange for an income rider charge of 0.95% of the income account value that’s deducted from the accumulation value. At the end of year 1, your income value is $106,000 ($100,000 x 1.06). An income rider charge of $1,007 ($106,000 x 0.95) will be deducted from your accumulation value. At the end of year 2, your income value is $112,360 ($106,000 x 1.06). An income rider charge of $1,067 ($112,360 x 0.95) will be deducted from your accumulation value.

The income account value will continue to increase by the 6% compound growth factor for 12 years in this example, assuming income withdrawals aren’t taken in the first 12 years. Consequently, the income rider charge will also increase for the first 12 years of the contract before it levels off and begins decreasing when income withdrawals begin.

Is the income rider charge worth it? Find out in Part 2 next week.

Retirement Income Planning

Don’t Fall Into the Short Longevity Trap

Whenever I’m doing retirement income planning for a client, one of the most, if not the most, important decisions that needs to be made is the duration of the plan, or plan timeframe. The starting point, i.e., today, can be easily defined; however, the termination date is unknown in all cases.

This topic typically begins with a discussion of my client’s parents’ and grandparents’ longevity. I’m always surprised how people attempt to correlate their life expectancy directly to that of their parents or grandparents, particularly when one or more of their ancestors may not have lived a long life. They do this without acknowledging the fact that (a) the average life expectancy has increased significantly for someone born today compared to when their parents or grandparents were born and (b) our health is not necessarily controlled by genetics.

Increased Life Expectancy

Let’s take a look at the change in United States life expectancies for females who have traditionally enjoyed a longer life expectancy than males. Assuming your grandmother was born in 1900, her life expectancy was 48.3 years. The life expectancy for women born in 1950 increased dramatically to 71.1 years. Girls born in 2010 have an average life expectancy of 81.0 years.

When males turned 65 in 1950, they were expected to live another 12.8 years on the average, or until age 77.8. This has increased five years, with males turning 65 in 2010 expected to live another 17.7 years on the average, or until age 82.7. A male who reached age 75 in 2010 has an average life expectancy of 11.0 years, or until age 86.

Our Health Goes Beyond Genetics

Although it has been demonstrated that longevity has a genetic component, genetics, in and of itself, doesn’t necessarily control the health issues you will experience during your lifetime or how long you will live. While family health history is important, it is only one factor in determining your longevity.

If you haven’t heard about it, I would strongly urge you to read about the emerging field of epigenetics. Bruce Lipton, PhD, one of the leaders in this field, defines epigenetics as “the study of inherited changes in phenotype (appearance) or gene expression caused by mechanisms other than changes in the underlying DNA sequence.”

According to Dr. Lipton, our health is not controlled by genetics. Instead, the mind, toxins and trauma impact the fate of individual cells and our ultimate health. The mind plays a critical role, with “…your thoughts and perceptions having a direct and overwhelmingly significant effect on cells.”

Impact on Retirement Income Planning

The basic goal of retirement income planning is not to outlive our assets. Given increased life expectancies today that continue to increase, combined with the knowledge that our health and longevity goes beyond genetics, we cannot afford to simply look in the rearview mirror and use our parents’ and grandparents’ life expectancies as the basis for projecting our lifespan. To the extent we do this, we run the risk of falling into the short longevity trap in many cases, underestimating our life expectancy, and potentially making decisions that result in the premature depletion of our assets.

Retirement Income Planning

It’s All About Timing

No matter how many times we see magic shows, inevitably, in response to a professionally-performed magic trick, we blurt out, “How did he do that?” Even though we know that the magician’s goal is to elicit this reaction, we’re nonetheless amazed by it.

What’s more astounding is that we’re amazed despite the fact that we all know the secret to each and every trick – timing. The use of precise timing in the performance of a planned sequence of events is responsible for creating the illusion that’s played out before our eyes time and time again by a professional magician.

It’s no different when it comes to successful retirement income planning. It’s all about timing. Anyone can stop working permanently and say they’re retired. Successful financial retirement, however, requires the performance of a planned sequence of events before and throughout retirement.

As you may have noticed, unlike my description of the magic process, I omitted the word “precise” before “planned sequence of events.” This was intentional since, unlike magic where the magician has control over the outcome of his tricks provided his timing is precise, this is irrelevant when it comes to retirement income planning. There are too many variables beyond our control, e.g., longevity, inflation, etc., that affect the outcome of a retirement income plan, making the use of precise timing meaningless.

Nonetheless, the performance of a planned sequence of events in a timely manner is essential to increasing the likelihood of a successful financial retirement. It’s a complicated ongoing process that requires planning, managing, and protecting retirement income. Given the potential duration of retirement of up to 25+ years, the sooner the process is begun, the more likelihood of a successful result.

As a retirement income planner, my ability to perform “magic” for a client is dependent upon my ability to understand my client’s financial needs and my client’s willingness to allow me to implement and maintain a plan that includes the performance of a planned sequence of events that will increase the likeliness of my client meeting his/her financial needs throughout retirement. Timing is everything.

Fixed Index Annuities Retirement Income Planning

Cap Rates Are Secondary When Optimizing Retirement Income

If you’ve been reading Retirement Income Visions™ for any length of time, you know that I’m a fan of fixed index annuities (“FIA’s”) with income riders, or guaranteed minimum withdrawal benefit’s (“GMWB’s”) as part of a retirement income planning solution in the right situation. The ability to create a predictable retirement paycheck with a flexible start date that includes an investment component with upside potential, downside protection, and a potential death benefit is unparalleled in the investment and insurance world.

For you horse race fans, that’s what I call hitting the trifecta! Unlike horse race betting, when you invest in a FIA with an income rider with a highly-rated life insurance company, while the results aren’t guaranteed since they’re subject to the claims paying ability of each individual insurance carrier, your bet is pretty secure given the stellar historical claims paying experience of the life insurance industry.

It’s important to understand that very few FIA’s that are sold today include GMWB’s as part of their base product. If you need sustainable lifetime income beginning at a specific age, you will generally need to purchase an optional income rider when you complete your FIA application. Only about two-thirds of FIA’s on the market today offer an optional income rider. An income rider charge of between 0.75% and 0.95% of your contract’s income account value will generally be deducted from your contract’s accumulation value each year.

Assuming that your goal is to maximize sustainable lifetime income, once you, or more likely your retirement income planner, narrows your FIA search to those that include a GMWB or optional income rider, illustrations need to be prepared for multiple products offered by highly-rated life insurance companies that are well-established in the FIA business to determine which ones will provide you with the greatest amount of income for your desired investment amount(s) beginning at various ages.

This is a difficult task due to the fact that there are several variables that are used in the calculation of annual income that will be received from a particular FIA. After analyzing hundreds of FIA illustrations, trust me, it requires a lot of skill, hands-on experience, and access to dozens of options, including appointment as a licensed life insurance agent with multiple life insurance carriers, in order to offer an independent optimal recommendation for a particular situation. One product may provide greater income beginning at age 62, however, another one may be more suitable if you don’t plan on taking withdrawals until age 70.

What about cap rates? Assuming your goal isn’t to create a predictable retirement paycheck, there’s no need to purchase a FIA with a GMWB or income rider. If this is your situation, you should be paying close attention to the caps, or limits, on interest that will be credited to your account each year that are associated with various indexing methods offered by a particular FIA depending upon its performance during the previous contract year.

If, on the other hand, your primary goal is to optimize lifetime income beginning at a particular age, cap rates, while important, should be a secondary consideration when choosing a FIA. While higher cap rates may result in a greater accumulation value that may more seamlessly absorb income rider charges associated with good market performance and may potentially result in a greater death benefit, they generally won’t affect the amount of lifetime income that you will ultimately receive from a particular FIA. This is due to the fact that the lifetime income calculation of most FIA’s is generally independent of indexing method performance. Furthermore, even if there’s no remaining accumulation value in your contract as a result of income withdrawals over many years, you will continue to receive your income so long as you’re alive.

While cap rates are often hyped by life insurance companies when promoting FIA’s, they should be a secondary consideration when your primary goal is to create and optimize a predictable retirement paycheck beginning at a specific age. If this is your situation, you or your retirement income planner should be devoting the majority of your research to locating those FIA’s offered by highly-rated life insurance companies that are well-established in the FIA business that include a GMWB or income rider that will enable you to achieve your goal.

Annuities Deferred Income Annuities Fixed Index Annuities Retirement Income Planning

Is Your Investment Advisor Afraid of Losing AUM?

When it comes to retirement income planning, one of my philosophies is a bird in the hand is worth two in the bush. As defined in Urban Dictionary, this expression means that it is better to have an advantage or opportunity that is certain than having one that is worth more but is not so certain.

One of the ways that I use this approach is to look for opportunities to convert what amounts to a sliver of a client’s portfolio into a deferred sustainable income stream beginning in a targeted year during my client’s planned retirement. The income stream, while it’s often for life, is sometimes for a specified period of time to close a projected retirement income gap (See Mind the Gap).

The opportunities to which I’m referring are sizeable abnormal increases in the stock market that inevitably are followed by market corrections, or downturns. Rather than celebrating what often proves to be temporary good fortune, when appropriate, I will recommend to my clients who need sustainable retirement income that they consider transferring a small portion of their investment portfolio into one or more new or existing fixed income annuities. These include fixed index annuities (“FIA’s”) with income riders, deferred income annuities (“DIA’s”), and single premium immediate annuities (“SPIA’s”).

This is a natural timely conversation that invariably makes sense to the clients to whom I recommend this approach since it is in their best interest. Furthermore, it’s an easy conversation for me to initiate since I specialize in retirement income planning, am a Retirement Income Certified Professional® (RICP®), CPA, CFP® professional, and a licensed insurance agent in addition to my firm being regulated as a Registered Investment Advisor (“RIA”). There’s no conflict of interest when I make the above recommendation to a client since, unlike most investment advisors, my income isn’t tied to a single compensation model.

The compensation model to which I’m referring is assets under management, or “AUM.” While many firms charge financial planning fees, the lion’s share of compensation earned by most traditional investment management firms is derived from AUM. As the name implies, the fee is typically calculated as a declining percentage of the value of a client’s investment portfolio. The greater the value of a portfolio, the smaller the percentage is that is applied to calculate the investment management fee. This is one of several compensation models offered by my firm.

Firms that are tied to an “AUM” compensation model generally don’t offer retirement income planning solutions that require insurance licensing and ongoing specialized insurance and annuity training. Most “AUM” driven firms are reluctant to refer clients to advisors like myself who offer a total retirement income planning approach since, in addition to the obvious revenue loss, this would be tantamount to an admission that they’re unable to provide a total retirement income planning solution.

An “AUM” model, while it’s appropriate for assisting clients with their retirement planning, i.e., asset accumulation, needs, isn’t designed for addressing lifetime sustainable income and other retirement income planning solutions. For clients seeking sustainable retirement income, it’s like trying to fit a square peg in a round hole.